2019 (5) TMI 622 - AT - Income Tax

TPA - comparable selection - functional dissimilarity - captive Data processing services - HELD THAT - Eclerx services Ltd is not a comparable company with the ITeS segment of the assessee. Therefore, we direct the learned transfer pricing officer/AO to exclude this company. Infosys BPO Ltd - Exclude the same from the comparability analysis for the reasons of having huge brand value. TCS E serve international Ltd is a subsidiary of Tata consultancy services Ltd. - it belongs to a Tata group and has paid contribution for Tata brand. We have also perused the annual report of the comparable company which is placed on careful analysis of the annual report it is found that in schedule N , Tata brand equity contribution of this comparable companies is ₹ 46065 thousands. Therefore we direct the learned transfer pricing officer to exclude the above comparable from the comparability analysis. Mphasis Fincources Ltd - is not a suitable comparable as it has been selected by the assessee on the basis of the data for a financial year 2008 09 despite the fact that assessee has used companies with financial year for FY 2009 10 as a filter. Further according to the TPO the functional profile is also different and employee compensation is a percentage to total expenses is less than 25%. The learned dispute resolution panel also accepted the reasons recorded by the learned transfer pricing officer for its rejection. We have carefully considered the contention of the assessee on this aspect. In the transfer pricing study report submitted before the learned transfer pricing officer the assessee did not submit the financial for Year 2009 10 of this comparable company. Risk adjustment - the appellant undertakes minimum business risk as against comparable companies that are full-fledged risk entrepreneurs - TPO DRP has rejected the argument of the assessee for the reason that assessee failed to demonstrate before them that the risk profile of the assessee is making a difference in the margins earned by the assessee and the comparables - HELD THAT - Before us also assessee could not demonstrate that how the risk profile is making a difference in the margin of the comparable companies as well as the assessee. Therefore we do not find any reason to interfere in the decision of the learned transfer pricing officer and approved by the learned dispute resolution panel. Accordingly we direct the learned transfer pricing officer to exclude Accentia technology Ltd, E Clerx services Ltd, Infosys BPO Ltd, TCS E serve international Ltd and TCS E serve limited.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Confirmation of addition to income based on Transfer Pricing adjustments.
3. Exclusion of certain comparables in the Transfer Pricing analysis.
4. Inclusion of a specific comparable in the Transfer Pricing analysis.
5. Claim for risk adjustment.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contested that the assessment order passed by the Learned Assessing Officer (AO) pursuant to the directions of the Learned Dispute Resolution Panel (DRP) is bad in facts and law. However, this issue was not elaborated upon in the detailed analysis, and it was dismissed as general in nature.

2. Confirmation of Addition to Income Based on Transfer Pricing Adjustments:
The AO, following the directions of the DRP, confirmed the addition of ?14,770,775 to the income of the appellant. The Transfer Pricing Officer (TPO) had proposed an adjustment of ?25,575,349 as the arm's-length price (ALP) of the international transaction. The DRP upheld the TPO's selection of 12 comparables and computed the mean operating profit/total cost (OP/TC) of the comparable companies at 28.83%, resulting in the adjustment.

3. Exclusion of Certain Comparables in the Transfer Pricing Analysis:
The assessee sought the exclusion of the following comparables on various grounds:

a. Accentia Technologies Ltd: The assessee argued for its exclusion due to functional dissimilarity, involvement in medical transcription services, significant brands, IPRs, goodwill, and business restructuring. The Tribunal agreed, noting the functional dissimilarity and the presence of advanced assets and directed the exclusion of Accentia Technologies Ltd.

b. E Clerx Services Ltd: The assessee contended that it is engaged in knowledge process outsourcing (KPO) and not comparable to simple IT-enabled services (ITeS). The Tribunal agreed, citing the Delhi High Court's decision in Ramp Green Solutions Pvt Ltd vs. CIT, and directed the exclusion of E Clerx Services Ltd.

c. Infosys BPO Ltd: The assessee argued for its exclusion due to high-end integrated services, significant intangible assets, and an extraordinary event of amalgamation. The Tribunal agreed, noting the impact of the Infosys brand on profitability, and directed the exclusion of Infosys BPO Ltd.

d. TCS E-Serve International Ltd: The assessee argued for its exclusion due to functional dissimilarity, payment for Tata brand equity, and large scale of operations. The Tribunal agreed, noting the impact of the Tata brand on pricing capacity, and directed the exclusion of TCS E-Serve International Ltd.

e. TCS E-Serve Ltd: Similar arguments were made as for TCS E-Serve International Ltd. The Tribunal agreed and directed the exclusion of TCS E-Serve Ltd.

4. Inclusion of a Specific Comparable in the Transfer Pricing Analysis:
The assessee sought the inclusion of Mphasis Fincources Ltd, arguing that it met the employee cost filter. The Tribunal noted that the financials for FY 2009-10 were not submitted to the TPO or DRP and rejected the inclusion of Mphasis Fincources Ltd.

5. Claim for Risk Adjustment:
The assessee claimed a risk adjustment, arguing that it undertakes minimal business risk compared to full-fledged risk-taking comparables. The TPO and DRP rejected this claim, stating that the assessee failed to demonstrate how the risk profile affected margins. The Tribunal upheld this decision, finding no reason to interfere.

Conclusion:
The Tribunal directed the exclusion of Accentia Technologies Ltd, E Clerx Services Ltd, Infosys BPO Ltd, TCS E-Serve International Ltd, and TCS E-Serve Ltd from the comparability analysis. The appeal was partly allowed, with ground number 2 being partly allowed and grounds 1 and 3 dismissed as general in nature. The order was pronounced in the open court on 06/05/2019.