2020 (2) TMI 930 - AT - Income Tax

TP Adjustment - comparable selection - assessee bench marked its ALP under Transaction Net Margin Method (TNMM) - HELD THAT - Assessee is providing IT-enabled services / date processing services and business processing outsourcing, thus companies functionally dissimilar with that of assessee need to be deselected from final list

Summary

Issues Involved:
1. Transfer Pricing addition to total income
2. Functional Profile of the Appellant
3. Incorrect selection of comparables by the learned TPO
4. Incorrect rejection of Appellant's benchmarking analysis and comparables
5. Erred in using single year data for margin computation
6. Risk adjustment disallowed
7. Disallowance on account of delayed payment of employee's ESI Contribution
8. Initiation of Penalty Proceedings
9. Levy of Incorrect Interest under Section 234B & 234C of the Act

Detailed Analysis:

1. Transfer Pricing Addition to Total Income
The appeal concerns an addition of ?40,94,88,782/- to the appellant's total income based on Chapter X of the Income-tax Act, 1961. The appellant is a low-end Business Process Outsourcing (BPO) service provider. The TPO included MPS Limited as a comparable, which the appellant contested, arguing that it should not be considered comparable due to its different functional profile.

2. Functional Profile of the Appellant
The appellant argued that it is a low-end back office support service provider, and this was not adequately considered by the AO/TPO and the DRP. The appellant referenced the Income Tax Appellate Tribunal's (ITAT) Special Bench decision in its own case, which emphasized identifying principal functions performed by the appellant and comparing them with those of comparable companies.

3. Incorrect Selection of Comparables by the Learned TPO
The TPO's selection of MPS Limited as a comparable was contested. The appellant argued that the TPO did not provide the search process for selecting additional comparable companies, which amounted to cherry-picking. The ITAT found that MPS Limited, engaged in software development and providing technology solutions for the publishing industry, was not comparable to the appellant, a low-end support service provider.

4. Incorrect Rejection of Appellant's Benchmarking Analysis and Comparables
The appellant's selected comparables, such as Allsec Technologies Limited and others, were rejected by the TPO. The ITAT directed the inclusion of Caliber Point Solutions Ltd. as a comparable, following its own decision in the appellant's case for the previous assessment year. The rejection of comparables based on different accounting periods was also contested, and the ITAT referenced the Bombay High Court's decision in PTC Software, which held that different year-end should not be a sole reason for rejection.

5. Erred in Using Single Year Data for Margin Computation
The appellant argued that the TPO erred by not considering the requirement of proviso to Rule 10B(4) while analyzing data for comparability. This issue was not pressed further by the appellant during the hearing.

6. Risk Adjustment Disallowed
The appellant contested the non-allowance of risk adjustment by the TPO/DRP. This issue was not pressed further by the appellant during the hearing.

7. Disallowance on Account of Delayed Payment of Employee's ESI Contribution
The AO disallowed payments towards employee's ESIC Contribution aggregating ?478,028/-, even though they were paid within the due date of filing the return under section 139(1) of the Act. The DRP did not adjudicate the appellant's objections on this matter. This issue was not pressed further by the appellant during the hearing.

8. Initiation of Penalty Proceedings
The AO initiated penalty proceedings under Section 271(1)(c) of the Act. This issue was not pressed further by the appellant during the hearing.

9. Levy of Incorrect Interest under Section 234B & 234C of the Act
The appellant contested the computation of interest under Sections 234B and 234C of the Act. This issue was not pressed further by the appellant during the hearing.

Conclusion:
The ITAT directed the inclusion of Caliber Point Solutions Ltd. and exclusion of MPS Limited from the final set of comparables. The ITAT emphasized that MPS Limited, engaged in providing publishing solutions and software development, was not comparable to the appellant, a low-end support service provider. The appeal was partly allowed, and other grounds of appeal were treated as not pressed and dismissed. The order was pronounced in the open court on 05-02-2020.