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2021 (1) TMI 621 - AT - Income TaxTP Adjustment - Comparable selection - HELD THAT - For the purpose of exclusion or inclusion of any comparable, only two things are required to be looked into (1) the functional profile of the assessee, (2) the annual reports of the comparable companies. Accentia Technologies Limited - Merely because the assessee as well as the comparable company operates in different business segment, it does not make their functions different. It is undisputedly both are engaged in BPO services. As the comparable company has only one segment of Health Care BPO services, we do not find any requirement of segmental information. With respect to the extra-ordinary events stated by the ld. AR it is apparent that this company has entered into scheme of amalgamation wherein earlier the subsidiary of the company, amalgamated with the assessee company, with effect from 1st April, 2008. Therefore, in this year there is no extra-ordinary event but it was in financial year 2008-09. There is no fluctuation in profit. Therefore we find this comparable company functionally similar and does not have any other reasons to exclude it. In view of this we do not find any infirmity in the order of the ld. Lower authorities in retaining this comparable. This comparable company cannot be excluded. Fortune Infotech Ltd. fails the receding sales filter applied by the TPO and also owns its own software Finetran index - this comparable company does not pass is a filter applied by the learned TPO himself. In view of this, we direct the ld. TPO to exclude it. Igate Clobal Solutions Ltd - Such a large company whereby turnover of 509 times cannot be considered as a comparable. We direct the ld. TPO to exclude the same. Infosys BPO Ltd.- The turnover of the comparable is ₹ 1126 crores which is 616 times more than the assessee. Therefore, on this criteria itself, we direct the ld. TPO to exclude this comparable company. TCS E-Serve International Ltd - It has a huge brand value as it belongs to Tata Group. We find that this comparable company has a turnover of ₹ 1,492,956,000/ whereas the turnover of the assessee is merely ₹ 1.82 crores. Therefore on this criteria itself the learned TPO is directed to exclude this comparable company. TCS E Serve Limited company has a turnover of ₹ 1359 crores and therefore on this criteria itself the learned TPO is directed to exclude this comparable company.
Issues Involved:
1. Jurisdictional error in the reference made by the AO to the TPO. 2. Determination of the arm's length price (ALP) of international transactions. 3. Selection and rejection of comparable companies by the TPO. 4. Initiation of penalty proceedings under Section 271(1)(c) of the Act. 5. Charging and computing interest under Sections 234A, 234B, and 234C of the Act. Issue-wise Detailed Analysis: 1. Jurisdictional Error: The assessee contended that the reference made by the AO to the TPO suffered from a jurisdictional error as the AO did not record any reasons in the assessment order to conclude that it was "expedient and necessary" to refer the matter to the TPO for computation of the arm's length price. However, this ground was not pressed during the hearing and was thus dismissed. 2. Determination of ALP: The AO determined the ALP of the assessee's international transactions at ?21,307,974 as opposed to ?18,263,276 determined by the assessee, leading to an addition of ?3,044,698. The assessee adopted the Transactional Net Margin Method (TNMM) and selected 10 comparable companies with an average margin of 13.60%, which was later updated to 10.57%. The TPO, however, selected different comparables and determined an adjusted PLI of 33.92%, resulting in the proposed adjustment. 3. Selection and Rejection of Comparable Companies: The assessee contested the inclusion of six comparables selected by the TPO: - Accentia Technologies Limited: The assessee argued it was functionally dissimilar and had extra-ordinary events. However, the Tribunal found it functionally similar to the assessee and retained it as a comparable. - Fortune Infotech Ltd.: The Tribunal excluded this company as it failed the declining sales filter applied by the TPO himself. - Igate Global Solutions Ltd.: This company was excluded due to its significantly higher turnover compared to the assessee. - Infosys BPO Ltd.: Excluded due to its massive turnover, which was 616 times more than the assessee's. - TCS E-Serve International Ltd. and TCS E-Serve Ltd.: Both were excluded due to their substantially higher turnovers and brand value associated with the Tata Group. 4. Initiation of Penalty Proceedings: The assessee challenged the initiation of penalty proceedings under Section 271(1)(c) of the Act. However, no arguments were advanced on this ground during the hearing, and it was dismissed. 5. Charging and Computing Interest: The assessee contested the charging and computing of interest under Sections 234A, 234B, and 234C of the Act. Similar to the penalty proceedings, no arguments were presented, and this ground was also dismissed. Conclusion: The appeal was partly allowed, with the Tribunal directing the exclusion of certain comparables and retaining others. The grounds related to jurisdictional error, penalty proceedings, and interest computation were dismissed due to lack of arguments or pressing of those grounds. The final determination of the TP adjustment was modified based on the exclusion of specific comparables. The order was pronounced in the open court on 15/01/2021.
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