2024 (7) TMI 630 - AT - Income Tax

TP Adjustment - determination of functional profile - whether the assessee is a KPO/ITeS/high end BPO ? - HELD THAT - There is inconsistency in the adjudication of this issue. The Tribunal in the case of the assessee for A.Ys. 2011-12 and 2012-13, treated the assessee as TPO/KPO whereas while deciding the appeal for A.Y. 2014-15, the Tribunal had deleted the E-Clerks on the premise that the assessee is not a KPO / ITeS. In our considered opinion, though the TPO in his order has mentioned that the assessee is a ITeS, however, the issue is required to be examined afresh by the TPO on the basis of the agreements entered by the assessee with its AEs and functions performed. The TPO shall examine the work profile of the assessee vis- -vis it s A.E. and the qualifications and experiences of employees / work force engaged by the assessee in discharging its duties pursuant to the contracts entered with its A.E. and remuneration paid. Based on the above said data, the TPO shall adjudicate and decide whether the assessee is a ITeS / KPO / high end BPO or merely low end BPO after following due process of law and decide the Arms Length Price afresh after providing the opportunity of hearing to the assessee, in accordance with law. The assessee is directed to produce all the documents / submissions before the TPO to substantiate its case that the assessee is not KPO / ITeS. Appeal of the assessee is allowed for statistical purposes.

Issues Involved:
1. Transfer Pricing Adjustment
2. Rejection of Transfer Pricing Analysis
3. Application of Filters for Comparable Companies
4. Non-operating Expenditure Consideration
5. Working Capital Adjustment
6. Risk Adjustment
7. Inclusion of Functionally Non-comparable Companies
8. Exclusion of Functionally Comparable Companies
9. Incorrect Margin Computation
10. Entity Level Adjustment
11. Outstanding Receivables as Separate Transaction
12. Notional Interest on Receivables
13. Benchmarking with SBI Short Term Deposit Rates
14. Benchmarking with International Market Rates
15. Deduction of Education Cess
16. Fresh Claim on Education Cess
17. Levy of Interest and Penalty

Detailed Analysis:

1. Transfer Pricing Adjustment:
The Deputy Commissioner of Income-tax (Transfer Pricing Officer) and the Assessing Officer, under the directions of the Dispute Resolution Panel (DRP), made a Transfer Pricing addition of Rs. 19,48,67,226 to the appellant's income, determining a total income of Rs. 49,99,97,800. This adjustment was contested by the assessee as wholly unjustified and liable to be deleted.

2. Rejection of Transfer Pricing Analysis:
The TPO and DRP rejected the transfer pricing analysis/study prepared by the appellant, without satisfying the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act. The appellant argued that this rejection was contrary to law.

3. Application of Filters for Comparable Companies:
The TPO applied certain filters, such as rejecting companies with different financial year endings, export revenue less than 75% of total revenue, and companies with peculiar economic circumstances. The DRP upheld these actions, which the appellant contested as incorrect.

4. Non-operating Expenditure Consideration:
The TPO considered provisions for bad and doubtful debts and bad debts as non-operating expenditure while computing the operating margin of comparable companies. The DRP upheld this consideration, which was contested by the appellant.

5. Working Capital Adjustment:
The TPO did not allow a working capital adjustment, which the appellant demonstrated was necessary to account for differences between the international transactions undertaken by the appellant and those by the comparables. The DRP upheld this decision.

6. Risk Adjustment:
The TPO did not allow a risk adjustment to account for differences between the international transactions undertaken by the appellant and those by the comparables. The DRP upheld this decision, which was contested by the appellant.

7. Inclusion of Functionally Non-comparable Companies:
The TPO included companies such as Microland Limited, Crossdomain Solutions Private Limited, Tech Mahindra Business Services Limited, Infosys BPO Limited, SPI Technologies India Private Limited, Eclerx Services Limited, and MPS Limited as comparables, despite them being functionally dissimilar, earning high margins due to extraordinary events, or having brand presence. The DRP upheld this inclusion.

8. Exclusion of Functionally Comparable Companies:
The TPO excluded companies like Cosmic Global Limited, Sundaram Business Services Private Limited, ACE BPO Services Private Limited, Suprawin Technologies Limited, Informed Technologies Limited, Jindal Intellicom Limited, Allsec Technologies Limited, Tata Elxsi Limited, BNR Udyog Limited, R Systems International Limited, and Tata Consulting Engineers Limited, which were functionally comparable and passed all filters applied by the TPO. The DRP upheld this exclusion.

9. Incorrect Margin Computation:
The TPO incorrectly computed the margin of comparable companies like Microland Limited, Infosys BPO Limited, SPI Technologies India Private Limited, and MPS Limited. The DRP upheld these computations, which were contested by the appellant.

10. Entity Level Adjustment:
The TPO made an adjustment on an overall entity level instead of restricting the transfer pricing adjustment only to the associated enterprise segment. The DRP upheld this adjustment.

11. Outstanding Receivables as Separate Transaction:
The TPO considered outstanding receivables as a separate and distinct international transaction and made a transfer pricing adjustment in the nature of notional interest on receivables amounting to Rs. 2,80,004. The DRP upheld this adjustment.

12. Notional Interest on Receivables:
The addition made by the TPO with respect to interest on outstanding receivables was contested as untenable since it was computed on an invoice-to-invoice basis rather than on a weighted average basis for all invoices raised during the year.

13. Benchmarking with SBI Short Term Deposit Rates:
The TPO used the State Bank of India’s (SBI) short-term deposit rates as an appropriate comparable uncontrolled price (CUP) to benchmark the appellant’s outstanding receivables. The appellant contested that services are not comparable.

14. Benchmarking with International Market Rates:
The appellant argued that the receivables due from overseas AEs are in foreign currency and hence, interest, if any, should be benchmarked with rates prevalent in the international market for foreign currency loans, i.e., at USD LIBOR plus.

15. Deduction of Education Cess:
The DRP did not admit the fresh claim raised by the appellant regarding the claim of education cess as a tax-deductible expenditure under the normal provisions of the Act.

16. Fresh Claim on Education Cess:
The DRP did not allow education cess as a tax-deductible expenditure under the normal provisions of the Act.

17. Levy of Interest and Penalty:
The AO levied interest and penalty, which the appellant contested as wholly unjustified and sought deletion.

Conclusion:
The Tribunal noted inconsistencies in the adjudication of the issue of whether the appellant is an ITeS/KPO/high-end BPO or merely a low-end BPO. The matter was remanded back to the TPO for fresh adjudication based on the agreements entered by the appellant with its AEs, the functions performed, and the qualifications and experiences of the employees. The TPO was directed to decide the Arms Length Price afresh after providing the opportunity of hearing to the appellant. The appeal was allowed for statistical purposes.

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