2015 (8) TMI 263 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Infosys BPO Ltd. Held that - The assessee is a captive unit providing back office support services to its AE alone, which are basically in the nature of processing of insurance claims and the data entry, it can have no valid comparison with Infosys Ltd., as the latter is a full-fledged risk taking entrepreneur with diversified business including software product, consulting application, design development, re-engineering and maintenance etc. Infosys Ltd. has developed/owns proprietary products like Finacle, whereas the assessee, being a captive unit, does not own any such proprietary product. Unlike Infosys, the assessee does not have any substantial intangible assets . Thus we direct the exclusion of this company from the list of comparables. Wipro Ltd. (Seg.)is also a giant entity in comparison with the assessee company with marked differences as regards risk profile, nature of services, ownership of IP rights, expenditure on R & D etc, thus be excluded from the list of comparables. HCL Comnet Systems & Services Ltd. (Seg.) cannot be excluded from the list of comparable as in view of the fact that the assessee has admitted the functional comparability of the relevant segment of this company and the only difference pointed out is about its higher turnover and a potentially comparable case cannot be excluded for the reason of high or low turnover or high or low profit margin Eclerx Service Ltd. company is a Knowledge Process Outsourcing (KPO) company providing data analytics and data processing solution to its clients. It is a recognized expert in Financial services and Retail and Manufacture. It provides consulting services and also process outsourcing. The above details have been pointed out by the ld. AR from the Annual accounts of this company for the Financial year 2007-08. Nothing has been brought on record by the ld. DR to show that the functions performed by this company in the relevant year were any different. When we consider the nature of assessee s business, which is primarily that of processing insurance claim and data entry, it becomes vivid that Eclerx Service Ltd. cannot be considered as functionally comparable with the assessee company. Maple Esolutions Ltd. and Triton Corp. Ltd. companies are owned by Rastogi Group and the reputation of the Directors of these companies was having question-mark in earlier years. Both these companies are inter-related entities. During the year under consideration, there was acquisition of 100% shares of Maple Esolutions Ltd. by Triton Corp. Ltd. and thus, Maple Esolutions Ltd. became a wholly owned subsidiary of Triton Corp. Ltd. w.e.f 01.01.2007. It can be seen that this merger/acquisition has taken place during the year under consideration, thereby shattering their comparability. Thus we direct the exclusion of these two companies from the list of comparables.

Summary

Issues: Transfer pricing adjustment based on choice of comparables

Analysis:
The appeal pertains to the order passed by the CIT(A) regarding the international transaction of export of I.T enabled services for the assessment year 2007-08. The Transfer Pricing Officer (TPO) had proposed a transfer pricing adjustment of Rs. 23,85,223 based on the choice of comparables made by the assessee. The CIT(A) directed the exclusion of two companies from the list of comparables, retaining twenty-three companies chosen by the TPO. The assessee contested the inclusion of six companies in the final list of comparables.

Inclusion of Infosys BPO Ltd.:
The Tribunal found that Infosys BPO Ltd. was incomparable with the assessee due to vast differences in size, functional profile, assets, risks, and activities. Citing a judgment of the Delhi High Court, the Tribunal directed the exclusion of Infosys BPO Ltd. from the list of comparables.

Inclusion of Wipro Ltd. (Seg.):
The Tribunal held that Wipro Ltd. (Seg.) was incomparable with the assessee based on differences in risk profile, nature of services, ownership of IP rights, and R & D expenditure. Drawing from a previous judgment, the Tribunal directed the exclusion of Wipro Ltd. (Seg.) from the list of comparables.

Inclusion of HCL Comnet Systems & Services Ltd. (Seg.):
Despite objections raised by the assessee regarding the high turnover of HCL Comnet Systems & Services Ltd. (Seg.), the Tribunal upheld its inclusion in the list of comparables. Citing relevant provisions of the Income-tax Act and judicial precedents, the Tribunal concluded that turnover alone should not be a basis for exclusion.

Inclusion of Eclerx Service Ltd.:
The Tribunal excluded Eclerx Service Ltd. from the list of comparables based on its business activities in data analytics and processing solutions, which were not comparable to the assessee's services in processing insurance claims and data entry.

Inclusion of Maple Esolutions Ltd. and Triton Corp. Ltd.:
The Tribunal noted the merger/acquisition of Maple Esolutions Ltd. by Triton Corp. Ltd. during the relevant year, rendering them incomparable. Additionally, citing financial irregularities and a previous Tribunal order, the Tribunal directed the exclusion of both companies from the list of comparables.

Conclusion:
The Tribunal set aside the impugned order and remanded the matter to the AO/TPO for a fresh determination of the Arm's Length Price (ALP) of the international transaction in accordance with the directions provided. The appeal was partly allowed for statistical purposes.