2023 (2) TMI 1104 - AT - Income Tax

Tribunal's Decision on Transfer Pricing Appeal: Excludes Tricom India, Upholds Concentrix

The Tribunal partially allowed the assessee's appeal regarding the determination of the Arm's Length Price (ALP) for back-office support services. ... TP Adjustment - determination of ALP of the back-office support services rendered by the assessee for which the assessee received payments from its AE - Comparable selection - HELD THAT:- Concentrix Daksh Services India Pvt. Ltd. in the search matrix of BPO back-office services and therefore is no evidence brought on record to show that the predominant activity of the assessee is not that of backoffice support services. In this regard, we also notice that in the search matrix / filter applied by the assessee, the assessee itself has adopted a filter of choosing companies with income from a major line of activities ≥ 50% of the total revenue selected for performing similar functions such as the assessee. It has also applied a filter of comparing companies performing broadly comparable companies of rendering services with similar cost structure. TPO on his part has also adopted a filter whereby he has chosen companies having service income of 75% or more in each of the segments. We also notice that it has not been demonstrated as to how owning intangibles will render this company out of the ambit of comparability. In the given circumstances of the case, we are of the view that Concentrix was rightly included as a comparable company by the TPO. Tricom India Ltd. (“Tricom”) - In the case of 24/7 Customer.com (P) Ltd. [2013 (1) TMI 45 - ITAT BANGALORE] for AY 2004-05, the assessee was engaged in back-office support BPO services and Tricom was chosen as a comparable company by the TPO. The Tribunal held in paragraph 15.3.3 of its order that Tricom had a unique software developed in house which renders specialized services in it’ area of specialization given the company a competitive edge. Since this company had unique intangible, it was regarded as not comparable with a normal back-office service provider. Following the view taken in the aforesaid decision by a co-ordinate Bench, we are of the view that Tricom ought to be excluded from the final list of comparables. We hold and direct accordingly. TPO is directed to compute ALP of the international transaction as per the directions contained in this order after affording the assessee opportunity of being heard. Issues Involved:1. Determination of Arm's Length Price (ALP) for back-office support services.2. Inclusion of Concentrix Daksh Services India Private Ltd. as a comparable company.3. Inclusion of Tricom India Ltd. as a comparable company.Issue-wise Detailed Analysis:1. Determination of Arm's Length Price (ALP) for back-office support services:The primary issue in this appeal is the determination of the ALP of the back-office support services rendered by the assessee to its associated enterprises (AEs). Both the assessee and the Transfer Pricing Officer (TPO) chose the Transaction Net Margin Method (TNMM) as the most appropriate method for determining the ALP. The Profit Level Indicator (PLI) chosen was operating profit/operating cost (OP/OC). The TPO selected five comparable companies and computed the ALP, resulting in an addition of Rs. 3,46,64,723/- to the assessee's income. The Dispute Resolution Panel (DRP) upheld this adjustment, and the final assessment order was passed accordingly. The assessee contested this adjustment before the Tribunal.2. Inclusion of Concentrix Daksh Services India Private Ltd. as a comparable company:The assessee argued for the exclusion of Concentrix Daksh Services India Private Ltd. ('Concentrix') on the grounds that it is functionally dissimilar, engaged in a wide range of services including BPOs, KPOs, ITeS, and transcription, and undertakes research and development (R&D) activities. The assessee also pointed out that Concentrix owns significant intangibles and had an extraordinary event of a share purchase agreement with IBM during the relevant year. The TPO and DRP, however, included Concentrix as a comparable, stating that the assessee did not demonstrate how these factors impacted the profit margins. The Tribunal upheld the inclusion of Concentrix, noting that the financial impact of the features pointed out by the assessee did not reflect in the ultimate financial results and that Concentrix was rightly included as a comparable company by the TPO.3. Inclusion of Tricom India Ltd. as a comparable company:The assessee contended that Tricom India Ltd. ('Tricom') is functionally dissimilar as it is significantly engaged in R&D activities, develops unique software in-house, and had an abnormal growth in revenue and profits due to peculiar economic circumstances. The assessee also highlighted that Tricom had substantial related party transactions. The Tribunal agreed with the assessee, citing previous decisions where Tricom was excluded as a comparable for similar reasons. The Tribunal directed the exclusion of Tricom from the final list of comparables.Conclusion:The Tribunal's decision resulted in the partial allowance of the assessee's appeal. The Tribunal upheld the inclusion of Concentrix Daksh Services India Private Ltd. as a comparable company but directed the exclusion of Tricom India Ltd. The TPO was instructed to recompute the ALP of the international transaction in line with the Tribunal's directions after affording the assessee an opportunity of being heard.