2025 (5) TMI 388 - AT - Income Tax

TP Adjustment - Comparable selection - Infosys BPO Ltd. - HELD THAT - We find that in assessee s own case for the AY 2012-13 the Tribunal 2018 (6) TMI 1639 - ITAT DELHI excluded Infosys BPO Ltd. from final set of comparables for this assessment year also. Working capital adjustment - AO/TPO is directed to look into the workings furnished by the assessee and appropriate relief may be granted in accordance with law after providing adequate opportunity of being heard to the assessee.

Summary

The core legal questions considered by the Tribunal in this appeal are twofold: (i) whether Infosys BPO Limited should be included or excluded from the final set of comparable companies for transfer pricing analysis, and (ii) whether a working capital adjustment should be granted to the assessee.

Regarding the inclusion or exclusion of Infosys BPO Limited as a comparable company, the Tribunal examined the functional comparability and business model similarity between Infosys BPO Limited and the assessee. The assessee contended that Infosys BPO Limited is functionally dissimilar due to its engagement in a wide array of high-end integrated services, including business platforms, customer service outsourcing, finance and accounting, human resources outsourcing, legal process outsourcing, sales and fulfillment sourcing, and procurement outsourcing. This contrasted with the assessee's provision of routine back-office support services, primarily data collection and analysis, characterized as low-end IT-enabled services and captive in nature. The assessee supported this argument by referencing the annual report of Infosys BPO Limited, highlighting the lack of clarity in revenue segmentation and the presence of technical service costs linked to consultancy charges, which indicated a fundamentally different business model involving outsourcing activities. Additionally, the assessee pointed to its own financial statements demonstrating the absence of outsourcing, reinforcing the functional disparity.

The Tribunal's analysis relied heavily on precedent, notably the decision of a coordinate bench for the assessment year 2012-13, where Infosys BPO Limited was excluded from the set of comparables. In that earlier decision, the Tribunal observed that Infosys BPO Limited's engagement in niche sectors such as insurance, banking, financial services, manufacturing, and telecom, coupled with its significant brand value as a subsidiary of Infosys, rendered it functionally dissimilar. The presence of brand-related expenses and substantial marketing expenditure to maintain brand image distinguished it from the assessee, which did not incur such costs. Furthermore, the acquisition of an Australian company by Infosys BPO Limited during the relevant year introduced an extraordinary event, further undermining comparability. The Tribunal also cited a similar exclusion in the case of Baxter India Pvt. Ltd., where Infosys BPO Limited was rejected due to functional dissimilarity and brand influence.

In applying these precedents and facts to the current appeal, the Tribunal found the circumstances substantially similar. It emphasized that the wide functional dissimilarity between Infosys BPO Limited and the assessee sufficed to exclude the former from the final set of comparables. The Tribunal stated: "Respectfully following the order of the coordinate bench, on identical facts, we direct the AO/TPO to exclude BPO Infosys Ltd. from the final set of comparables." This directive was grounded in the principle that comparability in transfer pricing requires similarity in functions, risks, and assets, and that inclusion of functionally dissimilar entities would distort the arm's length price determination.

On the issue of working capital adjustment, the assessee argued for its allowance based on details already submitted before the Dispute Resolution Panel and the Tribunal. The assessee requested a direction to the Assessing Officer/Transfer Pricing Officer (AO/TPO) to consider the working capital adjustment after verifying the submitted data. The Tribunal, while not deciding the quantum or specifics of the adjustment, directed the AO/TPO to examine the workings furnished by the assessee and grant appropriate relief in accordance with law, ensuring the assessee is afforded an adequate opportunity of being heard. This approach reflects the principle of procedural fairness and adherence to statutory mandates governing transfer pricing adjustments.

The Revenue's contention supporting the orders of the authorities below was considered but ultimately rejected in respect of the comparability of Infosys BPO Limited, given the binding nature of coordinate bench decisions and the persuasive factual matrix establishing functional dissimilarity. The Tribunal's reasoning underscores the importance of consistency in transfer pricing jurisprudence and the necessity to exclude comparables that do not meet functional similarity tests.

The significant holdings of the Tribunal can be summarized as follows:

"Respectfully following the order of the coordinate bench, on identical facts, we direct the AO/TPO to exclude BPO Infosys Ltd. from the final set of comparables."

"In so far as working capital adjustment is concerned, the AO/TPO is directed to look into the workings furnished by the assessee and appropriate relief may be granted in accordance with law after providing adequate opportunity of being heard to the assessee."

These holdings establish the core principles that (i) functional dissimilarity, including differences in business models, brand value, and extraordinary events, justifies exclusion of a company from the comparable set in transfer pricing analysis, and (ii) working capital adjustments, if substantiated, must be considered with due procedural safeguards.

In conclusion, the Tribunal partly allowed the appeal by excluding Infosys BPO Limited from the final comparables and directing the AO/TPO to consider the working capital adjustment upon verification, thereby ensuring adherence to transfer pricing principles and procedural fairness.