2019 (3) TMI 1928 - AT - Income Tax

TP Adjustment - comparable selection - functional dissimilarity - HELD THAT - Companies functionally dissimilar with that of assessee's IT Segment and ITes segment need to be deselected as comparable - difference in the business model brought out between assessee and selected comparable makes it uncomparable.

Summary

Issues Involved:
1. Adjustment of ?3,96,51,776 in respect of international transactions.
2. Arbitrary selection and rejection of comparable companies in the IT Segment.
3. Arbitrary rejection of functionally comparable companies in the ITes Segment.
4. Validity of CRISIL Limited as a comparable for the BSS Segment.
5. Selection of Agrima Consultants Ltd. as a comparable in the BSS and MSS segments.
6. Denial of economic/risk adjustments.
7. Ignoring Rule 10B(4) and judicial pronouncements advocating multiple year data for determining the arm’s length price.
8. Denial of the benefit of 5% range as per the proviso to section 92C(2).

Detailed Analysis:

1. Adjustment of ?3,96,51,776 in respect of international transactions:
The appellant contested the adjustment made by the AO/TPO, upheld by the DRP, alleging that the international transactions pertaining to IT, ITes, BSS, and MSS were not at arm's length. This issue was general in nature and did not require adjudication.

2. Arbitrary selection and rejection of comparable companies in the IT Segment:
- Exclusion of KALs Information Systems Ltd. (KALS):
The assessee argued that KALS, being a product company engaged in developing software products and providing software development services, was not comparable. The Tribunal upheld this view, directing the TPO to exclude KALS from the list of comparables, citing the Bombay High Court's decision in CIT Vs. PTC Software India (Pvt.) Ltd.

- Exclusion of Compucom Software Ltd.:
The Tribunal noted that Compucom was engaged in diversified services, including ITes/BPO services, which were not comparable to the assessee's software services. Following the decision in Principal Global Services Vs. DCIT, the Tribunal directed the exclusion of Compucom from the final set of comparables.

- Exclusion of Mindtree Ltd.:
The Tribunal directed the exclusion of Mindtree's R&D services segment, considering only the IT services segment for comparability, following the decision in Principal Global Services Vs. DCIT.

- Exclusion of F.C.S Software Solutions Ltd.:
The Tribunal upheld the exclusion of FCS Software, noting its involvement in ITes services, which were not comparable to the assessee's IT segment, following the decision in TIBCO Software India (P.) Ltd. Vs. DCIT.

3. Arbitrary rejection of functionally comparable companies in the ITes Segment:
- Inclusion of Techprocess Software Solutions Ltd.:
The Tribunal remanded the matter for verification by the TPO to determine if Techprocess could be included as a comparable.

- Inclusion of Reliance Infosolutions Private Limited:
The Tribunal remanded the matter for verification by the TPO, noting the need to verify the functional comparability and the impact of alleged tax evasion by its parent company.

- Inclusion of Thinksoft Global Services Limited:
The Tribunal remanded the matter for verification by the TPO to determine if Thinksoft could be included as a comparable.

- Inclusion of Bells Softtech Ltd.:
The Tribunal remanded the matter for verification by the TPO to determine if Bells Softtech could be included as a comparable.

4. Validity of CRISIL Limited as a comparable for the BSS Segment:
The Tribunal directed the exclusion of CRISIL from the BSS segment, citing its significant related party transactions (45%), following the decision in TPG Capital India Pvt. Ltd. Vs. DCIT.

5. Selection of Agrima Consultants Ltd. as a comparable in the BSS and MSS segments:
The Tribunal directed the exclusion of Agrima Consultants from the BSS and MSS segments, noting its involvement in financial consultancy and the Tribunal's earlier decision in the assessee's own case for AY 2008-09.

6. Denial of economic/risk adjustments:
This issue was considered consequential and did not require separate adjudication.

7. Ignoring Rule 10B(4) and judicial pronouncements advocating multiple year data for determining the arm’s length price:
The assessee did not press this ground, and it was dismissed as 'not pressed.'

8. Denial of the benefit of 5% range as per the proviso to section 92C(2):
This issue was considered consequential and did not require separate adjudication.

Conclusion:
The appeal was partly allowed for statistical purposes, with several issues remanded to the TPO for verification and adjudication. The Tribunal directed the exclusion of certain companies from the list of comparables and upheld the inclusion of others, ensuring a fair and accurate benchmarking of the assessee's international transactions.