2020 (8) TMI 923 - AT - Income Tax

TP Adjustment - comparable selection - turnover filter - assessee alleged exclusion RS software India Pvt. Ltd.on turnover filter, as this company has huge turnover of 2472.08% - HELD THAT - We note that international transaction for year under consideration and asst. year 2010-11 2015 (7) TMI 212 - ITAT BANGALORE are similar. There is nothing on record placed by revenue that brings out any factual differences. Respectfully following above view, we direct Ld.AO/TPO to exclude all these comparables, for having excessive turnover. Genesis International Corp Ltd - This company renders mapping and Geo spatial services in the process of which it develops software. Genesys International Corporation Ltd., cannot be considered as a comparable company and the said company should be excluded from the final list of comparable companies. Comparables in respect of software R D segment - As entire issue should be restored to the file of Ld. AO/TPO for undertaking exercise afresh by selecting fresh set of comparable companies in respect of software R D segment. Accordingly, we set aside the order passed by Ld. AO on this issue and restore the same to his file for examining the issue afresh in the light of discussions made supra. We direct learnt Ld.TPO to undertake fresh search analysis having regards the above observations and the view taken by this (Tribunal) in assessee s own case for immediately preceding and succeeding assessment years. Assessee is directed to file all relevant information/details to assist Ld. AO/TPO for determining arms length price of the transaction in accordance with law. Appeal filed by assessee stands allowed for statistical purposes.

Issues Involved:

1. Validity of the assessment order.
2. Jurisdictional error in the reference to the Transfer Pricing Officer (TPO).
3. Enhancement of income by the TPO.
4. Violation of principles of natural justice.
5. Use of multiple year/prior years' data.
6. Rejection of the assessee's transfer pricing documentation and methodology.
7. Treatment of depreciation on intangible assets.
8. Treatment of foreign exchange fluctuation income.
9. Application of employee cost filter.
10. Inclusion of comparables with high related party transactions.
11. Inclusion of functionally dissimilar comparables.
12. Exclusion of functionally similar comparables.
13. Initiation of penalty under section 271(1)(c).

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contended that the assessment order passed by the Assessing Officer (AO) was "bad in law and void ab-initio." This issue was not elaborated upon in the judgment.

2. Jurisdictional Error in Reference to TPO:
The assessee argued that the AO did not record any reasons in the draft assessment order for referring the matter to the TPO for computation of the arm's length price (ALP), as required under section 92CA(1) of the Act. This was not specifically addressed in the judgment.

3. Enhancement of Income by TPO:
The TPO enhanced the income of the assessee by Rs 9,42,35,339/- by holding that the international transactions did not satisfy the arm's length principle. The TPO selected new comparables and used current year data, which resulted in an average margin of 22.63%, leading to the proposed adjustment.

4. Violation of Principles of Natural Justice:
The assessee claimed that the AO/TPO did not provide a mandatory show-cause notice or an opportunity of being heard as required under section 92C(3) of the Act. This issue was not specifically addressed in the judgment.

5. Use of Multiple Year/Prior Years' Data:
The TPO objected to the use of multiple year data by the assessee and insisted on using current year data for comparable companies. The Tribunal did not specifically address this issue in the judgment.

6. Rejection of Assessee's Transfer Pricing Documentation and Methodology:
The TPO disregarded the assessee's transfer pricing documentation and methodology, which used a detailed Functional, Asset, and Risk (FAR) analysis. The Tribunal did not specifically address this issue in the judgment.

7. Treatment of Depreciation on Intangible Assets:
The TPO treated the depreciation on intangible assets as operating in nature, which the assessee contested. This issue was not specifically addressed in the judgment.

8. Treatment of Foreign Exchange Fluctuation Income:
The TPO treated the income earned on foreign exchange fluctuation as non-operating in nature, which the assessee contested. This issue was not specifically addressed in the judgment.

9. Application of Employee Cost Filter:
The TPO applied a filter for rejecting companies whose employee costs were less than 25%, which the assessee argued was arbitrary. This issue was not specifically addressed in the judgment.

10. Inclusion of Comparables with High Related Party Transactions:
The TPO included comparables with related party transactions in excess of 25%, which the assessee argued contradicted the TPO's own filter. This issue was not specifically addressed in the judgment.

11. Inclusion of Functionally Dissimilar Comparables:
The assessee challenged the inclusion of several comparables (Infosys Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., RS Software India Ltd., and Genesys International Corp. Ltd.) on the grounds of functional dissimilarity and excessive turnover.

The Tribunal noted that these comparables had been excluded in the assessee's own case for the assessment year 2010-11 due to their high turnover. The Tribunal upheld the exclusion of these comparables based on the turnover filter, following the decision in the case of Trilogy E-Business Software India (P.) Ltd. The Tribunal also excluded Genesys International Corp. Ltd. on the grounds of functional dissimilarity, as it was engaged in providing geographical information services and not predominantly in software development services.

12. Exclusion of Functionally Similar Comparables:
The assessee challenged the exclusion of certain comparables (Akshay Software Technologies Ltd., Blue Star Infotech Limited, Cigniti Technologies Ltd., Goldstone Technologies Limited, Thinksoft Global Services Limited) on the grounds that they were functionally similar to the assessee. This issue was not specifically addressed in the judgment.

13. Initiation of Penalty under Section 271(1)(c):
The assessee contended that the AO erred in initiating penalty under section 271(1)(c) of the Act. This issue was not specifically addressed in the judgment.

Final Decision:
The Tribunal directed the AO/TPO to exclude the comparables with high turnover and functional dissimilarity from the final list. The Tribunal restored the issue to the file of the AO/TPO for undertaking a fresh exercise by selecting a new set of comparable companies in respect of the software R&D segment. The appeal filed by the assessee was allowed for statistical purposes.

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