ITAT excludes Infosys BPO from comparables, orders fresh transfer pricing analysis with working capital adjustments

The ITAT Chennai directed exclusion of Infosys BPO Ltd from comparable companies for transfer pricing analysis of ITeS services. The tribunal ordered fresh consideration of segmental margins for Microland Ltd and inclusion of Informed Technologies India Ltd as comparable after proper examination. Working capital adjustments were remanded to AO/TPO for fresh consideration, emphasizing that capital employed including working capital must be compared between assessee and comparable companies for determining arm's length price. The Section 80JJAA deduction claim was remitted to AO pending CIT(A)'s decision in earlier year.

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Issues Involved:

1. Exclusion of Infosys BPO Ltd. from the comparable list.
2. Consideration of segmental margins for Microland Ltd.
3. Inclusion of Informed Technologies India Ltd. in the comparable set.
4. Working capital adjustment.
5. Disallowance of claim under Section 80JJAA.

Detailed Analysis:

1. Exclusion of Infosys BPO Ltd. from the Comparable List:

The appellant argued for the exclusion of Infosys BPO Ltd. from the comparable list due to significant differences in turnover, brand value, nature of services, and asset base. The turnover of Infosys was INR 2323 Crores compared to the appellant's INR 64.81 Crores, with Infosys having a substantial brand value and a diverse service portfolio. The Tribunal found merit in the appellant's submission, referencing judicial precedents, and directed the exclusion of Infosys BPO Ltd. from the comparable list for computing the arm's length price (ALP) in the ITES segment.

2. Consideration of Segmental Margins for Microland Ltd.:

The appellant contended that Microland Ltd. was engaged in both ITES and infrastructure management services, making it functionally different. They argued that only the ITES segment should be considered comparable. The Tribunal agreed with this view, noting the segmentation in Microland's financial statements, and remanded the issue to the Assessing Officer (AO)/Transfer Pricing Officer (TPO) to consider only the ITES segment and rework the adjustments accordingly.

3. Inclusion of Informed Technologies India Ltd. in the Comparable Set:

The appellant argued for the inclusion of Informed Technologies India Ltd., asserting it was functionally comparable as it operated solely in the BPO segment. The TPO had erroneously excluded it based on a service income filter, considering non-operating income. The Tribunal found merit in the appellant's argument, referencing a decision from the Hyderabad Bench, and remanded the issue to the AO/TPO to reassess the comparability after providing the appellant an opportunity to be heard.

4. Working Capital Adjustment:

The appellant sought a working capital adjustment, citing differences in working capital days between themselves and comparable companies, which impacted profitability and operating margins. The Tribunal, referencing OECD principles and a prior decision, acknowledged the relevance of working capital in determining the arm's length price. The Tribunal remanded this issue to the AO/TPO for fresh consideration, emphasizing the need to compare working capital employed by the appellant and comparable companies.

5. Disallowance of Claim under Section 80JJAA:

The appellant claimed eligibility for deduction under Section 80JJAA, arguing that their activities qualified as "production," a term broader than "manufacture," as per Supreme Court rulings. The Tribunal noted that this issue was pending before the CIT(A) for a decision in an earlier year and remitted the issue back to the AO to decide in accordance with the CIT(A)'s decision.

Conclusion:

The Tribunal partly allowed the appellant's appeal for statistical purposes, directing the AO/TPO to reassess certain issues while dismissing unargued grounds. The order was pronounced on 25th October 2019 in Chennai.

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