PCIT-1 Vs American Express (India) Pvt. Ltd. (Delhi High Court)
Conclusion: Where ITAT directed inclusion of Cepha Imaging Pvt. Ltd. as a comparable solely on the basis that it satisfied the export turnover filter without examining its functional comparability with assessee, and further directed inclusion of CG Vak Software & Exports Ltd. despite a substantial disparity in turnover between assessee and the comparable, High Court held that functional similarity was a fundamental requirement for comparability analysis and that significant differences in scale and turnover may render an entity incomparable. Accordingly, the matter was remanded to the TPO for examination of functional comparability.
Held: Assessee, a wholly owned subsidiary of a foreign group company, was engaged in providing data processing, information analysis, back-office support and other IT-enabled services (ITeS) to its associated enterprises on a cost-plus basis. During the relevant assessment year, it entered into international transactions with its associated enterprises and benchmarked the same under the Transactional Net Margin Method (TNMM). In the transfer pricing study, assessee selected certain comparable companies. TPO rejected some of the comparables proposed by assessee and introduced additional comparables, resulting in transfer pricing adjustments. DRP substantially upheld the TPO’s findings. On appeal, ITAT directed inclusion of, inter alia, Cepha Imaging Pvt. Ltd. and CG Vak Software & Exports Ltd. as comparables. Aggrieved by the ITAT’s order, the Revenue preferred an appeal before the High Court. It was held that ITAT had proceeded on the assumption that the only issue concerning Cepha Imaging Pvt. Ltd. was satisfaction of the export turnover filter. However, Revenue had specifically contended that the company was engaged in e-publishing activities, which were not expressly covered within the scope of IT-enabled services under CBDT Notification No. 890(E) dated 26-9-2000. Since ITAT had not examined the issue of functional comparability, its findings were incomplete. Accordingly, the matter was remanded to the TPO to examine the functional similarity of Cepha Imaging Pvt. Ltd. vis-à-vis the assessee, while also considering the requirements of the CBDT notification. With regard to CG Vak Software & Exports Ltd., the Court observed that comparability analysis under transfer pricing provisions necessarily requires consideration of the scale and size of operations. Assessee’s ITeS turnover was approximately Rs. 782 crores, whereas the comparable’s ITeS turnover was only about Rs. 86 lakhs. Such a vast disparity in turnover materially affected comparability. Relying on judicial precedents including Agnity India Technologies (P.) Ltd., Principal Global Services (P.) Ltd. and Avaya India (P.) Ltd., the Court held that entities with significantly different scales of operation could not be regarded as proper comparables. Consequently, ITAT erred in directing inclusion of CG Vak Software & Exports Ltd. merely on the basis of functional similarity without considering the substantial turnover mismatch.
