2022 (3) TMI 1567 - AT - Income Tax

TP Adjustment - comparable selection - exclusion of the comparable namely Acropetal Technologies Ltd., inclusion of C.G. Vak Software and Export Ltd. And R. System International Ltd. - HELD THAT - Acropetal Technologies Limited (Segmental) cannot be held as comparable on account of different functionality, significant expenditure on Research and Development and Advertising and Marketing and Sales Promotion Expenses and significant Outsourcing of Work. We, therefore, set aside the order of the Ld. CIT(A) on this issue and direct the A.O./TPO to exclude Acropetal Technologies Limited (Segmental) from the list of comparables. R System International Limited - TPO rejected the inclusion of the above comparable on account of different financial year - Hon ble Delhi High Court in the case of CIT vs., Mckinsey Knowledge Centre India Ltd. 2015 (3) TMI 1226 - DELHI HIGH COURT has held that if the comparable is functionally same as that of the tested party, then the same cannot be rejected merely on the ground that data for entire financial year is not available. It is held that if from the available data on record the results for financial year can reasonably be extrapolated then the comparable cannot be excluded solely on the ground that the comparable has different financial year ending. We, therefore, set aside the order of the Ld. CIT(A) and restore the issue to the file of A.O./TPO with a direction to extrapolate the result for the F.Y. 2009-10 from the available data and accordingly consider the same as comparable. A.O./ TPO should give due opportunity of being heard to the assessee while extrapolating the data for the F.Y. 2009-10. Incorrect computation of profit margin of the comparable in the case of Cosmic Global - We find from the various details furnished by the assessee that while the TPO considered the miscellaneous income as operating income while computing the profit margin of Cosmic Global, however, for the computation of profit margin of the assessee, the miscellaneous income was not considered as operating income. We, therefore, direct the A.O./TPO to consider the miscellaneous income of the assessee as operative income and accordingly compute the profit margin. CG-VAK Software and Export Limited - TPO and the Ld. CIT(A) held that this company is not a suitable comparable on account of very low turnover - Merely on account of low turnover, Company cannot be rejected. We, therefore, set aside the order of the Ld. CIT(A) and direct the A.O./TPO to include CG-VAK Software and Exports Ltd., (Segmental) as comparable. Accentia Technologies Ltd. has diversified business operation, significant intangible assets, abnormal high profits, occurring of extraordinary events, functional dissimilarity and absence of segmental details and, therefore, cannot be considered as a good comparable. Fortune Infotech Limited company has different revenue recognition model and functionally dissimilar since it has diversified business operations. Since the Ld. CIT(A) while excluding this company from the list of comparables has relied on the decision of M/s. Vertex customer Services India Private Limited, Gurgaon 2017 (12) TMI 992 - ITAT DELHI therefore, in absence of any distinguishable features brought before us by the Ld. D.R, we do not find any infirmity in the order of the Ld. CIT(A) in excluding Fortune Infotech Limited from the list of comparables. Igate Global Solutions Limited company is functionally different and insufficient segmental information respect of IT and ITES services are available. Further this is an exceptional year of operation on account of amalgamation. Apart from M/s. Vertex Customer Services India Private Limited 2017 (12) TMI 992 - ITAT DELHI relied on by the Ld. CIT(A), we find the Coordinate Bench of the Tribunal in various decisions has also directed to exclude Igate Global Solutions Limited from the list of comparables on account of exceptional year of operation on account of amalgamation. In absence of any contrary material or distinguishable feature brought to our notice by the Ld. D.R, we do not find any infirmity in the order of the Ld. CIT(A) in directing the A.O./TPO to exclude Igate Global Solutions Limited from the final set of comparables. ICRA Techno Analytics Limited (Segmental) - We find no segmental details are available in respect of this comparable and this company is functionally dissimilar since it is engaged in business intelligence and ideologies - We, therefore, uphold the order of the Ld. CIT(A) on this issue and the grounds raised by the Revenue challenging the exclusion of ICRA Techno Analytics Limited (Segmental) is dismissed. Infosys BPO Limited has high brand value and intangibles (goodwill) whereas the assessee has no such goodwill. Infosys BPO Limited derives benefits being part of Infosys group whereas the assessee does not belong to any reputed group. We further find Infosys BPO Limited has incurred substantial selling and marketing expenses. It has incurred significant expenditure on account of employee salary and advertising expenses, whereas the assessee has no such expenditure. It has also made certain acquisitions during the year, for which, this is an exceptional year for Infosys BPO Limited, whereas the assessee company has not made any acquisitions. Thus we uphold the order of the Ld. CIT(A) on this issue and the ground raised by the Revenue challenging the order of the Ld. CIT(A) in excluding the Infosys BPO Limited is dismissed.

Summary

Issues Involved:
1. Exclusion and inclusion of comparables in Transfer Pricing (TP) analysis.
2. Correct computation of profit margins.
3. Application of +/- 5% range as per Section 92C(2) of the Income Tax Act.
4. Levy of consequential interest under Section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Exclusion and Inclusion of Comparables in Transfer Pricing Analysis:
The primary issue revolves around the inclusion and exclusion of certain comparables in the TP analysis. The assessee contested the inclusion of Acropetal Technologies Limited, while seeking the inclusion of CG-VAK Software and Export Limited and R System International Limited. The Revenue, on the other hand, challenged the exclusion of Accentia Technologies Limited, Fortune Infotech Limited, Igate Global Solutions Limited, and Infosys BPO Limited.

Acropetal Technologies Limited (Segmental):
The Tribunal agreed with the assessee's contention that Acropetal Technologies Limited (Segmental) should be excluded due to its functional dissimilarity, significant expenditure on Research and Development, and substantial outsourcing of work. The Tribunal cited various precedents, including the case of JCIT vs. Steria India (P.) Ltd., where Acropetal Technologies Limited (Segmental) was excluded due to these reasons.

CG-VAK Software and Export Limited:
The Tribunal directed the inclusion of CG-VAK Software and Export Limited, rejecting the Revenue's argument that it should be excluded due to low turnover. The Tribunal referenced the decision in Ameriprise India Pvt. Ltd. vs. DCIT, where it was held that low turnover alone is not a valid reason for exclusion if the company is functionally comparable.

R System International Limited:
The Tribunal restored the issue to the AO/TPO to extrapolate the financial results for the financial year 2009-10 from the available data, following the principle established in CIT vs. Mckinsey Knowledge Centre India Ltd., which held that different financial year ending cannot be the sole basis for rejection if the company is otherwise functionally comparable.

Accentia Technologies Limited:
The Tribunal upheld the CIT(A)'s decision to exclude Accentia Technologies Limited, noting its diversified business operations, significant intangible assets, and extraordinary events like acquisitions/amalgamation during the relevant year. The Tribunal cited various precedents, including JCIT vs. Steria India (P.) Ltd., where the exclusion of Accentia Technologies Limited was upheld due to similar reasons.

Fortune Infotech Limited:
The Tribunal upheld the exclusion of Fortune Infotech Limited, agreeing with the CIT(A) that the company had a dissimilar functional profile and unique intangibles. The Tribunal referenced the case of Vertex Customers Services India Private Limited, where Fortune Infotech Limited was excluded for similar reasons.

Igate Global Solutions Limited:
The Tribunal upheld the exclusion of Igate Global Solutions Limited, noting its functional dissimilarity, lack of segmental information, and exceptional year of operation due to amalgamation. The Tribunal cited various decisions, including Vertex Customers Services India Private Limited, supporting the exclusion of Igate Global Solutions Limited.

Infosys BPO Limited:
The Tribunal upheld the exclusion of Infosys BPO Limited, noting its high brand value, significant intangible assets, and substantial expenditure on employee salary and advertising. The Tribunal referenced several decisions, including Steria (India) Ltd. vs. ACIT, where Infosys BPO Limited was excluded due to these factors.

2. Correct Computation of Profit Margins:
The Tribunal directed the AO/TPO to correctly compute the profit margin of Cosmic Global by considering the miscellaneous income as operating income, aligning with the treatment of similar income in the assessee's case.

3. Application of +/- 5% Range as per Section 92C(2) of the Income Tax Act:
The Tribunal did not specifically address this issue in detail, as it was not raised as a separate ground in the grounds of appeal.

4. Levy of Consequential Interest under Section 234B of the Income Tax Act:
The Tribunal did not specifically address this issue in detail, as it was not raised as a separate ground in the grounds of appeal.

Conclusion:
The Tribunal partly allowed the appeal of the assessee, directing the exclusion of Acropetal Technologies Limited (Segmental) and the inclusion of CG-VAK Software and Export Limited and R System International Limited. The Tribunal upheld the CIT(A)'s decision to exclude Accentia Technologies Limited, Fortune Infotech Limited, Igate Global Solutions Limited, and Infosys BPO Limited. The Tribunal also directed the correct computation of profit margin for Cosmic Global. The appeal of the Revenue was dismissed.