2018 (11) TMI 1652 - AT - Income Tax

TP Adjustment - Comparable selection criteria - HELD THAT - Following the decisions of ITAT in 2017 (4) TMI 1448 - ITAT BANGALORE we uphold the directions of DRP in directing to exclude the said companies in both SDS and ITES segments for computation of ALP. Accordingly we dismiss ground No. 2 raised by the revenue in this regard Negative working capital adjustment - HELD THAT - In the case of Adaptec (India) P. Ltd. 2015 (6) TMI 288 - ITAT HYDERABAD the coordinate bench held that there is no need for making any negative working capital adjustment when the assessee does not carry any working capital risk and in fact the TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. Following the said decision we uphold the order of DRP in directing the TPO to delete the negative working capital adjustment. Accordingly ground Nos. 3 4 are dismissed. Including bad debts and provisions of bad debts as provisions of expenses for the purpose of computing P L of comparable companies - HELD THAT - Tribunal in KENEXA TECHNOLOGIES (P.) LTD. VERSUS Dy. CIT 2014 (11) TMI 587 - ITAT HYDERABAD has held that bad debts and provision for bad and doubtful debts are part of the operating expenses and that the margins of the companies should be computed by including bad debts and provisions of bad debts as provisions of expenses for the purpose of computing P L of comparable companies. Tribunal has followed the decision of the Coordinate Bench of the Tribunal at Delhi in the case of Sony India (P) Ltd vs. DCIT 2008 (9) TMI 420 - ITAT DELHI-H . Respectfully following the same we remand the issue to the file of the AO with a direction to recompute the margins of the companies by including the bad debts/provision for bad and doubtful debts as operating income of those companies as well as the assessee. Thus this ground is allowed for statistical purposes. Foreign exchange fluctuation as operating - HELD THAT - We find that this issue is squarely covered by the decision of the coordinate bench in the case of M/s Open Text Corporation India Pvt. Ltd. 2018 (5) TMI 1381 - ITAT HYDERABAD where in it was held that the foreign exchange fluctuation loss is not abnormal only to the assessee. Such fluctuation would affect the margins of the comparable companies as well as long as the transactions are in the same currency. - Following the said decision we dismiss this ground of appeal of the assessee.

Summary

Issues Involved:
1. Exclusion of comparable companies based on huge turnover.
2. Negative working capital adjustment.
3. Selection and rejection of comparable companies for software and ITES segments.
4. Computation of net margins and treatment of specific expenses.
5. Treatment of foreign exchange fluctuation.
6. Imposition of interest under sections 234B and 234C.
7. Initiation of penalty proceedings.

Issue-wise Detailed Analysis:

1. Exclusion of Comparable Companies Based on Huge Turnover:
The revenue's appeal contested the DRP's direction to exclude certain companies from the list of comparables due to their high turnover. The Tribunal upheld the DRP's decision, referencing multiple ITAT decisions, including the case of Wissen Infotech Pvt. Ltd., which established that companies like Infosys Technologies Ltd. and L&T Infotech Ltd. should be excluded due to their super profits and high turnover, making them incomparable to the assessee.

2. Negative Working Capital Adjustment:
The TPO made a negative working capital adjustment, which the DRP directed to be deleted. The Tribunal supported the DRP's direction, citing decisions such as Adaptec (India) P. Ltd., which held that no negative working capital adjustment is necessary when the assessee does not bear any working capital risk. The Tribunal dismissed the revenue's grounds on this issue.

3. Selection and Rejection of Comparable Companies for Software and ITES Segments:
The Tribunal addressed various objections by the assessee regarding the selection and rejection of comparables:

- Software Segment:
- Comp-U-Learn Tech India Ltd.: Excluded due to its revenue from ITES and software without segmental details, exceptional growth, and diverse activities.
- E Infochips Bangalore Ltd.: Excluded due to engagement in both IT and ITES without segmental data.
- Persistent Systems Ltd.: Excluded due to involvement in product development and lack of segmental data.
- Sasken Communication Technologies Ltd.: Excluded due to revenue from multiple segments without segmental margins.
- Kals Information Systems Ltd. (Seg): Excluded due to involvement in software products and ITES, with significant inventory.
- Tata Elxsi Ltd. (Seg): Excluded due to its complex nature and involvement in diverse activities.

- ITES Segment:
- Accentia Technologies Ltd. and TCS e-Serve International Ltd.: Excluded due to exceptional circumstances affecting their financials, such as mergers and acquisitions.

4. Computation of Net Margins and Treatment of Specific Expenses:
The Tribunal directed the AO to recompute the margins by including the provision for bad debts as operating expenses, following the decision in Kenexa Technologies (P) Ltd. The Tribunal also addressed the computation of net margins for specific companies and the treatment of advertisement expenses and unallocable costs.

5. Treatment of Foreign Exchange Fluctuation:
The Tribunal held that foreign exchange fluctuation should be considered as part of the operating revenue, rejecting the assessee's contention that it should be treated as an extraordinary item, referencing the decision in M/s Open Text Corporation India Pvt. Ltd.

6. Imposition of Interest Under Sections 234B and 234C:
The Tribunal noted that the imposition of interest under sections 234B and 234C is consequential in nature and directed the AO to compute it accordingly.

7. Initiation of Penalty Proceedings:
The Tribunal deemed the ground regarding the initiation of penalty proceedings as premature and stated that it requires no adjudication at this stage.

Conclusion:
The revenue's appeal was dismissed, and the assessee's appeal was partly allowed, with specific directions provided for the exclusion of certain comparables, recomputation of margins, and treatment of expenses and foreign exchange fluctuations. The Tribunal's decisions were based on consistent application of precedents and functional analysis of the comparables.