2022 (7) TMI 1339 - AT - Income Tax

TP adjustment - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:
1. Transfer Pricing Adjustment
2. Functional Similarity of Comparables
3. Application of Filters
4. Specific Comparable Rejections
5. Working Capital Adjustment
6. Risk Adjustment
7. Provision of Information
8. Opportunity of Being Heard
9. Levy of Penalty

Detailed Analysis:

1. Transfer Pricing Adjustment:
The Assessee challenged the transfer pricing adjustment amounting to INR 17,93,46,830, asserting that the AO/TPO erred in rejecting the analysis conducted by the Assessee to determine the arm's length price of international transactions.

2. Functional Similarity of Comparables:
The Assessee contended that several companies were wrongly considered functionally similar by the AO/TPO:
- Persistent Systems Ltd.: Excluded due to extraordinary financial events like acquisition.
- E-Infochips Ltd.: Excluded due to amalgamation.
- Aspire Systems (India) Pvt. Ltd.: Excluded due to amalgamation.
- R.S. Software (India) Limited: Excluded due to functional dissimilarity.
- Nihilent Ltd.: Excluded due to acquisition.
- Dun & Bradstreet Technologies & Data Services Pvt. Ltd.: Excluded due to functional dissimilarity and high margins.
- Puresoftware Pvt. Ltd.: Excluded due to varied activities and inconsistency in the TPO's approach.
- Exilant Technologies Pvt. Ltd.: Excluded due to being a product company with varied services.
- Infobeans Technologies Ltd.: Excluded due to diversified services and lack of segmental financials.
- Cybage Software Pvt. Ltd.: Excluded due to being an onsite service provider and functionally different.

3. Application of Filters:
The Assessee argued that the AO/TPO erred in applying various filters, such as data sufficiency, service income, turnover, export, forex spending, extraordinary economic circumstances, gross intangible to sales, different accounting year, and employee cost filters. The Tribunal did not provide specific rulings on these filters in the summary judgment.

4. Specific Comparable Rejections:
- KALS Information Systems Ltd. and CG-VAK Software & Exports Limited: Rejected only on the basis of turnover filter.
- TVS Infotech Ltd.: Rejected due to failing the export filter.
- Akshay Software Technologies Ltd.: Rejected on the basis of forex spending filter.
- Bhilwara Infotechnology Ltd.: Rejected due to failing the export filter.
- Ingenuity Gaming Pvt. Ltd.: Remitted back for re-adjudication on comparability.

5. Working Capital Adjustment:
The Assessee claimed that the AO/TPO erred in applying and performing the working capital adjustment. However, the Tribunal did not provide a specific ruling on this issue in the summary judgment.

6. Risk Adjustment:
The Assessee argued that the AO/TPO did not grant the risk adjustment requested. The Tribunal did not provide a specific ruling on this issue in the summary judgment.

7. Provision of Information:
The Assessee contended that the AO/TPO failed to provide details pertaining to yearly margin computations and unadjusted and working capital adjusted margin computations for the companies selected as comparable. The Tribunal did not provide a specific ruling on this issue in the summary judgment.

8. Opportunity of Being Heard:
The Assessee argued that the AO/TPO did not provide computations related to various search filters applied, thereby depriving the Assessee of the opportunity to be heard in case of factual errors. The Tribunal did not provide a specific ruling on this issue in the summary judgment.

9. Levy of Penalty:
The Assessee contended that the AO erred in issuing a notice for the levy of penalty under section 270A for underreporting of income. The Tribunal did not provide a specific ruling on this issue in the summary judgment.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO/TPO to exclude certain companies from the list of comparables due to functional dissimilarities and extraordinary financial events. The Tribunal emphasized the necessity of adhering to judicial precedents and ensuring consistency in the application of filters and selection of comparables.

← Previous Next →