2019 (2) TMI 710 - AT - Income Tax

TPA - upward adjustment - adjustment to arm s length price of international transactions - Held that - The mean margins of comparables worked out to 14.92% as against assessee s margins on cost of 8.53% and hence, in the final assessment order, the Assessing Officer made an upward adjustment of ₹ 90,07,200/-. The assessee is in appeal against the said adjustment to arm s length price of international transactions. Acropetal Technologies Limited as a comparable - company is functionally different, owns significant intangible assets and has earned supernormal profits and/or has exceptional year of performance - Held that - Where the concern Acropetal Technologies Ltd. was engaged in similar line of business as in the preceding year and following the same parity of reasoning as held in assessee s own case for assessment year 2010-11, we hold that the said concern is functionally not comparable to the assessee and hence, cannot be included in the final set of comparables. Further, the said concern also owns significant intangible assets comprised of 49% of its total fixed assets and also was incurring significant R&D expenditure. Hence, the concern could not be held to be comparable to the assessee. Accordingly, we direct the AO / TPO to exclude the concern Acropetal Technologies Ltd. from final set of comparables. The ground of appeal No.8 raised by assessee is thus, allowed. E-Infochips Limited as a comparable without appreciating that the company is functionally different and has earned supernormal profits and / or has exceptional year of performance - Held that - On perusal of financial statement of E-Infochips Ltd., it is apparent that the said concern was engaged in various activities and was also having income from sale of products. The segmental details of said business activity undertaken by the said concern were not available. In view thereof, where the concern is engaged in diversified activities and was also a product company, then the margins of said concern cannot be applied to the margins of assessee, who was only providing software development services to its associated enterprises and was not a product company. In the absence of segmental details, E-Infochips Ltd. cannot be adopted as comparable to benchmark the international transactions undertaken by the assessee - we direct the Assessing Officer to exclude E-Infochips Ltd. from the final set of comparables. Maveric Systems Limited on the basis that they failed the export earnings filter of 75% of revenues i.e. their export turnover were less than 75% of respective revenues - Held that - We find that as against total turnover of ₹ 56.90 crores, the export turnover was ₹ 43.17 crores and in such regard, the export sales to total sales ratio worked out to 75.87%. Without going into merits of applying export filter of 75%, we hold that since the said concern fulfills the export turnover filter, then the said concern is to be included in the final set of comparables for benchmarking the international transactions. Accordingly, we hold so. The ground of appeal No.7 part is thus, allowed. Allowance of working capital adjustment - the assessee pointed out that similar issue was decided by the Tribunal in assessee s own case for assessment year 2010-11 and the Tribunal has allowed the claim of assessee. Following the same parity of reasoning, we direct the Assessing Officer to allow working capital adjustment and re-compute the margins of comparables. Allowance of risk adjustment is decided against the assessee. Hence, we dismiss the ground of appeal of assessee. The assessee pointed out that in case two concerns are excluded and one concern is included and working capital adjustment is allowed, then the margins shown by the assessee were within /- 5% of mean margins of comparables and there is no need to adjudicate any other issue. Even the issues raised in the Revenue appeal would become academic.

Summary

Issues Involved:
1. Exclusion of functionally comparable companies.
2. Inclusion of companies not functionally comparable.
3. Exclusion of companies due to non-availability of segmental data.
4. Materiality of onsite and offsite revenue differences for functional comparability.
5. Exclusion of companies considered functionally comparable by the assessee.
6. Consideration of CBDT safe harbour guidelines regarding turnover criteria.
7. Inclusion of Maveric Systems Ltd. as a comparable.
8. Allowance of working capital adjustment.
9. Allowance of risk adjustment.
10. Arm's length price within +/- 5% range.
11. Timeliness of the Revenue's appeal.

Detailed Analysis:

1. Exclusion of Functionally Comparable Companies:
The Tribunal examined whether Acropetal Technologies Ltd. and E-Infochips Ltd. should be excluded as comparables. It was found that Acropetal Technologies Ltd. was not functionally comparable due to its significant intangible assets and R&D expenditure, and was excluded. Similarly, E-Infochips Ltd. was excluded because it was engaged in diversified activities including software development services, sale of software products, and IT Enabled Services without segmental breakup.

2. Inclusion of Companies Not Functionally Comparable:
The Tribunal upheld the exclusion of Acropetal Technologies Ltd. and E-Infochips Ltd. from the final set of comparables due to their functional dissimilarities with the assessee's business activities.

3. Exclusion of Companies Due to Non-Availability of Segmental Data:
E-Infochips Ltd. was excluded because it did not provide segmental data, which made it impossible to accurately benchmark the assessee's international transactions.

4. Materiality of Onsite and Offsite Revenue Differences:
The Tribunal did not specifically address the onsite and offsite revenue differences in detail, focusing instead on the functional comparability and availability of segmental data.

5. Exclusion of Companies Considered Functionally Comparable by the Assessee:
The Tribunal did not find merit in including companies that the assessee initially considered comparable but later contested due to functional differences and lack of segmental data.

6. Consideration of CBDT Safe Harbour Guidelines Regarding Turnover Criteria:
The Tribunal did not specifically address the CBDT safe harbour guidelines regarding turnover criteria in this judgment.

7. Inclusion of Maveric Systems Ltd. as a Comparable:
The Tribunal directed the inclusion of Maveric Systems Ltd. as a comparable. The TPO had initially rejected it based on export turnover and RPT filters, but the Tribunal found that it met the export turnover filter of 75.87%.

8. Allowance of Working Capital Adjustment:
The Tribunal allowed the working capital adjustment, following the precedent set in the assessee's case for the previous assessment year. This adjustment was directed to be made by the Assessing Officer.

9. Allowance of Risk Adjustment:
The Tribunal decided against the allowance of risk adjustment, thereby dismissing the assessee's ground of appeal on this issue.

10. Arm's Length Price Within +/- 5% Range:
The Tribunal noted that if the adjustments and inclusions/exclusions were made as directed, the assessee's margins would fall within the +/- 5% range of the mean margins of comparables, making further adjudication unnecessary.

11. Timeliness of the Revenue's Appeal:
The Tribunal condoned the 14-day delay in the Revenue's appeal filing, but found the grounds of appeal to be academic in nature due to the adjustments made in the assessee's appeal.

Conclusion:
The Tribunal partially allowed the assessee's appeal by excluding Acropetal Technologies Ltd. and E-Infochips Ltd., including Maveric Systems Ltd., and allowing working capital adjustment. The Revenue's appeal was dismissed as academic. The judgment was pronounced on February 11, 2019.