2021 (11) TMI 1144 - AT - Income Tax

TP Adjustment - selection of comparables - exclusion of two companies Larsen Toubro Infotech Limited, and Persistent Systems Limited on account of application of upper turnover filter - HELD THAT - As decided in Pentair Water Private Limited 2016 (5) TMI 137 - BOMBAY HIGH COURT as directed the AO / TPO to exclude from the list of comparables, the companies having turnover of more than Rs.200 crore We direct the AO / TPO to exclude L T Infotech Limited and Persistent Systems Limited from the list of comparables for having high turnover as compared to assessee providing Software Development (SWD) services to its Associate Enterprises (AEs). Tech Mahindra Limited is functionally dissimilar to that of the assessee. Tech Mahindra Limited has got multiple segments and on perusal of the segmental details in the consolidated report, it can be seen that the said company is strictly not into software development services, ITES etc. Moreover Tech Mahindra Limited is having turnover far exceeding Rs.200 crore. Therefore, this company gets excluded by application of upper turnover limit also. ICRA Techno Analytics is excluded from the final list of comparables on account of functional dissimilarity. The said company is engaged in multifarious activities such as web development and engineering services etc. and the segmental details of the company is not available. Therefore, we hold that the CIT(A) is justified in excluding the above company. Negative Working Capital - HELD THAT - Since the assessee in this case does not have working capital loans / borrowings and entails no working capital risks, the ratio decidendi in the case of e4e Business Solutions India Private Limited 2020 (12) TMI 1255 - ITAT BANGALORE directly applies to the assessee and no working capital adjustment should be made. Therefore, the CIT(A) s conclusion that no negative working capital adjustment is to be made is correct and no interference is called for.

Summary

Issues Involved:
1. Exclusion of Larsen & Toubro Infotech Limited and Persistent Systems Limited based on the upper turnover filter.
2. Exclusion of ICRA Techno Analytics and Tech Mahindra Limited.
3. Negative Working Capital Adjustment.

Issue-wise Detailed Analysis:

1. Exclusion of Larsen & Toubro Infotech Limited and Persistent Systems Limited based on the upper turnover filter:
The assessee, a 100% export-oriented unit providing Software Development (SWD) services to its Associate Enterprises (AEs), challenged the inclusion of Larsen & Toubro Infotech Limited and Persistent Systems Limited as comparables due to their significantly higher turnover compared to the assessee's turnover of Rs. 56.38 crore. The Tribunal noted that the AO/TPO had excluded companies with turnover less than Rs. 1 crore but did not set an upper turnover limit. Citing the Hon’ble Bombay High Court's decision in CIT v. Pentair Water Private Limited and recent Tribunal orders, the Tribunal held that companies with very high turnover cannot be compared to the assessee. Consequently, the Tribunal directed the exclusion of Larsen & Toubro Infotech Limited and Persistent Systems Limited from the list of comparables.

2. Exclusion of ICRA Techno Analytics and Tech Mahindra Limited:
- *Tech Mahindra Limited:* The CIT(A) excluded Tech Mahindra Limited after analyzing its annual report, noting that it operates in multiple segments and segmental details are not available. The Tribunal upheld this exclusion, agreeing that Tech Mahindra Limited is functionally dissimilar to the assessee and has a turnover far exceeding Rs. 200 crore.
- *ICRA Techno Analytics:* The CIT(A) excluded ICRA Techno Analytics on the grounds of functional dissimilarity and lack of segmental data. The Tribunal upheld this exclusion, noting that ICRA Techno Analytics is engaged in various activities such as web development and engineering services, making it not comparable to the assessee.

3. Negative Working Capital Adjustment:
The CIT(A) ruled that negative working capital adjustment is not appropriate for the assessee, a captive service provider operating on a cost-plus basis with its entire revenue from AEs. The Tribunal upheld this decision, noting that the assessee does not have borrowings/loans for working capital and operates without working capital risks. The Tribunal referred to the Bangalore Bench's decision in Lam Research India Pvt. Ltd., which supports the view that negative working capital adjustment should not be made for captive service providers operating on a cost-plus model.

Conclusion:
The Tribunal partly allowed the assessee's appeal by excluding Larsen & Toubro Infotech Limited and Persistent Systems Limited from the list of comparables and upheld the CIT(A)’s exclusion of ICRA Techno Analytics and Tech Mahindra Limited. The Tribunal also upheld the CIT(A)’s decision on not making a negative working capital adjustment. The Revenue's appeal was dismissed.