2019 (7) TMI 1279 - HC - Income Tax

Court excludes TCS E-Serve from comparables list for transfer pricing. Appeal allowed for Assessee.

M/s. Avaya India Pvt. Ltd. Versus ACIT

The Court excluded M/s TCS E-Serve Limited and M/s TCS E-Serve International Limited from the list of comparables for determining the arm's-length price ... TP Adjustment - ITAT upholding the order of the TPO and the DRP in not excluding M/s TCS EServe Limited; M/s TCS E-Serve International Limited from the list of comparables for the purposes of determining the arms-length price of the international transactions involving the Assessee - HELD THAT:- What weighed invariably is the fact that both companies had huge turnovers when compared to the tested entity. Both entities had close connection of the Tata Group of Companies and TCS E-Serve International had given a huge amount to TCS towards brand equity. Further there was no segmental bifurcation between the transaction processing and technical services. The assets employed by TCS E-Serve along with huge intangibles in the form of brand value were found to have a definite considerable effect on its PLI. These factors vitiated its comparability under the FAR analysis with the tested company, which could be a capital service provider without much intangible and risks. There is merit in the contention of the Assessee that the scale of operations of the comparables with the tested entity is a factor that requires to be kept in view. TCS E-Serve has a turnover of ₹ 1359 crores and has no segmental revenue whereas the Assessee’s entire segmental revenue is a mere 24 crores The Director’s report of TCS E-Serve Limited bears out the contention of the Assessee that both entities have been leveraging TCSs scale and large client base to increase their business in a significant way. The submission that the two comparables offer an illustration of 'an identical transaction being conducted in an uncontrolled manner” overlooks the effect of the Tata brand on the performance of the impugned comparables. The question was not merely whether the margins earned by the Tata group in providing captive service to the Citi entities were at arm’s length. The question was whether they offered a reliable basis to re-calibrate the PLI of the Assessee whose scale of operations was of a much lower order than the two impugned comparables. The mere fact that the transactions were identical was not, in terms of the law explained in the above decisions, either a sole or a reliable yardstick to determine the apposite choice of comparables. For all of the aforementioned reasons, the Court finds merit in the contention of the Assessee that both the impugned comparables viz., TCS EServe Limited and TCS E-Serve International Limited ought to be excluded from the list of comparables for the purposes of determining the ALP of the international transactions involving the Assessee and its AEs. - Decided in favour of assessee. Issues Involved:1. Exclusion of M/s TCS E-Serve Limited and M/s TCS E-Serve International Limited from the list of comparables for determining the arm's-length price (ALP) of international transactions.Detailed Analysis:Background Facts:The Assessee, a subsidiary of Avaya International LLC, USA, provides programming, application support, marketing support services, and back-office services to its Associated Enterprises (AEs) on a cost-plus basis. For the Assessment Year (AY) 2010-11, the Assessee filed its return declaring a total income of Rs. 29,83,98,593/-. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) for determining the ALP of international transactions.Order of the TPO:The TPO, in his order dated 22nd January 2014, carried out a fresh search of comparables and proposed adjustments to the ALPs of international transactions in all three segments (ITES, MSS, and CSD). For the ITES segment, the TPO picked nineteen comparables, recommending a TP adjustment of Rs. 19,40,74,658/-. For the MSS segment, he picked eight comparables, recommending a TP adjustment of Rs. 2,53,25,670/-. The TPO also applied the Comparable Uncontrolled Price (CUP) method for the MSS segment, determining the ALP at NIL and making a TP adjustment of Rs. 2,12,31,617/-.Order of the ITAT:The Income Tax Appellate Tribunal (ITAT) excluded certain comparables for the MSS and ITES segments but upheld the inclusion of M/s TCS E-Serve Limited and M/s TCS E-Serve International Limited for the ITES segment. This led to the current appeal by the Assessee.Submissions on behalf of the Assessee:1. High Brand Value and Economic Upscale: The Assessee argued that both TCS E-Serve Limited and TCS E-Serve International Limited have a high brand value and operate on a huge economic upscale, making them functionally dissimilar to the Assessee.2. Previous Judicial Decisions: The Assessee cited previous decisions where these comparables were excluded due to their association with the TATA brand and their significant impact on profitability.3. Outliers: The inclusion of these comparables skewed the margin upwards significantly, making them outliers.4. Turnover Disparity: The turnover of TCS E-Serve Limited was Rs. 1359 crores, whereas the Assessee’s turnover was Rs. 24 crores.5. Brand Contribution: TCS E-Serve Limited and TCS E-Serve International Limited made significant brand contributions, unlike the Assessee.6. Section 92B (2) of the Act: The Assessee argued that the arrangement between TCS and Citi Group falls under Section 92B (2), deeming it an international transaction.Submissions on behalf of the Revenue:1. Functional Similarity: The Revenue contended that the comparables were functionally similar to the Assessee, as both provided ITES to their respective group entities.2. TATA Brand Impact: The Revenue argued that the TATA brand's impact was minimal (0.43% of operational expenses) and did not significantly affect the comparability.Court’s Analysis and Reasons:1. Legal Framework: The Court emphasized the need for reliable benchmark studies for determining ALP, requiring comparables to be functionally similar and subject to similar business environments and risks.2. Rule 10B (2) and (3) of the Income Tax Rules: The Court referred to Rule 10B, which mandates that comparables should not have material differences affecting the price or profit and that adjustments should be made to eliminate such differences.3. Previous Decisions: The Court cited several decisions where TCS E-Serve Limited and TCS E-Serve International Limited were excluded due to their high brand value, economic upscale, and significant turnover disparity.4. Functional Analysis: The Court reiterated that comparables must be similar in all material aspects, including functions performed, assets employed, and risks assumed.5. Impact of Brand and Economic Upscale: The Court noted that the brand and economic upscale of TCS E-Serve Limited and TCS E-Serve International Limited made them unsuitable comparables for the Assessee.6. Turnover and Segmental Data: The Court highlighted the significant turnover disparity and the lack of segmental data for the comparables, further supporting their exclusion.Conclusion:The Court found merit in the Assessee's contention that both TCS E-Serve Limited and TCS E-Serve International Limited should be excluded from the list of comparables. The question framed was answered in favor of the Assessee, and the impugned order of the ITAT, as well as the corresponding orders of the DRP and TPO, were set aside. The appeal was allowed with no order as to costs.