Appellate tribunal revises transfer pricing for IT services, emphasizes comparables criteria. 'sLengthPrice

The appellate tribunal set aside the DRP's orders and directed the TPO to determine the arm's length price afresh for international transactions of IT enabled back office services. Specific criteria were provided for determining comparables, emphasizing functional similarity, foreign exchange impacts, depreciation rate differences, and reliability of financial results. Exclusions of certain comparables were upheld based on objections raised by the assessee regarding extraordinary profits, turnover, fraud involvement, and functional dissimilarity. The tribunal partially allowed the appeal concerning the computation of deduction under section 10A, excluding certain charges from export turnover while considering them as normal business expenditures.

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Issues involved:
1. Transfer pricing adjustment for IT enabled back office services.
2. Exclusion of specific comparables in determining arm's length price (ALP).
3. Criteria for determining comparables for transfer pricing analysis.
4. Computation of deduction under section 10A for certain charges.

Transfer pricing adjustment for IT enabled back office services:
The case involved international transactions of IT enabled back office services provided by the assessee to its Associate Enterprises (AEs). The Transfer Pricing Officer (TPO) made adjustments to the assessee's transaction, selecting 27 comparable companies with a mark-up of 30.21%. The TPO recommended an adjustment of Rs.1,97,35,890. The assessee adopted the Transactional Net Margin Method (TNMM) and identified 12 comparable companies with a profit level indicator of 15.99%. The Dispute Resolution Panel (DRP) determined the mean of all comparables at 29.16% to 24.15% and excluded certain companies, leading to the appeal.

Exclusion of specific comparables in determining ALP:
The assessee raised objections regarding the comparables selected by the TPO, specifically challenging the inclusion of companies like Eclerx Services Ltd, Infosys BPO Ltd, Wipro Ltd, HCL Comnet Systems & Services Ltd, Maple E-solutions Ltd, and Triton Corporation Ltd. The objections were based on factors such as extraordinary profits, turnover, involvement in fraud by directors, and functional dissimilarity. The DRP excluded certain comparables based on these objections, leading to a detailed analysis of each company's suitability for comparison.

Criteria for determining comparables for transfer pricing analysis:
The appellate tribunal set aside the orders of the DRP and the assessment order, directing the TPO to determine the arm's length price (ALP) afresh. The tribunal provided specific directions for determining transfer pricing, including considering functional similarity, impact of foreign exchange gains or losses, adjustment for differences in depreciation rates, examination of companies with super normal profits, and exclusion of companies with unreliable financial results or turnover outside specific limits. The tribunal emphasized the need for accurate adjustments and detailed analysis in determining comparables for transfer pricing purposes.

Computation of deduction under section 10A for certain charges:
Regarding the computation of deduction under section 10A, the tribunal addressed the exclusion of communication and circuit charges, telephone charges, and reimbursement of internet and cell phone charges from the export turnover. The tribunal held that certain charges were not excluded under the explanation to section 10A and should be considered as normal business expenditures. However, based on precedents, the tribunal excluded telecommunication and circuit charges from both export turnover and total turnover, partially allowing the assessee's appeal in this regard.

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