Delhi High Court Excludes Comparable On Grounds Of Functional Dissimilarity & Amalgamation

The Delhi High Court has held that the Software Development Services offered by TCS International could not be used as a comparable since the assessee was in the business of Indian Information technology-enabled services (ITES) or business process outsourcing (BPO).

The division bench of Justice Rajiv Shakdher and Justice Tara Vitasta Ganju has observed that TCS International is in the business of rendering software development services, which, inter alia, include maintenance and updation of software, as per the requirements of the users. In comparison, the respondent/assessee was providing non-development software services, which involved the purchase of software for provisioning services.

The respondent/assessee filed its Return of Income (ROI), which was processed under Section 143(1) of the Income Tax Act, 1961. The assessee's case was picked up for scrutiny, and accordingly, notice was served upon it. During scrutiny, it came to light that the assessee had entered into international transactions that involved providing Information technology-enabled services (ITES) to its AEs.

Since the value of the transactions during the relevant period was more than Rs. 15 crores, the AO referred the matter to the TPO for determination of the Arm’s Length Price (ALP).

The assessee had submitted a Transfer Pricing Study Report that adopted the Transactional Net Margin Method to arrive at the ALP concerning international transactions entered into by the assessee with its AEs regarding ITES.

The eight comparables referred to in the TP Study Report were examined and analyzed by the TPO. The TPO, after applying various filters, concluded that the comparables were not suitable for determining the ALP.

The TPO concluded that some of the comparables that had been rejected by the assessee were, in fact, suitable. The TPO, thus, zeroed in on the seven comparables.

The Tribunal excluded the four comparables from the list selected under the TNMM Method for arriving at the ALP concerning international transactions entered into by the respondent/assessee with its AEs. The four comparables were ATPL, I-Gate, Infosys, and TCS International.

The tribunal in respect of ATPL held that it cannot be considered comparable since, in the period under consideration, an entity going by the name Ascent Infoserve Ltd. amalgamated with ATPL.

In the case of I-Gate, the tribunal discovered that an entity going by the name I-Gate Global Solutions Sdn. Bhd. had amalgamated with I-Gate. The financials of I-Gate included the results of the amalgamating company. The I-Gate was found to be unfit for comparison to determine the ALP.

As regards Infosys, it was revealed that it had acquired an entity, i.e., McCamish Systems LLC. The Tribunal considered this an extraordinary financial event and hence excluded it from the final set of comparables.

Insofar as TCS International is concerned, the Tribunal noted that it is in the business of rendering software development services, which, inter alia, include maintenance and updation of software as per the requirements of the users. In comparison, the respondent/assessee was providing non-development software services, which involved the purchase of software for provisioning services.

The department contended that the Tribunal should have also borne in mind the business environment, the nature and functions performed by the tested party and comparable entities, value addition in respect of products and services provided by the parties, the business model, and the assets and resources employed.

The assessee contended that the Tribunal had excluded three out of the four comparables, i.e., ATPL, I-Gate, and Infosys, upon concluding that the entities had been subjected to an extraordinary event. Therefore, it did not fall into the category of fit comparables. TCS International was providing software development services and, hence, was not functionally similar to an entity such as the assessee, which was provisioning non-development software services.

The court ruled that the Tribunal was right in excluding ATPL, I-Gate, and Infosys on the ground that an extraordinary financial event had occurred, rendering them unfit comparables to determine the ALP.

Case Title: The Commissioner Of Income Tax -4 Versus GE India Business Services Pvt. Ltd.

Citation: 2023 LiveLaw (Del) 614

Date: 18.07.2023

Counsel For Petitioner: Shlok Chandra

Counsel For Respondent: Sachit Jolly

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