2021 (1) TMI 921 - HC - Income Tax

TP Adjustment - Comparable selection - Tribunal excluding M/s Vishal Information Technologies Ltd as comparable company of ITES segment in holding that M/s VITL outsources majority of its work ignoring the fact that outsourcing entails higher cost resulting in lower operating profit - Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding M/s Nucleus Netsoft GIS (India) ltd., is not a comparable brushing aside the fact that it was taken as a comparable by the assessee on its own TP study and the fact that ITES is the primary business of the company? - HELD THAT - From perusal of the relevant extract of the order passed by the tribunal, it is evident that the tribunal has neither considered evidence brought on record by the Transfer Pricing Officer and has neither considered the findings of the Transfer Pricing Officer as well as the dispute resolution panel and in a cryptic and cavalier manner has recorded a finding in favour of the assessee. No cogent reasons worth the name have been assigned by the tribunal for recording the findings. Therefore the order passed by the tribunal dated 23.06.2015 is hereby quashed. The substantial questions of law are answered accordingly. The matter is remitted to the tribunal for decision afresh in accordance with law by a speaking order.

Summary

Issues:
1. Exclusion of certain companies as comparables in Transfer Pricing Study.
2. Consideration of evidence and findings by the Tribunal.

Analysis:

Issue 1: Exclusion of certain companies as comparables in Transfer Pricing Study
The appeal under Section 260A of the Income Tax Act, 1961 was filed by the revenue challenging the exclusion of M/s Vishal Information Technologies Ltd and M/s Nucleus Netsoft & GIS (India) Ltd as comparables in the Transfer Pricing Study. The assessee, engaged in software development, had interaction transactions with associated enterprises. The Assessing Authority referred the matter to the Transfer Pricing Officer, who determined a difference in arms length price. The tribunal excluded the mentioned companies based on a decision by a coordinate bench regarding a similar company's profile. The revenue contended that the assessee took a contradictory stand regarding comparables, and the tribunal failed to consider the findings of the Transfer Pricing Officer and Dispute Resolution Panel. The revenue argued that ignoring evidence on record raises substantial questions of law, citing relevant case law.

Issue 2: Consideration of evidence and findings by the Tribunal
The assessee argued that the exclusion of Vishal Information Technologies Ltd and Nucleus Netsoft & GIS (India) Ltd as comparables was a factual finding, not challenged by the revenue. The assessee maintained that the excluded companies were functionally dissimilar and supported its stance with legal precedents. The High Court noted that the tribunal, as a final fact-finding authority, did not adequately consider the material before it. The tribunal's order lacked cogent reasons and was deemed cryptic and cavalier. Consequently, the High Court quashed the tribunal's order and remitted the matter for a fresh decision in accordance with the law by a speaking order.

In conclusion, the High Court disposed of the appeal, emphasizing the importance of a thorough consideration of evidence and findings in transfer pricing disputes. The judgment highlighted the necessity for tribunals to provide reasoned decisions and adhere to legal principles in determining comparables for transfer pricing analysis.