Karnataka HC Upholds ITAT’s Exclusion Of 8 Firms From Nuance Transcription’s Transfer-Pricing Comparables; Revenue Failed To Show They Were Comparable

The respondent-assessee provided IT-enabled services, principally medical transcription and BPO services.

In its transfer-pricing assessment for AY 2008–09, the Transfer Pricing Officer (TPO) included comparables that the Income Tax Appellate Tribunal (ITAT) later excluded as functionally dissimilar: Genesys International Corporation Ltd., Mold-Tek Technologies Ltd., Eclerx Services Ltd., Coral Hubs Ltd., Acropetal Technologies Ltd., Infosys BPO Ltd., Wipro Ltd. and Accentia Technologies Ltd.

The Revenue appealed under Section 260A of the Income Tax Act, 1961, challenging the ITAT’s treatment of the comparables and other transfer-pricing directions.

The ITAT had remanded certain issues to the TPO for fresh consideration.

Section 260A of the Income Tax Act provides for appeals to the High Court on substantial questions of law.

Sections 92C and 92C(3), read with Rule 10B of the Income Tax Rules, govern determination of the arm’s-length price and the assessment of comparability.

As stated in Sap Labs India Private Limited v. Income Tax Officer (ITA No. 10/2011 and connected appeals), transfer-pricing comparability is a factual, data-driven inquiry; the TPO must comply with Rule 10B and cannot replace the taxpayer’s comparables with a standard departmental set without justification.

Once the TPO substitutes comparables, the burden lies on the TPO to justify their inclusion or exclusion.

Foreign-exchange gain or loss is an operating item only where it has a direct nexus with the international transaction.

The Tribunal’s decision in Global E:Business Operations (P.) Ltd. v. Deputy Commissioner of Income-tax, [2015] 63 taxmann.com 282 (Bangalore-Trib.), was also relied upon in assessing the comparables.

The Court treated the comparables’ selection or exclusion as a factual exercise governed by Rule 10B.

The ITAT had considered the assessee’s business profile and the activities of the eight disputed companies, and concluded that they were not comparable to the assessee’s IT-enabled medical transcription and BPO services.

The Revenue did not identify perversity, show that the ITAT relied on irrelevant material, or establish that it had ignored relevant material.

The Court therefore found no basis to interfere with the ITAT’s factual determination.

As the ITAT had remanded the issues concerning foreign-exchange items, brand value and filters to the TPO, the Court considered those questions premature.

Questions 4–6 did not arise for consideration because the relevant issues had been remanded to the TPO for fresh consideration.

The appeal was disposed of accordingly.