2023 (11) TMI 47 - HC - Income Tax

Companies properly excluded from transfer pricing comparables due to functional differences and risk profiles

Principal Commissioner of Income Tax-7 Delhi Versus Qualcomm India Pvt. Ltd.

The Delhi HC upheld the Tribunal's decision rejecting three companies as comparables for transfer pricing analysis. The Court found that Infobeans ... TP Adjustment - comparable selection - HELD THAT:- Infobeans Technologies Ltd rejected on functional dissimilarity between the assessee and Infobeans, the said comparable. Cybercom is the business of providing technical services. Based on this finding, the Tribunal has excluded Cybercom as a comparable. Infosys BPO is a riskbearing entity having diversified activities. The respondent/assessee, on the other hand, which has a turnover of only Rs. 96 crores in the BPO sector and hence cannot be compared. Clearly, the findings returned by the Tribunal above for each comparable are findings of fact, and that no question is proposed by the appellant/revenue that the findings are perverse. Therefore, in our view, Infobeans, Cybercom and Infosys were rightly rejected as comparables. Adjustment on account of interest on receivables - as argued by assessee that once working capital adjustment is allowed, then no adjustment on account of interest on receivables is required to be made - HELD THAT:- Tribunal has noted the assertions made on behalf of the respondent/assessee that it permitted a ninety (90) days credit period. On behalf of the appellant/assessee, it had been emphasized that once the credit period exceeded ninety (90) days, interest had to be charged. It is on this account that adjustment was ordered with regard to the receivables. Tribunal has relied upon its decision [2021 (11) TMI 1148 - ITAT DELHI] and concluded that the said issue needed to be restored to the Assessing Officer (AO) for verifying the respondent/assessee’s claim, keeping in view its aforementioned decision, albeit, after providing reasonable opportunity of hearing to the respondent/assessee. 20. In our view, on this score as well, no interference is called for with the order of the Tribunal. Also in support of her submission that once working capital adjustment is made, no further adjustment is required to be made on account of interest received on receivables has correctly relied upon the judgment of Kusum Health Care Pvt. Ltd. [2017 (4) TMI 1254 - DELHI HIGH COURT] as held with the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-à-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. No substantial question of law arises ISSUES PRESENTED AND CONSIDERED 1. Whether condonation of delay in filing the appeal should be granted. 2. Whether the Income Tax Appellate Tribunal's exclusion of three selected comparables - (i) a diversified software/product company, (ii) a diversified technical services provider with undisclosed segmental details, and (iii) a large branded BPO with substantially higher turnover - was justified on factual and legal grounds for transfer pricing comparability analysis. 3. Whether, having allowed a working capital adjustment, an additional adjustment on account of interest on receivables is permissible; and whether the Explanation inserted in Section 92B mandates such an adjustment as a matter of law. 4. Whether the issues raised give rise to any substantial question of law warranting interference. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Condonation of Delay Legal framework: Courts may condone delay in filing appeals where sufficient cause is shown and opposing party does not object. Precedent treatment: Not specifically invoked; standard practice followed. Interpretation and reasoning: The Court observed the stated delay (79 days) and that the respondent raised no objection; exercise of discretion to condone delay was ordered 'subject to just exceptions.' Ratio vs. Obiter: Ratio - the Court's order condoning delay is an operative disposition in the proceedings. Conclusion: Delay of 79 days in filing the appeal was condoned; application disposed accordingly. Issue 2 - Exclusion of Comparables (Infobeans, Cybercom, Infosys) Legal framework: Transfer pricing comparability requires examination of functional similarity, risk profile, and other economically relevant factors between tested party and comparables. Findings of fact by the Tribunal on comparability are ordinarily not interfered with unless perverse. Precedent treatment: The Court treated the Tribunal's determinations as findings of fact and applied the well-established principle that appellate courts will not disturb non-perverse factual findings on comparability. Interpretation and reasoning: - Infobeans: Tribunal found diversified activities including sale of software products, domestic and foreign product sales revenue, and payment of sales tax/MODVAT. These functional and business model differences render it non-comparable to the tested party focused on software development services/ITES. - Cybercom: Tribunal found diversified activities, lack of public segmental disclosure, and that Cybercom provides technical services distinct from the tested party's operations; absence of segmental detail prevented reliable functional parity assessment, justifying exclusion. - Infosys BPO: Tribunal excluded on risk-bearing capacity and scale differences - large branded BPO with substantial sales and significant sales/marketing expenditure versus tested party's far smaller BPO turnover. The divergence in risk profile, brand value and scale led to non-comparability despite both operating in BPO sector. Ratio vs. Obiter: Ratio - the Tribunal's exclusions were upheld as supported by factual findings; these form the core holding that the specified entities were rightly rejected as comparables. Observations on the nature of evidence required (e.g., segmental disclosures) are also central to the reasoning. Conclusion: No interference with the Tribunal's factual findings; the three comparables were correctly excluded from the transfer pricing comparability set. Issue 3 - Working Capital Adjustment v. Interest on Receivables; Effect of Explanation to Section 92B Legal framework: Rule 10B(3) contemplates working capital adjustments to improve comparability where tested party and comparables exhibit different working capital intensities. The Explanation to Section 92B (as amended) addresses characterization of 'receivables' but does not automatically convert every receivable into an international transaction without inquiry into patterns and effects on working capital. Precedent treatment: The Court relied on a coordinate-bench judgment holding that where working capital adjustments have already been incorporated into comparables, a further adjustment solely on the basis of outstanding receivables (for one year) may distort pricing and recharacterise transactions; the Explanation does not render every receivable an international transaction per se and requires investigation into patterns over time. Interpretation and reasoning: - The DRP directed working capital adjustment under Rule 10B(3) to improve comparability, emphasizing that receivables, payables and inventories affect margins via implicit interest costs. - The respondent claimed that once working capital adjustment is made, no separate adjustment for interest on receivables is necessary. The Tribunal, following its earlier decision for a subsequent assessment year, concluded the matter should be restored to the Assessing Officer for verification of the respondent's claim (including examination of credit period practice and whether receivables beyond agreed period warranted interest adjustment), after affording reasonable opportunity of hearing. - The Court noted that the coordinate-bench authority recognized that the Explanation to Section 92B does not obviate the need for fact-based inquiry; one-year figures of receivables cannot, without pattern analysis and assessment of working capital impact, justify an additional adjustment that would distort comparability already adjusted for working capital. Ratio vs. Obiter: Mixed. Ratio - where working capital adjustments have been properly made, a further automatic adjustment on account of outstanding receivables is not warranted without fact-based inquiry; authorities support remittance to fact-finder for verification. Obiter - observations on the precise interplay between the Explanation to Section 92B and Rule 10B(3) serve as guiding commentary but are grounded in application to facts remitted to the AO. Conclusion: No interference with the Tribunal's approach; the question of interest on receivables was correctly remitted for verification in light of prior Tribunal findings and the need for factual inquiry. The Explanation to Section 92B does not mandate an automatic additional adjustment absent investigation of patterns and working capital impact. Issue 4 - Existence of a Substantial Question of Law Legal framework: Appellate interference on facts requires a substantial question of law; mere disagreement with factual conclusions is insufficient. Precedent treatment: Applied the conventional test that no substantial question of law arises where the dispute hinges on factual determinations and non-perverse findings by the Tribunal. Interpretation and reasoning: The Court found that the appeal challenged factual findings on comparability and sought re-examination of working capital/receivable adjustments that required fact-finding; no substantial question of law of general importance was demonstrated. Ratio vs. Obiter: Ratio - no substantial question of law arises; appeal disposed without granting interference on merits beyond remittal ordered by the Tribunal. Conclusion: The matter did not raise any substantial question of law for the Court's determination; appeal disposed accordingly.