2022 (5) TMI 1450 - AT - Income Tax

TP Adjustment - comparable selection - Functional dissimilarity - HELD THAT - Mind Tree Limited - On presence of onsite revenue over and above the threshold limit of 25% of total revenue we are of the view that this company should be excluded from the list of comparable companies. Persistent systems Limited - It is a product company and there is no segmental data between product and services segment presence of onsite activity and the impact of extra-ordinary event of acquisition during the relevant previous year. Therefore this company is directed to be excluded from the list of comparable company. Infosys Ltd - Difference pointed out by the ld. counsel for the assessee before us show that this company cannot be compared with that of the assessee basically because of its business model presence of onsite revenue generation and other reasons cited before us. Besides the reason that turnover of this company is huge and more than 10 times that of the assessee - We direct the AO/TPO to exclude this company from the list of comparables. Thirdware Solutions Pvt. Ltd is to be excluded from the list of comparables. L T Infotech Ltd - We see the revenue in Schedule M of the profit loss account there is no break-up of the revenue with regard to software services and software product. In our opinion this distinction is enough to exclude this company from the list of comparable companies. Melstar Information Technologies Ltd - A.R. submitted that this company Melstar Information Technologies Ltd. is a loss making company in the last 3 continuous successive assessment years and if there is a profit in any one of the past 3 financial years then that company cannot be excluded on the basis of persistent loss making filter - it is appropriate to remit the issue to the file of AO/TPO to decide the same in the light of above findings of the Tribunal. Accordingly the issue is remitted to AO/TPO for fresh consideration. Appropriate adjustments towards working capital - After hearing the parties we direct the AO/TPO to grant appropriate adjustments towards working capital as directed by Ld. DRP. In other words actual working capital adjustment to be given. Directed accordingly. Levy of interest u/s 234A - The contention of the A.R. is that the assessee filed the return of income before due date and therefore levy of interest u/s 234A is unwarranted and is to be deleted. Further it was submitted that draft assessment order did not contain this interest computation. Hence no ground is raised before the Ld. DRP. This ground is remitted to AO/TPO to consider chargeability of interest u/s 234A of the Act and decide accordingly.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Corporate Tax: Levy of Interest under Section 234A

Detailed Analysis:

I. Transfer Pricing Adjustments:

1. Adjustment of INR 19,64,72,927/-:
The Tribunal examined the adjustment determined by the AO/TPO/DRP concerning the international transaction rendered by the taxpayer under Section 92CA of the Income-tax Act, 1961. The adjustment was based on the rejection of the TP documentation maintained by the appellant and the introduction of various filters by the TPO to determine the Arm's Length Price (ALP).

2. Rejection of TP Documentation:
The Tribunal noted the appellant's contention that the AO/TPO/DRP erred in rejecting the TP documentation by invoking provisions of sub-section (3) of 92C of the Act. However, specific grounds (1 to 10) related to this issue were not pressed before the Tribunal and were dismissed accordingly.

3. Exclusion of Comparable Companies:
The appellant pressed for the exclusion of certain companies from the list of comparables. The Tribunal analyzed each company in detail:

- Mind Tree Ltd.: The Tribunal directed the AO/TPO to exclude Mind Tree Ltd. from the list of comparables, referencing the case of Yahoo Software Development India Pvt. Ltd., where Mind Tree Ltd. was found functionally dissimilar due to its diverse services and significant R&D activities.

- Persistent Systems Ltd.: Persistent Systems Ltd. was also directed to be excluded based on its involvement in product development and significant RPT transactions, as highlighted in the Yahoo Software Development India Pvt. Ltd. case.

- Infosys Ltd.: Infosys Ltd. was excluded due to its functional dissimilarities, including significant R&D costs, brand presence, and involvement in diversified business activities, as discussed in the Yahoo Software Development India Pvt. Ltd. case.

- Thirdware Solutions Pvt. Ltd.: The Tribunal directed the exclusion of Thirdware Solutions Pvt. Ltd., citing the LG Soft India Pvt. Ltd. case, where it was found to be engaged in product development without segmental details.

- L&T Infotech Ltd.: L&T Infotech Ltd. was excluded based on the LG Soft Pvt. Ltd. and Yahoo Software Development India Pvt. Ltd. cases, which highlighted its involvement in trading activities and lack of segmental revenue details.

4. Inclusion of Comparable Companies:
The appellant sought the inclusion of certain companies:

- I2T2 India Ltd.: The Tribunal directed the AO/TPO to verify I2T2 India Ltd.'s annual report and decide on its inclusion, referencing the LG Soft India Pvt. Ltd. case.

- Melstar Information Technologies Ltd.: The Tribunal remitted the issue to the AO/TPO to reconsider the inclusion of Melstar Information Technologies Ltd., following the Tribunal's findings in the KBACE Technologies Pvt. Ltd. case.

5. Operating Mark-up Computation:
The Tribunal directed the AO/TPO to correctly compute the operating mark-up for Sasken Communications Technologies Ltd. and Daffodil Software Ltd.

6. Working Capital Adjustments:
The Tribunal instructed the AO/TPO to grant appropriate working capital adjustments as directed by the DRP.

II. Corporate Tax: Levy of Interest under Section 234A:

1. Levy of Interest under Section 234A:
The appellant contested the levy of interest amounting to INR 5,32,362 under Section 234A, arguing that the return of income was filed within the due date. The Tribunal remitted this issue to the AO/TPO to verify the chargeability of interest under Section 234A and decide accordingly.

2. Additional Grounds:
The appellant did not press additional grounds regarding the non-granting of deduction towards payment of educational cess and secondary & higher education cess. These grounds were dismissed as not pressed.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes, with specific directions given for the exclusion/inclusion of comparable companies and the reconsideration of interest levied under Section 234A. The Tribunal's detailed analysis and directions ensure a thorough and fair assessment of the appellant's contentions.