2023 (1) TMI 97 - AT - Income Tax

TP Adjustment - comparable selection - Functional dissimilarity - HELD THAT - The assessee had provided Information Technology Enabled Services (ITES) to its Associated Enterprises (AE) during the year under consideration and the said international transaction has been benchmarked by the assessee using Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM). The Profit Level Indicator (PLI) used by the assessee is Operating Profit to Total Operating Cost (OP/TC). The assessee s margin is 32.01%. Companies functionally dissimilar with that of assessee need to be deselected from the final list. We direct the ld. TPO to include R.Systems International Ltd., CG-VAK Software and Exports Pvt. Ltd., and Jindal Intellicom Pvt. Ltd. and exclude E-Clerx Services Ltd., in the final list of comparables. When this is done, according to ld. AR , the assessee would be well within the tolerance band of /-5% statutorily provided in the Act and hence, its pricing with AE would be at arm s length. Cross objections raised by the assessee by way of original grounds, in respect of aforesaid comparables are partly allowed and additional ground raised by the assessee is allowed.

Summary

Issues:
Inclusion and exclusion of comparables for transfer pricing analysis.

Analysis:
1. Inclusion of Comparables:
- R Systems International Ltd.: The Tribunal held that R Systems International Ltd. is a good comparable with the assessee based on functional similarities and past decisions.
- CG VAK Software and Exports Ltd.: Despite past losses, this company was included as a comparable after considering foreign exchange gains and functional similarities.
- Jindal Intellicom Pvt. Ltd.: This company passed all filters and was found functionally similar to the assessee, hence included as a comparable.
- E4E Healthcare Services Ltd.: The inclusion of this comparable was not pressed by the assessee during the hearing.

2. Exclusion of Comparables:
- E-Clerx Services Ltd.: The Tribunal allowed the exclusion of E-Clerx Services Ltd. as it was found to be functionally dissimilar to the assessee, despite being initially included by the assessee in the study report. The Tribunal cited previous decisions and High Court rulings to support this exclusion.

3. Legal Precedents:
- The Tribunal referred to the decision of the Hon'ble Delhi High Court in the case of Mckinsey Knowledge Centre India (P) Ltd. to counter arguments by the Revenue, highlighting subsequent clarifications made by the High Court.

4. Conclusion:
The Tribunal directed the Transfer Pricing Officer to include R Systems International Ltd., CG VAK Software and Exports Pvt. Ltd., and Jindal Intellicom Pvt. Ltd. as comparables while excluding E-Clerx Services Ltd. The inclusion of these comparables would ensure that the assessee's pricing with associated enterprises remains within the tolerance band of +/-5%, meeting arm's length requirements. As a result, the cross objections raised by the assessee were partly allowed, rendering the adjudication of the Revenue appeal as academic and hence dismissed as infructuous.