Taxpayer's Appeal Allowed, Transfer Pricing Adjustment Recomputation Ordered

The Tribunal allowed the taxpayer's appeal, directing the AO/TPO to recompute the Transfer Pricing adjustment by excluding certain comparables for benchmarking international transactions related to IT-enabled services. The order was pronounced on November 22, 2019.

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Issues Involved:
1. Determination of arm's length margin for ITES.
2. Rejection of Transfer Pricing (TP) documentation.
3. Selection and rejection of comparables.
4. Computation errors in profit level indicator.
5. Charging of interest under sections 234B and 234C.
6. Initiation of penalty under section 271(1)(c).

Detailed Analysis:

1. Determination of Arm's Length Margin for ITES:
The taxpayer, M/s. Convergys India Services Pvt. Ltd., contested the determination of the arm's length margin at 21.79% for providing IT-enabled customer care back-office support services to its Associated Enterprise (AE), leading to an addition of INR 446,145,228/-. The Transfer Pricing Officer (TPO) accepted the Transactional Net Margin Method (TNMM) with Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI) as the Most Appropriate Method (MAM). The TPO computed the average of comparables at 21.79% against the taxpayer's 14.06%, resulting in a reduced adjustment from Rs.55,81,27,648/- to Rs.44,61,45,228/-.

2. Rejection of Transfer Pricing (TP) Documentation:
The taxpayer maintained that the TP documentation was prepared in good faith and with due diligence. However, the TPO rejected this documentation, disregarding the conditions set out in Section 92C(3) of the Income-tax Act, 1961.

3. Selection and Rejection of Comparables:
The taxpayer challenged the inclusion of certain comparables by the TPO and CIT (A), specifically Excel Infoways Ltd., TCS E-Serve Ltd., and Infosys BPO Ltd.

- Excel Infoways Ltd. (Segment): The taxpayer argued for exclusion based on Excel failing the service revenue from exports/ITES filter of 75%, employee cost filter of 25%, and diminishing revenue filters. The Tribunal agreed, noting that Excel's revenue from ITES was only 51.06% and its employee cost to sales ratio was 13.05%. Additionally, Excel's revenue had been consistently diminishing, making it unsuitable as a comparable.

- TCS E-Serve Ltd.: The taxpayer sought exclusion due to functional dissimilarity, payment for the TATA brand, lack of segmental information, and significant risk differences. The Tribunal found that TCS E-Serve's operations included delivering core business processing services and analytics, which were not comparable to the taxpayer's routine call center services. Moreover, TCS E-Serve's significant risks and brand payments rendered it unsuitable as a comparable.

- Infosys BPO Ltd.: The taxpayer argued for exclusion due to Infosys BPO's significant brand value, functional dissimilarity, and extraordinary events such as acquiring Portland Group Pty Ltd. The Tribunal noted that Infosys BPO provided high-end integrated services and had significant intangibles and brand value, making it unsuitable as a comparable for the taxpayer's routine ITES services.

4. Computation Errors in Profit Level Indicator:
The taxpayer contended that the AO/CIT(A) committed factual errors in computing the profit level indicator (net cost plus mark-up) of certain comparable companies and ignored necessary economic adjustments in the computation of the arm's length price.

5. Charging of Interest Under Sections 234B and 234C:
The AO charged interest under sections 234B and 234C of the Act. The Tribunal did not specifically address this issue in detail, focusing instead on the TP adjustments.

6. Initiation of Penalty Under Section 271(1)(c):
The AO initiated penalty proceedings under section 271(1)(c) mechanically and without recording any satisfaction for its initiation. The Tribunal's order did not delve into this issue, as the primary focus was on the TP adjustments.

Conclusion:
The Tribunal allowed the taxpayer's appeal, directing the AO/TPO to recompute the TP adjustment by excluding Excel Infoways Ltd., TCS E-Serve Ltd., and Infosys BPO Ltd. from the list of comparables for benchmarking the international transactions related to ITES. The order was pronounced in open court on November 22, 2019.

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