2022 (1) TMI 1083 - AT - Income Tax

Assessee Wins Appeal on Transfer Pricing Issues

Future First Info Services Pvt. Ltd. Versus ACIT Circle-9 (2) New Delhi

The appeal was partly allowed in favor of the assessee, particularly regarding the classification as a KPO entity, the inclusion/exclusion of comparables, ... TP Adjustment - classification of the assessee as a KPO by applying safe harbor Rules - AR submitted that the functional profile of the assessee has been accepted by the TPO and no case was ever made out by the TPO that the assessee is a KPO - HELD THAT:- It is pertinent to note that the Revenue at no point of time disputed the functions of the assessee company. The assessee company provides back office support services to AEs with the help of tools, infrastructure and training provided by the AEs which is different than the functions of the KPO. Besides this, the DRP has admitted that the Safe Harbour Rule will not be applicable in assessee company’s case. Thus, classification of the assessee as a KPO by applying safe harbor Rules is totally out of context and does not get any support from the evidences before us. Therefore, the directions of the DRP as well as the observations made by the TPO and thereafter comparing the assessee company with that of high end KPO for benchmarking ALP determination of the comparables is not correct. Hence, Ground No. 4 is allowed. Comparable selection - E- Clerx Services Ltd - Functions performed by E-Clerx Services Ltd. takes the nature of high end analytical and research services which require manpower of specific qualifications, skill sets and domain knowledge in contrast to the Assessee rendering back office support services. E-Clerx Services Ltd. works on outsourcing model and outsources substantial amount of work. In the subject year, 22.07% of the total cost of the company that has been paid to the outside vendors for availing of IT enabled services. As such it cannot be compared to the Assessee which provides in-house back office services to AEs. Infosys BPO Ltd - This comparable company is a giant engaged in providing high-end integrated services by assisting its clients in improving their competitive positioning by managing their business processes in addition to providing increased value, whereas the Assessee engaged in providing IT Enabled services. Infosys BPO has high value of goodwill. Infosys BPO owns significant intangibles. Infosys BPO acquired Portland Group Pty. Limited during the FY 2011-12. The acquisition has enhanced the presence of Infosys BPO in high end sourcing and procurement space in Asia Pacific Region. Thus, this comparable company has to be excluded from the set of final comparables. Caliber Point Business Solutions Ltd. - This comparable company cannot be rejected only on the ground of different financial year ending. Company is functionally comparable, this fact has not been disputed by the TPO or the DRP. Caliber Point Business Solutions Ltd. was held comparable to the assessee and included in the final set of comparables by the Tribunal in assessee’s own case in AY 2010-11. No distinguishing facts were pointed out by the Ld. DR related to functions for this year to that of A.Y. 2010-11. Hence, we direct the TPO/AO to include this comparable company in final set of comparable. Jindal Intellicom Ltd.- The assessee is not a high-end KPO. Jindal Intellicom Ltd. passes all the filters applied by the TPO and it is functionally comparable to the assessee. In fact, in preceding year 2011-12, the said comparable company was accepted by the TPO/DRP and the functions remain same. No distinguishing facts were brought on record by the Ld. DR. Hence, we direct the TPO/AO to include this comparable company in final set of comparable. Erroneous treatment of foreign exchange gain/loss as non-operating by applying Safe Harbour Rules - HELD THAT:- It is pertinent to note that foreign exchange fluctuation is inextricably linked with the assessee’s business operation. The foreign exchange gain was on account of difference in the exchange rate prevailing at the time of invoicing & payment for the inter-company billing as well as Difference in exchange rates prevailing at the time of transaction and as on 31.3.2012 for the amount outstanding at the end of the year. In fact, the DRP has admitted that the Safe Harbour Rules do not apply in assessee’s case. Thus this Ground is allowed. Issues Involved:1. Validity of the assessment order.2. Transfer pricing adjustment for IT enabled services.3. Selection and rejection of comparables for benchmarking.4. Classification of the assessee as a Knowledge Process Outsourcing (KPO) entity.5. Computation of operating margins.6. Treatment of foreign exchange gain/loss.7. Application of Safe Harbour Rules.8. Usage of multiple year data.9. Interest charged under section 234B.Detailed Analysis:1. Validity of the Assessment Order:The assessment order dated August 31, 2016, under section 143(3) of the Income Tax Act, 1961, was challenged by the assessee. The order assessed the total income at Rs. 34,84,50,690 against the returned income of Rs. 23,32,06,570.2. Transfer Pricing Adjustment:The AO/TPO/DRP made an upward transfer pricing adjustment of Rs. 11,52,44,123 for IT enabled services, alleging the same was not at arm's length as per Sections 92C(1) and 92C(2) of the Act. The assessee contested the adjustment, arguing that the economic analysis and search filters used were arbitrarily modified or rejected.3. Selection and Rejection of Comparables:The assessee challenged the inclusion of E-Clerx Services Ltd. and Infosys BPO Ltd. as comparables, arguing they were not functionally similar. The Tribunal agreed and directed the exclusion of these companies. Conversely, the exclusion of Caliber Point Business Solutions Ltd. and Jindal Intellicom Ltd. was contested, and the Tribunal directed their inclusion, noting they were functionally comparable.4. Classification as KPO:The assessee contested the classification as a KPO entity, arguing that it provided back office support services and not high-end KPO services. The Tribunal agreed, noting that the assessee’s functions were different from those of a KPO and that the Safe Harbour Rules were not applicable.5. Computation of Operating Margins:The assessee argued that the AO/DRP/TPO incorrectly computed operating margins by excluding forex fluctuation gains/loss from operating revenue/expenditure. The Tribunal found that forex fluctuations were inextricably linked to the assessee’s business operations and should be considered in computing operating margins.6. Treatment of Foreign Exchange Gain/Loss:The Tribunal agreed with the assessee that foreign exchange gain/loss was linked to business operations and should be considered in operating revenue/expenditure.7. Application of Safe Harbour Rules:The Tribunal noted that the Safe Harbour Rules were not applicable for the assessment year in question, supporting the assessee's contention.8. Usage of Multiple Year Data:The Tribunal did not specifically adjudicate on the usage of multiple year data, as the issue was considered general in nature.9. Interest Under Section 234B:The issue of interest charged under section 234B was deemed consequential and was not specifically adjudicated upon.Conclusion:The appeal was partly allowed, with significant findings in favor of the assessee regarding the classification as a KPO, the inclusion/exclusion of certain comparables, and the treatment of foreign exchange gains/losses. The Tribunal directed the AO/TPO to recompute the arm's length price adjustment accordingly.