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2019 (6) TMI 1696 - AT - Income TaxTP Adjustment - Comparable selection - HELD THAT - Tata Consultancy Services Ltd (TCS) has expended Rs.42.31 crores on its R D and a highly risk bearing company and as such cannot be a suitable comparable vis- -vis taxpayer which is a captive software provider being remunerated on cost plus mark up basis for rendering 100% services to its AE. Thus we direct Ld. TPO to exclude this company from final set of comparables. Infosys Ltd. company has been ordered to be excluded in case cited as CIT v. Agnity India Technologies (P.) Ltd. 2013 (7) TMI 696 - DELHI HIGH COURT as observed that this Tribunal while examining comparability of this company with Agnity India Technologies which was also a captive service provider operating on minimal risk providing software development service has excluded this company from list of comparables for reason that it is a giant company in area of development of software assumption of risk leading to high profits etc. Hon ble High Court upheld view expressed by this Tribunal for excluding Infosys from list of comparables. We therefore direct Ld.TPO/AO to exclude this company from final list of comparables for benchmarking international transactions. Cat Technologies Ltd. (standalone) - This company is running both software development and maintenance support services. Further Schedule IX of the Profit and loss account of this company shows that this company is deriving a sum of Rs.8, 49, 39, 375/- from out of software development and consulting services. However no segmental data is available and as stated by Note No.7 of Notes on Account that the company s exclusive business is medical transcription and training software development and consulting services which should be treated as the only reportable segment. We therefore direct Ld.TPO to exclude this company from the final list of comparables. Thirdware Solutions Ltd. - As observed that that this company derives income from sales whereas other income in Schedule XII relates to sales shows that this company is deriving income from sales of licences from software services from export of SEZ unit from export from STPUI unit and a sum from subscriptions. No segmental information is available. We accordingly direct Ld.AO to exclude this company from the final list of comparables. Tata Elxis Ltd (segmental) - This company cannot be considered to be a mere software developer and over and above it is involved in products and Innovative functions like visual computing labs. We therefore direct Ld. AO/TPO to exclude this company from final list of comparables. Carving out technical support services from business support services by Ld. TPO without any basis - As in facts of present case Ld.TPO arbitrarily without any basis segregated transaction without analysing agreement under which such services has been applied along with business support service. Further in preceding as well subsequent assessment years revenue has accepted approach adopted by assessee. We are inclined to set aside this issue back to TPO to be analysed on basis of equipment entered into by assessee actual nature of transaction being interlinked with each other in the light of aforestated principles laid down by Hon ble High Courts and Coordinate bench of this Tribunal reproduced hereinabove. Proper opportunity shall be granted to assessee as per law. Accordingly we set aside Ground No. 11 back to Ld.TPO for fresh adjudication.
Issues Involved:
1. Addition to total income by AO based on TPO's adjustments. 2. Rejection of transfer pricing documentation. 3. Rejection of use of multiple year data. 4. Eligibility under section 10A of the Income-tax Act, 1961. 5. Use of additional/modified filters. 6. Selection of functionally different companies as comparable companies to software development services. 7. Rejection of companies selected as comparable to software development services. 8. Selection of functionally different companies as comparable companies to business support services. 9. Rejection of companies selected as comparable to business support services. 10. Non-inclusion of comparable companies in the final set. 11. Carving out of technical support services from business support services. 12. Selection of functionally different companies as comparable companies to technical support services. 13. Deviation in the approach adopted for computation of working capital adjusted margin. 14. Adjustment of risk differences. 15. Adjustment of differences in depreciation policy. 16. Applicability of proviso to section 92C(2) of the Act. Detailed Analysis: 1. Addition to Total Income by AO Based on TPO's Adjustments: The AO made an addition of Rs. 42,50,47,081/- to the total income of the appellant after considering the adjustments proposed by the TPO. The appellant contested this addition, arguing that the TPO's adjustments were not justified. 2. Rejection of Transfer Pricing Documentation: The DRP and TPO rejected the transfer pricing documentation undertaken by the appellant under section 92C(3)(c) of the Income-tax Act, 1961, and conducted a fresh analysis. The appellant argued that the comparability analysis was based on well-accepted TP principles and should not have been rejected. 3. Rejection of Use of Multiple Year Data: The DRP upheld the TPO's rejection of multiple year data, using only the data for the financial year 2008-09. The appellant argued that the use of multiple year data was appropriate under the circumstances. 4. Eligibility Under Section 10A of the Income-tax Act, 1961: This ground was not pressed by the appellant and was dismissed. 5. Use of Additional/Modified Filters: The DRP upheld the TPO’s action of using additional/modified filters such as diminishing revenue/persistent loss filter, turnover filter, different financial year-end filter, 75% export revenue filter, and employee cost filter. The appellant argued that these filters were not justified. 6. Selection of Functionally Different Companies as Comparable Companies to Software Development Services: The DRP upheld the TPO’s selection of certain companies as comparable to the software development services rendered by the appellant, which the appellant argued were functionally different. The Tribunal directed the exclusion of Tata Consultancy Services Ltd, Infosys Ltd, Cat Technologies Ltd, Thirdware Solutions Ltd, and Tata Elxsi Ltd from the final set of comparables. 7. Rejection of Companies Selected as Comparable to Software Development Services: This ground was not pressed by the appellant and was dismissed with liberty to raise the issue in other assessment years. 8. Selection of Functionally Different Companies as Comparable Companies to Business Support Services: The Tribunal did not express a view on this issue as it was linked to the decision on Ground No. 11. 9. Rejection of Companies Selected as Comparable to Business Support Services: The Tribunal did not express a view on this issue as it was linked to the decision on Ground No. 11. 10. Non-Inclusion of Comparable Companies in the Final Set: The Tribunal did not express a view on this issue as it was linked to the decision on Ground No. 11. 11. Carving Out of Technical Support Services from Business Support Services: The Tribunal observed that the TPO arbitrarily segregated technical support services from business support services without any basis. The Tribunal set aside this issue back to the TPO for fresh adjudication, emphasizing the need for proper analysis based on the agreement and actual nature of transactions. 12. Selection of Functionally Different Companies as Comparable Companies to Technical Support Services: The Tribunal did not express a view on this issue as it was linked to the decision on Ground No. 11. 13. Deviation in the Approach Adopted for Computation of Working Capital Adjusted Margin: The Tribunal did not express a view on this issue as it was linked to the decision on Ground No. 11. 14. Adjustment of Risk Differences: The Tribunal did not express a view on this issue as it was linked to the decision on Ground No. 11. 15. Adjustment of Differences in Depreciation Policy: The Tribunal did not express a view on this issue as it was linked to the decision on Ground No. 11. 16. Applicability of Proviso to Section 92C(2) of the Act: The Tribunal did not express a view on this issue as it was linked to the decision on Ground No. 11. Conclusion: The Tribunal allowed the appeal for statistical purposes, setting aside several issues for fresh adjudication by the TPO. The Tribunal emphasized the need for proper analysis based on agreements and actual nature of transactions, and directed the exclusion of certain companies from the final set of comparables. The Tribunal dismissed some grounds as not pressed by the appellant.
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