2024 (11) TMI 503 - HC - Income Tax

TP Adjustment - comparable selection - functional dissimilarity - HELD THAT -Infosys was engaged in providing variety of services including software, consulting, products application design, development, re-engineering, maintenance, system integration, package evaluation, implementation in business process management, etc. and further that its turnover was significantly higher than that of the assessee in that case. The functional dissimilarities between the entities as pointed out by the learned Tribunal in Alcatel Lucent India Ltd. 2016 (8) TMI 1195 - ITAT DELHI are equally applicable in the facts of the present case. Zylog Systems India Limited is functionally dissimilar to the assessee as it owns substantial intangibles in the form of goodwill and product development cost. It was noted that the assessee does not hold any intangibles and earns its entire income from off-shore activities. As against the same, 85% of the revenue of Zylog was from on-site operation and therefore, cannot be included as a comparable entity for benchmarking the ALP of the international transactions in question. Larsen Toubro Private Limited as engaged in diversified business. In Principal Commissioner of Income Tax v. Alcatel Lucent India Ltd. (supra), this court did not interfere with the decision of the learned Tribunal to exclude Larsen Toubro as a comparable entity in similar circumstances. Acropetal Technologies Limited is to be excluded as noted that the activities of Acropetal were in three distinct segments engineering design service, IT services and health care. In addition, the said entity had also acquired two US based companies, which had resulted in an increase of 43.66% in its sales during the relevant period. Indisputably, the functional differences as pointed out by the learned Tribunal cannot be considered as inconsequential. Inclusion of foreign exchange currency fluctuation and operating revenue - Tribunal had accepted the same. Concededly, the said issue is covered by the decision of this Court in Rampgreen Solutions Pvt. Ltd. 2015 (8) TMI 931 - DELHI HIGH COURT We find no infirmity in the decision of the learned Tribunal in this regard as well. No substantial question of law arises in the present appeal.

Summary

Issues:
1. Appeal against assessment order under Income Tax Act, 1961.
2. Addition of income on account of re-computation of arm's length price (ALP) in international transactions.
3. Transfer pricing study using Transactional Net Margin Method (TNMM).
4. Inclusion/exclusion of comparable entities for benchmarking.
5. Functionally dissimilar entities like Infosys, Zylog, Larsen & Toubro, and Acropetal.
6. ALP adjustments recommended by Transfer Pricing Officer (TPO).
7. Decision of Dispute Resolution Panel (DRP) on comparable entities.
8. Judicial precedents supporting exclusion of certain entities.
9. Inclusion of foreign exchange currency fluctuation and operating revenue.
10. Absence of substantial question of law in the appeal.

Detailed Analysis:
The High Court of Delhi heard an appeal filed by the Revenue against an order passed by the Income Tax Appellate Tribunal regarding the assessment year 2013-14. The appeal challenged the addition of Rs. 17,25,99,668/- to the declared income of the assessee due to re-computation of the arm's length price (ALP) in international transactions related to software development. The assessee had used the Transactional Net Margin Method (TNMM) for benchmarking and the Transfer Pricing Officer (TPO) selected additional comparable entities for determining the mean Profit Level Indicator (PLI) (para 1-3).

The TPO's selection of comparables, including Infosys, Zylog, Larsen & Toubro, and Acropetal, was contested by the assessee. The Dispute Resolution Panel (DRP) accepted some objections raised by the assessee, leading to final ALP adjustments of Rs. 17,26,00,000/-. The assessee's appeal against the inclusion of four entities was accepted by the Tribunal, prompting the Revenue to challenge this decision (para 4-6).

The High Court noted that entities like Infosys, Zylog, Larsen & Toubro, and Acropetal were found to be functionally dissimilar to the assessee, based on previous judicial decisions and the nature of their operations. The exclusion of these entities as comparables was upheld by the Court, citing functional dissimilarities and revenue sources as key factors (para 7-11).

Regarding the inclusion of foreign exchange currency fluctuation and operating revenue, the Court upheld the Tribunal's decision, citing precedent cases. It was concluded that no substantial question of law arose in the present appeal, leading to the dismissal of the appeal (para 12-14).