2015 (8) TMI 43 - AT - Income Tax

Transfer pricing adjustment - section of comparable - Held that - As far as Accentia Technologies Ltd. is concerned the DRP did not direct to exclude the comparable but directed the AO to verify whether there is any extraordinary event which had an effect on financials. Since it is AO who on verification excluded the comparable we do not see any reason to interfere with the direction of the DRP. - Decided against revenue. As far as Eclerx Services Ltd. is concerned DRP has given a clear finding that the said company was providing KPO services which are not comparable to assessee s BPO services. - Decided against revenue. Whether DRP is correct in excluding the Infosys BPO and TCS e-Serve Ltd.? - Held that - As seen from the order of the panel about Infosys BPO and TCS e-Serve Ltd. they have considered twin conditions of advantageous brand value along with high turnover of 1, 000 Crores and above. Assessee has objected on the same twin conditions as far as TCS e-Serve International Ltd. also. There is contradiction in the findings of the DRP in excluding two companies while rejecting assessee s objections in TCS e-Serve International Ltd. DRP also did not give any finding whether there is any influence on the margins of the comparables as there is no higher turnover filter adopted by the AO while selecting the comparables. As we see from the list of final comparables even a company with 1.74 Crores was selected as comparable company Jeevan Softech Ltd. (Seg) . Therefore there seems to be some merit in Revenue s grounds. Since the DRP did not give any detailed reasoning and did not consider the TPO s order in its correct prospective we are of the opinion that as far as exclusion of these two companies are concerned DRP should have given a detailed order. For this purpose we remit the matter to the DRP for limited purpose of giving detailed order on the contentions raised by Revenue in ground No. 2. - Decided in favour of revenue for statistical purposes. Excluding telecommunication charges from the total turnover while excluding the same from the export turnover - Held that - With reference to ground of amount of communication charges excluded AO considered an amount of 51, 89, 321/- i.e. total communication charges spent in India also whereas assessee objected before the DRP that the data link charges were only 39, 22, 626/- which required to be reduced from both export turnover as well as from total turnover. The DRP as can be seen from the direction in page 11 of the order has directed the AO / TPO to verify the correct amount of communication charges after giving due opportunity to assessee. Revenue should not have come in appeal on this direction of the DRP to verify the correct amount. Since verification is with the AO only he should exclude only the communication charges as covered by the provisions of the I.T. Act. The ground is not maintainable. Accordingly the same is rejected.- Decided against revenue.

Summary

Issues involved:
1. Exclusion of comparable companies in transfer pricing study.
2. Exclusion of companies based on business nature and financial impact.
3. Treatment of telecommunication charges in total turnover computation.

Issue 1 - Exclusion of comparable companies in transfer pricing study:
The appeal by Revenue challenges the directions of the Dispute Resolution Panel (DRP) regarding the exclusion of certain comparable companies in the transfer pricing study. The Assessing Officer raised concerns about the rejection of companies like Infosys BPO Ltd and TCS e-Serve Limited due to their large scale of operations. The DRP justified the exclusion based on brand value and turnover criteria, directing the reworking of the Arm's Length Price (ALP) by excluding these companies. However, there were discrepancies in the DRP's reasoning for excluding some companies while accepting others, leading to the matter being remitted back to the DRP for a detailed order.

Issue 2 - Exclusion of companies based on business nature and financial impact:
The DRP's decision to exclude companies like Accentia Technologies Ltd and e-Clerx Services Ltd was based on considerations of extraordinary events and business nature. The DRP directed the Assessing Officer to verify the financial impact of extraordinary events and the nature of services provided by these companies. The arguments presented by both sides focused on the nature of services provided by the companies and their comparability to the assessee's business. Ultimately, the DRP's decisions were upheld as they were consistent with previous decisions and the nature of services provided by the companies.

Issue 3 - Treatment of telecommunication charges in total turnover computation:
Regarding the treatment of telecommunication charges in the computation of total turnover, the DRP's decision was in line with judicial interpretations and precedents. The DRP directed the exclusion of telecommunication charges from the total turnover, aligning with the provisions of the Income Tax Act and previous court decisions. The appeal by Revenue on this issue was rejected, affirming the correctness of the DRP's direction.

In conclusion, the judgment addressed various issues related to transfer pricing study, exclusion of comparable companies based on business nature and financial impact, and the treatment of specific expenses in total turnover computation. The decision provided detailed analysis and upheld certain exclusions while remitting one issue back to the DRP for further clarification.