2018 (9) TMI 1973 - AT - Income Tax

TP Adjustment - Assessee has adopted TNMM as the Most Appropriate Method (MAM) - comparable selection - HELD THAT - Turnover Filter - Respectfully following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Dell International Services India (P.) Ltd. , 2017 (10) TMI 1376 - ITAT BANGALORE we uphold the decision of the learned CIT (Appeals) in applying the upper turnover filter and excluding the five companies accordingly. Abnormal Profits - It is now settled principle, upheld in several decisions that companies cannot be excluded from the set of comparables only because of abnormal profits, and the matter of comparability analysis in such cases would require further investigation to ascertain the reasons for unusually high profits in order to establish whether the entities with such high profits can be taken as comparable or not. As observed in the earlier paragraphs, there is no discussion by the learned CIT (Appeals) in the impugned order on the issue of abnormal profits; even though there was a caption to this effect and therefore the comparability or otherwise of these two companies namely, M/s. Exensys Software Solutions Ltd. and M/s. Thirdware Solutions Ltd. has not been discussed at all. It is now settled principle, upheld in several decisions that companies cannot be excluded from the set of comparables only because of abnormal profits, and the matter of comparability analysis in such cases would require further investigation to ascertain the reasons for unusually high profits in order to establish whether the entities with such high profits can be taken as comparable or not. As observed in the earlier paragraphs, there is no discussion by the learned CIT (Appeals) in the impugned order on the issue of abnormal profits; even though there was a caption to this effect and therefore the comparability or otherwise of these two companies namely, M/s. Exensys Software Solutions Ltd. and M/s. Thirdware Solutions Ltd. has not been discussed at all Rejecting the diminishing revenue filter used by the TPO to exclude companies not reflecting the industry trend - On a perusal of the impugned order, we find that none of the comparable companies have been either excluded OR included by the learned CIT (Appeals) due to decision on this filter. Different Accounting Year - Quintegra Solutions Ltd. - In the case on hand, the assessee has not furnished any details of the financial results of the company. It is not known as to whether the quarterly results of the company are available on record. It is also not known whether such results, even if available, are reliable OR not. It is also not known whether from such details, the results can be extrapolated or not. No evidence has been brought on record to substantiate the above. In the absence of any details, we are unable to agree/concur with the assessee's contention. As regards the computation of margin, it is settled principle that only the current financial year's data has to be considered; which has not been followed by the learned CIT (Appeals). No reasons have been adduced by the learned CIT (Appeals) for his direction that the average of two years margin has to be taken as the margin in this case. We do not agree with the decisions of the learned CIT (Appeals) on both disapproving of the different accounting year filter and in adopting the average of two years margin, and consequently set aside the orders of the learned CIT (Appeals) on this issue and restore that of the TPO. Exclusion of Tata Elxsi Ltd. - This company held to be functionally not comparable to the assessee.Bodhtree Consulting Ltd., is engaged in product development, software development and ITES and segmental details are not available. This finding of the learned CIT (Appeals) has not been controverted by the learned Departmental Representative for revenue. Bodhtree Consulting Ltd. is engaged in product development, software development and ITES and segmental details are not available. This finding of the learned CIT (Appeals) has not been controverted by the learned Departmental Representative for revenue. M/s. Geometric Software Solutions Co. Ltd company is engaged in developing and licensing of products and product life cycle management services which are not similar to the functions of the assessee.The revenue break up between products and services is not available and therefore directed exclusion of this company from the set of comparables.. VJIL Consulting Ltd. and Akshay Software Technologies Ltd. are predominantly an exporter of software development services thus need to be included. Computation of Deduction under Section 10A - HELD THAT - Respectfully following the decision of the Hon'ble Apex Court in the case of HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT we direct the AO to allow assessee's claim for deduction under Section 10A.

Summary

Issues Involved:
1. Turnover Filter
2. Abnormal Profits
3. Different Accounting Year Filter
4. Exclusion of Tata Elxsi Ltd.
5. Exclusion of Bodhtree Consulting Ltd. and Geometric Software Solutions Co. Ltd.
6. Inclusion of VJIL Consulting Ltd.
7. Inclusion of Akshay Software Technologies Ltd.
8. Computation of Deduction under Section 10A of the Act

Detailed Analysis:

1. Turnover Filter:
The Revenue contested the CIT(A)'s decision to exclude companies with high turnover, arguing that turnover is irrelevant if companies are functionally comparable. The Tribunal upheld the CIT(A)'s application of the upper turnover filter, excluding companies like i-Gate Global Solutions Ltd., L&T Infotech Ltd., Satyam Computer Services Ltd., Infosys Technologies Ltd., and Flextronics Software Systems Ltd. This was based on the principle that size matters in business, as established in the case of Genisys Integrating Systems (India) (P.) Ltd. v. DCIT.

2. Abnormal Profits:
Revenue challenged the exclusion of companies with abnormal profits without defining the abnormal profit filter. The Tribunal noted that companies cannot be excluded solely due to abnormal profits and remanded the issue of comparability of Exensys Software Solutions Ltd. and Thirdware Solutions Ltd. to the CIT(A) for further examination, as there was no discussion on abnormal profits in the CIT(A)'s order.

3. Different Accounting Year Filter:
Revenue contested the inclusion of Quintegra Solutions Ltd., arguing against the CIT(A)'s rejection of the different accounting year filter. The Tribunal agreed with Revenue, stating that only current financial year's data should be considered and set aside the CIT(A)'s decision to include Quintegra Solutions Ltd. and adopt an average margin from two years.

4. Exclusion of Tata Elxsi Ltd.:
Revenue argued that Tata Elxsi Ltd. satisfies all filters applied by the TPO. The Tribunal upheld the CIT(A)'s decision to exclude Tata Elxsi Ltd., noting it was functionally different and lacked segmental details. This was consistent with prior Tribunal decisions in similar cases, including the assessee's own case for Assessment Year 2009-10.

5. Exclusion of Bodhtree Consulting Ltd. and Geometric Software Solutions Co. Ltd.:
Revenue contended that these companies met all TPO filters. The Tribunal upheld the CIT(A)'s exclusion of Bodhtree Consulting Ltd., noting it was engaged in product development, software development, and ITES without segmental details. Similarly, Geometric Software Solutions Co. Ltd. was excluded due to functional dissimilarity and lack of revenue break-up between products and services.

6. Inclusion of VJIL Consulting Ltd.:
Revenue challenged the inclusion of VJIL Consulting Ltd., arguing it failed qualitative filters. The Tribunal upheld the CIT(A)'s decision, noting the TPO's rejection was based on a misunderstanding of VAT payments. The Tribunal found VJIL Consulting Ltd. predominantly engaged in software development services, consistent with the decision in Qualcomm India (P.) Ltd. v. Asstt. CIT.

7. Inclusion of Akshay Software Technologies Ltd.:
Revenue argued against including Akshay Software Technologies Ltd., claiming it was predominantly an on-site company. The Tribunal upheld the CIT(A)'s decision, noting the TPO's rejection was based on foreign branch expenses, not on-site revenues. The Tribunal found the company functionally similar to the assessee, supported by the decision in Qualcomm India (P.) Ltd.

8. Computation of Deduction under Section 10A:
Revenue contested the CIT(A)'s direction to recompute the deduction under Section 10A by reducing communication charges from total turnover. The Tribunal upheld the CIT(A)'s decision, citing the Karnataka High Court's ruling in CIT v. Tata Elxsi Ltd. and the Supreme Court's decision in CIT v. HCL Technologies Ltd., which mandated that expenses excluded from export turnover must also be excluded from total turnover.

Conclusion:
The Tribunal partly allowed Revenue's appeal, affirming the CIT(A)'s decisions on turnover and abnormal profits filters, exclusion and inclusion of specific companies, and computation of deduction under Section 10A, while remanding certain issues for further examination.