2019 (6) TMI 588 - AT - Income Tax

Tax Tribunal Grants Relief, Directs Re-examination of Comparables

The Tribunal partly allowed the appeals for both assessment years, directing the TPO/AO to re-examine the comparables and ensure proper adjustments and ... TP Adjustment - comparable selection - functional similarity - HELD THAT:- For the purpose of the comparability all factors are of paramount importance. Hence, before relying upon any judicial precedent for exclusion or inclusion one has to cross the threshold of rule 10 B (2) of IT Rules, to ensure that the conditions specified therein are similar as decided by the honourable court. In view of this, the argument of the learned authorised representative cannot be accepted at the threshold itself that the comparables challenged by the assessee before us should be excluded based on judicial precedents without looking at the functional identity of assessee vis a vis comparable E Clerxs Services Limited - Therefore, On careful analysis of all these arguments, and respectfully following the decision of the coordinate bench in BC MANAGEMENT SERVICES PVT. LTD., VERSUS DY. CIT [2017 (5) TMI 1501 - ITAT DELHI] , wherein a ratio has been laid down stating that a comparable company carrying on its services through outsourcing model substantially is not comparable with a company providing services on its own, we set aside the comparability suitability of this comparable company back to the file of the learned assessing officer/transfer pricing officer with a direction to examine the above fact by issue of notice u/s 133 (6) to the comparable company and ascertain whether the sum of INR 437,150,000/- spent on ‘contract for services’ debited under the General And Administration Expenses are relating to Outsourcing Services or not. If, it is found that these are outsourcing expenditure, then TPO is directed to delete/exclude the above comparable company from the comparability analysis. Even otherwise, it is found that these expenditure are not for the outsourcing services, the learned transfer pricing officer is directed to decide the issue after giving assessee a opportunity of contesting this comparable on this issue of outsourcing model as well as any other issue, and then decide it on merits. Accordingly, we decide the issue of exclusion of each clerk services as above. Infosys BPO Ltd. - Coupled with the fact that the comparable company belongs to an Infosys group, has incurred the expenditure on the brand building and on the annual report itself shows the imprint of being part of the large IT segment group, it is apparent that the functional profile, the assets utilized by the comparable company are not comparable with the assessee company. Therefore, for this reason only, we direct the learned transfer pricing officer, AO to exclude the above comparable. TCS E serve limited - For this reason that it belongs to Tata group and has also contributed to Tata brand which is one of the largest brand in the information technology segment, there is a definite impact on the pricing capacity of the comparable which the assessee lacks. Hence, we find that TCS E serve Ltd deserves to be excluded. Accordingly we direct the learned TPO - AO to exclude the above comparable. CG Vak software and exports Ltd - The learned DRP vide para number 5.3 of his order has rejected the objection of the assessee with respect to inclusion of the comparables stating that all these comparable selected by the assessee and rejected by the learned TPO have been rejected because the file filter used by the learned transfer pricing officer. These filters have been discussed by the learned DRP and therefore the exclusion of the companies which fill these filters was justified and the appellant. We find it is not the reason for rejection of any of the comparable selected by the assessee without finding the functional dissimilarity is between them. R system International Ltd - Further the functional analysis of this comparable is also not made by TPO. However, it has been pointed out before us that R system International Ltd as a listed company which has the quarterly results available. Therefore if such a quarterly results can be constructed with reliable information then, if it is found to be functionally comparable, crosses all other filters , then it should be included in the comparability analysis. Coral hub Ltd - Further there is also a fact that this comparable is found to be functionally dissimilar to assessee by assessee itself as per argument of the ld DR. Therefore The learned TPO is directed to include the above company in the comparability analysis if it is functionally similar and crosses all other filters. In view of above facts we also direct the ld TPO to examine this comparable. Accordingly all 3 comparables which have been included by the assessee but rejected by the learned transfer pricing officer for comparability analysis are set aside to the file of the learned transfer pricing officer to consider them for the comparability analysis if they are found functionally comparable, passes all the filters applied by the TPO, and reliable information has furnished by the assessee in the form of quarterly results and annual reports - appeal of the assessee are allowed. Issues Involved:1. Transfer pricing adjustments for content support services and back-office support services.2. Acceptance of economic analysis and determination of Arm’s Length Price (ALP).3. Use of multiple year data versus single year data.4. Selection and rejection of comparable companies based on various criteria.5. Treatment of operating and non-operating items.6. Adjustments for differences in risk profiles.7. Initiation of penalty proceedings under section 271(1)(c).8. Granting of Minimum Alternate Tax (MAT) credit and charging of consequential interest.Detailed Analysis:1. Transfer Pricing Adjustments:The assessee, M/s Kaplan India Private Limited, engaged in providing software maintenance and support services, faced adjustments for the assessment years 2011-12 and 2012-13. The Transfer Pricing Officer (TPO) proposed adjustments for international transactions related to content support services and back-office support services, which were partly upheld by the Dispute Resolution Panel (DRP). The final assessment order was passed under sections 143(3) and 144C of the Income Tax Act.2. Acceptance of Economic Analysis and Determination of ALP:The assessee contended that the TPO/AO/DRP erred in not accepting its economic analysis and in modifying the same for determining the ALP without finding any circumstances specified in section 92C(3) of the Act. The TPO rejected certain comparable companies selected by the assessee and included others, leading to adjustments in the ALP.3. Use of Multiple Year Data:The TPO/AO/DRP did not accept the use of multiple year data as adopted by the assessee in its Transfer Pricing documentation. Instead, they determined the ALP using data pertaining only to the financial year 2010-11, which was not available to the assessee at the time of compliance.4. Selection and Rejection of Comparable Companies:The TPO/AO/DRP rejected certain comparable companies based on criteria such as turnover, export turnover, accounting year, and employee cost. The assessee challenged the inclusion of companies like E-Clerx Services Ltd, Infosys BPO Ltd, and TCS E-Serve Ltd, arguing functional dissimilarities, brand value, and incomparable scale of operations. The Tribunal directed the TPO to re-examine these comparables, especially E-Clerx Services Ltd, by issuing a notice under section 133(6) to ascertain whether the expenditure on 'contract for services' was related to outsourcing services.5. Treatment of Operating and Non-Operating Items:The assessee contended that the TPO/AO/DRP erred in the treatment of operating and non-operating items while computing the margins of the assessee and comparable companies. The Tribunal directed the TPO to consider the functional profile of the assessee and the comparables while making adjustments.6. Adjustments for Differences in Risk Profiles:The assessee argued that suitable adjustments were not made to account for differences in the risk profile vis-a-vis the comparable companies. The Tribunal emphasized the importance of ensuring functional comparability and considering the risk profiles of the entities involved.7. Initiation of Penalty Proceedings:The assessee challenged the initiation of penalty proceedings under section 271(1)(c) of the Act. The Tribunal found this ground to be premature and dismissed it.8. Granting of MAT Credit and Charging of Consequential Interest:The assessee raised issues regarding the granting of MAT credit and the charging of consequential interest under sections 234B and 234C of the Act. The Tribunal directed the AO to grant the proper MAT credit and relief as per the directions of the DRP after proper verification.Separate Judgments:The Tribunal delivered a common order for both assessment years, addressing similar issues and directing the TPO/AO to re-examine certain comparables and ensure proper adjustments and reliefs as per the directions given.Conclusion:The Tribunal partly allowed the appeals for both assessment years, directing the TPO/AO to re-examine the comparables and ensure proper adjustments and reliefs, while dismissing the ground related to the initiation of penalty proceedings as premature.