ITES Company Appeal: Transfer Pricing Adjustments Limited to Associated Enterprises

The Tribunal partly allowed the appeal of an ITES company concerning Transfer Pricing adjustments. The Tribunal directed the TPO/AO to determine the Transfer Pricing adjustment after excluding specified comparables, following the exclusion of comparables due to functional dissimilarities and extraordinary events affecting their financials. The Tribunal emphasized that TP adjustments should be limited to transactions with Associated Enterprises. The appeal outcome favored the assessee, with the order pronounced on 5th January 2018.

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Issues Involved:
1. Grounds of Appeal
2. Transfer Pricing Adjustment
3. Selection of Comparables

Detailed Analysis:

1. Grounds of Appeal:
The appellant, an ITES company, challenged the assessment order passed by the AO under Section 143 read with Section 144C (13) of the Act, which determined its income at Rs. 14.61 crores. The Authorized Representative (AR) stated that Grounds of Appeal No. 1, 2, and 3.2 were general in nature and not pressed. Grounds No. 3 and 4 were dismissed as not pressed. The focus was on Grounds No. 3.1 and 3.3, which pertained to Transfer Pricing (TP) adjustments.

2. Transfer Pricing Adjustment:
The effective grounds of appeal (GOA-3.1 and 3.3) involved a TP adjustment of Rs. 7.34 crores. The AO found that the assessee had international transactions with its Associated Enterprise (AE) and referred the matter to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP). The TPO suggested an upward adjustment of Rs. 9.41 crores, which was incorporated in the draft order. The assessee objected before the Dispute Resolution Panel (DRP), which directed the AO to recalculate the margin of comparable by excluding four comparables (Mould Tech Technologies Ltd., Infosys BPO Ltd., and Wipro Ltd. segment). The TPO applied the Transactional Net Margin Method (TNMM) instead of the Comparable Uncontrolled Price (CUP) method used by the assessee, resulting in a TP adjustment at the entity level.

3. Selection of Comparables:
The assessee argued for the exclusion of four comparables (Accentia Technologies Ltd.-Seg., Coral Hubs Ltd., Eclerx Services Ltd., and Genesys International Corpn Ltd.). The Tribunal referred to various cases, including IGS Imaging Services (I.) (P) Ltd. and Rampgreen Solutions P. Ltd., which supported the exclusion of these comparables due to functional dissimilarities and extraordinary events affecting their financials. The Tribunal concluded that the services offered by these comparables were not in the same field as those offered by the assessee. Consequently, the Tribunal directed the exclusion of these comparables from the list of valid comparables.

The Tribunal also noted that the Hon’ble Bombay High Court in Fire Stone International (P.) Ltd. held that TP adjustments should be restricted to transactions with AEs and not include non-AE transactions. The AR conceded to an adjustment of approximately 9% of AE transactions, which the assessee would not object to.

Conclusion:
The Tribunal directed the TPO/AO to determine the TP adjustment after excluding the specified comparables and to work out the exact adjustment. The appeal was partly allowed in favor of the assessee. The order was pronounced in the open court on 5th January 2018.

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