2017 (2) TMI 1438 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee providing software development services to the AE need to be deselected from final list. Risk adjustment - It is seen from the observations of the TPO that the TPO is not against risk adjustment but it was not allowed for the reason of absence of proper basis of quantification. Now that the assessee has given the basis of such quantification the TPO /AO is directed to consider them in the light of this Tribunal decisions.

Summary

Issues Involved:
1. Functional dissimilarity of comparables.
2. Working capital adjustment.
3. Correction in the margin computation of comparables.
4. Inclusion of comparables erroneously rejected by the TPO.
5. Exclusion of comparables erroneously included by the TPO.
6. Risk adjustment.

Issue-wise Detailed Analysis:

1. Functional dissimilarity of comparables:
The Tribunal examined the exclusion of certain comparables based on functional dissimilarity. For the Software Services segment, the Tribunal excluded M/s Kals Information Systems Ltd., M/s Bodhtree Consulting Ltd., M/s Tata Elxsi Ltd., M/s Persistent Systems Ltd., and M/s Infosys Technologies Ltd. The Tribunal noted that these companies were functionally dissimilar to the assessee, which provides software development services to its AE. The Tribunal relied on previous decisions, including the assessee’s own case for AY 2007-08 and other relevant case laws, to justify the exclusion. Similarly, for the Customer Support Services segment, comparables such as M/s Eclerx Services Ltd., M/s Infosys BPO Ltd., M/s Accentia Technologies Ltd., and M/s Informed Technologies Ltd. were excluded based on functional dissimilarity.

2. Working capital adjustment:
While the judgment did not specifically address working capital adjustment in detail, it is implied that the Tribunal considered adjustments where necessary to ensure comparability. The assessee had challenged the working capital adjustment on both segments before the CIT(A), which was part of the grounds for appeal.

3. Correction in the margin computation of comparables:
The Tribunal addressed the issue of incorrect margin computation for comparables such as Sasken Communications Services Ltd. and Larsen & Toubro Infotech Ltd. For Sasken Communication Technologies Ltd., the Tribunal noted that the margins were erroneously computed and needed correction. Similarly, for Larsen & Toubro Infotech Ltd., the Tribunal highlighted the need to correct the margins due to the company’s involvement in trading activities. The Tribunal remitted these issues to the TPO/AO for fresh adjudication, ensuring the assessee was given an opportunity to present its case.

4. Inclusion of comparables erroneously rejected by the TPO:
The Tribunal considered the inclusion of comparables such as Aztecsoft Ltd., CG-VAK Software and Exports Ltd., Goldstone Technologies Ltd., and Quintegra Solutions Ltd., which were erroneously rejected by the TPO. The Tribunal remitted these issues to the TPO/AO for fresh adjudication, emphasizing that the assessee should be given an opportunity to present its case.

5. Exclusion of comparables erroneously included by the TPO:
The Tribunal directed the exclusion of comparables such as Infosys BPO Ltd. and Informed Technologies India Ltd., which were erroneously included by the TPO. The Tribunal relied on previous decisions, including the assessee’s own case for AY 2007-08 and other relevant case laws, to justify the exclusion. The Tribunal noted that these companies had different risk profiles, brand values, and other factors that made them incomparable to the assessee.

6. Risk adjustment:
The Tribunal addressed the issue of risk adjustment, noting that the TPO had not allowed risk adjustment due to the absence of a proper basis for quantification. The Tribunal directed the TPO/AO to consider the basis of quantification provided by the assessee in light of the Tribunal’s decisions, including the case of Philips Software Centre Private Limited vs. Asst. Commissioner of Income Tax and the Hon’ble Delhi Tribunal’s decision in Sony India Pvt Ltd.

Conclusion:
The Tribunal allowed the assessee’s appeal, directing the TPO/AO to exclude certain comparables based on functional dissimilarity, correct the margin computation for specific comparables, reconsider the inclusion of comparables erroneously rejected by the TPO, and consider the basis for risk adjustment provided by the assessee. The Tribunal emphasized the need for fresh adjudication, ensuring the assessee was given an opportunity to present its case.