2018 (2) TMI 1750 - HC - Income Tax

TPO - Comparability analysis - Held that - This Court notices that as far as the exclusion of three comparables M/s. TCS E-Serve Limited; M/s. TCS E-Serve International Limited and M/s. Infosys BPO Ltd. is concerned the ITAT was cognizant of and took note of the circumstances that these entities had a high brand value and therefore were able to command greater profits; besides they operated on economic upscale. There was no segmented data and on that account directed the exclusion of that entity from the list of comparables. Likewise in the case of M/s. ICRA Techno Analysis Ltd. it was found that the said entity was engaged in business intelligence and analytics supplies software development consultancy services engineering services web development and hosting services. Besides functional dissimilarity the ITAT also noted that there was no segmented data to compare its activity with the assessee. Likewise in the M/s. eClarx Services the ITAT noted that its activity was functionally dissimilar because it performed KPO function whereas the assessee was classifiable as BPO.

Summary

Issues: Appeal against ITAT order on determination of Arm's Length Price (ALP) and Transfer Pricing adjustment under Section 93CA of the Income Tax Act, 1961.

Analysis:
1. ALP Determination: The Revenue challenged the ITAT order accepting the assessee's contentions regarding the comparison with six entities for ALP determination. The assessee, engaged in IT-enabled services, disagreed with the inclusion of six comparables by the Transfer Pricing Officer (TPO) and approached the Disputes Resolution Panel (DRP) after the Assessing Officer (AO) finalized the draft assessment order. The ITAT, in its decision, directed the exclusion of the six comparables based on various reasons, leading to the Revenue's appeal.

2. Exclusion of Comparables: The ITAT considered various factors in excluding specific comparables like M/s. TCS E-Serve Limited, M/s. TCS E-Serve International Limited, and M/s. Infosys BPO Ltd. It recognized the high brand value and economic upscale of these entities, which impacted their profitability significantly. The ITAT's decision was supported by the Court's ruling in a previous case, emphasizing the importance of functional similarities and availability of segmental data in determining comparability.

3. Functional Dissimilarities: The ITAT's analysis of entities like M/s. Accentia Technologies Ltd., M/s. ICRA Techno Analysis Ltd., and M/s. eClarx Services highlighted functional dissimilarities compared to the assessee's business activities. For instance, M/s. Accentia was primarily involved in medical transcription services, while M/s. ICRA Techno Analysis Ltd. focused on business intelligence and analytics supplies, software development, and consultancy services. The ITAT's decision to exclude these entities was based on the lack of segmented data and functional dissimilarities.

4. Judicial Review: The Court upheld the ITAT's reasoning for excluding specific comparables, emphasizing that the ITAT's findings were reasonable and supported by the legal precedent. The Court noted that the ITAT's decisions were justified and aligned with the principles established in previous judgments, thereby dismissing the Revenue's appeal and ruling that no substantial question of law arose.

5. Conclusion: The Court dismissed the writ petition, affirming the ITAT's exclusion of certain comparables in the ALP determination process. The judgment highlighted the importance of considering functional similarities, brand value, and availability of segmental data when determining comparability for Transfer Pricing adjustments under the Income Tax Act, 1961.