2022 (5) TMI 1558 - AT - Income Tax

TP Adjustment - comparable selection - Cybercom Datamatics Information Solutions Ltd. rejected as it is super abnormal profit making company and also it is into the diversified activities, apart from the software development services such as an advisor and consultant on IT/IT space - HELD THAT - A perusal of the annual report of the said company clearly shows that it was engaged in providing technical software services, contrary to the assessee company which is engaged purely in rendering software development services. The financial statements of the said company do not give any segmental information between the technical services and software services. Further, this company was chosen by the TPO in the list of the comparables, the onus of proving the comparability lies upon the TPO. We also find that this company had reported super profit of 83.99% which is abnormally high profits, the TPO should have caused enquiry to ascertain whether such abnormally profits reflected normal business conditions or arising from abnormal conditions.Thus we direct the Assessing Officer/TPO to exclude this company from the list of comparables. Thirdware Solutions Ltd. is a product development company which is quite different from a software services provider - Revenue from sale of licence is only 7.98 crores which is very-very minimal compared to the total revenue of Rs. 20,675.00 crores. Further, the balance sheet does not indicate the presence of any intangible assets or closing stock. Therefore, it cannot be said that this company cannot be compared with software development provider. Therefore, we do not find any merit in the contentions raised on behalf of the assessee company. Hence, we uphold the action of the AO/TPO/DRP in inclusion of this company in the list of comparables. Infobeans Systems India Ltd rejected on the ground of earning super normal profits - Merely because the company is earning super normal profits cannot be excluded without enquire into whether the profits are earned under normal business conditions or abnormal business conditions. Reliance can be placed on case of CIT vs. Quark Systems India (P.) Ltd. approved by the Hon ble Punjab Haryana High Court 2011 (5) TMI 508 - PUNJAB AND HARYANA HIGH COURT - Thus, we uphold the action of the Assessing Officer/TPO/DRP in inclusion of this company in the final list of the comparables. Admission of additional ground - Exchange operations on account of foreign currency conversion - whether foreign exchange gain or loss should be considered as part of operating revenue while determining PLI of the assessee and the comparable companies? - HELD THAT - Admittedly, the issue whether gain or loss arising out of foreign currency conversion is forming part of the income or loss is not subject-matter of proceedings before the lower authorities. Whether gain or loss arising out of conversion of foreign currency form part of the operating income or not is indicated question of fact and law as the gain or loss arising out on trading alone can form part of the operating income. Therefore, it requires examination and verification of the financial statements of the tested party as well as the comparable entities to form an opinion whether gain or loss arising out of foreign exchange fluctuation shall form part of the operating income or not?. Therefore, it cannot be said that it is a pure question of law as canvassed by the ld. AR for the appellant company. Appellant contention is not based on the material on record in support of the additional ground of appeal. He could not establish that it is a pure question of law. Additional ground of appeal no.1 cannot be admitted for adjudication and hence, additional ground of appeal no.1 stands dismissed.

Summary

Issues Involved:

1. Inclusion/Exclusion of Comparable Companies for Transfer Pricing Adjustments.
2. Acceptance of Additional Grounds of Appeal.

Detailed Analysis:

1. Inclusion/Exclusion of Comparable Companies for Transfer Pricing Adjustments:

Cybercom Datamatics Information Solutions Ltd.:
The appellant challenged the inclusion of Cybercom Datamatics Information Solutions Ltd. as a comparable, arguing it is functionally different and engaged in diverse activities, including consulting and manufacturing software products for the telecom industry. The absence of segmental information further complicated comparability. The Tribunal noted that the company reported an abnormally high profit margin of 83.99%, which necessitated an inquiry into whether this reflected normal business conditions. The Tribunal directed the exclusion of Cybercom from the list of comparables, citing its functional differences and lack of segmental information.

Thirdware Solutions Ltd.:
The appellant contended that Thirdware Solutions Ltd. is a product development company and earns revenue from product sales and licenses, making it incomparable. The Tribunal examined the company's financials and noted the minimal revenue from product sales compared to total revenue, and the absence of intangible assets or closing stock. The Tribunal upheld the inclusion of Thirdware Solutions Ltd. as a comparable, finding no merit in the appellant's contentions.

Infobeans Systems India Ltd.:
The appellant argued for the exclusion of Infobeans Systems India Ltd. due to its supernormal profits. The Tribunal reviewed the financial statements and found that the company was engaged in software development services, with no evidence of product development activities. The Tribunal upheld the inclusion of Infobeans Systems India Ltd., stating that supernormal profits alone do not warrant exclusion without examining the underlying business conditions.

2. Acceptance of Additional Grounds of Appeal:

Foreign Exchange Gain/Loss as Operating Revenue:
The appellant sought to include foreign exchange gain or loss as part of operating revenue for determining the Profit Level Indicator (PLI). The Tribunal noted that this issue was not raised before the lower authorities and requires examination of financial statements. The Tribunal found that the appellant did not provide sufficient material to support this claim and dismissed the additional ground, stating it was not a pure question of law.

Inclusion of Cat Technologies Ltd. and Maverick Systems Ltd. as Comparables:
The appellant requested the inclusion of Cat Technologies Ltd. and Maverick Systems Ltd. as comparables. However, this additional ground was not pressed during the hearing, and the Tribunal dismissed it as not pressed.

Conclusion:
The appeal was partly allowed. The Tribunal directed the exclusion of Cybercom Datamatics Information Solutions Ltd. from the list of comparables but upheld the inclusion of Thirdware Solutions Ltd. and Infobeans Systems India Ltd. The additional grounds of appeal regarding foreign exchange gain/loss and the inclusion of additional comparables were dismissed.