2014 (4) TMI 925 - AT - Income Tax

Transfer pricing - Determination of ALP - Selection of comparables Held that - As far as assessee's six comparables are concerned, 4 comparables selected by Assessee are not comparable either on functional profile or on other parameters as considered by TPO and accepted by Assessee after CIT(A)'s order - There is no dispute with reference to two comparables i.e. Nucleus Net Soft & GIS India, whose operating profit by cost is at 16.87%, which is accepted as comparable by Assessee and TPO - The other company, which is also accepted by Assessee and TPO are Mercury Outsourcing Management Ltd., whose operating profit by cost is at 5.88% - when TPO and Assessee accepted a particular company as functionally comparable and when assessee has not agitated before the CIT(A), it cannot be excluded from list of comparables - CIT(A) may have original jurisdiction coterminous with AO, but, when the issue is not agitated, it cannot be reviewed on selection of comparables - He does not have power of review or revision on order of AO which was with CIT(Admn.) u/s 263/ 264 - thus, the comparable cannot be excluded. Spanco Telesystems & Solutions Ltd. Held that - Both TPO and Assessee have agreed that profit margin is reasonable for the year and no specific objection was raised either on the operating profit margin on the related party transactions, which were decided in another case - Assessee has not specifically raised any objection on the comparable before the learned CIT(A), there is no reason to exclude the same from the list of comparables ultimately approved by the TPO - the AO is directed to include this comparable as it was mistakenly excluded by the CIT(A), without any discussion. Wipro BPO Solutions Ltd Held that - The exclusion of Wipro BPO Solutions, whose operating profit over the cost is less than the companies accepted as comparables by Assessee, is not proper the assessee's objections cannot be accepted that exclusion of Wipro BPO Solutions on the basis of the turnover alone - the order of CIT(A) is upheld as far as the issue of profitability vis- -vis scale of operations/turnover is concerned the view expressed by the TPO is accepted that it will not have significant effect on the profitability of a company, as far as the BPO sector is concerned it would be appropriate to include the above company as comparable for the purpose of determining the average PLI in the relevant assessment year thus, the AO is directed to work out the addition Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Addition made by the AO based on transfer pricing adjustments suggested by the TPO.
2. Acceptance and rejection of comparable companies for determining the arm's length price (ALP).
3. Inclusion of Mercury Outsourcing Management Ltd. as a comparable.
4. Exclusion of Wipro BPO Solutions Ltd. as a comparable based on turnover.
5. Exclusion of Spanco Telesystems & Solutions Ltd. as a comparable.

Detailed Analysis:

1. Addition Made by the AO Based on Transfer Pricing Adjustments Suggested by the TPO:
The primary issue in this appeal concerns the addition made by the Assessing Officer (AO) based on transfer pricing adjustments suggested by the Transfer Pricing Officer (TPO) under section 92CA(3) of the Income Tax Act. The AO made an addition of Rs. 5,64,94,497/- for BPO/ITES services and Rs. 46,41,194/- for software services. The CIT(A) deleted the addition for software services and partially modified the addition for BPO/ITES services, sustaining Rs. 4,94,26,276/-.

2. Acceptance and Rejection of Comparable Companies for Determining the Arm's Length Price (ALP):
The Assessee used six comparable companies in its Transfer Pricing (TP) study, which showed an average operating profit of 9.33%. The TPO accepted only two of these comparables and added five more, resulting in an arithmetic mean of 33% of operating profit to cost. The AO, after making adjustments, arrived at a revised PLI of 31%, leading to the addition.

3. Inclusion of Mercury Outsourcing Management Ltd. as a Comparable:
The Assessee objected to the CIT(A)'s rejection of Mercury Outsourcing Management Ltd., which was accepted by both the Assessee and the TPO. The Tribunal held that when both parties accept a company as functionally comparable, the CIT(A) cannot exclude it unless contested. The Tribunal directed the AO to include Mercury Outsourcing Management Ltd. as a comparable.

4. Exclusion of Wipro BPO Solutions Ltd. as a Comparable Based on Turnover:
The Assessee argued that Wipro BPO Solutions Ltd. should be excluded due to its high turnover. The Tribunal noted that the Assessee accepted other comparables with significantly lower turnovers. It held that turnover alone is not a valid reason for exclusion if the company is functionally comparable. The Tribunal upheld the inclusion of Wipro BPO Solutions Ltd. as a comparable, agreeing with the CIT(A) that turnover does not significantly affect profitability in the BPO sector.

5. Exclusion of Spanco Telesystems & Solutions Ltd. as a Comparable:
The Assessee initially claimed that Spanco Telesystems & Solutions Ltd. was deleted by the CIT(A), but later admitted this was a mistake. The Tribunal noted that this comparable was not contested before the CIT(A) and was mistakenly excluded. The Tribunal directed the AO to include Spanco Telesystems & Solutions Ltd. as a comparable.

Conclusion:
The Tribunal directed the AO to recompute the addition based on the inclusion of Mercury Outsourcing Management Ltd. and Spanco Telesystems & Solutions Ltd. as comparables and the inclusion of Wipro BPO Solutions Ltd. The final addition should not exceed the amount confirmed by the CIT(A). The appeal was partly allowed.

Pronouncement:
The decision was pronounced in the open court on 31st October 2013.