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2018 (2) TMI 2054 - AT - Income TaxTP Adjustment - comparability - application of turnover filter in the selection of comparables - HELD THAT - Bodhtree Consulting Ltd - The coordinate bench in the matter of M/s. Infinera India Pvt. Ltd 2016 (6) TMI 1280 - ITAT BANGALORE had examined the profile of Bodhtree Consulting Ltd. from the Annual Report of the said company and have come to the conclusion that Bodhtree Consulting Ltd. is a product company and therefore it cannot be compared to software development company Exclusion of Sasken Communication Technologies Ltd. Persistent Systems Ltd. Larsen Toubro infotech Ltd. and Infosys Ltd. Persistent Systems Ltd. Larsen Toubro infotech Ltd. and Infosys Ltd - The question of application of turnover filter is a vast question and the Tribunal has been taking the stand of 1 to 200 Crores turnover filter however thereafter 1/10 tribunal has decided to follow 10times to 1/10 times of turnover and thereafter now sending the matters to the TPO for the purposes of examining whether the turnover of the comparables are having any effect on the profit margin/price charged by the comparable or assessee in the light of judgment of Hon ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. 2015 (4) TMI 949 - DELHI HIGH COURT In the present set of appeal Persistent Systems Ltd. Larsen Toubro infotech Ltd. and Infosys Ltd. were required to be examined on the touch stone of FAR analysis by the ld. CIT(A) but it has not been done as these comparables were removed from the list of comparables on account of turnover filter. Therefore we are remitting back the matter with respect to FAR analysis of Persistent Systems Ltd. Larsen Toubro infotech Ltd. and Infosys Ltd. to the file of CIT(A) with the direction to decide the functionality of these companies in accordance with the rules and regulations and by following the judicial pronouncements of High Court and Tribunal decisions. FCS Software Solutions Ltd. and Thinksoft Global Services Ltd. - inclusion of these two companies FCS Software Solutions Ltd. and Thinksoft Global Services Ltd. is covered in favour of the assessee and we accordingly hold the same. Comparability for ITES segment - Infosys BPO Ltd. and Aditya Birla Minacs Worldwide Ltd.inclusion - These companies are required to be send back to file of CIT(A) for FAR analysis. We accordingly do so. As we are sending back for FAR analysis of Infosys BPO Ltd. and Aditya Birla Minacs Worldwide Ltd. to the file of CIT(A) therefore we are not examining the applicability of turnover filter. Accordingly we direct the CIT(A) to examine the functionality (FAR analysis) of these two companies on the tests of parameter laid down by the rules by the judicial pronouncements of High Court as well as decision rendered by the coordinate bench while examining the Infosys BPO Ltd. and Aditya Birla Minacs Worldwide Ltd. Exclusion of M/s. Accentia Technologies Ltd. M/s. Cosmic Global Ltd. M/s. Eclerx Services Ltd - This issue is covered by the decision rendered by the coordinate bench in the case of e4e Business Solutions India Pvt. Ltd. 2016 (3) TMI 356 - ITAT BANGALORE Therefore following the decision of coordinate bench we direct the exclusion of these companies from the list of comparables. Thus the TPO/AO is directed to re-compute the arms length price in the ITES segment on the basis of the remaining comparable companies needless to say the benefit of second proviso to section 92C(2) be considered. Working capital adjustment - putting a cap by the CIT (A) and the TPO - HELD THAT - Law is settled to the extent that the assessee would be entitled to working capital adjustment in accordance with Act and Rules without any cap and therefore we direct the TPO to calculate the working capital adjustment of the assessee vis- -vis of the assessee on actual basis if any. Accordingly the ground of working capital adjustment is allowed for statistical purpose. Risk adjustment - HELD THAT - Though the CIT(A) has directed the TPO to work out the risk adjustment as per the prevailing norms and grant the same to the assessee however it is pertinent to note that the onus is on the assessee is to provide all the relevant details and computation of quantum of level of risk in the case of the assessee as well as comparables. Therefore we direct the AO/TPO that in case the assessee provides these details the TPO has to consider and decide this issue as per the rules.
Issues Involved:
1. Arms length price in respect of software development services and ITES. 2. Inclusion and exclusion of certain companies as comparables. 3. Application of turnover filter in the selection of comparables. 4. Granting of adequate working capital adjustment. 5. Determination of MAT credit eligibility. 6. Benefit of risk adjustment. Detailed Analysis: 1. Arms Length Price in Software Development Services and ITES: The assessee, a wholly owned subsidiary of Misys India Holding Ltd., UK, engaged in software development services, ITES, and marketing support services to its AEs, reported its financial results and international transactions. The TPO accepted the sales support service segment at arms length but disputed the software development services and ITES. The TPO proposed an adjustment u/s. 92CA of ? 14,75,07,706/- for software development services and ? 51,52,442/- for ITES. The CIT(A) granted partial relief by excluding certain companies from the set of comparables and allowing risk adjustment. 2. Inclusion and Exclusion of Certain Companies as Comparables: - Bodhtree Consulting Ltd.: Excluded due to fluctuating and abnormal profit margins, and different accounting principles. Supported by decisions in M/s. Infinera India Pvt. Ltd. Vs. ITO and VMware Software India Pvt. Ltd. Vs. DCIT. - Sasken Communication Technologies Ltd.: Excluded due to functional dissimilarity, involvement in software product development, and owning intangibles. Supported by decisions in VMware Software India Pvt. Ltd. Vs. DCIT and Novell Software Development India Pvt. Ltd. Vs. DCIT. - Persistent Systems Ltd., Larsen & Toubro Infotech Ltd., and Infosys Ltd.: Remitted back to CIT(A) for FAR analysis as they were excluded by applying the turnover filter without examining functional dissimilarity. - FCS Software Solutions Ltd. and Thinksoft Global Services Ltd.: Included as comparables, supported by decisions in VMware Software India Pvt. Ltd. Vs. DCIT and ARM Embedded Technologies Pvt. Ltd. Vs. DCIT. - Infosys BPO Ltd. and Aditya Birla Minacs Worldwide Ltd.: Remitted back to CIT(A) for FAR analysis without being influenced by the turnover filter. - Accentia Technologies Ltd., Cosmic Global Ltd., and Eclerx Services Ltd.: Excluded due to functional dissimilarity and extraordinary events, supported by decisions in e4e Business Solutions India Pvt. Ltd. Vs. DCIT and Lam Research (India) Pvt. Ltd. Vs. DCIT. 3. Application of Turnover Filter in the Selection of Comparables: The CIT(A) applied a turnover filter of 1 to 500 Crores, excluding certain companies. However, the Tribunal decided to remit the matter back to CIT(A) for examining the impact of turnover on profit margins and price charged by comparables, following the judgment in Chryscapital Investment Advisors (India) (P.) Ltd. Vs. DCIT. 4. Granting of Adequate Working Capital Adjustment: The Tribunal directed the TPO to calculate the working capital adjustment on an actual basis without any cap, as the law entitles the assessee to working capital adjustment in accordance with the Act and Rules. 5. Determination of MAT Credit Eligibility: The CIT(A) accepted the assessee's arguments on errors in the assessment order regarding MAT credit eligibility but did not determine the eligible amount. The Tribunal did not provide further details on this issue. 6. Benefit of Risk Adjustment: The CIT(A) directed the TPO to work out the risk adjustment as per prevailing norms, provided the assessee submits all relevant details and computations. The Tribunal upheld this direction, emphasizing the onus on the assessee to provide necessary details. Conclusion: The Tribunal partly allowed the appeal filed by the assessee and remitted several issues back to the CIT(A) for further examination and proper determination. The revenue's appeal was allowed for statistical purposes. The judgment highlighted the importance of functional comparability, proper application of filters, and adherence to judicial precedents in transfer pricing cases.
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