2022 (12) TMI 65 - AT - Income Tax

TP Adjustment - Comparability - CTIL should be excluded from the comparable set - CTIL has subcontracted majority of its software development work to 3rd party vendors and has made significant payments to these vendors to the extent of 53-72% of total cost/27.85% of software development income - HELD THAT - As it is well established principle that the company which does most of these activities through its own employees is not functionally comparable to a company which outsources majority of its work to third party vendors. In view of the above, we are of the considered view that CTIL should be excluded from the list of comparables, since CTIL is functionally different from that of the assessee company. Appeal of assessee allowed.

Summary

Issues:
1. Condonation of delay in filing the appeal.
2. Transfer pricing adjustment dispute regarding CTIL's inclusion as a comparable company.

Condonation of Delay:
The appeal was filed by the assessee against the order of the Assistant Commissioner of Income Tax for the assessment year 2008-09. The assessee cited a delay of 33 days in filing the appeal due to the non-resident director being unavailable to authorize the filing. The delay was condoned by the ITAT considering the reasons provided by the assessee and in the interests of justice.

Transfer Pricing Adjustment Dispute - CTIL Inclusion:
The dispute revolved around the inclusion of CTIL as a comparable company in the transfer pricing adjustment. The assessee argued that CTIL was not functionally comparable to its segments, citing reasons such as CTIL's diverse revenue sources, abnormal profits in the previous year, and significant management changes. The DRP rejected the assessee's contentions, stating that CTIL's core business was software development, and the extraordinary events did not impact comparability.

The ITAT analyzed the arguments and case laws presented by both parties. Relying on precedents, the ITAT concluded that a company outsourcing most of its work to third-party vendors cannot be functionally compared to a company with in-house operations. Considering this principle, the ITAT held that CTIL should be excluded from the list of comparables due to its significant outsourcing of software development work.

In conclusion, the ITAT allowed the appeal of the assessee, directing the exclusion of CTIL as a comparable company in the transfer pricing adjustment. The order was pronounced on 21-11-2022.