Transfer Pricing Dispute: Income Determination & Comparable Companies Exclusion

The dispute centered on the determination of total income and Arm's Length Price (ALP) for international transactions. The Assessing Officer/TPO's adjustment led to a total income of Rs. 3,94,73,751/-, contested by the assessee. Various companies were debated for inclusion/exclusion as comparables, with the ITAT directing exclusion of CAT Technologies Ltd, Persistent Systems Ltd, Tata Consultancy Limited, and Thirdware Solutions Limited. Margin computation errors were noted, leading to re-examination of certain companies. The CIT(A) excluded Bodhtree Consulting Ltd and Infosys Ltd from the final set of comparables. The ITAT partly allowed the assessee's appeal and dismissed the Revenue's appeal.

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Issues Involved:
1. Determination of total income and Arm's Length Price (ALP) in respect of international transactions.
2. Inclusion and exclusion of comparables for ALP determination.
3. Margin computation errors and re-examination of comparables.
4. Exclusion of certain companies from the final set of comparables by the CIT(A).

Summary:

1. Determination of Total Income and ALP:

The assessee's substantial grievance was against the upward adjustment of Rs. 3,70,12,100/- made by the Assessing Officer/TPO, determining the total income at Rs. 3,94,73,751/- against the returned income of Rs. 24,61,650/-. The dispute revolved around the inclusion and exclusion of certain comparables while determining the Arm's Length Price (ALP) in respect of international transactions with AE.

2. Inclusion and Exclusion of Comparables for ALP Determination:

CAT Technologies Ltd: The assessee contended that this company should not be comparable due to its diverse activities, including medical transcription and job portal services, with no segmental information available. The ITAT directed its exclusion, considering its significant abnormal growth in profit and functional dissimilarity.

Persistent Systems Ltd: The assessee objected to its inclusion due to the absence of segmental accounts and significant difference in OP/TC margins. The ITAT excluded this company, noting the lack of segmental reporting and functional dissimilarity.

Tata Consultancy Limited (TCS): The assessee argued against its inclusion due to its diversified business activities and significant R&D expenditure. The ITAT directed its exclusion, considering its significant brand value and turnover disparity.

Thirdware Solutions Limited: The assessee objected to its inclusion due to revenue from various sources and lack of segmental accounts. The ITAT directed its exclusion, considering the functional dissimilarity and absence of segmental reporting.

3. Margin Computation Errors and Re-examination of Comparables:

The ITAT directed the TPO to re-examine the correct margins of Goldstone Technologies Limited and Sasken Technology Limited, as pointed out by the assessee. The TPO was also directed to re-examine the employee cost of CG VAK Software & Exports Ltd and SIP Technology and include them in the final set of comparables if the criteria were met.

4. Exclusion of Certain Companies from the Final Set of Comparables by the CIT(A):

Bodhtree Consulting Ltd: The CIT(A) excluded this company due to its abnormal profit during the F.Y. under consideration, which was not considered by the TPO. The ITAT upheld this exclusion, noting the volatility in profit.

Infosys Ltd: The CIT(A) excluded this company based on the decision of the Hon'ble High Court of Delhi in the case of Agnity India Technologies Pvt. Ltd, which held that Infosys Ltd is not a proper comparable due to various factors, including risk profile and revenue ownership. The ITAT upheld this exclusion, noting the functional dissimilarity and turnover disparity.

Conclusion:

The appeal of the assessee in ITA No. 1542/DEL/2015 was partly allowed for statistical purposes, and the appeal of the Revenue in ITA No. 1608/DEL/2015 was dismissed.

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