2014 (11) TMI 1017 - AT - Income Tax

Transfer pricing adjustment - selection of comparables - Held that - OECD guidelines para 2.62 relied upon by the TPO support action of the lower authorities in identifying the said comparables. The assessee fails to rebut this comparability of the aforesaid three remaining entities in ITES/BPO domain. The facts now zero-in to six comparables in fray. The assessee had initially itself selected 13 comparables and only three of them ( M/s Accentia Technologies M/s Coral Hub Ltd. and M/s Cosmic Global Ltd.) could clear the final hurdle. The TPO has also not done a better exercise by taking a BPO in the field of accounting and related services specifically but ventured in Healthcare customer Life Cycle Management and e-commerce business comparable(supra) etc. having extraordinary profit margins(supra.) Only the fourth entity M/s Cosmic Global appears to have been involved in desktop publishing. But this comparable is not engaged in BPO services. In other words the Revenue s three comparables are not in both desktop publishing and captive BPO fields but in either one of these two. Therefore both parties seem to have failed in finding sufficient number of most appropriate comparables. We also notice that the assessee s comparables have a mean PLI of almost 19%. The Revenue s three comparables(supra) show the same at 33.11%. It has come on record that profit margin in this field varies from 1.8% to almost 50% i.e from a miniscule percentile to extraordinary profits. The latter margins are in the Healthcare Receivables and/Medical transcription etc. We reiterate that neither of the assessee s vocations i.e desktop publishing and a captive BPO involves such a profit margin. All these facts make it clear that the present case does not involve interpretation of a serious question of law or fact. The dispute is only regarding selection of most appropriate comparables. In these peculiar circumstances and also in view of the fact that both parties have not been able to find sufficient number of most appropriate comparables we observe that interest of justice would be met in case the matter is not remanded back for a fresh innings. We reiterate that in transfer pricing proceedings finding a most suitable or appropriate comparable for bench marking of a related party transaction to ascertain ALP is a very cumbersome task. So we deem it proper in the interest of justice that ALP is determined somewhere in between the two profit margins adopted i.e 13.47%(assessee) and 24.3% (the Revenue) to that @18%. The Assessing Officer is directed to pass his consequential order. The assessee s grounds challenging comparability of the above three parties are rejected. However it gets part relief as the ALP stands reduced from 24.3% to 18%. - Decided against assessee.

Summary

Issues Involved:
Transfer pricing adjustment under Income-tax Act, 1961 for assessment year 2009-10.

Detailed Analysis:

1. Background and Assessment by AO:
The appeal pertains to an assessment for the year 2009-10 where the Asstt. Commissioner of Income-tax made a transfer pricing adjustment of `3,08,00,388 under section 143(3) r.w.s 92CA r.w.s 144(C) of the Income-tax Act, 1961. The assessee, a company providing corporate information and IT enabled services, had related party transactions with entities in the UK, USA, Hong Kong, and Japan totaling `30,17,69,910. The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) to ascertain the Arm's Length Price (ALP).

2. TPO's Analysis and Adjustments:
The TPO used the Transactional Net Margin Method (TNMM) to benchmark the profit margin of the assessee's related receipts. Initially, 13 comparables were selected, but after exclusions and additions, only six comparables remained. The TPO proposed to enhance the assessee's Profit Level Indicator (PLI) to 27.3%, resulting in a differential adjustment of `3.57 crores. The TPO's order was passed on 10.1.2013, and a draft assessment order was issued on 28.2.2013.

3. Objections and DRP's Directions:
The assessee raised objections before the Dispute Resolution Panel (DRP) challenging the comparability of certain entities. The DRP accepted some objections and revised the PLI to 24.3%, resulting in an addition to the income. The assessee appealed against this order.

4. Judicial Review and Decision:
The ITAT Chennai heard the parties and analyzed the case details. It noted the nature of the assessee's business, the selection of TNMM, and the disputed comparables in the IT enabled services/BPO domain. The ITAT observed that both the assessee and the Revenue failed to find sufficient appropriate comparables. Considering the profit margins in the industry and the difficulty in finding suitable comparables, the ITAT decided to set the ALP at 18%, between the assessee's 13.47% and the Revenue's 24.3%. The assessee's grounds challenging the comparability of certain entities were rejected, but it received partial relief with the ALP reduction.

5. Conclusion:
The ITAT partially allowed the assessee's appeal, directing the Assessing Officer to pass a consequential order based on the revised ALP of 18%. The decision was pronounced on 11th November 2014 in Chennai.

This detailed analysis covers the issues involved in the legal judgment regarding transfer pricing adjustments under the Income-tax Act, 1961 for the assessment year 2009-10, providing a comprehensive overview of the background, TPO's analysis, objections raised, DRP's directions, judicial review, and the final decision by the ITAT Chennai.