Tribunal Decides on Transfer Pricing, Excludes/Includes Comparables, Rejects Margin Deviation

The Tribunal held that transfer pricing provisions apply regardless of income exemption under section 10A of the Income-tax Act. Various comparables were excluded/included based on specific criteria. Return on Asset Employed (ROA) or Return on Capital Employed (ROCA) were deemed unsuitable for margin computation in service sectors. Working capital adjustment was mandated for comparability, following OECD guidelines. The claim for adjustment on linked costs was rejected. The benefit of +/-5% deviation in margin computation was denied. Both appeals were partly allowed, with directions for adjustments by the Assessing Officer/Transfer Pricing Officer.

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Issues Involved:
1. Applicability of Transfer Pricing Provisions.
2. Selection and Exclusion of Comparables.
3. Computation of Margin.
4. Working Capital Adjustment.
5. Adjustment on Account of Linked Cost and Other Costs.
6. Benefit of +/-5% Deviation in Margin Computation.

Detailed Analysis:

1. Applicability of Transfer Pricing Provisions:
The assessee contended that transfer pricing provisions should not apply as its income was exempt under section 10A of the Income-tax Act. The Tribunal rejected this argument, stating that once there is an international transaction, the arm's length price must be computed as per the law, without requiring the Revenue to prove tax avoidance. This view is supported by the decisions of the Tribunal in the cases of 24/7 Customer.Com.Pvt. Ltd. and Aztec Software and Technology Services Ltd.

2. Selection and Exclusion of Comparables:
The Tribunal dealt with various disputes regarding the selection of comparables:

- Accentia Technologies Ltd.: Excluded due to involvement in software sales and lack of segment-wise results.
- Apex Knowledge Solutions Ltd.: Excluded as it was engaged in software and database creation services.
- Apollo Healthcare Ltd.: Excluded due to high related party transactions.
- Asit C. Mehta (Nucleus Net Soft): Included despite involvement in portfolio management services, as the revenue from this was insignificant.
- Caliber Point Business Solutions Ltd.: Included, but only BPO segment results to be considered.
- Cosmic Global Ltd.: Excluded as the main revenue was from translation business, not comparable to the assessee.
- Datamatics Financial Services Ltd. (Seg.): Excluded due to significant revenue from printing services and lack of segment-wise results.
- Eclerx Services Ltd.: Included despite high profit margins, as high margin alone was not a valid ground for exclusion.
- Genesys International Corporation Ltd.: Included as it was engaged in GIS activities, an information technology enabled service.
- HCL Comnet Systems and Services Ltd.: Excluded due to high related party transactions.
- Informed Technologies India Ltd.: Included as it was engaged in BPO activities.
- I Services India P. Ltd.: Included, subject to verification of actual activities.
- Mold Tek Technology Ltd.: Included, subject to verification of merger impact.
- R Systems International Ltd. (Seg.): Included as it had a BPO division with segment-wise results.
- Vishal Information Technologies Ltd.: Included, subject to verification of outsourcing activities.

3. Computation of Margin:
The assessee argued for using Return on Asset Employed (ROA) or Return on Capital Employed (ROCA) for margin computation. The Tribunal rejected this, stating that ROA/ROCA are suitable for manufacturing or asset-intensive industries, not for service sectors like call centers where employees are the main assets.

4. Working Capital Adjustment:
The Tribunal agreed that working capital adjustment should be made to improve comparability, following OECD guidelines. The issue was restored to the Assessing Officer/Transfer Pricing Officer for proper computation.

5. Adjustment on Account of Linked Cost and Other Costs:
The Tribunal rejected the claim for adjustment on account of linked cost and other costs incurred by the associated enterprise, as the margins would remain unaffected due to the cost-plus model followed by the assessee.

6. Benefit of +/-5% Deviation in Margin Computation:
The Tribunal upheld the denial of the benefit of +/-5% deviation as per the amended proviso to section 92C(2), applicable to all assessments/reassessments pending as on October 1, 2009.

Conclusion:
Both appeals were partly allowed, with specific directions for inclusion/exclusion of comparables and adjustments to be made by the Assessing Officer/Transfer Pricing Officer as per the Tribunal's findings.

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