2020 (11) TMI 742 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Functional profile of the assessee as described in the transfer pricing documentation in respect of the ITES segment shows that the assessee being a subsidiary of Steria UK Corporate Limited a software service company in the United Kingdom ( UK ) provides IT enabled services (ITES) to the clients of its associated enterprises; that the marketing function including client acquisition is performed by the associated enterprise and the assessee performs ITES activity in relation to work outsourced /sub-contracted by the associated enterprise to the assessee; that it provides back office process outsourcing and inbound and outbound voice-based services; and that the delivery centers of the assessee are located in Noida Chennai and Pune from where Steria India delivers work on behalf of Seteria UK for Clients. companies functionally dissimilar with that of assessee need to be deselected. Volume of Related Party Transactions Extra-ordinary year of operation and Functional profile of the assessee as spoken need to be taken care while selecting comparable.

Summary

Issues Involved:
1. Consideration of Forex Fluctuation as operating income/expense.
2. Exclusion of certain companies from the list of comparables.
3. Inclusion of specific companies in the list of comparables.
4. Functional dissimilarity and financial results of comparables.
5. High related party transactions.
6. Extraordinary year of operation.
7. Ownership of intangibles/brand.
8. Segmental data availability.

Detailed Analysis:

1. Consideration of Forex Fluctuation as Operating Income/Expense:
The Tribunal addressed whether Forex fluctuations should be treated as operating income/expense. The assessee considered Forex as operating in nature, which was initially rejected by the TPO but accepted by the DRP. The Tribunal referred to its own decision in the assessee’s case for AY 2015-16, where it was held that Forex fluctuations related to trading items should be treated as operating if they emanate from international transactions. The issue was restored to the AO/TPO for verification.

2. Exclusion of Certain Companies from the List of Comparables:
The Tribunal dealt with the exclusion of several companies based on functional dissimilarity, brand value, and other factors:
- Infosys BPO Ltd.: Excluded due to its giant size, brand value, and different functional profile. The Tribunal upheld the DRP's decision, citing previous judgments and the assessee’s own case for AY 2015-16.
- TCS E-Serve International Ltd.: Excluded due to high brand value and different functional profile. The Tribunal referred to various High Court decisions supporting exclusion based on brand value.
- TCS E-Serve Ltd.: Excluded for similar reasons as TCS E-Serve International Ltd. The Tribunal emphasized the impact of brand value on profitability.
- Accentia Technologies Ltd.: Excluded due to merger during the year, functional differences, and significant intangibles. The Tribunal upheld the DRP's decision, referencing previous cases.
- ICRA Techno Analytics Ltd.: Excluded due to functional dissimilarity and lack of segmental data. The Tribunal cited multiple decisions where this company was excluded for similar reasons.
- Eclerx Services Ltd.: Excluded due to its engagement in KPO services, which are functionally different from the assessee’s ITES services. The Tribunal referred to several High Court decisions supporting this exclusion.

3. Inclusion of Specific Companies in the List of Comparables:
The Tribunal addressed the inclusion of Thinksoft Global Services Ltd.:
- Thinksoft Global Services Ltd.: Included as it was found functionally comparable to the assessee’s software services. The Tribunal upheld the DRP's direction, referencing similar cases where this company was considered comparable.

4. Functional Dissimilarity and Financial Results of Comparables:
The Tribunal evaluated the functional profiles and financial results of various companies:
- Infinite Data Systems Pvt. Ltd.: Excluded due to functional dissimilarity, high related party transactions, and extraordinary growth. The Tribunal upheld the DRP's decision, citing multiple cases where this company was excluded for similar reasons.
- E-Infochips Ltd.: Excluded due to lack of segmental data. The Tribunal confirmed the DRP's decision, referencing previous cases with similar findings.
- E Zest Solutions: Excluded due to its engagement in diversified software activities and high-end technical services, making it functionally different from the assessee. The Tribunal upheld the DRP's decision.
- Acropetal Technologies Ltd.: Excluded due to functional dissimilarity, significant R&D activities, and outsourcing a major part of its business. The Tribunal upheld the DRP's decision.

5. High Related Party Transactions:
The Tribunal considered the impact of high related party transactions on comparability:
- Infinite Data Systems Pvt. Ltd.: Excluded due to high related party transactions, as it provided services to an associated enterprise. The Tribunal upheld the DRP's decision, referencing previous cases.

6. Extraordinary Year of Operation:
The Tribunal evaluated the impact of extraordinary years of operation on comparability:
- Infinite Data Systems Pvt. Ltd.: Excluded due to an extraordinary year of operation with abnormal growth. The Tribunal upheld the DRP's decision, citing previous cases.

7. Ownership of Intangibles/Brand:
The Tribunal considered the impact of ownership of intangibles and brand value on comparability:
- Infosys Technologies Ltd. and Wipro Technologies Services Ltd.: Excluded due to ownership of significant intangibles and brand value, which provided a competitive advantage. The Tribunal upheld the DRP's decision, referencing previous cases.

8. Segmental Data Availability:
The Tribunal addressed the importance of segmental data for comparability:
- E-Infochips Ltd.: Excluded due to lack of segmental data. The Tribunal confirmed the DRP's decision, referencing previous cases with similar findings.

Conclusion:
The Tribunal upheld the DRP's decisions on excluding certain companies from the list of comparables based on functional dissimilarity, high related party transactions, extraordinary years of operation, ownership of intangibles, and lack of segmental data. The Tribunal also upheld the inclusion of Thinksoft Global Services Ltd. as a comparable. The appeals were allowed in part for statistical purposes.