Huge Turnover Difference Between Taxpayer, Comparable Warrants Exclusion In Transfer Pricing Analysis: Delhi HC

The Delhi High Court has held that a company with a vastly different turnover and scale of operations may not be a proper comparable for transfer pricing analysis.

A division bench of Justices V. Kameswar Rao and Vinod Kumar observed that huge differences between the tested entity and the comparable would necessarily require the exclusion of the comparable.

The court made the observation while dealing with an appeal filed by the Income Tax Department against an order of the Income Tax Appellate Tribunal in the case concerning American Express India (assessee).

The dispute pertained to assessment year 2009-10 and involved transfer pricing adjustments relating to export of data processing and office support services provided by the assessee to its associated enterprises.

Revenue had challenged the ITAT's directions regarding inclusion and exclusion of certain comparable companies used for determining the arm's length price.

One of the issues before the Court was regarding the inclusion of CG Vak Software & Exports Ltd. as a comparable company.

Revenue argued that while the assessee's IT-enabled services segment had a turnover exceeding Rs. 782 crore, the comparable company's ITES export turnover was only around Rs. 86 lakh.

Accepting the Revenue's contention, the High Court observed that scale and size are important factors in transfer pricing comparability analysis since they directly impact operating costs and pricing structures.

It observed,

“The scale of operation of the comparable with the tested entity is a factor that requires to be kept in view. Huge differences between the tested party and the comparable would necessarily require the comparable to be excluded. This we say so for the reason that the assessee has a turnover of Rs.782,63,63,57,677/- from its ITeS segment while the comparable CG Vak Software and Exports Ltd. has a total turnover of Rs. 7,23,39,181/- and ITeS export turnover is Rs.86,10,268/-. That means, the assesse has a turnover of 100 times than that of the comparable/C.G. Vak Software and Exports Ltd.”

Reliance was placed on The Commissioner of Income Tax-2, Pune v. Principal Global Services Pvt. Ltd., Pune where it was held that companies with substantially different scales of operation cannot be considered proper comparables under transfer pricing rules.

The Court also dealt with another issue relating to Cepha Imaging Pvt. Ltd., which had been rejected by the Transfer Pricing Officer on the ground that it failed the export turnover filter. The ITAT had directed reconsideration of the issue after finding that the company's export turnover was allegedly 100%.

However, the High Court observed that the ITAT failed to examine whether Cepha Imaging was functionally comparable to the assessee, particularly since it was engaged in e-publishing services, which may not fall within the category of IT-enabled services under CBDT Notification No. 890/2000.

For Appellant: Senior Standing Counsel Debesh Panda, Zehra Khan and Vikramaditya Singh, Junior Standing Counsel

For Respondent: Advocates Nageswar Rao, Ravi Lochan, Parth and Pratik Rath