2016 (7) TMI 1318 - AT - Income Tax

TPA - selection of comparable - Held that - The assessee has been operating in India through a Branch office and is in the business of development of computer software. The software developed by the branch office in India is integrated with software developed by the parent entity, thus companies functinally dissimilar with that of assessee need to excluded from final list of comparability. Risk adjustment - Held that - It would be appropriate in the peculiar facts and circumstances restore the issue back to the TPO. While so restoring it is made clear that the onus for providing the relevant data warranting risk and capital adjustments if any in the comparables has to be provided by the assessee. The TPO thereafter considering the same shall pass a speaking order in accordance with law giving the assessee a reasonable opportunity of being heard in case any adverse conclusions are sought to be drawn.

Summary

Issues Involved:
1. Inclusion of certain companies in the final set of comparables.
2. Denial of working capital adjustment.
3. Denial of risk adjustment.

Detailed Analysis:

1. Inclusion of Certain Companies in the Final Set of Comparables:

Persistent Systems Ltd.:
The exclusion of Persistent Systems Ltd. was sought on the grounds of functional differences and extraordinary events. The company derives income from both software services and products, and significant events like the formation of a subsidiary and acquisition of assets occurred during the year. The Tribunal restored the issue back to the TPO to demonstrate the impact of these events on the net profitability.

Bodhtree Consulting Ltd.:
The exclusion was justified due to high volatility in margins and diverse operations. The Tribunal restored the issue to the TPO to examine abnormal factors causing high volatility in margins and make necessary adjustments.

KALS Information Systems Ltd.:
The exclusion was sought on the grounds of functional differences and unreliable financial information. The Tribunal restored the issue to the TPO to examine the impact of revenue recognition policies on the segmental net profitability of the comparable.

I Gate Global Solutions Ltd.:
The exclusion was sought due to functional differences and extraordinary events like merger and termination of a joint venture agreement. The Tribunal restored the issue to the TPO to demonstrate the impact of these events on the net profitability.

Tata Elxsi Ltd.:
The exclusion was justified based on judicial precedent, as the company is engaged in niche product development. The Tribunal accepted the exclusion on the grounds of functional differences.

Lucid Software Ltd.:
The exclusion was sought on the grounds of functional differences and involvement in R&D activities. The Tribunal rejected the exclusion, stating that there was no functional dissimilarity and no abnormality in the accounting policy.

Acropetal Technologies Ltd.:
The exclusion was sought on the grounds of failing the employee cost filter. The Tribunal rejected the exclusion, stating that the employee-related costs and on-site expenses were 80.22% of the total expenses, making it a valid comparable.

2. Denial of Working Capital Adjustment:
The assessee argued that working capital adjustment is essential due to differences in cash collection cycles, which affect profits. The Tribunal restored the issue to the TPO to consider the relevant data and pass a speaking order.

3. Denial of Risk Adjustment:
The assessee argued that risk adjustment is necessary due to minimal business risks compared to comparable companies. The Tribunal restored the issue to the TPO to consider the relevant data and pass a speaking order.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, restoring several issues back to the TPO for re-examination and passing a speaking order. The onus for providing relevant data for working capital and risk adjustments lies with the assessee. The order was pronounced on 13th July 2016.