Transfer Pricing | Entities Operating On Economic Upscale Can't Be Included As 'Comparables' Of Those Working On Cost-Plus Pricing: Delhi HC
Kapil Dhyani
25 Oct 2024 11:00 AM IST
The Delhi High Court has reiterated that entities commanding high profit margins cannot be included as comparables of those working on cost-plus markup basis, to determine Arm's Length Price for international transactions. A division bench of Justices Yashwant Varma and Ravinder Dudeja thus ordered the exclusion of TCS E-Serve International Ltd., TCS E-Serve and Infosys BPO Limited...
The Delhi High Court has reiterated that entities commanding high profit margins cannot be included as comparables of those working on cost-plus markup basis, to determine Arm's Length Price for international transactions.
A division bench of Justices Yashwant Varma and Ravinder Dudeja thus ordered the exclusion of TCS E-Serve International Ltd., TCS E-Serve and Infosys BPO Limited from the list of comparables of the Appellant- Cadence Designs.
The Appellant had submitted that while it operates on cost-plus pricing, the three comparables command high profits due to their brand value. It was further submitted that these companies incur huge expenditures in brand building and advertisement, whereas no cost is incurred by Cadence for promoting its brand.
Meanwhile, the Transfer Pricing Officer, the Dispute Resolution Panel and the Income Tax Appellate Tribunal had taken a consistent view to include the three companies as comparables in regard to ALP determination.
At the outset, the High Court noted that insofar as TCS E-Serve and Infosys BPO Limited are concerned, ITAT itself had excluded the two entities from the list of appellant's comparables in a subsequent Assessment Year. TCS E-Serve International was excluded from consideration by the TPO itself.
It observed,
“The exclusion of the three comparables in question would clearly merit acceptance bearing in mind a subsequent decision rendered by this Court in PCIT v. Evalueserve Sez (Gurgaon) Pvt. Ltd.”
In Evalueserve Sez (supra), the Delhi High Court had held in the year 2018 that M/s. TCS E-Serve Limited; M/s. TCS E-Serve International Limited and M/s. Infosys BPO Ltd. were excluded since these entities operated on economic upscale whereas Evalueserve is exposed to price risk.
The High Court also relied on Pr. Commissioner of Income Tax v BC Management Services Pvt. Ltd. (2017) where exclusion of TCS E-serve was upheld citing its high profitability due to association with TATA Consultancy Service Ltd. which was of high brand value.
Accordingly, the appeal was allowed and Court ordered exclusion of all three companies from the list of comparables.
Appearance: Advocates Nageswar Rao and Parth for Petitioner; SSC Siddhartha Sinha with JSCs Dacchita Shahi and Anuja Pethia, and Advocates Nring Chamwibo Zeliang and Anu Priya Nisha Minz for Revenue
Case title: Cadence Design Systems (India) v. Deputy Commissioner Of Income Tax
Case no.: ITA 592/2018
