2019 (2) TMI 817 - HC - Income Tax

High Court admits appeal challenging ITAT order for AY 2007-08 under Section 260A. TNMM, ALP, comparables emphasized.

The High Court admitted the appeal challenging the Income Tax Appellate Tribunal's order for Assessment Year 2007-08 under Section 260A of the Income Tax ... TPA - ICRA Online Ltd. from the list of comparables as being high profit margin company when Indian Transfer Pricing Regulation does not provide exclusion of same but arriving at the arithmetic mean of profit margin of the comparable companies - Held that:- The impugned order of the Tribunal also does not dispute the position in law as reiterated in Barclays Technology Centre India Pvt. Ltd. (2018 (8) TMI 574 - BOMBAY HIGH COURT) that mere high profit margin would not warrant an exclusion of a company from the final list of comparable. However, in the present case, the Tribunal has found on examination of facts that, the profit margin in the subject assessment year declared by ICRA Online Ltd. was abnormally high, taking into account the manner in which it conducted its business. This to conclude that the profit margin declared by ICRA Online Ltd. does not reflect a normal business trend and, therefore, was excluded from the list of comparable. This view of the Tribunal is essentially a finding of fact. The same is not shown to be perverse. Include ACE Softwares Exports Ltd. as comparable when its profitability cannot be worked out in the absence of segmental data - Held that:- The activities rendered by the respondent assessee in the application engineering segment which involves the use of CAD/CAM services, which are similar to ones performed by ACE Softwares Exports Ltd. These services namely; CAD/CAM services would fall under the broad category of IT Enabled Services and, therefore, would be broadly functionally comparable. We note that the Tribunal rendered a finding of fact that ACE Software Exports Ltd., was not a persistent loss making unit. It further found that the loss suffered in the subject assessment year is on account of normal business and not on account of factors beyond the normal business environment. We find that the Tribunal has rendered a finding of fact which has not been shown to be perverse in any manner. In the above view, the question as proposed does not give rise to any substantial question of law. The appeal is admitted on the substantial question of law at Sr. No.(i) above - Whether on the facts and circumstances of the case and in law, the Tribunal was correct in considering internal TNMM as most appropriate method when the relevant data for comparison is not available for transfer pricing analysis? Issues involved:1. Challenge to the order of the Income Tax Appellate Tribunal for Assessment Year 2007-08 under Section 260A of the Income Tax Act, 1961.2. Consideration of internal TNMM as the most appropriate method when relevant data for comparison is not available for transfer pricing analysis.3. Exclusion of ICRA Online Ltd. from the list of comparables due to high profit margin.4. Inclusion of ACE Softwares Exports Ltd. as comparable despite the absence of segmental data.Analysis:Issue 1: Challenge to the Tribunal's orderThe appellant challenged the order of the Income Tax Appellate Tribunal (Tribunal) for Assessment Year 2007-08 under Section 260A of the Income Tax Act, 1961. The appeal raised questions of law regarding the methodology used for transfer pricing analysis and the selection of comparables for determining the Arms Length Price (ALP) of the business support services provided to Associated Enterprises (AEs).Issue 2: Use of internal TNMM methodThe Tribunal considered the internal Transactional Net Margin Method (TNMM) as the most appropriate method for transfer pricing analysis, even when relevant data for comparison was not available. This decision was challenged by the Revenue, raising a question of law regarding the correctness of using internal TNMM without comparable data.Issue 3: Exclusion of ICRA Online Ltd. from comparablesThe Tribunal excluded ICRA Online Ltd. from the list of comparables due to its abnormally high profit margin of 63.33% for the subject assessment year, which was deemed abnormal compared to previous and subsequent years. The Tribunal's decision was based on the abnormality of the profit margin, which was not reflective of normal business profitability, leading to the exclusion of ICRA Online Ltd. from the final list of comparables.Issue 4: Inclusion of ACE Softwares Exports Ltd. as comparableThe Assessing Officer and the Dispute Resolution Panel rejected the plea to include ACE Softwares Exports Ltd. in the final set of comparables for design engineering services due to functional dissimilarity and being a loss-making enterprise. However, the Tribunal found that the activities of ACE Softwares Exports Ltd., particularly in CAD/CAM services, were functionally comparable to the engineering services provided by the respondent assessee. The Tribunal concluded that the loss incurred by ACE Softwares Exports Ltd. in the subject assessment year was a normal business incident and not due to external factors, justifying its inclusion in the final set of comparables.In conclusion, the High Court admitted the appeal on the substantial question of law related to the use of internal TNMM method and directed the Registry to communicate the order to the Tribunal for further proceedings. The judgment provides detailed analysis and reasoning for each issue raised, emphasizing the importance of factual findings and normal business conditions in determining comparables for transfer pricing analysis.