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2019 (6) TMI 49 - AT - Income TaxTP adjustment - Comparable selection - functional dissimilarity - HELD THAT - EClerx Services Ltd this comparable is a best KPO company outsourcing substantial work to 3rd parties and that assessee is only providing back-office support services with its own human resource to the AEs. Further it has not been disputed that there is any change in the functionality of either companies from earlier years. Under such circumstances we direct Ld. TPO to exclude this comparable from the finalist. Infosys BPO Ltd and TCS E-Serve Ltd. - TCS E-Serve shows that this company is engaged in business process services to the banking and financial services industries which is considered as the primary segment. It is observed that the ownership of TCS e-services with Citibank group and which is a high brand value. See PR. COMMISSIONER OF INCOME TAX VERSUS B.C. MANAGEMENT SERVICES PVT. LTD. 2017 (12) TMI 255 - DELHI HIGH COURT Benchmarking the international transaction pertaining to purchase of fixed assets at nil - MAM selection - HELD THAT - Assessee purchased certain fixed assets from its AE wherein it had declared certain value. And the same has been rightly reported as purchase of fixed assets with the transacted value, as international transaction. This transaction is definitely covered within the definition of section 92B (1) and for any income arising from an international transaction arm s length price has to be determined in accordance to section 92C. Assessee has applied TNMM as most appropriate method for showing that the international transaction is at arm s length price. As observed from records that the matter needs to be restored back to file of Ld.TPO because markup cannot be taken as zero as has been done by TPO. Admittedly assessee gets depreciation as well as cost plus markup on the fixed assets purchased from AE. From order passed by Ld.TPO at page 225, it is observed that assessee, has not filed documents/evidences/proof showing value of assets as appearing in books of AEs to satisfaction of TPO. We direct Ld.TPO to determine the ALP based upon FAR analysis and on contemporaneous document filed by assessee. Assessee is directed to file all requisite details in respect of price for determining the arm s length price of the transaction.
Issues Involved:
1. Validity of the final assessment order. 2. Upward adjustment on account of transfer pricing matters. 3. Rejection of the economic analysis undertaken by the Appellant. 4. Rejection and addition of comparables on an ad-hoc basis. 5. Violation of natural justice principles. 6. Directions to rectify arithmetical errors in the computation of operating margins. 7. Application of arbitrary filters for identifying comparable companies. 8. Selection of companies earning super normal profits as comparables. 9. Failure to make appropriate adjustments for differences in risk profiles. 10. Use of single year data for financial year 2011-12. 11. Benchmarking the international transaction pertaining to purchase of fixed assets on a standalone basis. 12. Determination of arm's length price for the purchase of fixed assets. 13. Initiation of penalty under section 271(1)(c) of the Act. 14. Charging of interest under section 234A, 234B, and 234C of the Act. Detailed Analysis: 1. Validity of the Final Assessment Order: The assessee challenged the final assessment order dated 30 November 2016, passed by the Assistant Commissioner of Income Tax, Circle 5(2), New Delhi, as bad in law and void-ab-initio. 2. Upward Adjustment on Account of Transfer Pricing Matters: The learned AO computed the total income of the Appellant at INR 54,21,67,892/- against the returned income of INR 49,56,97,610/- by making an upward adjustment of INR 4,64,70,282/- on account of transfer pricing matters. This adjustment included INR 3,36,00,559/- for IT enabled back office support services and INR 1,28,70,223/- for the purchase of fixed assets from AE. 3. Rejection of the Economic Analysis Undertaken by the Appellant: The learned DRP/TPO/AO erred in rejecting the economic analysis undertaken by the Appellant by conducting a fresh economic analysis for the impugned international transactions involving provision of ITeS to AE and purchase of fixed assets from AE. 4. Rejection and Addition of Comparables on an Ad-hoc Basis: The learned DRP/TPO/AO erred in rejecting certain comparables and adding certain companies to the final set of alleged comparables on an ad-hoc basis, thereby resorting to cherry-picking of comparables for benchmarking the transaction involving provision of ITeS. 5. Violation of Natural Justice Principles: The learned TPO/AO violated the principles of natural justice by not giving due cognizance to the detailed analysis and technical arguments submitted by the appellant and issuing their respective orders after relying on completely new facts without giving the Assessee a proper opportunity of being heard. 6. Directions to Rectify Arithmetical Errors in the Computation of Operating Margins: The learned DRP erred in giving a direction to rectify the arithmetical errors in the computation of the operating margins of alleged comparable companies without appreciating that Indian regulations do not prescribe the methodology for computing operating margins applicable to the Appellant. 7. Application of Arbitrary Filters for Identifying Comparable Companies: The learned DRP/TPO/AO applied arbitrary filters for identifying companies comparable to the ITeS provided by the Appellant, including rejecting companies with turnover less than INR 1 Crore, different accounting years, employee cost less than 25% of sales, peculiar economic circumstances, and export revenue less than 75% of sales. 8. Selection of Companies Earning Super Normal Profits as Comparables: The learned DRP/TPO/AO erred by selecting certain companies earning super normal profits as comparable to the Appellant for the impugned transactions. 9. Failure to Make Appropriate Adjustments for Differences in Risk Profiles: The learned DRP/TPO/AO failed to make appropriate adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparables for the transaction involving provision of ITeS. 10. Use of Single Year Data for Financial Year 2011-12: The learned DRP/TPO/AO erred in using single-year data for the financial year 2011-12 of alleged comparable companies without considering the fact that the same was not available to the Appellant at the time of complying with the transfer pricing documentation requirements. 11. Benchmarking the International Transaction Pertaining to Purchase of Fixed Assets on a Standalone Basis: The learned DRP/TPO/AO erred in benchmarking the international transaction pertaining to the purchase of fixed assets on a standalone basis and rejecting the combined transaction approach adopted by the Assessee to benchmark the said impugned transaction. 12. Determination of Arm's Length Price for the Purchase of Fixed Assets: The learned DRP/TPO/AO erred in determining the arm's length price of the international transaction pertaining to the purchase of fixed assets by ignoring relevant facts, failing to understand that depreciation charged on the fixed asset forms part of the cost base, and not appreciating the valuation undertaken by custom authorities. 13. Initiation of Penalty Under Section 271(1)(c) of the Act: The learned AO erred in initiating a penalty under section 271(1)(c) of the Act. 14. Charging of Interest Under Section 234A, 234B, and 234C of the Act: The learned AO erred in charging interest under section 234A, 234B, and 234C of the Act. Separate Judgments Delivered: The Tribunal directed the exclusion of certain comparables (Eclerx Services Ltd, Infosys BPO Ltd, and TCS E-Serve Ltd) based on the functional dissimilarity with the assessee. The Tribunal found that the assessee was providing back-office support services with its own human resources, whereas the comparables were engaged in high-end integrated services or had high brand value impacting profitability. The Tribunal restored the issue of benchmarking the international transaction pertaining to the purchase of fixed assets back to the file of the TPO for determining the ALP based on FAR analysis and contemporaneous documents filed by the assessee. The Tribunal allowed the appeal filed by the assessee, directing the exclusion of certain comparables and restoring the issue of the purchase of fixed assets for fresh determination. Grounds related to the penalty and interest were considered premature or consequential and did not require adjudication.
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