2023 (9) TMI 389 - HC - Income Tax

Tribunal's decision to exclude firms as comparables for international transactions upheld; no substantial legal question found.

The HC upheld the Tribunal's decision to exclude Acropetal Technologies Ltd., BNR Udyog Ltd., and Informed Technologies India Ltd. as comparables for ... TP Adjustment - comparable selection - whether the services offered by the three (3) entities were comparable to those of the respondent/assessee? - HELD THAT:- TPO has accepted the fact that the assessee is into providing ITES and so-called BPO services, which are related to phone activation and local number portability, both to its clients and its parent company. The extract from the impugned order would demonstrate that, insofar as the three (3) comparables are concerned, they were providing services which were different from the respondent/assessee. Acropetal was rendering Knowledge Process Outsourcing (KPO) services. The Tribunal has said that it was engaged in medical transcription services, which compendiously has been given the name Electronic Medical Record.Likewise, insofar as the BNR was concerned, the Tribunal once again returned the finding of fact that it was engaged in providing medical transcription services. Similarly, insofar as Informed Technologies was concerned, the Tribunal notes that it provides financial research and data management services. More particularly, insofar as Informed Technologies is concerned, the Tribunal notes that it is a leading player in KPO services, which extend from financial content to financial industry. We are in agreement with the submissions of the counsel for the respondent/assessee that Rule 10(B)(2)(a) required that, when carrying out a comparability analysis of international transactions, with an uncontrolled transaction, the reference point should be, inter alia, the services provided by the entities which are being compared. Tribunal has, in our view, carried out that exercise. We may note that Mr Sharma, is perhaps, right to the extent that the Tribunal did not consider the analysis of operating margin vis-a-vis BNR, which the TPO had carried out. The difference in operating margins clearly arose because the respondent/assessee has included revenue and expenses from medical transcription services, which the TPO excluded, and thereby caused the difference between the operating margins in the period in issue and the average margin which BNR had registered. In our view, fluctuation in margin was not the only reason that the Tribunal provided in excluding BNR as a comparable. The fact that BNR offered a service which was different from that the respondent/assessee offered was the principal reason why the Tribunal concluded that BNR had been wrongly included in the comparables. Issues Involved:1. Exclusion of comparables by the Tribunal for benchmarking international transactions.2. Appropriateness of the services provided by the comparables in relation to the respondent/assessee's services.3. Analysis of operating margins of the comparables.Summary:Exclusion of Comparables by the Tribunal:The appellant/revenue challenged the Tribunal's order excluding three comparables'Acropetal Technologies Ltd., BNR Udyog Ltd., and Informed Technologies India Ltd.'for benchmarking international transactions of the respondent/assessee. The Tribunal had directed the exclusion based on the nature of services provided by these entities, which were deemed not comparable to those provided by the respondent/assessee.Appropriateness of Services Provided by Comparables:The Tribunal found that Acropetal Technologies Ltd. was engaged in Knowledge Process Outsourcing (KPO) services, specifically in the healthcare sector, involving high skill and intellectual property application. BNR Udyog Ltd. was engaged in medical transcription services, which were not comparable to the IT-enabled services provided by the respondent/assessee. Informed Technologies India Ltd. provided financial research and data management services, which were also not comparable to the routine transaction processing services of the respondent/assessee.Analysis of Operating Margins:The Tribunal noted significant fluctuations in the operating margins of BNR Udyog Ltd., with an exceptionally high margin of 40.62% during the relevant year compared to an average of 24.86% in preceding and succeeding years. The Tribunal concluded that such fluctuations rendered BNR an inappropriate comparable. The Tribunal emphasized that the primary reason for exclusion was the difference in the nature of services provided by BNR, not just the margin fluctuations.Conclusion:The High Court agreed with the Tribunal's assessment that the services provided by the three comparables were different from those of the respondent/assessee. The Tribunal's analysis aligned with Rule 10(B)(2)(a) of the Income Tax Rules, 1962, which requires comparability analysis based on the specific characteristics of the services provided. The appeal was dismissed as no substantial question of law arose for consideration.