2014 (9) TMI 201 - AT - Income Tax

Transfer pricing adjustment - ITES Segment - Selection of comparables - Cosmic Global Ltd. Held that - The assessee is engaged in providing the Manual claim processing services to its foreign A.E. and also providing services relating to analyzing data on health insurance, launching lucrative insurance products - the United Health Corp. group is, inter alia, engaged in health related insurance business - So the services provided by the assessee under this segment are mainly in the nature of processing on manual basis, the insurance claims lodged by its policy-holders - from the Annual Report of the company it is found that the financial results in the Balance sheet and Profit and loss account are available only on entity level - the major part is the income from Translation charges at ₹ 5.59 crore out of total revenues of ₹ 5.86 crore, which is totally dissimilar to that of the assessee - The assessee is not into any Translation business - Merely because the assessee inadvertently included the company in the list of comparable, can be no reason to bar the assessee from claiming that it was wrongly included - Cosmic Global Ltd. is incomparable to the assessee the TPO is directed to exclude the company from the comparables Decided in favour of assessee. Eclerx Services Ltd. Functionally different company Held that - The company is engaged in providing data analytics and customized process solutions to a host of global clients from a look at the functional profile of the company from its Annual report, it can be seen that it is nowhere close to the assessee s instant segment of manual claim processing services - the TPO is directed to exclude the company from the comparables Decided in favour of assessee. Genesys International Corpn. Ltd. Different nature of work - Operated in single business unit - Held that - The company is engaged in rendering geospatial services catering to the needs of consumer mapping, navigation and internet portals - It is providing mapping technologies managing the earth s resources and surfaces at a time - Talent eco system with this company includes urban planners, cartographers, remote sensing scientists etc. and even rocket scientists, giving its skills in all kinds of land base work - the nature of work done by the assessee under its ITES segment, which is simply that of processing insurance claims manually is different from the unit being compared - the TPO is directed to exclude the company from the comparables Decided in favour of assessee. Vishal Informatics Held that - From the Annual report of the company that it is mainly engaged in e-publishing business - the working capital adjustment is required with reference to stock, trade receivable and trade payables - Since, the authorities below have denied working capital adjustment to the assessee on flimsy ground, thus, the grant of working capital adjustment, if otherwise available, cannot be jeopardized - the AO/TPO is directed to vet the correctness of the amount of working capital adjustment claimed by the assessee thus, the matter is remitted back to the AO/TPO for a fresh computation of the ALP of the international transactions Decided in favour of assessee. Software development services - Working capital adjustment - 3K Technologies Ltd. Held that - From the Annual report of this company that apart from Personnel cost of ₹ 1.15 crore, there are Onsite expenses to the tune of ₹ 26.74 crore and also Administrative and other expenses amounting to ₹ 3.50 crore, which also include personnel cost - the Directors remuneration is part of it, which is nothing but personnel cost - In so far as Onsite expenses are concerned, it can be seen that the nature of business of the company is that of development of computer system and other related activities - when the company is rendering services to its customer at their doorstep, it will incur onsite expenses, which would predominantly include the personnel cost - as the business of this company has not been shown to be functionally different from that of the assessee and further it is an admitted position that even if a part of Onsite expenses is included in the personnel cost, it would pass the filter of employee cost more than 25% of the total cost, the view taken by the TPO is upheld Decided against assessee. Infosys Technologies Ltd. Held that - Infosys Technologies Ltd., which is otherwise a giant company in terms of risk profile, scale, nature of services, revenue ownership of branded/proprietary products, onsite and offshore services, etc., cannot be compared with the assessee relying upon CIT vs. Agnity India Technologies Pvt. Ltd. 2013 (7) TMI 696 - DELHI HIGH COURT - The parameters on which Infosys Technologies Ltd., was held to be not comparable with that assessee, are fully applicable here also the TPO is directed to exclude the company from the list of comparables Decided in favour of assessee. KALS Information System Ltd. Held that - The TPO adopted Software development segment of this company - From the Annual report of this company it can be noticed that this segment also includes revenues from software products - the assessee is not engaged in selling any software products, the financials of the company under this segment cannot be compared with the assessee - The contribution by the sale of software products to the overall revenue of this segment cannot be precisely ascertained for determining the question of its comparability Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment in ITES Segment
2. Transfer Pricing Adjustment in Software Development Segment
3. Working Capital Adjustment

Detailed Analysis:

A. ITES Segment

1. Clubbing of Transactions:
- The TPO clubbed the transactions of 'Provision of claim processing services' and 'Provision of data analytics services' under the ITES segment, which was not objected to by the assessee.

2. Selection of Comparables:
- The TPO selected twelve comparable companies with an average OP/TC of 29.39%, leading to an initial Transfer Pricing Adjustment of Rs. 12,35,42,873/-. Post-DRP directions, this was recalculated to Rs. 6,34,01,567/-.
- The assessee contested the inclusion of four companies: Cosmic Global Ltd., Eclerx Services Ltd., Genesys International Corpn Ltd., and Vishal Information Technologies Ltd.

3. Exclusion of Comparables:
- Cosmic Global Ltd.: Excluded due to functional differences; major revenue from translation charges, not comparable to the assessee's insurance claim processing services.
- Eclerx Services Ltd.: Excluded due to functional differences; involved in data analytics and process solutions, not manual claim processing.
- Genesys International Corpn Ltd.: Excluded due to functional differences; engaged in geospatial services, not insurance claim processing.
- Vishal Information Technologies Ltd.: Excluded due to functional differences; primarily in e-publishing, not comparable to the assessee's services.

4. Working Capital Adjustment:
- The DRP denied working capital adjustment due to the inability to ascertain daily working capital deployment of comparables. The Tribunal vacated this denial, directing the AO/TPO to verify and allow the adjustment if applicable.

5. Final Directions:
- The Tribunal set aside the Transfer Pricing Adjustment of Rs. 6.34 crore and remanded the matter to the AO/TPO for fresh computation in line with the directions provided.

B. Software Development Segment

1. Selection of Comparables:
- The TPO selected twenty comparable companies with an average OP/TC of 25.63%, leading to an initial TP adjustment of Rs. 10.95 crore. Post-DRP directions, this was recalculated to Rs. 5,11,33,714/-.
- The assessee contested the inclusion of three companies: 3K Technologies Ltd., Infosys Technologies Ltd., and KALS Information Systems Ltd. (segment).

2. Exclusion of Comparables:
- 3K Technologies Ltd.: Included by the TPO; the Tribunal upheld its inclusion as the onsite expenses were part of personnel cost, meeting the employee cost filter.
- Infosys Technologies Ltd.: Excluded due to differences in scale, risk profile, and ownership of branded products, following the precedent set by the jurisdictional High Court.
- KALS Information Systems Ltd. (segment): Excluded as the segment included revenues from software products, which the assessee did not engage in.

3. Working Capital Adjustment:
- The Tribunal reiterated its earlier stance on working capital adjustment from the ITES segment, directing the AO/TPO to consider the adjustment in accordance with the directions provided.

4. Final Directions:
- The Tribunal set aside the Transfer Pricing Adjustment of Rs. 5.11 crore and remanded the matter to the AO/TPO for fresh computation in line with the directions provided.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal directing fresh computations for both the ITES and Software Development segments, including reconsideration of working capital adjustments. The Tribunal emphasized functional comparability and the necessity of accurate adjustments to ensure fair assessment.