2015 (6) TMI 899 - AT - Income Tax

Transfer pricing adjustment - Information Technology enabled services (ITES) segment - selection of comparable - Held that - Cosmic Global Ltd. be excluded from the list of comparables for the reason of its major activity, namely, Translation, with revenue of ₹ 6.99 crore (out of total revenue of ₹ 7.35 crore), being dissimilar with the assessee s activities under this segment. The second reason for considering this company as incomparable on entity level is the business model adopted by it. It can be seen that this company has outsourced major activities in comparison with the assessee doing its business inhouse. It goes without saying that these two business models, namely, outsourcing services and providing in-house services, cannot be compared with each other because of their inherent differences. Accentia Technologies Ltd. directed to be excluded from the final list of comparables as a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. It can be noticed from page 31 of the Annual report that during the year under consideration this company completed the acquisition of 96% of M/s Oak Technologies Inc., a healthcare back-office processing company engaged in medical billing, coding and transcription activities and having substantial global work force. Microland Ltd. company was not originally selected by the assessee as comparable in its TP study. No contention was raised before the TPO for considering it as comparable. It was only for the first time that the assessee came up with the argument for the inclusion of Microland Ltd., in the list of comparables before the Dispute Resolution Panel (DRP). Since the authorities below have not pondered over the comparability of this company, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this score is set aside and the matter is restored to the file of AO/TPO for examining the comparability of this company. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Addition on account of transfer pricing adjustment in Information Technology enabled services (ITES) segment.

Analysis:
The judgment revolves around an appeal by the assessee against the final order passed by the Assessing Officer concerning the assessment year 2009-10. The primary issue raised in this appeal pertains to the addition made on account of transfer pricing adjustment in the ITES segment. The assessee, a subsidiary of a UK-based company, engaged in providing software development and IT-enabled services to group companies. The Transactional Net Margin Method (TNMM) was applied to demonstrate that the international transaction of providing ITES was at arm's length price (ALP). The dispute arose when the Transfer Pricing Officer (TPO) disagreed with the comparables chosen by the assessee, leading to a transfer pricing adjustment of Rs. 6,23,11,494 on this transaction. The key contention was the inclusion and exclusion of certain companies as comparables.

The Tribunal analyzed the nature of services provided by the assessee to its associated enterprises, which included back office services, insurance-related services, accounting-based services, helpdesk support, and more. The first company under scrutiny was Cosmic Global Ltd., which the TPO considered comparable but was later excluded by the Tribunal due to dissimilarities in its major activity and business model compared to the assessee. The second company, Accentia Technologies Ltd., with a high profit margin, was also excluded from comparables due to exceptional financial results from an acquisition. Lastly, Microland Ltd., not initially selected as comparable, was brought up during the appeal process, prompting the Tribunal to remand the matter back to the Assessing Officer for a thorough examination of its comparability.

The judgment concluded by setting aside the impugned order and directing the Assessing Officer to reevaluate the arm's length price of the international transaction of 'Provision of ITES' in line with the Tribunal's directions. The appeal was allowed for statistical purposes, emphasizing the need for a fresh determination in compliance with the detailed analysis provided.

This comprehensive analysis of the judgment highlights the intricate transfer pricing issues, comparability considerations, and the Tribunal's meticulous approach in ensuring a fair assessment of the arm's length price in the ITES segment.