2018 (4) TMI 1064 - AT - Income Tax

TPA - Comparable selection criteria - Functional profile of the Assessee - Held that - Assessee could be said to be engaged in the business of being a captive contracts services provider rendering services to its AE s which are in the nature of providing back office support services which are low end in nature thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:
1. Rejection of Accentia Technologies Ltd. as a comparable.
2. Inclusion of R. System International Ltd. and Caliber Point Business Solutions Ltd. as comparables.
3. Inclusion of Infosys BPO Ltd. as a comparable.
4. Inclusion of Acropetal Technologies Ltd. as a comparable.
5. Application of additional filters in the comparability analysis.
6. Incorrect rejection of the assessee's benchmarking analysis and comparables.
7. Use of single-year data for margin computation.
8. Disallowance of risk adjustment.

Issue-wise Detailed Analysis:

1. Rejection of Accentia Technologies Ltd. as a Comparable:
The Revenue's first grievance was the rejection of Accentia Technologies Ltd. as a comparable for benchmarking the ALP of international transactions. The DRP rejected this comparable, noting that Accentia Technologies Ltd. was involved in high-end medical transcription activities, medical billing and coding, and software development, without providing segmental data. The tribunal upheld the DRP's decision, referencing the Special Bench of ITAT's findings that the assessee was a captive contract service provider mainly rendering low-end back-office support services. The tribunal confirmed that there was no significant change in the nature of the assessee's business to warrant a different conclusion.

2. Inclusion of R. System International Ltd. and Caliber Point Business Solutions Ltd. as Comparables:
The Revenue challenged the inclusion of R. System International Ltd. and Caliber Point Business Solutions Ltd. as comparables, arguing that their financial year ending in December made them unsuitable. The DRP included these companies, noting their functional comparability despite the different financial year-end. The tribunal upheld this inclusion, referencing previous decisions where the difference in accounting periods was deemed acceptable if the companies were functionally similar. The tribunal also noted that the data for nine months was common and could be extrapolated with credible accuracy.

3. Inclusion of Infosys BPO Ltd. as a Comparable:
The assessee contested the inclusion of Infosys BPO Ltd., arguing that it was a giant company with significant goodwill, brand value, and different functional characteristics. The tribunal agreed with the assessee, noting that Infosys BPO Ltd. had substantial brand value and incurred marketing and selling expenses, indicating different risks and functions. The tribunal referenced previous decisions excluding Infosys BPO Ltd. as a comparable for similar reasons and directed its exclusion from the list of comparables.

4. Inclusion of Acropetal Technologies Ltd. as a Comparable:
The assessee argued that Acropetal Technologies Ltd. was primarily engaged in software development and offering integrated enterprise solutions, making it unsuitable as a comparable. The tribunal found that the segmental analysis of Acropetal Technologies Ltd. required further investigation and verification of the actual expenses allocated to the healthcare segment. The tribunal set aside this matter, directing the AO/TPO to re-examine the comparability after considering all submissions and evidence provided by the assessee.

5. Application of Additional Filters in the Comparability Analysis:
The assessee contended that the AO/TPO erred in applying additional filters, such as rejecting companies with less than 75% export earnings and those with losses or diminishing revenue. The tribunal did not specifically address this issue in detail, but the overall context suggests that the tribunal emphasized the need for a thorough and accurate comparability analysis based on functional similarity rather than rigid filters.

6. Incorrect Rejection of the Assessee's Benchmarking Analysis and Comparables:
The assessee argued that the AO/TPO incorrectly rejected some of the comparable companies selected by the assessee. The tribunal's detailed analysis of specific comparables like Accentia Technologies Ltd., Infosys BPO Ltd., and Acropetal Technologies Ltd. indicates that the tribunal focused on ensuring that the selected comparables were functionally similar to the assessee's operations.

7. Use of Single-Year Data for Margin Computation:
The assessee contended that the AO/TPO erred in using single-year data for margin computation, contrary to the requirement of considering multiple-year data to reflect normal business conditions. The tribunal did not specifically address this issue in detail, but the emphasis on accurate and fair comparability analysis implies the importance of considering appropriate data periods.

8. Disallowance of Risk Adjustment:
The assessee argued that the AO/TPO erred in not allowing risk adjustment to account for differences between international transactions and comparable uncontrolled transactions. The tribunal did not specifically address this issue in detail, but the overall emphasis on functional comparability and accurate analysis suggests the importance of considering risk adjustments where appropriate.

Conclusion:
The tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objections, directing the exclusion of Infosys BPO Ltd. and setting aside the inclusion of Acropetal Technologies Ltd. for further investigation. The tribunal upheld the inclusion of R. System International Ltd. and Caliber Point Business Solutions Ltd. as comparables and emphasized the importance of accurate and fair comparability analysis based on functional similarity.

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