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2018 (6) TMI 1628 - AT - Income TaxTP adjustment - comparable selection - Provision of Software Development Services - HELD THAT - PERSISTENT SYSTEMS AND SOLUTIONS LTD. (PERSISTENT) being a product development company and into diversified services having no segmental information is not a valid comparable vis- -vis the taxpayer which is a routine software development service provider, so we order to exclude the same from the final set of comparables. SANKHYA INFOTECH LTD. (SANKHYA) - being into diversified services providing customized services to end users and has developed customized products for imparting training and having its own research and development centre cannot be a valid comparable vis -vis the taxpayer which is a routine software development service provider. E-ZEST SOLUTIONS (E-ZEST) - Coordinate Bench of the Tribunal in M/s. Symantec Software and Services India Pvt. Ltd. Vs. DCIT 2017 (1) TMI 1388 - ITAT CHENNAI examined comparability of the taxpayer with routine software service provider and ordered to exclude the same on the ground that it is providing high end technical services and as such, is a KPO and not a software development company. So, in view of the matter, we order to exclude E-Zest from final set of comparables. Working capital adjustment denied - HELD THAT - The taxpayer has filed detailed working capital computation and has also filed submissions on working capital adjustment as per OECD Guidelines. It is also an uncontroverted fact that the working capital adjustment has been allowed to the taxpayer by the TPO in AY 2012-13 and business model of the taxpayer has not undergone any change. In these circumstances, we are of the considered view that the issue is required to be sent back to AO/TPO to decide allowability of working capital adjustment in view of the settled principle of law applied by the Revenue itself in taxpayer s own case for AY 2012-13 after providing an opportunity of being heard to the taxpayer. Computing correct margins of the comparables - HELD THAT - We are of the considered view that when the taxpayer has argued its case on the basis of facts and figures brought on record by way of evidence as well as submissions, AO/TPO is required to compute the correct margin. So, this issue is remanded back to the AO/TPO to compute the correct margin to be consistent with directions issued by the ld. DRP in taxpayer s own case for AY 2012-13 as there is no change in the business model of the taxpayer. INFOSYS LTD. (INFOSYS) - keeping in view the functional dissimilarity, scale of operation, high brand value impacting profit, having own research and development centre with capital expenditure of ₹ 5 to ₹ 7 crores and revenue expenditure of ₹ 570 crores, creating huge intangibles for the company and the fact that Infosys is a full-fledged risk bearing company, hence cannot be a valid comparable vis- -vis the taxpayer which is a routine captive software service provider working on minimal risk having no brand value nor having any research and development centre to produce its own intangibles. So, ld. CIT (A) has rightly excluded Infosys from the final set of comparables. WIPRO TECHNOLOGIES LTD. (WIPRO) has generated its entire revenue pursuant to the master service agreement having its huge scale of operation as compared to taxpayer and the fact that the taxpayer is a routine captive service provider, the ld. CIT (A) has rightly excluded Wipro as a comparable from final set of comparables for benchmarking the international transactions. Companies with diversified business activities with no segmental financials and is also into research and development activities, product engineering and end to end product life scale management solutions, etc. and as such, cannot be a valid comparable vis- -vis the taxpayer which is a routine captive software development service provider.
Issues Involved:
1. Validity of the Assessing Officer's order. 2. Jurisdictional error in referring the matter to the Transfer Pricing Officer (TPO). 3. Re-computation of the arm's length price (ALP) of international transactions. 4. Acceptance and rejection of quantitative filters and comparable companies. 5. Provision of economic adjustments on account of working capital and risk profile differences. 6. Computation of margins of comparable companies. 7. Use of multiple year data versus current year data. 8. Initiation of penalty proceedings under section 271(1)(c). 9. Charging and computing interest under section 234B and 234C. Detailed Analysis: Validity of the Assessing Officer's Order: The taxpayer argued that the order passed by the AO is "bad in law and void ab-initio." However, this ground was dismissed as it was not pressed during the course of arguments. Jurisdictional Error: The taxpayer contended that the AO did not record any reasons for referring the matter to the TPO, which is a jurisdictional error. This ground was also dismissed as it was not pressed during the course of arguments. Re-computation of ALP: The taxpayer and the revenue both challenged the addition made by re-computing the ALP of international transactions. The TPO had rejected the taxpayer's TP analysis and selected 17 comparables with an OP/OC at 20.28%, proposing a TP adjustment of ?1,63,95,979. The CIT (A) partly allowed the taxpayer's appeal by rejecting certain comparables selected by the TPO. The Tribunal examined the comparability of each disputed comparable. Acceptance and Rejection of Quantitative Filters and Comparable Companies: - Persistent Systems and Solutions Ltd.: Excluded due to functional dissimilarity and lack of segmental data. - Sankhya Infotech Ltd.: Excluded due to functional dissimilarity and lack of segmental financials. - E-Zest Solutions: Excluded due to diversified activities and being a KPO. - Infosys Ltd.: Excluded due to functional dissimilarity, high brand value, and significant R&D activities. - Wipro Technologies Ltd.: Excluded due to functional dissimilarity and high scale of operations. - Sasken Communication Technologies: Excluded due to functional dissimilarity and significant intangibles. - Zylog Systems Ltd.: Excluded due to diversified business activities and lack of segmental financials. - Larsen & Toubro Infotech Ltd.: Excluded due to functional dissimilarity and significant intangibles. Provision of Economic Adjustments: The TPO denied working capital adjustment on the ground that the taxpayer had not specifically sought it. The Tribunal remanded the issue back to the AO/TPO for reconsideration, noting that the working capital adjustment had been allowed in the taxpayer's own case for AY 2012-13. Computation of Margins: The taxpayer argued that the AO/TPO/CIT(A) erred in computing the correct margins of the comparables. The Tribunal remanded this issue back to the AO/TPO for correct computation consistent with directions issued by the DRP for AY 2012-13. Use of Multiple Year Data: The taxpayer's ground regarding the use of multiple year data was dismissed as it was not pressed during the course of arguments. Initiation of Penalty Proceedings: Grounds related to the initiation of penalty proceedings under section 271(1)(c) and the charging and computing of interest under sections 234B and 234C were noted as consequential and required no specific findings. Conclusion: The Tribunal partly allowed the taxpayer's appeal for AY 2011-12 for statistical purposes, dismissed the revenue's appeal for AY 2011-12, and allowed the taxpayer's appeal for AY 2012-13. The order emphasized the need for functional comparability and proper segmental financials in selecting comparables for benchmarking international transactions.
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