2019 (4) TMI 869 - AT - Income Tax

TP adjustment - selection of comparable - international transactions - functional similarity - Infosys BPO ltd.company cannot be a comparable to the assessee company as it has functional dissimilarity as well as extraordinary events took place during the year and, further, it has high turnover of ₹ 1,312 crores - HELD THAT - As decided in HYUNDAI MOTOR INDIA ENGG. PVT. LTD. VERSUS DY. COMMISSIONER OF INCOME- TAX, CIRCLE 2 (2) , HYDERABAD 2018 (6) TMI 505 - ITAT HYDERABAD other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys BPO is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, because of its big brand value this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. Therefore, we direct the Assessing Officer/TPO to exclude this company. TCS eServe Ltd. - following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables. Crystal Voxx Ltd - As relying on assessee s own case for AY 2013-14 we direct the TPO to verify the comparability of this company. Therefore, the matter is remitted to the file of the TPO for fresh analysis. This ground is allowed for statistical purposes. Adjustment for risk differences - HELD THAT - As relying on HELLOSOFT INDIA (P.) LTD. 2013 (10) TMI 747 - ITAT HYDERABAD we direct the AO/TPO to allow the risk adjustment in accordance with the Rule 10B(1)(e) considering the fact that assessee is a captive service provider to its AEs. Accordingly, ground raised by the assessee is allowed for statistical purposes. MAT credit disallowed the same while computing the tax liability for this AY - HELD THAT - We direct the AO to verify the claim of the assessee and allow the MAT credit as per law. This ground is allowed for statistical purposes.

Issues Involved:
1. Transfer Pricing Adjustment
2. Selection of Comparable Companies
3. Computation of Margin of Comparable Companies
4. Rejection of Comparable Companies
5. Use of Filters
6. Rejection of Use of Multiple Year Data
7. Adjustment for Risk Differences
8. Arm’s Length Range of 5%
9. MAT Credit
10. Interest Liability under Section 234B and 234C

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee challenged the transfer pricing adjustment of ?1,69,15,395 on account of provision of IT enabled services to its Associated Enterprises (AEs). The TPO had suggested an adjustment under section 92CA(3) of the Income Tax Act, 1961, enhancing the total income by ?1,87,40,795, which was later restricted by the DRP to ?1,69,15,395.

2. Selection of Comparable Companies:
The assessee contested the inclusion of certain companies as comparables by the TPO. Specifically, the assessee objected to the inclusion of Infosys BPO Ltd. and TCS e-Serve Ltd., citing functional dissimilarity, high turnover, and possession of brand value and intangibles. The Tribunal directed the AO/TPO to exclude Infosys BPO Ltd. and TCS e-Serve Ltd. from the list of comparables, following precedents where these companies were found to be functionally dissimilar and possessing significant brand value and intangibles.

3. Computation of Margin of Comparable Companies:
The assessee argued against the TPO’s treatment of provision for bad and doubtful debts and bad debts written off as non-operating expenses for margin computation. However, this specific issue was not pressed during the hearing.

4. Rejection of Comparable Companies:
The TPO had rejected Crystal Voxx Ltd. as a comparable due to failing the service income filter and persistent losses. The Tribunal directed the TPO to verify the comparability of Crystal Voxx Ltd., referencing a prior decision where the company was deemed functionally similar and satisfying the necessary filters.

5. Use of Filters:
The assessee raised an issue regarding the use of different financial year-end filters for rejecting comparable companies. This issue was not specifically addressed in the detailed analysis as it was not pressed during the hearing.

6. Rejection of Use of Multiple Year Data:
The assessee contested the rejection of multiple year data usage, arguing for the use of data for FY 2011-12 only. This issue was not specifically addressed in the detailed analysis as it was not pressed during the hearing.

7. Adjustment for Risk Differences:
The assessee argued for a risk adjustment, citing that it is a captive service provider with transactions only with its AE, and all risks lie with the AE. The Tribunal directed the AO/TPO to allow the risk adjustment in accordance with Rule 10B(1)(e), considering the assessee’s status as a captive service provider.

8. Arm’s Length Range of 5%:
The assessee requested the AO/TPO to rework the profit margins and allow the benefit of the +/- 5% range as provided in the proviso to Section 92C(2) of the Act. This issue was not specifically addressed in the detailed analysis as it was not pressed during the hearing.

9. MAT Credit:
The assessee claimed MAT credit amounting to ?40,23,521, which was not granted by the AO. The Tribunal directed the AO to verify and allow the MAT credit as per law.

10. Interest Liability under Section 234B and 234C:
The assessee contested the interest charged under section 234C amounting to ?1,76,969, as against ?15,456 considered in the return of income. The Tribunal directed that consequential effects be given to the interest liability under section 234B and 234C.

Conclusion:
The appeal was allowed for statistical purposes, with directions to the AO/TPO to exclude certain comparables, verify the comparability of Crystal Voxx Ltd., allow risk adjustment, and verify and allow MAT credit. The Tribunal’s decision emphasized the need for functional similarity and appropriate filters in selecting comparables, and the importance of considering the risk profile of the assessee in transfer pricing adjustments.

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