2024 (10) TMI 1210 - HC - Income Tax

TP Adjustment - comparable selection - M/s TCS E-Serve International Ltd., M/s TCS E-Serve Ltd. and M/s Infosys BPO Limited - inclusion of 3 comparables was essentially raised on the ground of the huge expenditure incurred by those entities in brand building and advertisement as also on account of the reputed brand value and profile of those entities which clearly resulted in higher profitability. HELD THAT - We find that insofar as TCS E-Serve and Infosys BPO Limited are concerned, the Tribunal had in the appellant s own case pertaining to AY 2011-12 excluded those two entities from the list of comparables following the decision rendered by this Court in BC Management Services Pvt. Ltd. 2017 (12) TMI 255 - DELHI HIGH COURT In AY 2011-12, TCS E-Serve International had been excluded from consideration by the TPO itself. The exclusion of the three comparables in question would clearly merit acceptance bearing in mind a subsequent decision rendered by this Court in PCIT v. Evalueserve Sez (Gurgaon) Pvt. Ltd 2018 (2) TMI 1750 - DELHI HIGH COURT The appeal shall consequently stand allowed. The question as framed is answered in the affirmative and in favour of the appellant assessee.

Summary

Issues:
1. Whether the Tribunal erred in including TCS E-Serve International, TCS E-Serve Limited, and Infosys BPO Limited as comparables for Arm's Length Price (ALP) determination.
2. Whether the activities of the mentioned companies are functionally similar to the appellant's international transactions for Assessment Year (AY) 2010-11.
3. Whether the huge expenditure incurred by the entities in brand building and advertising affects their comparability.
4. Whether the exclusion of the three comparables is justified based on previous court decisions.

Detailed Analysis:
1. The principal issue in this case was the inclusion of TCS E-Serve International, TCS E-Serve Limited, and Infosys BPO Limited as comparables for ALP determination. The Tribunal upheld their inclusion based on functional similarities with the appellant. The appellant challenged this decision citing dissimilarities in services provided and brand value impact on profitability.

2. The Tribunal analyzed each company individually. Regarding TCS E-Serve International, it was found that the services provided were similar to the appellant's, leading to the conclusion that functional dissimilarity did not exist. For TCS E-Serve Limited, similar activities were noted, justifying its inclusion as a comparable. Infosys BPO Ltd. was also deemed comparable due to the similarity in functions carried out by the company and the appellant.

3. The appellant argued that the huge expenditure on brand building and advertising by the entities affected their comparability. However, the Tribunal rejected this argument, stating that the expenses were insignificant in relation to total turnover and did not significantly impact profitability. The turnover ratio was also considered in determining comparability.

4. The decision to exclude the three comparables was supported by previous court judgments. The court emphasized the importance of considering brand value and economic upscale in determining comparability. The exclusion was deemed justified based on functional similarities and brand value impact on profitability, as established in previous cases.

In conclusion, the High Court allowed the appeal, directing the exclusion of TCS E-Serve International Ltd., TCS E-Serve Ltd., and Infosys BPO Ltd. from the list of comparables for ALP determination for AY 2010-11, based on the findings of functional dissimilarities and brand value impact on profitability.