2020 (1) TMI 442 - AT - Income Tax

Transfer pricing (TP) adjustments - selection of comparable - Function test - The six comparables challenged by the assessee for exclusion - assessee is engaged in the business of providing IT enabled services to its AEs and is also registered with Software Technology Parks of India (STPI) - Corporate and Professional services - Financial Services - Held that - Ld. AO/TPO is directed to recompute the ALP after excluding the aforesaid six comparables.

Summary

Issues Involved:
1. Transfer pricing adjustment on international transactions for IT enabled services (ITeS).
2. Selection of comparable companies for benchmarking the international transactions.

Detailed Analysis:

1. Transfer Pricing Adjustment on International Transactions for IT Enabled Services (ITeS):
The primary issue in the appeal was the transfer pricing adjustment of ?10,82,46,897/- made on international transactions with the Associated Enterprises (AEs) for rendering IT enabled services (ITeS). The assessee, E-valueserve.com Pvt. Ltd., a wholly-owned subsidiary of E-valueserve Ltd. Bermuda, provides IT enabled services to its AEs. The business segments include Corporate and Professional services, Financial Services, and Intellectual Property Research. The assessee adopted the Transactional Net Margin Method (TNMM) as the most appropriate method for benchmarking, resulting in a profit margin of 18.94%. The Transfer Pricing Officer (TPO) rejected the assessee’s comparables and conducted his own analysis, selecting 12 comparables with an average profit margin of 27.58%.

2. Selection of Comparable Companies for Benchmarking the International Transactions:
The assessee challenged six comparables selected by the TPO, arguing they were not comparable based on Functions, Assets, and Risks (FAR) analysis. The Tribunal examined each of these comparables:

i) Eclerx Services Ltd.:
- The assessee objected to Eclerx on the grounds of functional dissimilarity, extraordinary events, and unreliable data. The Tribunal noted that Eclerx provides high-end KPO services, which are not comparable to the assessee’s ITeS. The Tribunal cited previous rulings, including the Hon’ble Delhi High Court in Rampgreen Solutions, which rejected Eclerx as a comparable for ITeS companies. Consequently, Eclerx was excluded from the list of comparables.

ii) Accentia Technologies Ltd.:
- The assessee argued that Accentia is functionally dissimilar, possesses IPRs, and underwent extraordinary events like acquisition, lacking segmental details. The Tribunal agreed, noting that Accentia’s services in medical transcription, coding, and billing are specialized and not comparable to the assessee’s services. The Tribunal referenced earlier decisions, including the Hon’ble Delhi High Court in Ameriprise India, to exclude Accentia.

iii) BNR Udyog Ltd.:
- The assessee contended that BNR Udyog is similar to Accentia, providing medical transcription services without segmental details. The Tribunal found that BNR Udyog’s functional profile is akin to Accentia’s and lacks segmental details, leading to its exclusion, following the Tribunal’s earlier decision in Evalueserve SEZ, confirmed by the Hon’ble Delhi High Court.

iv) Excel Infoways Ltd.:
- The assessee objected based on the employee cost to total sales filter and involvement in infrastructure development without segmental details. The Tribunal found that Excel Infoways has significant revenue from infrastructure activities, lacking segmental details, making it an unfit comparable. The Tribunal excluded Excel Infoways, referencing the Baxter Indian case.

v) Infosys BPO Ltd.:
- The assessee argued that Infosys BPO is a giant company with high brand value and intangibles, incomparable to the assessee. The Tribunal agreed, noting Infosys BPO’s significant differences in scale, brand value, and intangibles. The Tribunal cited several Delhi High Court decisions, including Oracle (OFSS) BPO Services, to exclude Infosys BPO.

vi) TCS E-Serve Ltd.:
- The assessee argued that TCS E-Serve is a giant company with high brand value and intangibles, incomparable to the assessee. The Tribunal agreed, noting TCS E-Serve’s significant differences in scale, brand value, and intangibles. The Tribunal referenced the Hon’ble Delhi High Court in Avaya India, which excluded TCS E-Serve for similar reasons.

Conclusion:
The Tribunal directed the TPO/AO to exclude the six challenged comparables (Eclerx Services Ltd., Accentia Technologies Ltd., BNR Udyog Ltd., Excel Infoways Ltd., Infosys BPO Ltd., and TCS E-Serve Ltd.) from the final list and to recompute the Arm’s Length Price (ALP) accordingly. The appeal of the assessee was partly allowed.