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2018 (5) TMI 1009 - AT - Income TaxTPA - ALP determination - comparability analysis - functional dissimilarity - Held that - We do not agree with the findings of the lower authorities that a captive sourcing service provider like the assessee can be considered functionally similar to a company providing liaisoning services like Axis Integrated Systems Ltd. Considering the functional dissimilarity between the assessee company and Axis Integrated Systems Services Ltd., we are unable to persuade ourselves to agree with the directions of the Ld. DRP in retaining this company as a comparable. We direct that Axis Integrated Systems Ltd. be excluded from the final set of comparables.
Issues Involved:
1. Adjustment to the arm’s length price of the international transaction of provision of sourcing support services. 2. Inclusion of Axis Integrated Systems Ltd. as a comparable. 3. Exclusion of ICRA Management Consulting Services Ltd. as a comparable. 4. Incorrect computation of operating margins for certain companies. 5. Rejection of risk adjustment claim. Detailed Analysis: 1. Adjustment to the Arm’s Length Price: The assessee challenged the adjustment of ?6,44,05,518 made by the AO/TPO to the arm’s length price of the international transaction of provision of sourcing support services. The assessee argued that the transaction was at arm’s length and no adjustment was necessary. The TPO had proposed this adjustment after conducting a new search process, selecting seven comparables, and computing the PLI at 14.35%. 2. Inclusion of Axis Integrated Systems Ltd. as a Comparable: The primary issue raised by the assessee was the inclusion of Axis Integrated Systems Ltd. as a comparable. The assessee contended that Axis Integrated Systems Ltd. was engaged in issuing digital certification and was not functionally comparable to the assessee, which provided sourcing support services for high volume, time-sensitive consumer goods. The Tribunal noted that the TPO and DRP had overlooked the essential requirement that even under TNMM, the standard for selection of comparable transactions cannot be diluted. The Tribunal referred to the Delhi High Court’s judgment in Rampgreen Solutions Pvt. Ltd. vs. CIT, which emphasized that comparables must be selected based on similarity with the controlled transaction/entity. The Tribunal concluded that Axis Integrated Systems Ltd. was not functionally similar to the assessee and directed its exclusion from the final set of comparables. 3. Exclusion of ICRA Management Consulting Services Ltd. as a Comparable: The assessee objected to the exclusion of ICRA Management Consulting Services Ltd. by the DRP, arguing that it was engaged in providing business support services and had been accepted as a comparable in the current and preceding years. The DRP excluded this company on the basis that it had a totally different FAR (Functions, Assets, Risks) profile from the assessee. The Tribunal did not address this issue in detail as the exclusion of Axis Integrated Systems Ltd. resolved the primary dispute. 4. Incorrect Computation of Operating Margins: The assessee argued that the TPO had incorrectly computed the operating margins of Axis Integrated Systems Ltd., Cameo Corporate Services Ltd., and HGS Business Services Pvt. Ltd. The Tribunal did not delve into this issue in detail, as the exclusion of Axis Integrated Systems Ltd. addressed the primary concern. 5. Rejection of Risk Adjustment Claim: The assessee claimed that it was a risk-immune captive service provider and was eligible for risk adjustment. The AO/TPO rejected this claim, stating that the assessee had not produced details of the risk profile of the comparables. The Tribunal did not address this issue in detail, as the exclusion of Axis Integrated Systems Ltd. resolved the primary dispute. Conclusion: The Tribunal directed the exclusion of Axis Integrated Systems Ltd. from the final set of comparables, which resolved the primary dispute raised by the assessee. Consequently, the remaining grounds of appeal were dismissed as not pressed. The appeal of the assessee was partly allowed.
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