2018 (7) TMI 741 - AT - Income Tax

TPA - comparable selection - Held that - Companies functionally different with market support services segment need to be deselected from final list Forex Fluctuations, bank charges, provision for doubtful debt and provisions written back should be considered part of operating margin calculation - expenses as intrinsically related to business operation of the assessee Held that - No infirmity in the order of the DRP holding that the losses/gains due to foreign exchange fluctuation as part of the operating margin and the bank charges as part of the operating expenditure of the assessee. Further, the order of the DRP holding the provision for doubtful debts and provision for written back as part of operating margin is also upheld. The ground raised by the Revenue on this issue is accordingly dismissed.

Summary

Issues Involved:
1. Inclusion/Exclusion of Comparables in Software Development Services Segment.
2. Inclusion/Exclusion of Comparables in Market Support Services Segment.
3. Treatment of Foreign Exchange Fluctuations, Bank Charges, Provisions for Doubtful Debts, and Provisions Written Back in Operating Margin Calculations.
4. Computation Errors and Non-Compliance with DRP Directions.

Detailed Analysis:

1. Inclusion/Exclusion of Comparables in Software Development Services Segment:

The Tribunal addressed the inclusion of Infosys Technologies Ltd. as a comparable. The TPO included it, but the DRP excluded it based on the Delhi High Court’s decision in Agnity India Technologies Pvt. Ltd., which held that giant entities with significant economic advantages are not comparable to smaller entities. The Tribunal restored the issue to the TPO to allow the assessee to provide evidence that Infosys Technologies Ltd. is functionally different.

The Tribunal also examined the inclusion of E-Infochips Limited, which the TPO included despite it being engaged in multiple activities beyond software development. The Tribunal directed its exclusion following the decision in Ness Technologies Private Limited, which found E-Infochips Limited unsuitable due to its diverse activities and lack of segmental data.

For Wipro Technology Services Limited, the Tribunal noted its exclusion in the previous assessment year due to high related party transactions (RPT). The Tribunal restored the issue to the TPO to verify RPT and exclude it if RPT exceeds 25%.

Regarding E-Zest Solutions Limited, the Tribunal restored the issue to the TPO to allow the assessee to demonstrate functional dissimilarity.

For Igate Global Solutions Ltd., the Tribunal directed the TPO to verify segmental details due to insufficient information.

2. Inclusion/Exclusion of Comparables in Market Support Services Segment:

The Tribunal upheld the DRP’s exclusion of several companies from the market support services segment due to functional dissimilarity:
- MMTV Limited: Engaged in television broadcasting.
- Media Research Users Council: Conducts media surveys and research.
- Power Systems Operation Corporation Limited: A Government of India undertaking with different economic models.
- Quadrant Communication Limited: An advertising agency.
- Apitco Limited: Provides technical consultancy services.
- Global Procurement Consultants Limited: Engaged in procurement advisory services.
- TSR Darashaw Limited: Provides IT-enabled services like share registry and payroll management.

The Tribunal upheld the DRP’s decision to exclude these companies due to their different functions and economic environments.

3. Treatment of Foreign Exchange Fluctuations, Bank Charges, Provisions for Doubtful Debts, and Provisions Written Back in Operating Margin Calculations:

The Tribunal agreed with the DRP that foreign exchange fluctuations, bank charges, provisions for doubtful debts, and provisions written back should be considered part of operating margins. The DRP relied on decisions in First Rain Software Centre Private Limited and Sony India Private Limited, which treated these items as operating expenses.

4. Computation Errors and Non-Compliance with DRP Directions:

The Tribunal noted that the TPO/Assessing Officer did not follow the DRP’s directions regarding certain comparables and adjustments. The Tribunal directed the TPO to comply with the DRP’s directions, including verifying and including/excluding certain comparables as per the DRP’s instructions.

Conclusion:

The Tribunal’s decision involved a thorough examination of the inclusion/exclusion of various comparables in both software development services and market support services segments, ensuring functional similarity and adherence to filters. The Tribunal also emphasized the correct treatment of specific financial items in operating margin calculations and directed compliance with DRP’s directions to ensure accurate and fair assessment.