2016 (5) TMI 1333 - AT - Income Tax

Tribunal excludes disputed comparables for IT services, favoring assessee. Consistent approach upheld.

Orange Business Services India Solutions Pvt. Ltd., Versus DCIT, Circle 3, Gurgaon

The Tribunal decided in favor of the assessee, excluding disputed comparables from the final list for both ITeS and IT (CSD) segments. The appeal was ... TPA - selection of comparables by the TPO - Held that:- Companies with dissimilar functional profile with that of assessee as engaged in providing information technology enables network management and other back office support services to its group companies. It also undertakes software development services for developing software applications, which are used within the Group companies. The IT enabled network management and other back office support services performed by assessee, primarily include remote monitoring and maintenance of Equant global network platforms and services, coordination, remote configuration, and implementation of quality customer networking solutions. Further under the category of software development services assessee is engaged in the providing routine contract software development services relating to the development and maintenance of application companies like HR and accounting need to be deleted as comparable. Issues Involved:1. Enhancement of income by Rs. 13,34,87,027.2. Arm's Length Principle for international transactions.3. Selection of comparables by the Transfer Pricing Officer (TPO).4. Computation of interest under section 234B of the Act.5. Initiation of penalty under section 271(1)(c) of the Act.Detailed Analysis:1. Enhancement of Income by Rs. 13,34,87,027:The assessee challenged the enhancement of income by Rs. 13,34,87,027 made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO), following the directions of the Dispute Resolution Panel (DRP). The enhancement was based on the alleged failure to satisfy the arm's length principle for international transactions related to IT/CSD and ITeS services.2. Arm's Length Principle for International Transactions:The AO and TPO were accused of not appreciating the factual positions and submissions of the assessee. They allegedly disregarded the Arm's Length Price (ALP) determined by the assessee in its Transfer Pricing (TP) documentation, rejected the comparability analysis, and included/excluded certain companies arbitrarily in the final set of comparables. The assessee argued that none of the conditions set out in section 92C(3) of the Act were satisfied in this case, and the TPO's approach ignored multiple year/prior years' data, included companies with high/volatile margins, and did not allow a risk adjustment for the assessee being a low-risk captive unit.3. Selection of Comparables by TPO:The main issue was the selection of comparables by the TPO, which was upheld by the DRP. The assessee argued that the issue was covered by the Tribunal's decision in its own case for the Assessment Year 2010-11. The Tribunal had previously excluded certain comparables like Accentia Technologies Ltd., Infosys BPO Ltd., and TCS e-Serve Ltd. on the grounds of functional dissimilarity, high-end integrated services, and extraordinary events like amalgamation or restructuring.Accentia Technologies Ltd.:The Tribunal noted that Accentia Technologies Ltd. was excluded as a comparable in the previous year due to its involvement in KPO services, amalgamation during the relevant year, and significant intangible assets.Infosys BPO Ltd.:Infosys BPO Ltd. was excluded for being engaged in high-end integrated services and benefiting significantly from the Infosys brand, which resulted in higher profits.TCS e-Serve Ltd.:TCS e-Serve Ltd. was excluded for providing high-end technology services, owning significant intangibles, and benefiting from the Tata brand.Infosys Ltd., Persistent Systems Ltd., Wipro Technology Services Ltd., Zylog Systems Ltd.:These companies were excluded from the IT (CSD) segment for reasons including high turnover, significant brand value, lack of segmental information, and undergoing business restructuring.4. Computation of Interest under Section 234B:The AO proposed to compute interest under section 234B of the Act, which the assessee contested as grossly erroneous.5. Initiation of Penalty under Section 271(1)(c):The AO initiated a penalty under section 271(1)(c) mechanically and without recording any satisfaction for its initiation, which the assessee argued was incorrect.Conclusion:The Tribunal, following its previous decision for the Assessment Year 2010-11, excluded the disputed comparables from the final list for both ITeS and IT (CSD) segments. Consequently, the grounds raised by the assessee were allowed, and the appeal was decided in favor of the assessee. The Tribunal emphasized the need for a consistent approach in selecting/rejecting comparables when facts are identical. The decision was pronounced in the open court on 31st May 2016.