Direction to Assessee to exclude 6 comparables and thereafter Compute ALP: ITAT [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) in the case of Evalueserve.com Pvt Ltd v DCIT holding in favor of the assessee directed the AO to exclude the 6 comparables and thereafter compute the ALP.

According to the facts of the case, the assessee company is a wholly-owned subsidiary of E-valueserve Ltd. Bermuda engaged in the business of providing IT enabled services to its Associated Enterprises (AEs) and is also registered with Software Technology Parks of India. The assessee derives business from the segments of (1) Corporate and Professional services (2) Financial Services and (3) Intellectual Property Research.

The assessee in order to benchmark its international transaction with its AEs had adopted TNMM as the most appropriate method, which resulted in a profit margin of 18.94%. Assessee while short-listing 9 comparables with the average margin of 10.75% reported that the assessee’s international transactions are at arm’s length price. The TPO while rejecting the above assessee’s analysis short-listed 12 comparables out of which 6 comparables were challenged by the assessee and were excluded from the analysis.

The Bench constituting of Judicial Member Amit Shukla and Accountant Member O.P. Kant holding in favor of the assessee directed the AO to exclude the above 6 comparables and thereafter compute the ALP. The basis of such exclusions are as follows:

Eclerx Services Ltd. along with Accentia Technologies, BNR Udyog Ltd was held not to be comparables for the major reason of not being functionally comparable.

Further, since the profit margin for the major activities carried on by Excel Infoways Ltd. cannot be identified, it cannot be held that a huge margin reported by the said company is on account of ITeS and hence, it cannot be found to be comparable.

Infosys BPO Ltd and TCS E-Serve Ltd. have been held not only to be high turnover companies but also have been held to have high brand value and intangibles as compared to the assessee having insignificant intangibles. The factors enjoyed by giant companies have been held to be incomparable with low risk or capital service providers.