2014 (12) TMI 1276 - AT - Income Tax

Transfer Pricing Adjustment - Selection of comparable - Held that - As the assessee is engaged in legal process outsourcing which is a high end service akin to KPO thus companies with dissimilar as that of assessee need to be de-selected as good comparable.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Nature of Services Provided by the Assessee
3. Selection of Comparables

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee is aggrieved by the Transfer Pricing Adjustment of Rs. 6,70,40,907 made on account of the arm's length price. The assessment order was made u/s 143(3) r.w. Sec. 144C(13) of the Act pertaining to A.Y. 2008-09. The assessee, a wholly owned subsidiary of Mindcrest Inc., provided offshore support services to its parent company. The assessee entered into a service agreement with its parent company on 1.4.2006, agreeing to a 12.50% markup on operating costs. During the year under consideration, the assessee supported its Associated Enterprises (parent company) by uploading generic judgments on a given website.

2. Nature of Services Provided by the Assessee:
The main dispute is whether the services provided by the assessee are high-end services or low-end services. The assessee contended that it provided low-end services, as indicated by the consideration of 12 US Dollars per hour agreed upon in the agreement between Mindcrest Inc. and Bloomberg LP. The assessee argued that the comparables selected by it were in line with the nature of the services provided. The Revenue authorities, however, considered the services to be high-end, akin to Knowledge Process Outsourcing (KPO), and rejected the comparables selected by the assessee.

3. Selection of Comparables:
The Transfer Pricing Officer (TPO) applied specific filters to search for comparables, excluding companies that did not meet criteria such as data availability for FY 2007-08, IT enabled service revenue thresholds, related party transactions, export sales, and functional similarity. The TPO rejected all but one of the comparables considered by the assessee, arguing that the assessee's comparables did not stand scrutiny of FAR analysis and were not engaged in knowledge process outsourcing. The TPO proposed a new set of comparables, which the assessee objected to before the Dispute Resolution Panel (DRP). The DRP directed the exclusion of Coral Hubs Ltd. from the list of comparables used by the TPO.

Detailed Analysis of Comparables:

1. Acropetal Technologies (Seg.):
The company was engaged in engineering design services and did not pass the 75% export turnover filter. The Tribunal had previously rejected this company as a comparable due to its different business model and high onsite expenses.

2. Crossdomain Solutions Ltd.:
This company was involved in niche services and re-engineered payroll services. It had software as intangible assets and was rejected by the Tribunal in previous cases due to its different business profile.

3. Eclerx Services Ltd.:
This company provided high-end services involving specialized knowledge and domain expertise. It was considered functionally different and had abnormal features such as the acquisition of a UK-based company.

4. Mold Tex Technologies Ltd.:
The company had related party transactions exceeding 25% and was involved in a Scheme of Arrangement, making it an abnormal feature. It was rejected by the Tribunal in previous cases.

5. Datamatics Financial Services Ltd.:
The company failed the 75% export turnover filter and was directed to be excluded from the final list of comparables.

Conclusion:
The Tribunal directed the TPO to determine the arm's length price by adopting the comparables used in subsequent assessment years, including M/s. Allsec Technology Ltd., for the determination of the arm's length price of the international transaction entered into by the assessee. The appeal filed by the assessee was treated as allowed for statistical purposes.