2025 (1) TMI 900 - AT - Income Tax

TP Adjustment - international transactions of receipt from production services - comparable selection - HELD THAT - As the business profile of the assessee is inline with that of GTS eservices direction for exclusion of Universal Print Systems Limited from the list of comparables as functionally dissimilar. BNR Udyog Limited - As on perusal of the annual report it is seen that apart from medical transcription activities, it is also into medical billing and coding services. The functional profile of the medical transcription segment is almost akin to functions of Accentia Technologies Ltd. and again for the various activities of medical transcription, medical billing and coding services there is no separate segment thus excluded the said comparable. TP adjustment on account of receipt from software development services - exclusion of two comparables, namely, Vama Industries with margin at 31.08 % and Spry Resources India Pvt. Ltd. with margin at 22.37% - HELD THAT - As IT and ITeS services are not comparable, the assessee rendering only IT services cannot be compared with a company which renders both IT and ITeS. In view of the foregoing discussion, we are satisfied that Vama Industries Ltd. is not a functionally comparable company and the same should be excluded from the list of comparables - See Approva Systems Private Limited 2019 (6) TMI 437 - ITAT PUNE . I nclusion of the Thirdware Solutions Ltd.- as argued that nowhere the TPO has explained how he has worked out the margin of this comparable at 28.17% when as per the assessee, the margin comes at 19.63% - We are left with no choice but to restore this issue to the file of the TPO. TPO is directed to explain how he has computed the margin at 28.17% and re-determine the inclusion/exclusion of this comparable after affording a reasonable and adequate opportunity of being heard to the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses the following core issues:

• Whether the Transfer Pricing (TP) adjustments made by the Transfer Pricing Officer (TPO) concerning the international transactions of receipt from production services (ITeS) and software development services (IT Services) were justified.
• Whether the comparables selected by the TPO for determining the Arm's Length Price (ALP) were appropriate.
• Whether the exclusion of certain comparables proposed by the assessee was warranted.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: TP Adjustment for Production Services (ITeS)

• Relevant legal framework and precedents: The Transfer Pricing Regulations under the Income Tax Act, which require international transactions to be conducted at arm's length, were the basis for the TP adjustments.
• Court's interpretation and reasoning: The Tribunal analyzed the comparables selected by the TPO and the assessee. The Tribunal found that certain comparables selected by the TPO were not functionally similar to the assessee's business activities.
• Key evidence and findings: The assessee's business profile was compared with the selected comparables. The Tribunal noted the functional dissimilarity of Universal Print Systems Ltd. and BNR Udyog Limited with the assessee's operations.
• Application of law to facts: The Tribunal applied the principles of functional comparability and found that the inclusion of Universal Print Systems Ltd. and BNR Udyog Limited was inappropriate.
• Treatment of competing arguments: The Tribunal considered the assessee's objections and the TPO's rationale for selecting the comparables. It found merit in the assessee's arguments for exclusion.
• Conclusions: The Tribunal directed the exclusion of Universal Print Systems Ltd. and BNR Udyog Limited from the final set of comparables for the production services segment.

Issue 2: TP Adjustment for Software Development Services (IT Services)

• Relevant legal framework and precedents: The Transfer Pricing Regulations under the Income Tax Act, focusing on the arm's length principle, were applied to the software development services transactions.
• Court's interpretation and reasoning: The Tribunal evaluated the comparables used by the TPO and the assessee, focusing on functional similarity and the appropriateness of the selected comparables.
• Key evidence and findings: The Tribunal reviewed the functional profiles of the comparables and found that Vama Industries Ltd. was not functionally comparable to the assessee.
• Application of law to facts: The Tribunal applied the principles of functional comparability and found that Vama Industries Ltd. should be excluded from the comparables for the software development services segment.
• Treatment of competing arguments: The Tribunal considered the assessee's arguments for exclusion and the TPO's justification for inclusion. It sided with the assessee's position on Vama Industries Ltd.
• Conclusions: The Tribunal directed the exclusion of Vama Industries Ltd. from the final set of comparables for the software development services segment.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "There can be no estoppel against the provisions of the Act... Simply because a company was wrongly chosen by the assessee as comparable cannot act as a deterrent from challenging the fact that such a company is actually not comparable."
• Core principles established: The Tribunal emphasized the importance of functional comparability in selecting comparables for TP analysis and upheld the exclusion of entities that are not functionally similar.
• Final determinations on each issue: The Tribunal allowed the appeal in favor of the assessee, directing the exclusion of Universal Print Systems Ltd., BNR Udyog Limited, and Vama Industries Ltd. from the final set of comparables for the respective segments.

The judgment highlights the importance of selecting appropriate comparables based on functional similarity in TP cases and reinforces the principle that entities with distinct business activities should not be used as comparables.