2017 (9) TMI 1340 - AT - Income Tax

Transfer Pricing Tribunal Decision: Accentia's comparability, exclusion of companies, mark-up on reimbursements

The Tribunal partly allowed both the assessee's and the Revenue's appeals. It remitted the issue of Accentia Technologies Ltd's comparability to the ... TPA - selection of comparable - Held that:- The assessee company, engaged in the business of providing Information Technology Enabled Services and Software Development services to its AE’s, thus companies functionally different with that of assessee need to be deselected from final list. International transaction of recovery of expenses - assessee prayed for deletion of 5% mark-up while the Revenue wants it to be recomputed at 25.73% as done by the TPO - Held that:- The expenses reimbursed are travel and visa processing charges. In our opinion, there could not be any markup on such expenses and particularly in the absence of any material on record that unreasonable credit facility has been extended to the AEs of the assessee for such reimbursement of costs. Further, the assessee has also adopted the CUP method to hold the transactions to be at ALP. Except for aggregating both the transactions at TNMM, the TPO has not been able to bring out any material on record to show that the reimbursement of expenses are excessive and therefore, at a markup. Further, in the case of Kirby Building Systems India Ltd [2014 (11) TMI 728 - ITAT HYDERABAD], the issue was of cost sharing exercise in implementing ERP systems in the group and ITAT held that it involves services by the said company, but in the case of the assessee, it is pure reimbursement of expenses incurred by the assessee and no service element is involved. Thus, DRP’s reliance on the said decision is clearly misplaced. Assessee’s ground of appeal is allowed and the AO/TPO is directed to treat the transaction to be at ALP and adjustment to be made at Rs. Nil. Issues Involved:1. Inclusion of Accentia Technologies Ltd as a comparable company.2. Inclusion of Microgenetics Systems Ltd as a comparable company.3. Mark-up on reimbursement of expenses.4. Exclusion of certain companies as comparables in the Revenue's appeal.5. Inclusion of ICRA Online Ltd as a comparable company.6. Exclusion of provision for bad and doubtful debts from operating costs.Issue-wise Detailed Analysis:1. Inclusion of Accentia Technologies Ltd as a Comparable Company:The assessee objected to the inclusion of Accentia Technologies Ltd as a comparable, arguing it provided high-end IT services (KPO), unlike the assessee's ITES services. The TPO and DRP rejected this, noting both companies' services were similar. However, the Tribunal found that the ownership of intangible assets like brands/IPRs by Accentia Technologies, which the assessee lacked, was a significant factor. The Tribunal remitted the issue back to the TPO to verify the ownership of intangibles and reconsider the comparability if Accentia Technologies owned such assets.2. Inclusion of Microgenetics Systems Ltd as a Comparable Company:The assessee sought the inclusion of Microgenetics Systems Ltd as a comparable. The TPO included it, but the DRP excluded it due to its outsourcing of medical transcription activities, which differed from the assessee's functional model. The Tribunal upheld the DRP's decision, noting the significant outsourcing by Microgenetics Systems Ltd.3. Mark-up on Reimbursement of Expenses:The assessee argued against a 5% mark-up on reimbursement of expenses, contending these were at cost without any profit element. The TPO had applied a 25.73% mark-up, which the DRP reduced to 5%. The Tribunal found no basis for a mark-up on these expenses, as they were purely reimbursements for travel and visa processing without any service element. The Tribunal directed the TPO to treat the transaction at ALP with no adjustment.4. Exclusion of Certain Companies as Comparables in the Revenue's Appeal:The Revenue challenged the DRP's exclusion of Infosys BPO Ltd, Eclerx Services Ltd, TCS E-serve Ltd, and Cosmic Global Ltd. The DRP excluded these companies due to differences in size, brand value, functional dissimilarities, and outsourcing models. The Tribunal upheld the DRP's decision, finding no material to rebut the DRP's findings.5. Inclusion of ICRA Online Ltd as a Comparable Company:The Revenue sought the inclusion of ICRA Online Ltd as a comparable, which the assessee did not object to. The Tribunal allowed this inclusion.6. Exclusion of Provision for Bad and Doubtful Debts from Operating Costs:The Revenue contested the DRP's direction to exclude provisions for bad and doubtful debts from operating costs. The Tribunal upheld the DRP's decision, finding no prejudice to the Revenue.Conclusion:The Tribunal partly allowed both the assessee's and the Revenue's appeals. The Tribunal remitted the issue of Accentia Technologies Ltd's comparability to the TPO, upheld the exclusion of Microgenetics Systems Ltd, directed no mark-up on reimbursements, upheld the exclusion of certain companies in the Revenue's appeal, allowed the inclusion of ICRA Online Ltd, and upheld the exclusion of provisions for bad and doubtful debts from operating costs.