2019 (10) TMI 1439 - AT - Income Tax

Tribunal excludes companies from comparables list for transfer pricing, orders recompute of Arm's Length Price.

The Tribunal allowed the assessee's appeal, directing the exclusion of Infosys BPO Limited and Excel Infoways Limited from the list of comparables for ... TP Adjustment - comparable selection - exclusion of Infosys BPO Ltd. and Excel Infoways Ltd. - HELD THAT:- This comparable i.e. Infosys BPO Ltd. due to high turnover and extraordinary event of acquisition as well as brand value, is not comparable with the assessee, who is providing medical transcription services, information technology quality assurance in the nature of back office support services to its AE. Therefore, we direct the Assessing Officer/TPO to exclude this comparable. Excel Infoways Ltd.company does not pass the diminishing revenue filter as adopted by the TPO himself since its revenue has decreased consistently from financial years 2009-10 to 2011-12 i.e. including the year under consideration. Further, the above company has super normal profits. We further find the submissions of the assessee that Excel Infoways Ltd. has super normal profits during the current year has not been controverted by the Revenue. We find the Mumbai Bench of the Tribunal the case of Willis Processing Services (India) Pvt. Ltd. [2015 (1) TMI 300 - ITAT MUMBAI] has upheld the order of the DRP rejecting Excel Infoways Ltd. as comparable company on the ground that the company has a super normal profit of 203.80% and low employee cost 10.02%. We, therefore, find merit in the submissions of the Id. counsel for the assessee that Excel Infoways Ltd. should be excluded from the list of comparable on account of super normal profit of the said company in the preceding year. Thus we direct the AO/TPO to exclude Excel Infoway Ltd. from the final set of comparable. Considering the fact that we have directed to exclude the Infosys BPO Ltd. and Excel Infoways Ltd., therefore, the AO/TPO is directed to recompute the ALP of IT support services with its AE as per direction/ observation hereinabove. Application u/s 154 - not granting set off of brought forward losses and unabsorbed depreciation against the income of current years - HELD THAT:- AO is directed to decide the application of assessee filed under section 154 in seeking the set off of brought forward business loss and unabsorbed depredation in accordance with law. Issues Involved:1. Transfer pricing addition of INR 4,73,88,068/-.2. Selection of comparable companies.3. Computation of profit level indicator of Jindal Intellicon Limited.4. Rejection of transfer pricing documentation and cherry-picking of comparables.5. Disregarding multiple year data analysis.6. Not providing appropriate adjustments to margins of selected comparables.7. Not granting set-off of brought forward losses.8. Levying interest under Sections 234B and 234C.9. Proposing to initiate penalty under Section 271(1)(c).Detailed Analysis:1. Transfer Pricing Addition:The assessee contested the addition of INR 4,73,88,068/- made by the AO and TPO under the directions of the DRP. The TPO had initially computed an upward adjustment of INR 5,42,97,825/-, which was later reduced by the DRP.2. Selection of Comparable Companies:The primary contention was the inclusion of Infosys BPO Limited and Excel Infoways Limited as comparables. The assessee argued that Infosys BPO was not functionally comparable due to its brand value, high turnover, and acquisition of an Australian company. Excel Infoways was argued to be incomparable due to its different business segments, low employee cost ratio, and fluctuating margins.3. Computation of Profit Level Indicator (PLI) of Jindal Intellicon Limited:The assessee argued that the AO and TPO erred in computing the PLI of Jindal Intellicon Limited. Specific details on this computation error were not elaborated in the judgment.4. Rejection of Transfer Pricing Documentation and Cherry-Picking of Comparables:The assessee contended that the AO and TPO erred in rejecting its transfer pricing documentation and resorting to cherry-picking comparables to arrive at a set of companies comparable to the assessee.5. Disregarding Multiple Year Data Analysis:The assessee argued that the AO and TPO disregarded the multiple year data analysis undertaken by the assessee in accordance with Rule 10B(4) of the Income Tax Rules, 1962, for computing the margins of comparable companies.6. Not Providing Appropriate Adjustments to Margins:The AO and TPO were also accused of not providing appropriate adjustments to margins of the companies finally selected as comparable as required by Rule 10B(1)(e)(iii) of the Rules.7. Not Granting Set-Off of Brought Forward Losses:The assessee argued that the AO did not grant set-off of brought forward losses against the income of the current year. The Tribunal directed the AO to decide the application filed under Section 154 seeking set-off of brought forward business loss and unabsorbed depreciation in accordance with law.8. Levying Interest under Sections 234B and 234C:The assessee contested the levy of interest under Sections 234B and 234C of the Act. The details of the Tribunal's decision on this issue were not elaborated in the judgment.9. Proposing to Initiate Penalty under Section 271(1)(c):The assessee also contested the proposal to initiate penalty under Section 271(1)(c) of the Act. The Tribunal's decision on this issue was not detailed in the judgment.Tribunal's Decision on Key Issues:Exclusion of Infosys BPO Limited:The Tribunal agreed with the assessee's contention and directed the exclusion of Infosys BPO Limited from the list of comparables. The Tribunal cited various cases where Infosys BPO was rejected as a comparable due to its high turnover, brand value, and acquisition activities.Exclusion of Excel Infoways Limited:The Tribunal also directed the exclusion of Excel Infoways Limited, agreeing with the assessee's arguments regarding its fluctuating margins, different business segments, and low employee cost ratio. The Tribunal referred to multiple cases where Excel Infoways was excluded as a comparable for similar reasons.Recomputation of ALP:Following the exclusion of Infosys BPO and Excel Infoways, the Tribunal directed the AO/TPO to recompute the ALP of IT support services with the assessee's AE.Set-Off of Brought Forward Losses:The Tribunal directed the AO to decide the application filed by the assessee under Section 154 for set-off of brought forward business loss and unabsorbed depreciation in accordance with law, after granting an opportunity to the assessee.Conclusion:The appeal of the assessee was allowed, with specific directions to exclude Infosys BPO Limited and Excel Infoways Limited from the list of comparables and to recompute the ALP accordingly. The AO was also directed to address the set-off of brought forward losses as per the assessee's application.