ITAT excludes Cosmic Global from BPO comparables for failing 75% export sales filter, includes TCS e-Serve as functionally comparable

ITAT Delhi ruled on transfer pricing adjustments regarding comparable selection for BPO services. The tribunal excluded Cosmic Global as it failed the 75% export sales filter with 0% export revenue from BPO services, and rejected Eclerx Services for functional dissimilarity while including TCS e-Serve as functionally comparable. The tribunal directed foreign exchange gains be treated as operating income rather than non-operating, finding such gains directly related to ITES revenue from associated enterprises. ICRA Online was retained as comparable meeting the 87% export earnings threshold, while Motif India Infotech was included due to insufficient grounds for rejection by TPO.

---

---

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment revolve around the determination of the arm's length price (ALP) for the assessee's international transactions with its associated enterprises (AEs) under the Transfer Pricing (TP) regulations. The key issues include:

• Whether the inclusion or exclusion of certain comparable companies by the Transfer Pricing Officer (TPO) and the Commissioner of Income Tax (Appeals) [CIT(A)] was appropriate.
• Whether the foreign exchange gains should be considered as operating income for the purpose of computing the profit level indicator (PLI).
• Whether the working capital adjustments were correctly computed by the TPO.
• Whether the CIT(A) erred in rejecting or including certain comparables based on export filter criteria and availability of annual reports.

2. ISSUE-WISE DETAILED ANALYSIS

Inclusion/Exclusion of Comparable Companies:

• Cosmic Global Ltd: The assessee argued for the exclusion of Cosmic Global Ltd from the list of comparables due to its failure to meet the TPO's filters for revenue from BPO services and export sales. The Tribunal agreed with the assessee, citing precedents where Cosmic Global was excluded due to similar reasons.
• Eclerx Services Ltd: The Tribunal found that Eclerx, being a KPO service provider, was not functionally comparable to the assessee, which was a BPO service provider. The Tribunal directed the exclusion of Eclerx from the list of comparables.
• TCS e-Serve Ltd: The Tribunal agreed with the assessee's contention that TCS e-Serve was not comparable due to its brand value and lack of segmental data, directing its exclusion from the comparables.
• Omega Healthcare Management Services Pvt Ltd: The Tribunal found Omega to be functionally comparable and directed its inclusion in the list of comparables.

Foreign Exchange Gains as Operating Income:

• The Tribunal held that foreign exchange gains should be considered as operating income, as they are directly linked to the assessee's core business operations. The Tribunal noted that the Safe Harbour Rules, which treat forex gains as non-operating, were not applicable for the assessment year in question.

Working Capital Adjustments:

• The Tribunal directed the TPO to correct the working capital adjusted margins for Interglobe, as the CIT(A) had previously instructed but was not implemented by the TPO.

Revenue Appeal:

• The Revenue's appeal against the inclusion of Axis-IT & T Ltd., ICRA Online Ltd., and Motif India Infotech Pvt Ltd was dismissed. The Tribunal found that these companies met the necessary filters and were functionally comparable to the assessee.

3. SIGNIFICANT HOLDINGS

• The Tribunal established that foreign exchange gains directly related to the core business operations should be considered as operating income for transfer pricing purposes.
• The Tribunal reinforced the principle that comparables must meet functional similarity and applicable filters, such as export revenue thresholds, to be included in TP analysis.
• The Tribunal emphasized the need for accurate computation of working capital adjustments and directed corrections where necessary.
• The Tribunal's decision to exclude or include certain comparables was based on detailed functional analysis and adherence to established filters and precedents.

---