2017 (5) TMI 1815 - AT - Income Tax

TP Adjustment - comparable selection - Turnover filter - HELD THAT - As the turnover filter or less than 1 / 10th of the assessee company s turnover or more than 10 times Of the turnover of the assessee company is a good filter and by applying the same we direct the AO/TPO to exclude two companies i.e. Infosys BPO Ltd and M/S L T Infotech Ltd from the list of final comparables by applying higher turnover filter because the turnover of these two companies is more than 10 times of the turnover of Software Development Segment of the assessee company. Similarly in respect Of ITES Segment we direct the to exclude two companies i.e. Infosys BOPO Ltd and TCS E-Serve Ltd. by applying turnover filter because the turnover of these two companies is more than 10 times of the turnover of ITES segment Of the assessee company. Request of the assessee for exclusion of Persistent Systems Ltd. in Software Development Segment and universal Print Systems Ltd. (Seg.) and BNR Udyog Ltd. (Beg.) in ITES Segment. we direct the AO/TPO to examine these companies Afresh on account of functional dissimilarity being claimed by the Assessee because regarding these 4 comparable companies the Order of DRP is very cryptic and therefore this issue should be decided afresh in respect of both these segments for these 4 comparable company by way of a speaking and reasoned order. Request for inclusion of two comparable companies in the final list of comparables for Software Development Segment i.e. Thinksoft Global Services Ltd and Evoke technologies Pvt. Ltd. and the request for inclusion of two companies in the final list of comparables for ITES segment i.e. Jindal Intellicom Ltd. and Microland Ltd. also we direct the AO/TPO to decide this issue afresh because we find that the order the DRP regarding these four comparables is also very crypti Two comparables companies in each of these two segments are excluded by applying turnover filter and the issue regarding exclusion and inclusion of various other comparables of these two segments is restored to AO/TPO for fresh decision as discussed above. The AO/TPO should decide this issue Afresh by way of speaking and reasoned order and after affording adequate opportunity of being heard to the assessee. Appeal of the assessee stands allowed for statistical purposes.

Issues Involved:
1. Rejection of TP documentation
2. Determination of ALP for software development services
3. Determination of ALP for ITES
4. Rejection of certain companies as comparables
5. Exclusion of Thinksoft Global Service Ltd. as a comparable
6. Rejection of Intellicom Ltd. as a comparable
7. Working capital adjustment
8. Risk adjustment
9. Levy of interest under sections 234B and 234D
10. Initiation of penalty proceedings under section 271(1)(c)

Detailed Analysis:

1. Rejection of TP Documentation:
The assessee argued that the AO/TPO and the DRP erred in law and on facts by rejecting the TP documentation without cogent reasons. The documentation was prepared in accordance with the relevant provisions of the IT Act and Rules.

2. Determination of ALP for Software Development Services:
The AO/TPO and the DRP were criticized for selecting companies that were not comparable to the assessee due to functional differences, lack of segmental information, and other factors. Specifically, the inclusion of ICRA Techno Analytics Ltd., Infosys Ltd., Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., and Spry Systems Ltd. was contested.

3. Determination of ALP for ITES:
Similar to the software development services, the AO/TPO and the DRP were criticized for selecting non-comparable companies for ITES. The companies in question included Universal Print Systems Limited (BPO segment), Infosys BPO Ltd., TCS E-serve International Ltd., BNR Udyog Ltd. (Medical transcription segment), and Excel Infoways Ltd. (segmental).

4. Rejection of Certain Companies as Comparables:
The assessee contended that the AO/TPO and the DRP erred in rejecting several companies for determining the ALP on inappropriate grounds, including the failure of these companies to meet the filters applied by the TPO.

5. Exclusion of Thinksoft Global Service Ltd. as a Comparable:
The DRP rejected Thinksoft Global Service Ltd. as a comparable due to the unavailability of its annual report in the public domain. However, the assessee argued that the report was available under its new name, SQS India BFSI Ltd.

6. Rejection of Intellicom Ltd. as a Comparable:
The DRP rejected Intellicom Ltd. as a comparable due to market distinctions. The assessee argued that no such distinction was made for other comparable companies.

7. Working Capital Adjustment:
The AO/TPO and the DRP were criticized for not granting the correct working capital adjustment to the margin of the comparable companies for the respective international transactions.

8. Risk Adjustment:
The AO failed to provide an appropriate risk adjustment considering the risk profile of the assessee as directed by the DRP.

9. Levy of Interest under Sections 234B and 234D:
The assessee contested the levy of interest under sections 234B and 234D of the IT Act.

10. Initiation of Penalty Proceedings under Section 271(1)(c):
The AO was criticized for initiating penalty proceedings under section 271(1)(c) of the IT Act.

Separate Judgments Delivered:

Software Development Segment:
The assessee's turnover for this segment was Rs. 198.65 Crores. The TPO selected 10 comparables, and the assessee sought the exclusion of Infosys Ltd., L&T Infotech Ltd., and Persistent Systems Ltd. The tribunal directed the exclusion of Infosys Ltd. and L&T Infotech Ltd. due to the turnover filter, as their turnovers were more than 10 times that of the assessee. Persistent Systems Ltd. was to be re-examined for functional dissimilarity.

ITES Segment:
The assessee's turnover for this segment was Rs. 15.29 Crores. The TPO selected 10 comparables, and the assessee sought the exclusion of five comparables, including Infosys BPO Ltd. and TCS E-Serve Ltd., which were to be excluded due to the turnover filter. The tribunal also directed the AO/TPO to re-examine the exclusion of Universal Print Systems Ltd. (Seg.), BNR Udyog Ltd. (Seg.), and Excel Infoways Ltd. (Seg.) for functional dissimilarity.

Inclusion of Comparables:
The tribunal directed the AO/TPO to re-examine the inclusion of Thinksoft Global Services Ltd. and Evoke Technologies Pvt. Ltd. for the Software Development Segment and Jindal Intellicom Ltd. and Microland Ltd. for the ITES Segment.

Conclusion:
The appeal was allowed for statistical purposes, directing the AO/TPO to decide the issues afresh by way of a speaking and reasoned order after affording adequate opportunity of being heard to the assessee.

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