2023 (8) TMI 368 - AT - Income Tax

Tribunal allows appeal, changes comparables in transfer pricing case.

The Tribunal allowed the appeal filed by the assessee, directing the exclusion of Excel Infoways Ltd. and Infosys BPO Limited as comparables and including ... TP Adjustment - comparable selection - turnover filter application - AR contended that the comparability of the companies has to be made with reference to the functional analysis which according to the assessee was not disputed by the TPO nor was the functionality of the comparables distinguished by the lower authorities - HELD THAT:- As held that where in case the assessee has failed to apply the turnover filter on quantitative level then only the qualitative level based on the FAR analysis has to be made. In the present case in hand the ld. DRP/TPO has not differentiated the comparable company in view of the assets deployed, risk assumed effecting the cost or margin, the same cannot be rejected merely on the basis of low turnover. We would like to place our reliance on the decision in the case of Cadence Design Systems India (Pvt.) Ltd. [2018 (4) TMI 1574 - ITAT NEW DELHI] which has considered the decision of Chryscapital Investment Advisory India Ltd. [2015 (4) TMI 949 - DELHI HIGH COURT] and also which has dealt with on identical issues, wherein it was held that a company cannot be held to be incomparable simply on the ground of low turnover, unless it is demonstrated that asset/risks are completely different and are incomparable. From the above observation, we hold that Infosys Technology Ltd. and ACE BPO Services should be included as comparable company for determining the arms length price of the assessee’s international transaction. Ground no. 3.2 raised by the assessee is allowed. Comparables Excel Infoways Ltd. - TPO's comparable of Excel Infoways Limited has been rejected for the reason that it had not bifurcated employee cost for infra activities segment, which according to the said decisions were highly impractical and contradictory in facts or data sourced from the annual report. On identical facts, we are of the considered view that Excel Infoways Limited should be rejected as a comparable company for determining the ALP of the international transaction of the assessee company. Infosys BPO Limited be excluded as a comparable company for the reason that it was functionally not comparable and the presence of brand and extraordinary event of acquisition of the Australian company. It is pertinent to point out that the assessee has alleged that TPO has included both the comparables without notices or neither any data base nor any such process was conducted by the TPO. It is also evident that the Hon’ble DRP has also not given a specific finding on the objection raised by the assessee. As we hereby direct the A.O./TPO to exclude Excel Infoways Ltd. and Infosys BPO Limited as comparable company to the assessee Issues Involved:1. Transfer Pricing Adjustment2. Rejection of Comparables3. Inclusion of Certain Comparables by TPOSummary:1. Transfer Pricing Adjustment:The appeal was filed by the assessee challenging a transfer pricing adjustment of Rs. 3,28,79,224/- for the Assessment Year (A.Y.) 2012-13. The adjustment was made following the directions of the Dispute Resolution Panel (DRP) and involved various grounds.2. Rejection of Comparables:The assessee used the Transaction Net Margin Method (TNMM) with Net Cost Plus (NCP) as the profit level indicator (PLI) and identified 9 comparative companies. The Transfer Pricing Officer (TPO) rejected the internal TNMM benchmarking analysis, computed the entity-level PLI at 13.35%, and proposed an adjustment of Rs. 3,54,31,368/-. The DRP upheld the TPO's order, leading to an adjustment of Rs. 3,28,79,224/-.The lower authorities rejected the comparables Informed Technologies Ltd. and ACE BPO Services Pvt. Ltd. based on a turnover filter of less than Rs. 5 crores, while the assessee argued that the turnover filter of Rs. 1 crore was justified. The Tribunal held that the lower authorities erred in rejecting the comparables merely on the ground of low turnover without functional dissimilarity and allowed the inclusion of Infosys Technology Ltd. and ACE BPO Services as comparables.3. Inclusion of Certain Comparables by TPO:The TPO included Excel Infoways Ltd. and Infosys BPO Limited as comparables, which the assessee contested. The Tribunal found that Excel Infoways Ltd. should be rejected as a comparable due to its impractical allocation of employee costs and contradictions in data. Similarly, Infosys BPO Limited was excluded as a comparable due to its brand value, acquisition of an Australian company, and functional dissimilarity. The Tribunal directed the exclusion of both Excel Infoways Ltd. and Infosys BPO Limited as comparables.Conclusion:The Tribunal allowed the appeal filed by the assessee, directing the exclusion of Excel Infoways Ltd. and Infosys BPO Limited as comparables and including Infosys Technology Ltd. and ACE BPO Services as comparables. The remaining grounds were deemed general and required no separate adjudication.