2022 (9) TMI 1192 - HC - Income Tax

TP Adjustment - Comparable selection - Whether ITAT fell in error in holding that the Assessee is not a Knowledge Processing Outsourcing Unit ( KPO ) whereas the Assessee itself in the transfer pricing study report had declared that it is engaged in KPO activities? - HELD THAT - ITAT has recorded that admittedly, there has been no change in the functions performed by the Assessee for the earlier years and in AY 2009-10 when the said comparables were excluded in the case of the Assessee after analyzing its functional profile. ITAT and the DRP have thus, returned concurrent finding of facts with respect to the functional dissimilarities of the said four comparables with the Assessee. In the present appeal, the challenge is to the said finding of facts and there is no perversity in the said findings. Revenue has not been able to demonstrate that the analysis done by ITAT and DRP while excluding the companies suggested by Revenue from the list of comparables, was in any manner contrary to the settled position in law. This Court in WSP Consultants India Pvt. Ltd. 2017 (11) TMI 464 - DELHI HIGH COURT has held that inclusion or exclusion of comparables per se cannot be treated as a question of law unless it is demonstrated to the Court that the Tribunal took into account irrelevant consideration or excluded irrelevant factors in the ALP that impact significantly. ITAT has not committed any perversity or applied incorrect principle to the given facts and therefore, we do not find that any substantial questions of law arise for consideration in the present appeal. Accordingly, the same is dismissed.

Issues:
1. Delay in filing the appeal
2. Direction for setting aside the ITAT order
3. Assessee's classification as a KPO unit
4. Exclusion of comparables in transfer pricing study
5. Functional dissimilarities of comparables
6. Challenge to the findings of functional dissimilarities
7. Application of Transfer Pricing Method

1. Delay in filing the appeal:
The High Court condoned a delay of 28 days in filing the appeal, as per CM APPL. 7944/2020, based on the averments made in the application.

2. Direction for setting aside the ITAT order:
The appeal sought a direction to set aside the ITAT order dated 31st July, 2019, concerning the Assessment Year 2011-12. The Appellant argued that the ITAT erred in classifying the Assessee as not a Knowledge Processing Outsourcing Unit (KPO) despite the Assessee's declaration in the transfer pricing study report. The Appellant also contested the exclusion of certain comparables in the ITES industry by the ITAT.

3. Assessee's classification as a KPO unit:
The Assessee, engaged in ITES, adopted the Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The Transfer Pricing Officer (TPO) selected comparables, including eClerxservices, TCS eServe, Accentia Technologies Ltd., and ICRA Techno Analytics Ltd. The Assessee objected to these comparables, and the Dispute Resolution Panel (DRP) accepted the objections, leading to the exclusion of these companies.

4. Exclusion of comparables in transfer pricing study:
The ITAT concurred with the DRP's findings that the excluded comparables were functionally dissimilar to the Assessee. The ITAT noted that there had been no change in the Assessee's functions in earlier years when similar comparables were excluded. The Revenue failed to demonstrate any legal errors in the exclusion of these comparables.

5. Functional dissimilarities of comparables:
Both the ITAT and DRP found the comparables functionally dissimilar to the Assessee. The ITAT upheld the exclusion based on functional diversity and past exclusions in the Assessee's case. The Revenue's challenge to these findings was dismissed as the analysis was found to be in line with established legal principles.

6. Challenge to the findings of functional dissimilarities:
The High Court cited a previous judgment to emphasize that the inclusion or exclusion of comparables is not a question of law unless relevant considerations are ignored or irrelevant factors are included. In this case, the Court found no perversity or incorrect application of principles by the ITAT, leading to the dismissal of the appeal.

7. Application of Transfer Pricing Method:
The case highlighted the application of the Transfer Pricing Method in determining the arm's length price for international transactions. The TNMM with OP/OC as the PLI was adopted by the Assessee, leading to the exclusion of certain comparables based on functional dissimilarities and lack of segmental data.

In conclusion, the High Court upheld the ITAT's decision, dismissing the appeal as no substantial questions of law were found to arise from the case. The judgment emphasized the importance of considering relevant factors in transfer pricing studies and upheld the exclusion of comparables based on functional dissimilarities.

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