2024 (9) TMI 646 - HC - Income Tax

TP Adjustment - comparable selection - exclusion of Vishal Information Technologies Ltd. and Nucleus Net soft GIS (India) Ltd. - HELD THAT - Vishal Information Technologies Ltd. is engaged in data conversion and digitization of documents i.e., text conversion and e- publishing which is functional different. The assessee provides services including voice and communication, data entry and financial management. On other hand, Vishal Information Technologies Ltd. is engaged in data conversion and digitization of documents i.e., text conversion and e- publishing which is functional different. Nucleus Net soft GIS Ltd company is also to be excluded on account of different business model, export revenue filter, extra ordinary events and segmental details. The assessee does not outsource work. Whereas this company has outsourced most of its business activities. Major operating expenses of Rs.1.04 crores are with regard to data processing charges. The company has a different business model than that of assessee.Further there is no extra ordinary event of amalgamation in the case of assessee. But this company had extra ordinary events. The scheme of amalgamation was approved by the Bombay High Court . Also the company has both IT and ITeS segments which are considered by the company as one segment and the segmental details are not available. Therefore, this company is not comparable with assessee on this count also. Accordingly, the above two comparables i.e., Nucleus Net Soft GIS Ltd. and Vishal Information Technologies Ltd. cannot be compared to the assessee company and be excluded from the list of comparables for determination of the arm s length price of international transactions.

Summary

Issues:
1. Correctness of judgment by the Income Tax Appellate Tribunal (ITAT) regarding exclusion of comparables Vishal Information Technologies Ltd. and Nucleus Net soft & GIS (India) Ltd.

Analysis:
The Principal Commissioner challenged the ITAT judgment regarding the exclusion of Vishal Information Technologies Ltd. and Nucleus Net soft & GIS (India) Ltd. The ITAT justified the exclusion of Vishal Information Technologies Ltd. based on various factors. Firstly, it noted that Vishal Information Technologies Ltd. had significantly higher employee costs compared to the assessee, along with major operating expenses related to data entry charges and vendor payments. The ITAT highlighted that the services provided by the assessee and Vishal Information Technologies Ltd. were functionally different, with the latter engaged in data conversion and digitization of documents. Additionally, the ITAT considered the substantial onsite expenses of Vishal Information Technologies Ltd. compared to the offshore activities of the assessee. The Mumbai Tribunal's decision in a similar case supported the exclusion of Vishal Information Technologies Ltd. based on outsourcing and operational differences. Consequently, Vishal Information Technologies Ltd. was directed to be excluded from the list of comparables.

Moving on to Nucleus Net soft & GIS (India) Ltd., the ITAT recommended its exclusion due to a different business model, export revenue filter, extraordinary events, and segmental details. The company outsourced most of its business activities, unlike the assessee. The export revenue of Nucleus Net soft & GIS (India) Ltd. was lower than the assessee's, and it had experienced extraordinary events related to amalgamation. The absence of segmental details for Nucleus Net soft & GIS (India) Ltd. further supported its exclusion as a comparable. Therefore, both Nucleus Net soft & GIS (India) Ltd. and Vishal Information Technologies Ltd. were deemed incomparable to the assessee for determining the arm's length price of international transactions.

In conclusion, the High Court found no substantial question of law arising from the ITAT's decision. Consequently, the appeal was dismissed, upholding the findings of the ITAT regarding the exclusion of the aforementioned comparables.