2018 (3) TMI 1921 - AT - Income Tax

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

M/s. International Specialty Products (India) Pvt. Ltd. Versus ACIT-15 (2) (1), Mumbai.

M/s. International Specialty Products (India) Pvt. Ltd. Versus ACIT-15 (2) (1), Mumbai. - TMI 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.