2020 (4) TMI 913 - AT - Income Tax

TP Adjustment - comparable selection - functional dissimilarity - HELD THAT - CG Vak Software Exports Ltd. company excluded as it is consistent loss making company - We noted that before the DRP the assessee stated that this comparable is having profit in the current year at 7.14% and can be considered as a comparable. It was also stated that merely because a company is incurring losses, it would not lose its status as a comparable and that losses and incidental of business which is at par with the profit. However, the contention of assessee was not accepted by DRP by taking view that those companies with fluctuating margins are to be excluded. As this comparable is not consistent loss making as it had made profit in the relevant assessment year, hence, we direct the TPO/AO to include this comparable in the final set of comparable. Infosys Ltd. was excluded by tribunal from compatibility on the ground of that Infosys ltd is engaged in Software product and have huge turnover is not comparable to the assessee as a captive service provider to its associated enterprises, therefore, we direct the assessing officer to exclude this comparable from the final set of comparable. Exclusion of Wipro Technology Services Ltd. as it had related party transaction. e Infochips Ltd has provided hardware maintenance and product, providing back officer services and have substantial inventory. Sasken Communication Technology Ltd is engaged in software product. And Persistent system Ltd has huge intangible, made investment in intellectual property right and huge turnover. Therefore, accepting the similar view we are also of the view that these comparable cannot be compared with captive service provider. Hence, we direct the AO/TPO to exclude these four comparable. Zylog System Ltd. company is engaged in R D activities, has a license fee and developed in house intangible. Thus, cannot be compared with captive service provider. Thus we direct the TPO/AO to include CG Vak Software Export Ltd and exclude Infosys Ltd, Wipro Technology Services Ltd., e Infochips Ltd, Sasken Communication Technology Ltd, Persistent system Ltd and Zylog System Ltd from final set of comparable and recompute the ALP afresh.

Summary

Issues Involved:
1. Computation of Arm's Length Price (ALP) for international transactions and the resultant adjustment.
2. Alleged absence of motive to avoid tax due to the appellant being an STPI unit.
3. Alleged cherry-picking of comparables by the TPO and rejection of the appellant's search process.
4. Alleged violation of Rule 10B(2) and 10B(3) by the TPO in rejecting comparables selected by the appellant.
5. Rejection of filters applied by the appellant.
6. Denial of working capital adjustment.

Issue-wise Detailed Analysis:

1. Computation of Arm's Length Price (ALP) for International Transactions:
The appellant challenged the assessment order dated 27-01-2016, which included an adjustment of Rs. 2,05,78,185 to the appellant's total income based on the ALP computation. The TPO had rejected four comparables selected by the appellant and included sixteen of his own, resulting in an arithmetic mean of 23.64%. The appellant argued for the exclusion of six comparables (Infosys Ltd, Wipro Technology Services Ltd, e-Infochips Ltd, Zylog Systems Ltd, Sasken Communication Technologies Ltd, and Persistent Systems Ltd) and the inclusion of one (CG Vak Software & Exports Ltd). The Tribunal directed the TPO/AO to include CG Vak Software & Exports Ltd and exclude the six contested comparables, noting that these companies were not functionally comparable to the appellant.

2. Alleged Absence of Motive to Avoid Tax:
The appellant argued that as an STPI unit claiming a tax holiday under Section 10A, there was no motive to avoid tax. However, no specific submissions were made on this ground, and it was treated as not pressed and dismissed.

3. Alleged Cherry-picking of Comparables by the TPO:
The appellant contended that the TPO and DRP erred in rejecting the appellant's methodical and scientific search process and engaged in cherry-picking comparables without providing cogent reasons. The Tribunal found merit in the appellant's argument and directed the exclusion of certain comparables that were not functionally similar to the appellant.

4. Alleged Violation of Rule 10B(2) and 10B(3):
The appellant argued that the TPO violated Rule 10B(2) and 10B(3) by adding new comparables that differed in functions, assets, and risks. The Tribunal agreed, noting that the TPO's selection of comparables was not consistent with the appellant's business model as a captive service provider. Specific comparables were excluded based on their functional dissimilarity and other factors such as high turnover, brand value, and involvement in software products.

5. Rejection of Filters Applied by the Appellant:
The appellant argued that the TPO erred in rejecting the appellant's quantitative filters for selecting comparable companies. The Tribunal found that the TPO's approach was not justified and directed the inclusion and exclusion of certain comparables based on a more accurate assessment of comparability.

6. Denial of Working Capital Adjustment:
The appellant contended that the TPO and DRP erred in denying the working capital adjustment concerning the provision of a reasonable credit period to the appellant's associated enterprises. The Tribunal did not specifically address this issue in detail, focusing instead on the comparability analysis.

Conclusion:
The Tribunal directed the TPO/AO to recompute the ALP afresh by including CG Vak Software & Exports Ltd and excluding Infosys Ltd, Wipro Technology Services Ltd, e-Infochips Ltd, Sasken Communication Technologies Ltd, Persistent Systems Ltd, and Zylog Systems Ltd from the final set of comparables. The appeal was partly allowed, and the order was pronounced on 21.04.2020.