2021 (6) TMI 1115 - AT - Income Tax

TP addition - addition u/s 92CA(3) in respect of Information Technology Enabled Services ( ITes ) provided by the Assessee to its Associated Enterprise ( AE ) - comparable selection - HELD THAT - Manipal Digital Systems Private Limited - As per Indian Council for Advertising the online advertising has to be published on true and honest disclosure basis and therefore when proper documentation of activities are not physically available in such scenario referring the website for information is correct option and the information therein cannot be doubted. These are all multi-national companies and certain amount of honesty has to be attributed to them since all are functioning as per relevant rules and laws. With these observations and respectfully following the judgment of RAMPGREEN SOLUTIONS PVT LTD VERSUS COMMISSIONER OF INCOME TAX 2015 (8) TMI 931 - DELHI HIGH COURT we direct the AO/TPO to exclude this company i.e. Manipal Digital Systems Private Limited from the final set of comparables with that of the assessee company. CES limited - Segregation of ITes services has to be categorically conducted before classifying as functionally comparable with another. In this case Revenue Authorities have only looked into the revenue earning from ITes segment and included this company as comparable. The facts remains both these companies are functionally different. We therefore direct the AO/TPO to exclude CES Limited from the final set of comparables with that of the assessee company. MPS Limited - Having gone through the annual report of the company findings of the Sub-ordinate Authorities and the submissions of the assessee placed on record along with judicial pronouncements it is evident that MPS Limited is functionally different from that of the assessee company in more-so that high end activities of MPS Ltd. is akin to IT services and not ITes - we direct the AO/TPO to exclude MPS Limited from final list of comparable companies. Domex E-Data Pvt. Ltd. - If two companies performing ITes are to be considered as comparable then the specific business of the said two companies has to be analyzed and then decide upon whether they are at all comparable or not. In this case we do not find such exercise was conducted neither by TPO nor by the Ld. DRP. Therefore we are of the considered view that in the given set of facts this company is functionally not comparable with that of the assessee company. We therefore direct the AO/TPO to exclude this company i.e. Domex E-Data Pvt. Ltd. from the final set of comparables. e4e Healthcare Business Services Pvt. Ltd - As decided in M/S MERCER CONSULTING (INDIA) PVT. LTD. GURGAON 2016 (8) TMI 1163 - PUNJAB AND HARYANA HIGH COURT miniscule difference cannot result in the rejection of the case if it is otherwise comparable. However it had not laid down any specific percentage as to the deviation permissible. We find the Ld. DRP stated the permissible deviation is at 0.5% but this is not appearing anywhere in the said judgment. That further the Sub-ordinate Authorities have rejected this company as it failed on the RPT filter which according to the assessee was not correct. Now before us the Ld. Counsel for the assessee has prayed that the issue may be restored to the file of AO/TPO for factual verification of functional Compatibility to which the Ld. DR also has not objected. Therefore in the interest of justice we set aside the order of the Ld. DRP on this issue i.e. e4e Healthcare Business Services Pvt. Ltd. and remand this matter back to the file of AO/TPO for verification of functional compatibility of this company with that of the assessee while complying with the principles of natural justice.

Summary

Issues Involved:
1. Addition under section 92CA(3) for IT Enabled Services (ITes)
2. Disregarding benchmarking analysis and comparable companies by the assessee
3. Validity of directions issued by DRP under section 144C
4. Rejection and selection of comparable companies by DRP

Issue-wise Detailed Analysis:

1. Addition under section 92CA(3) for IT Enabled Services (ITes):
The assessee contested the addition of INR 42,152,857 made under section 92CA(3) concerning ITes provided to its Associated Enterprise (AE). The Tribunal observed that the DRP's directions for two comparable companies, Insync Analytics (India) Private Limited and Manipal Digital Systems Private Limited, violated Section 144C(8) of the Act, which prohibits setting aside any proposed variation or issuing directions for further inquiry to the AO/TPO. However, the Tribunal upheld the other directions of the DRP and dismissed the assessee's prayer to quash the entire final assessment order.

2. Disregarding benchmarking analysis and comparable companies by the assessee:
The assessee argued that the DRP disregarded its benchmarking analysis and the comparable companies selected based on contemporaneous data in the transfer pricing study report. The Tribunal analyzed the functional profiles of the companies involved and found that the DRP and TPO had not adequately justified the inclusion of certain companies as comparables. The Tribunal directed the exclusion of Manipal Digital Systems Private Limited, CES Limited, MPS Limited, and Domex E-Data Pvt. Ltd. from the final set of comparables due to functional dissimilarities with the assessee.

3. Validity of directions issued by DRP under section 144C:
The assessee challenged the validity of the DRP's directions, claiming they were issued in violation of Section 144C of the Act. The Tribunal noted that the DRP's directions concerning Insync Analytics (India) Private Limited and Manipal Digital Systems Private Limited were indeed in violation of Section 144C(8). However, the Tribunal concluded that this violation did not invalidate the other findings of the DRP, and thus, the entire final assessment order could not be quashed.

4. Rejection and selection of comparable companies by DRP:
The Tribunal scrutinized the selection and rejection of comparable companies by the DRP:
- Manipal Digital Systems Private Limited: The Tribunal found that this company was functionally different from the assessee, as it was involved in pre-press activities and diverse services not comparable to the assessee's ITes. The Tribunal directed its exclusion.
- CES Limited: The Tribunal noted that CES Limited was engaged in both BPO and KPO activities, whereas the assessee was primarily a call center. Following the Delhi High Court's decision in Rampgreen Solutions Pvt. Ltd. vs. CIT, the Tribunal directed the exclusion of CES Limited.
- MPS Limited: The Tribunal observed that MPS Limited was engaged in high-end activities akin to IT services rather than ITes. Citing previous Tribunal decisions, the Tribunal directed the exclusion of MPS Limited.
- Domex E-Data Pvt. Ltd.: The Tribunal found that Domex E-Data Pvt. Ltd. was primarily a KPO company, functionally different from the assessee. The Tribunal directed its exclusion.
- e4e Healthcare Business Services Pvt. Ltd.: The Tribunal remanded the issue back to the AO/TPO for verification of functional compatibility, as the assessee contested the RPT filter applied by the TPO.
- Informed Technologies India Limited: The assessee did not press for the inclusion of this company, and thus, the Tribunal dismissed this part of the ground.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the exclusion of certain companies from the final set of comparables and remanding the issue of e4e Healthcare Business Services Pvt. Ltd. back to the AO/TPO for further verification. The order was pronounced on 18th June 2021.