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2019 (8) TMI 1868 - AT - Income TaxTP Adjustment - Comparable selection - HELD THAT - Exclusion of Thirdware Solution Ltd. as decided in own case 2018 (5) TMI 2146 - ITAT MUMBAI we direct that Thirdware Solutions Ltd. should not be considered as comparable. Aspire Systems India Pvt. Ltd. - This company is liable to be excluded from the list of comparable in as much as its related party transaction to sale is above 25% of filter applied by the TPO himself. As claimed that this aspect is arising out of financials of the company itself. On the facts and circumstances of this case we deem it appropriate to remit this issue to the file of the TPO. TPO shall examine the working as given by learned counsel as above. If RPT exceeds 25% this shall cease to be a good comparable and be liable to be excluded. As regards the claim that this company has extraordinary event affecting the income the said plea has been rejected by DRP on the ground that it is not borne out of records. Now learned counsel is referring to notes of account of the said company to canvas his proposition.We deem it appropriate to remit this aspect also to the TPO for factual verification and order accordingly. Cigniti Technologies Ltd. is engaged in software testing services and the same has been found to be functionally different from software development services in the aforesaid case law. Following the precedents as above we direct that the above comparable should be excluded.
Issues Involved:
1. Adjustment to the provision of routine, low-end software development and localization services. 2. Disregarding transfer pricing documentation and benchmarking analysis. 3. Use of non-contemporaneous data. 4. Disregarding multiple year/prior year data. 5. Disregarding certain filters in the selection of comparable companies. 6. Introducing/modifying filters in comparability analysis. 7. Inclusion of non-comparable companies. 8. Exclusion of comparable companies similar to the appellant. 9. Not making suitable adjustments for differences in risk profiles. 10. Inclusion of pass-through costs while computing margins. 11. Levying interest under Section 234A and Section 234B. 12. Initiating penalty proceedings under Section 271(1)(c). 13. Retaining Aspire Systems India Pvt. Ltd. in comparability analysis. Detailed Analysis: Adjustment to Software Development Services: The appellant contested an adjustment of Rs. 11,59,94,404/- related to software development and localization services provided to its Associated Enterprises (AEs). The Tribunal analyzed the Transfer Pricing (TP) study and the application of the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining the Arm's Length Price (ALP). Disregarding Transfer Pricing Documentation: The Tribunal noted that the appellant's TP documentation, which included a detailed Functional, Asset, and Risk (FAR) analysis and economic analysis, was disregarded by the Assessing Officer (AO) and Transfer Pricing Officer (TPO). The TPO used data not contemporaneous and not available in the public domain at the time of preparing the TP documentation. Use of Non-Contemporaneous Data: The Tribunal found that the TPO's use of non-contemporaneous data was not justified, as the appellant had used multiple year/prior year data, which was disregarded without proper justification. Disregarding Multiple Year/Prior Year Data: The Tribunal observed that the appellant's use of multiple year/prior year data was in line with the TP documentation requirements, and the TPO's rejection of this approach was not warranted. Disregarding Certain Filters: The Tribunal noted that the TPO disregarded certain filters applied by the appellant in selecting comparable companies and introduced/modifying filters during the comparability analysis. This led to the inclusion of companies that were not functionally comparable to the appellant. Inclusion of Non-Comparable Companies: The Tribunal examined the inclusion of companies such as Aspire Systems India Pvt. Ltd., Cigniti Technologies Ltd., and Thirdware Solutions Ltd., which were argued to be functionally different from the appellant. The Tribunal directed the exclusion of Thirdware Solutions Ltd. and Cigniti Technologies Ltd. due to functional dissimilarities and extraordinary events affecting their income. Exclusion of Comparable Companies: The Tribunal addressed the exclusion of certain companies that were functionally similar to the appellant. The Tribunal directed the TPO to reconsider the inclusion of such companies in the comparability analysis. Not Making Suitable Adjustments: The Tribunal found that the TPO did not make suitable adjustments to account for differences in the risk profiles of the appellant vis-a-vis the comparables. This was deemed necessary for a fair comparability analysis. Inclusion of Pass-Through Costs: The Tribunal noted that the TPO included pass-through costs, which were reimbursements of outsourced costs, while computing the margin earned by the appellant. The Tribunal directed the TPO to exclude such costs from the computation. Levying Interest Under Section 234A and Section 234B: The Tribunal did not specifically address the issue of levying interest under Section 234A and Section 234B, as the primary focus was on the TP adjustments and comparability analysis. Initiating Penalty Proceedings Under Section 271(1)(c): The Tribunal did not specifically address the issue of initiating penalty proceedings under Section 271(1)(c), as the primary focus was on the TP adjustments and comparability analysis. Retaining Aspire Systems India Pvt. Ltd.: The Tribunal examined the inclusion of Aspire Systems India Pvt. Ltd. in the comparability analysis. The Tribunal directed the TPO to verify if the Related Party Transaction (RPT) exceeded 25%. If so, Aspire Systems should be excluded from the comparability analysis. The Tribunal also directed the TPO to verify the appellant's claim regarding extraordinary events affecting Aspire Systems' income. Conclusion: The Tribunal partially allowed the appeal for statistical purposes, directing the TPO to recompute the arithmetic margin afresh based on the Tribunal's directions regarding the exclusion of certain comparables and the reconsideration of others. The Tribunal emphasized the need for a fair and accurate comparability analysis, taking into account the functional similarities and differences, as well as the appropriate adjustments for risk profiles and pass-through costs.
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