CIT Vs GE India Business Services Pvt. Ltd. (Delhi High Court)
The Delhi High Court recently passed a judgment in a transfer pricing case involving GE India Business Services Pvt. Ltd. The appeal was against the order of the Income Tax Appellate Tribunal (ITAT) for the Assessment Year 2010-11. The key issue was the exclusion of four comparables by the Tribunal for benchmarking international transactions related to offshore outsourcing services provided by the taxpayer to its associated enterprises (AEs).
The appellant/revenue argued that the Tribunal wrongly excluded the comparables based on functional similarity with another entity, Rampgreen Solutions Pvt. Ltd. However, the Court disagreed, stating that the functional profile of the taxpayer was different from Rampgreen Solutions Pvt. Ltd. The Court also upheld the exclusion of comparables due to extraordinary events like amalgamation and acquisitions.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. This is an appeal preferred by the appellant/revenue against the order dated 27.04.2018 passed by the Income Tax Appellate Tribunal [in short, “Tribunal”] concerning Assessment Year (AY) 2010-11.
1.1 The appellant/revenue’s principal grievance articulated before us is the exclusion of four out of five comparables selected by the Transfer Pricing Officer (“TPO”), for the purposes of benchmarking international transactions relating to offshore outsourcing services provided by the respondent/assessee to its Associated Enterprises (AEs).
BACKGROUND:
2. Before we proceed further, it may be necessary to record the following broad facts, which have led to the institution of the instant appeal:
3. On 30.09.2010, the respondent/assessee filed its Return of Income (ROI), wherein it declared its taxable income as Rs.12,16,81,262/-.
3.1 Initially, the ROI was processed under Section 143(1) of the Income Tax Act, 1961 [in short, “Act”]. However, the respondent/assessee’s case was picked up for scrutiny, and accordingly, notice under Section 143(2) of the Act was served upon it.
4. It is during scrutiny that it came to light that the respondent/assessee had entered into international transactions, which involved providing Information Technology Enabled Services (ITES) to its AEs.
5. Since the value of the transactions during the relevant period was more than Rs.15 crores, the AO referred the matter to the TPO, in terms of the provisions of Section 92CA of the Act, for determination of the Arm’s Length Price (ALP) concerning the transactions in issue.
5.1 As required, the respondent/assessee had submitted a Transfer Pricing Study Report (“TP Study Report”), which adopted the Transactional Net Margin Method (“TNMM method”) to arrive at the ALP concerning international transactions entered into by the respondent/assessee with its AEs, regarding ITES.
5.2 As per the respondent/assessee’s TP Study Report, the price charged by it concerning transactions entered into with its AEs in respect of ITES was at Arm’s Length. This conclusion was arrived at in the TP Study Report by working out the Profit Level Indicator (“PLI”), having regard to the ratio between Operating Profit (OP) and Total Cost (TC) of eight comparable entities.
5.3 As per the TP Study Report, the average OP/TC of the comparable entities worked out at 8.36% whereas insofar as the respondent/assessee was concerned, it worked out at 16.94%. It is based on this that the respondent/assessee had taken the stand before the TPO, that the transactions executed with its AEs were at Arm’s Length.
5.4 The eight comparables adverted to in the TP Study Report were examined and analysed by the TPO. The TPO, after applying various filters concluded that the comparables were not suitable for determining the ALP. Interestingly, the TPO, upon further analysis concluded that some of the comparables that had been rejected by the respondent/assessee [as noticed in the TP Study Report] were, in fact, suitable. The TPO, thus, zeroed down on the following seven comparables:
