TPO instructed to re-examine Transfer Pricing issues, consider risk adjustments. Appeal partially allowed.

The Tribunal directed the Transfer Pricing Officer (TPO) to re-examine issues, excluding non-comparable comparables and recalculating the arithmetic mean for potential Transfer Pricing adjustments. The appeal was partially allowed, instructing the TPO to consider risk adjustments and other directives provided. The order was pronounced on 21st February 2014.

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Issues Involved:
1. Filters adopted by the TPO.
2. Comparables selected/not selected by TPO.
3. Risk adjustments.

Detailed Analysis:

1. Filters Adopted by the TPO:

The main contention revolves around the filters used by the Transfer Pricing Officer (TPO) to select comparable companies. The TPO excluded companies with receipts less than Rs. 1 crore and above Rs. 150 crores, which the assessee challenged, but the range selected by the TPO was affirmed. The TPO applied a related party transactions (RPT) filter of 25%, which the Disputes Resolution Panel (DRP) upheld, rejecting the assessee's preference for a 10% threshold. The TPO also excluded companies with less than 25% revenue from export sales, a filter the assessee did not initially apply but later contested. This filter was also affirmed by the Tribunal.

2. Comparables Selected/Not Selected by TPO:

The TPO initially selected 22 comparables, which was reduced to 18 after the DRP's intervention. The Tribunal examined the objections raised by the assessee against several comparables:

- Accentia Technologies Ltd.: Excluded due to extraordinary events like mergers and acquisitions affecting its financial results.
- Acropetal Technologies Ltd. (seg): Retained as comparable despite the assessee's objections, as its high-end services were deemed similar to those of the assessee.
- Crossdomain Solutions Ltd.: Excluded due to its involvement in high-end KPO services without clear bifurcation of its service verticals.
- Eclerx Services Ltd.: Excluded due to its engagement in high-end KPO services and extraordinary events impacting its profitability.
- Genesys International Corporation Ltd.: Excluded for being functionally different, involving skilled manpower and R&D services.
- Infosys BPO Ltd.: Excluded due to its significant brand value and market leadership, which impacted its pricing and profitability.
- HCL Comnet Systems & Services Ltd. and Wipro Ltd.: Excluded due to their substantially higher turnover compared to the assessee, following the principle that size matters in business comparability.
- Cosmic Global Ltd.: Referred back to the TPO for fresh examination due to discrepancies in the employee cost filter.
- Datamatics Financial (BPO) Div.: Retained, as the segmental profits were within the TPO's filters.

The Tribunal also addressed the inclusion of comparables rejected by the TPO:

- Jindal Intellicom Pvt. Ltd.: Not included due to functional differences, primarily being in call center activities.
- Informed Technologies: Referred back to the TPO for examination, as it was not discussed in the TPO's order despite the assessee's objections.

3. Risk Adjustments:

The assessee argued for risk adjustments, which were not initially provided in the Transfer Pricing documentation. The TPO had discussed this issue but concluded no adjustments were necessary. The Tribunal directed the TPO to re-examine the risk adjustments afresh, considering the specific risks associated with the assessee's single customer versus the market risks of the comparables.

Conclusion:

The Tribunal directed the TPO to re-examine the issues, excluding the comparables deemed non-comparable and re-computing the arithmetic mean to determine if any Transfer Pricing adjustment is required. The appeal was partly allowed for statistical purposes, with the TPO instructed to consider the risk adjustments and other directives provided.

Order Pronounced:

The order was pronounced in the open Court on 21st February, 2014.

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