2015 (1) TMI 147 - AT - Income Tax

Transfer Pricing adjustment - arm s length adjustment - Held that - Arm s length adjustment has been made by TPO by excluding certain comparables and including some new comparables. Out of the new comparables so included, in the case of Excel Infoways Ltd., the OP/TC was 243.69% which is abnormally high. Thus, this company has made super normal profit and is found to be functionally not comparable to the assessee which is a limited risk service provider. In this case, ratio of employee expenses to sales is only 8.82% which is extremely low for service company. However, the ratio of companies selected by the TPO himself have a ratio of employee expenses to sales in the range of 30-60% and ratio of assessee for the relevant assessment year under consideration is also 60%. If this comparable is excluded, assessee s mark-up cost would come within 5%. Accordingly, we find that assessee has prima facie case in its favour - Considering the totality of facts and circumstances of the case, we deem it fit to grant stay for six months or till the date of passing of the order by the Tribunal, whichever is earlier - Stay granted.

Summary

Issues:
Stay application in relation to Transfer Pricing adjustment made by TPO based on comparables selected for IT enabled back office support services.

Analysis:
The Stay Application pertains to an appeal filed by the assessee regarding a Transfer Pricing adjustment made by the Transfer Pricing Officer (TPO) concerning IT enabled back office support services. The learned AR argued that the TPO's selection of comparables led to an adjustment of Rs. 2,92,13,537, resulting in a higher arm's length mark-up than what the assessee had earned. The AR contended that excluding certain comparables, especially one with an abnormally high operating profit to total cost ratio of 243.69%, would bring the assessee within the acceptable range of +5%. This exclusion would align the assessee's mark-up of cost with the arm's length standard.

The learned DR opposed the stay application, advocating for the payment of the demand before granting any stay. However, upon careful examination of the case, the Tribunal found that the TPO's inclusion of certain comparables, like Excel Infoways Ltd., with significantly different operational metrics compared to the assessee, affected the Transfer Pricing adjustment. Notably, the high profit ratio of Excel Infoways Ltd. rendered it functionally incomparable to the limited risk service provider assessee. By excluding such comparables, the Tribunal observed that the assessee had a prima facie case in its favor. Additionally, the Tribunal noted that the appeal was scheduled for a hearing on merits shortly, on 27-10-2014.

Considering the facts and circumstances, the Tribunal granted a stay for six months or until the Tribunal's order, whichever is earlier. However, the Tribunal clarified that the observations made in the stay order would not impact the appeal's merit hearing. Furthermore, if the assessee requested an adjournment, the granted stay would automatically be vacated. The stay application filed by the assessee was allowed in terms specified in the order pronounced on 12th Sept. 2014.