2018 (8) TMI 574 - HC - Income Tax

TPA - Tribunal justification in law in excluding M/s. E Zest Solutions Ltd., M/s. FCS Software Ltd., M/s. KALS information Systems Ltd. and M/s. Bodhtree Consulting Ltd. from the set of comparables selected by the TPO - Held that - Assessee is engaged in rendering software development services to its Associated Enterprises (AE) worldwide on captive basis at cost plus basis. Revenue and the Assessee who seek to prefer appeals from the orders of the Tribunal on Transfer Pricing particularly inclusion/exclusion of comparables. CIT and the Assessee in general would do well to also review the appeals filed and withdraw the same, in case the only challenge therein is to finding of facts, if the same is without evidence of any perversity or is in the face of settled legal position. Revenue is directed to serve a copy of this order on the Principal Chief Commissioner of Income Tax within the State of Maharashtra for necessary action

Issues:
Challenge to the order of the Income Tax Appellate Tribunal regarding the exclusion of certain companies as comparables for determining the Arm's Length Price (ALP) of services rendered by the Assessee to its Associated Enterprises (AE).

Analysis:
1. Exclusion of M/s. EZest Solutions Ltd.:
The Tribunal excluded EZest Solutions Ltd. as it was found to be rendering Knowledge Process Outsourcing (KPO) services, making it incomparable to the software development services provided by the Assessee. The decision was based on a previous order and no distinguishing features were presented to challenge this exclusion, leading to a finding of fact that could not be disturbed without evidence of perversity.

2. Exclusion of Kals Information Systems Ltd.:
Similarly, Kals Information Systems Ltd. was excluded as it was engaged in developing and selling software, which differed functionally from the software development services offered by the Assessee. The Tribunal's decision was upheld due to the absence of any challenge or distinctive features presented to justify a different conclusion.

3. Exclusion of Bodhtree Consulting Ltd.:
Bodhtree Consulting Ltd. was excluded as it was involved in sales of software products in addition to software services, making it functionally dissimilar to the Assessee. The Tribunal's decision was supported by the absence of Segmental Accounts and the adoption of a fixed price project method, different from the cost plus basis used by the Assessee. The appeal challenging this exclusion was admitted based on a different issue regarding inclusion in the list of comparables by the Assessee itself.

4. Exclusion of FCS Software Solutions Ltd.:
FCS Software Solutions Ltd. was excluded due to its abnormally high profit margin for the relevant assessment year, which was deemed not a normal business condition. The Tribunal's decision was supported by a lack of dispute from the Revenue regarding the factual analysis, leading to the conclusion that the high profit margin was abnormal and thus not comparable.

5. Overall Finding:
The Tribunal's decisions to exclude the aforementioned companies as comparables were upheld as findings of fact, with no demonstration of perversity by the Revenue. The analysis conducted by the Tribunal was found to be in line with established legal principles, and the appeal was dismissed. The Court also highlighted the need for both the Revenue and Assessee to refrain from filing ritualistic appeals challenging comparables without evidence of relevant factors impacting significantly.

6. Conclusion:
The appeal was dismissed with no order as to costs, emphasizing the importance of adhering to legal principles and avoiding unnecessary challenges to Tribunal decisions on Transfer Pricing issues. The Court directed the Revenue to serve a copy of the order on the Principal Chief Commissioner of Income Tax within the State of Maharashtra for appropriate action.

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