No Adjustment If Margin Falls Within Tolerance Range Of (+/-) 5% As Per Sec 92CA: Mumbai ITAT

Finding that the margins of assessee company fell within the tolerance limit of +/-5% for AY 2005-06, the Mumbai ITAT deleted the ALP adjustments proposed by the TPO in ITEs as well as IT segments.

The ITAT Bench comprising Amit Shukla (Judicial Member) and S. Rifaur Rahman (Accountant Member) observed that “TPO had adopted certain criteria for rejection of comparables which has been highlighted above. If those criteria itself are adopted on the comparables which has been chosen by the TPO and applying the filters adopted by him on the final set of comparables selected by him under ITES and IT segment, then as noted by the CIT (A) the arithmetic mean in ITES segment comes to 13.73% and in IT segment comes to 17.51%. In that case, in ITES segment margin shown by the assessee and margin which has been determined falls within the tolerance limit of +/- 5% as provided in proviso to Section 92CA which was applicable prior to 01/10/2009, then assessee's price of Rs. 30,29,93,009/-, which is well within the tolerance range”. (Para 10)

As per the brief facts of the case, the assessee, engaged in the business of providing range of back-office support services, is a captive service provider for its group entities. During the year, assessee had entered IT & ITES international transactions with its AEs, which was benchmarked by adopting TNMM as Most Appropriate Method. The PLI was net cost plus and computed the operating margin under the BPO/ITES segment at 11.78% and Software/IT segment at 14.87%. The TPO in so far as ITES segment is concerned has rejected all the comparable and selected his own 11 comparable with arithmetic mean of 29.30%. In so far as IT segment is concerned, out of 29 comparable chosen by the assessee, the TPO rejected 24 comparable and accepted only 5 comparable. He further introduced 15 additional comparable and finally worked out arithmetic mean at 27.11% under the IT segment and accordingly, made upward adjustment in both the segments.

The Coram found that the TPO has rejected assessee's comparable in IT and ITES by following various criteria viz. RPT being more than 25%, export income nil, salary 1.15% of turnover, unavailability of segmental data, consistent-loss making and extra-ordinary events.

Observing that SWD comparable were used for segment of back-office support services, the Bench highlighted that though the TPO introduced new comparable, however, he did not adopt the requisite criteria while introducing his own comparable.

The Bench pointed that if the identical criteria are applied on final set of comparable in both these segments, the arithmetic mean would come to 13.73% in ITES segment and 17.51% in IT segment.

Therefore, concurring with the CIT(A), the ITAT concluded that since the margins determined fell within tolerance limit of +/-5% as per proviso to Sec. 92CA, no ALP adjustment was warranted.

Counsel for Appellant/ Department: Shilpa N.C

Counsel for Respondent/ Taxpayer: None

Case Title: ITO Verses M/s. Excult Client Services I P Ltd

Case Number: ITA No. 6508/Mum/2010

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