PYRAMID IT CONSULTING P LTD v. ADDITIONAL COMMISSIONER OF INCOME TAX

2. Both these matters concern a common issue regarding Transfer Pricing Adjustment for the international transaction involving the Petitioner/Appellant which is headquartered in the United States ofAmerica and is engaged in the business ofproviding value added IT Solutions and IT staffing services to global companies including growing mid-tier firms. The Appellant claims that it is primarily engaged in the provision of contract software development('CSD segment')and recruitment/manpower services. However, the present cases concern the issue of transfer pricing for its staffmg segment.

3. For Assessment Year (AY) 2010-2011 the Assessee filed a return declaring an income ofRs.32,79,820/- and paid tax under section 115 JB on a book profit ofRs 1,76,61,244/-.

4. The Assessing Officer('AO') after noting that there were international transactions entered into by the Assessee with its Associated Enterprises, referred the case to the Transfer Pricing Officer('TPO')for determining the arm's length price('ALP')ofthe said international transactions.

5. Admittedly before the TPO as part of the Transfer Pricing Study, the Assessee had put forth two comparables as regards the staffmg segment. Both these comparables were rejected by the TPO. On the other hand,the W.P.(C)5198/2019& ITA 1289/2018 Page2of[6] TPO introduced another comparable i.e. HCCA Business Services Pvt. Ltd. (hereafter 'HCCA') and after determining that the margin of the said comparable was20.05% recommended an adjustment ofRs.1,03,61,078/- on the staffing services segmentearnings ofthe Assessee.

6. Aggrieved by the said order of the TPO,the Assessee went before the Dispute Resolution Panel(DRP) which by its decision dated 27 October 2014 upheld the order ofthe TPO.

7. The Assessee then went before the Income Tax Appellate Tribunal (ITAT) which by the order dated 11^*^ July 2018 rejected the Assessee's contention that HCCA was not a comparable as it was fimctionally different. The Assessee then filed MA No.632/Del/2018 before the ITAT under Section 254(2)ofthe Act pointing outthat in its order dated 11^^ July 2018 the ITAT had noted that HCCA owns 'intangibles' and yet it was not excluded as a comparable. The case of the Assessee was that a company owning intangibles like HCCA could not be compared with the Assessee which admittedly does not own intangibles. The Assessee pointed out that it had placed before the ITAT the decision dated 3'"^ May 2016 ofthe ITAT itselfin LG ChemicalsIndia Pvt.Ltd. v. ACIT where the same comparable i.e. HCCA had been excluded since it had a different functional profile from the Assessee in that case. It was pointed out that the said decision was not even discussed bytheITATin its order dated 11^July 2018.

8. The said MA was dismissed by the ITAT by its order dated 25^*^ March 2019.It is against the said order that W.P.(C)5198/2019 has been filed by W.P.(C)5198/2019& ITA 1289/2018 Page3of[6] the Assessee.

9. Ms. Vibhooti Malhotra, learned counsel for the Revenue,submitted that the mere exclusion or inclusion ofa comparable for the purposes ofTransfer Pricing Adjustment does not give rise to any substantial question oflaw and this has been the settled legal position as explained in several decisions of this Courtas well as other High Courts.

10. While it is correct that the mere exclusion or inclusion ofa comparable may not per se give rise to any substantial question oflaw, in the present case the Court finds that the only comparable on the basis of which the Transfer Pricing Adjustment has been recommended by the TPO is HCCA. The two comparables proposed by the Assessee have been excluded by the TPO. These two comparables were Ma Foi Management Consultants Ltd. and Overseas Manpower Corporation Ltd.The Courtfurther finds that when the matter went before the DRP,another comparable was introduced by the DRP viz., Nirbhay Management Services Pvt. Ltd. However even the DRP picked up only HCCA for upholding the Transfer Pricing Adjustment as proposed by the TPO. In that view ofthe matter it cannot be said that the. impugned order oftheITAT does not give rise to any substantial question of law.

11. Admit(as far as the appeal is concerned).

12. The question oflaw that arises for determination in the appeal is whether the ITAT was justified in upholding the exclusion of the comparables W.P. (C)5198/2019& ITA 1289/2018 Page4of[6] suggested by the Assessee and in approving the TP adjustment as proposed by the TPO only on the basis ofone comparable objected to by the Assessee on account ofit being functionally differentfrom the Assessee?

13. It appears that in the impugned order dated 11^*^ July 2018 ofthe ITAT there is no discussion of its earlier order in LG Chemicals India Pvt. Ltd. where it was held that a company owning intangibles carmot be compared with one which does not. Also,the order dated 25^*^ March 2019 passed by the ITAT rejecting MA No.632 clearly notes that the agreements referred to in the audit report concerning HCCA were not before the ITAT.The ITAT appears to have overlooked the Assessee's objections to inclusion ofHCCA which according to the Assessee was only providing pay roll processing services. The difference in functionality ofthe Assessee and HCCA was not discussed by theITAT.

14. Since the entire TP Adjustment has hinged only on one comparable,viz., HCCA the objection to the inclusion of which by the Assessee required a detailed consideration, the Court is of the view that the impugned order dated 11"^July2018oftheITAT cannotbe sustained in law.The question of law is accordingly answered in the negative i.e. in favour ofthe Assessee and againstthe Revenue.

15. The Court notes that in the impugned order,the ITAT has remanded to the TPO the consideration of one of the comparables proposed by the Assessee viz.. Ma Foi Management Consultants Ltd. and one other as suggested bythe DRP i.e. Nirbhay ManagementServicesPvt.Ltd. W.P.(C)5198/2019& ITA 1289/2018 Page5of[6]

16. The Court is of the view that the entire issue of determining the TP adjustment ifany in respect ofthe transactions in the staffing segment ofthe Assessee should be considered afresh by the TPO uninfluenced by his earlier order. (..J f[7]. Accordingly while setting aside the orders dated 11^^ July 2018 and 25^*^ March 2019 ofthe ITAT and the corresponding orders dated 2^^ January 2014 ofthe TPO and 27^'' October 2014 ofthe DRP,this Courtremands the entire issue of determining the TP adjustment if any in respect of the transactions in the staffing segment ofthe Assessee to the TPO for a fresh determination.The TPO will examine afresh the question ofinclusion and/or exclusion ofcomparables as proposed by the Assessee and the Revenue.