Revenue's appeal dismissed as four companies excluded from transfer pricing comparables due to functional dissimilarity

ITAT Hyderabad dismissed Revenue's appeal regarding transfer pricing comparable selection. The Tribunal excluded E-clerx Services Ltd., Acropetal Technologies Ltd., Infosys BPO Ltd., and TCS EServe Ltd. from comparables list due to functional dissimilarity, following consistent precedent from coordinate bench decisions in assessee's earlier assessment years. Following factual consistency principle, the exclusion of these comparables rendered Revenue's other challenges academic, making cross-objection infructuous and dismissed.

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Issues Involved:
1. Selection of comparables for benchmarking international transactions.
2. Exclusion of specific comparables by the Dispute Resolution Panel (DRP).
3. Functional dissimilarity and high turnover of certain comparables.
4. Consistency in the Tribunal's findings from earlier assessment years.

Issue-wise Detailed Analysis:

1. Selection of Comparables for Benchmarking International Transactions:
The assessee, M/s. GD Research Center Pvt. Ltd., engaged in providing Information Technology enabled Services (ITeS) to its Associated Enterprises (AEs), benchmarked its international transactions using the Transactional Net Margin Method (TNMM) and selected eight entities as comparables with a margin of 16.88%. The Transfer Pricing Officer (TPO) found defects in the assessee's selection process and conducted a fresh search, resulting in a list of thirteen comparables, including three from the assessee's list, and determined the margins at 24.87%, proposing an upward adjustment of Rs. 2,79,60,009/-.

2. Exclusion of Specific Comparables by the Dispute Resolution Panel (DRP):
The DRP excluded E-clerx Services Ltd., Acropetal Technologies Ltd., Infosys BPO Ltd., Jeevan Scientific Technologies Ltd., TCS EServe Ltd., e4e Healthcare Ltd., and Mastiff Tech Pvt Ltd. from the list of comparables, citing functional differences and high turnover. The Revenue challenged this exclusion, while the assessee filed Cross Objections against the exclusion of other entities and the inclusion of Accentia Technologies Ltd. and Cross Domain Ltd.

3. Functional Dissimilarity and High Turnover of Certain Comparables:
The DR argued that the assessee's services, including market research and data analysis, are high-end ITeS services classified as KPO services. The DR contended that the DRP did not examine the services of the assessee in detail and excluded comparables based on vague conjectures. Specifically, the DR argued that E-clerx Services Ltd. and TCS EServe Ltd. should not be excluded based on size, turnover, or brand value without demonstrating their impact on the Profit Level Indicator (PLI). The DR also contended that Acropetal Technologies Ltd. and Infosys BPO Ltd. were functionally similar to the assessee.

4. Consistency in the Tribunal's Findings from Earlier Assessment Years:
The assessee's counsel argued that the functions of the assessee were assessed in earlier assessment years, and a Co-ordinate Bench of the Tribunal had excluded the same four entities (E-clerx Services Ltd., Acropetal Technologies Ltd., Infosys BPO Ltd., and TCS EServe Ltd.) due to functional dissimilarity. The Tribunal noted that there was no change in the assessee's business model or the functions performed by the comparables over the years. The Tribunal emphasized the need for factual consistency and followed the earlier findings, directing the exclusion of the four entities from the list of comparables.

Conclusion:
The Tribunal upheld the exclusion of E-clerx Services Ltd., Acropetal Technologies Ltd., Infosys BPO Ltd., and TCS EServe Ltd. from the list of comparables, dismissing the Revenue's appeal. Consequently, the Cross Objections filed by the assessee were deemed academic and dismissed. The Tribunal's decision was pronounced on December 18, 2023.

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