2017 (6) TMI 1318 - AT - Income Tax

Appeal partially allowed, focus on functional comparability & accurate segmental info in transfer pricing.

The appeal was partly allowed with directions to exclude certain comparables and verify others, emphasizing the importance of functional comparability and ... TP Adjustment - comparable selection - Accentia Technologies is selected by the ld TPO but is challenged now by the assessee submitting that it has an extra ordinary event during the year, functionally dis-comparable as it is engaged in medical transcription, has significant intangibles and abnormally high profit margin - HELD THAT:- Medical transcription is a service which requires employment of medical professional also. However, the medical coding the billing may not require higher technical skill. In annual report the company has mentioned that it has only one segment and therefore it does not have segmental results pertaining to medical transcription vis-à-vis coding and billing activity. According to us the medical transcription itself cannot be said to be comparable with the functions performed by the assessee. However, the medical coding and billing activities are similar to the functions performed by the assessee. But , in absence of the segmental accounts with respect to medical coding and billing activities this comparable cannot be included. Hence, TPO is directed to exclude it. E-Clerx Services Ltd - nature of business carried on by e- Clerx Services Ltd., it is patent that the same being a KPO company, is quite different from the assessee, providing only IT enabled services to its AE, which fall in the realm of BPO services. Apart from that, it is further observed that this company has significant intangibles which it uses in rendering KPO services, against which the assessee does not have any intangibles. A s such, e-Clerx Services Ltd. cannot be considered as comparable. Igate Global Solutions Ltd - As the functional profile of amalgamating company and amalgamated company are similar the mere fact of amalgamation during the year does not make a company otherwise comparable on FAR as non-comparable. On looking of the functional profile of Igate Global Solution it is found that it is engaged in provision of contract sample services and IT enables services. On the income revenue stream of the assessee is also with respect to ITES services. It is also engaged in BPO activities. In view of this we do not find that the functional profile of this company differs from assessee. In view of this we do not find any merit in the argument of ld AR for exclusion of this comparable. Hence, the order of the ld TPO in retaining this comparable is upheld. ICRA Techno Analytics Ltd - This company as per its annual accounts placed at Page NO. 1210 shows that it is engaged in the business intelligence and analytics space. It is also engaged in software development and consultancy, engineering services, web development and hosting services. It is also noted that it has two income segments of services and sales and it does not have the complete segmental information with respect to both the segments of services and sales as fixed assets and services are used inter-changeability. In view of this we find that this company is functionally not comparable as well as it does not have complete segmental information with respect to the sales and service segments. In the result we direct the Transfer Pricing Officer to exclude the above comparable. Infosys BPO Ltd. - In the present case the size of this comparable with the size of the assessee is more than 20 times. Therefore, we direct exclusion of this comparable on the size and scale of its operation. TCS eServe International Ltd - This company also contributes to Tata Brand Equity from this year and according to Schedule M of the financial statement during the year it has contributed ₹ 37 crores towards the brand. In view of this the functional profile of the assessee as well as the assets employ are not comparable. In view of this ld Transfer Pricing Officer is directed to exclude it. TCS eServe Ltd. - As perused the annual report of the company for year ended 31.03.2010. The company is mainly engaged in IT enabled services and business process outsourcing. It is also providing technical services which involve software testing, verification and validation. It also contributes similarly to Tata Brand Equity and for this year the contribution was ₹ 42 crores. Therefore, following the same reasoning given by us for exclusion of TCS eserve International Ltd we also direct the ld TPO to exclude this comparable. e4e Healthcare Ltd - we reject the contention of the assessee of withdrawing of its own comparable for the reason that the assessee could not demonstrate before us that how the original comparable was selected when the same functional profile of the company was available at the time of preparing TP documentation. In view of this, we reject the argument of the assessee for exclusion of this comparable. R Systems Pvt. Ltd - It is held in several decisions that if the assessee can demonstrate with publicly available authentic information for the remaining period and exclusionary period and further produces the tabulated data for the similar accounting year as followed by the assessee then if the FAR analysis of that company is comparable, it may be included. Therefore, it is now the duty of the assessee to satisfy the Assessing Officer/TPO with such information. Hence, we direct the ld Transfer Pricing Officer to verify the information with respect to this comparable in accordance with the law and then decide inclusion or exclusion. Omega Healthcare Ltd - This comparable was selected by the assessee but rejected by the ld Transfer Pricing Officer and ld DRP for the reason that the annual report of the relevant year is not available in the public domain. The ld AR stated that same is available in public domain and further same is also produced before us at page No. 1269 to 1284 of the paper Book. In view of this we direct the ld TPO to verify the annual report and decide the issue about inclusion of this comparable. Issues Involved:1. Validity of the Assessing Officer's order.2. Addition of Rs. 54,014,130 to the assessee's income by re-computing the arm's length price of international transactions.3. Jurisdictional error in the reference to the Transfer Pricing Officer (TPO).4. Errors in the assessment of the arm's length price of the appellant's international transactions by rejecting the comparability analysis conducted by the appellant.Detailed Analysis:1. Validity of the Assessing Officer's Order:The appellant argued that the order passed by the Assessing Officer (AO) was bad in law and void ab-initio. However, this issue was not elaborated upon in the judgment and was not the primary focus of the appeal.2. Addition of Rs. 54,014,130 to the Assessee's Income:The AO, incorporating adjustments proposed by the TPO, added Rs. 54,014,130 to the assessee's income by re-computing the arm's length price of the international transactions. The TPO accepted only 2 out of the 10 comparables provided by the assessee and included 10 additional comparables, resulting in a higher average margin of 33.14% compared to the assessee's margin of 20.36%. The Dispute Resolution Panel (DRP) upheld the TPO's adjustments.3. Jurisdictional Error in Reference to the TPO:The assessee contended that the AO's reference to the TPO suffered from a jurisdictional error as the AO did not record any reasons in the assessment order to justify the necessity of referring the matter to the TPO, as required under Section 92CA(1) of the Income Tax Act.4. Errors in Assessment of Arm's Length Price:The assessee argued that the AO, TPO, and DRP erred in their assessment by rejecting the comparability analysis conducted by the assessee. The key points of contention included:- Accentia Technologies Ltd.: The assessee argued that this company had extraordinary events during the year, was functionally dissimilar, had significant intangibles, and abnormally high profit margins. The tribunal agreed with the assessee, noting the lack of segmental results and the involvement of medical professionals in medical transcription, making it incomparable.- eClerx Services Ltd.: The assessee claimed this company was a Knowledge Process Outsourcing (KPO) unit, not comparable to the ITES services provided by the assessee. The tribunal agreed, citing the Delhi High Court's judgment in Rampgreen Solutions Pvt. Ltd. v. CIT, which held that eClerx, being a KPO, cannot be compared with a BPO service provider.- Igate Global Solutions Ltd.: The tribunal found this company comparable, despite the assessee's objections regarding extraordinary events and functional dissimilarity.- ICRA Techno Analytics Ltd.: The tribunal agreed with the assessee, noting that the company was engaged in business intelligence and analytics, with no segmental details, making it functionally dissimilar.- Infosys BPO Ltd.: The tribunal excluded this company, citing its high brand value, significant intangibles, and large scale of operations, which made it incomparable to the assessee.- TCS eServe International Ltd. and TCS eServe Ltd.: The tribunal excluded these companies due to functional dissimilarity, ownership of significant intangibles, and contributions to Tata Brand Equity.- e4e Healthcare Ltd.: The tribunal rejected the assessee's request to exclude this company, as it was originally selected by the assessee and no valid reasons were provided for its exclusion.- R Systems Pvt. Ltd.: The tribunal directed the TPO to verify the financial data for the corresponding period and decide on its inclusion.- Omega Healthcare Ltd.: The tribunal directed the TPO to verify the annual report and decide on its inclusion, as it was now available in the public domain.Other Issues:The tribunal dismissed the grounds related to the charging of interest and initiation of penalty proceedings as premature.Conclusion:The appeal was partly allowed, with directions to exclude certain comparables and verify others, while rejecting other contentions. The tribunal emphasized the importance of functional comparability and the need for accurate segmental information in transfer pricing assessments.