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2023 (3) TMI 388 - AT - Income TaxTP Adjustment - Comparable selection - application of turnover filter - HELD THAT - Four companies listed whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. Functional dissimilarity - Set aside the question of comparability of CES Ltd., to the TPO/AO to examine as to whether the functional profile of the assessee and the assessees in the decisions cited by the learned AR remains the same in Assessment Year 2017-18 as it was in Assessment Year 2016-17. We set aside the question of comparability of Manipal Digital Systems Pvt.Ltd., to the TPO/AO to examine as to whether the functional profile of the assessee and the assessees in the decisions cited by the learned AR remains the same in Assessment Year 2017-18 as it was in Assessment Year 2016-17.
Issues Involved:
1. Determination of Arms' Length Price (ALP) for the international transaction of rendering Information Technology enabled Services (ITeS). 2. Application of turnover filter for selecting comparable companies. 3. Functional comparability of selected companies. Detailed Analysis: 1. Determination of Arms' Length Price (ALP) for the international transaction of rendering Information Technology enabled Services (ITeS): The assessee, engaged in providing ITeS to its wholly-owned holding company, filed a Transfer Pricing Study (TP Study) justifying the price paid in the international transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM). The assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) and identified 11 comparable companies. The Transfer Pricing Officer (TPO) accepted TNMM as the MAM and used the same PLI. The TPO selected additional comparable companies, resulting in a final set of 13 companies. The TPO computed an addition to the total income based on the adjustment to ALP, resulting in an addition of Rs.2,61,16,669/- to the total income of the assessee. 2. Application of turnover filter for selecting comparable companies: The assessee contested the inclusion of four companies selected by the TPO on the grounds that their turnover exceeded Rs.200 Crores, while the assessee's turnover was only Rs.31.39 Crores. The Tribunal referred to several judicial decisions, including the case of Dell International Services India (P) Ltd. Vs. DCIT, which held that companies with high turnover should be excluded from the list of comparable companies when determining ALP. The Tribunal concluded that the four companies with turnovers exceeding Rs.200 Crores should be excluded from the list of comparable companies. 3. Functional comparability of selected companies: The assessee sought the exclusion of CES Ltd. and Manipal Digital Systems Pvt. Ltd. on the basis that they were not functionally comparable. For CES Ltd., it was argued that the company provides both knowledge process outsourcing (KPO) and business process outsourcing (BPO) services, which are high-end services and not comparable to the routine ITeS provided by the assessee. The Tribunal, after considering the functional profile, directed the TPO/AO to re-examine the comparability of CES Ltd. for the relevant assessment year. For Manipal Digital Systems Pvt. Ltd., the assessee argued that the company provides multiple high-end services, including KPO activities like Design Services and Animation, without segmental details available in the financial statements. The Tribunal referred to the decision of the ITAT, Pune Bench, which excluded Manipal Digital Systems Pvt. Ltd. from the list of comparables for being functionally different. The Tribunal directed the TPO/AO to re-examine the comparability of Manipal Digital Systems Pvt. Ltd. for the relevant assessment year. Conclusion: The Tribunal directed the TPO to recompute the ALP of the international transaction after excluding the four companies with high turnover and re-examining the functional comparability of CES Ltd. and Manipal Digital Systems Pvt. Ltd. The appeal by the assessee was partly allowed, and the TPO was instructed to afford the assessee an opportunity of being heard.
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