Delhi ITAT Excludes 4 Companies From WNS Transfer Pricing Comparables, Says Functional Similarity Is Key
The Delhi Income Tax Appellate Tribunal (ITAT) on 25 August upheld the exclusion of Eclerx Services, TCS E Serve, Infosys BPO and Acropetal Technologies from WNS Business Consulting Services' comparable set, observing that transfer-pricing comparables must be assessed on their actual functional profile rather than merely on their presence in the same broad industry.
A Bench comprising Judicial Member Satbeer Singh Godara and Accountant Member Manish Agarwal dismissed the Revenue's appeal for Assessment Year (AY) 2011-12 and upheld the deletion of the Rs. 87.72 lakh transfer-pricing adjustment. It held:
“TPO has silent on the issue of outsourcing, therefore, this company cannot be held as comparable to the assessee who is mainly providing services through its own employees and had not outsourced the same.”
WNS Business Consulting Services was engaged in exporting IT-enabled Business Process Services, IT-enabled delivery solutions, back-office operations and data-processing services to customers in the US financial-services industry, with a significant focus on mortgage banking solutions. Its international transactions were referred to the Transfer Pricing Officer (TPO), who proposed an adjustment of Rs. 87.72 lakh in the IT-enabled services (ITES) segment.
The TPO included several companies in the final comparable set. The Commissioner of Income Tax (Appeals) [CIT(A)] subsequently excluded some companies and included Informed Technologies India Ltd., which WNS had originally selected as a comparable. The Revenue challenged the CIT(A)'s changes before the ITAT.
On Informed Technologies, the Tribunal noted that the Revenue had failed to controvert WNS's factual submissions and that the same company had been accepted as a comparable in WNS's preceding assessment years. Applying the principle of consistency, it upheld its inclusion.
The Bench then considered Eclerx Services Ltd., which had an operating profit to operating cost (OP/OC) margin of 57.62%. WNS had argued that Eclerx was not comparable as it had outsourced most of its services, whereas WNS performed its services primarily through its own employees.
The CIT(A), relying on an earlier coordinate Bench ruling, accepted that differences in the deployment of human resources, infrastructure and intangibles affected comparability. The Tribunal agreed, particularly since the TPO had not addressed the outsourcing issue.
The Bench also upheld the exclusion of TCS E Serve Ltd. and Infosys BPO Ltd. The CIT(A) had found that both companies were substantially larger, operated in the same line of business and had significantly higher brand value than WNS. The Tribunal noted that the Revenue did not controvert these factual differences. It held:
“Before us, the Revenue has not controverted this fact stated by ld. CIT(A) who had excluded these two companies being not comparable looking to their volume and size as well as their brand value viz a viz of the assessee.”
On Accentia Technologies Ltd, the Tribunal noted that the company had acquired brand and goodwill through acquisitions and amalgamations and was engaged in diverse activities including medical transcription, KPO, data-process outsourcing and high-end software services, without adequate segmental information. Since the same company had also been excluded in WNS's own earlier assessment year, the it found no reason to interfere with the CIT(A)'s decision.
With respect to Acropetal Technologies Ltd. (Segment), the Bench found a functional mismatch. Acropetal was engaged in engineering design services, which were characterised as KPO activities, whereas WNS provided BPO services. Since the Revenue did not controvert this functional distinction, the Tribunal upheld its exclusion. It held:
“As this company was not functionally similar with the assessee and this fact has not been controverted before us, therefore, we find no error in the order of ld. CIT(A) in excluding the same in the final set of comparables.”
The Tribunal consequently found no error in the CIT(A)'s final comparable set and rejected the Revenue's challenge to the transfer-pricing adjustment.
Separately, the Bench upheld the deletion of a Rs. 1.06 crore disallowance from WNS's Section 10A deduction. WNS's Gurgaon units were registered with the Software Technology Park of India and provided services to US customers in the financial-services sector.
It noted that CBDT Notification No. 890(E) dated 26 September 2000 expressly included activities such as back-office operations, call centres and data processing within the notified definition of computer software.
Accordingly, the ITAT dismissed the Revenue's appeal, leaving intact the deletion of the Rs. 87.72 lakh transfer-pricing adjustment and the Rs. 1.06 crore Section 10A disallowance.
Counsel for the Revenue: Mahesh Kumar, CIT(DR)
Counsel for the Assessee: Tarandeep Singh, AR & Sandeep Yadav, Advocate