2020 (3) TMI 1437 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - We consider it appropriate to restore the comparables (i) Acropetal Technologies Ltd(ii)E-Zest Solutions Ltd (iii)E-Infochips Ltd and (iv)ICRA Techno Analytics Ltd to the file of TPO to verify and examine on the functionalities and allow the grounds of appeal of the assessee for statistical purposes. AR has restricted his submissions to the extent of exclusion of comparables supported by chart and paper book. Hence other grounds of appeal are dismissed.

Summary

Issues Involved:
1. Exclusion of comparables in Transfer Pricing.
2. Functional dissimilarity of comparables.
3. Examination and verification of comparables by the TPO.

Detailed Analysis:

1. Exclusion of Comparables in Transfer Pricing:
The primary issue in the appeal was the exclusion of certain comparables chosen by the Transfer Pricing Officer (TPO) in determining the Arm's Length Price (ALP) for the assessee's international transactions. The assessee, engaged in software development services and IT consultancy, had contested the inclusion of specific companies as comparables, arguing that they were functionally different and did not meet the necessary filters.

2. Functional Dissimilarity of Comparables:
The assessee argued for the exclusion of the following comparables on the grounds of functional dissimilarity:

- Acropetal Technologies Ltd.: The turnover of Rs. 81.40 Crores, functionally different, and failed the employee cost filter. The comparable had an abnormally high-profit margin. The assessee relied on the decision in Commonscope Networks India Pvt. Ltd. Vs. ITO.

- E-Zest Solutions: Turnover of Rs. 11.29 Crores, functionally different, and failed the export turnover filter. The employee earnings were only 73%. The assessee relied on the decision in Commonscope Networks India Pvt. Ltd. Vs. ITO.

- E-Infochips Limited: Turnover of Rs. 26.04 Crores, with an abnormal high margin of 56.44%. The revenue from the software development services segment was 73.77%, failing the revenue filter of 75%. The assessee relied on the decision in Commonscope Networks India Pvt. Ltd. Vs. ITO.

- ICRA Techno Analytics Limited: Turnover of Rs. 15.84 Crores, with a Related Party Transaction (RPT) of 23.28%. The company was engaged in IT Products, Engineering, and KPO Services, and segmental results of software development were not available. The assessee relied on the decision in Applied Materials India Pvt. Ltd. Vs. ACIT.

3. Examination and Verification of Comparables by the TPO:
The Tribunal noted that the TPO and the Dispute Resolution Panel (DRP) had not adequately addressed the objections raised by the assessee regarding the inclusion of these comparables. The Tribunal found merit in the assessee's arguments and referenced previous judicial decisions supporting the exclusion of these comparables. However, the Tribunal also considered the recent decision in the case of M/s. Telsima Communications Pvt. Ltd. Vs. DCIT, which remanded the issue of comparability back to the TPO for examination and verification.

Conclusion:
The Tribunal decided to restore the comparables (i) Acropetal Technologies Ltd., (ii) E-Zest Solutions Ltd., (iii) E-Infochips Ltd., and (iv) ICRA Techno Analytics Ltd. to the file of the TPO for further examination and verification of their functionalities. The appeal was partly allowed for statistical purposes, and other grounds of appeal were dismissed. The decision emphasized the need for a thorough examination of the functional comparability of the selected companies to ensure a fair determination of the ALP.