Transfer Pricing | Delhi High Court Excludes Comparables On The Basis Of Functional Dissimilarity

The Delhi High Court has excluded the comparables on the basis of functional dissimilarity in the transfer pricing case.

The bench of Justice Rajiv Shakdher and Justice Girish Kathpalia excluded three comparables, namely Infobeans Technologies Ltd., Cybercom Datamatics Information Solutions Ltd., and Infosys BPO Ltd., citing clear reasons for their exclusion.

The appellant/department assailed the order dated January 19, 2023, passed by the Income Tax Appellate Tribunal (ITAT).

The appeal is confined to the exclusion of three comparables, namely Infobeans Technologies Ltd., Cybercom Datamatics Information Solutions Ltd., and Infosys BPO Ltd.

The respondent or assessee is operating in software development services, information technology-enabled services (ITES), business support services, and technical support services.

The comparisons, as regards functions, were made taking into account the software development services and ITES carried on by the respondent or assessee.

As regards the three comparables, the Tribunal reasoned why they are not comparable.

Firstly, as regards Infobeans, the Tribunal notes that it is into diversified activities, which include the sale of products. The Tribunal has advertised the profit and loss account of Infobeans, which shows that it has received revenue from operations amounting to Rs. 32,96,59,883. The notes to account (i.e., Note No. 20) indicate that it is in the business of selling software, which is sold both abroad and domestically. The other finding, which has been recorded by the Tribunal, is that Infobeans also pays sales tax and MODVAT. Thus, based on the functional dissimilarity between the assessee and Infobeans, the comparable was rejected.

Secondly, as regards Cybercom, the findings of fact recorded by the Tribunal are that it is into diversified activities, which include the provision of software services. It is indicated that segmental details concerning various segments are not available in the public domain. The Tribunal highlighted that, unlike the assessee, Cybercom is in the business of providing technical services. Based on this finding, the Tribunal has excluded Cybercom as a comparable

Thirdly, as regards Infosys, the Tribunal has discarded the comparable not on the ground of functional dissimilarity but on the ground of risk-bearing capacity. The Tribunal concluded that Infosys BPO is a risk-bearing entity with diversified activities. The assessee, on the other hand, has a turnover of only Rs. 96 crores in the BPO sector and hence cannot be compared.

“Clearly, the findings returned by the Tribunal are findings of fact, and no question is proposed by the appellant or revenue that the findings are perverse. Therefore, in our view, Infobeans, Cybercom, and Infosys were rightly rejected as comparables,” the court said.

Counsel For Appellant: Sunil Agarwal

Counsel For Respondent: Ananya Kapoor

Case Title: PCIT Versus Qualcomm India Pvt Ltd

Citation: 2023 LiveLaw (Del) 1042

Case No.: ITA 586/2023

Click Here To Read The Order