2018 (4) TMI 1817 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Referring to Software development services and IT enabled services of assessee thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:

1. Legality of the assessment order.
2. Rejection of Transfer Pricing (TP) documentation.
3. Comparability analysis and selection of comparables.
4. Use of multiple year/prior year data versus current year data.
5. Use of data available at the time of assessment versus data at the time of preparing TP documentation.
6. Application of sales and employee cost filters.
7. Inclusion/Exclusion of specific comparables in software development and IT-enabled services (ITES) segments.
8. Risk adjustment in TP analysis.

Detailed Analysis:

1. Legality of the Assessment Order:
The appellant contended that the assessment order passed by the AO, pursuant to the directions of the DRP, was prejudicial and should be quashed. However, this ground was not specifically addressed in detail in the judgment, implying that the primary focus was on the TP adjustments and comparability analysis.

2. Rejection of Transfer Pricing Documentation:
The appellant argued that the AO and DRP erred in upholding the rejection of the TP documentation and the adjustment to the transfer price for software development and IT-enabled services. The tribunal examined the comparability analysis and the selection of comparables, which were central to the TP adjustments.

3. Comparability Analysis and Selection of Comparables:
The tribunal addressed various grounds related to the comparability analysis:

- Software Development Segment:
- Exclusion of Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd.: The tribunal relied on previous tribunal orders and functional dissimilarities to exclude these companies from the list of comparables.
- Inclusion of Akshay Software Technologies Ltd.: The tribunal upheld the DRP's decision to exclude this company due to the lack of segmental information and functional differences.

- ITES Segment:
- Exclusion of Infosys BPO Ltd.: The tribunal followed previous tribunal decisions, highlighting Infosys BPO's functional differences, brand value, and market leadership, to exclude it from the comparables.
- Exclusion of BNR Udyog Ltd.: The tribunal restored this issue to the AO/TPO for fresh decision, considering the turnover filter and the judgment of the Delhi High Court in Chryscapital Investment Advisors (India) (P.) Ltd. vs. DCIT.
- Exclusion of TCS e-Serve Ltd.: The tribunal followed previous tribunal orders, noting the functional differences and the use of intangibles, to exclude this company from the comparables.

4. Use of Multiple Year/Prior Year Data versus Current Year Data:
The tribunal did not specifically address this ground in detail, but the focus on the current year data for comparability analysis was implied in the decisions regarding the comparables.

5. Use of Data Available at the Time of Assessment versus Data at the Time of Preparing TP Documentation:
Similar to the previous issue, this ground was not elaborated upon, but the tribunal's reliance on current and relevant data for comparability analysis was evident.

6. Application of Sales and Employee Cost Filters:
The tribunal did not provide a detailed analysis on this issue, but the exclusion and inclusion of specific comparables implicitly addressed the application of such filters.

7. Inclusion/Exclusion of Specific Comparables:
The tribunal provided a comprehensive analysis for each comparable in both the software development and ITES segments, as detailed above.

8. Risk Adjustment in TP Analysis:
The appellant's request for risk adjustment, considering the limited risk nature of its services, was noted as consequential and not specifically addressed in the tribunal's detailed analysis.

Conclusion:
The appeal was partly allowed, with the tribunal directing the exclusion of certain comparables in both the software development and ITES segments, and restoring the issue of BNR Udyog Ltd. to the AO/TPO for fresh consideration. The tribunal's decisions were based on functional dissimilarities, previous tribunal orders, and relevant judicial precedents.