2019 (6) TMI 437 - AT - Income Tax

TPA - comparable selection - functional similarity - inclusion of Vama Industries Ltd. in the final set of comparables - HELD THAT - Software Development Services segment of Vama Industries Ltd. which has been considered as comparable not only includes revenues from Software development services but also from I.T. enabled services as well. It goes without saying that I.T. services and I.T. enabled services are as distinct in connotation and nature as north pole is from the south pole. Whereas IT services include software development services IT enabled services means services rendered with the already developed software. As IT and ITeS services are not comparable the assessee rendering only IT services cannot be compared with a company which renders both IT and ITeS. In view of the foregoing discussion we are satisfied that Vama Industries Ltd. is not a functionally comparable company and the same should be excluded from the list of comparables. AR submitted that if Vama Industries Ltd. is excluded then its profit margin would fall within /-5% range and there would be no need to examine other comparables challenged in the instant appeal. In view of our decision on exclusion of Vama Industries Ltd. we do not deem it appropriate to delve into other companies from the angle of comparability. We set-aside the impugned order and restore the matter to the file of the AO for recomputing the ALP of the international transaction of the assessee of rendering software development services by excluding Vama Industries Ltd. from the final set of comparables. Appeal of assessee allowed for statistical purposes.

Summary

Issues: Transfer pricing adjustment based on comparables selection.

The judgment pertains to an appeal against the order passed by the CIT(A)-13, Pune for the Assessment Year 2012-13. The appellant, a subsidiary of a US company, provided Software Development Services and Quality Assurance to its Associated Enterprises. The appellant declared a total income of ?2.26 crore, accompanied by an Audit Report detailing international transactions. The Transactional Net Marginal Method (TNMM) was used for benchmarking with a Profit Level Indicator (PLI) of 14.72%. The Assessing Officer (AO) conducted his benchmarking analysis, leading to a transfer pricing addition of ?1,26,92,794. The CIT(A) made adjustments, resulting in an addition of ?88,48,944. The primary issue was the inclusion of Vama Industries Ltd. in the comparables list, contested by the appellant. The Tribunal held that the appellant could challenge the inclusion of a company chosen by mistake. Detailed analysis of Vama Industries Ltd.'s comparability was conducted, highlighting discrepancies in revenue sources and services offered. The judgment cited precedents emphasizing the importance of accurate comparables selection. Ultimately, Vama Industries Ltd. was deemed not functionally comparable, leading to the exclusion of the company from the comparables list. The Tribunal set aside the order and directed the AO to recompute the arm's length price by excluding Vama Industries Ltd. The appeal was allowed for statistical purposes.

This judgment primarily deals with transfer pricing adjustments based on the selection of comparables. The Tribunal's detailed analysis focused on the functional comparability of Vama Industries Ltd. and the importance of accurate comparables selection in determining the arm's length price of international transactions. The judgment emphasized the appellant's right to challenge the inclusion of a company chosen by mistake, supported by legal precedents. By excluding Vama Industries Ltd. from the comparables list, the Tribunal directed the AO to recompute the arm's length price. The judgment serves as a significant precedent in transfer pricing disputes, highlighting the criticality of precise comparables selection in transfer pricing assessments.