2022 (8) TMI 90 - HC - Income Tax

TP Adjustment - comparable selection - ITAT excluding Excel Infoways Ltd - HELD THAT - This Court is of the view that the intent of Chapter X of the Act is to compute the income in relation to a controlled transaction between an assessee and its associated enterprise having regard to the arm s length price in order to nullify the effect of transfer of income to a jurisdiction outside India, if any, in respect of the controlled transaction. The exercise of determining the arm s length price in respect of international transactions between related enterprises is aimed at determining the price which would have been charged for products and services, as nearly as possible, if such international transactions were not controlled by virtue of their being executed between related parties. The object of the exercise is to remove the effect of any influence on the prices or costs that may have been exerted on account of the international transactions being entered into between related parties. It is clear that for the exercise of determining the arm s length price to be reliable, it is necessary that the controlled transactions be compared with uncontrolled transactions which are similar in all material aspects. As in the present case Excel Infoways Pvt. Ltd. fails not only the service revenue from export/ITES filter of 75% insisted upon by the TPO but also the diminishing revenue filter as is apparent from the chart reproduced hereinabove, no interference is called for in the finding recorded by the Tribunal.

Summary

Issues:
1. Challenge to the Order of the Income Tax Appellate Tribunal for the Assessment Year 2012-13.
2. Stringency in comparability standards for determining Arm's Length Price (ALP).
3. Exclusion of Excel Infoways Ltd. as a comparable entity.
4. Dispute over the service revenue filter from export/ITES.
5. Exclusion of TCSE-Serve Ltd. and Infosys BPO from the appeal.
6. Analysis of the diminishing revenue filter for Excel Infoways Ltd.

1. Challenge to ITAT Order:
The appellant contested the ITAT's Order dated 22nd November, 2019, arguing that stringent comparability standards were applied, hindering the ALP determination flexibility. The counsel highlighted the necessity of recognizing differences in comparables and criticized the exclusion of Excel Infoways Ltd. due to employee cost ratios. The appellant also disputed the service revenue filter and acknowledged the exclusion of other entities from the appeal.

2. Stringency in Comparability Standards:
The appellant emphasized the need to avoid exact replicas in comparability analysis, citing Indian Law and international jurisprudence. The counsel argued against the stringent comparability standards applied by the ITAT, stressing the importance of flexibility in ALP determination.

3. Exclusion of Excel Infoways Ltd.:
The appellant contested the exclusion of Excel Infoways Ltd. as a comparable entity, citing discrepancies in employee cost ratios and segmental values. The counsel argued that Excel Infoways Ltd. met the TPO's filter criteria and should not have been excluded.

4. Dispute Over Service Revenue Filter:
A dispute arose over the service revenue filter from export/ITES, with the TPO insisting on a 75% threshold. The counsel for the appellant argued for a diluted filter due to functional similarity, challenging the TPO's decision based on the filter criteria.

5. Exclusion of Other Entities:
The counsel for the appellant acknowledged not pressing the appeal regarding the exclusion of TCSE-Serve Ltd. and Infosys BPO due to subsequent developments and acquisitions by these entities.

6. Analysis of Diminishing Revenue Filter:
The respondent pointed out Excel Infoways Ltd.'s failure to meet the diminishing revenue filter, supported by a chart showing revenue trends over multiple financial years. The court upheld the Tribunal's decision based on the failure to meet filter criteria and dismissed the appeal, stating no question of law arose for consideration.

This detailed analysis covers the key issues raised in the legal judgment, providing insights into the arguments presented and the court's decision on each matter.