2023 (8) TMI 679 - HC - Income Tax

Appeal delay condoned, comparables exclusion upheld. Working capital issues remanded.

Pr. Commissioner of Income Tax -7, Delhi Versus M/s. Reservation Data Maintenance India Pvt. Ltd.

The delay in filing and re-filing the appeal was condoned. The Tribunal upheld the exclusion of four comparables for Arm's Length Price determination and ... TP Adjustment - comparable selection - HELD THAT:- For Accentia Technology Ltd. Tribunal notes that it has developed its own software, it is in the business of medical transcription services and not the BPO services and during the period in issue, it experienced an extraordinary economic event i.e., it had acquired 96% stake in Oak Technologies Inc. which added heft to both its top and bottom line. For Cosmic Global Ltd, the Tribunal has returned a finding of fact that it operated on a business model which was different from that of the respondent/assessee. According to the Tribunal, Cosmic Global Ltd outsourced a major part of its business and that in the relevant period, it had registered abnormal profit. According to us, these are findings of fact which cannot be termed as perverse. Even otherwise, we find that there is no question of law proposed by the appellant/revenue categorizing these findings as perverse. We are not inclined to interfere with the impugned order. According to us, no substantial question of law arises for our consideration. ISSUES PRESENTED AND CONSIDERED 1. Whether the Tribunal correctly sustained the Commissioner (Appeals)'s exclusion of four comparables from the comparable set for computing Arm's Length Price (ALP) in relation to international transactions. 2. Whether two specific comparables (Accentia Technology Ltd. and Cosmic Global Ltd.) were rightly excluded on the basis of functional dissimilarity, extraordinary/abnormal events and differing business models. 3. Whether the Tribunal's factual findings concerning functional comparability and abnormal/extraordinary events are perverse or raise a substantial question of law. 4. Whether the Tribunal's treatment of two other comparables (Eclerx Services Ltd. and Coral Hub Ltd.) is supported by precedent of the coordinate bench and whether that precedent governs the present matter. 5. Whether any consequence flows from a pending higher court appeal against the coordinate-bench precedent relied upon by the Tribunal. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Correctness of excluding four comparables for ALP computation Legal framework: Determination of ALP requires selection of comparable uncontrolled transactions/enterprises that are functionally comparable. Comparables that suffer from material functional dissimilarity, abnormal events affecting results, or differing business models may be excluded to preserve reliability of the comparable set. Precedent treatment: The Tribunal followed the approach of the coordinate bench in treating functionally dissimilar or abnormal comparables as excludable; two comparables were specifically treated in line with a coordinate-bench decision (Rampgreen approach) for Eclerx and Coral Hub. Interpretation and reasoning: The Tribunal examined the nature of activities, outsourcing patterns, proprietary software development, and extraordinary business events of the four companies. It found that Accentia developed proprietary software and was in medical transcription rather than BPO services and experienced an acquisition that inflated results; Cosmic Global outsourced substantial operations and recorded abnormal profits; Eclerx and Coral Hub were addressed by reference to the coordinate bench precedent. Ratio vs. Obiter: The ratio establishes that comparables showing material differences in functions, presence of extraordinary economic events, or divergent business model/outsourcing levels which produce abnormal profits can be excluded from the comparable set for ALP computation. Observations about specific factual matrixes of the four companies are operative findings applied to the appeal. Conclusions: The Tribunal's exclusion of the four comparables was upheld as consistent with the requirement of functional comparability and exclusion of aberrant data; the Court declined to interfere with that conclusion. Issue 2 - Exclusion of Accentia Technology Ltd. and Cosmic Global Ltd. (functional dissimilarity and abnormal events) Legal framework: Selection of comparables requires close functional analysis - including comparison of services rendered, use of proprietary software, extent of outsourcing, and presence of extraordinary transactions (e.g., major acquisitions) that materially distort profit levels. Such factors may render a company non-comparable. Precedent treatment: The Tribunal applied established transfer-pricing principles requiring functional similarity and exclusion of companies affected by abnormal/one-off events. The Court treated the Tribunal's factual findings as determinative and consistent with established law. Interpretation and reasoning: For Accentia the Tribunal recorded three factual aspects: proprietary software development (functional difference), primary activity being medical transcription rather than BPO services (activity mismatch), and a near-total acquisition that materially boosted income (extraordinary event). For Cosmic Global the Tribunal recorded that it outsourced a major part of its business and registered abnormal profits in the relevant period (business-model and profit aberration). The Tribunal concluded these factual situations undermined comparability. Ratio vs. Obiter: The factual findings that a comparable developed proprietary software, was engaged in a distinct primary business (medical transcription vs. BPO), or experienced a material acquisition creating atypical financials are treated as ratio when used to exclude a comparable; similar treatment applies where outsourcing materially changes cost and profit structure producing abnormal profits. Conclusions: The Court found these to be findings of fact not perverse and declined to substitute its view for the Tribunal's; accordingly Accentia Technology Ltd. and Cosmic Global Ltd. were properly excluded. Issue 3 - Whether the Tribunal's factual findings are perverse or raise a substantial question of law Legal framework: Appellate interference with factual findings is permitted only if findings are perverse, unsupported by record evidence, or no reasonable tribunal could have reached them; pure appreciation of evidence ordinarily does not raise a substantial question of law. Precedent treatment: The Court applied the standard of review for appellate courts assessing findings of fact returned by the Tribunal - interference only if perversity or absence of evidence is shown. Interpretation and reasoning: The Court examined the impugned order's recorded findings (functional differences, outsourcing, acquisition-related distortion, abnormal profits) and determined they were supported by the Tribunal's fact-finding. No argument was advanced to demonstrate perversity under the legal standard; the appellant did not articulate a question of law that would vitiate those findings. Ratio vs. Obiter: The holding that these specific findings are not perverse and do not raise a substantial question of law is ratio as it disposes of the appellant's challenge on that ground. Conclusions: The Court refused to interfere, concluding the Tribunal's findings are factual, sustainable, and not perverse; consequently no substantial question of law arises from them. Issue 4 - Treatment of Eclerx Services Ltd. and Coral Hub Ltd.; application of coordinate-bench precedent Legal framework: Where coordinate-bench precedent on comparability exists, tribunals may follow it unless distinguishable; higher-court rulings or per incuriam findings may displace such precedent. Precedent treatment: The Tribunal's approach in excluding Eclerx and Coral Hub was stated to be covered by a coordinate-bench decision (Rampgreen). The Court acknowledged that reliance and noted an appeal against that coordinate-bench decision is pending in the Supreme Court. Interpretation and reasoning: The Court observed that the approach in the coordinate-bench decision supports exclusion of those comparables on comparable law/facts, and no persuasive reason to distinguish the precedent was shown. The Court left open the procedural remedy that, if the coordinate-bench decision is reversed by the higher forum, the revenue may pursue remedies in accordance with law. Ratio vs. Obiter: The endorsement that the Tribunal's treatment accords with coordinate-bench precedent is effectively ratio for the present appeal; the observation regarding the pendency of an appeal against that precedent is obiter guidance about future remedies. Conclusions: The Tribunal's exclusion of Eclerx Services Ltd. and Coral Hub Ltd. stands in view of applicable coordinate-bench precedent; any change in legal position due to outcome of the pending higher-court appeal can be addressed subsequently by the parties as per law. Issue 5 - Effect of pending appellate challenge to coordinate-bench precedent Legal framework: A pending appeal against a coordinate-bench decision does not, per se, alter the binding effect of that precedent until the higher court decides; parties may pursue further remedies if the higher forum reverses the precedent. Precedent treatment: The Court recognized the pendency of an appeal before the apex forum against the coordinate-bench decision relied upon but treated it as not altering the present appeal's outcome. Interpretation and reasoning: The Court noted that should the revenue succeed in the higher-court appeal overturning the coordinate-bench precedent, appropriate steps may be taken consistent with law to revisit consequences in this matter. Meanwhile, the coordinate-bench precedent remains applicable. Ratio vs. Obiter: The statement that a successful higher-court challenge may permit subsequent action is obiter procedural guidance; the ratio is that a pending appeal does not invalidate a coordinate-bench precedent relied upon by the Tribunal in the present appeal. Conclusions: No present interference is warranted on account of the pending appeal; parties retain the right to act in accordance with law if the higher forum alters the precedent.