2019 (8) TMI 609 - AT - Income Tax

TP Adjustment - acceptance/rejection of certain comparables by learned Commissioner (Appeals) - functionally dissimilarity - HELD THAT - Vishal Information Technologies Ltd. - It is now fairly well settled that this company cannot be a comparable to other companies due to its completely distinct business model. Time and again, it has been established that this company does not undertake ITeS itself, but, gets the work done by outsourcing to third party vendors. This is evident from the low employee cost of the company, as revealed from the annual report for the relevant period. The Co ordinate Bench in DBOI Global Services Pvt. Ltd. 2016 (8) TMI 1292 - ITAT MUMBAI , noticing that the employee cost of the company as a percentage of total cost works out to a meager 1.36% which proves the outsourcing of work, excluded the company as a comparable. Considering all the very same assessment year and were rendered on the basis of more or less common facts, respectfully following the cited decisions of the Tribunal, we uphold the decision of the learned Commissioner (Appeals) in excluding this company as a comparable, though, on the basis of our own reasoning. Cepha Imaging Pvt. ltd. - From the facts and materials placed on record including the annual report of this comparable, it is evident, the company is in the business of development and sale of software. That being the case, it is functionally different from the assessee as the assessee is admittedly an ITeS provider. The Co ordinate Bench in DBOI Global Services Pvt. Ltd. 2016 (8) TMI 1292 - ITAT MUMBAI having found that the company is engaged in software development service, excluded it as a comparable. Similar view was expressed by the Tribunal in other decisions cited by the learned Authorised Representative. Since, the aforesaid decisions are for the very same assessment year and the facts on the basis of which the company was excluded as a comparable are more or less common, respectfully following the aforesaid decisions of the Tribunal, we uphold the decision of the learned Commissioner (Appeals) on the issue. Assessee has furnished a chart before us computing the margin of the rest of the comparables after exclusion of Vishal Information Technologies Ltd. and Cepha Imaging Pvt. Ltd. As per the said chart, after exclusion of the aforesaid two companies, the average margin of the rest of the comparables works out to 18.53%. According to the learned Authorised Representative, the margin shown by the assessee would fall within 5% range of the arithmetic mean of the rest of the comparables @ 18.53% requiring no further adjustment. - Decided against revenue

Summary

Issues:
Acceptance/rejection of certain comparables by learned Commissioner (Appeals).

Detailed Analysis:
The appeal and cross objection arose from an order passed by the Commissioner of Income Tax (Appeals) for the assessment year 2005-06. The main issue raised by both parties concerned the acceptance/rejection of certain comparables by the Commissioner (Appeals). The assessee, an Indian company providing IT-enabled services to its overseas Associated Enterprise, benchmarked its transactions using the Transactional Net Margin Method (TNMM). The Transfer Pricing Officer rejected 16 out of 22 comparables selected by the assessee, leading to adjustments in the arm's length price. The Commissioner (Appeals) accepted some comparables proposed by the assessee but rejected others, leading to appeals and cross objections.

Vishal Information Technologies Ltd.:
The Departmental Representative argued in favor of this comparable, while the assessee contended that the company's business model was not similar, citing low employee costs due to outsourcing. The Tribunal upheld the decision to exclude this comparable based on functional dissimilarity and previous Tribunal decisions for the same assessment year.

Cepha Imaging Pvt. Ltd.:
The Departmental Representative objected to the exclusion of this company, but the assessee argued that it was engaged in software development, making it functionally different from the assessee. The Tribunal upheld the exclusion of this comparable based on the functional disparity and consistent Tribunal decisions for the same assessment year.

After excluding the two comparables, the Tribunal found that the average margin of the remaining comparables fell within the acceptable range, leading to the dismissal of certain grounds of the Revenue's appeal and the partial allowance of the assessee's cross objection. The Tribunal left open the possibility of adjudicating on other comparables in future assessment years.

In conclusion, the Revenue's appeal was dismissed, and the assessee's cross objection was partly allowed. The issues related to other comparables were left open for future adjudication if they arise in subsequent assessment years.