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2016 (1) TMI 1260 - AT - Income TaxTPA - selection of comparable - Held that - Functionally dissimilar and are having product lead revenues extra ordinary events different risk profile and application of wrong filters compnaies to be excluded form comparability. Claim of the assessee on working capital adjustments - Held that - We find that the assessee made detailed submissions before the lower authorities on this issue which we do not extract for the sake of brevity. Suffice to say that the contentions raised by the assessee have not been dealt with by the TPO as well as the DRP properly and assessee to needs to be provided one more opportunity in the interest of justice for proving its case for working capital adjustments. The propositions of law laid down by the Tribunals on the issue of working capital adjustment in ITes and IT segment deserves to be considered by TPO. Thus it would be appropriate to set aside the matter to the file of the Assessing Officer/T.P.O. for fresh adjudication in accordance with law on the issue of claim of the assessee on working capital adjustments.
Issues Involved:
1. Validity of the assessment order. 2. Transfer Pricing adjustments and selection of comparables. 3. Working capital adjustment. Detailed Analysis: 1. Validity of the Assessment Order: The first issue raised by the assessee was the general validity of the assessment order passed by the Assessing Officer (AO) pursuant to the directions of the Dispute Resolution Panel (DRP). The Tribunal dismissed this ground as no arguments were put forth. 2. Transfer Pricing Adjustments and Selection of Comparables: The primary contention of the assessee was against the selection and rejection of comparables by the Transfer Pricing Officer (TPO) and upheld by the DRP. The Tribunal focused on specific comparables contested by the assessee: a. Persistent Systems Limited: The Tribunal noted that Persistent Systems Limited engaged in product development and design services, and lacked segmental information for sales of services and products. Citing the Mumbai Tribunal's decision in Telcordia Technologies India (P.) Ltd., the Tribunal ordered the exclusion of Persistent Systems Ltd. from the set of comparables. b. Sonata Software Limited: The Tribunal found discrepancies in the related party transaction (RPT) percentage calculation. The assessee claimed an RPT percentage of 59.35%, contrary to the TPO's 11.93%. The Tribunal set aside the issue to the TPO for verification of the correct RPT percentage. c. Wipro Technology Services Limited: The Tribunal excluded Wipro Technology Services Ltd., noting its entire revenue was from a related party, and it benefitted from the Wipro brand, making it incomparable to the assessee. d. Zylog Systems Limited: The Tribunal excluded Zylog Systems Ltd., citing its diversified operations, significant intangibles, and extraordinary events like business restructuring during the year. e. Accentia Technologies Limited: The Tribunal excluded Accentia Technologies Ltd. due to its involvement in high-end functions like KPO and LPO, significant brand and IPR, and extraordinary events like amalgamation during the relevant year. f. Infosys BPO Limited: The Tribunal excluded Infosys BPO Ltd., noting its high turnover, significant brand value, and involvement in high-end integrated services, making it functionally dissimilar to the assessee. g. TCS E Serve International Ltd.: The Tribunal excluded TCS E Serve International Ltd., noting its involvement in high-end technical services and ownership of substantial intangibles, making it functionally dissimilar to the assessee. h. TCS E Serve Limited: The Tribunal excluded TCS E Serve Ltd., citing its involvement in high-end technical services, ownership of substantial intangibles, and benefit from the Tata brand, making it functionally dissimilar to the assessee. The Tribunal directed the AO/TPO to rework the average Profit Level Indicator (PLI) of the comparables after considering these exclusions and to reassess the pricing of the international transactions of the assessee in both the Contract Software Development (CSD/IT) and IT-enabled services (ITES) segments. 3. Working Capital Adjustment: The assessee contended that it should have been granted a working capital adjustment. The TPO denied this, stating that working capital is relevant only in situations involving inventory and receivables, not in the service industry. The Tribunal found that the lower authorities did not properly address the assessee's detailed submissions on this issue. The Tribunal set aside the matter to the AO/TPO for fresh adjudication, considering the propositions of law laid down by Tribunals on working capital adjustment in IT and ITES segments. Conclusion: The appeal of the assessee was partly allowed for statistical purposes, with specific directions for reworking the comparables and reassessing the working capital adjustment.
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