2013 (3) TMI 172 - AT - Income Tax

Transfer pricing adjustment u/s 92CA - assessee company is engaged in the business of software development services and information technology enabled services (ITES) - assessee contested against selection of comparable - Held that - The assessee's objection regarding two companies Asit C Mehta Financial Services Ltd. and Goldstone Infratech Ltd., on the issue of abnormally higher margin is justified on the basis of various decisions of the Tribunal wherein it has been held that super profit making companies have to be excluded from the list of comparable before making transfer pricing adjustment. Thus direct the AO to exclude these two companies from the list of comparables for the purpose of making the transfer pricing adjustment. For Vishal Information Technologies Ltd. adopted by the TPO it is concluded that it has outsourced its call centre work and, therefore, the employee cost is less than 25% as is the common practice among other ITES services. The employee cost filter is important filter to be adopted for the purpose of computing ALP. In Maersk Global Service Centre (India) (P.) Ltd. (2011 (11) TMI 465 - ITAT MUMBAI)it has held that Vishal Information Technologies Ltd. has to be excluded from the list of comparables of ITES company as it has outsourced its services. Thus the AO directed to exclude this company also from the list of comparables. For Apex Knowledge Solutions Pvt. Ltd. the assessee submitted it is functionally different as it is provides services such as E-publishing knowledge based services etc. - TPO has rejected the objection on the ground the assessee has not considered the verticals or functional lines during the search process conducted by it therefore, it is not proper to make any objection on this basis now - Held that - Merely because, the assessee itself has not considered the said filter while making its TP study it cannot be said that it cannot raise such an objection before the TPO. It is the TPO who has adopted this company as comparable. On such adoption, the assessee has every right to raise the objections as regards the functional differences between the assessee and comparable. As brought out by the assessee, the assessee is in the TT enabled services, whereas the said comparable company is in the business of E-publishing which cannot be said to be in the same line of business. Thus this company is also to be excluded from the list of comparables. For Datamatics Financial Services Ltd. and Allsec Technologies Ltd. merely because there were extraordinary events during the financial year, without demonstrating as to how these extraordinary events have influenced the profit margin of the company, they cannot be excluded from the list of comparables, but the adjustments for such extraordinary events have to be made to the profits of the companies to bring them on par with the assessee before comparing them with the assessee. Therefore,remand this issue to the file of the AO to consider the adjustments to be made to these two comparables before arriving at the ALP - assessee's appeal allowed for statistical purposes.

Summary

Issues:
Transfer pricing adjustment under ITES segment, comparables adopted by the TPO, objection to specific comparable companies.

Transfer Pricing Adjustment under ITES Segment:
The appeal concerns an assessment order passed in line with the DRP's decision regarding transfer pricing adjustments under the ITES segment. The TPO proposed adjustments for software development and IT enabled services, leading to objections from the assessee. The DRP confirmed the adjustment for IT enabled services but recommended no adjustments for software development services. The main grievance of the assessee is against the transfer pricing adjustment and the comparables adopted by the TPO.

Comparables Adopted by the TPO:
The assessee raised objections to the comparables adopted by the TPO, citing issues with companies like Asit C Mehta Financial Services Ltd., Goldstone Infratech Ltd., Vishal Information Technology Ltd., Apex Knowledge Solution Pvt. Ltd., Datamatics Financial Services Ltd., and Allsec Technologies Ltd. The objections were based on factors such as abnormally high profit margins, employee cost, and functional differences. The Tribunal agreed with the assessee on excluding companies with abnormally high margins from comparables and directed the AO to make necessary adjustments. Furthermore, the Tribunal directed the exclusion of companies like Vishal Information Technology Ltd. due to outsourced services and Apex Knowledge Solution Pvt. Ltd. due to functional differences.

Specific Objections to Comparable Companies:
The objections raised against specific comparable companies were thoroughly analyzed. The Tribunal agreed with the assessee's objections regarding companies like Asit C Mehta Financial Services Ltd. and Goldstone Infratech Ltd. due to abnormally high margins. Regarding Vishal Information Technology Ltd., the Tribunal directed its exclusion due to outsourced services impacting comparability. The Tribunal also agreed to exclude Apex Knowledge Solution Pvt. Ltd. due to functional differences affecting profit-making capacity. Datamatics Financial Services Ltd. and Allsec Technologies Ltd. were remanded to the AO for adjustments related to extraordinary events influencing profit margins before comparison with the assessee. The assessee's appeal was allowed for statistical purposes.

This judgment primarily focuses on transfer pricing adjustments under the ITES segment and the objections raised against specific comparable companies, emphasizing factors like profit margins, employee costs, and functional differences in determining comparability for transfer pricing purposes. The Tribunal's detailed analysis and directions provide clarity on the exclusion of certain companies from comparables to ensure a fair assessment of transfer pricing adjustments.