2019 (10) TMI 856 - AT - Income Tax

TP Adjustment - comparable selection - functional similarity - HELD THAT - Assessee in the instant case is engaged in the provision of information technology (IT) enabled back office support service in the nature of customized proprietary research and analytic support to Copal group. The assessee in the year under consideration has entered into international transaction to the tune on account of provision of Information Technology Enabled Services thus companies functionally dissimilar with that of assessee need to be deselected.

Summary

Issues Involved:
1. Upward adjustment to the income of the appellant by INR 1,28,30,310.
2. Inclusion of Vishal Information Technologies Ltd. as a comparable.
3. Inclusion of other companies as comparables.
4. Ignoring the claim for working capital adjustment.
5. Incorrect operating margin of Asit C. Mehta Financial Services Ltd.

Detailed Analysis:

1. Upward Adjustment to the Income:
The Tribunal noted that the assessee is engaged in providing financial services and had declared a total income of ?2,83,768 for the assessment year 2006-07. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) due to international transactions amounting to ?12,02,77,639. The TPO proposed a TP adjustment of ?1,74,55,101, which was later reduced to ?1,28,30,310 by the AO following the directions of the Dispute Resolution Panel (DRP).

2. Inclusion of Vishal Information Technologies Ltd.:
The Tribunal found that Vishal Information Technologies Ltd. (previously Coral Hub Ltd.) was functionally dissimilar to the assessee. The company provided agency services by outsourcing to third-party vendors, which is different from the assessee's business model of providing back-office support services. The Tribunal referred to the Delhi High Court's decision in Rampgreen Solutions vs. CIT, which excluded Vishal Information Technologies Ltd. due to its distinct business model. The Tribunal directed the AO/TPO to exclude Vishal Information Technologies Ltd. from the list of comparables.

3. Inclusion of Other Companies as Comparables:
Asit C. Mehta Financial Services Ltd. (Segmental):
The Tribunal noted that this company was functionally dissimilar as its income was derived from portfolio management fees, IT enabled services, and software development, and no segmental details were available. The Tribunal also observed that the company's business model changed due to amalgamation during the assessment year 2006-07. The Tribunal directed the exclusion of Asit C. Mehta Financial Services Ltd. from the list of comparables.

Maple eSolutions Ltd.:
The Tribunal found that Maple eSolutions Ltd. should be excluded due to functional dissimilarities, unreliable financial data, and involvement in fraudulent activities by its promoters. The Tribunal referred to various decisions, including CRM Services India Pvt. Ltd. and M/s Deutsche Networking Services Pvt. Ltd., which excluded Maple eSolutions Ltd. from the list of comparables. The Tribunal directed the exclusion of Maple eSolutions Ltd. from the list of comparables.

Triton Corp Ltd.:
The Tribunal observed that Triton Corp Ltd. should be excluded due to functional dissimilarities, non-availability of segmental data, unclear financials, and involvement in fraudulent activities. The Tribunal noted that the TPO himself had rejected this comparable in the assessee's own case for assessment year 2008-09. The Tribunal directed the exclusion of Triton Corp Ltd. from the list of comparables.

4. Ignoring the Claim for Working Capital Adjustment:
The Tribunal found that the TPO had allowed working capital adjustment for the assessment years 2007-08 and 2008-09, and the DRP had allowed it for the assessment year 2011-12. Since there was no change in the business model of the assessee, the Tribunal saw no reason for denying the working capital adjustment. The Tribunal restored this issue to the file of the TPO for verification and directed to grant the working capital adjustment after necessary verification.

5. Incorrect Operating Margin of Asit C. Mehta Financial Services Ltd.:
The Tribunal addressed this issue under the inclusion of other companies as comparables and directed the exclusion of Asit C. Mehta Financial Services Ltd. due to functional dissimilarities and lack of segmental details.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directed the exclusion of certain companies from the list of comparables, and restored the issue of working capital adjustment to the TPO for verification. The final adjustment to the arm's length price of the international transaction was to be computed by the AO/TPO accordingly.