2016 (8) TMI 1187 - HC - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - The assessee was involved only in software development. Considering widely fluctuating and erratic results of the company the Tribunal found that it would be unsafe to assess arm s length price based on TNMM taking into account the results of Bodhtree Consulting Ltd. company. We do not find the decision of the Tribunal gives rise to any substantial question of law. E-Infochip Bangalore Ltd - Tribunal merely considered whether in absence of segmental information available with respect to E-Infochip Bangalore Ltd., the margin of such company could have been considered by the TPO. This issue completely ignores the fundamental question whether E-Infochip Bangalore Ltd. was engaged in any services other than software development services. Only if answer to the question was in the affirmative, the question of availability or non-availability of segmental information would arise. The Tribunal thus without overruling the finding of the TPO, without giving any specific finding of its own much less recording the reasons, proceeded to hold that in absence of segmental information E-Infochip Bangalore Ltd. must be excluded from consideration, directed exclusion of E-Infochip Bangalore Ltd. We find that the Tribunal has committed a serious error. Tribunal s directions to exclude E-Infochip Bangalore Ltd. from working out the transfer pricing, the judgment is reversed.

Summary

Issues:
Challenge to the judgment of the Income-Tax Appellate Tribunal regarding transfer pricing and exclusion of companies from comparability analysis.

Detailed Analysis:

1. The Revenue challenged the Tribunal's judgment on transfer pricing, specifically questioning the exclusion of two companies from consideration in the comparability analysis. The Tribunal directed the Assessing Officer to rework the additions after excluding the two companies, Bodhtree Consulting Ltd. and E-Infochip Bangalore Ltd.

2. The Tribunal's decision was based on Section 92C of the Income Tax Act, which deals with the computation of arm's length price in international or specified domestic transactions. The Tribunal applied the Transactional Net Margin Method (TNMM) and excluded the two companies due to fluctuating financial results and differing business segments.

3. Bodhtree Consulting Ltd.'s financial results showed wide fluctuations in operation profit to total cost ratio over seven years, leading the Tribunal to exclude it from the TNMM analysis. The Tribunal's decision was deemed reasonable and not giving rise to any substantial legal questions by the High Court.

4. Regarding E-Infochip Bangalore Ltd., the Tribunal's decision to exclude it from the comparability analysis was challenged. The company was engaged in software development and IT enabled services, while the assessee was involved only in software development. The Tribunal upheld the exclusion based on the lack of segmental information and the differing business activities.

5. The High Court scrutinized the exclusion of E-Infochip Bangalore Ltd. and found that the Tribunal's decision was based on the absence of segmental information rather than a consideration of the company's actual business activities. The Court reversed the judgment on this issue and remanded it back to the Tribunal for further consideration within the proper legal parameters.

6. In conclusion, the High Court reversed the Tribunal's decision to exclude E-Infochip Bangalore Ltd. from the transfer pricing analysis and directed a reconsideration of the issue. The Tax Appeal was disposed of accordingly, emphasizing the need for a thorough examination of the companies' actual business activities and financial data in transfer pricing assessments.