American Express (India) Pvt. Ltd. (AEIPL), a wholly owned subsidiary of American Express International Inc., USA, benchmarked its ITeS transactions of ₹782 crore for AY 2009-10 using TNMM, selecting nine Comparables with an average PLI of 19.06%.
The TPO rejected four comparables selected by AEIPL and introduced two new comparables, resulting in a revised average PLI of 29.91%.
Based on the revised benchmarking, a transfer pricing adjustment of ₹67.06 crore (₹67,05,58,495) was ultimately determined.
Assessee’s Contentions | Revenue’s Contentions | Tribunal’s Judgment |
AEIPL contended that Cepha Imaging Pvt. Ltd. should be included as a comparable since it had 100% export turnover. The ITAT remanded the matter to the TPO only on the export filter issue, since the TPO had already considered functional comparability and rejected it solely on the export filter. | Revenue argued that the ITAT erred in directing the TPO to include Cepha Imaging without first examining its functional dissimilarity. Cepha Imaging is engaged in e-publishing services, which is not listed under CBDT Notification No. 890/2000 as an ITeS activity. | Decided in favour of the Revenue. The High Court held that the ITAT failed to address the functional comparability of Cepha Imaging vis-à-vis the assessee. Since e-publishing services are not listed under CBDT Notification No. 890/2000, the matter is remanded to TPO to examine both functional similarity and export turnover afresh. |
AEIPL contended that CG Vak Software & Exports Ltd. had been a comparable in its own case for AY 2004-05, 2005-06 and 2006-07. The assessee did not apply a turnover filter, and under TNMM, comparability should be assessed on FAR analysis, not turnover size. As per the Delhi High Court in Chryscapital Investment Advisors (India) Pvt. Ltd. v. DCIT, low turnover alone cannot be grounds for exclusion of a functionally comparable company. | Revenue argued that scale of operations is a material comparability factor. The assessee's ITeS turnover was INR 782 crores while CG Vak's ITeS segment turnover was only Rs. 86 lakhs which is a 100-fold difference, making them non-comparable. Reliance was placed on CIT v. Agnity India Technologies (Del. HC) and CIT v. Principal Global Services Pvt. Ltd. (Bom. HC), which held that huge turnover disparities require exclusion of the comparable. | Decided in favour of the Revenue. The High Court held that scale of operations is a critical comparability factor and requires exclusion of CG Vak. Relying on Agnity India Technologies (Delhi HC), Principal Global Services (Bombay HC), and Avaya India Pvt. Ltd. (Delhi HC), the Court overruled the ITAT's direction to include CG Vak. |
Ruling Summary
The High Court held that comparability under TNMM must be assessed on both functional similarity and scale of operations. Accordingly, it remanded the inclusion of Cepha Imaging Pvt. Ltd. to the TPO for a fresh examination of functional comparability and export turnover.
The Court upheld the exclusion of CG Vak Software & Exports Ltd., ruling that the substantial disparity in turnover and scale of operations rendered it unsuitable as a comparable, thereby deciding both issues in favour of the Revenue.
