2019 (7) TMI 1923 - AT - Income Tax

TP Adjustment - Comparable selection - TPO by applying various filters, rejected certain comparables and reduced list comprising of following 10 comparables with average margin of 28.2% - HELD THAT - Assessee held to be providing software development services to iPass U.S. and is remunerated on cost 16 % basis for services rendered. Functions performed by assessee under this segment are coding and documentation, project management, testing and quality assurance. Thus companies functionally dissimilar with that of assessee are to be deselected from final list of comparability. Negative working capital adjustment - HELD THAT - As relying on FNF INDIA PRIVATE LIMITED case 2019 (7) TMI 1760 - ITAT BANGALORE there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment.

Summary

Issues Involved:
1. Incorrect interpretation of law and facts by CIT(A)
2. Adjustment to the arm's length price for software development services
3. Economic analysis and comparability analysis
4. Use of FY 2011-12 data for transfer pricing documentation
5. Rejection of certain comparables by AO/TPO
6. Comparability criteria used by AO/TPO
7. Risk profile adjustments
8. Benefit of +/-5 percent under section 92C(2)
9. Imposition of interest under Section 234B
10. Initiation of penalty proceedings under section 271(1)(c)
11. Negative working capital adjustment

Detailed Analysis:

1. Incorrect Interpretation of Law and Facts by CIT(A):
The appellant contended that the CIT(A)'s order was based on an incorrect interpretation of law and facts, rendering it bad in law. However, this issue was not specifically adjudicated as it was covered under the broader issues discussed.

2. Adjustment to the Arm's Length Price for Software Development Services:
The CIT(A) re-determined an addition of Rs. 1,83,26,121 for the arm's length price adjustment related to the appellant's international transactions. The appellant argued that the economic analysis undertaken was in accordance with the Act and Rules. The CIT(A) upheld the AO/TPO's determination using FY 2011-12 data, which was not available to the appellant during documentation.

3. Economic Analysis and Comparability Analysis:
The CIT(A) upheld the AO/TPO's rejection of certain comparables identified by the appellant, applying different quantitative and qualitative filters. The appellant argued that companies with turnover less than Rs. 1 crore, different accounting years, employee costs greater than 25% of total revenues, and export earnings greater than 75% of sales should not have been rejected.

4. Use of FY 2011-12 Data for Transfer Pricing Documentation:
The CIT(A) upheld the AO/TPO's use of FY 2011-12 data, which was not available to the appellant at the time of complying with transfer pricing documentation requirements. The appellant contended that this was erroneous.

5. Rejection of Certain Comparables by AO/TPO:
The CIT(A) upheld the AO/TPO's rejection of certain comparables, including companies with turnover less than Rs. 1 crore, different accounting years, and those using consolidated results. The appellant argued that these rejections were based on unreasonable comparability criteria.

6. Comparability Criteria Used by AO/TPO:
The CIT(A) upheld the AO/TPO's comparability criteria, which included rejecting companies based on turnover, accounting year, employee costs, export earnings, and use of consolidated results. The appellant contended that these criteria were unreasonable.

7. Risk Profile Adjustments:
The CIT(A) did not make suitable adjustments for differences in the risk profile between the appellant and the comparables. The appellant argued that this was an error in the comparability analysis.

8. Benefit of +/-5 Percent Under Section 92C(2):
The CIT(A) upheld the AO/TPO's computation of the arm's length price without giving the benefit of +/-5 percent under the proviso to section 92C(2). The appellant argued that this benefit should have been granted.

9. Imposition of Interest Under Section 234B:
The CIT(A) confirmed the imposition of interest under Section 234B. The appellant contended that this was erroneous.

10. Initiation of Penalty Proceedings Under Section 271(1)(c):
The CIT(A) upheld the initiation of penalty proceedings under section 271(1)(c). The appellant argued that this was erroneous.

11. Negative Working Capital Adjustment:
The CIT(A) held that a negative working capital adjustment could not be granted. The appellant argued that allowing working capital adjustment would result in better comparison and that the adjustment is computed scientifically. The Tribunal followed the decision in F & F India Pvt. Ltd., directing the AO not to make a negative working capital adjustment, as the appellant did not bear any working capital risk.

Conclusion:
The Tribunal partly allowed the appellant's appeal by excluding certain comparables (Genesis International Corporation Ltd, Infosys Ltd, Larsen and Toubro Infotech Ltd, and Persistent Systems Ltd) and directed the AO to grant working capital adjustment. The revenue's appeal was dismissed, and the Tribunal upheld the CIT(A)'s decision on not granting a negative working capital adjustment. The issues of interest under Section 234B and initiation of penalty proceedings under section 271(1)(c) were not pressed by the appellant and were dismissed.