2015 (1) TMI 1063 - AT - Income Tax

Transfer Pricing Adjustment - arm s length price - selection of comparable - Held that - For ACCENTIA TECHNOLOGIES LTD. (Seg.) as during the previous year there were extra ordinary events that took place in this company which warrants exclusion of this company as a comparable. We therefore hold that this company cannot be considered as a comparable. For ACROPETAL TECHNOLOGIES LTD. (Seg.) said company was excluded on the differentiation of high end services being provided by this company. Assessee does not provide high end services as submitted. Therefore we are of the opinion that functions of assessee are not similar to the above Company. We direct the TPO/AO to exclude this company. For COSMIC GLOBAL LTD. while there was no objection for assessee objecting to the comparable even at a later stage when it comes to know of new facts what we noticed is that the assessee s objections before the DRP have not been addressed by the DRP. It is for the TPO to determine whether this company falls within the filters as adopted by the TPO himself. If the company fails the employee cost filter then the same cannot be accepted as a comparable company. In order to examine this aspect we are of the opinion that selection of this comparable is to be restored to the file of the TPO for fresh examination after giving due opportunity of hearing to the assessee. The issue is restored to the file of the TPO. For ECLERX SERVICES LTD. (seg.) this company cannot be regarded as a comparable for the reason that it was having extraordinary event and super normal profits. For GENESYS INTERNATIONAL CORPORATION LTD. from the notes to accounts of this company it is seen that this company is engaged in providing geographical information services comprising of photogrammetry remote sensing cartography data conversion related computer based services and other related services. Further the business of this company requires skilled manpower and scientists civil engineers etc. Besides the above this company also carries out R ble Special Bench in case of ITO vs Banyan Chemicals P. Ltd. (2008 (12) TMI 296 - ITAT AHMEDABAD) has held that foreign exchange gain on account of fluctuation qua exports business is eligible for exemption u/s 10B. Thus we direct AO to treat Foreign exchange gain as business income and allow the deduction accordingly. - Decided in favour of assessee. Reduction of communication charges from the export turnover without reducing it from the total turnover while computing deduction u/s 10A of the Act - Held that - his issue is squarely covered in favour of the assessee by the judgment of Hon ble Bombay High Court in case of CIT vs. Gem Plus Jewellery Ltd (2010 (6) TMI 65 - BOMBAY HIGH COURT) and the decision of Income-tax Appellate Tribunal Chennai Special Bench in case of ITO vs. Sak Soft Limited (2009 (3) TMI 243 - ITAT MADRAS-D (AT) thus we direct the Assessing Officer to reduce communication charges both from the export turnover as well as the total turnover for computing exemption u/s 10A of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Re-characterisation of Foreign Exchange Gain
3. Reduction of Communication Charges from Export Turnover
4. Levy of Interest under Section 234B

Detailed Analysis:

1. Transfer Pricing Adjustments:
The assessee, HSBC Electronic Data Processing India Private Limited (HDPI), contested the Transfer Pricing (TP) adjustments made by the Assessing Officer (AO) based on the Transfer Pricing Officer's (TPO) analysis. The TPO selected 20 comparables, which was later reduced to 18 by the Disputes Resolution Panel (DRP). The primary objections were related to the selection of comparables and the risk adjustment.

Accentia Technologies Ltd.: The Tribunal held that this company could not be considered a comparable due to extraordinary events such as mergers and acquisitions during the relevant financial year, referencing decisions from other cases like Hyundai Motors India Engineering Pvt. Ltd. and Symphony Marketing Solutions India Pvt. Ltd.

Acropetal Technologies Ltd.: It was excluded as a comparable because it provided high-end engineering design services, which are not comparable to the low-end ITES/BPO services provided by the assessee.

Cosmic Global Ltd.: The Tribunal restored the selection of this comparable to the TPO for fresh examination, as the company's employee cost was significantly lower than the filter applied by the TPO, suggesting it might be outsourcing work.

Eclerx Services Ltd.: This company was excluded due to its classification as a high-end KPO and the presence of extraordinary events and supernormal profits.

Genesys International Corporation Ltd.: Excluded for being functionally different, involving skilled manpower and R&D services, and owning intangibles.

HCL Comnet Systems & Services Ltd. and Wipro Ltd.: The Tribunal directed the TPO to reconsider these companies after a detailed functional analysis, as they were functionally different from the assessee.

Risk Adjustment: The Tribunal agreed in principle that risk adjustments should be made due to the different risk environments of the assessee and the comparables. However, the quantification of such adjustments was restored to the AO for fresh examination.

Reimbursement Transactions: The Tribunal directed the AO to exclude reimbursement costs from operating costs, as they do not involve significant additional functions, referencing decisions from other cases like Four Soft Ltd.

2. Re-characterisation of Foreign Exchange Gain:
The AO had reduced the foreign exchange gain from the business profits for computing the deduction under Section 10A. The Tribunal directed the AO to treat the foreign exchange gain as business income, referencing the Special Bench decision in ITO vs. Banyan Chemicals Pvt. Ltd. and the assessee's own case for AY 2006-07.

3. Reduction of Communication Charges from Export Turnover:
The AO had reduced communication charges from the export turnover without reducing them from the total turnover. The Tribunal directed the AO to reduce communication charges from both the export turnover and the total turnover for computing the deduction under Section 10A, referencing the Bombay High Court judgment in CIT vs. Gem Plus Jewellery Ltd. and the ITAT Chennai Special Bench decision in ITO vs. Sak Soft Ltd.

4. Levy of Interest under Section 234B:
The issue of interest levy under Section 234B was deemed consequential to the final determination of income and thus was dismissed as infructuous.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, with directions for the AO/TPO to re-examine certain issues and provide a reasonable opportunity for the assessee to be heard in fresh proceedings.