2017 (12) TMI 1680 - HC - Income Tax

TP Adjustment - exclusion of six comparables in the transfer pricing study and arm‟s length price assessment - functional similarity - interest income exemption in view of Section 10A - HELD THAT - The assessee is engaged primarily in software development, specifically in healthcare claims adjudication and bio-pharmaceutical services. The functional profile of the comparables, noticed the two authorities, was entirely different because E-Infochips Bangalore Ltd. and Infinite Data Systems Pvt. Ltd. were primarily concerned with technology and software development in contrast of the assessee‟s expertise which was software development services. This Court is of the opinion that having regard to the findings in respect of the two comparables, no question of law arises. Revenue has to ensure the functional similarities and exclude comparison of entities where there are significant dissimilarities as in the case of Accentia Technologies Ltd. As far as the TCS E-Serve Ltd. and TCS E-Serve International Ltd. are concerned, the ITAT was of the opinion that these entities had to be excluded having regard to the established brand value‟ which drew the profitability upward and secondly, that the merger of the one entity had resulted in distortion of the profit figures. This Court had recently in Pr. Commissioner of Income Tax Vs. B.C. Management Services Pvt. Ltd. 2017 (12) TMI 255 - DELHI HIGH COURT , upheld the identical reasoning. Therefore, no question of law arises with respect to the exclusion of these two comparables. Having regard to the submissions made and the material on record, especially the ITAT‟s observations that I-Gate Global Solutions Limited‟s functioning is similar to that of the assessee, the appeal deserves to be admitted on that aspect. Admit the following questions of law arise for consideration - i) Did the ITAT fall into error in holding that I-Gate Global Solutions Limited underwent significant change in its profitability in view of the amalgamation undergone, having regard to the report and materials on record and the circumstances of the present case? (ii) Did the impugned order err in law in holding that any interest income derived by the assessee could be treated as falling under Section 10A of the Act?

Summary

Issues:
1. Exclusion of comparables in transfer pricing study
2. Exemption of interest income under Section 10A of the Income Tax Act

Analysis:

1. Exclusion of Comparables in Transfer Pricing Study:
The assessee, engaged in healthcare claims adjudication, software development, and bio-pharmaceutical services, enjoyed the benefit of Section 10A of the Income Tax Act. The dispute revolved around the exclusion of six comparables in the transfer pricing study and arm's length price assessment. The Transfer Pricing Officer (TPO) excluded several comparables for the Arm's Length Price (ALP) determination. The Disputes Resolution Panel (DRP) and the Income Tax Appellate Tribunal (ITAT) upheld the exclusion of entities like E-Infochips Bangalore Ltd. and Infinite Data Systems Pvt. Ltd., noting their different functional profiles from the assessee's activities. The High Court concurred with the ITAT's decision, emphasizing the need for functional similarities in transfer pricing exercises and upheld the exclusion of other comparables like Accentia Technologies Ltd., TCS E-Serve Ltd., I-Gate Global Ltd., and TCS E-Serve International Ltd. The Court found the reasoning for exclusion sound, especially in cases where significant dissimilarities existed.

2. Exemption of Interest Income under Section 10A:
Regarding the interest income declared by the assessee, the question arose whether it could be exempted under Section 10A of the Income Tax Act. The High Court admitted the appeal to consider if the ITAT erred in holding that I-Gate Global Solutions Limited underwent significant changes in profitability due to amalgamation. Additionally, the Court noted the question of law concerning the treatment of interest income under Section 10A. The matter was scheduled for further consideration, with notices issued to the respondent/assessee returnable on a specified date.

In conclusion, the judgment addressed the issues of exclusion of comparables in the transfer pricing study and the exemption of interest income under Section 10A of the Income Tax Act. The High Court upheld the decisions of the ITAT regarding the exclusion of comparables with different functional profiles and admitted the appeal to further examine the treatment of interest income, highlighting specific questions of law for consideration.