2019 (5) TMI 621 - AT - Income Tax

TPA - comparable selection - functional comparability - HELD THAT - Infosys technologies Ltd has been excluded from the comparability analysis following the decision of the honourable jurisdictional High Court. Therefore respectfully following the decision of the coordinate bench in assessee s own case we also direct the learned AO/transfer pricing officer to exclude Infosys technologies Ltd from the comparability analysis of software development segment. Inclusion of persistent systems Ltd included by the learned transfer pricing officer for which which assessee prays for the exclusion. - assessee has submitted that if the Infosys Ltd has been excluded from the final list of the comparability analysis the ground of the assessee for the exclusion of this comparable will become academic in nature in respect of software development segment. As we have already directed the learned AO/TPO to exclude the Infosys Ltd from the comparability analysis, we leave the ground of contest of the assessee for exclusion of persistent systems Ltd open. Accordingly ground number 2 of the appeal of the assessee is allowed with above directions. Adjustment on account of the receivables - The assessee has been granted a working capital adjustment by the DRP. When the working capital adjustment has been granted it definitely takes into account the impact of outstanding receivable on the profitability and therefore there is no separate adjustment is warranted on account of overdue outstanding advances.

Summary

Issues Involved:
1. Transfer pricing adjustment for software development services.
2. Transfer pricing adjustment for Information Technology Enabled Services (ITeS).
3. Adjustment on account of interest on receivables.
4. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Transfer Pricing Adjustment for Software Development Services:
The assessee benchmarked the software development services using the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of 14.53%, which was higher than the mean PLI of 13.35% of the selected comparables. However, the Transfer Pricing Officer (TPO) conducted a fresh comparability analysis and selected 8 comparables with a PLI of 21.30%, resulting in an adjustment of INR 26,86,128.

The assessee contested the inclusion of Infosys Technologies Ltd and Persistent Systems Ltd as comparables, arguing that these companies are significantly larger and have brand-related advantages. The Tribunal agreed with the assessee, noting that Infosys Technologies Ltd had been excluded in a previous assessment year for similar reasons. Therefore, Infosys Technologies Ltd was directed to be excluded from the comparability analysis, making the issue of Persistent Systems Ltd academic.

2. Transfer Pricing Adjustment for Information Technology Enabled Services (ITeS):
The assessee used TNMM to benchmark ITeS, selecting 11 comparables with a mean PLI of 9.42%, while the assessee's PLI was 13.59%. The TPO, however, adopted new filters and selected 6 comparables with a PLI of 17.62%, resulting in an adjustment of INR 10,16,169.

The assessee challenged the inclusion of Infosys BPO Ltd and Micro-Genetic Systems Ltd. The Tribunal focused on Infosys BPO Ltd, noting its significant brand presence and large scale, which made it incomparable with the assessee. The Tribunal directed the exclusion of Infosys BPO Ltd from the comparability analysis, which would render the assessee's transactions at arm's length.

3. Adjustment on Account of Interest on Receivables:
The TPO initially proposed an adjustment of INR 36,81,330 for interest on outstanding receivables, which was reduced by the Dispute Resolution Panel (DRP) to INR 1,384, considering a reasonable credit period of 60 days. The assessee argued that working capital adjustments already accounted for the impact of outstanding receivables.

The Tribunal agreed with the assessee, stating that when working capital adjustments are granted, they account for the impact of outstanding receivables, and thus no separate adjustment is warranted. Consequently, the adjustment of INR 1,384 was directed to be deleted.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal did not provide a detailed analysis on this issue, as it was contingent upon the outcomes of the primary issues discussed above.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the exclusion of certain comparables from the transfer pricing analysis and deleting the adjustment for interest on receivables. The detailed examination of the functional profiles and comparability criteria was crucial in reaching these conclusions. The order was pronounced on 6th May 2019.