2020 (9) TMI 1096 - AT - Income Tax

TP Adjustment - inclusion/exclusion of TCS-e-Serve Ltd. by the TPO - HELD THAT - One of the key reason why the TCS-e-serve Ltd. cannot be held to be comparable with the assessee company which is providing back office support services, i.e., ITeS/BPO services, because TCS-e-Serve in addition to ITeS/BPO services also render technical services like software testing and validation of software which falls under software development services activity. Admittedly, the assessee is a low risk captive unit involved in provision of back office support service to it s group companies for which it is remunerated at cost plus basis and is not exposed to any kind of risk. Whereas, the TCS-e-serve Ltd. bears significant risk such a macro economic risk, regulatory risk, financial risk and risks from operations etc. which clearly indicates that the TCS-e-serve Ltd is a full risk bearing company. On risk analysis also it cannot compared with the assessee. Besides this, TCS-e-serve Ltd is not comparable on account of intangible held by this company and has large scale of operation and huge brand value. As in the case Avaya India Ltd. vs. ACIT 2019 (7) TMI 1279 - DELHI HIGH COURT has upheld the exclusion of TCS-e-Serve on account of large scale of operations, huge brand value, lack of segmental information with the comparables who are simply involved ITeS/BPO services which are captive services provider. Accordingly, we direct the TPO to exclude the TCS-e- Serve Ltd. from the comparability list and determine the Arms Length Price. Accordingly, the appeal of the assessee is treated as allowed.

Summary

Issues involved:
1. Tax effect threshold for appeal.
2. Transfer pricing adjustment challenge.

Analysis:
1. Tax effect threshold for appeal:
The Revenue's appeal, ITA No. 1571/Del/2016, was dismissed as the tax effect on the disputed amount challenged was less than ?50 lakh, complying with CBDT Circular No. 17/2019. The tax effect computation was detailed, resulting in the dismissal of the Department's appeal.

2. Transfer pricing adjustment challenge:
The assessee challenged a transfer pricing adjustment of ?81,33,706 on back office support services. The Tribunal noted that only one comparable, TCS-e-Serve Ltd., was effectively challenged, citing a previous decision for the Assessment Year 2012-13. The assessee's argument focused on TCS-e-Serve Ltd.'s functional dissimilarity, brand value, and scale of operations, which led to a detailed analysis of the comparability issue.

The Tribunal found that TCS-e-Serve Ltd. was not a suitable comparable due to its additional software services, significant risks, brand value, and lack of segmental data. Citing the Delhi High Court's decision in Avaya India Ltd. vs. ACIT, the Tribunal upheld the exclusion of TCS-e-Serve Ltd. based on large scale operations and brand value. The Tribunal also referenced its previous decision for the Assessment Year 2012-13, where TCS-e-Serve Ltd. was excluded after a detailed discussion, reinforcing the incompatibility of the company as a comparable.

Consequently, the Tribunal directed the TPO to exclude TCS-e-Serve Ltd. from the comparability list, allowing the assessee's appeal and dismissing the Revenue's appeal. The judgment was pronounced on 27th August 2020, resolving the transfer pricing dispute in favor of the assessee.