Upward Transfer Pricing Adjustment Upheld Under Rule 10B Using Current Year Data, Safe Harbour Margin Disallowed

The ITAT Bangalore upheld the TPO's upward transfer pricing adjustment against the Indian assessee providing call centre services to its AE in the USA. The Tribunal confirmed the mandatory use of current year data for comparability analysis under Rule 10B, rejecting the assessee's reliance on prior year data. It held that contemporaneous data used by the TPO, even if unavailable to the assessee at the time of documentation, was valid. The +/- 5% safe harbour margin was disallowed as it applies only to justify prices, not adjustments. The TPO's rejection of the assessee's transfer pricing study was upheld due to non-compliance with prescribed rules. The Tribunal directed exclusion of comparables with significant related party transactions, unique intangibles, or functional dissimilarity. Arguments based on parent company losses and tax avoidance were rejected. Certain comparables were excluded or included based on turnover, business model, and functional comparability. The depreciation adjustment claim was remitted for fresh consideration.

---

---

1. ISSUES PRESENTED and CONSIDERED

1.1 Whether the adjustments made by the Transfer Pricing Officer (TPO) and upheld by the Commissioner of Income Tax (Appeals) (CIT(A)) to the arm's length margin in respect of call centre services rendered to the Associated Enterprise (AE) are justified.

1.2 Whether the comparable companies selected by the TPO, which include entities with related party transactions exceeding prescribed thresholds, economies of scale, and ownership of intangibles, are appropriate comparables.

1.3 Whether the assessee's use of non-contemporaneous data and multiple year data for benchmarking is permissible under the Transfer Pricing Regulations.

1.4 Whether the benefit of safe harbour provisions (+/- 5% variation) under the proviso to section 92C(2) of the Income Tax Act, 1961, is applicable to the assessee.

1.5 Whether the loss incurred by the parent company impacts the arm's length price determination for the assessee.

1.6 Whether the Transfer Pricing Study (TPS) submitted by the assessee is reliable and acceptable.

1.7 Whether the depreciation adjustment sought by the assessee as an additional ground should be admitted and allowed for comparability purposes.

1.8 Whether individual comparable companies selected or rejected by the TPO are correctly included or excluded based on functional comparability, related party transactions, export orientation, and other relevant criteria.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Adjustments to Arm's Length Margin

- Legal Framework: Transfer Pricing provisions under sections 92C and 92CA of the Income Tax Act, 1961; Rule 10B of the Income Tax Rules, 1962.

- Court Reasoning: The assessee initially challenged the CIT(A)'s upholding of the TPO's upward adjustment to the arm's length margin on call centre services. However, the ground challenging rejection of non-contemporaneous data was not pressed and dismissed as infructuous.

- Conclusion: The adjustment to the arm's length margin as upheld by the CIT(A) stands, except for issues related to specific comparables discussed separately.

2.2 Use of Non-Contemporaneous and Multiple Year Data

- Legal Framework: Rule 10B(4) mandates use of data relating to the financial year in which the international transaction occurred; data not more than two years prior may be considered only if it influences transfer price determination.

- Court Reasoning: The mandatory use of contemporaneous data is emphasized. Non-availability of current year data in public databases does not excuse the assessee from this requirement. The TPO is empowered and duty-bound to use contemporaneous data, even if unavailable to the assessee at the time of TPS preparation.

- Competing Arguments: Assessee argued for acceptance of earlier years' data and multiple year averaging due to non-availability of current year data. These grounds were not pressed or rejected.

- Conclusion: Use of non-contemporaneous and multiple year data by the assessee is not permissible; the TPO's rejection of such data is upheld.

2.3 Use of Data Beyond Specified Cut-Off Date

- Legal Framework: Section 92D and Rule 10B(4) require contemporaneous documentation by the specified date (due date of filing return).

- Court Reasoning: No statutory cutoff limits the TPO to data available by the specified date for ALP determination. The TPO may use contemporaneous data available at the time of audit.

- Conclusion: The TPO's use of contemporaneous data beyond the assessee's documentation date is valid.

2.4 Safe Harbour Provisions

- Legal Framework: Proviso to section 92C(2) prior to amendment allowed ALP to vary by +/- 5% of the arithmetical mean; section 92C(2A) (introduced retrospectively) restricts this option if variation exceeds 5%.

- Court Reasoning: The retrospective amendment disallows the assessee's option to accept a price within +/- 5% variation if the actual price differs by more than 5%. Judicial decisions cited by the assessee predate this amendment and are not applicable.

- Conclusion: The assessee is not entitled to safe harbour benefit of +/- 5%; ground dismissed.

2.5 Reliability and Rejection of Transfer Pricing Study (TPS)

- Legal Framework: Transfer Pricing documentation requirements under section 92D and Rules 10B and 10D; comparability analysis principles.

- Court Reasoning: The TPO rejected the assessee's TPS due to use of non-contemporaneous data, inadequate search of comparables, and inclusion of domestic sector companies instead of export-oriented ones. The Court upheld the TPO's rejection as the assessee failed to comply with mandatory requirements.

- Conclusion: TPS submitted by the assessee is unreliable and rightly rejected.

2.6 Selection and Exclusion of Comparable Companies

- Related Party Transactions:

-- Legal Framework: No explicit threshold in Transfer Pricing Regulations; however, transactions exceeding 15% of total revenue are considered significant to distort comparability.

-- Court Reasoning: Following precedent, companies with related party transactions exceeding 15% of revenue are to be excluded from comparables.

-- Conclusion: TPO/Assessing Officer directed to exclude comparables exceeding 15% related party transactions.

- Economies of Scale and Turnover Range:

-- Legal Framework: OECD Guidelines and Tribunal precedents recognize size as a key comparability factor.

-- Court Reasoning: Only companies with turnover between Rs. 1 Crore to Rs. 200 Crores are appropriate comparables for the assessee (turnover approx. Rs. 66 Crores). Wipro BPO Ltd. with turnover Rs. 322 Crores is excluded.

-- Conclusion: Companies outside the turnover range to be excluded.

- Ownership of Intangibles:

-- Legal Framework: Comparables must be functionally similar; ownership of unique intangibles confers competitive advantage affecting profitability.

-- Court Reasoning: Companies owning unique software intangibles (e.g., Tricom India Ltd., Fortune Infotech Ltd.) derive advantages not possessed by the assessee and must be excluded.

-- Conclusion: Comparables with unique intangibles excluded.

- Individual Comparable Companies:

-- Vishal Information Technologies Ltd. excluded due to outsourcing significant work, making it functionally dissimilar.

-- Spanco Telesystems & Solutions Ltd. retained as comparable due to clear call centre segment and related party transactions below 15% threshold.

-- Ultramarine Pigments Ltd. retained despite high profit margin, as Indian TP Rules require inclusion of all companies in arithmetic mean method; no specific evidence of abnormality.

-- Ace Software Ltd. excluded as it is an Associated Enterprise (100% services to single AE).

-- Apollo Health Street Ltd. to be verified for related party transactions and functional comparability due to mixed revenue sources.

-- MCS Ltd. and Tata Share Registry excluded due to functional dissimilarity and domestic market orientation failing export filter.

-- Allsec Technologies Ltd. accepted as comparable; however, TPO to reconsider adjustments to abnormal expenses (connectivity and database costs) based on assessee's submissions.

2.7 Parent Company Losses and Impact on ALP

- Legal Framework: Section 92 mandates ALP determination based on comparable uncontrolled transactions; parent company profitability irrelevant.

- Court Reasoning: Profit or loss of the parent company is irrelevant to ALP determination for the assessee. The focus is on the tested party's transactions at arm's length, independent of group results. Precedents confirm no need to prove profit shifting or tax avoidance to make TP adjustments.

- Conclusion: Parent company losses do not justify deviation from ALP; ground rejected.

2.8 Depreciation Adjustment (Additional Ground)

- Legal Framework: Adjustments for differences in accounting treatment affecting comparability are permissible if justified by operational facts.

- Court Reasoning: The assessee raised this ground belatedly without prior notice to authorities below and without detailed evidence explaining the difference in depreciation percentages or operational reasons. The difference in depreciation as a percentage of gross block alone is insufficient to justify adjustment. The issue involves both fact and principle.

- Court Direction: The additional ground is admitted but remitted to the Assessing Officer/TPO for examination and decision after affording opportunity to the assessee, considering operational reasons, accounting methods, and impact on comparability.

- Conclusion: Depreciation adjustment issue remitted for fresh consideration; no immediate relief granted.

---