2020 (2) TMI 1179 - AT - Income Tax

Transfer pricing addition - international transaction of Provision of Carpet designing, planning and estimation services - Comparable selection - HELD THAT - Referring to carpet design services of assessee companies functionally dissimilar with that of assessee need to be deselected from final list. Also excluding certain companies on the basis of higher turnover. Accentia Technologies Ltd., Eclerx Services Ltd.and Infosys BPO Ltd to be excluded from final list. Send the matter back to the AO/TPO for fresh determination of ALP of the international transaction in dispute in accordance with the directions given supra - Appeal is allowed for statistical purposes.

Issues Involved:
1. Transfer pricing addition in the international transaction of provision of carpet designing, planning, and estimation services.
2. Selection of comparables for determining the arm's length price (ALP).

Issue-wise Detailed Analysis:

1. Transfer Pricing Addition:
The appeal concerns the transfer pricing addition of ?56,09,376/- made in the international transaction of 'Provision of Carpet designing, planning, and estimation services' for the assessment year 2011-12. The assessee, a domestic company engaged in manufacturing and sale of machine-made Axminster Woven carpets and spun yarn, reported several international transactions, including the provision of carpet design services to its Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) determined the arm's length price (ALP) for these services, leading to the disputed addition.

2. Selection of Comparables:
The primary controversy revolves around the selection of comparables for determining the ALP. The TPO did not dispute the use of the Transactional Net Margin Method (TNMM) and the Profit Level Indicator (PLI) of Operating profit to Total Cost (OP/TC) as chosen by the assessee. However, the dispute pertains to the inclusion of certain companies as comparables. The assessee challenged the inclusion of three companies: Infosys BPO Ltd., Eclerx Services Ltd., and Accentia Technologies Ltd.

i. Infosys BPO Ltd.:
The TPO included Infosys BPO Ltd. as a comparable despite the assessee's objections regarding functional differences and significant size disparity. Infosys BPO Ltd. had a total revenue of ?1129.11 crore, vastly exceeding the assessee's revenue of ?5.53 crore in the relevant segment. The Tribunal found that the services rendered by Infosys BPO Ltd. spanned multiple sectors, unlike the assessee's exclusive focus on carpet manufacturing. Citing the Bombay High Court decision in CIT Vs. Pentair Water India Pvt. Ltd., the Tribunal concluded that Infosys BPO Ltd. should not be included as a comparable due to the significant turnover difference and functional dissimilarities.

ii. Eclerx Services Ltd.:
The TPO included Eclerx Services Ltd. despite the assessee's contention that it rendered Knowledge Process Outsourcing (KPO) services, whereas the assessee provided Business Process Outsourcing (BPO) services. The Tribunal noted that the nature of services rendered by Eclerx, including consulting, business analysis, and solution testing for financial institutions, differed significantly from the assessee's design services. The Tribunal emphasized that comparability should be based on the specific nature of services provided, not merely the broad classification of KPO and BPO. Consequently, Eclerx Services Ltd. was excluded from the list of comparables.

iii. Accentia Technologies Ltd.:
The TPO included Accentia Technologies Ltd., which the assessee argued was functionally incomparable due to its involvement in KPO services, product development, and intellectual property rights. The Tribunal found that Accentia Technologies Ltd. engaged in developing and marketing its own software products and provided healthcare receivable management services, which were not comparable to the assessee's ITES segment. The Tribunal referenced the Delhi High Court decision in Principal CIT vs. B.C. Management Services Pvt. Ltd., which held that Accentia Technologies Ltd. was not comparable with a company providing ITES. Thus, Accentia Technologies Ltd. was excluded from the list of comparables.

Conclusion:
The Tribunal set aside the impugned order and remanded the matter back to the AO/TPO for fresh determination of the ALP, excluding the three disputed companies from the list of comparables. The assessee was to be given a reasonable opportunity of hearing. The appeal was allowed for statistical purposes.

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