2014 (8) TMI 106 - AT - Income Tax

Rejection of comparables and selection of fresh comparables - Rejection of economic and comparability analysis - Rejection of Business Activity profile - Comparables selected by Assessing Officer/TPO - The assessee is a wholly owned subsdiary of Tecnimont ICB Pvt. Ltd. and engaged in the execution of computer software and information technology enabled services, engineering design under the software development park scheme of Govt. of India - the TPO has not undertaken the exercise of comparing the actual functions and business profile of the assessee with the comparables selected by the assessee but the rejection of the comparables selected by the assessee is based only on the ground of BPO and KPO services Relying upon Maersk Global Centres (India) (P.) Ltd. Versus Assistant Commissioner of Income-tax 2014 (3) TMI 891 - ITAT MUMBAI - the classification of Information Technology Enabled Services (ITES) into low-end BPO services and high-end KPO services for comparability analysis is not just and proper, and, therefore, the action of the TPO in rejecting the comparables by applying the criteria of BPO and KPO is not sustainable. The assessee has used the segmental data for determining the arm s length price and taken the mean profit of each comparable only from the segmental data/results - the objection of using multiple year data ceased to exist - once the criteria adopted by the TPO for rejecting the comparable of the set of companies selected by the assessee is not found proper then the comparability has to be analysed on the basis of real nature of the business activities of the assessee as well as the comparables and further where the segmental data are used then the only business activity of the particular segment of comparable has to be compared with the business activity of the assessee. The business profile of the six comparables selected by the assessee and particularity the segment of engineering design services are similar to that of the assessee s services provided to the AEs, therefore, when the International transaction of the assessee company in respect of the services provided to the AEs are similar to the business profile of the comparables and a particular segment of the comparable then the rejection of the comparables selected by the assessee is not proper and justified. Margin of comparable companies as documented in the transfer pricing study of EDTICB plus the companies adopted by the learned TPO Held that - The assessee also filed the computation which shows that the assessee s operating profit by using PLI as OP/OC from the international transaction is 24.17% which is more than the arithmetic mean/ALP based on the set of eleven comparables including the assessee s as well as the TPO s selected companies - even after accepting the comparable companies selected by the assessee, the TPO has power u/s 92 CA(3) to gather and consider all relevant materials and information apart from the evidence, information and documents provided by assessee as required under section 92 D(3) of Income-tax Act to determine the ALP in relation to the international transaction - under the provisions of transfer pricing the TPO is not precluded from carrying out fresh search for gathering more relevant information for the purpose of determining the ALP - large size of comparable would give better and adequate representation of uncontrolled price in turn a proper and more realistic price can be determined to compare with the price of international transaction - assessee s international transactions are at arm s length and, therefore, no adjustment is called for Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Transfer pricing adjustment of Rs. 29,08,51,336/-
2. Approach based on unsubstantiated presumptions
3. Ignoring tax holiday u/s 10A of the Act
4. Rejection of economic and comparability analysis
5. Incorrect presumptions about the appellant's operations
6. Rejection of business activity profile
7. Selection of functionally different comparables
8. Selection of Mold-Tek Technologies despite demerger and acquisition
9. Incorrect margin application for Mold-Tek Technologies
10. Inclusion of Coral Hubs Ltd. despite DRP's exclusion
11. Rejection of certain comparables fulfilling quantitative filters
12. Non-selection of certain comparables fulfilling quantitative filters
13. Adjustment on account of cost of new hires/trainees
14. Risk adjustment

Detailed Analysis:

1. Transfer Pricing Adjustment:
The appellant contested the transfer pricing adjustment of Rs. 29,08,51,336/-. The Tribunal noted that the TPO had rejected the comparables selected by the appellant and conducted a fresh search, selecting six new comparables in the KPO field. The TPO's adjustment was based on an arithmetic mean margin of 49.88% of these comparables.

2. Approach Based on Unsubstantiated Presumptions:
The appellant argued that the TPO's approach was based on presumptions and conjectures. The Tribunal observed that the TPO had categorized the appellant's services as KPO without a detailed functional analysis, which was not appropriate.

3. Ignoring Tax Holiday u/s 10A:
The appellant claimed there was no motive to shift profits out of India due to the tax holiday u/s 10A. The Tribunal did not specifically address this issue but focused on the comparability analysis.

4. Rejection of Economic and Comparability Analysis:
The Tribunal found that the TPO had rejected the appellant's comparables on the basis of the KPO vs. BPO distinction, which was not justified. The Tribunal referred to the Special Bench decision in Maersk Global Centres (India) (P.) Ltd., which held that such classification for comparability analysis was not fair and proper.

5. Incorrect Presumptions About Appellant's Operations:
The TPO made several presumptions about the appellant's operations, such as operating on a cost-plus 15% basis and being engaged in KPO services. The Tribunal found these presumptions to be incorrect and not based on a detailed functional analysis.

6. Rejection of Business Activity Profile:
The TPO held that the appellant's business activity was similar to KPO without valid reasons. The Tribunal noted that the TPO did not undertake a detailed analysis of the appellant's actual business activities.

7. Selection of Functionally Different Comparables:
The Tribunal found that the TPO had selected comparables that were not functionally similar to the appellant. The Tribunal emphasized the need for a detailed functional analysis rather than a broad categorization into KPO and BPO.

8. Selection of Mold-Tek Technologies:
The Tribunal noted that the DRP had directed the TPO to recompute the margin of Mold-Tek Technologies after considering the loss on derivatives. Consequently, ground Nos. 8, 10, and 11 became infructuous.

9. Incorrect Margin Application for Mold-Tek Technologies:
The Tribunal dismissed this ground as infructuous due to the DRP's direction to recompute the margin.

10. Inclusion of Coral Hubs Ltd.:
The DRP had directed the exclusion of Coral Hubs Ltd., but the TPO continued to include it. The Tribunal dismissed this ground as infructuous following the DRP's rectified directions.

11. Rejection of Certain Comparables:
The Tribunal found that the TPO had rejected certain comparables that fulfilled all quantitative filters without valid reasons. The Tribunal emphasized the need for a detailed functional analysis.

12. Non-selection of Certain Comparables:
The Tribunal noted that the TPO did not select certain comparables that fulfilled all quantitative filters. The Tribunal found this to be unjustified.

13. Adjustment on Account of Cost of New Hires/Trainees:
The Tribunal did not specifically address this issue but focused on the overall comparability analysis.

14. Risk Adjustment:
The Tribunal found that the TPO had rejected the appellant's claim for risk adjustment without a detailed analysis. The Tribunal emphasized the need for a detailed functional analysis to determine the risk profile.

Conclusion:
The Tribunal concluded that the TPO's rejection of the appellant's comparables based on the KPO vs. BPO distinction was not justified. The Tribunal found that the appellant's international transactions were at arm's length when considering a broader set of comparables, including those selected by both the appellant and the TPO. Consequently, the Tribunal allowed the appeal in part, dismissing certain grounds as infructuous and emphasizing the need for a detailed functional analysis in transfer pricing cases.