Tribunal directs inclusion/exclusion of comparables for arm's length price computation.

The Tribunal directed the assessing officer to include R Systems International Ltd, Allsec Technologies, and CG Vak Software & Exports Ltd as comparables and exclude eClerx Services Ltd, Coral Hubs Limited, and Crossdomain Solutions Limited from the list of comparables. The assessing officer was instructed to compute the arm's length price of the international transactions accordingly. The appeal was allowed with other grounds being dismissed as purely academic.

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Issues Involved:
1. Addition made on account of transfer pricing adjustment.
2. Selection/rejection of certain comparables for benchmarking international transactions.

Detailed Analysis:

1. Addition made on account of transfer pricing adjustment:

The appeal arises from the order dated 29-08-2014 by the Commissioner of Income Tax (Appeals)-11, Mumbai, for the assessment year 2008-09. The primary issue raised by the assessee pertains to the addition made due to transfer pricing adjustment. The assessee, a resident company and part of the Morgan Stanley group, provides back office support services (ITES) to its group entities. For the year under consideration, the assessee had international transactions with its associated enterprises (AEs) and benchmarked these transactions using the transactional net margin method (TNMM). The assessee selected 13 companies for comparability analysis, later reduced to 7, with an arithmetic mean of 16.91%. The Transfer Pricing Officer (TPO) did not accept this benchmarking and re-characterized the services as knowledge process outsourcing (KPO) services. The TPO then selected a different set of comparables, resulting in an average margin of 49.88%, leading to an adjustment of Rs. 10,30,34,720/- to the arm's length price (ALP).

2. Selection/rejection of certain comparables for benchmarking international transactions:

The main contention during the appeal was the selection and rejection of certain comparables. The assessee argued that the companies retained by the TPO were KPO companies, whereas the assessee was characterized as an ITES/BPO service provider. The first appellate authority had accepted the assessee's contention that it was not providing KPO services. However, the TPO and the Commissioner (Appeals) had retained certain KPO companies as comparables.

The Tribunal examined whether the companies selected by the TPO were comparable to the assessee. It was noted that the department did not challenge the decision of the first appellate authority that the assessee was not a KPO service provider. Therefore, the Tribunal had to determine the acceptability of the comparables disputed.

Comparables selected by the TPO:

- eClerx Services Ltd and Crossdomain Solutions Limited: The Tribunal noted that these companies are KPO service providers, as held in various judicial precedents, including the Delhi High Court's decision in Rampgreen Solutions Pvt Ltd vs Commissioner of Income Tax 377 ITR 533 (Del). The Tribunal found that the Commissioner (Appeals) erred in including these companies as comparables.
- Coral Hubs Limited (earlier Vishal Information Technologies Limited): The Tribunal observed that this company had an abnormally low employee cost, indicating that most of its work was outsourced, unlike the assessee, which provided services without outsourcing. Therefore, the business model of Coral Hubs Limited was fundamentally different from that of the assessee.

Comparables selected by the assessee:

- Allsec Technologies and CG Vak Software & Exports Ltd: The primary objection was that these companies were consistent loss-making entities. However, the Tribunal found that these companies had shown profits in the preceding two assessment years and only reported losses in the current year. Therefore, they could not be considered consistent loss-making companies.
- R Systems International Ltd: The only reason for exclusion was a different financial year ending. The Tribunal noted that the departmental authorities did not examine whether contemporaneous data corresponding to the financial year of the assessee was available.

Conclusion:

The Tribunal directed the assessing officer to include R Systems International Ltd, Allsec Technologies, and CG Vak Software & Exports Ltd as comparables and exclude eClerx Services Ltd, Coral Hubs Limited, and Crossdomain Solutions Limited from the list of comparables. The assessing officer was instructed to compute the ALP of the international transactions accordingly. The appeal was allowed as indicated, with other grounds being dismissed as purely academic.

Order pronounced on 12/08/2021.

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