2019 (10) TMI 726 - AT - Income Tax

Transfer pricing adjustment - selection of three comparables by the Transfer Pricing Officer - HELD THAT - Companies functionally dissimilar with that of assessee as ITES service provider need to be deselected from final list.

Summary

Issues Involved:
1. Selection of comparables for transfer pricing adjustment.
2. Functional dissimilarity of selected comparables.
3. Impact of extraordinary events on comparability.
4. Presence of substantial intangibles and brand value advantage.

Issue-wise Detailed Analysis:

1. Selection of Comparables for Transfer Pricing Adjustment:
The primary issue in the appeal pertains to the addition of ?1,15,66,256 on account of transfer pricing adjustment. The dispute centers around the selection of three comparables by the Transfer Pricing Officer (TPO) and upheld by the Commissioner of Income Tax (Appeals). The assessee, an Indian company and wholly owned subsidiary of a US-based company, provided Information Technology Enabled Services (ITES) to its Associated Enterprises (AE). The assessee used the Transactional Net Margin Method (TNMM) and selected ten comparables with an arithmetic mean of 4.31%, which was claimed to be at arm's length. However, the TPO rejected most of the comparables and selected nine companies with an arithmetic mean of 32.35%, resulting in a transfer pricing adjustment.

2. Functional Dissimilarity of Selected Comparables:
The assessee contested the selection of three comparables: Accentia Technologies Ltd., TCS e-Serve Ltd., and TCS e-Serve International Ltd., arguing that they were functionally dissimilar.

Accentia Technologies Ltd.:
The assessee argued that Accentia Technologies Ltd. provides diversified knowledge process outsourcing (KPO) services, including medical transcription and coding services, making it functionally different. Additionally, the company has significant intangibles, substantial marketing expenditure, and underwent extraordinary events like acquisition and amalgamation, impacting profitability. The Tribunal noted that the company's activities and financial characteristics made it non-comparable to the assessee, consistent with various judicial precedents.

TCS e-Serve Ltd.:
The assessee argued that TCS e-Serve Ltd. is engaged in business process management services in the banking and financial sectors, primarily serving Citi Group entities globally. The company benefits from the Tata brand, owns substantial intangibles, and operates on a different scale. The Tribunal agreed that the brand value and functional differences, supported by Tribunal and High Court decisions, made TCS e-Serve Ltd. non-comparable.

TCS e-Serve International Ltd.:
The assessee contended that TCS e-Serve International Ltd. provides a broad range of services, including financial information processing and business process outsourcing services to various industries. The company benefits from the Tata brand and owns substantial intangibles. The Tribunal found that the company's diversified services and brand advantage made it functionally different from the assessee, aligning with previous Tribunal decisions.

3. Impact of Extraordinary Events on Comparability:
The Tribunal acknowledged that extraordinary events like acquisition and amalgamation in Accentia Technologies Ltd. could impact profitability, making it non-comparable. This consideration was consistent with various judicial precedents.

4. Presence of Substantial Intangibles and Brand Value Advantage:
The Tribunal noted that both TCS e-Serve Ltd. and TCS e-Serve International Ltd. benefit from the Tata brand and own substantial intangibles, which significantly impact pricing and profitability. This brand advantage and the presence of intangibles were crucial factors in determining non-comparability, supported by multiple judicial decisions.

Conclusion:
The Tribunal held that Accentia Technologies Ltd., TCS e-Serve Ltd., and TCS e-Serve International Ltd. could not be treated as comparables to the assessee due to functional dissimilarities, extraordinary events, and brand advantages. The Tribunal directed the Assessing Officer to recompute the arm's length price of the ITES provided to the AE, considering the Tribunal's observations. The appeal was partly allowed.