CIT Vs Ut Starcom Inc. (India Branch) (Delhi High Court)- When we examine the profile of the assessee company vis-à-vis Infosys Technologies Limited in the light of the judgment in CIT vs. Agnity India Technologies Pvt. Ltd. (supra), there is no comparability for benchmarking the international transactions for the reasons inter alia that Infosys Technologies Limited is a giant risk taking company whereas, on the other hand, the assessee is a captive unit of its parent company and prone to minimum/ limited risk; that the Infosys Technologies Limited is having huge significant intangibles and having huge assets leading to the exorbitant turnover; that it is not in dispute that functional profile of assessee company and CIT vs. Agnity India Technologies Pvt. Ltd. is similar; that moreover, in the SDS segment, numerous companies are available for comparability. So, in the given circumstances, we are of the considered view that Infosys Technologies Limited is not a valid comparable in this case, hence ordered to be excluded.
Full Text of the High Court Judgment / Order is as follows:-
1. The Revenue is in appeal against an order dated 23rd December 2016 passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITA No. 5848/Del/2011 for the Assessment Year 2007-08.
2. The following two questions have been urged by the Revenue for consideration:
“(i) Whether the Tribunal erred in law in directing exclusion of Infosys Technologies Ltd and Kals Information Systems Ltd in respect of Software Development Segment and exclusion of Vishal Information Technology Ltd (now Coral Hub Limited) in respect of IT Enabled Services Segment though all the aforesaid companies were functionally similar under Transaction Net Margin Method?
(ii) Whether the Tribunal erred in law in laying down stringent standards of comparability analysis as applicable to traditional methods such as Comparable Uncontrolled Price (CUP) Method for selecting comparables under Transactional Net Margin Method (TNMM)?”
3. Having heard learned counsel for the Revenue, the Court is of the view that the ITAT has given cogent reasons for excluding the aforementioned comparables applying TNMM and its order suffers from no legal infirmity giving rise to any substantial question of law.
4. The appeal is dismissed.
O R D E R
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, UT Starcom Inc. (India Branch) (hereinafter referred to as ‘the assessee company’) by filing the present appeal sought to set aside the impugned order dated 29.09.2011, passed by the AO under section 144C (1) read with section 143 (3) of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2007-08 in consonance with the orders passed by the ld. DRP/TPO on the concise grounds inter alia that :-
“On the facts and in the circumstances of the case and in law, the learned Additional Director of Income Tax, Transfer Pricing Officer – 11(4), New Delhi (“Ld. TPO”) and the learned Deputy Director of Income-tax, Circle 2(2), International Tax, New Delhi (“Ld. AO”) under directions issued by the Hon’ble Dispute Resolution Panel – II, New Delhi (“DRP”), erred in making an addition to the Appellant’s total income of INR 5,45,17,350 (i.e. INR 2,07,82,181 based on the provisions of Chapter X of the Income-tax Act, 1961 (‘the Act’) and INR 3,37,35,169 based on the other provisions of the Act.)
1. Transfer Pricing adjustment
1.1 On the facts and in the circumstances of the case, the Ld. TPO/ AO has erred in misconstruing the directions of Hon’ble DRP issued under section 144C( 5) of the Act while issuing final assessment order under section 143(3) read with section 144C(13) of the Act resulting in incorrect transfer pricing adjustment of INR 2,07,82,181 instead of INR 23,98,098.
1.2 On the facts and in the circumstances of the case and in law, the Ld. TPO has erred and the Hon’ble DRP has further erred in upholding / confirming the action of the Ld. TPO of disregarding, without material defects, the benchmarking analysis and comparable companies selected by the Appellant based on the contemporaneous data in the transfer pricing study report maintained as per section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (‘the Rules’) and the various submissions made by the Appellant.
1.3 On the facts and in the circumstances of the case and in law, the Ld. TPO and Hon’ble DRP has erred, in adopting an arbitrary search strategy for selection of alleged comparable companies. Specifically, the Ld. TPO and Hon’ble DRP has grossly erred –
1.3.1 By adopting a flawed process of using notices under section (6) of the Act and relying on the same without providing complete information to the Appellant or an opportunity to cross examine the parties.
1.3.2 By disregarding the multiple year data approach and considering the data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements.
1.3.3 By adopting inappropriate filters in the process of selecting comparable companies;
1.3.4 By adopting companies as comparables having complete disregard to their functional comparability;
1.3.5 By inappropriately computing the operating margins of the alleged comparable companies.
1.4 On the facts and in the circumstances of the case and in law, the Ld. TPO has erred and the Hon’ble DRP has further erred in upholding / confirming the action of the Ld. TPO in not allowing appropriate adjustment(s) in accordance with the provisions of rule 1 OB of the Rules.
1.5 On the facts and in the circumstances of the case and in law, the Ld. TPO has erred and the Hon’ble DRP has further erred in upholding / confirming the action of the Ld. TPO in making in adjustment to the arm’s length price of international transactions without giving benefit of the proviso to section 92C(2) of the Act.
1.6 On the facts and in the circumstances of the case and in law, the Ld. TPO has erred and the Hon’ble DRP has further erred in upholding / confirming the action of the Ld. TPO in not following principle of consistency
1.7 On the facts and in the circumstances of the case and in law, the Ld. TPO has erred and the Hon’ble DRP has further erred in upholding / confirming the action of the Ld. TPO in making the adjustment without demonstrating that the Appellant had any motive to shift profits outside of India.
1.8 On the facts and in the circumstances of the case and in law, the Ld. TPO followed an unjustified approach by issuing two show-cause notices without providing appropriate responses against the replies filed by the Appellant in response to the first show-cause notice. Accordingly, the change in the approach followed by the Ld. TPO clearly demonstrates a biased state of mind and is against the principle of natural justice.
1.9 On the facts and in the circumstances of the case and in law, the Hon’ble DRP and the Ld. AO/ TPO has erred not granting reasonable and adequate opportunity to the Appellant.
