2018 (8) TMI 1928 - AT - Income Tax

Transfer Pricing Appeals: Exclusion of Comparables Upheld, Fixed Assets Write-off as Non-operating Expenses

The ITAT partly allowed the appeals by the assessee and the Revenue. It upheld the exclusion of certain comparables such as Coral Hubs Ltd., Eclerx ... TP Adjustment - selection of comparable - functional similarity - HELD THAT:- Assessee's international transaction relating to provisions of services to its Associated Enterprises is providing consultancy services - assessee has adopted the transactional net margin method to benchmark its International transactions, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Comparables to be excluded which have been directed by the DRP to be included as canvassed by the ld. Counsel of the assessee are Coral Hubs Ltd., Eclerx Services Ltd., Accentia Technologies Ltd. and Cosmic Global Ltd. Write off of fixed assets as non operating expenditure - HELD THAT:- We find that the item of fixed assets write off is not a normal expenditure. It cannot be equated with depreciation. Hence, the direction of the DRP that the same is non operating item and should be excluded from the calculation of the profit margin, is liable to be sustained. Furthermore, the DRP has directed that if there is similar write off of fixed assets in any of the comparables finally considered, the TPO is directed to exclude such costs from the comparables also. Thus, in our considered opinion, is fair and reasonable direction and does not need any interference in our part. Issues Involved:1. Exclusion of comparables (Aditya Birla Minacs Worldwide Ltd., Cross Domain Solutions Pvt. Ltd., Excel Infoways Ltd., Mold Tek Technologies Ltd., Proximus Knowledge & Technologies Services Pvt. Ltd., Sparsh BPO Services Ltd., Surewin Internet Services Ltd., Sundram Business Services Ltd., Coral Hubs Ltd., Eclerx Services Ltd., Accentia Technologies Ltd., Cosmic Global Ltd.)2. Transfer Pricing Adjustment3. Write off of fixed assets as non-operating expenses4. Levying of interest under Sections 234B and 234C of the Income-tax ActDetailed Analysis:1. Exclusion of Comparables:- Coral Hubs Ltd.: The assessee argued that Coral Hubs Ltd. outsourced a significant part of its activities, making it functionally dissimilar. The Hon'ble Bombay High Court upheld this exclusion, noting the outsourcing of major activities to third parties.- Eclerx Services Ltd.: The assessee contended that Eclerx Services Ltd. is a KPO and not comparable to its BPO services. The ITAT, in Fractal Analytics (P.) Ltd. v. ACIT, held that Eclerx Services Ltd. is engaged in diverse activities without segmental data, making it non-comparable.- Accentia Technologies Ltd.: The assessee argued that Accentia Technologies Ltd. is involved in software services and medical transcription, which are functionally different. The Hon'ble Bombay High Court upheld its exclusion due to functional dissimilarity and the impact of mergers/amalgamations on its profits.- Cosmic Global Ltd.: The assessee contended that Cosmic Global Ltd. outsourced significant activities. The Hon'ble Bombay High Court upheld its exclusion due to functional dissimilarity, similar to Vishal Technologies Ltd.- Excel Infoways Ltd.: The DRP excluded this comparable due to its engagement in voice-based services and high-profit fluctuations. The ITAT in Baxter India (P.) Ltd. v. ACIT supported this exclusion based on diminishing revenue and super normal profits.2. Transfer Pricing Adjustment:- The assessee, a subsidiary of Swiss Reinsurance Limited, provided consultancy services and used the transactional net margin method for benchmarking. The TPO rejected several comparables identified by the assessee and included others, leading to a transfer pricing adjustment of Rs. 3.53 crores. The DRP granted partial relief, leading to cross appeals by both the assessee and the Revenue.3. Write off of Fixed Assets as Non-Operating Expenses:- The DRP directed the exclusion of write-off of fixed assets from operating profit margin calculations, considering it a non-operating item. The Revenue's appeal against this was dismissed, as the ITAT found the DRP's direction fair and reasonable.4. Levying of Interest under Sections 234B and 234C:- The assessee contested the levying of interest under Sections 234B and 234C. The ITAT did not provide specific details on this issue, but consequential reliefs were sought based on the main issues' outcomes.Conclusion:The appeals by the assessee and the Revenue were partly allowed. The ITAT upheld the exclusion of certain comparables and the treatment of fixed assets write-off as non-operating expenses, while directing the TPO to make fresh computations excluding the non-comparable entities.