2022 (3) TMI 252 - AT - Income Tax

Tribunal Upholds Comparable Selection Based on Functional Comparability Over Turnover Differences

The Tribunal upheld the inclusion of M/s. CG VAK Software & Exports Ltd. as a comparable for benchmarking international transactions, rejecting the ... TP Adjustment - comparable selection - inclusion of M/s. CG VAK Software and Exports Ltd. as a comparable for benchmarking the international transactions entered into by the assessee with its associated enterprises - HELD THAT:- Upon examination of the annual reports for financial years 2007-08, 2008-09 and 2009-10 of M/s CG VAK Software & Exports Ltd., which are forming part of the paper book, we find that the company had earned profit of 3.81% in financial year 2008-09 and profit of 0.29% in financial year 2009-10 in the BPO segment. Thus, M/s CG VAK Software & Exports Ltd. (segmental) does not satisfy the criteria of being a persistent loss making company, as in 2 out of 3 past consecutive financial years the company was earning profit. Accordingly, we are of the view that the DRP has rightly directed inclusion of M/s CG VAK Software & Exports Ltd. (segmental) as a comparable for benchmarking the international transactions pertaining to ‘Provision of ITeS Services’ and ‘Provision of Research Support Services’. As a result, ground no. 1 raised in Revenue’s appeal is dismissed. M/s CG VAK Software & Exports Ltd. cannot be held to be incomparable simply on the ground of low turnover, unless it is demonstrated that the functions, assets and risk are completely different and are incomparable. Accordingly, the additional grounds raised by the Revenue are dismissed. Issues involved:1. Inclusion of M/s. CG VAK Software and Exports Ltd. as a comparable for benchmarking international transactions.2. Exclusion of M/s. CG VAK Software & Exports Ltd. based on turnover comparison.Issue 1: Inclusion of M/s. CG VAK Software and Exports Ltd. as a comparable for benchmarking international transactions:The Revenue challenged the inclusion of M/s. CG VAK Software and Exports Ltd. as a comparable for benchmarking international transactions. The Transfer Pricing Officer (TPO) proposed adjustments based on comparables excluding CG VAK Software & Exports Ltd. due to being a persistent loss-making company. However, the Dispute Resolution Panel (DRP) directed the inclusion of CG VAK Software & Exports Ltd. as a comparable, leading to the deletion of proposed adjustments. The Revenue argued for exclusion based on persistent losses, while the assessee contended that CG VAK Software & Exports Ltd. had been profitable in certain years. The Tribunal analyzed the financial reports of CG VAK Software & Exports Ltd. for past years and found profitability in the BPO segment for two out of three consecutive years, thereby rejecting the Revenue's appeal and upholding the DRP's direction for inclusion.Issue 2: Exclusion of M/s. CG VAK Software & Exports Ltd. based on turnover comparison:The Revenue sought exclusion of CG VAK Software & Exports Ltd. based on turnover disparity compared to the assessee. The Tribunal noted that functional comparability was not in question, and the Revenue's argument focused on quantitative differences. Emphasizing that transfer pricing analysis primarily considers net margins rather than turnover, the Tribunal held that mere turnover differences do not warrant exclusion unless significant functional dissimilarities exist. Citing a precedent, the Tribunal ruled that functional comparability prevails over turnover differences unless it affects the function, asset, and risk analysis significantly. Consequently, the Tribunal dismissed the Revenue's additional grounds seeking exclusion based on turnover comparison.In conclusion, the Tribunal dismissed the Revenue's appeal and the cross-objection by the assessee as they became infructuous. The decision emphasized the importance of functional comparability in transfer pricing analysis and highlighted that turnover differences alone do not justify exclusion if functional similarities exist.