Appeal partly allowed, TP Officer to verify concerns, Eureka Outsourcing included, working capital plea rejected

The appeal was partly allowed, directing the Transfer Pricing Officer to verify functionality of concerns rejected by the Dispute Resolution Panel and include them if functionally comparable. Eureka Outsourcing Solutions Pvt. Ltd. was included, and the plea for working capital adjustment was rejected. The revised filter applied by the Assessing Officer/DRP in set-aside proceedings was found meritless.

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Issues Involved:
1. Completion of assessment under section 143(3)/144C read with section 254 of the Income-tax Act.
2. Addition on account of difference in arm’s length price of international transactions.
3. Adoption of additional filters by DRP/TPO.
4. Rejection of certain companies as comparables.
5. Transfer Pricing adjustment in relation to ITES services.
6. Comparability adjustment for working capital differences.
7. Risk adjustment for low-risk-bearing captive service providers.
8. Applicability of Section 10A exemption.
9. Levy of interest under Section 234B.
10. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Completion of Assessment:
The assessment was completed under section 143(3)/144C read with section 254 of the Income-tax Act at an income of Rs. 1,15,57,890 as against the returned income of Rs. 3,417. The assessee had initially declared an income of Rs. 3,417, but the AO assessed the income at Rs. 3.26 Crores, which was later reduced to Rs. 2.66 Crores and finally to Rs. 1.15 Crores after multiple rounds of litigation.

2. Addition on Account of Difference in Arm’s Length Price:
The AO/TPO made an addition of Rs. 1,15,57,886 on account of the difference in the arm’s length price of international transactions for BPO/ITES services. The TPO used current year data and rejected several comparables selected by the assessee, leading to a proposed adjustment of Rs. 3.22 Crores, which was later reduced.

3. Adoption of Additional Filters by DRP/TPO:
The DRP/TPO adopted an additional filter of export sales less than 75% of total income, which was contested by the assessee. The DRP applied a new turnover filter in the third round of proceedings, excluding concerns with less than 75% export activity, which was not applied in the initial proceedings.

4. Rejection of Certain Companies as Comparables:
The DRP/TPO rejected several companies (Surevin Internet Services Ltd., E-Nxt Financial Ltd., Cosmic Global Ltd., AOK In-House BPO Services Ltd., Cameo Corporate Services Ltd.) based on the export filter. Eureka Outsourcing Solutions Pvt. Ltd. was rejected on the ground of being a persistent loss-making company, despite having a positive margin of 0.25%.

5. Transfer Pricing Adjustment in Relation to ITES Services:
The AO/TPO did not hold that no Transfer Pricing adjustment was warranted despite the AE incurring a loss in relation to ITES services rendered by the appellant. The adjustment could not exceed the total profit earned by the group.

6. Comparability Adjustment for Working Capital Differences:
The AO did not undertake comparability adjustment for differences in working capital employed by the appellant vis-a-vis comparable companies. The DRP rejected the assessee’s contentions of working capital adjustment in the second round.

7. Risk Adjustment for Low-Risk-Bearing Captive Service Providers:
The AO did not allow appropriate risk adjustment to establish comparability, holding that the assessee cannot be compared to a risk-free entity.

8. Applicability of Section 10A Exemption:
The assessee argued that since its income was exempt under section 10A of the Income-tax Act, there could be no motive to divert any part of its profit to the foreign enterprise. This argument was not upheld by the AO.

9. Levy of Interest under Section 234B:
The AO levied interest under Section 234B of the Act, which was contested by the assessee.

10. Initiation of Penalty Proceedings under Section 271(1)(c):
The AO initiated penalty proceedings under Section 271(1)(c) of the Act, which was also contested by the assessee.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal directed the TPO to verify the functionality of the five concerns rejected by the DRP based on the new filter and include them in the final list of comparables if they are found to be functionally comparable. The inclusion of Eureka Outsourcing Solutions Pvt. Ltd. was directed as it was not a persistent loss-making concern. The plea for working capital adjustment was rejected as it was not raised in the original order. The Tribunal found no merit in the revised filter applied by the AO/DRP in the set-aside proceedings.

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