Case Law Details
Infogain India Pvt Ltd Vs DCIT (ITAT Delhi)
Conclusion: Comparison of activities undertaken /functions performed was important for determining the comparability between controlled and uncontrolled transactions/entity. It would not be opposite to ignore functional dissimilarity only for the reasons that its impact may be reduced on account of using arithmetical mean of the profit level indicator. The principle governing the identification of comparable transactions would be the same, irrespective of whichever transfer pricing method is adopted.
Held: Assessee-company was established as a back-end software services company and worked mainly for its parent Infogain, USA. During the year under consideration, it reported international transactions, as mentioned in the 92CE Report. Assessee-company selected a set of 44 comparables with an average profit margin @ 11.94% and since the margin shown by assessee-company was 13.77%, the international transactions were reported to be at arm’s length. TPO examined the TP report of assessee-company and found that assessee had not gone into the verticals/horizontals within the software industry in its comparability study. After rejecting the comparables of the assessee, 21 companies had been proposed as comparables by TPO. Assessee vehemently stated that the TPO had used the comparables which were either giant companies having high brand value or were functionally dissimilar and many comparables had extra ordinary items during the year in the form of merger and acquisition. Hence they should not be taken as good comparables. It was held that In so far as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the transfer pricing method adopted. In other words, the comparable transactions/entities must be selected on the basis of similarity with the controlled transaction entity. Comparability of controlled and uncontrolled transactions has to be judged, inter alia, with reference to comparability factors as indicated under rule 10B(2) of the Income Tax Rules, 1962. Comparability analysis by the transactional net margin method may be less sensitive to certain dissimilarities between the tested party and the comparables. However, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable arm’s length price. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in profit level indicator must trigger further investigations/analysis. Consideration for a transaction would reflect the functions performed, the significant activities undertaken, the assets or resources used/consumed, the risks assumed. Thus, comparison of activities undertaken /functions performed was important for determining the comparability between controlled and uncontrolled transactions/entity. It would not be opposite to ignore functional dissimilarity only for the reasons that its impact may be reduced on account of using arithmetical mean of the profit level indicator. The principle governing the identification of comparable transactions would be the same, irrespective of whichever transfer pricing method is adopted.·The usage of several terms such as debt syndication, debt financing, IPO advisory, corporate restructuring, mergers, acquisitions etc, appearing in the annual reports of the comparable to hold that assessee and the said comparables performed similar did not by itself make the functions similar in nature. There was a difference between giving advice on these matters and actually undertaking the said services. A similar illustration, in the context of litigation, would be the difference between giving advice on what to argue in Court and actually arguing the matter in the Court. This difference needs to be borne in mind and the mere appearance of similar sounding words does not by itself constitute similar functions. Thus, it required a deeper analysis to determine as to whether they were in fact comparables to be retained for the purpose of fixing the ALP. The matter was restored to CIT (A) in view of above principles.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by the assessee is preferred against the order dated 31.10.2011 framed u/s 143(3) r.w.s 144C of the Income tax Act, 1961 [hereinafter referred to as ‘The Act’ for short] pertaining to assessment year 2007-08.
Please become a Premium member. If you are already a Premium member, login here to access the full content.
