2022 (5) TMI 1491 - AT - Income Tax

TP Adjustment - software development segment - upper limit of the turnover for exclusion of comparables having high turnover - HELD THAT - We direct the AO to exclude Larsen Toubro Infotech Limited, Mindtree Limited, Persistent Systems Limited, Tata Elxsi Limited, Nihilent Limited, Infosys Limited and Cybage Software Private Limited from the list of comparables, since the said companies are having turnover far exceeding Rs.200 crore for the relevant assessment year. It is ordered accordingly. Exclude M/s.R Systems International Limited as a comparable - The issue is restored to the files of the AO / TPO. The AO / TPO shall comply with the directions of the DRP and exclude M/s.R Systems International Limited, if it is found that the said company has prepared financials for the year ending December 2016. It is ordered accordingly. Seeking to rectify the margin of comparable M/s.Harbinger Systems Private Limited - As submitted that the TPO has taken the margin at 11.16%, whereas, the correct margin of this company is 8.12% - TPO has merely incorporated the margin at 11.16% and has not verified the claim of the assessee. Therefore, in the interest of justice and equity, we confirm the directions of the DRP and restore the matter to the AO / TPO to examine the issue afresh. It is ordered accordingly. TP adjustment in Marketing Support Segment - TPO, while giving effect to the directions of the DRP, had deleted the TP adjustment in marketing support segment - AO, in the final assessment order, has included TP adjustment for marketing support segment. The matter is restored to the AO / TPO to examine the issue raised in ground and take a decision in accordance with law. TP adjustment for the software distribution segment - AR has placed on record the TPO s order passed pursuant to the DRP s directions, wherein the entire TP adjustment in this segment was deleted (refer page 18 of the TPO s order giving effect to DRP s directions). AO is directed to look into the issue raised in ground 12 and take a decision in accordance with law. It is ordered accordingly.

Summary

Issues Involved:
1. Transfer Pricing Adjustment in Software Development Segment
2. Transfer Pricing Adjustment in Marketing Support Segment
3. Transfer Pricing Adjustment in Software Distribution Segment

Detailed Analysis:

1. Transfer Pricing Adjustment in Software Development Segment:

Ground 5:
The assessee challenged the transfer pricing (TP) adjustment of Rs.6,92,14,199 made by the Assessing Officer (AO) without considering the revised TP adjustment of Rs.6,15,49,522 as per the TPO's order following the Dispute Resolution Panel (DRP) directions. The Tribunal directed the AO to examine the issue and reduce the TP adjustment accordingly. Ground 5 was allowed for statistical purposes.

Ground 6(iii):
The assessee sought exclusion of seven comparables with turnovers exceeding Rs.200 crore, arguing that their turnover was only Rs.45.35 crore. The Tribunal, referencing judicial precedents, directed the exclusion of Larsen & Toubro Infotech Limited, Mindtree Limited, Persistent Systems Limited, Tata Elxsi Limited, Nihilent Limited, Infosys Limited, and Cybage Software Private Limited from the list of comparables. Ground 6(iii) was partly allowed.

Ground 7:
The assessee requested the exclusion of M/s.R Systems International Limited due to a different financial year ending December 2016, as directed by the DRP. The Tribunal restored the issue to the AO/TPO to comply with the DRP's directions. Ground 7 was allowed for statistical purposes.

Ground 8:
The assessee sought rectification of the margin of M/s.Harbinger Systems Private Limited from 11.16% to 8.12%, citing incorrect treatment of certain items by the TPO. The Tribunal confirmed the DRP's directions and restored the matter to the AO/TPO for fresh examination. Ground 8 was allowed for statistical purposes.

2. Transfer Pricing Adjustment in Marketing Support Segment:

Ground 11:
The assessee contended that the TPO had deleted the TP adjustment of Rs.2,53,32,409 in the marketing support segment as per the DRP's directions, but the AO retained it in the final assessment order. The Tribunal restored the issue to the AO/TPO for examination and decision in accordance with the law. Ground 11 was allowed for statistical purposes.

3. Transfer Pricing Adjustment in Software Distribution Segment:

Ground 12:
The assessee argued that the TPO had deleted the TP adjustment of Rs.4,56,73,477 for the software distribution segment as per the DRP's directions, but the AO retained it in the final assessment order. The Tribunal directed the AO to review the issue and decide in accordance with the law. Ground 12 was allowed for statistical purposes.

Conclusion:
The appeal filed by the assessee was partly allowed, with specific directions given to the AO/TPO to re-examine and adjust the TP issues in accordance with the DRP's directions and relevant judicial precedents. Order pronounced on May 13, 2022.