2017 (9) TMI 103 - AT - Income Tax

TPA - comparability - selection procedures - Held that - Assessee carries on information technology enabled services ITes in the form of research activities according to the terms of its agreement with its associated enterprises which is driven by business information, market research and intellectual property research, thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Addition to returned income by recomputing the arm's length price (ALP) of international transactions.
3. Jurisdictional error in reference to the Transfer Pricing Officer (TPO).
4. Errors in the assessment of the arm's length price of international transactions.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the validity of the assessment order passed by the learned Deputy Commissioner of Income-tax-Circle-1, New Delhi, arguing that it was "bad in law and void ab initio." However, this ground was not elaborated upon in the judgment, and the primary focus was on the transfer pricing issues.

2. Addition to Returned Income by Recomputation of ALP:
The assessee contested the addition of ?5,40,14,130 to its returned income by the learned AO, who recomputed the ALP of the international transactions under section 92 of the Income-tax Act, 1961. The assessee used the Transactional Net Margin Method (TNMM) and selected 10 comparables, showing its margin at 20.36%, which was higher than the comparables' mean of 13.60%. The TPO, however, accepted only 2 of these comparables and included 10 additional comparables, resulting in an average margin of 33.14%, leading to the adjustment.

3. Jurisdictional Error in Reference to the TPO:
The assessee argued that the reference to the TPO suffered from a jurisdictional error as the AO did not record any reasons in the assessment order justifying the necessity to refer the matter to the TPO under section 92CA(1) of the Act. This ground was not separately adjudicated but was embedded in the broader discussion on the transfer pricing adjustments.

4. Errors in the Assessment of the ALP of International Transactions:
The primary contention revolved around the comparables selected by the TPO and those rejected by the TPO. The assessee provided a detailed chart contesting various comparables based on functional dissimilarity, extraordinary events, high profit margins, and other factors. The Tribunal analyzed each comparable in detail:

a. Accentia Technologies Ltd.:
The Tribunal excluded Accentia Technologies Ltd. due to its involvement in medical transcription, which requires special skills and employs medical professionals, making it functionally dissimilar to the assessee.

b. eClerx Services Ltd.:
eClerx was excluded as it was a Knowledge Process Outsourcing (KPO) company, providing data analytics and process solutions, which was different from the assessee's BPO services.

c. Igate Global Solutions Ltd.:
The Tribunal upheld the inclusion of Igate Global Solutions Ltd., finding it functionally similar to the assessee despite the amalgamation during the year.

d. ICRA Techno Analytics Ltd.:
ICRA Techno Analytics Ltd. was excluded due to its engagement in business intelligence, analytics, and lack of complete segmental information.

e. Infosys BPO Ltd.:
Infosys BPO Ltd. was excluded due to its high brand value, intangibles, leverage from Infosys Technologies Ltd., and significantly larger scale of operations.

f. TCS eServe International Ltd. and TCS eServe Ltd.:
Both were excluded due to functional dissimilarity, ownership of intangibles, and contributions to Tata Brand Equity.

g. e4e Healthcare Ltd.:
The Tribunal rejected the assessee's request to exclude e4e Healthcare Ltd., as it was the assessee's own comparable and no valid reasons were provided for its withdrawal.

h. R Systems Pvt. Ltd.:
The Tribunal directed the TPO to verify the information and reconsider the inclusion of R Systems Pvt. Ltd., which was excluded due to a different financial year.

i. Omega Healthcare Ltd.:
The Tribunal directed the TPO to verify the annual report and reconsider the inclusion of Omega Healthcare Ltd., which was excluded due to the unavailability of the annual report in the public domain.

Other Grounds:
Grounds related to charging of interest and initiation of penalty proceedings were dismissed as premature.

Conclusion:
The appeal was partly allowed with directions to exclude certain comparables and reconsider others. The Tribunal emphasized the importance of functional comparability and directed the TPO to verify specific details for some comparables.