2014 (1) TMI 890 - AT - Income Tax

Tribunal's Decision on Comparable Selection and Profit Margin Calculation

The Tribunal upheld the inclusion of Wipro BPO Solutions as a comparable but directed a re-examination of the profit margin calculation. Mercury ... Rejection of comparables - Adjustment in arm's length price - Exclusion of Wipro BPO Solutions – The decision in M/s. HSBC Electronic Data Processing India Ltd. Versus Dy. Commissioner of Income-tax Circle 2(2), Hyderabad [2013 (9) TMI 485 - ITAT HYDERABAD] followed - The contentions of the assessee against the inclusion of this comparable are not accepted, and this company was included as one of the comparables on the reason that the assessee's turnover is equally high as that of Wipro BPO Solutions - the assessee's contention that profit margin worked out by the TPO is incorrect requires to be examined by the TPO/Assessing Officer – the matter restored to the AO for fresh adjudication to examine the assessee's contentions on this aspect and accordingly decide the PLI of this comparable. Exclusion of Mercury Outsourcing Management Ltd and Transworks Information Services Ltd as comparables – Held that:- The order of the CIT(A) is not elaborate - The nature of the related party transactions cannot be examined and the TPO's working is different from the assessee –in the interests of justice the matter restored back to the AO to re-examine the functionality of the company afresh – Decided in favour of Assessee. Issues: Transfer Pricing - Selection of comparablesDetailed Analysis:1. Selection of Wipro BPO Solutions as Comparable:The appellant contested the inclusion of Wipro BPO Solutions as a comparable due to functional differences and incorrect computation of net margin by the TPO. The Tribunal, in a related appeal for the assessment year 2005-06, upheld the inclusion of Wipro BPO Solutions but directed a re-examination of the profit margin calculation. Similarly, for the assessment year 2004-05, the matter was remanded to the Assessing Officer/TPO to review the quantification of PLI for this comparable based on the appellant's contentions.2. Selection of Mercury Outsourcing Management Ltd. as Comparable:The TPO selected Mercury Outsourcing Management Ltd. as a comparable, which was accepted by both the appellant and the TPO. However, the CIT(A) excluded this comparable without clear reasoning. The Tribunal, noting the lack of elaboration in the CIT(A)'s order, remanded the issue back to the Assessing Officer/TPO for a fresh examination of the functional comparability of this company.3. Selection of Transworks Information Services Ltd. as Comparable:The TPO rejected Transworks Information Services Ltd. as a comparable under the related party transactions filter. The appellant argued that the RPT filter should only consider transactions impacting profitability, not capital account transactions. The Tribunal directed a re-examination of this issue by the Assessing Officer/TPO, considering the nature of related party transactions and the appellant's objections to the inclusion/exclusion of this company as a comparable.4. Other TP Issues and Directions:The Tribunal decided not to adjudicate on other TP issues raised by the appellant, as the main contentions were focused on the selection of comparables. The Assessing Officer/TPO was directed to re-examine the selection of the three comparables, allowing the appellant to calculate the average PLI, make necessary adjustments, and consider directions from separate orders for other assessment years. The appeal for the assessment year 2004-05 was considered allowed for statistical purposes.This detailed analysis highlights the Tribunal's approach to reviewing the selection of comparables in transfer pricing assessments, emphasizing the need for functional comparability and accurate profit margin calculations in determining the Arm's Length Price. The Tribunal's decisions to remand issues back to the Assessing Officer/TPO for fresh examination demonstrate a commitment to ensuring a fair and accurate transfer pricing assessment process.