2017 (6) TMI 722 - AT - Income Tax

Addition on adjustment to Arm s Length Price (ALP) - Held that - As the assessee is in the business of providing call centre services / business process outsourcing services to the clients of its parent company the companies functionally dissimilar with that of assessee need to be de-selcted from final list of comparable. If 13 comparables are excluded (ie comparables having RPT more than 25%, functionally not comparable, irregular business operations and having brand value as stated supra) and one comparable is included (i.e. Ask Me Info Hubs Ltd) and if the arithmetic mean of 15% is applied on the reduced Operating Cost of ₹ 28,16,08,026/- ( i.e. 31,09,36,578 2,92,51,866 76,686) as discussed above, then the ALP @ 115% of Operating Cost would be ₹ 32,38,49,230/-. If the 5% tolerance limit is applied on the same (i.e. 32,38,49,230 5% 1,61,92,462), then the price charged by the assessee on its international transactions could range between ₹ 30,76,56,768 to ₹ 34,00,41,692/-. In the instant case, the price charged by the assessee for its BPO services (international transaction) was ₹ 31,21,86,866/-. Hence we hold that the price charged by the assessee for its international transaction is at Arm s Length as it falls within the permitted range as supra and hence no adjustment is required to be made to its ALP - Decided in favour of assessee.

Summary

Issues Involved:

1. Justification for enhancing the addition to ?7,21,92,932/- by making adjustments to Arm’s Length Price (ALP).
2. Consideration of recovery of expenses and sale of call manager phones in the transfer pricing adjustment.
3. Use of multiple-year data versus contemporaneous data for determining ALP.
4. Exclusion and inclusion of certain comparables for determining the arithmetic mean of ALP.
5. Adjustments for differences in sales and marketing efforts.

Detailed Analysis:

1. Justification for Enhancing Addition to ?7,21,92,932/- by Adjusting ALP:

The primary issue in this appeal is whether the Dispute Resolution Panel (DRP) was justified in enhancing the addition to ?7,21,92,932/- by making adjustments to the Arm’s Length Price (ALP). The assessee argued that the addition was without basis and unsupported by material evidence. The DRP had considered only the transaction related to BPO services provided by the assessee, amounting to ?31,21,86,866/-, and ignored other transactions such as recovery of expenses and sale of call manager phones. The Tribunal agreed with the assessee's contention that the recovery of expenses, being on a cost-to-cost basis without any profit element, should not be included in the total cost for ALP determination. The Tribunal also noted that the sale of call manager phones was insignificant and would not affect the Profit Level Indicator (PLI).

2. Consideration of Recovery of Expenses and Sale of Call Manager Phones:

The Tribunal found that the DRP should have reduced the recovery of expenses (?2,92,51,866) and the amount received from the sale of call manager phones (?76,686) from the total cost incurred by the assessee. This adjustment would result in a revised total cost of ?28,16,08,026. The Tribunal emphasized that the recovery of expenses was on a cost-to-cost basis and did not involve any provision of services, thus should not be considered for ALP determination.

3. Use of Multiple-Year Data vs. Contemporaneous Data:

The Tribunal upheld the use of contemporaneous data for FY 2006-07, as adopted by the TPO and DRP, for arriving at the arithmetic mean, rejecting the use of multiple-year data by the assessee. The Tribunal agreed with the DRP that the contemporaneous data should be considered for determining the ALP, as it provides a more accurate reflection of the market conditions during the relevant financial year.

4. Exclusion and Inclusion of Certain Comparables:

The Tribunal addressed the exclusion of certain comparables based on various grounds:
- Related Party Transactions (RPT) More Than 25%: The Tribunal excluded comparables with RPT exceeding 25%, following the precedent set by the Delhi Tribunal in the case of Actis Advisers Pvt Ltd.
- Functional Dissimilarity: Companies engaged in registrar and share transfer activities were excluded as they were not functionally comparable to the assessee's BPO services.
- Irregular Business Operations: Companies with irregular business operations, such as Maple Esolutions Ltd and Triton Corp Ltd, were excluded due to their involvement in fraud and different business models.
- Brand Value: Wipro Ltd was excluded due to its significant brand value, which made it incomparable to the assessee.

The Tribunal also included Ask Me Info Hubs Ltd as a comparable, noting that its exclusion by the DRP lacked cogent reasons. The Tribunal referred to the Delhi Tribunal's decision in Tech Books Electronics Pvt Ltd, which found no negative phase of economic cycle for Ask Me Info Hubs Ltd.

5. Adjustments for Differences in Sales and Marketing Efforts:

The Tribunal rejected the assessee's request for adjustments related to sales and marketing efforts, as the assessee failed to provide sufficient details on how these expenses affected the comparables' profitability. The DRP had noted that such expenses are netted out at the net margin level under the TNMM method.

Conclusion:

The Tribunal concluded that if the revised total cost of ?28,16,08,026 is considered and the arithmetic mean of 15% is applied, the ALP would be ?32,38,49,230. With a 5% tolerance limit, the allowable range for the price charged by the assessee would be between ?30,76,56,768 and ?34,00,41,692. Since the price charged by the assessee for its BPO services was ?31,21,86,866, it falls within the permitted range, and no adjustment is required to the ALP. The appeal of the assessee was allowed, and the Tribunal ordered that the adjustment of ?7,21,92,932 be deleted.