2019 (4) TMI 289 - AT - Income Tax

TP adjustment - comparable selection - comparable analysis - Related party transactions - segmental details availability - Functions Assets and Risk analysis (FAR) - HELD THAT - Sonata Software Limited - Related party transactions, as reported in the annual report by Sonata Software Limited, is indeed more than 50% of sales and therefore, this company does not pass the related party filter applied by the TPO. E Infochips Bangalore Ltd. company is primarily engaged in software development and IT enabled services which is considered as the only one reportable segments and therefore there is no segmental information available with respect to the software development activities as well as IT enabled services. In view of this the above comparable is required to be excluded from the comparability analysis of the software development service segment of the assessee. Infinite Data Systems Private Limited is engaged in a wide variety of services including software technical consultancy services etc. It is our considered opinion that these services cannot be compared with software development services provided by a captive service provider like the assessee in the absence of segmental information. Infosys limited has a huge brand value, it has huge turnover, and its Finacle Software is a leading product in banking industry. Therefore, it is functionally different and has significant R&D. Working capital adjustment - HELD THAT - It is necessary to allow working capital adjustment for better comparability. Accordingly, we direct the AO/TPO to grant working capital adjustment on the final set of comparables Risk adjustment - HELD THAT - It is not necessary to give any directions on the issue of risk adjustment. We note that the contentions of the Ld. AR on risk adjustment in the present case have been rendered academic as the entire TP adjustment gets deleted consequent to the exclusion of the 4 companies as directed above and upon grant of the working capital adjustment. We, therefore, feel that it is not necessary to return any findings on the above issue. - Appeal of the assessee stands partly allowed

Issues Involved:
1. Addition to total income regarding international transactions.
2. Non-acceptance of economic analysis and modification of the same for determination of Arm's Length Price (ALP).
3. Use of multiyear data.
4. Rejection of certain comparable companies.
5. Inclusion and exclusion of companies from the final set of comparables.
6. Selection of companies with supernormal profits.
7. Computation errors in the margin of comparable companies.
8. Treatment of operating and non-operating items.
9. Granting of working capital adjustment.
10. Adjustment for differences in risk profile.
11. Initiation of penalty proceedings under section 271(1)(c).
12. Levying of interest under section 234B and 234C.

Detailed Analysis:

1. Addition to Total Income Regarding International Transactions:
The assessee contested the addition of ?1,77,16,054/- made by the TPO/AO/DRP to its total income concerning international transactions for software maintenance and support services provided to its Associated Enterprises (AEs). The Tribunal found that the TPO had modified the TP study by using current year data and some appropriate filters, leading to the adjustment.

2. Non-Acceptance of Economic Analysis:
The assessee argued that the TPO/AO/DRP erred in not accepting the economic analysis undertaken by the appellant and modifying it without finding any specified circumstances under section 92C of the Act. The Tribunal noted that the TPO had accepted the Functions Assets and Risk analysis (FAR) but had modified the filters applied in the TP study.

3. Use of Multiyear Data:
The assessee's use of multiyear data was not accepted by the TPO, who used data pertaining only to the financial year 2009-10. The Tribunal found that the TPO's approach was consistent with the Indian TP documentation requirements.

4. Rejection of Certain Comparable Companies:
The TPO rejected certain comparable companies selected by the assessee based on criteria such as turnover less than ?5 crores, export turnover less than 75% of operating revenues, different accounting year, and employee cost less than 25% of total cost. The Tribunal did not find specific arguments from the assessee on these grounds.

5. Inclusion and Exclusion of Companies from the Final Set of Comparables:
The Tribunal considered the inclusion and exclusion of companies like Sonata Software Ltd, E Infochips Bangalore Ltd, Infinite Data Systems Private Ltd, and Infosys Ltd.
- Sonata Software Ltd: Excluded due to related party transactions exceeding 50% of sales.
- E Infochips Bangalore Ltd: Excluded due to income from consultancy charges and lack of segmental profitability details.
- Infinite Data Systems Private Ltd: Excluded due to functional dissimilarity and lack of segmental information.
- Infosys Ltd: Excluded due to income from software products, lack of segmental information, and significant brand value.

6. Selection of Companies with Supernormal Profits:
The Tribunal did not find specific submissions from the assessee regarding the selection of companies with supernormal profits.

7. Computation Errors in the Margin of Comparable Companies:
No specific arguments were made by the assessee regarding computation errors in the margin of comparable companies.

8. Treatment of Operating and Non-Operating Items:
The assessee did not make specific submissions regarding the treatment of operating and non-operating items.

9. Granting of Working Capital Adjustment:
The Tribunal directed the AO/TPO to grant working capital adjustment as per the methodology given in OECD guidelines, noting that it is necessary for better comparability.

10. Adjustment for Differences in Risk Profile:
The Tribunal noted that the assessee's contentions on risk adjustment were rendered academic as the entire TP adjustment was deleted due to the exclusion of certain companies and the grant of working capital adjustment.

11. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal did not address this issue as it was considered premature or consequential.

12. Levying of Interest under Section 234B and 234C:
The Tribunal did not address this issue as it was considered premature or consequential.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal directed the exclusion of certain companies from the final set of comparables and granted the working capital adjustment, leading to the deletion of the entire TP adjustment.

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