2018 (3) TMI 222 - HC - Income Tax

Court affirms exclusion of comparables & Wipro Limited based on RPT & brand value.

The Court upheld the ITAT's decision, affirming the exclusion of certain comparables and M/s Wipro Limited based on the Related Party Transaction (RPT) ... TPA - ALP determination - comparable selection - deletion directed by the ITAT, based upon its application of the Related Party Transaction (“RPT”) and the exclusion of the comparable i.e. M/s Wipro Limited (BPO service segment) - Held that:- The RPT filter, is relevant and fits in with the overall scheme of a transfer pricing study which is premised primarily on comparing light entities having similar if not identical functions. Therefore, if a particular entity predominantly has transactions with its associate enterprise – in excess of a certain threshold percentage, its profit making capacity may resulted in a distorted picture, either way. The ITAT, in the present case, followed a previous precedent and was of the opinion that a broad threshold figure of 25% RPT in the case of comparables was essential. Applying that rationale, the ITAT excluded some comparables listed in the TPO’s report. There is no error of law per se in this approach. As to the exclusion of M/s Wipro Limited, here too, the Court is of the opinion that the brand value of an entity has a significant role in its ability to garner profits and negotiate contracts. While considering the comparables, the likelihood of profits derived or attributable to the brand having regard to the consistency of the quality of services that an entity is able to offer would be relevant; although functionally, the two entities may be similar in terms of the services or products they offer, brand does play its own role in price or cost determination. If this singular aspect is kept in mind, the ITAT’s approach cannot be faulted with. - Decided against revenue Issues:Challenge to impugned order of ITAT based on Related Party Transaction (RPT) and exclusion of comparable M/s Wipro Limited.Analysis:The judgment pertains to an appeal under Section 260-A of the Income Tax Act, 1961 challenging the order passed by the Income Tax Appellate Tribunal (ITAT). The primary contention raised was regarding the deletion directed by the ITAT, which was based on the application of the Related Party Transaction (RPT) and the exclusion of M/s Wipro Limited as a comparable entity. The appellant argued that these decisions were erroneous in law.The case involved the assessment year 2007-08, where the assessee reported three categories of international transactions with its Associated Enterprise (AE). The Transfer Pricing Officer (TPO) accepted the Transactional Net Marginal Method (TNMM) as the most appropriate method for determining the Arm’s Length Price (ALP). However, the TPO excluded 13 comparables out of 22, leading to an upward adjustment by the TPO. Subsequently, the Dispute Resolution Panel (DRP) conducted a fresh exercise and made adjustments resulting in a higher amount.The ITAT, upon the assessee's appeal, deleted the adjustments made by the DRP. The ITAT considered the RPT and excluded certain comparables based on a threshold of 25% RPT. Additionally, M/s Wipro Limited was excluded as a comparable due to its significant brand presence in the market. The Revenue contested these decisions, arguing that the RPT filter was not appropriate and that M/s Wipro Limited should have been included as a comparable.The Court upheld the ITAT's decision, stating that the RPT filter was relevant in transfer pricing studies to ensure comparability. The Court agreed that entities with excessive transactions with their associate enterprises could distort profit-making capacity. Regarding the exclusion of M/s Wipro Limited, the Court recognized the significance of brand value in profit generation and contract negotiation. Therefore, the ITAT's approach in excluding certain comparables and M/s Wipro Limited was deemed appropriate.In conclusion, the Court found no error of law in the ITAT's decision and dismissed the appeal, affirming the exclusion of certain comparables and M/s Wipro Limited based on the RPT filter and brand value considerations.