2023 (6) TMI 506 - AT - Income Tax

TP Adjustment - comparable selection - functional dissimilarity or extra-ordinary events - Difference in business model - difference between KPO and BPO/ITES - HELD THAT - Cosmic Global Ltd. is functionally different from that of the assessee as it out-sourced major part of its work and it had an exceptional performance, high turnover, abnormal profit in the relevant assessment year - we affirm the order of the CIT (Appeals) in excluding Cosmic Global Ltd., from the final set of comparables selected by the TPO for the purpose of bench-marking international transactions. Accentia Technologies Ltd - As decided in PTC SOFTWARE (I) PVT. LTD., 2018 (4) TMI 1002 - BOMBAY HIGH COURT the nature of activities carried out by Accentia Technologies Ltd. are different from that carried by the assessee - Thus functions of the assessee company and the comparable selected by the TPO with that of Accentia Technologies Ltd., are dissimilar and also since during the assessment year 2009-10 there were extra-ordinary events such as merger/amalgamation, this company cannot be considered as comparable. Eclerx Services Ltd. is a KPO providing specialized services whereas the activities of the assessee are in the nature of routine BPO services. Assessee is providing only ITES services and whereas Eclerx Services Ltd. which provides data analytics and data processing solutions to some of the largest brands in the world and is recognized expert in chosen markets financial services, retail and manufacturing is a data analytic KPO service provider specialized in two verticals financial services and retail manufacturing, cannot be considered as a comparable company of that of the assessee and the ld. CIT (Appeals) rightly excluded Eclerx Services Ltd. from the final set of comparables selected by the TPO. Coral Hub (formerly known as Vishal Technologies Ltd.) we notice that this company has out-sourced its BPO activities and in the case of Rampgreen Solutions (P.) Ltd. 2015 (8) TMI 931 - DELHI HIGH COURT held that a company which out-sourced its activities cannot be held comparable with a company which carries BPO activities as business model of both the companies are different. Thus we hold that the ld. CIT (Appeals) rightly excluded Coral Hub Ltd. from the final set of comparable companies selected by the TP. Benefit of working capital adjustment - ground raised by the assessee before the ld. CIT (Appeals) for not allowing working capital adjustment has been decided as infructuous without considering the submissions of the assessee - HELD THAT - We restore this ground to the file of the Assessing Officer, who shall consider the claim of the assessee in accordance with law. This ground is allowed for statistical purpose.

Summary

Issues Involved:
1. Rejection of high-margin comparables by CIT (Appeals).
2. Stringent standards of comparability analysis.
3. Rejection of specific companies as comparables.
4. Mode of engagement of employees for comparability analysis.
5. Use of current year data for benchmarking.
6. Inclusion of certain companies as comparables.
7. Benefit of working capital adjustment.

Detailed Analysis:

1. Rejection of High-Margin Comparables by CIT (Appeals):
The Revenue questioned the CIT (Appeals) for rejecting high-margin comparables while retaining low-margin comparables. The CIT (Appeals) excluded companies like Eclerx Services Ltd., Accentia Technology Ltd., Cosmic Global Ltd., and Vishal Information Technology Ltd. (Coral Hub) from the final set of comparables selected by the TPO. The Tribunal affirmed the CIT (Appeals) decision, noting that these companies had different functional profiles or were affected by extraordinary events like mergers and acquisitions.

2. Stringent Standards of Comparability Analysis:
The Revenue contended that CIT (Appeals) laid down stringent standards for comparability analysis, which could defeat the flexibility provided in determining the Arm's Length Price (ALP). The Tribunal upheld the CIT (Appeals) approach, emphasizing the importance of functional similarity in selecting comparables.

3. Rejection of Specific Companies as Comparables:
- Cosmic Global Ltd.: The Tribunal agreed with the CIT (Appeals) that Cosmic Global Ltd. was functionally different from the assessee as it outsourced a major portion of its BPO activities. This was supported by various judicial precedents, including the Delhi High Court in Rampgreen Solutions (P.) Ltd. and the Pune Bench in Cummins Turbo Technologies Ltd.
- Accentia Technology Ltd.: The Tribunal upheld the exclusion of Accentia Technology Ltd. due to its involvement in mergers and acquisitions during the relevant financial year, which affected its profitability. This was consistent with the Bombay High Court's decision in DCIT Vs. PTC Software India Pvt. Ltd.
- Eclerx Services Ltd.: The Tribunal affirmed that Eclerx Services Ltd., a KPO service provider, was not comparable to the assessee's BPO services. This was in line with the Delhi High Court's decision in Rampgreen Solutions (P.) Ltd.
- Coral Hub Ltd.: The Tribunal upheld the exclusion of Coral Hub Ltd., which outsourced its activities, making it functionally different from the assessee. This was supported by the Delhi High Court in Rampgreen Solutions (P.) Ltd.

4. Mode of Engagement of Employees for Comparability Analysis:
The Tribunal noted that the mode of engagement of employees (whether through vendors or on own rolls) is crucial for comparability analysis. Companies outsourcing their activities were deemed functionally different from those employing their own staff, impacting their cost structures and profitability.

5. Use of Current Year Data for Benchmarking:
The assessee's cross-objection on using only current year data for benchmarking was dismissed, following the Delhi High Court's decision in Chryscapital Investment Advisors (India) (P.) Ltd. Vs. DCIT, which upheld the use of current year data.

6. Inclusion of Certain Companies as Comparables:
The assessee's objections to the inclusion of Crossdomain Services Ltd. and the exclusion of Datamatics Financial Services Ltd. were not pressed and thus dismissed.

7. Benefit of Working Capital Adjustment:
The Tribunal restored the issue of working capital adjustment to the Assessing Officer for reconsideration, as the CIT (Appeals) had not addressed the assessee's submissions on this matter.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection for statistical purposes, affirming the CIT (Appeals) decisions on excluding certain comparables and addressing the working capital adjustment issue.