2016 (12) TMI 1585 - AT - Income Tax

Tribunal directs exclusion of companies from comparables list & verification of working capital adjustment

The Tribunal allowed the appeal, directing the exclusion of certain companies from the list of comparables and verification of the working capital ... TPA - selection of comparable - Held that:- Assessee provides Information Technology ('IT') enabled back office processing services thus companies functionally different and operates on a different business model with that of assessee need to be de-selected from final list of comparable. Working Capital Adjustments - Held that:- As far as working capital adjustments are concerned, there is no dispute about the adjustment per se. the dispute is regarding the working of adjustment only. As regards the quantum of working capital adjustment, we direct the AO/TPO to verify the correctness of the amount of working capital adjustment claimed by the assessee and then decide as per facts and law. The ground is allowed accordingly. AO is also directed to work out the correct margins of the comparable companies as directed by Ld. CIT(A) in his order as assessee submits that this direction of Ld. CIT(A) was not followed by AO. After that AO/TPO is directed to work out the ALP as per the provisions of the Act. Issues Involved:1. Selection of comparable companies for Transfer Pricing (TP) analysis.2. Calculation of working capital adjustment.Issue-wise Detailed Analysis:1. Selection of Comparable Companies for Transfer Pricing (TP) Analysis:Accentia Technologies Limited (Accentia):The assessee contended that Accentia had extraordinary business operations during the year, including business restructuring and peculiar economic circumstances, and a low employee cost percentage. The TPO and CIT(A) rejected these contentions. The assessee relied on several judicial precedents to argue that Accentia should be excluded as a comparable. The Tribunal, following the decision in Hyundai Motors India Engineering P. Ltd. vs. ITO, agreed with the assessee and directed the exclusion of Accentia from the list of comparables due to extraordinary events impacting its financial results.Coral Hub Limited (formerly Vishal Information Technologies Limited):The assessee argued that Coral Hub was functionally different as it primarily outsourced its work, unlike the assessee. The TPO and CIT(A) did not accept this argument. The assessee cited judicial precedents to support the exclusion of Coral Hub. The Tribunal, referencing the decision in United Health Group Information Services Pvt. Ltd. vs. ACIT, found Coral Hub to be engaged in e-publishing and document scanning, which are not comparable to the assessee's services. Hence, Coral Hub was excluded from the list of comparables.Eclerx Services Limited (Eclerx):The assessee claimed that Eclerx was functionally different, providing high-end KPO services and experiencing an extraordinary situation due to a merger. The TPO and CIT(A) rejected these claims. The Tribunal, citing the decision in Hyundai Motors India Engineering P. Ltd. vs. ITO, agreed that Eclerx's services and the extraordinary events warranted its exclusion as a comparable.Mold-tek Technologies Limited (Moldtek):The assessee argued that Moldtek was functionally different, providing engineering design services, and had undergone mergers and demergers during the year. The TPO and CIT(A) did not accept these arguments. The Tribunal, following the decision in Symphony Marketing Solutions India Pvt. Ltd. vs. ITO, found Moldtek's services and extraordinary events justified its exclusion from the list of comparables.Genesys International Corporation Limited (Genesys):The assessee contended that Genesys was functionally different, providing Geographical Information Services, and had abnormal growth. The TPO and CIT(A) rejected these claims. The Tribunal, referencing the decision in Hyundai Motors India Engineering P. Ltd. vs. ITO, agreed that Genesys's services and abnormal growth warranted its exclusion as a comparable.2. Calculation of Working Capital Adjustment:The assessee argued that the TPO made an arithmetical error in calculating the average receivables, leading to an erroneous working capital adjustment. The CIT(A) upheld the TPO's calculation. The Tribunal directed the AO/TPO to verify the correctness of the working capital adjustment claimed by the assessee and to compute the ALP after making necessary corrections. The Tribunal emphasized that the correct working capital adjustment could bring the assessee's margin within the permissible range, potentially eliminating the need for a TP adjustment.Conclusion:The Tribunal allowed the appeal of the assessee, directing the exclusion of certain companies from the list of comparables and the verification and correction of the working capital adjustment calculation. The Tribunal's order emphasized adherence to judicial precedents and accurate computation of adjustments to ensure compliance with the arm's length principle.