2018 (3) TMI 1932 - AT - Income Tax

TP Adjustment - comparable selection - functional dissimilarity - HELD THAT - Companies functional un-comparable with software development services rendered by the assessee need to be deselected. Market risk adjustment - As assessee has given the details of marketing risk undertaken by the assessee as well as by the comparable. However the DRP / TPO has not considered the same. In view of the above, we direct the TPO to examine the market risks / risk adjustment of the assessee as well as the comparable in view of the details submitted by the comparable.

Issues Involved:
1. Exclusion of Larsen & Toubro Infotech Limited (L&T Infotech) as a comparable.
2. Inclusion of Akshay Software Technologies Ltd, Evoke Technologies Ltd, Sankhya Infotech Ltd, and R Systems International Ltd as comparables.
3. Treatment of foreign exchange gains/losses and provision for doubtful debts as operating or non-operating in nature.
4. Market risk adjustment.

Detailed Analysis:

1. Exclusion of Larsen & Toubro Infotech Limited (L&T Infotech) as a Comparable:
The assessee argued that L&T Infotech is functionally dissimilar due to its diversified business, presence of intangibles, and lack of segmental information. The Tribunal noted that L&T Infotech operates in various segments and has significant intangibles and sub-contracting expenses, making it functionally different from the assessee. Citing the decision in Microsoft Research Lab India P. Ltd, the Tribunal remanded the matter to the TPO for fresh consideration, emphasizing the need for detailed segmental information and examination of the company's business model.

2. Inclusion of Akshay Software Technologies Ltd, Evoke Technologies Ltd, Sankhya Infotech Ltd, and R Systems International Ltd as Comparables:

Akshay Software Technologies Ltd:
The assessee contended that Akshay Software is functionally comparable, providing IT-related services predominantly in software development. The TPO had rejected it based on functional dissimilarity. The Tribunal found that Akshay Software primarily earns revenue from onsite services, making it not comparable with the assessee. The matter was remanded to the TPO for re-examination.

Evoke Technologies Ltd:
The TPO rejected Evoke due to the unavailability of data in the prowess database. The assessee argued that data was available in the Capitaline database and that Evoke was functionally comparable and accepted in previous assessments. The Tribunal remanded the matter to the TPO for fresh examination, directing a detailed review of the company's financials and functional profile.

Sankhya Infotech Ltd:
The TPO excluded Sankhya due to the lack of segmental information. The assessee provided evidence showing that Sankhya's revenue was entirely from software services. The Tribunal noted errors in the lower authorities' assessment and remanded the matter to the TPO for re-examination of Sankhya's functional profile.

R Systems International Ltd:
The TPO excluded R Systems due to a different financial year. The Tribunal, referencing the Punjab & Haryana High Court's decision in Mercer Consulting (India) (P.) Ltd., stated that if financial data for the corresponding period is available, the company can be considered comparable. The matter was remanded to the TPO for fresh examination, emphasizing the need to consider the functional profile and available financial data.

3. Treatment of Foreign Exchange Gains/Losses and Provision for Doubtful Debts:
The assessee argued that foreign exchange gains/losses should not be considered operating in nature. The Tribunal, citing the Supreme Court's decision in Woodward Governor India P. Ltd, held that forex gains/losses are part of operating costs and should be included for both the assessee and comparables. Regarding the provision for doubtful debts, the Tribunal noted that it should be treated as operating if closely linked to business operations. However, the assessee failed to provide sufficient evidence, leading to the rejection of this ground.

4. Market Risk Adjustment:
The assessee sought a market risk adjustment, arguing that it operates as a risk-free entity on a cost-plus basis, unlike the comparables. The Tribunal noted that the DRP/TPO had not considered the details provided by the assessee regarding market risks. The matter was remanded to the TPO for examination, with directions to consider the risk profiles of the assessee and comparables.

Conclusion:
The appeal was partly allowed, with several issues remanded to the TPO for fresh examination. The Tribunal emphasized the need for detailed analysis and consideration of the functional profiles, financial data, and risk adjustments for a fair determination of the arm’s length price.

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