Tribunal revises comparables list in transfer pricing case, excludes Infosys & TCS.

The Tribunal partially allowed the appeal, directing the exclusion of Infosys BPO Ltd. and TCS e-Serve Ltd. from the list of comparables in a transfer pricing adjustment case. The appellant's arguments were partially accepted, resulting in a revised list of comparables and a transfer pricing addition of Rs. 13,89,455/-. The order was pronounced on 8th September 2020.

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Issues Involved:
1. General ground challenging the assessment order.
2. Transfer Pricing Adjustment.
3. Rejection of the TP documentation of the Appellant.
4. Use of multiple year data.
5. Filters and qualitative criteria applied by the Appellant.

Issue-wise Detailed Analysis:

1. General Ground:
The appellant contested that the assessment order dated January 18, 2017, passed under section 143(3) read with section 144C(13) of the Act, was not in accordance with the law and contrary to the facts and circumstances of the case.

2. Transfer Pricing Adjustment:
The appellant argued that the Honorable DRP erred in making an adjustment of Rs. 1,389,455 with respect to ITES rendered to the AEs, upholding the approach of the AO and TPO in determining that the international transactions of ITES were not at arm's length as defined under section 92F(ii) of the Act.

3. Rejection of the TP Documentation:
The appellant contended that the DRP erred in upholding the AO and TPO's rejection of the TP documentation prepared by the appellant for ITES, under Section 92D of the Act read with Rule 10D of the Rules, stating that the data used in the computation of the ALP was "not reliable or correct" under section 92C(3)(c) of the Act.

4. Use of Multiple Year Data:
The appellant argued that the DRP erred by ignoring the provisions of Rule 10B(4) of the Rules, international commentaries, and judicial pronouncements advocating the usage of multiple year data of comparable companies for determining the ALP.

5. Filters and Qualitative Criteria Applied by the Appellant:
The appellant contested the DRP's upholding of the TPO's approach in conducting a fresh search for comparable companies and rejecting the search process carried out by the appellant under Section 92C of the Act. Specifically, the appellant challenged the following filters adopted by the TPO:
- Rejection of companies whose data was not available for FY 2011-12.
- Rejection of companies with employee costs less than 25% of sales.
- Rejection of companies with different fiscal year endings.
- Rejection of companies with export sales less than 75% of sales.

The appellant also argued that the TPO erred in determining the ALP by selecting companies not comparable to the appellant due to functional differences, size, and presence of intangible/brand value, among other factors. The appellant highlighted the rejection of certain companies by judicial precedence, including Accentia Technologies Limited, TCS E-Serve Limited, BNR Udyog Limited (Seg. - Medical Transcription), and Infosys BPO Limited.

Judgment Analysis:

Transfer Pricing Adjustment:
The Tribunal noted that the appellant earned a margin of 18% in the ITES segment and had adopted five comparables with an average margin of 16.29%. The TPO, however, rejected the TP documentation and conducted a separate benchmarking analysis, resulting in a set of ten comparables with an average margin of 28.11%, leading to an adjustment of Rs. 18,20,496/-. The DRP accepted some of the appellant's arguments and excluded three comparables, resulting in a revised list with a mean margin of 26.52% and a transfer pricing addition of Rs. 13,89,455/-.

Exclusion of Infosys BPO Ltd. and TCS e-Serve Ltd.:
The appellant argued for the exclusion of Infosys BPO Ltd. and TCS e-Serve Ltd. due to their high turnover and functional dissimilarity. The Tribunal referred to previous decisions, including Citrix R&D India Pvt. Ltd., XL Health Corporation India Pvt. Ltd., and the Hon'ble Delhi High Court in E Valueserve SEZ (Gurgaon), which supported the exclusion of these comparables due to their brand value, presence of intangibles, and functional incompatibility with a captive service provider.

Conclusion:
The Tribunal directed the exclusion of Infosys BPO Ltd. and TCS e-Serve Ltd. from the list of comparables, following the rationale provided in previous decisions. Consequently, the appellant's Ground 5.3 was partly allowed, and the appeal was partly allowed.

Order Pronounced:
The order was pronounced in the open court on 8th September 2020.

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