2015 (4) TMI 1172 - AT - Income Tax

Transfer Pricing Analysis: Consistency Key in Excluding Comparables

The Tribunal upheld the Commissioner of Income Tax (Appeals) decision to exclude M/s. Bodhtree Consulting Ltd. from the list of comparables for transfer ... TPA - ALP determination - selection of comparable - Held that:- Assessee is into providing Digitizing services and data conversion/creation services. Both the services fall under the ambit of IT enable service, thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable. As there is large variation in the operation revenue, operating cost and operating profit of M/s. Bodhtree Consulting Ltd. between different financial years. In view of the above discussion, we are of the considered opinion that M/s. Bodhtree Consulting Ltd. was rightly excluded by the CIT(A) from the list of comparables. Issues Involved:1. Inclusion of M/s. Bodhtree Consulting Ltd. as a comparable company for transfer pricing analysis.Issue-wise Detailed Analysis:1. Inclusion of M/s. Bodhtree Consulting Ltd. as a Comparable Company for Transfer Pricing Analysis:The primary issue in this case was whether M/s. Bodhtree Consulting Ltd. should be included as a comparable company for benchmarking the international transactions of the assessee, which is engaged in IT-enabled services (ITES).Facts and Background:The assessee, a company engaged in embroidery software designing and document creation, filed its return of income disclosing NIL income. During the assessment proceedings, the Assessing Officer (AO) noted that the assessee had entered into international transactions with related parties amounting to Rs. 31,72,64,609. The Transfer Pricing Officer (TPO) was involved to determine the arm's length price (ALP) of these transactions. The assessee used the Transactional Net Margin Method (TNMM) and selected a set of five external comparables. The TPO, however, included M/s. Bodhtree Consulting Ltd. as an additional comparable, leading to an adjustment of Rs. 2,09,60,280.Assessee's Argument:The assessee challenged the inclusion of M/s. Bodhtree Consulting Ltd., arguing that it was engaged in software development services, which are functionally different from the ITES provided by the assessee. The assessee pointed out that the business description in the annual report of M/s. Bodhtree Consulting Ltd. indicated that it was involved in software consultancy and development, making it non-comparable. The assessee also noted that M/s. Bodhtree Consulting Ltd. had hived off its e-paper business to a subsidiary, which was more comparable to the assessee's ITES.CIT(A)'s Decision:The Commissioner of Income Tax (Appeals) [CIT(A)] agreed with the assessee and directed the AO to exclude M/s. Bodhtree Consulting Ltd. from the list of comparables. The CIT(A) observed that the annual report of M/s. Bodhtree Consulting Ltd. clearly indicated its involvement in software development, making it non-comparable to the assessee's ITES.Revenue's Appeal:The Revenue appealed against the CIT(A)'s decision, arguing that M/s. Bodhtree Consulting Ltd. was engaged in similar services as the other comparables accepted by the assessee. The Revenue contended that the CIT(A) erred in excluding M/s. Bodhtree Consulting Ltd. without justifiable grounds.Tribunal's Analysis and Conclusion:The Tribunal upheld the CIT(A)'s decision to exclude M/s. Bodhtree Consulting Ltd. from the list of comparables. The Tribunal noted that from Assessment Year (A.Y.) 2006-07 onwards, M/s. Bodhtree Consulting Ltd. was never considered a comparable except for the impugned year, supporting the rule of consistency. The Tribunal emphasized that uniformity in treatment and consistency in approach are crucial when facts and circumstances are identical.The Tribunal also referred to previous decisions, including the case of Barclays Technology Centre vs. ACIT, where it was held that the revenue recognition model of M/s. Bodhtree Consulting Ltd. was different from the assessee's model, leading to fluctuations in margins. The Tribunal found that M/s. Bodhtree Consulting Ltd. was engaged in software development, whereas the assessee provided ITES, making them functionally different.Additionally, the Tribunal observed significant variations in the financial results of M/s. Bodhtree Consulting Ltd. over different years, further supporting its exclusion as a comparable.Final Judgment:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to exclude M/s. Bodhtree Consulting Ltd. from the list of comparables. The appeal filed by the Revenue was dismissed, and the order of the CIT(A) was upheld.Pronouncement:The judgment was pronounced in the open court on 29-04-2015.