2017 (11) TMI 1838 - AT - Income Tax

Tribunal partially allows appeal, remands transfer pricing issues for fresh review

The Tribunal partly allowed the appeal, remanding several issues back to the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) for fresh ... TP Adjustment - comparable selection - functinal similarity - HELD THAT:- Accentia' is engaged in diversified activity of medical transcription, medical coding, medical billing, etc. which are different from the activities of the assessee; which is in the nature of call centre and therefore functionally not comparable. While the TPO has characterized the assessee as an ITES service provider, the DRP has rendered the finding that the assessee provided a mix of ITES and KPO services. In factual matrix of this case as discussed above, we deem it appropriate to remand the issue of determining the functional profits of the assessee back to the file of the TPO for a fresh analysis, to evaluate the finding rendered by the DRP that the services rendered by the assessee are a mix of high end and low end services and also to evaluate the change in the functional profile of the assessee, if any, over the years and to then decide the comparability. Needless to add, the TPO shall provide the assessee adequate opportunity of being heard and make submissions in this regard, which shall be duly considered before taking a decision in the matter TCS E-Serve Ltd., ('TCS') - examination is necessary to decide whether the conditions/reasons on the basis of which his company was excluded in the earlier year are applicable to the fact situation prevailing in the asst. year under consideration; especially in the context of the finding rendered by the DRP that the assessee in the case on hand was performing various activities that constitute a mix of both high end and low end services. In this view of the matter, we deem it appropriate to remand the matter to the file of the TPO for examination to evaluate the functional profile of the assessee and then decide the comparability. BNR Udyog Ltd., ('BNR) - According to the assessee, this company carried out both Medical transcription and medical billing and coding and thus performed KPO services also. In our view, this aspect requires examination, particularly in the light of the finding of the DRP that the assessee also performed a mix of high end and low end services. In this view of the matter, we deem it appropriate to remand the matter of comparability of this company, 'BNR', to the file of the TPO for examination and determination of this issue afresh, in line with the above observations made by us. Infosys BPO Ltd., ('Infosys') shall be excluded from the set of comparables as presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. Infosys BPO is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factors will take this company out of the list of comparables Caliber Point Business Solutions Ltd., (Caliber') - it is not possible to conclude that the results of comparable periods can be extrapolated. In this factual matrix of this case, where such details are absent, the application of the financial year filter is upheld and we accordingly uphold the decision of the TPO in rejecting this company as a comparable. Cosmic Global Ltd., ('Cosmic') - TPO has not applied the employee cost filter. When the TPO has not applied the employee cost filter in his own comparability analysis, it is not appropriate to reject a company on this filter that was not adopted by him in the first place. The DRP has given its reasoning as to why this employee filter is an appropriate filter for ITES companies. However, in our view, a filter cannot be applied selectively or arbitrarily, as applying a filter could alter the contours of the comparability analysis. In this view of the matter, we deem it appropriate to remand the issue of comparability of this company to the file of the TPO for fresh consideration. Datamatics Financial Services Ltd.,- 'Datamatics' - except for raising this ground and reiterating that this company, 'Datamatics' is functionally comparable to the assessee in the case on hand, no evidence was brought on record to controvert the observations and findings of the DRP. In this factual matrix of the case, we have no hesitation in upholding the decision of the TPO in rejecting this company, 'Datamatics' as a comparable to the assessee. ICRA Techno Analytics Ltd., - ('ICRA') - assessee reiterated that this company 'ICRA' is functionally comparable to the assessee in the case on hand, but could not adduce any material/factual evidence to controvert the observations of the DRP. In this factual view of the matter, we uphold the decision of the TPO in rejecting this company as a comparable to the assessee in the case on hand. Jindal Intellicom Ltd., - ('Jindal') - procedure adopted by the DRP is not proper. This company, 'Jindal', was selected as a comparable by the TPO, which was accepted by the assessee. If the DRP felt that this company had been wrongly selected by the TPO, the least the DRP ought to have done was to have afforded an opportunity to both the assessee and the TPO to explain their stand, in the light of DRP's observations, instead of suo moto excluding this company from the set of comparables. In the fitness of things, the assessee and TPO should be afforded adequate opportunity of being heard in the matter. In this view of the matter, we remand the issue of the comparability of this company 'Jindal' to the file of the DRP to determine the issue afresh after affording both the TPO and the assessee adequate opportunity of being heard in the matter, which shall be duly considered Adjustment towards notional interest on AE Debtors in excess of 6 months - notional interest on outstanding receivables from AE's - HELD THAT:- Remand this issue back to the file of the TPO/AO for examination as to whether there was any agreement for charging interest on late payments or not and to do a proper comparability analysis, if the adjustment is required to be made after affording the assessee adequate opportunity of being heard in the matter and to file details/submissions in his regard as well as in respect of the alternate ground of benchmarking transactions with LIBOR. Treatment of Foreign Exchange gain/loss - HELD THAT:- We find that the assessee, in Form No: 35A submitted before the DRP, has furnished certain details on this issue, which does not appear to have been considered by the DRP. In view of the above, we deem it appropriate to remand this issue to the file of the TPO for examination and consideration of the details filed and to decide the issue afresh, as per the principles laid down by the decision of the coordinate bench of this Tribunal in the assessee's own case for asst. year 2009-10 [2016 (3) TMI 356 - ITAT BANGALORE] , after affording the assessee adequate opportunity of being heard in the matter and to file details/submissions required Computing of Operating Margins - HELD THAT:- While the assessee has raised this issue before the DRP, and the DRP has rejected the assessee's claims on the ground that the details of miscellaneous income were not furnished and therefore the assessee was not able to demonstrate that these were earned in the normal course of business. No details in respect of miscellaneous income have been filed by the assessee before us also in order to support is claim that miscellaneous income formed part of the operational income. In the absence of any details being filed by the assessee to prove its claim with material evidence, we are of the view that the assessee's contention/claim has been rightly rejected and we therefore uphold the decision of the authorities below Risk Adjustment - HELD THAT:- The issue of risk adjustment has been considered in several decisions of co-ordinate benches of this Tribunal wherein it has been held that as a matter of principle, risk adjustment needs to be granted. However, we find that in the case on hand the assessee has not furnished any details of the risk adjustment it seeks. In the absence of details/working/computation of the risk adjustment sought being filed by the assessee, the claim of risk adjustment is only an academic exercise and therefore we are not inclined to grant any such hypothetical adjustment. In this factual matrix of the matter, as discussed above, we dismiss this claim raised by the assessee for grant of risk adjustment Working capital adjustment - HELD THAT:- From the details before us, it is not clear whether the negative working capital has been arrived at based on wrong computation. Before us also, the assessee has not filed any details in this regard. In this factual nature of the case, as discussed above, we remand the issue of computation of working capital adjustment to the file of the of the TPO, with a direction to grant working capital adjustment, as per law, keeping in mind the judicial pronouncement of case of Adeptec (India) Pvt. Ltd. [2015 (6) TMI 288 - ITAT HYDERABAD] on the issue of negative working capital. Charging of interest u/s. 234B and 234C - assessee denies itself liable to be charged interest u/s. 234B and 234C - HELD THAT:- The changing of interest in consequential and mandatory and the AO has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of CIT v. Anjum H. Ghaswala [2001 (10) TMI 4 - SUPREME COURT] and we therefore uphold the action of the AO in charging the said interest. The AO is, however, directed to re-compute the interest chargeable u/s. 234B and 234C of the Act, if any, while giving effect to this order. Issues Involved:1. Rejection of Transfer Pricing Documentation2. Use of Multiple Year Data3. Filters and Qualitative Criteria Applied by TPO4. Information Gathered Under Section 133(6)5. Treatment of Foreign Exchange Fluctuation6. Computation of Operating Margins7. Risk Adjustment and Working Capital Adjustment8. Adjustment of Interest on Outstanding Debtors9. Other Transfer Pricing Related Grounds10. Charging of Interest Under Section 234B and 234CDetailed Analysis:1. Rejection of Transfer Pricing Documentation:The assessee's transfer pricing documentation was rejected by the TPO and upheld by the DRP on the grounds that the data used in the computation of the ALP was 'not reliable or correct' under Section 92C(3)(c). The Tribunal did not address this ground separately as it was not urged before them.2. Use of Multiple Year Data:The assessee argued that the use of multiple year data should be considered for determining the ALP. The DRP upheld the TPO's rejection of multiple year data. The Tribunal did not address this ground separately as it was not urged before them.3. Filters and Qualitative Criteria Applied by TPO:The TPO applied certain filters and qualitative criteria to select comparables. The Tribunal examined the inclusion/exclusion of specific companies:- Accentia Technologies Ltd.: The Tribunal remanded the issue back to the TPO to evaluate the functional profile of the assessee and determine comparability.- TCS E-Serve Ltd.: The Tribunal remanded the issue back to the TPO for a fresh analysis of the functional profile and comparability.- BNR Udyog Ltd.: The Tribunal remanded the issue back to the TPO for examination of the functional profile and segmental information.- Infosys BPO Ltd.: The Tribunal excluded this company from the set of comparables, citing functional differences and brand value.- Caliber Point Business Solutions Ltd.: The Tribunal upheld the rejection of this company due to different financial year endings.- Cosmic Global Ltd.: The Tribunal remanded the issue back to the TPO for fresh consideration, especially regarding the employee cost filter.- Datamatics Financial Services Ltd.: The Tribunal upheld the rejection of this company due to lack of segmental information and failure of the export earning filter.- ICRA Techno Analytics Ltd.: The Tribunal upheld the rejection of this company due to lack of segmental information.- Jindal Intellicom Ltd.: The Tribunal remanded the issue back to the DRP for fresh determination after affording an opportunity to both the TPO and the assessee.4. Information Gathered Under Section 133(6):The Tribunal did not address this ground separately as it was not urged before them.5. Treatment of Foreign Exchange Fluctuation:The Tribunal remanded the issue back to the TPO for examination and consideration of details filed by the assessee, in line with the decision of the coordinate bench in the assessee's own case for AY 2009-10.6. Computation of Operating Margins:The Tribunal upheld the decision of the authorities below in rejecting the assessee's claim that miscellaneous income should be considered as operating income, due to lack of supporting details.7. Risk Adjustment and Working Capital Adjustment:- Risk Adjustment: The Tribunal dismissed the claim for risk adjustment due to lack of details provided by the assessee.- Working Capital Adjustment: The Tribunal remanded the issue back to the TPO for proper computation, considering judicial pronouncements against negative working capital adjustment.8. Adjustment of Interest on Outstanding Debtors:The Tribunal remanded the issue back to the TPO/AO for examination of whether there was any agreement for charging interest on late payments and to perform a proper comparability analysis. The TPO was also directed to consider the alternate ground of benchmarking transactions with LIBOR.9. Other Transfer Pricing Related Grounds:The Tribunal did not address these grounds separately as they were not urged before them.10. Charging of Interest Under Section 234B and 234C:The Tribunal upheld the charging of interest under Sections 234B and 234C as mandatory and consequential, directing the AO to re-compute the interest while giving effect to the order.Conclusion:The appeal was partly allowed for statistical purposes, with several issues remanded back to the TPO/DRP for fresh consideration and proper examination.