2014 (3) TMI 680 - AT - Income Tax

Transfer pricing adjustment - Selection of comparables - Filters adopted by the TPO - Turnover filter - Held that - The TPO excluded the companies whose receipts are less than ₹ 1 crore and above ₹ 150 crores the range of companies adopted by the TPO is affirmed as the assessee's turnover was about ₹ 15.79 crores. Related party transactions filter Held that - The TPO selected companies having transactions exceeding 25% - It would not be a practical approach to consider only companies with NIL related party transactions because almost all the companies have related party transactions to some extent - Nil % criteria would result in selection of very small number of companies which may not give sufficient base for comparison thus, 25% is a proper threshold limit for related party transactions - the threshold limit of 25% for RPT looks reasonable. Export sales filter Held that - The TPO excluded companies having less than 25% revenue as export sales there was no reason to disagree with the TPO's filter adopted thus, the grounds raised by the assessee on various filters are rejected. Transfer pricing adjustment - Selection of comparables - Accentia Technologies Ltd. Held that - The decision in Capital IQ Information Systems (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax (International Taxation) 2014 (3) TMI 626 - ITAT HYDERABAD followed - DRP was of the view that the extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place in the previous year there were extra ordinary events that took place in this company which warrants exclusion of this company as a comparable thus, this company cannot be considered as a comparable. Acropetal technologies ltd. Held that - The major source of income for this company is from providing Engineering Design Service and Information Technology Services - The functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee - The performance of Engineering Design Services is regarded as providing high end services among the BPO which requires high skill whereas the services performed by the Assessee are routine low end ITES functions even though the said company was excluded on the differentiation of high end services being provided by this company, as noticed assessee also provide high end services in CAD / CAE designing areas - These are High end services as considered by the Bangalore bench thus, the functions of assessee are similar to the Company. Crossdomain solutions ltd. Eclerx services ltd. - Genesys international corporation ltd. - Infosys BPO ltd. - Held that - The business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service - there is no bifurcation available for such verticals of services Relying upon Symphony Marketing Solutions India (P.) Ltd. Versus Income-tax Officer 2014 (2) TMI 83 - ITAT BANGALORE - in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this company as a comparable, this company should be excluded from the list of comparables, accepting the plea of the Assessee. Datamatics financial (BPO) div. Held that - What the TPO has taken is only the receipts pertaining to ITES Division and the operating income was taken at ₹ 6.19 crores out of which export of ITES services admittedly was at ₹ 6.06 crores Therefore it has more than 75% of revenue from export of ITES services and therefore, it does not fail the filters provided, if only segmental profits are taken there is no reason to exclude this company from the comparables selected. Risk adjustment - Held that - The issue needs to be examined by the TPO afresh - Assessee admits that it is having a single customer risk, whereas, other comparable companies has market risk - Since DRP has not given any opinion, the issue requires detailed examination afresh by the TPO and DRP- In case of any adjustment to be required to be done, after excluding the comparables as stated above and inclusion of other comparables if any after examination as directed therein, risk adjustments may be considered by the TPO, if such situation arises - In case the PLI determined after examination of the comparables is within the parameters and no adjustment is to be made for the international transaction, then, adjustment for risk may become academic in nature thus, the matter remitted back to the TPO for fresh adjudication Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Filters adopted by the TPO.
2. Comparables selected/not selected by TPO.
3. Risk adjustments.

Detailed Analysis:

1. Filters Adopted by the TPO:

The main contention revolves around the filters used by the Transfer Pricing Officer (TPO) to select comparable companies. The TPO excluded companies with receipts less than Rs. 1 crore and above Rs. 150 crores, which the assessee challenged, but the range selected by the TPO was affirmed. The TPO applied a related party transactions (RPT) filter of 25%, which the Disputes Resolution Panel (DRP) upheld, rejecting the assessee's preference for a 10% threshold. The TPO also excluded companies with less than 25% revenue from export sales, a filter the assessee did not initially apply but later contested. This filter was also affirmed by the Tribunal.

2. Comparables Selected/Not Selected by TPO:

The TPO initially selected 22 comparables, which was reduced to 18 after the DRP's intervention. The Tribunal examined the objections raised by the assessee against several comparables:

- Accentia Technologies Ltd.: Excluded due to extraordinary events like mergers and acquisitions affecting its financial results.
- Acropetal Technologies Ltd. (seg): Retained as comparable despite the assessee's objections, as its high-end services were deemed similar to those of the assessee.
- Crossdomain Solutions Ltd.: Excluded due to its involvement in high-end KPO services without clear bifurcation of its service verticals.
- Eclerx Services Ltd.: Excluded due to its engagement in high-end KPO services and extraordinary events impacting its profitability.
- Genesys International Corporation Ltd.: Excluded for being functionally different, involving skilled manpower and R&D services.
- Infosys BPO Ltd.: Excluded due to its significant brand value and market leadership, which impacted its pricing and profitability.
- HCL Comnet Systems & Services Ltd. and Wipro Ltd.: Excluded due to their substantially higher turnover compared to the assessee, following the principle that size matters in business comparability.
- Cosmic Global Ltd.: Referred back to the TPO for fresh examination due to discrepancies in the employee cost filter.
- Datamatics Financial (BPO) Div.: Retained, as the segmental profits were within the TPO's filters.

The Tribunal also addressed the inclusion of comparables rejected by the TPO:

- Jindal Intellicom Pvt. Ltd.: Not included due to functional differences, primarily being in call center activities.
- Informed Technologies: Referred back to the TPO for examination, as it was not discussed in the TPO's order despite the assessee's objections.

3. Risk Adjustments:

The assessee argued for risk adjustments, which were not initially provided in the Transfer Pricing documentation. The TPO had discussed this issue but concluded no adjustments were necessary. The Tribunal directed the TPO to re-examine the risk adjustments afresh, considering the specific risks associated with the assessee's single customer versus the market risks of the comparables.

Conclusion:

The Tribunal directed the TPO to re-examine the issues, excluding the comparables deemed non-comparable and re-computing the arithmetic mean to determine if any Transfer Pricing adjustment is required. The appeal was partly allowed for statistical purposes, with the TPO instructed to consider the risk adjustments and other directives provided.

Order Pronounced:

The order was pronounced in the open Court on 21st February, 2014.