Multiple companies excluded from transfer pricing comparables due to functional dissimilarity while working capital adjustment allowed

ITAT Bangalore ruled on transfer pricing comparable selection, excluding multiple companies including Datamatics Business Solutions Ltd. (KPO company), Infosys BPM Services Pvt. Ltd. (functionally dissimilar with robotics automation), Manipal Digital Systems Pvt. Ltd., CES Ltd., and SPI Technologies India Pvt. Ltd. due to functional dissimilarity. BNR Udyog Ltd. was included as comparable. R Systems International Ltd. and Bhilwara Infotechnology Pvt. Ltd. were remitted to AO/TPO for fresh verification. Working capital adjustment was allowed following OECD guidelines. Issue regarding lease equalization cost treatment in operating markup computation was remitted to AO/TPO for examination of whether assessee claimed deduction.

---

---

Issues Involved:
1. Transfer Pricing Adjustments
2. Selection and Rejection of Comparable Companies
3. Working Capital Adjustment
4. Lease Equalization Cost

Summary:

Transfer Pricing Adjustments:
The appeal by the assessee challenges the final assessment order for the AY 2017-18, specifically the transfer pricing adjustments made by the Deputy Commissioner of Income-tax Circle-2(1)(1), Bangalore. The assessee, a subsidiary of Mobil Rocky Mountain Inc, USA, provides business process outsourcing (BPO) and technical support services to its Associated Enterprises (AE). The Transfer Pricing (TP) Officer made adjustments towards BPO and Technical Support Services, rejecting the assessee's TP study and conducting a fresh analysis. The TP Officer selected 13 comparable companies, applied specific filters, and determined an adjustment of Rs. 41,52,50,000/-, later revised to Rs. 42,29,80,000/- under section 154 of the Act.

Selection and Rejection of Comparable Companies:
The assessee contested the inclusion and exclusion of several comparable companies. The Tribunal directed the exclusion of Datamatics Business Solutions Ltd., Infosys BPM Services Pvt. Ltd., Manipal Digital Systems Pvt. Ltd., CES Ltd., and SPI Technologies India Pvt. Ltd. on grounds of functional dissimilarity and other factors. The Tribunal also remitted the inclusion of R Systems International Ltd., BNR Udyog Ltd., and Bhilwara Infotechnology Pvt. Ltd. to the AO/TPO for fresh consideration to verify if they satisfy all the filters adopted by the TPO.

Working Capital Adjustment:
The Tribunal directed the AO/TPO to grant working capital adjustment, emphasizing that differences in working capital requirements between the tested party and comparable companies should be adjusted to ensure a fair arm's length price. The Tribunal referenced previous decisions, noting that the cost of capital and working capital adjustments should be considered to eliminate the impact of such differences on profit margins.

Lease Equalization Cost:
The assessee argued that the lease equalization cost of Rs. 3,60,96,753/- was not claimed as a deductible business expenditure in the return of income for AY 2017-18 and should be excluded while computing the operating markup. The Tribunal remitted the issue to the AO/TPO to examine whether the assessee claimed any deduction towards this cost, stating that if the expenditure was disallowed by the assessee, it should not be treated as an operating expenditure in determining the ALP.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO/TPO to reconsider the inclusion/exclusion of certain comparables, grant working capital adjustment, and re-examine the lease equalization cost issue.

---