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2021 (11) TMI 1150 - AT - Income TaxTP Adjustment - comparable selection - application of turnover filter - HELD THAT - We hold that companies listed in Sl.No.(a) to (g) in paragraph 7 (i) which the assessee seeks exclusion and whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. Exclusion of companies as not functionally similar with that of assessee. Significant presence of intangibles - Merely pointing out that there is a substantial increase in value of intangible assets the assessee cannot seek to exclude company from the list of comparable companies unless the assessee is able to show that the presence of intangibles is owing to factors which can affect the functional comparability of this company with the assessee. No adjustment towards working capital given - As in case of Huawei Technologies India Pvt. Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE Tribunal held that working capital adjustment has to be given - We are therefore of the view that the issue with regard to the grant of working capital adjustment should be directed to be examined by the TPO/AO afresh in the light of the decision of the tribunal referred to above after affording the Assessee opportunity of being heard. Incorrect computation of margins of 2 companies viz. Kals Information Systems Pvt. Ltd. and CG Vak Software and Exports Ltd - DRP in coming to the above conclusion has rightly followed the decision of Sap Labs India Pvt.Ltd. 2010 (8) TMI 676 - ITAT BANGALORE wherein it has been held that foreign exchange fluctuation to the extent it relates to the business of the Assessee which is subject matter of the TP adjustment should be regarded as operating in nature. We find no grounds to take a different view and refuse to interfere with the order of the DRP. Not granting risk adjustment - We find that the DRP has primarily rejected the plea of the Assessee in this regard on the ground that quantification of risk adjustment has not been given and in the absence of such quantification the plea cannot be accepted. Besides the above the DRP has also placed reliance on judicial pronouncements holding that risk adjustment cannot be allowed in the absence of proper and reliable computation of risk adjustment. We are in agreement with the conclusions of the DRP in this regard and find no grounds to interfere with its conclusions.
Issues Involved:
1. Choice of comparable companies for determining the Arm's Length Price (ALP). 2. Non-acceptance of certain companies as comparable by the assessee. 3. Non-grant of working capital adjustment. 4. Re-computation of profit margins of specific companies. 5. Risk adjustment in computing ALP. Detailed Analysis: 1. Choice of Comparable Companies: The primary issue was the determination of the ALP for the international transaction of rendering Software Development (SWD) services by the assessee to its Associated Enterprises (AEs). The assessee used the Transaction Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The Transfer Pricing Officer (TPO) accepted TNMM but included additional companies in the comparable set, resulting in a higher PLI of 24.83%. The assessee contested the inclusion of certain high-turnover companies, arguing that high turnover affects profitability. The Tribunal, referencing multiple decisions, concluded that companies with turnover exceeding Rs.200 Crores should be excluded from the comparable set. 2. Non-Acceptance of Certain Companies as Comparable: The assessee sought inclusion of certain companies such as Sasken Communication Technologies Ltd., Sagarsoft (India) Ltd., Akshay Software Technologies Ltd., and Evoke Technologies Ltd. The Tribunal excluded Sasken Communication Technologies Ltd. due to its high turnover. For Sagarsoft (India) Ltd., the Tribunal remanded the issue to the TPO/AO for fresh consideration. Similarly, the inclusion of Akshay Software Technologies Ltd. and Evoke Technologies Ltd. was remanded to the TPO/AO for fresh consideration, aligning with previous Tribunal decisions. 3. Non-Grant of Working Capital Adjustment: The Tribunal addressed the non-grant of working capital adjustment, referencing the OECD Transfer Pricing Guidelines and previous Tribunal decisions. It emphasized that working capital adjustments are necessary to account for differences in the time value of money between the tested party and comparables. The Tribunal directed the TPO/AO to re-examine the issue, ensuring reasonable adjustments to bring both the comparable and test party on the same footing. 4. Re-Computing Profit Margins: The assessee raised concerns about the computation of margins for Kals Information Systems Pvt. Ltd. and CG Vak Software and Exports Ltd., particularly regarding the treatment of foreign exchange gains/losses. The Tribunal upheld the DRP's decision, which followed the ITAT Bangalore Bench's ruling in Sap Labs India Pvt. Ltd., considering foreign exchange fluctuations related to business as operating in nature. 5. Risk Adjustment in Computing ALP: The assessee argued for a risk adjustment, citing differences in risk levels between the assessee and comparable companies. The DRP rejected this plea due to the lack of quantification and reliable computation of risk adjustment. The Tribunal agreed with the DRP, finding no grounds to interfere with its conclusions. Conclusion: The Tribunal partly allowed the appeal, directing the TPO/AO to compute the ALP for the international transaction in accordance with the Tribunal's directions, after affording the assessee an opportunity to be heard. The decision emphasized the importance of appropriate comparability criteria, reasonable adjustments for working capital, and the need for reliable quantification in risk adjustments.
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