2021 (2) TMI 350 - AT - Income Tax

TP Adjustment - comparable selection - excluding the comparable M/s. Cosmic Global Ltd. in support service segment - HELD THAT - Since exclusion of the company has been sought first time before the Tribunal and in order to verify the exact nature translation work and the expenses on translation whether the same are in the nature of outsourcing or incurred by the assessee in developing employees we feel it appropriate to restore the issue of exclusion of the company from the set of the comparables to the file of the Learned AO/TPO for verifying from the Annual Report or by way of issuing notice under section 133(6) of the Act to the company. It is needless to mention that the assessee shall be provided copy of the information gathered by the AO/TPO from the company and also provide adequate opportunity of being heard on the issue. The additional ground No. 1 of the appeal is accordingly allowed for statistical purposes. Adopting correct margin of comparable M/s. R Systems International Ltd. under the ITeS segment - In transfer pricing comparability of the assessee has to be made with other companies in identical environment. Therefore same financial period of both the assessee and the comparable should be considered for comparison. In view of the above facts and circumstances we direct the learned TPO to compute the margin of this company after taking into consideration the financial results of four quarters which have been considered in the case of the assessee. The relevant ground of the appeal ground is accordingly allowed for statistical purposes Under ITES Segment inclusion of M/s. Vishal Information Technologies Ltd. in set of comparables - Testing of products and services in the field of the pollution-control are functionally different from the providing marketing support services. For providing testing services higher technical skills and experiences are required whereas support services can be provided using comparatively less technical persons. In view of different nature of services we hold the company as functionally dissimilar and accordingly direct the Learned AO/TPO to exclude the company from the final set of the comparable. Exclusion of companies being functionally dissimilar with that of assessee. CIT(A) has excluded the company on the ground of related party transactions being more than 25% of the sales - Comparing the total related party transaction with the sales reflect a distorted view of the measure of related party impact on the margin of the company. The Learned Counsel was directed to provide any binding judicial precedent where a company was rejected on the basis of filter of ratio of total RPT to sales being more than 25% however no such information was provided by him. In the facts and circumstances we are of the opinion that the company cannot be rejected on the ground of RPT filter. The direction of the Learned CIT(A) on the issue in dispute are set aside and the Learned AO/TPO is directed to retain the said company as comparable in the final set of the comparables. Exclusion of M/s. Mold-Tek Technologies Ltd. - CIT(A) is justified in excluding the company because of extraordinary event of merger/demerger. The Learned CIT(A) has also noted that the TPO himself has not included the company as comparable in subsequent year. Accordingly we uphold the order of the Ld. CIT(A) on the issue in dispute.

Summary

Issues Involved:
1. Adjustment to arm's length price of international transactions.
2. Jurisdictional error in referring the matter to the Transfer Pricing Officer (TPO).
3. Determination of arm's length price using comparable companies.
4. Inclusion and exclusion of specific comparable companies.
5. Computation of operating margin for a comparable company.

Detailed Analysis:

1. Adjustment to Arm's Length Price of International Transactions:
The assessee contested the adjustment made by the Assessing Officer (AO) to the arm's length price of international transactions in the IT enabled segment. The Tribunal examined the comparables selected by the TPO and the adjustments proposed. The Tribunal upheld the approach of the TPO in applying additional and modified quantitative filters to arrive at a set of comparable companies, but directed the AO/TPO to verify the functional similarity and business models of the comparables.

2. Jurisdictional Error in Referring the Matter to the TPO:
The assessee argued that the AO did not record any reasons for referring the matter to the TPO, as required under section 92CA(1) of the Income Tax Act, 1961. The Tribunal did not provide a detailed analysis on this issue, focusing instead on the substantive grounds of appeal related to the selection and rejection of comparables.

3. Determination of Arm's Length Price Using Comparable Companies:
The Tribunal reviewed the comparables selected by the TPO and the assessee. The TPO had rejected some comparables proposed by the assessee and included others. The Tribunal directed the AO/TPO to verify the functional similarity of certain comparables, such as Cosmic Global Ltd., and to compute the correct operating margin for R Systems International Ltd. based on quarterly results.

4. Inclusion and Exclusion of Specific Comparable Companies:
- Cosmic Global Ltd.: The Tribunal directed the AO/TPO to verify the nature of translation services provided by Cosmic Global Ltd. and whether it operates on an outsourcing model.
- Vishal Information Technologies Ltd.: The Tribunal restored the issue to the AO/TPO to verify if the company operates on an outsourced model.
- Choksi Laboratories Ltd.: The Tribunal held that the company is functionally dissimilar to the assessee and directed its exclusion.
- Saket Projects Ltd.: The Tribunal upheld the exclusion of this company on the ground of functional dissimilarity.
- Wapcos Ltd. and Rites Ltd.: The Tribunal upheld the exclusion of these companies due to functional dissimilarity and their status as public sector undertakings.
- Accentia Technologies Ltd.: The Tribunal upheld the exclusion of this company due to extraordinary events affecting its profitability.
- Eclerx Services Ltd.: The Tribunal upheld the exclusion of this company as it provides high-end KPO services, which are not comparable to the assessee's ITeS services.
- HCL Comnet Systems and Services Ltd.: The Tribunal set aside the exclusion of this company, directing the AO/TPO to retain it as a comparable.
- Mold-Tek Technologies Ltd.: The Tribunal upheld the exclusion of this company due to extraordinary events of merger/demerger.

5. Computation of Operating Margin for a Comparable Company:
The Tribunal directed the AO/TPO to compute the correct operating margin for R Systems International Ltd. based on quarterly financial results to ensure comparability with the assessee's financial period.

Conclusion:
The Tribunal provided a detailed analysis of the comparables selected by both the TPO and the assessee, directing the AO/TPO to verify the functional similarity and business models of certain comparables and to compute the correct operating margins. The Tribunal upheld the exclusion of several comparables due to functional dissimilarity, extraordinary events, or their status as public sector undertakings, while setting aside the exclusion of HCL Comnet Systems and Services Ltd.