2020 (11) TMI 1099 - AT - Income Tax

TP Adjustment - comparable selection - seeking exclusion of only two companies from the final list of comparables i.e. Persistent Systems Ltd. and Sasken Communication Ltd. in respect of software development service transactions - HELD THAT - We find that the assessee is engaged in the software development services whereas Persistent Systems Ld. is engaged in the product development services. The company Persistent Systems Ltd has income from outsourced product development and outsourced enabled services. No adjustment has been made by the TPO on account of these two distinguishing features. The Persistent Systems Ltd. in its P L Account has declared its income from software development services and products. The TPO ought to have enquired from Persistent Systems Ltd. as to the income from the products that is included in the income from software development services. Therefore we are satisfied that the said company is functionally different from the assessee company and therefore has to be excluded from the list of final comparables as comparable. Sasken Communication Technologies Ltd. - As decided in SAXO INDIA PVT. LTD VERSUS. ACIT 2016 (2) TMI 604 - ITAT DELHI though the break-up of revenue from software services and software products is available but the break-up of operating costs and net operating revenues from these two segments have not been the TPO has taken entity level figures for the purposes of making comparison. Since such entity level figures contain revenue from both software services and software products as against the assessee only providing software services we are disinclined to treat this company as comparable. The assessee s contention is accepted on this issue we direct the AO/TPO to exclude Sasken Communication Technology Ltd. from the list of final comparables.

Issues Involved:
1. Adjustment of Rs. 43,28,861 to the provision of software development services.
2. Rejection of Transfer Pricing (TP) documentation.
3. Use of non-contemporaneous data.
4. Disregarding multiple year/prior year data.
5. Disregarding certain filters in the selection of comparable companies.
6. Applying/modifying certain filters in comparability analysis.
7. Inclusion/exclusion of specific companies in comparability analysis.
8. Treatment of provision for doubtful debts and provision no longer required.
9. Treatment of bank charges and miscellaneous income in operating mark-up.
10. Disallowance of provision for customer claims.
11. Addition of provision for customer claims to book profit under section 115JB.
12. Levy of interest under section 234B and 234C.

Detailed Analysis:

1. Adjustment of Rs. 43,28,861 to the provision of software development services:
The Tribunal noted that the assessee challenged the comparability of Persistent Systems Ltd. and Sasken Communication Ltd. The assessee argued that Persistent Systems Ltd. is functionally different as it engages in outsourced product development services, unlike the assessee, which provides software development services. The Tribunal found that Persistent Systems Ltd. had income from both software services and products without segmental data available, making it incomparable. Similarly, Sasken Communication Ltd. was found to have revenue from software products, and the operating costs and net profitability between services and products were not segregated, thus not comparable to the assessee. Consequently, both companies were excluded from the final list of comparables.

2. Rejection of Transfer Pricing (TP) documentation:
The Tribunal observed that the TPO rejected the TP documentation maintained by the assessee, which was prepared in good faith and with due diligence. The Tribunal did not find specific fault with the TP documentation but focused on the comparability analysis.

3. Use of non-contemporaneous data:
The Tribunal did not specifically address the issue of non-contemporaneous data usage in the judgment, focusing instead on the functional comparability of the companies.

4. Disregarding multiple year/prior year data:
The Tribunal did not specifically address the issue of disregarding multiple year/prior year data in the judgment.

5. Disregarding certain filters in the selection of comparable companies:
The Tribunal did not specifically address the issue of disregarding certain filters in the selection of comparable companies.

6. Applying/modifying certain filters in comparability analysis:
The Tribunal did not specifically address the issue of applying/modifying certain filters in comparability analysis.

7. Inclusion/exclusion of specific companies in comparability analysis:
The Tribunal focused on the exclusion of Persistent Systems Ltd. and Sasken Communication Ltd. based on functional differences. Persistent Systems Ltd. was excluded due to its involvement in product development and lack of segmental data. Sasken Communication Ltd. was excluded due to its revenue from software products and lack of segmented operating costs and profitability.

8. Treatment of provision for doubtful debts and provision no longer required:
The Tribunal did not specifically address the treatment of provision for doubtful debts and provision no longer required in the judgment.

9. Treatment of bank charges and miscellaneous income in operating mark-up:
The Tribunal did not specifically address the treatment of bank charges and miscellaneous income in operating mark-up in the judgment.

10. Disallowance of provision for customer claims:
The Tribunal did not specifically address the disallowance of provision for customer claims in the judgment as the assessee did not press this ground.

11. Addition of provision for customer claims to book profit under section 115JB:
The Tribunal did not specifically address the addition of provision for customer claims to book profit under section 115JB as the assessee did not press this ground.

12. Levy of interest under section 234B and 234C:
The Tribunal did not specifically address the levy of interest under section 234B and 234C as the assessee did not press this ground.

Conclusion:
The Tribunal allowed the appeal of the assessee in part, specifically directing the exclusion of Persistent Systems Ltd. and Sasken Communication Ltd. from the final list of comparables due to functional differences and lack of segmental data. All other grounds raised by the assessee were dismissed as not pressed. The decision was pronounced in the open court on 9th November, 2020.

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