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2018 (6) TMI 969 - HC - Income TaxTPA - Selection of comparables to determine the ALP - functional dissimilarity - Held that - Assessee is engaged in providing Software Solutions and Back Office Operations thus companies dissimilar with that of assessee need to be deselected from final list of comparable - M/s. Kals Information System Ltd., is engaged in developing Software Products while assessee is engaged in the activities of providing software services. M/s. Compucom Software Ltd., was excluded from the list of comparable since it was was not only engaged in running of software development services but also sale of software products end to end mobile solutions as infrastructure services etc. and hence functionally dissimilar with that of assessee. Their is huge turnover difference between M/s. Infosys BPO Ltd. and the assessee, and hence being dissimilar cannot be treated as comparable. M/s. Cosmic Global Ltd. was also excluded from the list of comparable to determine the ALP since had a business model of subcontracting its work to others while providing services - while the business model of the Assessee was an inhouse business model - thus the appeal of revenue is dismissed.
Issues:
1. Exclusion of M/s. Kals Information Systems Ltd. from comparables analysis. 2. Exclusion of M/s. Transworld Infotech Ltd. from comparables analysis. 3. Exclusion of M/s. Compucom Software Ltd. from comparables analysis. 4. Exclusion of M/s. Infosys BPO Ltd. from comparables analysis. 5. Exclusion of M/s. Cosmic Global Ltd. from comparables analysis. Analysis: Issue 1: Exclusion of M/s. Kals Information Systems Ltd. The Tribunal excluded M/s. Kals Information Systems Ltd. from comparables analysis as its activities were found to be functionally different from the Respondent-Assessee. The Tribunal relied on past orders and functional dissimilarities to justify the exclusion. The Court found the decision to exclude M/s. Kals Information Systems Ltd. as a comparable to be based on valid reasoning and upheld the Tribunal's decision. Issue 2: Exclusion of M/s. Transworld Infotech Ltd. M/s. Transworld Infotech Ltd. was excluded from comparables analysis due to its financial data not corresponding to the financial year of the Respondent-Assessee's transaction with its AE. The Tribunal noted discrepancies in financial years and the lack of comparability. The Court found the exclusion of M/s. Transworld Infotech Ltd. to be a reasonable decision based on factual findings. Issue 3: Exclusion of M/s. Compucom Software Ltd. M/s. Compucom Software Ltd. was excluded from comparables analysis as it was engaged in different activities compared to the Respondent-Assessee. The Tribunal considered functional differences and customer profiles in its decision. The Court agreed with the Tribunal's findings, stating that the exclusion of M/s. Compucom Software Ltd. was a possible view based on factual distinctions. Issue 4: Exclusion of M/s. Infosys BPO Ltd. M/s. Infosys BPO Ltd. was excluded from comparables analysis due to significant turnover differences with the Respondent-Assessee. The Tribunal relied on past judgments and turnover variations to justify the exclusion. The Court found the decision to exclude M/s. Infosys BPO Ltd. to be reasonable and in line with established principles regarding turnover variations in comparables analysis. Issue 5: Exclusion of M/s. Cosmic Global Ltd. M/s. Cosmic Global Ltd. was excluded from comparables analysis due to differences in business models, specifically in outsourcing practices. The Tribunal noted the impact of differing business models on profit margins and deemed M/s. Cosmic Global Ltd. not comparable. The Court supported this decision, citing a similar case where the exclusion was upheld based on identical differences in business models. Conclusion: The Court dismissed the appeal, upholding the Tribunal's decisions to exclude the mentioned companies from the list of comparables for determining the Arms Length Price (ALP) through the Transactional Net Margin Method (TNMM). The Court found the exclusions to be based on valid reasoning and factual distinctions, thereby not entertaining the proposed questions of law.
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