2019 (9) TMI 972 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee is engaged in providing IT Support (ITES) account reconciliation services etc to Morgan Stanley group entities/its AEs. In the international transaction of assessee was accepted at the ALP in earlier years thus companies functionally with that of assessee need to be deselected from final list.

Issues Involved:
1. Deletion of M/s Mold-Tech Technology Ltd. as a comparable.
2. Deletion of M/s ICRA Techno Analytics Ltd. as a comparable.
3. Inclusion of 19 additional comparable companies by the Assessing Officer.
4. Rejection of the assessee's comparable company, Saven Technologies Limited.
5. Use of single-year data for Financial Year 2006-2007.
6. Application of inappropriate filters by the TPO for identifying comparable companies.
7. Non-granting of working capital adjustment.
8. Non-allowance of adjustment for the difference in the level of risk assumed.
9. Rejection of the 5% variation in the arithmetic mean of margins.
10. Enhancement of assessment without adequate opportunity.
11. Ignoring the tax holiday under section 10A of the Act.

Detailed Analysis:

1. Deletion of M/s Mold-Tech Technology Ltd. as a Comparable:
The CIT(A) excluded Mold-Tek Technologies Ltd. for being engaged in high-end KPO services, which are not comparable to the assessee's back-office support services. The Tribunal upheld this exclusion, referencing decisions where Mold-Tek was excluded due to its specialized engineering services.

2. Deletion of M/s ICRA Techno Analytics Ltd. as a Comparable:
The CIT(A) excluded ICRA Techno Analytics Ltd. due to its involvement in software development and consultancy, which lacked segmental data. The Tribunal supported this exclusion, citing the Delhi High Court's decision in PCIT Vs BC Management Services, which held that companies providing high-end BPO services without segmental data are not comparable to ITES providers.

3. Inclusion of 19 Additional Comparable Companies by the Assessing Officer:
The Tribunal addressed the inclusion of 19 additional comparables by the TPO. It excluded several companies (e.g., Eclerx Services Ltd., Accentia Technologies Ltd., Coral Hubs Ltd.) based on functional dissimilarity, involvement in high-end services, or unreliable financial data. The Tribunal emphasized the need for comparables to have similar business models and reliable financial data.

4. Rejection of the Assessee's Comparable Company, Saven Technologies Limited:
The TPO rejected Saven Technologies Limited, which the Tribunal did not specifically address in the detailed analysis but upheld the overall exclusion of certain comparables based on functional dissimilarity.

5. Use of Single-Year Data for Financial Year 2006-2007:
The Tribunal did not specifically address the use of single-year data but focused on the functional comparability and reliability of financial data in its analysis of comparables.

6. Application of Inappropriate Filters by the TPO for Identifying Comparable Companies:
The Tribunal found that the TPO applied inappropriate filters, leading to the inclusion of functionally dissimilar companies. It directed the exclusion of companies that did not meet the functional comparability criteria.

7. Non-Granting of Working Capital Adjustment:
The Tribunal did not specifically address the working capital adjustment but focused on the functional comparability and reliability of financial data in its analysis.

8. Non-Allowance of Adjustment for the Difference in the Level of Risk Assumed:
The Tribunal did not specifically address the risk adjustment but emphasized the need for comparables to have similar business models and reliable financial data.

9. Rejection of the 5% Variation in the Arithmetic Mean of Margins:
The Tribunal did not specifically address the 5% variation but focused on ensuring that the selected comparables were functionally similar and had reliable financial data.

10. Enhancement of Assessment Without Adequate Opportunity:
The Tribunal did not specifically address the enhancement of assessment but ensured that the comparables selected were functionally similar and had reliable financial data.

11. Ignoring the Tax Holiday Under Section 10A of the Act:
The Tribunal did not specifically address the tax holiday issue but focused on ensuring that the selected comparables were functionally similar and had reliable financial data.

Conclusion:
The Tribunal directed the exclusion of several comparables (e.g., Eclerx Services Ltd., Mold-Tek Technologies Ltd., Accentia Technologies Ltd., Coral Hubs Ltd.) due to functional dissimilarity, involvement in high-end services, or unreliable financial data. It emphasized the need for comparables to have similar business models and reliable financial data. The Tribunal allowed the appeal of the assessee and dismissed the appeal of the revenue, directing the AO/TPO to recompute the ALP based on the revised set of comparables.

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