2022 (7) TMI 1391 - AT - Income Tax

TP Adjustment - comparable selection - Turnover and Abnormal Profits Filter - exclusion of Celestial Biolabs Ltd. raised - HELD THAT - We are of the opinion that this comparable cannot be compared with that of the assessee which is a captive service provider as observed by this Tribunal vide order dated 06/04/2018. Also recorded by this Tribunal that the assessee before us is engaged in the business of providing software development and other related support services to the SAP AG Group companies and conducts its operations from various undertakings registered under STPI scheme. Based on the above analysis we hold that this comparable is not a fit company to be included in the list of comparables to compute the ALP of the transaction. Exclusion of comparables as functionally dissimilar with that of assessee as captive service provider.

Issues Involved:
1. Delay in filing the appeal for A.Y. 2008-09.
2. Exclusion of Celestial Biolabs Ltd. as a comparable for A.Y. 2008-09.
3. Correction of margins for R S Software Ltd. and Mindtree Ltd. for A.Y. 2008-09.
4. Exclusion of certain comparables for A.Y. 2015-16.
5. Inclusion of certain comparables for A.Y. 2015-16.
6. Working Capital Adjustment for A.Y. 2015-16.
7. Correction in the operating margin of certain comparables for A.Y. 2015-16.

Detailed Analysis:

1. Delay in Filing the Appeal for A.Y. 2008-09:
The appeal was delayed by about 600 days, attributed to the Covid-19 pandemic which led to the closure of the consultant's office. The last date for filing the appeal fell within the period covered by the Supreme Court's order extending limitation periods due to the pandemic. The actual delay was only 36 days. The Tribunal found a reasonable cause for the delay and condoned it, admitting the appeal for disposal on merits.

2. Exclusion of Celestial Biolabs Ltd. as a Comparable for A.Y. 2008-09:
The assessee sought the exclusion of Celestial Biolabs Ltd. on the grounds that it was not functionally similar and had an employee cost less than 25% of turnover. The Tribunal noted that this comparable was excluded in the first round of appeal and should not have been included again. It was found that Celestial Biolabs Ltd. was engaged in R&D activities and provided customized services to biopharma companies, making it functionally dissimilar to the assessee. The Tribunal directed the exclusion of Celestial Biolabs Ltd. from the list of comparables.

3. Correction of Margins for R S Software Ltd. and Mindtree Ltd. for A.Y. 2008-09:
The assessee sought correction of margins for these companies. The Tribunal directed the AO/TPO to compute the margins correctly in accordance with the law.

4. Exclusion of Certain Comparables for A.Y. 2015-16:
The assessee sought the exclusion of Mindtree Ltd., Persistent Systems Ltd., Infobeans Technologies Ltd., Larsen & Toubro Infotech Ltd., and Infosys Ltd. The Tribunal, relying on earlier decisions, found these companies functionally dissimilar to the assessee and directed their exclusion from the list of comparables.

5. Inclusion of Certain Comparables for A.Y. 2015-16:
The assessee sought the inclusion of I2T2 India Ltd. and Infomile Technologies Ltd. The Tribunal noted that these companies were excluded by the TPO due to the absence of RPT details. However, it was held that the absence of such details in the annual report should not be held against the assessee. The Tribunal directed the inclusion of these companies as comparables.

6. Working Capital Adjustment for A.Y. 2015-16:
The assessee sought appropriate working capital adjustments. The Tribunal directed the AO to consider and grant the working capital adjustment on actuals.

7. Correction in the Operating Margin of Certain Comparables for A.Y. 2015-16:
The assessee sought corrections in the operating margins of certain comparables. The Tribunal directed the AO to verify the details provided by the assessee and consider the claim in accordance with the law.

Conclusion:
The appeals for A.Y. 2008-09 and A.Y. 2015-16 were partly allowed. The Tribunal provided detailed directions on the exclusion and inclusion of certain comparables, correction of margins, and working capital adjustments. The decision emphasized the importance of functional similarity in selecting comparables and acknowledged the impact of the Covid-19 pandemic on procedural timelines.

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