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2020 (8) TMI 170 - AT - Income TaxTP Adjustment - comparable selection - HELD THAT - The assessee provides back office support functions to its associated enterprises. The transactions of IT Enabled Support Services to its associated enterprises and the arms length price computed by the assessee was accepted by the revenue in A.Y. 2005 06 and A.Y. 2006-07. Companies functionally dissimilar with that of assessee need to be deselected from final list. Rejection of comparable who fails the export filter of 75% which has been adopted by the transfer pricing officer. Rejecting the persistent loss making companies - Though some of the companies have suffered loss in the current assessment year the average of two years showed the robust positive figure. Hence, it cannot be said that the companies are persistently loss making company. Furthermore, we note that these comparables have been duly accepted as comparable in earlier assessment year by the officer himself. Hence, taking a contrary stand by the transfer pricing officer without giving a specific reasoning is not sustainable. Accordingly, we direct for inclusion of these comparables - CG Vak Software Exports Ltd., R Systems International Ltd, and Allsec Technologies.
Issues Involved:
1. Transfer pricing adjustment of ?1,44,87,25,823/-. 2. Characterization of the assessee as Knowledge Process Outsourcing (KPO) services. 3. Rejection and inclusion of certain comparables by the Transfer Pricing Officer (TPO) and Commissioner of Income Tax (Appeals) (CIT(A)). Detailed Analysis: 1. Transfer Pricing Adjustment of ?1,44,87,25,823/-: The assessee, a subsidiary of Morgan Stanley Incorporated USA, provided back office support services to its associated enterprises and received a fee of ?1,44,87,25,823/-. The assessee benchmarked this transaction under the transactional net margin method, selecting 18 comparables and computing a margin of 23.93% based on a two-year average, which was less than the assessee's margin of 26.81%. The Transfer Pricing Officer (TPO) rejected the two-year data, used single-year data of 7 comparables with a mean of 16.91%, and characterized the assessee as a KPO, leading to a margin of 51.73% and subsequent transfer pricing adjustment. 2. Characterization of the Assessee as Knowledge Process Outsourcing (KPO) Services: The TPO characterized the assessee as KPO services, which was contested by the assessee. The CIT(A) agreed that the TPO's characterization was incorrect but upheld the benchmarking process. The CIT(A) referred to the decision of the Special Bench of the ITAT in Maersk Global Centers (India) (P) Ltd Vs. ACIT and upheld the selection of four comparables by the TPO, leading to an arithmetic mean of 44.60%. 3. Rejection and Inclusion of Comparables: The assessee was aggrieved by the rejection of some comparables and the inclusion of others by the revenue. The assessee's counsel argued that the assessee had been accepted as dealing in back office support services in earlier years and that entities dealing with KPO services were not comparable. The CIT(A) rejected the TPO's characterization of the assessee as KPO but still accepted KPO comparables. Rejection of Comparables: The ITAT previously held that Eclerx Services Ltd. and Vishal Information Technologies Ltd. (earlier Coral Hub Ltd.) were not comparable to the assessee, as they were KPO service providers. The Tribunal noted that Eclerx Services Ltd. had an extraordinary event of acquisition and that Datamatics Financial Services failed the export filter of 75%. Consequently, the following comparables were rejected: - Eclerx Services Ltd. - Vishal Information Technologies Ltd. - Crossdomain Solutions - Datamatics Financial Services. Inclusion of Comparables: The assessee argued for the inclusion of Allsec Technologies, R Systems International Ltd., and CG Vak Software & Exports Ltd., which had been accepted as comparables in earlier years. The TPO had rejected these comparables without specific reasoning, despite the assessee submitting current year data. The Tribunal directed the inclusion of these comparables, noting that the TPO's rejection was not sustainable. Conclusion: The Tribunal agreed with the assessee's contention that its functions were those of ITES and not KPO. The Tribunal found that the CIT(A) contradicted himself by accepting KPO comparables while rejecting the KPO characterization. The Tribunal directed the TPO to exclude KPO comparables and include the assessee's comparables, leading to a fresh computation of the transfer pricing adjustment. The appeal was allowed for statistical purposes. The pronouncement was delayed due to the Covid-19 pandemic but was made under rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962, on 23.07.2020.
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