2014 (12) TMI 921 - AT - Income Tax

Selection of comparable - Nucleus Netsoft and GIS (India) Limited - functionally non-comparable or not - Failing employee cost filter and amalgamation of company - assessee is captive contract service provider engaged in providing IT enabled back office services to Ameriprise US - Held that - Assessee relied upon judicial precedent for exclusion of the specific comparable on the ground that the factum of amalgamation makes the comparable an incomparable in Willis Processing Services (I) (P.) Ltd. Versus Deputy Commissioner of Income-tax 2013 (3) TMI 415 - ITAT MUMBAI the issue has been restored to the TPO to verify whether the functionality of the comparable has also changed as that would be the relevant criteria to consider the prayer for excluding the comparable in M/s HSBC Electronic Data Processing (I) (P.) Ltd. Versus Assistant Commissioner of Income-tax 2013 (6) TMI 708 - ITAT HYDERABAD - for this specific year i.e 2006-07 assessment year has given a categorical finding that it has changed the business model of the company there is no merit in the arguments of the Revenue to still restore the issue for verification when a Co-ordinate bench on facts pertaining to the very same AY has held that the business model for Neclues Netsoft & GIS (India) Ltd. has changed as a result of the amalgamation thus, this company cannot be selected as a comparable not only on the reason of failing employee cost filter, but also due to amalgamation during the year, which has changed the business model of the company Decided in favour of assessee.

Summary

Issues involved:
1. Selection of Nucleus Netsoft & GIS (India) Ltd. as a comparable for the assessment year 2006-07.

Analysis:
1. The assessee contested the selection of Nucleus Netsoft & GIS (India) Ltd. as a comparable company for the assessment year 2006-07. The taxpayer, a wholly owned subsidiary of Ameriprise Financial Inc., USA, provided IT enabled back office services to its associated enterprise on a cost plus mark up basis. The taxpayer used the Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The Transfer Pricing Officer rejected 11 comparable companies, resulting in an adjustment of &8377; 38,60,675. The taxpayer succeeded in proving that the OP/OC margin of Nucleus Netsoft & GIS (India) Ltd. was inaccurately taken as 89.67% instead of 48.64% before the CIT(A).

2. The taxpayer argued before the ITAT that Nucleus Netsoft & GIS (India) Ltd. should be excluded as a comparable due to the company's changed business model post-amalgamation. The Ld. AR cited a Co-ordinate Bench order in a similar case to support the exclusion. The Ld. CIT DR opposed the exclusion, stating that merger or demerger alone should not render a comparable incomparable unless the functionality is impacted. The ITAT noted previous tribunal decisions where issues were restored to verify functional changes post-amalgamation.

3. After considering the arguments, the ITAT agreed with the Ld. CIT DR that amalgamation alone should not render a comparable incomparable. However, based on specific findings for the assessment year 2006-07, the ITAT upheld the exclusion of Nucleus Netsoft & GIS (India) Ltd. as a comparable due to a changed business model post-amalgamation. The ITAT dismissed the other grounds raised by the assessee and partially allowed the appeal solely for the exclusion of the said comparable.

4. In conclusion, the ITAT partially allowed the appeal, excluding Nucleus Netsoft & GIS (India) Ltd. as a comparable for the assessment year 2006-07 due to a changed business model post-amalgamation. The remaining grounds raised by the assessee were dismissed as not pressed. The order was pronounced on 12th December 2014.