ITAT deselects TCS-e-Serve, Infosys BPO, Excel Infoways as comparables for HR services transfer pricing

The ITAT Delhi ruled on transfer pricing adjustments for an assessee providing HR services, payroll processing, and data entry to its associated enterprise on a cost plus 10% basis. The tribunal deselected several comparables: TCS-e-Serve Ltd due to functional dissimilarity requiring skilled technical services; Infosys BPO Ltd for operating in niche areas unlike the assessee and having brand presence plus extraordinary acquisition events; and Excel Infoways Ltd for failing the TPO's own diminishing revenue filter while having super normal profits. However, R System International Limited was retained as comparable following HC precedent in McKinsey Knowledge Centre case, as audited quarterly results were provided with calculated margins for the relevant financial year. Regarding fixed asset purchases, the tribunal restored the matter to the Assessing Officer/TPO for recomputation following the tribunal's direction in the assessee's preceding assessment year case, allowing the grounds for statistical purposes.

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Issues Involved:
1. Adjustment of Arm's Length Price (ALP) in IT Enabled Services (ITES) Segment.
2. Adjustment on Purchase of Fixed Assets.
3. Levy of Interest under Sections 234B and 234C.
4. Initiation of Penalty Proceedings under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Adjustment of Arm's Length Price (ALP) in IT Enabled Services (ITES) Segment:
The assessee, engaged in providing ITES to its associated enterprises (AE), contested the TPO's adjustments. The TPO had initially selected 12 comparables with a mark-up of 25.38%, which was later reduced to 9 comparables with a mark-up of 27.65%. The DRP directed the exclusion of two comparables, reducing the mark-up to 22.26%. The assessee's mark-up was 10%. The Tribunal considered the exclusion of TCS e-Serve Ltd., Infosys BPO Ltd., and Excel Infoways Ltd., and the inclusion of R System International Ltd. It was noted that TCS e-Serve Ltd. and Infosys BPO Ltd. were functionally different, had significant brand value, and had undergone extraordinary events. Excel Infoways Ltd. failed the TPO's own filter of diminishing revenue and had supernormal profits. R System International Ltd. was included as it was functionally comparable, and quarterly results were available. The Tribunal directed the TPO to exclude TCS e-Serve Ltd., Infosys BPO Ltd., and Excel Infoways Ltd., and include R System International Ltd. in the list of comparables.

2. Adjustment on Purchase of Fixed Assets:
The assessee purchased fixed assets from its AE, which were necessary for its manufacturing plant. The TPO determined the arm's length value of the purchase as Nil, leading to an adjustment of Rs. 11,35,06,642/-. The DRP accepted the genuineness of the purchase but restricted the arm's length cost to the invoice value without mark-up, resulting in an adjustment of Rs. 13,51,543/-. The Tribunal restored the issue to the TPO with directions to re-compute the addition, if any, following the directions of the Tribunal in the assessee's own case for the preceding assessment year.

3. Levy of Interest under Sections 234B and 234C:
The Tribunal found that the levy of interest under Sections 234B and 234C is mandatory and consequential in nature. Therefore, the ground raised by the assessee was dismissed.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal dismissed the ground relating to the initiation of penalty proceedings under Section 271(1)(c) as premature at this juncture.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes. The Tribunal directed the TPO to exclude certain comparables and include others in the ITES segment and to re-compute the addition on the purchase of fixed assets following the directions provided. The levy of interest under Sections 234B and 234C was upheld as mandatory and consequential, while the initiation of penalty proceedings was dismissed as premature.

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