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2014 (9) TMI 192 - AT - Income TaxTransfer pricing adjustment - Understatement of ALP of international transaction - Selection of comparables - Functionally different unit Different business model Held that:- The TPO observed that the functions performed by Vishal are similar to the assessee; that wages to cost ratio cannot be adopted to accept/reject the comparables; that the assessee has itself chosen Vishal in its TP study - The assessee objected before the DRP that execution of contracts was outsourced by the assessee to external vendors - the company does not perform comparable functions; that work in progress is significant part of operating cost clearly demonstrating that the company is following a very different model of business - The DRP's findings are that the company is rendering ITES services using its own assets and human resources (may not be on the roll of the company) and is functionally similar to the taxpayer; and that RPT more than 25% as corporate guarantee is not acceptable, as this transaction does not have effect on profit & loss - M/s Vishal Information Technologies Limited has a different business model than that of the assessee, as it outsources execution of contracts to external vendors to save cost on employees which is also evident from the fact that employee cost for Vishal is 3% to the total cost, whereas in case of assessee, it is 60% to the total cost - the assessee was involved in the business of Information Technology Enabled Services, and revenue sought to include M/s Vishal Information Technologies as comparable to compute the mean margin of the comparables, it was held by the ITAT that such comparable is functionally not comparable. Relying upon First Advantage Offshore Services (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle - 11(3), Bangalore [2012 (6) TMI 572 - ITAT BANGALORE] - in the case of an ITES company, employee cost should definitely be more than 25% of the total expenses as in the ITES segment, the entire work is to be done by the employees and companies whose employee cost is less than 25% must be excluded - since the employee cost/operating sales of M/s Vishal Information Technologies Ltd. is a mere 3%, whereas the threshold limit for acceptance as a comparable on the basis of employee cost to sales should be at least 25%, the same is liable to be excluded. Over 20% of operating costs of M/s Vishal Information Technologies Ltd. consist of 'Work in Progress' and such a significant part of operating costs being 'work in progress' clearly signifies that the company is following a very different operating model from that of the assessee also in Dy. CIT v. Quark Systems (P.) Ltd. [2009 (10) TMI 591 - ITAT, CHANDIGARH] - while preparing the TP report by an oversight the business model of M/s Vishal was not properly taken into account and hence, merely because it is chosen by the assessee in its TP study, the same cannot be held to be comparable and the taxpayer is entitled to point out that the said enterprise has wrongly been taken as a comparable. Merely because M/s Vishal Information Technologies Ltd. has been selected as comparable in the transfer pricing study, this does not ipso facto establish that the same is an inappropriate comparable - even if the taxpayer or its counsel had taken Datamatics as comparable in its TP audit, the taxpayer is entitled to point out to the Tribunal that the above enterprise has wrongly been taken as a comparable, and as such, the assessee is entitled to contend that the aforesaid comparable is not comparable, as being functionally dissimilar. Revenue has not been able to refute the above position - finding the same to be perfectly reasonable, the exclusion of M/s Vishal Information Technologies Ltd. is directed as a comparable - the exclusion of M/s Vishal Information Technologies Ltd. from the set of comparables, brings the assessee within the prescribed range of +/- 5%, the merits of the comparability of the other comparables need not be gone into Decided in favour of Assessee.
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