The Delhi High Court has held that Tata Consultancy Service (TCS) could not be comparable for benchmarking offshore outsourcing since the assessee purchases software for customers, not a developer.
The appellant/revenue challenged the order passed by the Income Tax Appellate Tribunal concerning Assessment Year (AY) 2010-11. GE India Business Services Pvt. Ltd, the respondent/assessee filed its Return of Income (ROI), wherein it declared its taxable income as Rs.12,16,81,262/-.
Initially, the ROI was processed under Section 143(1) of the Income Tax Act, 1961 [“Act”]. However, the respondent/assessee’s case was picked up for scrutiny, and accordingly, notice under Section 143(2) of the Act was served upon it.
During scrutiny, it was found that the respondent/assessee had entered into international transactions, which 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, in terms of the provisions of Section 92CA of the Act, for determination of the Arm’s Length Price (ALP) concerning the transactions in issue.
The respondent/assessee had submitted a Transfer Pricing Study Report (“TP Study Report”), which adopted the Transactional Net Margin Method (“TNMM method”) to arrive at the ALP concerning international transactions entered into by the respondent/assessee with its AEs, regarding ITES.
As per the respondent/assessee’s TP Study Report, the price charged by it concerning transactions entered into with its AEs in respect of ITES was at Arm’s Length. This conclusion was arrived at in the TP Study Report by working out the Profit Level Indicator (“PLI”), having regard to the ratio between the Operating Profit (OP) and Total Cost (TC) of eight comparable entities.
The eight comparables adverted to in the TP Study Report were examined and analysed by the TPO. The TPO, after applying various filters concluded that the comparables were not suitable for determining the ALP.
The Tribunal has noted that ATPL cannot be considered as a comparable, since, in the period under consideration, an entity going by the name Asscent Infoserve Ltd. amalgamated with ATPL.
In the case of TCS International, the Tribunal noted that it is in the business of rendering software development services [which, inter alia, includes maintenance and updation of software], as per the requirements of the users. Since the respondent/assessee was providing non-development software services, which involved the purchase of software for provisioning services.
A division bench comprising Justice Rajiv Shakdher and Justice Tara Vitasta Ganju observed that “the services offered by TCS International [not TCS E-Serve Ltd.] could not be used as a comparable, since the respondent/assessee was, admittedly, in the business of ITES/BPO/FSS. For each of these services that the respondent/assessee offered, it purchased, it appears, proprietary software and did not develop, maintain and update its software for the use of its customers.”
The Writ petition was dismissed.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
