2019 (1) TMI 739 - AT - Income Tax

TPA - assessee a wholly owned subsidiary of Virtusa Inc. USA and derives income from providing software development and maintenance services to its parent company - comparable functionally - Held that - The assessee is having turnover of 90.24 crores and turnover of Infosys Technologies Ltd. was 6860 crores which is 76 times of assessee s turnover. The comparison has to be on level playing. The basics of comparison are that of apple to apple not apple with watermelon. Further it has brand value and has also engaged in development of various niche products. Therefore we uphold the order of CIT(A) in directing to exclude big companies like Infosys Technologies Ltd. as comparable to the assessee company and accordingly dismiss the grounds raised by the revenue in this regard. Appeal of the revenue is dismissed.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Selection of comparable companies for Transfer Pricing analysis.
3. Exclusion of certain companies based on high turnover, brand value, and functional differences.

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for international transactions:
The assessee, a wholly-owned subsidiary of Virtusa Inc. USA, filed its return of income for AY 2005-06 showing income at Nil after claiming a deduction under section 10A. The Assessing Officer (AO) referred the case to the Transfer Pricing Officer (TPO) as the international transactions exceeded ?5 crores. The TPO determined the ALP adjustment at ?8,95,20,945/- using the Transactional Net Margin Method (TNMM).

2. Selection of comparable companies for Transfer Pricing analysis:
The TPO selected 17 companies as comparables for the ALP analysis. The assessee accepted 10 out of these 17 comparables but contested the inclusion of the remaining seven companies (Sl. Nos. 11 to 17). The CIT(A) partially agreed with the assessee and excluded Exensys Software Solutions Ltd., Infosys Technologies Ltd., and Satyam Computer Services Ltd. from the list of comparables due to their different functionalities and high turnovers.

3. Exclusion of certain companies based on high turnover, brand value, and functional differences:
The Revenue appealed against the CIT(A)'s decision to exclude certain companies based on high turnover, arguing that turnover does not have a direct impact on profit margins in the service industry. The Revenue cited various cases to support their stance that companies with high turnover or brand value should not be excluded if their functions are broadly similar to the assessee's.

The Tribunal, however, upheld the CIT(A)'s decision to exclude Infosys Technologies Ltd. from the list of comparables. The Tribunal noted that Infosys, with a turnover of ?13,149 crores, is a giant company assuming all risks and enjoying economies of scale, which makes it functionally different from the assessee, a captive service provider. The Tribunal cited multiple cases where Infosys was excluded as a comparable for similar reasons, emphasizing that comparability requires a level playing field.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to exclude companies like Infosys Technologies Ltd. from the list of comparables due to their high turnover, brand value, and functional differences. The Tribunal reiterated that comparability should be based on similar functions, risks, and economic conditions, and upheld the principle of comparing like with like. The appeal was pronounced dismissed on 11th January 2019.