2022 (6) TMI 1368 - AT - Income Tax

TP Adjustment - adjustments towards the difference in the working capital between the assessee and the companies selected as comparables - HELD THAT - This issue was considered by the Tribunal in the case of Huawei Technologies India P. Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE , thus we remit the issue to the file of AO/TPO to compute the working capital adjustment after necessary examination in the light of the above observation and after allowing an opportunity of hearing to the assessee. This ground is partly allowed for statistical purpose. Comparable selection - exclusion of M/s. Tata Elxsi Limited from the list of comparables - In the present case, the TPO considered the software development services segment of Tata Elxsi Ltd. to compare with the assessee company, wherein he found that, that company is functionally comparable to the assessee company and passes through all the filters adopted by the TPO. It was also noted by TPO that revenue streams from this segment is on account of rendition of services and not on account of product sales. As per the information in annual report, in the software development services segment, this company helps its customer to create new path and experience to drive their growth and also the TPO/DRP rightly commented on the various objections made by the assessee before them. The Ld. A.R. was not able to controvert the above findings before us. In view of this, we do not find any infirmity in including this comparable in the list of comparables. This ground of appeal of the assessee is rejected. Exclusion of Mind Tree Ltd. from the list of comparables - Admittedly, this comparable is considered as not comparable in the case of Yahoo Software Development India Pvt. Ltd. 2020 (2) TMI 1365 - ITAT BANGALORE .Thus we are inclined to direct the TPO/AO to exclude this company from the list of comparables. Exclusion of Larsen Toubro Infotech Ltd. - We have heard the rival submissions and perused the materials available on record. This company as not considered as comparable in the case of Global Logic India Ltd 2020 (6) TMI 712 - ITAT DELHI because of trading in software and owned significant intangible assets, thus we direct the AO/TPO to exclude this company from the list of comparables. Exclusion of R.S. Software (India) Ltd. - As rightly pointed out by Ld. A.R., this company is not comparable with the assessee company as held by Tribunal in the case of Yahoo Software Development India Pvt. Ltd. Cited 2020 (2) TMI 1365 - ITAT BANGALORE wherein the overseas staff and office expenses constitutes significant portion of operating cost of the company i.e. 68.82% which is very exorbitant and hence we are inclined to direct the AO to exclude this company from the list of comparables. Exclusion of Persistent Systems Ltd - This company is considered as not comparable in the case of Yahoo Software Development India Ltd. cited 2020 (2) TMI 1365 - ITAT BANGALORE wherein it is held that when the controlled transactions of Persistent Systems Ltd. constitutes at 32% of sales, as such it cannot be comparable to the assessee s case. Further, same view has been taken by Tribunal in the case of Goldman Sachs Services Ltd. 2020 (11) TMI 464 - ITAT BANGALORE In view of the above, we remit this issue to the file of AO to consider the comparability of the company in the light of above observation of the Tribunal. The issue is remitted back to the AO/TPO for fresh consideration. Exclusion of Nihilent Technologies Ltd. - In view of the high percentage of on site revenue compared to the assessee company, Nihilent Technologies Ltd. cannot be compared to the assessee and cannot be considered as a comparable. However, these facts were not verified or the assessee not raised these arguments before lower authorities. Hence, this issue is remitted back to the file of AO/TPO for fresh consideration to examine this issue afresh. Aspire Systems (India) (P) Ltd. for exclusion - A.R. placed reliance on the order of Yahoo Software Development India Pvt. Ltd. 2020 (2) TMI 1365 - ITAT BANGALORE for the proposition that on site revenue is very high to the total sales and to be excluded. However, we find that these facts are not examined by AO/TPO at their end. Hence, it is remitted to the file of AO/TPO for fresh consideration after giving opportunity of hearing to the assessee. Exclusion of Infosys Ltd.cannot be compared with that of the assessee basically because of its business model, presence of onsite revenue. Inclusion of I2T2 India Pvt. Ltd. - We direct the AO/TPO to include this company as comparable in the list of comparables. Direction to AO/TPO to include comparables in the list of comparables while passing giving effect order to the DRP s direction arbitrarily when the above comparable did not form part of the final list of comparables as per TPO order for SWD segment - Bhilwara Infotechnology Ltd., Nucleus Software Expots Ltd., Cybercom Datamatics Information Solotions Ltd. AND Consilient Technologies Pvt. Ltd. - After hearing both the parties, we direct the AO/TPO to pass the consequent orders in conformity with the direction to the Ld. DRP order. Ordered accordingly. Excluding Infomile Technologies Ltd.- Admittedly, the assessee raised additional ground on this issue. As such in our opinion, lower authority have no occasion to examine it. Being so, in the interest of justice, we remit this issue to AO/TPO for fresh consideration.

Summary

Issues Involved:
1. Rejection of Transfer Pricing (TP) documentation.
2. Adjustment to the transfer price for Software Development services (SWD) & Information Technology enabled services (ITeS) segments.
3. Working Capital Adjustment.
4. Risk Adjustment.
5. Computation of incorrect margin for various comparable companies.
6. Inclusion/Exclusion of specific comparable companies in the SWD segment.
7. Inclusion/Exclusion of specific comparable companies in the ITeS segment.
8. Non-conformity of the Final Order with the directions issued by the Dispute Resolution Panel (DRP).

Detailed Analysis:

1. Rejection of Transfer Pricing (TP) Documentation:
The Tribunal noted that the learned Deputy Commissioner of Income Tax (AO) and the Dispute Resolution Panel (DRP) upheld the rejection of the TP documentation by the Transfer Pricing Officer (TPO). The assessee argued that the comparability analysis in the TP documentation was conducted in accordance with the provisions of the Income Tax Act and Rules, and the rejection was erroneous.

2. Adjustment to the Transfer Price for SWD & ITeS Segments:
The Tribunal examined the grounds related to the adjustment to the transfer price for the SWD and ITeS segments. The assessee contended that the TPO and AO, following the DRP's directions, erred in rejecting companies functionally akin to the assessee while performing the comparability analysis. The Tribunal remitted the issue back to the AO/TPO for re-computation of the correct margin after giving the assessee an opportunity of hearing.

3. Working Capital Adjustment:
The Tribunal discussed the issue of working capital adjustment in detail, referencing the case of Huawei Technologies India Pvt. Ltd. and other judgments. It was held that the net profit margin arising in comparable uncontrolled transactions should be adjusted to account for differences in working capital. The Tribunal remitted the issue to the AO/TPO to compute the working capital adjustment after necessary examination and hearing the assessee.

4. Risk Adjustment:
The Tribunal noted that the ground related to risk adjustment was not pressed by the assessee and hence dismissed it as not pressed.

5. Computation of Incorrect Margin for Various Comparable Companies:
The assessee argued that the AO/TPO computed incorrect margins for various comparables in both SWD and ITeS segments. The Tribunal remitted the issue to the AO/TPO for re-computation of the correct margin after giving the assessee an opportunity of hearing.

6. Inclusion/Exclusion of Specific Comparable Companies in the SWD Segment:
The Tribunal addressed the inclusion/exclusion of several comparable companies in the SWD segment:
- Tata Elxsi Ltd.: The Tribunal found no infirmity in including Tata Elxsi Ltd. in the list of comparables.
- Rheal Software P. Ltd.: Not pressed by the assessee, hence dismissed.
- Mind Tree Ltd.: Directed the AO/TPO to exclude this company from the list of comparables due to significant onsite revenue and other factors.
- Larsen & Toubro Infotech Ltd.: Directed the AO/TPO to exclude this company from the list of comparables.
- R.S. Software (India) Ltd.: Directed the AO/TPO to exclude this company due to significant onsite expenses.
- Infobeans Technologies Ltd.: Not pressed by the assessee, hence dismissed.
- Persistent Systems Ltd.: Remitted to the AO/TPO for fresh consideration due to high RPT to sales ratio.
- Nihilent Technologies Ltd.: Remitted to the AO/TPO for fresh consideration due to high onsite revenue.
- Aspire Systems (India) Pvt. Ltd.: Remitted to the AO/TPO for fresh consideration due to high onsite revenue.
- Inteq Software Pvt. Ltd.: Not pressed by the assessee, hence dismissed.
- Infosys Ltd.: Directed the AO/TPO to exclude this company from the list of comparables.
- Cybage Software Pvt. Ltd.: Not pressed by the assessee, hence dismissed.
- Akshay Software Technologies Ltd.: Not pressed by the assessee, hence dismissed.
- Sasken Communication Technologies Ltd.: Directed the AO/TPO to include this company as per DRP's directions.
- I2T2 India Pvt. Ltd.: Directed the AO/TPO to include this company as comparable.
- Cigniti Technologies Ltd.: Directed the AO/TPO to follow DRP's order and include this company.
- Bhilwara Infotechnology Ltd., Nucleus Software Exports Ltd., Cybercom Datamatics Information Solutions Ltd., Consilient Technologies Pvt. Ltd.: Directed the AO/TPO to pass the consequent orders in conformity with the DRP's directions.

7. Inclusion/Exclusion of Specific Comparable Companies in the ITeS Segment:
The Tribunal directed the AO/TPO to pass the final order in conformity with the DRP's directions regarding the inclusion/exclusion of specific comparable companies in the ITeS segment.

8. Non-Conformity of the Final Order with the Directions Issued by the DRP:
The Tribunal noted that the final order passed by the AO/TPO was not in conformity with the directions issued by the DRP. The Tribunal directed the AO/TPO to pass the final order in conformity with the DRP's directions and rectify any inadvertent lapses.

Conclusion:
The appeal filed by the assessee was allowed for statistical purposes, with several issues remitted back to the AO/TPO for fresh consideration and re-computation in accordance with the Tribunal's directions and after giving the assessee an opportunity of hearing.