2019 (5) TMI 1699 - AT - Income Tax

TP Adjustment - Kals Information System Ltd. (Seg) ( Kals ) - HELD THAT - Tribunal in the case of Cerner Healthcare Solutions Pvt. Ltd. 2017 (1) TMI 1491 - ITAT BANGALORE for Assessment Year 2010-11 we hold that Kals Information Systems Ltd. is not a good comparable to the assessee in the case on hand who merely provides software development services and therefore direct the AO/TPO to exclude it from the set of comparable companies - Assessee is allowed.

Summary

Issues Involved:
1. Application of upper turnover filter.
2. Grant of risk adjustment.
3. Exclusion of certain comparable companies: Infosys Technologies Limited, Tata Elxsi Limited, Larsen and Toubro Infotech Limited, and Kals Information System Ltd.

Detailed Analysis:

1. Application of Upper Turnover Filter:
The Tribunal confirmed the decision of the DRP in applying the upper turnover filter. The Tribunal upheld the DRP’s application of the upper turnover filter, which had been contested by the Revenue. The DRP had applied this filter to exclude companies that were not comparable to the assessee based on their size and turnover, providing partial relief to the assessee.

2. Grant of Risk Adjustment:
The Tribunal reversed the DRP’s decision on granting risk adjustment. Initially, the DRP had allowed a 1% risk adjustment to the assessee, which reduced the TP adjustment to NIL. However, upon appeal, the Tribunal upheld the Revenue’s contention that risk adjustment should not be granted, thereby reversing the DRP’s order on this point.

3. Exclusion of Certain Comparable Companies:
- Infosys Technologies Limited: The assessee argued that Infosys was not functionally comparable as it engaged in research and development activities and had a significant brand presence, resulting in substantial Intellectual Property creation. However, this specific issue was not adjudicated in the final decision.
- Tata Elxsi Limited: The assessee contended that Tata Elxsi was engaged in hardware design, making it functionally incomparable. This issue was also not specifically adjudicated in the final decision.
- Larsen and Toubro Infotech Limited: The assessee claimed that L&T was involved in software product development, making it functionally different. This issue was not specifically adjudicated in the final decision.
- Kals Information System Ltd.: The Tribunal agreed with the assessee that Kals Information System Ltd. was functionally different as it was engaged in software product development. The Tribunal referenced a previous decision in Cerner Healthcare Solutions Pvt. Ltd. vs. ITO, which held that Kals Information Systems Ltd., engaged in software product development, could not be compared to a company providing software development services. Consequently, the Tribunal directed the AO/TPO to exclude Kals Information Systems Ltd. from the set of comparable companies.

Summary of Cross Objections:
The assessee filed cross objections, which were treated as an independent appeal. The Tribunal acknowledged that the cross objections were filed in time and not listed due to reasons beyond the assessee’s control. The Tribunal upheld the assessee’s contention that the cross objection is an independent appeal and proceeded to adjudicate the issues raised therein.

Conclusion:
The Tribunal partly allowed the assessee’s cross objections for Assessment Year 2010-11. The Tribunal’s decision included confirming the application of the upper turnover filter, reversing the grant of risk adjustment, and directing the exclusion of Kals Information Systems Ltd. from the set of comparables. The other issues raised by the assessee regarding Infosys, Tata Elxsi, and L&T were not specifically adjudicated. The order was pronounced on May 10, 2019.