Case Law Details
Brief of the case:
ITAT held in Acclaris Business Solutions Lvt Ltd. Vs I.T.O that only those companies could be compared for calculating ALP which were functionally similar. Those companies which were not performing similar functions could not be compared for calculating ALP. If the companies were having different functional lines then their profit margins could not be compared.
Specific reasons should be there to exclude the high profit margin company from the list of comparables.
Moreover there was not mentioned in the income tax act that the companies with high profit margin could not be compared with other company under question for calculating ALP. Company with high profit margin could only be excluded from the list of comparable only and only if there was sufficient evidence to the fact that that company belongs to different functional line or any other thing which distinct the comparable company from the company under question.
Facts of the case:
The assessee was a 99.99% subsidiary of Acclaris Inc. and was incorporated on 6th June, 2003. The assessee provides Back Office Processing services (BPO) to Acclaris Inc., as a captive service provider in relation to some of Acclaris Inc’s clients. The BPO services include various types of services including recruitment services, financial services and routine back office services like indexing and enrollment for clients. The assessee works as an IT enabled back office services provider which provides back office services to the client. The assessee did not own any intangibles interest in the intangibles owned by Acclaris Inc. and was only a service provider.
According to the assessee, it had earned a profit of 15.02% for the relevant assessment year and as per the 14 comparables selected by the assessee with TP study, the average margin determined was 11.28%. The TPO had rejected the comparables of assessee and selected his own 5 comparables whose arithmetic mean of Operating Margin/ Total cost comes out to be 29.12 % but assessee had shown 15.02% so he had made upward addition of Rs 1,31,57,697.
Contention of the assessee:
Assessee was of the view that out of 5 comparables, 2 companies were functioning on voice based BPO units but the assessee was a non-voice based company. TPO failed to differentiate between the voice based and non-voice based company.. Further the assessee company was a BPO company not a software development company. So, the above 2 comparables selected by TPO should be excluded.
Moreover next 2 companies were having very high profit % so that companies should also be excluded from the list of comparables. As those companies were showing profit of 23.53% and 30.35% which was very high.
Contention of the revenue:
Revenue was of the view that the companies selected by TPO was showing arithmetic mean of 29.12 % so the assessee’s transaction with AE was not at ALP, so upward adjustment should be made by Rs 1,31,57,697/-.
Held by ITAT:
ITAT held that as the 2 companies which were selected by the TPO were different in functions so they should be excluded from the list of comparables because only those companies should be selected which were functionally similar for calculation of ALP.
Moreover there was no prohibition in considering companies with high profit or high losses as comparables for bench marking international transactions to the arm length price. However, if there were specific and particular reasons evidencing abnormal profits or losses margin of the comparable, only then the comparable could be excluded. The burden to demonstrate the same was on the assessee. In the present case, no such particular facts had been brought on record to substantiate the reasons for high profitability of these comparables. In any case, comparables could not be excluded for the sole reason that they were of high profitability margin. Such cases of high profitability or losses only invite further scrutiny as to the specific and particular reasons demonstrating abnormal profits/losses.
ITAT further relied on the decision given by ITAT Bangalore in Trilogy E Business Software India Pvt. Ltd. Vs DCIT (2013) 140 ITD 540 where in it was decided that the matter should be restored to the file of the AO for making fresh search of comparables.
So ITAT restored the file to AO for making fresh adjudication.
Appeal of assesse was allowed for statistical purpose.
