2021 (7) TMI 1401 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Referring to Appellant's international transactions in respect of software development services, companies functionally dissimilar with that of assessee need to be deselcted as comparable. Working capital adjustment - As decided in own case 2018 (10) TMI 1796 - ITAT BANGALORE no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. Thus we are of the opinion that this issue has to be remitted back to the file of AO/TPO for fresh consideration in accordance with the above order of the Tribunal in assessee s own case for AY 2012-13

Issues Involved:
1. Transfer Pricing Adjustments
2. Rejection of Comparability Analysis
3. Use of Non-contemporaneous Data
4. Exclusion and Inclusion of Comparable Companies
5. Working Capital Adjustment
6. Levy of Interest under Section 234B

Detailed Analysis:

Transfer Pricing Adjustments:
The primary issue revolves around the adjustment of Rs. 84,74,69,606 to the transfer price of the appellant's international transactions concerning software development services. The CIT(A) partially confirmed the action of the AO/TPO. The assessee challenges the rejection of its TP documentation under Section 92D and the fresh comparability analysis conducted by the TPO using additional filters to determine the arm's length price.

Rejection of Comparability Analysis:
The TPO rejected the comparability analysis carried out by the appellant and conducted a fresh analysis, which included using non-contemporaneous data not available in the public domain at the time of preparing the TP documentation. The appellant argues that multiple year/prior year data of comparable companies should have been considered while determining the arm's length price.

Use of Non-contemporaneous Data:
The appellant contends that the TPO used information under Section 133(6) of the Act, which involved choosing secret comparable companies whose information was not publicly available while preparing the TP documentation for the relevant financial year.

Exclusion and Inclusion of Comparable Companies:
The appellant raised several grounds for excluding certain comparable companies such as Infosys Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., and Thirdware Solutions Ltd., arguing they were functionally different. Conversely, the appellant sought the inclusion of companies like Akshay Software Technologies Ltd., E-Zest Solutions Ltd., and others, which were functionally comparable but were excluded by the TPO.

Infosys Ltd.:
The Tribunal directed the exclusion of Infosys Ltd. from the comparables based on its diversified operations, significant brand value, R&D expenses, and the lack of segmental data.

Larsen & Toubro Infotech Ltd.:
The Tribunal excluded Larsen & Toubro Infotech Ltd. due to its significant intangible assets, brand value, and extraordinary events during the year.

Mindtree Ltd.:
Mindtree Ltd. was excluded as it was involved in diversified operations, including intellectual property development and product business.

Persistent Systems Ltd.:
Persistent Systems Ltd. was excluded due to its engagement in product development, diversified business, and significant R&D activities.

Thirdware Solutions Ltd.:
Thirdware Solutions Ltd. was excluded as it was engaged in the sale of products, making it functionally different from the appellant.

Inclusion of Sankhya Infotech Ltd., I2T2 India Ltd., and Evoke Technologies Pvt. Ltd.:
The Tribunal remitted the issue of including Sankhya Infotech Ltd. and Evoke Technologies Pvt. Ltd. for fresh consideration by the TPO. I2T2 India Ltd. was directed to be included as a comparable company following the decision in the case of LG Soft India (P.) Ltd.

Working Capital Adjustment:
The appellant argued for a working capital adjustment (WCA), which the TPO did not allow. The Tribunal remitted the issue back to the AO/TPO for fresh consideration, following the decision in the appellant's own case for AY 2012-13.

Levy of Interest under Section 234B:
The appellant contested the levy of interest under Section 234B of the Act amounting to Rs. 16,13,16,690. The Tribunal did not specifically address this issue in the detailed analysis provided.

Conclusion:
The Tribunal partly allowed both the appeals by the assessee and the revenue, directing the exclusion of certain comparable companies and remitting other issues back to the AO/TPO for fresh consideration. The detailed analysis highlights the Tribunal's approach to ensuring that the comparability analysis and adjustments are fair and in accordance with the relevant legal provisions.

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