2018 (11) TMI 1793 - AT - Income Tax

Tribunal directs TPO on comparables. Working capital adjustment reconsidered.

M/s. Zyme Solutions Pvt. Ltd. Versus Assistant Commissioner of Income-tax, Circle 7 (1) (2), Bengaluru

The appeal was partly allowed. The Tribunal directed the Transfer Pricing Officer (TPO) to reconsider the comparability of Universal Print Systems Ltd. ... TP Adjustment - Comparable selection - selection of comparables by the TPO and also challenges appropriateness of RPT filter of more than 25% of sales - HELD THAT:- Comparability of M/s.Universal Print Systems Ltd. - As decided in M/s.CGI Information Systems & Management Consultants Pvt.Ltd. [2018 (4) TMI 1755 - ITAT BANGALORE] none of the objections raised by the Assessee in this regard about lack of information about allied services performed by die pre-press BPO segment of this company and the break-up of the revenue from such allied services have been dealt with specifically by the TPO or DRP. Since the comparability of this company is being remanded to be TPO for consideration of adjustments as mentioned above, the objection with regard to functional comparability should also be looked into by the TPO in the remand proceedings on the basis of materials which he may gather u/s. 133(6) of the Act, The Assessee should be given opportunity of being heard by the TPO before the issue is decided by the TPO - we remand this comparable to the file of the TPO/AO for fresh adjudication on the above lines. TCS E Service Ltd. - Since the appellant company is into low end BPO, it cannot be compared with KPO service provider. BNR Udyog Ltd - this company passes RPT filter as well as income from providing ITES being more than 75% of its revenue, this company has to be regarded as comparable company. No other arguments were advanced for exclusion of this company. Hence this company is held to be comparable with that of the Assessee. Excel Infoways Ltd - The contention as regards employee cost filter, nothing was shown to us that the findings of the TPO or Hon'ble DRP are contrary to the material on record. However, as regards diminishing revenue filter, this filter was never applied by the TPO, needless to say application of new filter is not permissible at a later stage. This comparable deleted from the list of comparables on the ground that it is engaged in the business of software testing, verification and validation of software. Working capital adjustment - HELD THAT:- We find merit in the contention of the learned AR of the assessee as there was no need for making any negative working capital adjustment as held in the case of NTT DATA India Enterprise Application Services (P.) Ltd. vs. Asst.CIT [2015 (1) TMI 604 - ITAT HYDERABAD] Risk adjustment - HELD THAT:- As regards risk adjustment, we find that this issue was not raised before the TPO. It is only before Hon'ble DRP, a claim was made towards risk adjustment. Written submissions were filed before Hon'ble DRP. Hon'ble DRP held that no accurate adjustment can be made in this case. Even before Hon'ble DRP, no working of risk adjustment was furnished. We do not find any reason to interfere with the findings of the Hon'ble DRP. Issues Involved:1. Rejection of Selection of Comparables by the TPO.2. Appropriateness of RPT Filter of More Than 25% of Sales.3. Working Capital Adjustment.4. Risk Adjustment.Detailed Analysis:1. Rejection of Selection of Comparables by the TPO:The appellant objected to the inclusion of certain comparables selected by the TPO, specifically Universal Print Systems Ltd., TCS E-Serve Ltd., BNR Udyog Ltd., and Excel Infoways Ltd. The TPO had applied various filters, including the use of current year data and excluding companies with service income less than Rs. 1 crore, among others. The TPO rejected one of the three comparables selected by the appellant and included 12 new comparables. The final list of comparables included companies like Accentia Technologies Ltd., Infosys BPO Ltd., and others. The appellant challenged the inclusion of Universal Print Systems Ltd. on the grounds of functional differences, failing the IT export revenue filter, and high-profit margins. The Tribunal, following the decision in CGI Information Systems, remanded this comparable to the TPO for fresh adjudication.Regarding TCS E-Serve Ltd., the appellant argued it was functionally different as it engaged in BPO services in banking, finance, and insurance domains. The Tribunal, referencing the decision in XL Health Corporation, directed the exclusion of this company from the list of comparables.For BNR Udyog Ltd., the appellant contended it failed the RPT filter. The Tribunal, following the decision in CGI Information Systems, directed the inclusion of this company in the list of comparables.Lastly, the appellant objected to Excel Infoways Ltd. on the grounds of high-end BPO services and failing the employee cost filter. The Tribunal, referencing the decision in CGI Information Systems, confirmed the inclusion of this company in the list of comparables.2. Appropriateness of RPT Filter of More Than 25% of Sales:The appellant challenged the appropriateness of the RPT filter of more than 25% of sales. The Tribunal did not find any specific arguments or evidence presented by the appellant to counter the TPO's application of this filter. As such, the Tribunal upheld the TPO's application of the RPT filter.3. Working Capital Adjustment:The appellant argued against the negative working capital adjustment made by the TPO. The Tribunal found merit in the appellant's contention, referencing the decision in NTT DATA India Enterprise Application Services, and held that there was no need for making any negative working capital adjustment. Thus, the Tribunal directed the TPO to reconsider the working capital adjustment.4. Risk Adjustment:The appellant made a claim for risk adjustment before the DRP, but no specific working of the risk adjustment was furnished. The DRP held that no accurate adjustment could be made in this case. The Tribunal found no reason to interfere with the DRP's findings and dismissed this ground of appeal.Conclusion:The appeal filed by the assessee was partly allowed. The Tribunal directed the TPO to reconsider the comparability of Universal Print Systems Ltd. and to exclude TCS E-Serve Ltd. from the list of comparables. The Tribunal upheld the inclusion of BNR Udyog Ltd. and Excel Infoways Ltd. in the list of comparables. The Tribunal also directed the TPO to reconsider the working capital adjustment and dismissed the ground of appeal related to risk adjustment.