2018 (12) TMI 1071 - AT - Income Tax

TPA - ALP determination - comparable selection - Held that - Assessee is engaged in business of development of software solutions and other Information Technology Enabled Services. As been characterised as routine contract software/IT service provider working in a risk insulated environment in TP study, thus companies functionally dissimilar with that of assessee need to be deselected from final list. If a comparable is functionally same as that of the tested party then the same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record the results were financial year can be reasonably extrapolated, then the comparable cannot be excluded solely on this ground.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Adjustment to arm’s length price (ALP) of international transactions.
3. Inclusion/exclusion of comparable companies in Transfer Pricing (TP) analysis.
4. Initiation of penalty proceedings.
5. Charging and computation of interest under sections 234B, 234C, and 234D of the Income Tax Act.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contended that the assessment order passed by the AO was "bad in law and void-ab-initio." However, this ground was not pressed during the hearing and was subsequently dismissed.

2. Adjustment to Arm’s Length Price (ALP):
The AO/TPO made an adjustment to the ALP of the assessee’s international transactions, enhancing the returned income by INR 15,276,175. The assessee challenged this adjustment on multiple grounds, including the rejection of certain comparables and the application of functional filters. The Tribunal noted that the assessee’s functions included providing contract IT services, and it operated in a risk-insulated environment. The Tribunal directed the exclusion of certain comparables and the inclusion of others based on functional similarity.

3. Inclusion/Exclusion of Comparable Companies:
- E Infochips Ltd.: The assessee argued for its exclusion, citing functional dissimilarity. The Tribunal observed that E Infochips Ltd. engaged in software services and hardware manufacturing, making it functionally different from the assessee. The Tribunal directed its exclusion.
- Wipro Technology Services Ltd.: The assessee contended that this company was functionally different and had significant related party transactions. The Tribunal noted that Wipro Technology Services Ltd. had significant transactions with Citigroup Inc. under a master service agreement, making it an international transaction. The Tribunal directed its exclusion.
- R Systems International Ltd.: The TPO excluded this company due to a different financial year ending. The Tribunal held that functional comparability should not be disregarded solely based on different financial year endings if data can be reasonably extrapolated. The Tribunal directed its inclusion.
- Infosys Technologies Ltd.: The DRP excluded Infosys Technologies Ltd. due to its functional dissimilarity and possession of significant intangibles. The Tribunal upheld this exclusion, noting that Infosys was not comparable to the assessee, a captive service provider.

4. Initiation of Penalty Proceedings:
The assessee argued that the AO erred in initiating penalty proceedings under section 274 r.w.s. 271(1)(c) without adequate satisfaction. This ground was not pressed during the hearing and was dismissed.

5. Charging and Computation of Interest:
The assessee contended that the AO erred in charging and computing interest under sections 234B, 234C, and 234D of the Act. This ground was also not pressed during the hearing and was dismissed.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directing the exclusion of E Infochips Ltd. and Wipro Technology Services Ltd. from the list of comparables and the inclusion of R Systems International Ltd. The appeal filed by the Revenue was dismissed, affirming the exclusion of Infosys Technologies Ltd. The Tribunal's decision was based on detailed functional analysis and adherence to legal principles governing transfer pricing adjustments.