2018 (9) TMI 1943 - AT - Income Tax

TP Adjustment - comparability - functional dissimilarity - HELD THAT - Assessee is engaged in provision of services of intermediate stage of design and development of software parts of Integrated Circuits ICs involving implementation verification and maintenance services. The appellant company works as per the specification provided by the Group. It performs limited functions in the intermediate stage of the design and software development for the associated enterprises AEs thus companies functionally dissimilar with that of assessee need to be deselected from final list. Assessee is entitled for risk adjustment to the net margin of the comparables for bringing them at par with the taxpayer on supplying the complete data by the assessee.

Issues Involved:

1. Transfer Pricing Adjustment.
2. Rejection of Arm's Length Price Determination.
3. Exclusion and Inclusion of Comparables.
4. Risk Adjustment.
5. Penalty Proceedings under Section 271(l)(c).

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:

The primary issue revolves around the Transfer Pricing (TP) adjustment of INR 11,58,07,710 concerning the international transaction of "provision of Integrated Circuit (I/C) design implementation, maintenance/software development services." The assessee contested the adjustment made by the Transfer Pricing Officer (TPO), Dispute Resolution Panel (DRP), and Assessing Officer (AO).

2. Rejection of Arm's Length Price Determination:

The assessee argued that the TPO/DRP/AO erred in rejecting the Arm's Length Price (ALP) determined by the appellant and in conducting a fresh economic analysis by applying inappropriate filters. The TPO's application of certain filters for selecting/excluding comparables was challenged, along with the exclusion of companies like Cignity Technologies Limited, Caliber Point Systems Solutions Limited, and R Systems International Limited (Seg). The assessee also argued that the TPO ignored information from annual reports and judicial decisions while selecting inappropriate comparables such as Persistent Systems Ltd and Thirdware Solutions Ltd.

3. Exclusion and Inclusion of Comparables:

The assessee objected to the inclusion of certain comparables in the final list, specifically ICRA Techno Analytics Ltd, Persistent Systems Ltd, and Thirdware Solutions Ltd, citing functional dissimilarities. The tribunal found that ICRA Techno Analytics Ltd operates as a full-fledged risk-taking entrepreneur engaged in various services, lacking segmental data, and thus directed its exclusion. Persistent Systems Ltd was also excluded due to its significant intangibles and different business model, as upheld in previous tribunal decisions. Thirdware Solutions Ltd was excluded for similar reasons, including the absence of segmental information and significant intangibles.

Conversely, the assessee argued for the inclusion of comparables like Cigniti Technologies Ltd, Caliber Point Business Solutions Ltd, and R Systems International Ltd, which were initially excluded by the TPO. The tribunal found that Cigniti Technologies Ltd, engaged in software verification and testing services, was functionally comparable and directed its inclusion. Caliber Point Business Solutions Ltd and R Systems International Ltd were also directed for inclusion, following the precedent set by the tribunal in previous assessment years.

4. Risk Adjustment:

The assessee's claim for risk adjustment was initially rejected by the TPO/DRP. However, the tribunal noted that similar disputes in previous assessment years were resolved in favor of the assessee, allowing for risk adjustment to the net margin of comparables. The tribunal directed the TPO to allow the risk adjustment in line with previous decisions, emphasizing that claims cannot be rejected merely due to quantification challenges.

5. Penalty Proceedings under Section 271(l)(c):

The initiation of penalty proceedings under Section 271(l)(c) was challenged by the assessee. However, the tribunal's order did not provide a detailed analysis or conclusion on this specific issue, focusing primarily on the TP adjustment and related comparables.

Conclusion:

The tribunal allowed the appeal in part for statistical purposes, directing the exclusion of certain comparables (ICRA Techno Analytics Ltd, Persistent Systems Ltd, and Thirdware Solutions Ltd) and the inclusion of others (Cigniti Technologies Ltd, Caliber Point Business Solutions Ltd, and R Systems International Ltd). The tribunal also directed the TPO to allow risk adjustment in line with previous decisions. The order was pronounced in the open court on 26.09.2018.

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