2018 (3) TMI 1921 - AT - Income Tax

Tribunal directs exclusion of comparables for ITeS services, orders re-evaluation for R&D

The appeal was partly allowed. The Tribunal directed the exclusion of certain comparable entities for ITeS services and restored the matter of specific ... TP Adjustment - comparable selection - HELD THAT:- Accentia Technologies Ltd.- A copy of the order of Ld.DRP has been placed on record. The Ld. DR could not controvert the said factual matrix. Upon perusal of assessee’s TP study, as placed on record, we find that the assessee was engaged in providing application support, analytical support, R&D support to its AE. Assessee was responsible for identification of resources, recruitment of manpower, training, project management and execution. These services were characterized as routine support services with less than normal business risk. These services, in our considered opinion, could not be equated with the functions performed by Accentia. This is further evidenced by the fact that in immediately AY 2011-12, Ld. DRP excluded this entity on functional dissimilarity. Keeping in view the fact that nothing on record suggest that there was any change in functional profile of the assessee or the said entity, we direct for exclusion of this entity. Nothing has been brought on record to suggest that the revenue contested the aforesaid stand of Ld. DRP, in any manner. Eclerx Services Ltd.- As observed that during the year, this entity had acquired Agilyst Inc., a US company providing operations and a tantalizing support to some of the largest cable and telecommunications companies in the world. Respectfully following the same, holding that scale of operation was a significant criterion for the purpose of benchmarking analysis and finding that this entity was functionally dissimilar, we direct for exclusion of this comparable. Infosys BPO Ltd.- As relying on PENTAIR WATER INDIA (P) LTD. [2014 (5) TMI 1068 - ITAT PANAJI] exclusion of this entity on account of functional dissimilarity and extra-ordinary events which took place during the year. TCS E-serve Ltd.entity has been directed to be excluded since it was engaged in providing high end KPO services. Secondly, applying the scale of operation criteria as approved by Hon’ble Bombay High Court in CIT V/s Pentair Water India (P.) Ltd. [2014 (5) TMI 1068 - ITAT PANAJI] we direct for exclusion of this entity. Cross Domain Solutions Pvt. Ltd.- DRP has relied upon the decision of Hyderabad Tribunal rendered in M/s Excellence Data Research Pvt. Ltd. [2014 (9) TMI 126 - ITAT HYDERABAD] wherein the nature of the services was found to be similar to ITeS filed. The cited decision of Bangalore Tribunal pertains to AY 2008-09 and therefore, would not throw much light on the nature of services being rendered by this entity. Therefore, we deem it fit to restore the matter back to Ld. AO / Ld. TPO to appreciate the functional profile of this entity and re-adjudicate the same as urged by Ld. AR with a direction to the assessee to substantiate the same. Oxygen Bio Research - We direct Ld. TPO / Ld. AO to consider Profit Before Depreciation for the purpose of benchmarking analysis. Syngene International Ltd - AR submitted that this company was found functionally non-comparable and wrongly included in the final list of comparable. It has been submitted that RPT of this entity is greater than 25% and therefore, the same would not be a good comparable - Upon perusal, we find that the assessee’s submissions would require verification and therefore, we deem it fit to restore the matter of this comparable to the file of Ld. TPO / Ld. AO for re-adjudication in the light of submissions made by Ld. AR. The assessee, in turn, is directed to substantiate the same. Issues Involved:1. Inclusion/Exclusion of Comparable Entities for Corporate/Back Office Support Services (ITeS Services)2. Inclusion/Exclusion of Comparable Entities for R&D ServicesDetailed Analysis:I. Corporate/Back Office Support Services (ITeS Services):1. Wrong Comparable and High Arithmetic Mean:- The assessee contested the high arithmetic mean of 22.90% derived by the AO/DRP using wrong comparable entities, as opposed to the assessee’s margin of 11.85%. The AO applied new filters and identified 10 comparable entities, resulting in a mean margin of 24.96%, adjusted to 22.90% after working capital adjustments.2. Adjustment u/s 92CA:- The AO made a TP adjustment of Rs. 93,05,870/- to the price received by the appellant. The final assessment order reflected a net TP adjustment of Rs. 143.59 Lacs.3. Exclusion of Specific Comparable Entities:- The assessee argued for the exclusion of Accentia Technologies Ltd., Eclerx Services Ltd., Infosys BPO Ltd., TCS E-serve Ltd., and Cross Domain Solutions Pvt. Ltd. based on functional dissimilarity. The Tribunal directed the exclusion of these entities due to significant differences in scale, functional profile, and extraordinary events affecting their operations.4. Accentia Technologies Ltd.:- Excluded due to functional dissimilarity, as it was involved in healthcare documentation and receivables management, not akin to the ITeS services provided by the assessee.5. Eclerx Services Ltd.:- Excluded due to its operating income being 51 times that of the assessee and an extraordinary event of acquiring Agilyst Inc.6. Infosys BPO Ltd.:- Excluded due to its operating income being 138 times that of the assessee and the acquisition of Portland Group Pty. Ltd.7. TCS E-serve Ltd.:- Excluded as it provided high-end KPO services and had a significantly larger scale of operations.8. Cross Domain Solutions Pvt. Ltd.:- The matter was restored to the AO/TPO for re-evaluation of its functional profile as the entity provided diversified KPO services.II. Contract Research & Development Services:1. Wrong Comparable and High Arithmetic Mean:- The assessee contested the high arithmetic mean of 19.30% derived by the AO/DRP using wrong comparable entities, as opposed to the assessee’s margin of 12%. The AO identified 5 fresh comparable entities, resulting in a TP adjustment of Rs. 72.32 Lacs.2. Adjustment u/s 92CA:- The AO made a TP adjustment of Rs. 50,53,176/- to the price received by the appellant.3. Exclusion of Specific Comparable Entities:- The assessee argued for the exclusion of Oxygen Bio Research Pvt. Ltd. and Syngene International Ltd. based on functional dissimilarity and other factors.4. Oxygen Bio Research Pvt. Ltd.:- The Tribunal upheld the inclusion of this entity, rejecting the assessee’s arguments regarding the unavailability of the annual report, acquisition by another entity, and change in depreciation policy. However, the Tribunal directed the AO to consider Profit Before Depreciation for benchmarking analysis.5. Syngene International Ltd.:- The matter was restored to the AO/TPO for re-evaluation of its functional profile and verification of the assessee’s submissions regarding its related party transactions and operating income.Conclusion:The appeal was partly allowed. The Tribunal directed the exclusion of certain comparable entities for ITeS services and restored the matter of specific comparable entities for R&D services to the AO/TPO for re-evaluation. The Tribunal emphasized the importance of functional similarity and scale of operations in selecting comparable entities for transfer pricing analysis.