2015 (6) TMI 527 - AT - Income Tax

Tribunal Excludes Comparables for ITES Segment, Orders Fresh Pricing

The Tribunal concluded that Coral Hub Ltd., Eclerx Services Ltd., and Cosmic Global Ltd. were not suitable comparables for the assessee's IT Enabled ... Comparability analysis in transfer pricing - functional comparability - exclusion of non-comparable entities from comparable set - arm's length price determination - merger/demerger affecting comparability - no estoppel in transfer pricing comparables - remand for fresh computation of ALPComparability analysis in transfer pricing - functional comparability - exclusion of non-comparable entities from comparable set - Coral Hub Ltd. is not a suitable comparable for benchmarking the assessee's ITES segmental international transactions and must be excluded from the final set of comparables. - HELD THAT: - The Tribunal found that Coral Hub Ltd. (Vishal Information Technologies Ltd.) carried out overwhelming outsourcing such that outsourcing charges constituted a very large proportion of its operating costs, resulting in a materially different functional profile and a significant bearing on profitability. The Bench placed weight on the DRP's own subsequent decision in the assessee's AY 2009-10 and on precedent where Coral Hub was excluded for similar reasons. Neither the TPO nor the DRP produced evidence that the assessee had comparable outsourcing income. On these facts the Tribunal held that Coral Hub's heavy outsourcing activity made it functionally incomparable and therefore unsuitable as a comparable. [Paras 11]Coral Hub Ltd. is to be deleted from the final set of comparables.Comparability analysis in transfer pricing - merger/demerger affecting comparability - exclusion of non-comparable entities from comparable set - Eclerx Services Ltd. is not a suitable comparable for the assessee's ITES segmental transactions and must be excluded from the final set of comparables. - HELD THAT: - The Tribunal observed that Eclerx provides data analytics, customised process solutions and acquired other entities during the relevant period, producing exceptional financial results not representative of the assessee's manual claim-processing ITES activities. The Tribunal rejected the proposition that a comparable cannot be excluded solely because it shows an abnormal profit margin if functionally similar, noting that mergers/demergers or exceptional financial results can render a year unfit for comparison. Having regard to Eclerx's different service mix and exceptional results, the Tribunal concluded it was functionally dissimilar and unsuitable as a comparable. [Paras 15]Eclerx Services Ltd. is to be deleted from the final set of comparables.Comparability analysis in transfer pricing - functional comparability - exclusion of non-comparable entities from comparable set - Cosmic Global Ltd. is not a suitable comparable for the assessee's ITES segmental international transactions and must be excluded from the final set of comparables. - HELD THAT: - The Tribunal noted from the comparable's annual report that the major part of Cosmic Global's revenue arose from Translation charges while medical transcription and BPO constituted only a negligible portion. The assessee's ITES transactions related to insurance claim processing and were dissimilar to the translation-dominated activities of Cosmic Global. The Tribunal followed prior decisions holding that mere prior inclusion by the assessee does not bar it from later demonstrating non-comparability. On this functional dissimilarity, Cosmic Global was held unsuitable. [Paras 18]Cosmic Global Ltd. is to be deleted from the final set of comparables.Arm's length price determination - remand for fresh computation of ALP - comparability analysis in transfer pricing - The matter is remanded for fresh computation of the arm's length price (ALP) for the assessee's ITES segmental international transactions after deleting the unsuitable comparables, with an opportunity of hearing to the assessee. - HELD THAT: - Having held that Coral Hub Ltd., Eclerx Services Ltd. and Cosmic Global Ltd. are not suitable comparables, the Tribunal set aside the impugned assessment direction and directed the DRP/AO to delete those comparables from the final list and recompute the ALP for the ITES segment (FY 2007-08/AY 2008-09). The recomputation is to be carried out in conformity with the Tribunal's findings and after affording the assessee a due opportunity of hearing. [Paras 19]Proceedings remitted for fresh computation of ALP after deleting the specified comparables and after affording the assessee an opportunity of hearing.Final Conclusion: The Tribunal allowed the assessee's appeal for statistical purposes: Coral Hub Ltd., Eclerx Services Ltd. and Cosmic Global Ltd. were held unsuitable as comparables for the assessee's ITES international transactions (FY 2007-08 / AY 2008-09) and were ordered deleted from the final set; the DRP/AO was directed to recompute the ALP for the ITES segment consistent with these directions after providing the assessee an opportunity of hearing. Issues Involved:1. Adjustment in Arm's Length Price (ALP) for IT Enabled Services (ITES).2. Rejection of economic analysis by the appellant.3. Use of FY 2007-08 data for determining ALP.4. Selection of comparables by the Transfer Pricing Officer (TPO).5. Adjustments for differences in working capital and risk profile.6. Penalty proceedings under Section 271(1)(c) of the Income Tax Act.Issue-wise Detailed Analysis:1. Adjustment in Arm's Length Price (ALP) for IT Enabled Services (ITES):The assessee challenged the addition of Rs. 2,34,97,662 to its total income on account of adjustment in the ALP for ITES transactions with its associated enterprise. The TPO and AO determined the ALP using FY 2007-08 data, which was not entirely available to the assessee at the time of documentation. The dispute centered on the comparables selected by the TPO, which included Coral Hub Ltd., Eclerx Services Ltd., and Cosmic Global Ltd.2. Rejection of Economic Analysis by the Appellant:The TPO and AO did not accept the economic analysis undertaken by the assessee, which was conducted in accordance with the provisions of the Act and Rules. Instead, they conducted a fresh economic analysis to determine the ALP, concluding that the appellant's international transactions were not at arm's length.3. Use of FY 2007-08 Data for Determining ALP:The TPO and AO used only FY 2007-08 data to determine the arm's length margin/price, which was not fully available to the assessee at the time of complying with transfer pricing documentation requirements. This approach was contested by the assessee.4. Selection of Comparables by the Transfer Pricing Officer (TPO):The main contention of the assessee was the inappropriate selection of comparables by the TPO. The assessee argued that Coral Hub Ltd., Eclerx Services Ltd., and Cosmic Global Ltd. were not suitable comparables for benchmarking its ITES transactions. The Tribunal examined each comparable in detail:Coral Hub Ltd.:The Tribunal noted that Coral Hub Ltd. had significant outsourcing activities, constituting 86% of its total operating expenses, and only 4.4% employee cost, making it functionally different from the assessee. The Tribunal relied on previous decisions, including the ITAT Mumbai Bench in ACIT vs. Maersk Global Service Centre (India) Pvt. Ltd., to exclude Coral Hub Ltd. from the list of comparables.Eclerx Services Ltd.:Eclerx Services Ltd. was engaged in providing high-end services involving special knowledge, which differed significantly from the assessee's ITES segment. The Tribunal observed that mergers/demergers in Eclerx Services Ltd. led to exceptional financial results, making it unfit for comparison. The Tribunal followed the decision in United Health Group Information Services Pvt. Ltd. vs. ACIT to exclude Eclerx Services Ltd. from the list of comparables.Cosmic Global Ltd.:Cosmic Global Ltd.'s major revenue source was translation charges, with only a minuscule share from medical transcription and consultancy services, making it functionally dissimilar to the assessee. The Tribunal, relying on the decision in United Health Group Information Services Pvt. Ltd. vs. ACIT, excluded Cosmic Global Ltd. from the list of comparables.5. Adjustments for Differences in Working Capital and Risk Profile:The assessee argued that suitable adjustments were not made to account for differences in working capital and risk profile vis-`a-vis the comparables. This issue was linked to the broader contention regarding the selection of appropriate comparables.6. Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:The assessee also contested the initiation of penalty proceedings under Section 271(1)(c) of the Act. However, this issue was not elaborately argued during the proceedings.Conclusion:The Tribunal concluded that Coral Hub Ltd., Eclerx Services Ltd., and Cosmic Global Ltd. were not suitable comparables for the assessee's ITES segment. The Tribunal directed the deletion of these comparables from the final set and ordered a fresh computation of the ALP for the ITES segmental international transactions for AY 2008-09. The appeal of the assessee was allowed for statistical purposes.