2016 (8) TMI 1161 - AT - Income Tax

TPA - selection of comparable - software development segment segment - Held that - M/s ICRA Techno Analytic Ltd(Seg.) M/s Infosys Ltd. M/s Kals Information Systems Ltd. (Seg.) M/s Persistent Systems Ltd. and M/s Tata Elxsi Ltd. companies were rightly excluded by the DRP from the list of final comparables. M/s R.S.Software (India) Ltd - there is no segment information available for sale of software services and product. In the light of these facts it was held by DRP that this company should be excluded from the list of final comparables. Under these facts we find no infirmity in the order of the DRP for directing exclusion of this comparable. Accordingly appeal of the revenue in respect of this segment i.e. software development segment is dismissed. ITES segment - M/s Acentia Technologies Ltd.(Seg.) company is predominantly engaged in providing services onsite we decline to interfere with the order of DRP regarding exclusion of this company. M/s Eclerx Services Ltd exclusion confirmed M/s ICRA Online Ltd (Seg.) - Exclusion of this company was directed by DRP by applying export revenue filter of 75% and it was submitted by the ld. AR of the assessee before us that he has no objection if this filter of 75% export is not applied. Accordingly we reverse the order of the DRP regarding exclusion of this company and direct the AO/TPO to include this company i.e. M/s ICRA Online Ltd (Seg.)as a good comparable. M/s Sundaram Business Services Ltd. - Regarding this comparable we find that this is noted by the DRP on page-24 of its order that only 36.91% of the turnover is from exports and therefore this company is failing 75% export earning filter since both sides agreed that this filter i.e. 75% export earning filter should not be applied we reverse the order of DRP on this comparable and hold that this comparable company i.e. M/s Sundaram Business Services Ltd. should be reinstated as a comparable. Accordingly the appeal of the revenue regarding this segment is partly allowed. M/s Acentia Technologies Ltd exclusion confirmed M/s Microland Ltd - as from the perusal of the annual report of this company i.e. M/s Microland Ltd. it is seen that out of total revenue of 135.00 Crores the revenue from ITES is only 31.73 Crores which is around 23% of revenue and hence this company is not predominantly engaged in ITES and therefore cannot be considered as a good comparable. Exclusion of two comparables i.e. a) HCCA Business Service Pvt. Ltd. and b) M/s Killick Agencies and Marketing Ltd confirmed. M/s Acentia Technologies Ltd.exclusion confirmed M/s ICC International Agencies Ltd. - Since the assessee is not engaged in trading activity in our considered opinion this company cannot be considered as good comparable in the present case and hence we direct the AO/TPO to exclude his company from the list of final comparable.

Issues Involved:
1. Directions of the Dispute Resolution Panel (DRP).
2. Application of new filters by DRP.
3. Exclusion of certain comparables by DRP.
4. Working capital adjustment.
5. Transfer Pricing (TP) documentation.
6. Use of multiple year data.
7. Adoption/modification of filters by DRP and TPO.
8. Risk adjustment.
9. Corporate tax matters.

Detailed Analysis:

1. Directions of the Dispute Resolution Panel (DRP):
The revenue argued that the directions of the DRP were opposed to law and facts of the case. The DRP's directions to exclude certain comparables were challenged, stating that these directions amounted to setting aside the draft order, which is beyond the mandate given to DRP under Section 144C(8).

2. Application of New Filters by DRP:
The DRP applied new filters such as the 25% Employee Cost Filter, Onsite Filter, and 75% Export Filter in the ITES and Software Segments. The revenue contended that the DRP erred in applying these filters without appreciating the facts discussed by the Transfer Pricing Officer (TPO) for the selection of comparables.

3. Exclusion of Certain Comparables by DRP:
The DRP directed the TPO to exclude several comparables like M/s ICRA Techno Analytics Ltd., M/s KALS Information Systems Ltd., M/s Infosys Ltd., M/s Persistent Systems Ltd., M/s Sundaram Business Services Ltd., M/s HCCA Business Services Pvt. Ltd., and M/s Killick Agencies & Marketing Ltd. The revenue argued that these comparables were excluded mainly based on other cases for other financial years without considering the specific facts of the assessee's case.

4. Working Capital Adjustment:
The DRP directed the TPO to adjust the profit margin of the assessee for the entire amount of advances received from Associated Enterprises (AEs) on the ground that there is a time value for money. The revenue questioned whether working capital adjustment could be made on the basis of advance received from AEs in the absence of debtors and inventory for calculating the cost of working capital.

5. Transfer Pricing (TP) Documentation:
The assessee argued that the TP documentation prepared was in accordance with relevant provisions of the Act and Rules. The DRP and TPO were said to have erred in rejecting this documentation and undertaking a new search for comparables.

6. Use of Multiple Year Data:
The DRP and TPO rejected the use of multiple year data, which the assessee claimed had an influence on determining the arm's length price. The assessee argued that contemporaneous data available at the time of the benchmarking study should have been considered.

7. Adoption/Modification of Filters by DRP and TPO:
The DRP and TPO were said to have erred in adopting/modifying additional filters for conducting TP analysis without appreciating the TP documentation prepared by the assessee. The DRP's exclusion of certain comparables and inclusion of others were also contested.

8. Risk Adjustment:
The DRP and TPO were argued to have erred in not granting appropriate risk adjustments to the margins of the comparables. The assessee, being a captive service provider, operated at lower risk levels compared to comparables carrying higher risks.

9. Corporate Tax Matters:
The DRP and AO were said to have erred in granting credit under section 115JAA of the Act, computing surcharge and education cess on the tax payable, and holding that the appellant was granted a refund of ?2,356,520 instead of the actual refund of ?1,663,079. The levy of interest under sections 234B and 234D was also contested.

Judgment Summary:

Software Development Segment:
The Tribunal upheld the DRP's exclusion of five comparables (M/s ICRA Techno Analytic Ltd., M/s Infosys Ltd., M/s Kals Information Systems Ltd., M/s Persistent Systems Ltd., M/s Tata Elxsi Ltd.) based on a previous Tribunal order in the case of M/s Electronics for Imaging India (P) Ltd. The exclusion of M/s R.S. Software (India) Ltd. was also upheld due to the absence of segment information for software services and product sales.

ITES Segment:
The Tribunal upheld the DRP's exclusion of M/s Acropetal Tech. Ltd. (Seg.) and M/s Eclerx Services Ltd. based on the company's predominant engagement in onsite services and the Delhi High Court judgment in M/s Rampgreen Solutions (P) Ltd., respectively. The exclusion of M/s ICRA Online Ltd. (Seg.) was reversed, and the company was reinstated as a comparable. M/s Sundaram Business Services Ltd. was also reinstated as a comparable.

Marketing Support Services Segment:
The Tribunal upheld the DRP's exclusion of HCCA Business Service Pvt. Ltd. and M/s Killick Agencies and Marketing Ltd. based on a previous Tribunal order. The exclusion of M/s Acentia Technologies Ltd. was also upheld. The Tribunal directed the exclusion of M/s ICC International Agencies Ltd. due to its involvement in trading activities and maintaining inventories.

Conclusion:
The appeals of both the assessee and the revenue were partly allowed. The Tribunal's decisions were based on previous Tribunal orders, High Court judgments, and the specific facts of the case. The Tribunal emphasized the need for comparable companies to be functionally similar to the assessee and to meet the applied filters.

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