2022 (12) TMI 833 - AT - Income Tax

TP adjsutment - AE investment banking activities - comparable selection - comparable were selected by the TPO on basis of business activities KPO which is summarily rejected by the ld. CIT(A) - HELD THAT - Rejection of KJMC Global Market (India Limited and Kinetic Trust Limited - The persistence loss- making company are normally excluded as comparable. As per the submission of assessee both the companies are made profit in relevant years. DR did not strongly object on the plea of assessee. No objection was made by the ld DR in factual position. So these companies should not be excluded on the ground of loss-making company. It is to be directed to the ld. TPO that KJMC Global Market (India) Limited and Kinetic Trust Limited be included in the set of comparable. Accordingly the Ground no-1 of the assessee is allowed. Erroneous acceptance of Khandwala Securities Ltd and Keynote Corporate Services Ltd. - As submitted that the principle that companies making abnormally high profit margin are required to be excluded - DR did not make any strong objection in this issue. No contrary judgment was produced by ld DR during hearing. We are directing that M/s Khandwala Securities Ltd M/s Keynote Corporate Services Ltd be excluded from the set of comparable. Accordingly the Ground no-2 of the assessee is allowed.

Issues Involved:

1. Rejection of the list of comparable companies selected by the Transfer Pricing Officer (TPO).
2. Classification of the assessee's business activities as Knowledge Process Outsourcing (KPO) services.
3. Inclusion and exclusion of specific companies from the list of comparables.
4. Determination of the Arm's Length Price (ALP) for the assessee's international transactions.
5. Acceptance of companies with persistent losses as comparables.
6. Exclusion of companies with fluctuating or high-profit margins.

Issue-wise Detailed Analysis:

1. Rejection of the List of Comparable Companies Selected by the TPO:
The Revenue contested the CIT(A)'s decision to reject the list of comparable companies selected by the TPO, arguing that the assessee's activities were akin to KPO services. The CIT(A) accepted the assessee's argument that their functions were more aligned with investment banking and advisory services rather than KPO services. Consequently, the CIT(A) rejected the TPO's comparables, which were primarily engaged in engineering design services or data analytics, and instead accepted the comparables selected by the assessee.

2. Classification of the Assessee's Business Activities as KPO Services:
The TPO classified the assessee's business activities as KPO services, which was contested by the assessee. The CIT(A) sided with the assessee, acknowledging that their activities were more aligned with investment banking and advisory services. The CIT(A) concluded that the assessee's functions were similar to companies providing services in the field of finance, thus rejecting the TPO's classification.

3. Inclusion and Exclusion of Specific Companies from the List of Comparables:
The CIT(A) accepted the exclusion of several companies from the assessee's list of comparables, including Aryaman Financial Services Ltd., Centrum Capital Market Ltd., CRISIL Ltd., Capital Trust Ltd., Besant Raj International Ltd., and NTPC Electric Supply Company Ltd. However, the CIT(A) rejected the exclusion of Khandwala Securities Ltd. and Keynote Corporate Services Ltd. The ITAT directed the TPO to include KJMC Global Market (India) Limited and Kinetic Trust Limited in the set of comparables, as they were not persistent loss-making companies.

4. Determination of the Arm's Length Price (ALP) for the Assessee's International Transactions:
The assessee argued that the TPO's determination of the ALP was incorrect due to the inappropriate selection of comparables. The CIT(A) and ITAT agreed with the assessee, stating that the TPO's comparables were not suitable and that the assessee's selected comparables were more appropriate. The ITAT upheld the CIT(A)'s decision to reject the TPO's comparables and accepted the assessee's list.

5. Acceptance of Companies with Persistent Losses as Comparables:
The CIT(A) had rejected the inclusion of KJMC Global Market (India) Limited and Kinetic Trust Limited on the grounds of being persistent loss-makers. The assessee argued that these companies were not persistent loss-makers as they had earned profits in relevant years. The ITAT agreed with the assessee and directed the TPO to include these companies in the set of comparables.

6. Exclusion of Companies with Fluctuating or High-Profit Margins:
The assessee argued for the exclusion of Khandwala Securities Ltd. and Keynote Corporate Services Ltd. due to their fluctuating and high-profit margins. The ITAT agreed with the assessee, citing precedents that companies with abnormally high-profit margins should be excluded from the list of comparables. The ITAT directed the exclusion of these companies from the set of comparables.

Conclusion:
The ITAT dismissed the Revenue's appeal and allowed the assessee's appeal, directing the inclusion of KJMC Global Market (India) Limited and Kinetic Trust Limited in the set of comparables and the exclusion of Khandwala Securities Ltd. and Keynote Corporate Services Ltd. The ITAT upheld the CIT(A)'s decision to reject the TPO's classification of the assessee's activities as KPO services and accepted the assessee's list of comparables. The order was pronounced in the open court on 05.08.2022.

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