2020 (8) TMI 918 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - E-infochips Bangalore Ltd be excluded on grounds of functional dissimilarity and non-availability of its segmental financial. E-Zest Solutions Ltd. having diversified activities without having any segmental information on record. In view of the matter, we order to exclude E-zest Solutions Ltd. from the final set of comparables. Infinite Data System Private Limited (Infinite) be exluded as functional dissimilarity and on ground of super normal profit to the tune of 1496%. Infosys Limited (Infosys) - Keeping in view the functionality and huge brand value and significant expenditure on R D we find Infosys not a suitable comparable vis- -vis taxpayer, hence, order to be excluded. Sonata Software Ltd. - Since the RPT/sales of Sonnata is 59.35%, thus apparently fails TPOs filter of 25%, this comparable is remitted back to the Ld. TPO to decide afresh after providing opportunity of being heard to the taxpayer. Sasken Communication Technologies Ltd is not a suitable comparable on ground of functional dissimilarity and business restructuring. Zylog is not a valid comparable on ground of extra ordinary event vis- -vis taxpayer hence, order to be excluded. Grant of working capital adjustment - TPO / DRP have denied the benefit of working capital adjustment while computing the ALP on the ground that the assessee has not demonstrated that there is a difference in levels of working capital employed by the taxpayers vis- -vis comparables - HELD THAT - TP study referred to by the taxpayer for benchmarking its International Transaction shows that the complete detail has been provided to grant working capital adjustment. So, in view of the matter, we are of the considered view that the matter is required to be reconsidered by the TPO by providing opportunity of being heard to the assessee. Moreover working capital adjustment has been granted to the taxpayer in the earlier years and since then there is no change in the business model of the assessee. So, this issue is remitted back to the Ld. TPO.

Issues Involved:

1. Validity of the assessment order passed by the AO.
2. Confirmation of addition to income by the TPO regarding software development services.
3. Denial of tax holiday under section 10B.
4. Rejection of taxpayer's Transfer Pricing (TP) documentation.
5. Use of current year data for comparables.
6. Rejection of taxpayer’s comparability analysis.
7. Inclusion of high-margin companies in comparables.
8. Inclusion of non-comparable companies.
9. Rejection of low-profit/loss-making companies.
10. Exclusion of comparable companies.
11. Errors in selection/rejection of comparables.
12. Denial of risk adjustment.
13. Denial of working capital adjustment.
14. TP addition to the entire value of transactions.
15. Ignoring judicial pronouncements.
16. Ignoring alternative benchmarking analysis.
17. Computation of interest under sections 234A, 234B, 234C, and 234D.
18. Initiation of penalty under section 271(1)(c).

Detailed Analysis:

1. Validity of the Assessment Order:
The taxpayer challenged the assessment order passed by the AO, claiming it was "bad in law and void ab-initio." However, the judgment does not provide a specific ruling on this issue, focusing instead on the TP adjustments and related matters.

2. Confirmation of Addition to Income:
The AO, following the directions of the DRP, confirmed the addition of Rs. 3,24,37,885/- to the taxpayer's income, holding that its international transactions did not satisfy the arm’s length principle. The Tribunal upheld the use of the Transactional Net Margin Method (TNMM) with Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI) but reviewed the comparables used.

3. Denial of Tax Holiday under Section 10B:
The taxpayer argued it was entitled to a tax holiday under section 10B and thus had no motive to manipulate transfer prices. This argument was not specifically addressed in the judgment, which focused on the comparability analysis.

4. Rejection of Taxpayer's TP Documentation:
The TPO disregarded the TP documentation maintained by the taxpayer, including the filters applied and the use of multiple-year data. The Tribunal reviewed the selection of comparables and found several of them unsuitable.

5. Use of Current Year Data:
The TPO used current year data for comparable companies, which the taxpayer contested. The Tribunal did not specifically rule on the use of current year data but focused on the functional comparability of the selected companies.

6. Rejection of Taxpayer’s Comparability Analysis:
The TPO conducted a fresh comparability analysis, rejecting the taxpayer's analysis. The Tribunal reviewed the comparables selected by the TPO and ordered the exclusion of several companies.

7. Inclusion of High-Margin Companies:
The taxpayer argued against the inclusion of high-margin companies. The Tribunal ordered the exclusion of companies like E-infochips and Infosys, which had high margins and were functionally dissimilar.

8. Inclusion of Non-Comparable Companies:
The Tribunal ordered the exclusion of several companies that were not comparable to the taxpayer in terms of functions performed, assets employed, and risks assumed, including E-infochips, E-Zest Solutions, Infinite Data System, Infosys, Sasken Communication Technologies, and Zylog Systems.

9. Rejection of Low-Profit/Loss-Making Companies:
The taxpayer argued against the arbitrary rejection of low-profit/loss-making companies. The Tribunal did not specifically address this issue but focused on the functional comparability of the selected companies.

10. Exclusion of Comparable Companies:
The Tribunal ordered the exclusion of several companies from the final set of comparables based on functional dissimilarity and other factors.

11. Errors in Selection/Rejection of Comparables:
The taxpayer pointed out factual and computational errors in the selection/rejection of comparables. The Tribunal reviewed and corrected the selection of comparables.

12. Denial of Risk Adjustment:
The taxpayer argued for a risk adjustment, which the TPO denied. The Tribunal did not specifically address this issue but remitted the matter back to the TPO for reconsideration.

13. Denial of Working Capital Adjustment:
The TPO denied the benefit of working capital adjustment. The Tribunal remitted this issue back to the TPO for reconsideration, noting that working capital adjustment had been granted in earlier years.

14. TP Addition to Entire Value of Transactions:
The taxpayer argued against the TP addition to the entire value of transactions. The Tribunal did not specifically address this issue.

15. Ignoring Judicial Pronouncements:
The taxpayer argued that the TPO disregarded judicial pronouncements. The Tribunal reviewed the comparables and excluded several based on judicial precedents.

16. Ignoring Alternative Benchmarking Analysis:
The taxpayer provided alternative benchmarking analyses using Internal Comparable Uncontrolled Price (CUP) and Internal Transactional Net Margin Method (TNMM). The Tribunal did not specifically address these alternative methods.

17. Computation of Interest:
The AO proposed to compute interest under sections 234A, 234B, 234C, and 234D. The Tribunal did not specifically address this issue.

18. Initiation of Penalty:
The AO initiated a penalty under section 271(1)(c) without recording any satisfaction. The Tribunal did not specifically address this issue.

Conclusion:
The Tribunal allowed the taxpayer's appeal for statistical purposes, ordering the exclusion of several comparables and remitting the issue of working capital adjustment back to the TPO for reconsideration. The order emphasized the need for functional comparability and adherence to judicial precedents in the selection of comparables.

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