ITAT excludes Domex, MPS, Vitae, Access Healthcare as transfer pricing comparables for ITES services

ITAT Mumbai ruled on transfer pricing comparable selection for ITES services. The tribunal excluded Domex due to diversified activities including software development and KPO services, MPS Ltd due to merger impact on margins, and Vitae for providing diversified services incomparable to ITES. Access Healthcare was rejected as KPO services require higher skills than ITES/BPO. However, R-Systems International was included despite different financial year, following Delhi HC precedent allowing extrapolation. Sundaram Business Services was reinstated as comparable, having been accepted in preceding and subsequent years.

---

---

Issues Involved:

1. Exclusion of certain comparables from the Transfer Pricing study.
2. Inclusion of certain comparables in the Transfer Pricing study.
3. Levy of interest under sections 234B and 234D of the Income Tax Act.
4. Initiation of penalty proceedings under section 270A of the Income Tax Act.

Summary:

1. Exclusion of Comparables:

Domex E-data Pvt. Ltd. (Domex): The assessee argued that Domex is functionally different as it provides knowledge processing services and engages in diversified activities including software development without segmental data. The Tribunal agreed, citing previous cases (Katerra Technology Services LLP vs. ACIT and Altair Engineering India (P) Ltd. vs. ACIT), and directed Domex to be excluded from the list of comparables.

MPS Ltd. (MPS): The assessee contended that MPS is functionally dissimilar due to its engagement in content creation and extraordinary events like acquisitions impacting margins. The Tribunal found merit in these arguments and directed the exclusion of MPS from the list of comparables.

Vitae International Accounting Services Pvt. Ltd. (Vitae): The Tribunal noted that Vitae is engaged in diversified services such as accounting, auditing, and staffing, making it functionally different from the assessee. The Tribunal directed the exclusion of Vitae from the list of comparables.

Access Healthcare Services Pvt. Ltd. (Access Healthcare): The Tribunal held that Access Healthcare provides KPO services requiring higher skill levels, making it non-comparable to the assessee's ITES-BPO services. The Tribunal directed the exclusion of Access Healthcare from the list of comparables.

2. Inclusion of Comparables:

R. Systems International: The TPO rejected this comparable due to a different financial year. However, the Tribunal noted that audited quarterly financial results are available and that the TPO had accepted R. Systems in other assessment years. Citing the Delhi High Court's decision in CIT vs. Mc Kinsey Knowledge Centre India Pvt. Ltd., the Tribunal directed the inclusion of R. Systems in the list of comparables.

Sundaram Business Services: The TPO rejected this comparable on functional disparity grounds. The Tribunal observed that the TPO had accepted Sundaram in previous and subsequent assessment years without any change in business activities. Thus, the Tribunal directed the inclusion of Sundaram in the list of comparables.

3. Levy of Interest:

The assessee's challenge to the levy of interest under sections 234B and 234D was dismissed as charging of interest under these sections is mandatory and consequential.

4. Penalty Proceedings:

The assessee's challenge to the initiation of penalty proceedings under section 270A was dismissed as premature.

Conclusion:

The appeal of the assessee was partly allowed, with specific directions for the inclusion and exclusion of certain comparables in the Transfer Pricing study. The challenges regarding the levy of interest and initiation of penalty proceedings were dismissed.

---