Transfer pricing comparables and seconded employee salary reimbursements were excluded from disallowance and recomputed.

Material differences in functional profile, scale, risk, brand value and business model meant TCS E-Serve Ltd. and eClerx Services Ltd. could not be treated as comparables for the assessee's captive ITES segment, so the arm's length price had to be recomputed after exclusion of those entities. Reimbursement of salary paid to seconded employees through an overseas group company was held to be salary in substance, because the personnel worked under the assessee's control and supervision and the foreign company merely acted as a conduit. As tax had been deducted under section 192, section 195 did not apply and disallowance under section 40(a)(i) was not warranted.

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Issues: (i) Whether TCS E-Serve Ltd. and eClerx Services Ltd. were functionally and economically comparable for determining arm's length price of the assessee's ITES segment; (ii) whether reimbursement of salary paid to seconded employees through the overseas group company was fees for technical services attracting tax deduction under section 195 and disallowance under section 40(a)(i).

Issue (i): Whether TCS E-Serve Ltd. and eClerx Services Ltd. were functionally and economically comparable for determining arm's length price of the assessee's ITES segment.

Analysis: The assessee was a captive IT enabled service provider with a much smaller turnover, limited risk profile and no brand advantage comparable to the selected companies. TCS E-Serve had vastly higher turnover, brand value, fixed assets and a different functional profile, including technical services beyond pure ITES. eClerx was engaged in KPO functions, whereas the assessee rendered low-end ITES/BPO services. The differences in turnover, business model, assets, risk and nature of services were material and could not be ignored for comparability.

Conclusion: TCS E-Serve Ltd. and eClerx Services Ltd. were directed to be excluded from the comparables set and the arm's length price was required to be recomputed accordingly, in favour of the assessee.

Issue (ii): Whether reimbursement of salary paid to seconded employees through the overseas group company was fees for technical services attracting tax deduction under section 195 and disallowance under section 40(a)(i).

Analysis: The employment contracts and salary reimbursement arrangement showed that the seconded personnel were recruited by the assessee, worked under its exclusive control and supervision, and their remuneration was in substance salary. The overseas group company acted only as a payment conduit. Since the amounts were chargeable under the head salaries, section 195 had no application. Tax had already been deducted under section 192 and deposited, so the statutory conditions for disallowance under section 40(a)(i) were not met. The facts were also held distinguishable from the cases relied upon by the Revenue.

Conclusion: The reimbursement was held to be salary cost and not fees for technical services, and the disallowance under section 40(a)(i) was deleted, in favour of the assessee.

Final Conclusion: The transfer pricing adjustment and the salary reimbursement disallowance were both set aside, resulting in complete relief to the assessee.

Ratio Decidendi: For transfer pricing comparability, entities with materially different functional profiles, risk, scale, brand and business model cannot be treated as comparables; and a reimbursement that is in substance salary, on which tax has been deducted under section 192, does not attract section 195 or disallowance under section 40(a)(i).

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