2021 (3) TMI 1321 - AT - Income Tax

TP adjustment - Comparable selection - HELD THAT - There is no dispute between the parties about the assessee being engaged in software development business having carried out the corresponding international transactions with its overseas AE(s) thereby disclosing net cost margin of 17.18%. It is thus purely an issue of the alleged wrongful exclusion and inclusion of comparable entities only. M/s.Mind Tree Ltd - We thus hold in this factual backdrop that the learned panel has rightly directed exclusion of M/s.Mindtree since lacking not only the reliable functional similarity but also having extraordinary events in the relevant time span in FY.2009-10. We therefore see no reason to accept the Revenue s instant ground. The same stands rejected. M/s.E-Infochips Bangalore Ltd., Kals Information Systems and Persistent Systems P. Ltd.- It transpires at the outset that this tribunal s co-ordinate bench s order in M/s.Pegasystems Worldwide India Pvt. Ltd. 2015 (10) TMI 2495 - ITAT HYDERABAD has already held in the very assessment year i.e., AY.2010-11 that former twin entities are not functionally similar in software development activity; and therefore, are not to be taken as valid comparables. M/s.Persistent Systems Ltd. as not a valid comparable in assessee s line of business of international transactions in the relevant previous year. The same is directed to excluded therefore. Interest of receivables - DRP s directions take note of the TPO s observations having merely proposed to charge interest @12% p.a. regarding the receivables exceeding the credit period of 30 days - Suffice to say, the DRP has admittedly directed the TPO to ascertain LIBOR rate for 12 months in FY.2009-10 without even indicating the corresponding comparables in the relevant segment involving the receivables in issue. We make it clear that Chapter-X in the Act is a special provision wherein each and every upward and downward adjustment ought to be made after analysing the array of comparables in the very segment than based on mere proposal lacking any uncontrolled transactions information. We thus deem it proper to delete the impugned arm s length price for this precise reason alone. The assessee succeeds in its 10 to 12 substantive grounds and the Revenue s corresponding second substantive ground is declined.

Summary

Issues involved:
1. Alleged wrongful exclusion/inclusion of comparable entities in software development business for international transactions.
2. Treatment of interest on receivables exceeding credit period.

Analysis:

Issue 1: Alleged wrongful exclusion/inclusion of comparable entities
The appeal involved cross-appeals by the Revenue and the Assessee for the assessment year 2010-11 concerning the exclusion/inclusion of comparable entities in the software development business for international transactions. The Revenue sought to reverse the exclusion of M/s. Mind Tree Ltd., while the Assessee challenged the inclusion of various companies as comparables. The Tribunal noted the parties' contentions and previous decisions regarding the functional similarity of the entities. The Tribunal upheld the exclusion of M/s. Mind Tree Ltd., based on its unique circumstances, such as strategic events and the nature of its business activities. Additionally, the Tribunal rejected the Revenue's arguments regarding the inclusion of certain companies as comparables, citing previous decisions that established the lack of functional similarity in software development activities. As a result, the Tribunal directed the exclusion of certain companies as comparables based on the factual and legal analysis presented.

Issue 2: Treatment of interest on receivables
The second issue revolved around the treatment of interest on receivables exceeding the credit period. The dispute resolution panel had directed the Transfer Pricing Officer (TPO) to ascertain the LIBOR rate for 12 months in the relevant period without specifying the comparables involved in the receivables segment. The Tribunal observed that adjustments in such cases should be based on a thorough analysis of comparables in the segment, rather than relying solely on proposed adjustments lacking uncontrolled transaction information. Consequently, the Tribunal deemed it appropriate to delete the arm's length price determined for interest on receivables due to the lack of proper analysis. The Assessee succeeded in its grounds related to interest on receivables, while the Revenue's corresponding ground was rejected. The Tribunal's decision resulted in the dismissal of the Revenue's appeal and partial acceptance of the Assessee's cross-appeal on the specified terms.

The detailed analysis of the issues involved in the judgment reflects a comprehensive examination of the factual, legal, and procedural aspects, leading to a balanced and reasoned decision by the Tribunal.