2019 (4) TMI 56 - AT - Income Tax

TP adjustment - upward adjustment in ITES segment - CIT(A) directed exclusion of two concerns from final list of comparables i.e. Infosys BPO Ltd. and Eclerx Services Ltd. - assessee has pointed out that two concerns i.e. Accentia Technologies Ltd. and Informed Technologies Ltd. need to be excluded from final set of comparables - HELD THAT - The assessee was engaged in business of BPO services thus companies functionally dissimilar with that of assessee need to be deselected from final list. Eclerx Services Limited is not a comparable company as engaged in KPO services. Accentia Technologies Ltd. cannot be selected in the final list of comparables as during the year under consideration, there was an extraordinary event of amalgamation. Jeevan Softech Ltd. - We direct the Assessing Officer / TPO to work out the correct PLI of said concern and then determine the average margins of comparables in order to compute arm s length price of international transactions. Informed Technologies Ltd. has been showing different profitability from year to year and such a concern cannot be picked up as being functionally similar because of abnormal profitability trend. Accordingly, we direct the Assessing Officer / TPO to exclude Informed Technologies Ltd. from final list of comparables. Claim of risk adjustment out of margins of comparables - HELD THAT - The issue of allowability of risk adjustment stands settled by various decisions of different Benches of Tribunal and applying the same parity of reasoning, we direct the Assessing Officer to allow risk adjustment @ 20% to the margins of comparables and compute the transfer pricing adjustment, if any, in the hands of assessee accordingly. The Assessing Officer / TPO shall afford reasonable opportunity of hearing to the assessee before finally computing arm s length price of international transactions in line with our directions in the paras hereinabove. In the final analysis, we summarize our decision i.e. concerns Eclerx Services Ltd., Accentia Technologies Ltd. and Informed Technologies Ltd. are to be excluded from final list of comparables; the PLI of margins of Jeevan Softech Ltd. need to be re- computed and further risk adjustment is to be allowed @ 20% and not 2%. Assessee appeal allowed.

Issues Involved:
1. Upward adjustment to the income of the assessee.
2. Exclusion of certain companies as comparables.
3. Correct computation of Profit Level Indicator (PLI) of Jeevan Softech Ltd.
4. Allowability of risk adjustment to the margins of comparables.
5. Initiation of penalty proceedings under Section 271(1)(c) of the Income-tax Act.

Detailed Analysis:

1. Upward Adjustment to the Income of the Assessee:
The assessee was aggrieved by an upward adjustment of ?68,38,278/- in the ITES segment. The assessee had applied the Transactional Net Margin Method (TNMM) as the most appropriate method and had selected 15 companies with three years of data as comparables. The Transfer Pricing Officer (TPO) rejected 12 of these companies and added six new concerns, resulting in an upward adjustment proposal of ?84,40,837/-. The CIT(A) directed the exclusion of two concerns, Infosys BPO Ltd. and Eclerx Services Ltd., from the final list of comparables, leaving seven concerns as functionally comparable.

2. Exclusion of Certain Companies as Comparables:
The Revenue appealed against the exclusion of Eclerx Services Ltd. The Tribunal upheld the CIT(A)'s decision, noting that Eclerx Services Ltd. was a Knowledge Process Outsourcing (KPO) service provider, while the assessee was engaged in Business Process Outsourcing (BPO) services. The Tribunal cited the Pune Bench's decision in DCIT Vs. BNY Mellon International Operations (India) (P.) Ltd. and the Delhi High Court's ruling in Rampgreen Solutions Pvt. Ltd. Vs. CIT, which supported the exclusion of KPO companies when benchmarking BPO services.

3. Correct Computation of PLI of Jeevan Softech Ltd.:
The assessee contended that the PLI of Jeevan Softech Ltd. needed correction. The Tribunal referred to its previous decision in DCIT Vs. BNY Mellon International Operations (India) (P.) Ltd., directing the TPO to work out the correct PLI of Jeevan Softech Ltd. by including the ERP segment revenue classified as ITES and then determine the average margins of comparables.

4. Allowability of Risk Adjustment to the Margins of Comparables:
The assessee claimed a risk adjustment of 20% instead of the 2% allowed by the TPO. The Tribunal referred to its decision in Starent Networks (India) (P.) Ltd. Vs. ACIT and directed the TPO to allow a risk adjustment of 20% to the margins of comparables, following the ratio laid down by the Delhi Bench in the case of Sony India Pvt. Ltd.

5. Initiation of Penalty Proceedings Under Section 271(1)(c) of the Income-tax Act:
The Tribunal did not specifically address the initiation of penalty proceedings under Section 271(1)(c) in the judgment summary provided.

Conclusion:
The Tribunal allowed the assessee's appeal, directing the exclusion of Eclerx Services Ltd., Accentia Technologies Ltd., and Informed Technologies Ltd. from the final list of comparables. It also directed the TPO to re-compute the margins of Jeevan Softech Ltd. and allow a risk adjustment of 20%. The Revenue's appeal was dismissed, and the Tribunal emphasized that the tax effect in the Revenue's appeal was below the limits prescribed by the CBDT, rendering the appeal not maintainable.

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