Income Tax Officer vs Sabre Travel Technologies Pvt. Ltd.

Introduction

The Income Tax Appellate Tribunal (ITAT), Bangalore Bench, delivered a significant ruling in the case of Income Tax Officer vs. Sabre Travel Technologies Pvt. Ltd., addressing critical issues in Transfer Pricing (TP) adjustments, working capital corrections, and deductions under Section 10A of the Income Tax Act, 1961. The judgment, dated 4th September 2020, pertains to Assessment Year 2011-12 and involves cross-appeals by both the Revenue and the Assessee. The core dispute revolves around the determination of the Arm’s Length Price (ALP) for international transactions involving Software Development Services (SWD) and Managed Support Services (MSS) provided by the Assessee to its wholly owned holding company, an Associated Enterprise (AE). The ITAT’s analysis underscores the necessity of functional comparability in selecting comparable companies, the proper methodology for working capital adjustments, and the consistent application of judicial precedents in tax computations. This commentary provides a deep-dive analysis of the Tribunal’s reasoning, focusing on the exclusion of comparable companies, the remand of working capital adjustments, and the treatment of Section 10A deductions.

Facts of the Case

The Assessee, Sabre Travel Technologies Pvt. Ltd., is engaged in providing SWD services and MSS to its wholly owned holding company, which is an AE under Section 92A of the Act. For the Assessment Year 2011-12, the Assessee filed a Transfer Pricing Study (TP Study) adopting the Transaction Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The Assessee identified 13 comparable companies with an average margin of 13.71%, claiming that its transaction price was at arm’s length.

The Transfer Pricing Officer (TPO), however, rejected several of the Assessee’s comparables and selected his own set of companies, resulting in an ALP adjustment of Rs. 8,22,35,220/-. The Disputes Resolution Panel (DRP) partially granted relief by excluding six companies (including Infosys Ltd., Larsen & Toubro Ltd., and Mindtree Ltd.) based on a turnover filter of Rs. 200 crores. However, the DRP declined to exclude five other companies: Acropetal Technologies Ltd., E-Infochips Ltd., ICRA Techno Analytics Ltd., Persistent Systems & Solutions Ltd., and E-Zest Solutions Ltd. The Assessee appealed against this non-exclusion, while the Revenue challenged the DRP’s direction for a 1% risk adjustment. Additionally, the Assessee raised issues regarding working capital adjustment methodology and the computation of deductions under Section 10A.

Reasoning of the Tribunal

The ITAT’s reasoning is structured around three primary issues: exclusion of comparable companies, working capital adjustment, and the Revenue’s appeal on risk adjustment.

1. Exclusion of Comparable Companies (Assessee’s Ground No. 10):
The Tribunal meticulously analyzed the functional comparability of the five contested companies. It relied heavily on precedents from the Bangalore ITAT and other tribunals, particularly the case of Electronic for Imaging (I) Pvt. Ltd. v. DCIT and Symantech Software & Services (I) Pvt. Ltd. v. DCIT. The key findings were:
– Acropetal Technologies Ltd.: Excluded because it was engaged in the development of computer products, not pure SWD services.
– E-Infochips Ltd.: Excluded as it earned revenue from both software services and products, and segmental data for costs and revenues were unavailable.
– E-Zest Solutions Ltd.: Excluded because it was engaged in Knowledge Process Outsourcing (KPO), which is functionally different from SWD services.
– ICRA Techno Analytics Ltd.: Excluded due to its involvement in engineering and consulting services, with no segmental information to isolate SWD margins.
– Persistent Systems & Solutions Ltd.: The Tribunal did not specifically address this company in the provided text, but the summary indicates that the exclusion of these five companies was upheld based on functional dissimilarity.

The Tribunal emphasized that the TPO’s selection of comparables must be based on functional similarity, not just data availability. By following binding precedents, the ITAT directed the exclusion of these companies, thereby reducing the ALP adjustment.

2. Working Capital Adjustment (Assessee’s Ground No. 12):
The Assessee argued that the TPO erred in applying a negative working capital adjustment and in restricting the adjustment without proper reasoning. The Tribunal found contradictions in the TPO’s order and remanded the issue for fresh consideration. It directed that:
– No negative working capital adjustment should be made if the Assessee does not bear working capital risks.
– Positive adjustments should be allowed without arbitrary caps.
– Advances from AEs should be included in payables for accurate computation.

The Tribunal stressed that the methodology must align with judicial precedents, such as the decision in Hellosoft Pvt. Ltd., which provides guidance on quantifying risk adjustments. This remand ensures that the TPO re-evaluates the adjustment with proper factual analysis.

3. Revenue’s Appeal on Risk Adjustment (Ground No. 2):
The Revenue challenged the DRP’s direction to allow a 1% risk adjustment. The Tribunal noted that the DRP had not provided any basis or discussion on the quantification of risks. It observed that the DRP merely directed the AO to take guidance from the Hellosoft case without specifying the percentage or rationale. Consequently, the Tribunal allowed the Revenue’s appeal, setting aside the DRP’s direction and remanding the issue for fresh determination. This underscores the principle that any adjustment must be supported by evidence and reasoning, not arbitrary percentages.

4. Section 10A Deduction and Lease Rental Issue:
The summary indicates that the Tribunal upheld the Assessee’s position on Section 10A deduction, requiring symmetrical treatment of expenses (telecommunication, insurance, and foreign exchange loss) in both export and total turnover. The lease rental issue was remanded to the AO for factual determination of whether payments were capital or revenue in nature. These aspects reinforce the need for consistency in computational methods and factual verification.

Conclusion

The ITAT’s ruling in Sabre Travel Technologies Pvt. Ltd. is a landmark decision that reinforces the importance of functional comparability in Transfer Pricing analysis. By excluding companies lacking segmental data or engaged in diversified activities, the Tribunal upheld the principle that comparables must be “like-for-like” with the tested party. The remand of working capital and risk adjustment issues highlights the need for transparent, evidence-based methodologies. Furthermore, the consistent application of Section 10A precedents ensures uniformity in tax computations. This judgment serves as a guide for both taxpayers and tax authorities in future TP disputes, emphasizing that adjustments must be grounded in factual analysis and judicial precedents.

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