Transfer pricing margin set at 18% per APA agreement for ITeS services with comparable company adjustments

ITAT Bangalore directed computation of transfer pricing margin per APA agreement terms at 18% for ITeS segment services. Tribunal excluded CRA Online Ltd. as comparable due to functional dissimilarity but retained Cosmic Global Ltd. since revenue did not dispute functionality. For Informed Technologies India Ltd. and Inhouse Production Ltd., AO/TPO directed to verify details from annual reports before exclusion. Regarding depreciation on goodwill, AO instructed to consider assessee's claim following SC precedent in CIT vs. Smifs Securities Ltd. Case remanded for fresh determination of arms length price under APA methodology.

---

---

Issues Involved:

1. Application of Advance Pricing Agreement (APA) for A.Y. 2011-12.
2. Exclusion and inclusion of certain comparables for transfer pricing.
3. Disallowance of depreciation on goodwill for A.Y. 2011-12, 2012-13, and 2014-15.

Summary:

1. Application of Advance Pricing Agreement (APA) for A.Y. 2011-12:

The appellant argued that the APA methodology agreed for A.Y. 2013-14 to A.Y. 2020-21 should be applied to A.Y. 2011-12 as the FAR (Functions, Assets, Risks) analysis remained consistent. The Tribunal noted that various courts have held that if FAR is the same, APA should be adopted for the disputed year. The Tribunal directed the computation of the margin as per the APA terms and instructed the Ld.AO/TPO to determine the arm's length price in accordance with the APA. Thus, grounds related to transfer pricing adjustments for A.Y. 2011-12 were allowed for statistical purposes.

2. Exclusion and Inclusion of Certain Comparables for Transfer Pricing:

A. Exclusion of ICRA Online Ltd.:
The appellant sought exclusion of ICRA Online Ltd., arguing it provides high-end consultancy services (KPO) and is not comparable to the appellant's low-end IT enabled services. The Tribunal agreed, citing previous decisions and functional dissimilarity, and directed its exclusion from the final list.

B. Inclusion of Comparables:
The appellant sought inclusion of Informed Technologies India Ltd., Inhouse Production Ltd., and Cosmic Global Ltd.

- Informed Technologies India Ltd. and Inhouse Production Ltd.: The Tribunal remanded these for verification by the Ld.AO/TPO, noting that functional dissimilarities were not disputed.
- Cosmic Global Ltd.: The Tribunal directed its inclusion, noting the DRP's exclusion was unwarranted as the TPO found it functionally similar.

3. Disallowance of Depreciation on Goodwill:

For A.Y. 2011-12, the appellant claimed depreciation on balance goodwill, referencing the Supreme Court decision in CIT vs. Smifs Securities Ltd. The Ld.AO disallowed it, and the DRP upheld the disallowance as the claim was not made in the original return. The Tribunal, citing the Karnataka High Court and Supreme Court decisions, directed the Ld.AO to consider the claim and verify it in accordance with the law.

For A.Y. 2012-13 and A.Y. 2014-15, similar issues were raised. The Tribunal applied the same reasoning and remanded these issues to the Ld.AO for necessary verification.

Conclusion:

The appeals for A.Y. 2011-12, 2012-13, and 2014-15 were allowed for statistical purposes, with specific directions for verification and application of APA terms, exclusion/inclusion of comparables, and consideration of depreciation on goodwill.

Order pronounced in the open court on 13th October, 2023.

---