2019 (12) TMI 1279 - AT - Income Tax

TP Adjustment - comparable selection - functional dissimilarity - HELD THAT - Assessee is engaged in the business of software development and related services to its Associated Enterprises (AEs) SSIPL wholly subsidiary of EMC Corporation USA and the assessee was registered under SEZ on 14th August 2008 for rendering IT and ITES to EMC Group of Companies and is compensated on mark up on cost basis for services provided and know how copy rights etc. and other commercial and marketing services owned by EMC thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:
1. Validity of Assessment and Reference to Transfer Pricing Officer (TPO)
2. Justification of Profit Shifting Motive
3. Comparability Analysis for Software Development Services Segment
4. Comparability Analysis for Information Technology Enabled Services (ITES) Segment
5. Use of Erroneous Data
6. Non-Allowance of Adjustments to Comparables
7. Variation of 3% from Arithmetic Mean
8. Non-Grant of Credit for Advance Tax and Self-Assessment Tax
9. Non-Grant of Minimum Alternate Tax (MAT) Credit
10. Non-Grant of Consequential Relief in Computation of Interest

Detailed Analysis:

1. Validity of Assessment and Reference to TPO:
The assessee challenged the validity of the assessment order issued under Section 143(3) r.w.s. 144C(1), claiming it violated principles of natural justice. The assessee argued that the Assessing Officer (AO) did not issue a show cause notice as per Section 92C(3) and that the reference to the TPO was erroneous. The Tribunal upheld the AO's actions, finding no procedural irregularities.

2. Justification of Profit Shifting Motive:
The assessee contended that the AO and TPO failed to demonstrate a motive for shifting profits outside India, a prerequisite for adjustments under Chapter X of the Act. The Tribunal found that the AO/TPO had sufficiently justified their stance, and the assessee's objections were dismissed.

3. Comparability Analysis for Software Development Services Segment:
The Tribunal addressed multiple issues regarding the comparability analysis conducted by the TPO:
- Exclusion of Comparables:
- Infosys Limited: Excluded due to functional dissimilarity, significant intangibles, and revenue from software products.
- L&T Infotech Limited: Excluded for high brand value, proprietary products, and significant capital work-in-progress.
- Persistent Systems Ltd.: Excluded due to involvement in IP-led solutions and significant R&D activities.
- Thirdware Solutions Ltd.: Excluded for functional dissimilarity and lack of segmental details.

- Inclusion of Comparables:
- Akshay Software Ltd.: Sent back to TPO for verification as major revenues were from software services.
- Sasken Communication Technologies Ltd.: Sent back to TPO for fresh consideration regarding export revenue filter.
- Maveric Systems Limited: Sent back to TPO for logical conclusion and findings regarding R&D expenses.
- Keerthi Soft Technologies Ltd.: Sent back to TPO for verification as revenue from sale of products was NIL.
- Excellent Technologies Pvt. Ltd.: Sent back to TPO for examination as financial summary was available.
- Celstream Technologies Limited: Sent back to TPO for verification as financial statements were available.

4. Comparability Analysis for ITES Segment:
The Tribunal addressed the exclusion and inclusion of comparables for the ITES segment:
- Exclusion of Comparables:
- Infosys BPO Limited: Excluded due to functional dissimilarity and involvement in cloud-based services.
- E-Clerx Services Limited: Excluded for rendering KPO services and lack of segmental information.
- Cross Domain Solutions Pvt. Ltd.: Excluded for providing KPO services and lack of segmental bifurcation.

- Inclusion of Comparables:
- Jindal Intelcom Ltd.: Included based on co-ordinate Bench decision and Annual Report information.
- Informed Technologies Limited: Included as it passed the operating revenue filter.
- Accentia Technologies Limited: Sent back to TPO for verification regarding RPT filter.

5. Use of Erroneous Data:
The assessee argued that the TPO used non-contemporaneous data not available in the public domain at the time of the transfer pricing study. The Tribunal upheld the TPO's use of data, dismissing the assessee's objections.

6. Non-Allowance of Adjustments to Comparables:
The assessee claimed that the TPO did not allow appropriate adjustments for differences in accounting practices, working capital, and risk profile. The Tribunal upheld the TPO's actions, finding no merit in the assessee's arguments.

7. Variation of 3% from Arithmetic Mean:
The assessee argued that the TPO did not grant the benefit of the proviso to Section 92C(2), which allows a variation of 3% from the arithmetic mean. The Tribunal upheld the TPO's actions.

8. Non-Grant of Credit for Advance Tax and Self-Assessment Tax:
The assessee claimed that the AO did not grant complete credit for advance tax and self-assessment tax paid. The Tribunal directed the AO to grant the necessary credits.

9. Non-Grant of Minimum Alternate Tax (MAT) Credit:
The assessee argued that the AO did not grant credit for MAT as claimed in the return of income under Section 115JAA. The Tribunal directed the AO to grant the MAT credit.

10. Non-Grant of Consequential Relief in Computation of Interest:
The assessee claimed that the AO did not grant consequential relief in the computation of interest under Sections 234B and 234C. The Tribunal directed the AO to grant the necessary relief.

Conclusion:
The Tribunal allowed the assessee's appeal partly for statistical purposes, directing the TPO to re-examine and verify certain comparables and issues. The Tribunal upheld the AO's and TPO's actions on other grounds. The appeal was disposed of with specific directions for re-evaluation of certain aspects.