2023 (12) TMI 633 - AT - Income Tax

TP Adjustment - Comparable selection - whether huge profit or a huge turnover, ipso facto lead to company's exclusion? - HELD THAT - As following the foot prints of Obopay Mobile Technology India Private Ltd 2018 (7) TMI 2129 - KARNATAKA HIGH COURT , Avaya India (P.) Ltd 2019 (7) TMI 1279 - DELHI HIGH COURT and in the case of Cadence Design Systems (I.) (P.) Ltd 2018 (4) TMI 1574 - ITAT NEW DELHI we hold that the turnover and brand name are relevant criteria for choosing companies as comparables in determining the ALP in Transfer Pricing cases. We, therefore, direct the learned Assessing Officer/learned TPO to exclude the entities Infosys BPM Services Pvt. Ltd., and eClerx Services Ltd from the list of comparables as per above criteria. Denial of working capital adjustment - As in view of the fact that for the assessment years 2009-10 and 2011-12, working capital adjustment is said to have been granted to the assessee apart from in sister concern s case of Parexel International Clinical Research Private Limited 2023 (3) TMI 1429 - ITAT BANGALORE we set aside this issue to the file of the learned Assessing Officer/learned TPO to decide the issue afresh in the light of the above, after obtaining necessary information from the assessee. Grounds are accordingly treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Exclusion of Infosys BPM Services Pvt. Ltd. and eClerx Services Ltd. as comparables.
2. Denial of working capital adjustment.

Summary:

Exclusion of Infosys BPM Services Pvt. Ltd. and eClerx Services Ltd. as comparables:

The assessee challenged the inclusion of Infosys BPM Services Pvt. Ltd. and eClerx Services Ltd. as comparables in the ITeS segment. The assessee argued that Infosys BPM Services Pvt. Ltd. is functionally different, engaged in diversified activities, and leverages significant brand value and marketing expenses. Similarly, eClerx Services Ltd. was argued to be functionally different due to its KPO services, high advertising costs, and lack of segmental data. The Tribunal considered precedents, including the assessee's own cases and other relevant judgments, and concluded that both companies should be excluded based on their functional dissimilarities, brand value, and other factors. The Tribunal directed the Assessing Officer/TPO to exclude these entities from the list of comparables.

Denial of working capital adjustment:

The assessee argued for a working capital adjustment, which was denied by the TPO and DRP on the grounds that the impact of differences in working capital requirements was not demonstrated with sufficient data. The Tribunal, referencing previous decisions, including the assessee's own cases and OECD guidelines, held that working capital adjustments should be allowed to ensure a fair comparison. The Tribunal emphasized that transfer pricing analysis involves estimation and reasonable adjustments should be made. The Tribunal directed the Assessing Officer/TPO to reconsider the issue of working capital adjustment in light of the provided guidelines and precedents.

Conclusion:

The appeal was partly allowed for statistical purposes, with directions to exclude Infosys BPM Services Pvt. Ltd. and eClerx Services Ltd. from the list of comparables and to reconsider the working capital adjustment.