2023 (7) TMI 1587 - AT - Income Tax

Appellate authority's exclusion of publishing company as TP comparable upheld under Section 92 due to business dissimilarity

Pr. CIT-9, Mumbai Versus M/s. E-Clinical Works India Pvt. Ltd.

ITAT upheld the appellate authority's exclusion of the comparable company from the TP analysis. The tribunal found the comparable primarily engaged in ... TP Adjustment - Comparable selection - exclusion of M/s. MPS Limited - HELD THAT:- As per the report of MPS, it provides publishing services relating to typesetting of books and journals, composing of yellow page advertisement and catalogues, data coding, conversion, indexing, editing, copy editing, editorial services, software development, maintenance and support to global publishers. It is also engaged in web-site designing & development and provides various software and cloud-based digital publishing platform developed by it called 'MPS Digi Core'. As per its website, it is largely engaged in providing content solution like content authoring and development, content production, content transformation, etc. As per the website at 50% of its business activities comprises of content solution. The annual report also mentions that it carries out various R&D activities in relation to cloud based digital publishing platform and the various benefits derived by it due to such R&D activities and these services are much more than IT enabled services and is more into publishing services and providing content solutions, content product and content transformation. It also carries out significant R & D activities in relation to cloud base digital publishing platforms. Thus, this comparable has rightly been excluded by the ld. CIT (A) while carrying out comparative analysis with the assessee company which is pure IT enabled services. Further, in the balance sheet of M/s. MPS Ltd. there is an inventory of Rs.7.82 Crores and there is also work-in-progress shown as inventory and if one sees the mark-up of Revenue recognition, it is seen that Revenue is from website designing and development as well as Revenue from website posting. It has also outsourcing cost of Rs. 10.78 Crores. Thus, segmental information provides that the company operates in one business segment of providing publishing solutions, typesetting and data digitalization services which is considered to constitute a single segment. Thus, this company nowhere is a comparable to the assessee company and accordingly, we hold the order of the ld. CIT (A). ISSUES PRESENTED AND CONSIDERED 1. Whether the comparable M/s. MPS Limited is functionally comparable to the assessee for purposes of benchmarking under the Transactional Net Margin Method (TNMM) in transfer pricing analysis. 2. Whether, in light of the exclusion of M/s. MPS Limited, adjudication of the remaining disputed comparables is necessary where the assessee's reported margin would fall within the arm's length range. 3. Whether the Transfer Pricing Officer's (TPO) adoption of an alternative set of comparables (including companies with materially different functions, assets and risks) and methodology adjustments (e.g., treatment of depreciation and forex items) is justified on the record. ISSUE-WISE DETAILED ANALYSIS Issue 1: Comparability of M/s. MPS Limited under FAR analysis Legal framework: Transfer pricing comparability requires analysis of Functions, Assets and Risks (FAR) to determine whether a tested party and a potential comparable perform substantially similar economic roles; segmental/annual report disclosures and nature of activities are relevant to functional comparability. Precedent treatment: No specific judicial precedents are invoked in the judgment; comparability principles are applied on the facts and documentary record. Interpretation and reasoning: The Tribunal examined the assessee's FAR matrix showing it as a limited-risk back-office service provider engaged primarily in providing trained Service Support Representatives (SSRs), routine IT-enabled services, and training, with limited assets and negligible non-routine intangibles (all significant intangibles owned by the associated enterprise). The Tribunal compared this profile with the annual reports and website materials of M/s. MPS Limited which demonstrated a different commercial and functional profile: publishing solutions, typesetting, content authoring/transformation, significant content-related product offerings, web-site design/development, a cloud-based digital publishing platform ('MPS Digi Core'), substantial R&D in digital platforms, inventory and work-in-progress, and revenue streams from website development/posting. The existence of inventory, content products, significant R&D and ownership/use of non-routine intangibles indicated materially different asset and risk profiles from the assessee's routine ITES/support operations. Ratio vs. Obiter: The conclusion that M/s. MPS Limited is not a comparable to a limited-risk back-office ITES provider constitutes the ratio applicable to comparability assessment in this case. Observations about specific balance sheet items and segmental disclosures are factual findings supporting the ratio. Conclusions: The Tribunal upheld exclusion of M/s. MPS Limited from the comparable set because its functions, assets and risks materially differ from those of the assessee. The exclusion was justified by the annual report, segmental information, inventory and WIP, R&D activities and ownership/use of intangibles indicating publishing/content solutions rather than routine ITES/call-centre support. Issue 2: Consequence of excluding a single comparable on arm's-length determination and need to adjudicate other comparables Legal framework: Transfer pricing outcome depends on the reliability and relevance of the final comparable set; removal of an outlier or non-comparable may affect whether the tested party's margin falls within an arm's-length range. If exclusion of one comparable results in the tested party's margin being arm's length, remaining disagreements may be academic. Precedent treatment: No precedent discussed; the Tribunal applied standard principle of materiality of comparables. Interpretation and reasoning: The assessee demonstrated that its reported PLI/margin on operating cost (21.05% on OP/OC) would fall within the arm's-length range if M/s. MPS Limited were excluded. The parties agreed that other two disputed comparables would become academic if MPS were excluded. The Tribunal accepted this position, finding that once MPS was excluded for lack of functional comparability, adjudication of remaining comparables was not necessary for determination of arm's-length price in the present assessment year. Ratio vs. Obiter: The Tribunal's holding that further adjudication of the other comparables is unnecessary in these circumstances is ratio for the case's disposition; it is a pragmatic application of materiality in transfer pricing quantification. Conclusions: Exclusion of M/s. MPS Limited rendered further disputes over other comparables academic because the assessee's reported margin would be within the arm's-length range; accordingly the Tribunal declined to adjudicate those comparables. Issue 3: Methodological adjustments by the TPO (treatment of depreciation and forex items) and adoption of alternative comparables Legal framework: The TNMM requires consistent measurement of operating profit relative to an appropriate base (e.g., operating costs) and consistent treatment of operating and non-operating items (such as depreciation, forex gains/losses) across tested and comparable entities; appropriate selection and adjustment of comparables is required to produce a reliable arm's-length range. Precedent treatment: The judgment does not record reliance upon or departure from any specific precedents addressing depreciation/forex treatment; it confines itself to fact-based comparability analysis and materiality considerations. Interpretation and reasoning: The Tribunal recorded that the TPO had recalculated PLI after treating depreciation and forex loss/income as non-operating, arriving at a different PLI and proposing additional comparables (MRS Ltd and Infosys BPO). However, the Tribunal's decision turned on functional dissimilarity of MPS and on the consequence that its exclusion made other disputed comparables academic. The Tribunal did not undertake a detailed assessment of the TPO's treatment of depreciation/forex or of the appropriateness of the alternative comparables because the central comparability issue resolved the outcome. Ratio vs. Obiter: Observations that the TPO adjusted PLI for depreciation and forex items and proposed alternative comparables are obiter relative to the Tribunal's main ruling, since no conclusive determination on those methodological adjustments was necessary after excluding MPS and finding the assessee within arm's length. Conclusions: The Tribunal did not finally adjudicate the TPO's methodological adjustments or the additional comparables because exclusion of the non-comparable (MPS) and the resulting arm's-length positioning of the assessee made such determinations unnecessary; those matters were left open. Cross-references and practical implications 1. The decision underscores that functional comparability (FAR analysis) carried out using annual reports, segmental disclosures, balance sheet composition (inventory/WIP), R&D and intangibles is determinative in inclusion/exclusion of comparables. 2. Exclusion of a materially non-comparable entity can be dispositive of the transfer pricing outcome and may render further disputes over comparables or methodological adjustments academic, obviating the need for exhaustive re-calculation where the tested party's margin then falls within an arm's-length range.