2018 (7) TMI 951 - AT - Income Tax

TPA - inclusion/exclusion of comparables - Held that - Assessee along with its global partners was involved in outsourcing to companies and large global corporations to create dedicated and customised designed Indian facilities, for providing remote delivery of business process services, thus companies functionally dissimlar with that of assessee need to be deselected from final list.

Summary

Issues Involved:
1. Rejection of comparables selected by the assessee.
2. Adoption of inappropriate filters by the TPO.
3. Selection of functionally different companies as comparables.
4. Denial of risk adjustment to the assessee.
5. Incorrect computation of operating margins of comparables.
6. Non-application of the second proviso to section 92C(2) of the Income Tax Act.
7. Use of single-year data for comparability analysis.

Issue-wise Detailed Analysis:

1. Rejection of Comparables Selected by the Assessee:
The assessee contended that the Transfer Pricing Officer (TPO) arbitrarily rejected the comparables selected by the assessee without identifying specific deficiencies. The TPO rejected 4 out of 15 comparables based on a sketchy understanding of their functional analysis. The Tribunal examined the functional, asset, and risk (FAR) analysis of the assessee, which was categorized as a captive service provider offering back-office support services to its Associated Enterprises (AEs). The Tribunal directed the exclusion of certain comparables such as Accentia Technologies Ltd. (due to amalgamation and different business models), Bodhtree Consulting Ltd. (functionally different as it was into software development), and Eclerx Services Ltd. (a KPO service provider).

2. Adoption of Inappropriate Filters by the TPO:
The TPO applied a turnover filter of less than ?500 crores, which led to the selection of 23 comparables with an average arithmetic mean of 30.07%. The Tribunal noted that the TPO used materials not shared with the assessee and directed the TPO to reconsider the comparability of HCL Comnet Systems and Services Ltd. (Segment) after providing all information to the assessee and considering foreign exchange earnings/loss.

3. Selection of Functionally Different Companies as Comparables:
The Tribunal addressed the inclusion of functionally different companies such as Infosys BPO Ltd. (a giant with high-end KPO services and significant intangibles), Mold-Tek Technologies Ltd. (involved in structural engineering services and affected by mergers), and Wipro Ltd. (a giant entity with diversified business and significant intangibles). The Tribunal directed the exclusion of these companies from the final list of comparables.

4. Denial of Risk Adjustment to the Assessee:
The Tribunal did not specifically address this issue in detail as the assessee did not press this ground during the hearing.

5. Incorrect Computation of Operating Margins of Comparables:
The assessee contended that the TPO incorrectly computed the operating margins of selected comparables. The Tribunal directed the TPO to verify the details provided by the assessee and to grant forex loss/gain as operating expenses/income. Additionally, the Tribunal directed the TPO to recompute the margins of comparables such as Flextronics Software Systems Ltd. and R Systems International Ltd. after proper verification.

6. Non-application of the Second Proviso to Section 92C(2) of the Income Tax Act:
The Tribunal did not address this issue in detail as the assessee did not press this ground during the hearing.

7. Use of Single-year Data for Comparability Analysis:
The Tribunal did not address this issue in detail as the assessee did not press this ground during the hearing.

Additional Grounds:
The assessee raised additional grounds challenging the inclusion of certain comparables like Maple E-Solutions Ltd., Triton Corp Ltd., and Vishal Information Technologies Ltd. The Tribunal directed the exclusion of these companies due to reasons such as involvement in fraud and different business models.

Conclusion:
The Tribunal partly allowed the appeal filed by the assessee, directing the TPO to reconsider the comparability analysis and recompute the margins of the comparables after proper verification and providing necessary information to the assessee. The Tribunal emphasized the need for comparables to be similar in material aspects, considering the products/services characteristics, functions undertaken, assets used, and risks assumed.