2018 (1) TMI 238 - AT - Income Tax

Tribunal excludes comparables, remits working capital issue. Revenue appeal dismissed.

The Tribunal partly allowed the appeal of the assessee by excluding certain comparables and remitting the issue of working capital adjustment back to the ... TPA - comparable selection criteria - Held that:- Assessee's services fall under the ambit of IT enabled services (ITes), which are rendered to its AE as an independent contractor and for which it is compensated on the cost plus markup basis of 15%, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Issues Involved:1. Characterization of the Assessee's Services2. Arm's Length Price (ALP) Determination3. Selection of Comparables4. Risk and Working Capital Adjustments5. Levy of Interest under Section 234B6. Initiation of Penalty Proceedings under Section 271(1)(c)Issue-wise Detailed Analysis:1. Characterization of the Assessee's Services:The assessee contended that it was engaged in routine, low-end IT enabled services (ITes) and not in high-end services as alleged by the Ld. AO/TPO/CIT(A). The Tribunal found that the services provided by the assessee, such as coordination, liaisoning, administrative support, and IT-enabled support services, were indeed routine and low-end. The Tribunal further noted that no intellectual property was created during the year, and the majority of operational personnel were graduates or postgraduates with limited engineering graduates, supporting the assessee's claim.2. Arm's Length Price (ALP) Determination:The Ld. TPO proposed an adjustment of Rs. 1,33,18,981/- to the income of the assessee based on the ALP determined using the Transactional Net Margin Method (TNMM). The assessee challenged the use of single-year data and the rejection of multiple-year data for computing the Profit Level Indicator (PLI). The Tribunal upheld the use of single-year data as per the provisions of the Act and the Rules.3. Selection of Comparables:The Tribunal addressed the inclusion and exclusion of various comparables:- eClerx Services Ltd.: The Tribunal directed the exclusion of eClerx Services Ltd. as it was engaged in high-end Knowledge Process Outsourcing (KPO) services, which were functionally dissimilar to the low-end ITes services provided by the assessee. Additionally, the acquisition of a UK-based company during the year was considered an extraordinary event impacting the PLI.- Accentia Technologies Ltd.: The Tribunal upheld the exclusion of Accentia Technologies Ltd. due to its substantial revenue from software development services and the impact of mergers and acquisitions during the year, which constituted extraordinary events.- Coral Hub Limited: The Tribunal supported the exclusion of Coral Hub Limited as its business model was outsourcing-based, with a significantly low employee cost, making it functionally dissimilar to the assessee.- Mold-Tek Technologies Ltd.: The Tribunal agreed with the exclusion of Mold-Tek Technologies Ltd. as it provided high-end structural engineering KPO services, which were not comparable to the routine ITes services of the assessee. The merger and demerger events during the year also constituted extraordinary circumstances.4. Risk and Working Capital Adjustments:The Tribunal addressed the issue of working capital adjustment. The Ld. CIT(A) had rejected the working capital adjustment due to the lack of accurate and reliable data. However, the Tribunal noted that working capital adjustments are relevant even for service industries and remitted the matter back to the Ld. AO/TPO for verifying the calculation of the working capital adjustment provided by the assessee and to give effect in accordance with the law.5. Levy of Interest under Section 234B:The Tribunal did not specifically address the issue of the levy of interest under Section 234B in the detailed analysis provided in the judgment.6. Initiation of Penalty Proceedings under Section 271(1)(c):The Tribunal did not specifically address the issue of the initiation of penalty proceedings under Section 271(1)(c) in the detailed analysis provided in the judgment.Conclusion:The Tribunal partly allowed the appeal of the assessee for statistical purposes, directing the exclusion of certain comparables and remitting the issue of working capital adjustment back to the Ld. AO/TPO for verification. The appeal of the Revenue was dismissed. The decision was pronounced in the open court on 3rd Jan., 2018.