2015 (4) TMI 590 - AT - Income Tax

Transfer pricing adjustment - assessment order passed u/s.143(3) r.w.s 144C(13) the AO made an adjustment in Arm s length price in pursuance of order u/s 92CA(3) - selection of comparable - Held that - The business of Cross Domain ranges from high end KPO services, development of product suits and routine low end ITES service as compared to the advisory and support services provided by assessee. Thus, we found it functionally different. Accordingly, we direct the AO/TPO to exclude M/s Cross Domain Solutions Limited from the list of comparables. Genesys International Corporation Ltd. company is not functionally comparable and it has a different employee skill set and also performs R&D services and also owns intangibles. Accordingly, we direct the TPO to exclude Genesys International Corporation Ltd. from the list of comparables. E-Clerx Services Private Limited be also directed to be excluded as this company is engaged in providing data analytics and data process solution to the largest brands in the world. They are recognized experts in financial services, retails and manufacturing. Accentia Technologies Ltd the TPO after collecting information u/s.133(6) of the Act had included it as a comparable. The plea of the ld. AR is that it has software development activity also, therefore, non comparable with the functional activity of the assessee. In the interest of justice, we restore this matter back to the file of the TPO for examining afresh. The information collected by him u/s.133(5) is to be supplied to assessee. Mold Tek Technologies Ltd. be rejected on the plea that the Financial Year 2007-028 relevant Assessment Year 2008-09 was a unique year for Mold Tek Technologies Ltd. as the scheme of arrangement involving amalgamation between Tekmen Tool Pvt. Ltd. and Mold. Tek Technologies Ltd. and de-merger between Mold-Tek Technologies Ltd. simultaneously was sanctioned by the Hon ble AP High Court by 15th July, 2008 with the appointed date for amalgamation and de-merger being 1st October, 2007 and 1st April, 2007, respectively. Infosys BPO Ltd., being a subsidiary of Infosys, has an element of brand value associated with it. This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company.Infosys BPO is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factors will take this company out of the list of comparables. Wipro Limited cannot be treated as comparable as it is a giant company having turnover of ₹ 11,57.20 crores and it owns tangibles. Maple e-Solution Ltd., Acropetal Technologies Ltd. & Cosmic Global Ltd. cannot be treated as comparable as found having low employee s cost to sales as against assessee s ratio of 48.85% Datamatics Financial Services Ltd. TPO has collected segmental information by issuing notice u/s.133(6). The contention of ld. AR was that the same are not audited. In the interest of justice, we restore this issue back to the file of AO/TPO with a direction to provide the information collected by the TPO u/s.133(6) of the Act to assessee and after calling assessee s objection decide afresh the inclusion/exclusion of M/s Datamatics Financial Services Ltd. from the list of comparables. - Decided partly in favour of assesse.

Issues Involved:
1. Determination of the arm's length price (ALP) of international transactions.
2. Rejection of the appellant's Transfer Pricing (TP) documentation.
3. Use of financial data of comparable companies.
4. Treatment of amounts paid to Castrol India Limited.
5. Granting of risk adjustment for differences in risk profiles.
6. Application of the +/- 5% benefit under Section 92C(2).

Detailed Analysis:

1. Determination of the Arm's Length Price (ALP):
The assessee's international transactions were initially assessed at Rs. 73,11,16,570/-, but the AO determined the ALP at Rs. 86,06,41,040/-. The Transfer Pricing Officer (TPO) made an upward adjustment of Rs. 15,95,57,149/-, later revised to Rs. 12,95,24,470/- by the Dispute Resolution Panel (DRP). The Tribunal reviewed the comparables used by the TPO and directed the exclusion of several companies, including Cross Domain Solutions Ltd., Genesys International Corporation Ltd., e-Clerx Services Private Limited, Accentia Technologies Ltd., Mold Tek Technologies Ltd., Infosys BPO Ltd., Wipro Limited, Maple e-Solution Ltd., Acropetal Technologies Ltd., and Cosmic Global Ltd. The Tribunal found these companies functionally different from the assessee, thus impacting the ALP determination.

2. Rejection of the Appellant's Transfer Pricing Documentation:
The AO disregarded the appellant's TP documentation, which arrived at a benchmarking margin of cost plus 12.33% using fourteen comparables. The TPO's approach was to use 19 comparables, resulting in a benchmarking margin of 30.49%. The Tribunal's analysis led to the exclusion of several comparables due to functional differences, reinforcing the need for accurate and relevant comparables in TP documentation.

3. Use of Financial Data of Comparable Companies:
The AO used financial data only from the current year (FY 2007-08) for benchmarking. The Tribunal did not specifically address this issue in isolation but its direction to exclude certain comparables implies a reassessment of the financial data used.

4. Treatment of Amounts Paid to Castrol India Limited:
The AO held that amounts paid to Castrol India Limited were not pass-through expenses and required a mark-up to be charged to associated enterprises. This issue was not separately addressed in the Tribunal's order, indicating that the primary focus was on the comparables used for determining the ALP.

5. Granting of Risk Adjustment:
The assessee sought a risk adjustment to account for differences in risk profiles between comparables and itself. The Tribunal's decision to exclude certain comparables implicitly addresses this concern by ensuring that only functionally similar companies are used for comparison, thus mitigating the risk profile differences.

6. Application of the +/- 5% Benefit:
The assessee requested the benefit of the +/- 5% range as per the proviso to Section 92C(2). The Tribunal's directive to recompute the benchmarking margin and determine the ALP suggests that this benefit would be considered in the reassessment.

Conclusion:
The Tribunal directed the AO/TPO to exclude several companies from the list of comparables due to functional differences and to recompute the benchmarking margin to determine the ALP of the assessee's international transactions. The appeal was allowed in part, with specific instructions for reassessment to ensure accurate and fair TP adjustments.

← Previous Next →