2017 (12) TMI 198 - AT - Income Tax

TPO - comparable selection - Held that - Companies functionally dissimilar with that of assessee providing software development service need to be added to final list of comparable.

Summary

Issues Involved:
1. Rejection and inclusion of certain comparable companies.
2. Suitable adjustments for differences in risk profile and working capital.

Issue 1: Rejection and Inclusion of Certain Comparable Companies

Ground No. 6:
The assessee challenged the rejection of certain comparable companies and the inclusion of functionally dissimilar companies in the final set of comparables under both software development services and marketing support services segments. The Tribunal had previously allowed the exclusion of two comparables under the marketing support services segment but did not provide findings on four comparables retained under the software development services segment.

Comparables Under Software Development Services:

* Bodhtree Consulting Ltd:
- The assessee argued that Bodhtree Consulting Ltd. is functionally dissimilar and has shown abnormal growth. The Tribunal agreed with the Revenue that since this comparable was already excluded by the DRP, the assessee could not challenge its exclusion. The Tribunal refrained from giving any direction on this comparable.

* Infosys Technologies Ltd:
- The assessee argued for exclusion due to insufficient segmental information, high turnover, and significant intangible assets. The Tribunal found Infosys Technologies Ltd. to be functionally similar to the assessee, noting that the assessee also plays a dominant role in software development and has economic ownership of intangibles. The Tribunal directed the TPO to retain Infosys Technologies Ltd. as a comparable.

* Tata Consultancy Services Ltd:
- The assessee argued for exclusion due to revenue from diverse sources and an extraordinary event (acquisition of Citi Group Inc.). The Tribunal found that the acquisition affected the profit level indicator and directed the TPO/AO to exclude Tata Consultancy Services Ltd. from the comparables.

* Wipro Ltd:
- The assessee argued for exclusion due to diverse business operations, significant intangible assets, and an extraordinary event (acquisition and merger). The Tribunal found that the acquisition and mergers enhanced the company's capabilities, making it an extraordinary event. The Tribunal directed the AO/TPO to exclude Wipro Ltd. from the comparables.

* Zenith Infotech Ltd:
- The assessee argued for exclusion due to the company's engagement in various products and exceptional financial performance. The Tribunal found the company functionally similar to the assessee and directed the AO/TPO to retain Zenith Infotech Ltd. as a comparable.

Issue 2: Suitable Adjustments for Differences in Risk Profile and Working Capital

Ground No. 14:
The assessee argued that differences in working capital employed by comparables should be factored into the comparability analysis. The Tribunal noted that the claim for working capital adjustment was not new and had been discussed by the TPO and DRP. The Tribunal found that working capital adjustment had been allowed in previous assessment years for the assessee and directed the AO/TPO to give effect to the working capital adjustment after affording an opportunity of being heard to the assessee.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, with specific directions to the AO/TPO regarding the inclusion/exclusion of certain comparables and the working capital adjustment. The decision was pronounced in the open court on 30th November 2017.