2024 (9) TMI 1105 - AT - Income Tax

ITAT directs fresh comparable search with ten times turnover filter, excludes three entities under Rule 10TA(g)

The ITAT Hyderabad ruled on transfer pricing comparable selection criteria, directing the AO/TPO to apply a turnover filter of ten times on both sides of ... TP Adjustment - Comparable selection - turnover filter application - HELD THAT:- As following the footprints of the Hon’ble Karnataka High Court in the case of Obopay Mobile Technology India Private Ltd. [2018 (7) TMI 2129 - KARNATAKA HIGH COURT] we hold that the turnover is a relevant criteria for choosing companies as comparables in determining the ALP in Transfer Pricing cases. Appropriate turnover filter - In all the decisions relied upon by the learned AR, a consistent view is taken that the application of tolerance range of turnover of ten times on both sides of assessee’s turnover was proper. Following the same, we direct AO to adopt the same for a fresh search. With this view of the matter, we set aside the findings of the authorities below and direct the AO/TPO to take the range of turnover filter at ten times on both the ends and conduct search afresh to take a plausible view. Vitae International Accounting Services Pvt. Ltd., Domex E – Data Pvt. Ltd., and MPS Ltd.- Vitae International Accounting Services Pvt. Ltd., is engaged in providing accounting, auditing and tax services apart from providing services in the knowledge specific domains to their clients, which require application of knowledge and advanced analytical and technical skills; whereas Domex E – Data Pvt. Ltd., is engaged in providing e-commerce operations, involving high end KPO services, which involves business analyticals, financial analytics and market research. MPS Ltd., is engaged in content solutions for the digital world like content authorizing and development, content production, content transformation and fulfilment and customer support. In the case of Maersk Global Centres (India) (P.) Ltd., [2014 (3) TMI 891 - ITAT MUMBAI] and in the case of Rampgreen Solutions (P.) Ltd. [2015 (8) TMI 931 - DELHI HIGH COURT] we find that the functions performed by Vitae International Accounting Services Pvt. Ltd., Domex E – Data Pvt. Ltd., and MPS Ltd., fall broadly in the class of ITeS, but those are akin to the functions enumerated in clause (iv) to (vii) of Rule 10TA(g) of the Rules, thereby rendering themselves to be non-comparables to the assessee. We, therefore, direct AO/TPO to exclude these entities from the list of comparables. Coming to Motiff India Infotech Pvt. Ltd., only reason urged before us to exclude this entity is its huge advertising and promotional expense. On this aspect, learned TPO observed that any independent entity in an uncontrolled market structure would be spending routine marking or sales promotion expenses and per se that does not amount to any extraordinary expense, since it would be impossible to find out any comparable without marketing or sales promotions expense in an uncontrolled market. DRP observed that no material is available to conclude that the brand or the expenses impacted the revenues of this entity. Since there is no dispute on the functional profile of this entity, we find it difficult to exclude this entity from the list of comparables. We direct the learned AO/TPO to conduct fresh study in the light of the above observations and determine the ALP of the international transaction. Appeal of the assessee is treated as allowed for statistical purposes. Issues:Transfer Pricing Adjustment based on comparables selectionDetailed Analysis:Issue: Transfer Pricing Adjustment based on comparables selectionThe judgment involves an appeal by the assessee against the final assessment order for the assessment year 2018-19, concerning the determination of Arm's Length Price (ALP) for international transactions with its Associated Enterprise (AE). The Transfer Pricing Officer (TPO) suggested an upward adjustment of Rs. 9,86,66,724 based on the selection of comparables. The assessee challenged the inclusion of certain entities like Tech Mahindra Business Services Ltd., Infosys BPM Ltd., and E-Clerx Services Ltd., on the grounds of turnover differences. The contention was that turnover is a relevant factor for comparability, supported by legal precedents. The Tribunal held that turnover is a relevant criteria for choosing comparables in Transfer Pricing cases, following the decision of the Hon'ble Karnataka High Court and directed the Assessing Officer to adopt a turnover filter range of ten times on both ends for a fresh search.The judgment further addressed the inclusion of Vitae International Accounting Services Pvt. Ltd., Domex E - Data Pvt. Ltd., and MPS Ltd., as comparables. While these entities broadly fall under ITeS, there were critical variations in their functionality beyond the ITeS category. Citing legal precedents, the Tribunal concluded that these entities did not qualify as comparables due to their specific service offerings and directed their exclusion from the list.Regarding Motiff India Infotech Pvt. Ltd., the only reason presented for exclusion was its significant advertising and promotional expenses. The TPO and DRP found these expenses routine for an independent entity and not impacting revenues significantly. As there was no dispute on the functional profile, the Tribunal directed a fresh study to determine the ALP of the international transaction without excluding this entity.In conclusion, the appeal of the assessee was treated as allowed for statistical purposes, and the Tribunal provided detailed reasoning for the adjustments made in the Transfer Pricing analysis, emphasizing the relevance of turnover and functional comparability in selecting appropriate comparables for determining the Arm's Length Price in international transactions.Order pronounced in the open court on the 28th day of June, 2024.