2015 (5) TMI 301 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Coral Hub (Vishal Information Technologies Ltd.) this company cannot be included in the list of comparables, though it might be carrying on the similar functions which asesssee was carrying on. The functional profile no doubt is one of the major criteria but not the sole criteria for deciding whether the said company can be included in the list of comparables or not. The assets and risk profile also has to be taken into consideration. This company was selected by TPO and, therefore, the submissions of ld. Standing Counsel on the ground of functional profile cannot be accepted. Moreover, we note that ld. Counsel has pointed out that data entry charges were 84.5% of total expenditure and, therefore, this cannot be compared to assessee, which was primarily imparting high end services. We, accordingly, direct for exclusion of this company from the list of comparables. Eclerx Service Ltd. In the present case all the functions are carried out by assessee for its AEs and, there is no doubt it was a captive service provider. However, the important aspect which is to be considered is as to what functions were being performed by assessee. If assessee was merely providing data to its AE without any analysis and performing its functions only in a mechanical manner, then no doubt it would be comparable to BPO but when the results provided to AE are after detailed analysis after employing skills of highest standards, then it would come within the ambit of BPO. Therefore, merely on the ground that assessee is a captive service provider, it cannot be said that this company was functionally not comparable. Ld. counsel has pointed out that extraordinary events of acquisition had occurred. However, in this year no such extraordinary events took place. We, therefore, are not inclined to accept the assessee s contention on this count and uphold the findings of DRP on this count. Infosys BPO and Wipro BPO keeping in view the huge turnover, economies of scale, brand value and other factors pointed out by ld. counsel in his submissions and also keeping in view the decision of Aginity India Technologies Pvt. Ltd. 2010 (11) TMI 852 - ITAT DELHI & (2013 (7) TMI 696 - DELHI HIGH COURT) these two companies cannot be included in the list of comparables because the assessee s turn over was only ₹ 11 crores. Working capital adjustment denied - Held that - Since, the authorities below have denied working capital adjustment to the assessee on flimsy ground, we vacate their action and hold in principle that the grant of working capital adjustment, if otherwise available, cannot be jeopardized. However, as regards the quantum of working capital adjustment, we direct the AO/TPO to vet the correctness of the amount of working capital adjustment claimed by the assessee and then decide its allowability as per law. We are in respectful agreement with the above observations. We direct the ld. TPO to allow working capital adjustment while determining the profit margins of comparables. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Exclusion of certain comparables from the list used for determining the Arm's Length Price (ALP).
2. Denial of working capital adjustment.

Issue-wise Detailed Analysis:

1. Exclusion of Certain Comparables:

Coral Hub (Vishal Information Technologies Ltd.):
The Tribunal noted that Coral Hub's business model is based on outsourcing, with data entry charges constituting 84.52% of total expenditure and negligible personnel costs. This contrasts with the assessee's model, where salary costs are 54.67%. Given the substantial outsourcing by Coral Hub, it cannot be considered functionally comparable to the assessee, which primarily imparts high-end services. The Tribunal directed the exclusion of Coral Hub from the list of comparables.

Eclerx Services Ltd.:
The Tribunal examined whether Eclerx Services Ltd., a Knowledge Process Outsourcing (KPO) company providing data analytics and data processing solutions, could be compared to the assessee. Given that the assessee provided high-end services requiring detailed analysis and high standards of skill, the Tribunal found Eclerx functionally comparable to the assessee and upheld its inclusion in the list of comparables.

Infosys BPO Ltd. and Wipro BPO Ltd.:
The Tribunal considered the significant differences in turnover, economies of scale, brand value, and other factors between Infosys BPO Ltd. and Wipro BPO Ltd. and the assessee. The Tribunal noted that Infosys BPO Ltd. had a turnover 69 times that of the assessee, and Wipro BPO Ltd. had a turnover 97 times that of the assessee. Given these disparities and following the precedent set by the Hon'ble Delhi High Court in the case of Aginity India Technologies Pvt. Ltd., the Tribunal directed the exclusion of Infosys BPO Ltd. and Wipro BPO Ltd. from the list of comparables.

2. Denial of Working Capital Adjustment:

The Tribunal addressed the denial of working capital adjustment by the revenue authorities, who argued that there were no means to ascertain the working capital deployed by the comparables throughout the year. The Tribunal disagreed with this reasoning, emphasizing that opening and closing working capital are decisive factors for determining the working capital deployed. Citing the case of United Health Care Information Services Pvt. Ltd., the Tribunal underscored that working capital adjustments are essential for aligning the comparables and the assessee on the same footing. The Tribunal directed the AO/TPO to allow the working capital adjustment while determining the profit margins of comparables, subject to verification of the correctness of the amount claimed by the assessee.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the exclusion of Coral Hub, Infosys BPO Ltd., and Wipro BPO Ltd. from the list of comparables and instructing the AO/TPO to allow working capital adjustment after proper verification.