2017 (11) TMI 117 - AT - Income Tax

TPA - comparable selection - selection criteria - Held that - Assessee is into providing ITeS services thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable.

Issues Involved:

1. Exclusion of FCS Software Ltd. as a comparable.
2. Exclusion of Eclerx Services Ltd. as a comparable.
3. Rejection of fresh search of comparables by the assessee.
4. Inclusion of Accentia Technologies Ltd., Infosys BPO Ltd., and BNR Udyog Ltd. as comparables.
5. Transfer Pricing Adjustment and benchmarking approach.

Issue-wise Detailed Analysis:

1. Exclusion of FCS Software Ltd. as a Comparable:

The Revenue contested the exclusion of FCS Software Ltd. as a comparable by the Dispute Resolution Panel (DRP). The DRP found that FCS Software Ltd. earned 42% of its revenue from software services, 37% from education, and 21% from infrastructure management, which did not meet the filter of 75% revenue from software services set by the Transfer Pricing Officer (TPO). The Tribunal upheld the DRP's decision, noting that FCS Software Ltd. was not functionally comparable to the assessee due to its varied revenue streams and high-profit margins. The Tribunal referenced its previous decisions in the assessee's own case for earlier assessment years, where FCS Software Ltd. was excluded on similar grounds.

2. Exclusion of Eclerx Services Ltd. as a Comparable:

The Revenue argued that Eclerx Services Ltd., a Knowledge Process Outsourcing (KPO) company, should be included as a comparable, citing a CBDT circular. The DRP excluded Eclerx Services Ltd. based on its functional dissimilarity with the assessee, who provided IT-enabled services (ITES). The Tribunal supported the DRP's decision, referring to the CBDT Safe Harbour Rules, which distinguish KPO services from ITES, and various judicial precedents, including the assessee's own case for the previous assessment year. The Tribunal concluded that Eclerx Services Ltd. was not functionally comparable to the assessee.

3. Rejection of Fresh Search of Comparables by the Assessee:

The Revenue's ground regarding the rejection of the assessee's claim for a fresh search of comparables was dismissed as misconceived. The Tribunal noted that this issue was already raised by the assessee in its appeal and did not warrant separate consideration.

4. Inclusion of Accentia Technologies Ltd., Infosys BPO Ltd., and BNR Udyog Ltd. as Comparables:

The assessee challenged the inclusion of Accentia Technologies Ltd., Infosys BPO Ltd., and BNR Udyog Ltd. as comparables by the TPO.

- Accentia Technologies Ltd.: The Tribunal found that Accentia Technologies Ltd. was not a good comparable due to its involvement in software product development and extraordinary events like acquisitions, which affected its financials. The Tribunal referenced its previous decisions in the assessee's own case, where Accentia Technologies Ltd. was excluded on similar grounds.

- Infosys BPO Ltd.: The Tribunal excluded Infosys BPO Ltd. due to its significantly large scale of operations, high brand value, and involvement in integrated services, which made it incomparable to the assessee. The Tribunal cited various judicial precedents supporting the exclusion of Infosys BPO Ltd. on similar grounds.

- BNR Udyog Ltd.: The Tribunal excluded BNR Udyog Ltd. due to its high related party transactions (RPT), which exceeded the filter set by the TPO. The Tribunal noted the inconsistency in the TPO's approach, as BNR Udyog Ltd. was excluded in previous years due to high RPT.

5. Transfer Pricing Adjustment and Benchmarking Approach:

The assessee contested the transfer pricing adjustment of ?69,68,175 confirmed by the DRP. The Tribunal found that the exclusion of the three comparables (Accentia Technologies Ltd., Infosys BPO Ltd., and BNR Udyog Ltd.) would bring the assessee's arithmetic mean within the permissible range, negating the need for the transfer pricing adjustment. Consequently, the Tribunal partly allowed the assessee's appeal and dismissed other grounds as academic.

Conclusion:

The Tribunal dismissed the Revenue's appeal and the assessee's cross-objection, while partly allowing the assessee's appeal by excluding the three contested comparables, thus resolving the transfer pricing adjustment issue in favor of the assessee.

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