2024 (12) TMI 432 - HC - Income Tax

TP Adjustment - comparable selection - whether Infosys BPO Ltd. was required to be excluded as a comparable entity for conducting the bench marking analysis for determining the ALP u/s 92CA? - HELD THAT - In the present case, as noted, this court had examined the question of comparability of entities on merit and in accordance with the statutory framework u/s 92CA of the Act read with Rule 10B (1) (e) of the Income Tax Rules, 1963. It is also material to note that the question of suitability to include Infosys for the purpose of benchmark analysis in normal cases was considered by this court in Evalueserve.com (P.) Ltd. 2024 (11) TMI 319 - DELHI HIGH COURT this court had reiterated the earlier decision.

Issues:
1. Appeal against ITAT judgment on transfer pricing adjustments for AY 2009-2010.
2. Exclusion and inclusion of comparable entities for bench marking studies.
3. Functionality comparison of Accentia Technologies and Eclerx Services with the Assessee.
4. Exclusion of Infosys BPO Ltd. as a comparable entity.
5. High Court's examination of the comparability of entities.
6. Supreme Court's involvement in the matter.

Analysis:

1. The appeal was filed by the Revenue against the ITAT judgment regarding transfer pricing adjustments for the assessment year 2009-2010. The dispute revolved around the use of Transactional Net Margin Method (TNMM) by the Transfer Pricing Officer (TPO) for determining the Arms Length Price (ALP) in certain international transactions.

2. The primary issue was the selection of comparable entities for bench marking studies. The Assessee contested the exclusion of three entities and the inclusion of four others by the TPO. The ITAT examined the suitability of these entities and the mean Profit Level Indicator (PLI) was determined based on the Operating Profit on Cost.

3. The High Court analyzed the functionality comparison of Accentia Technologies and Eclerx Services with the Assessee. It was found that both entities were functionally dissimilar as they were engaged in different activities compared to the Assessee, impacting the comparability for bench marking.

4. The exclusion of Infosys BPO Ltd. as a comparable entity was a key issue. The High Court examined whether Infosys should be excluded for bench marking analysis to determine the ALP under Section 92CA of the Income Tax Act. The Court found significant differences in the services provided by Infosys and the Assessee, leading to the exclusion of Infosys.

5. The High Court thoroughly examined the comparability of entities based on merit and statutory framework requirements. The decision was made in accordance with Section 92CA of the Act and Rule 10B (1) (e) of the Income Tax Rules, 1963. Previous judgments were also considered in determining the comparability of entities.

6. The Revenue's appeal led to a Special Leave Petition before the Supreme Court, which granted leave and tagged the appeal with a batch of matters. The Supreme Court clarified the jurisdiction of the High Court in examining substantial questions of law related to the comparability of entities, emphasizing the importance of statutory provisions in such cases.

In conclusion, the High Court's detailed analysis and decision on the issues related to transfer pricing adjustments, selection of comparable entities, functionality comparison, and exclusion of Infosys BPO Ltd. were based on statutory provisions and previous judgments, ensuring a thorough examination of the matter. The involvement of the Supreme Court further clarified the jurisdiction and importance of substantial questions of law in such appeals.

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