2019 (7) TMI 979 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee basically provides services to its AEs across the globe under three segments viz. software development service (SDS), ITES, consultancy Services under IPSA thus companies functionally dissimilar with that of assessee need to be deselected from final list. GENESYS INTERNATIONAL CORPORATION LTD - this company being a KPO service provider is not comparable to a BPO service provider. Therefore, in our considered view, due to functional difference alone, the company cannot be a comparable to the assessee. As regards the reasoning of the Department that the company was selected by the assessee as a comparable in the transfer pricing study report, we must observe, the comparables selected by the assessee in the transfer pricing study report are not sacrosanct. Had it been the case, all companies selected by the assessee have to be accepted by the Transfer Pricing Officer. After all, the purpose of comparative analysis is to find out suitability of a company as a comparable. In view of the aforesaid, we direct the Assessing Officer to exclude this company from the list of comparables. CROSSDOMAIN SOLUTIONS LTD. - This company has been held to be incomparable to a BPO service provider. In view of the aforesaid, we direct the Assessing Officer to exclude this company from the list of comparables. R. Systems International Ltd. - in assessee s own case in assessment years 2007 08 and 2008 09 the Transfer Pricing Officer himself has accepted this company as a comparable in spite of the fact that its financial year was not matching with that of the assessee. The reason for which the Transfer Pricing Officer accepted the company as comparable in those years is, the financial results of the company corresponding to the financial year followed by the assessee were available with him. Factual position is no different in the impugned assessment year. In view of the aforesaid, we do not find any infirmity in the decision of learned DRP in accepting this company as a comparable. Therefore, Revenue s ground on the issue is dismissed. Whether service provided to the AE under intellectual property service agreement (IPSA) is akin to ITES? - HELD THAT - As decided in own case assessment year 2008 09. While deciding the issue in 2018 (7) TMI 1877 - ITAT MUMBAI content development or animation and website services are coming within the ambit of I.T. enabled products or services. Thus, keeping in view the aforesaid fact, it has to be concluded that the services rendered under IPSA are to be treated as ITES. As could be seen from the order of the Transfer Pricing Officer, though, he has treated the revenue earned of ₹ 8.47 crore as ITES, however, he has benchmarked it separately without aggregating it with all services rendered ITES segment. The DRP has also failed to rectify the error committed by the Transfer Pricing Officer by benchmarking it separately. Since, the Transfer Pricing Officer has not benchmarked this particular transaction by aggregating it with other ITES, we are inclined to restore the issue to the Assessing Officer for undertaking the necessary exercise of benchmarking the transaction by aggregating with other ITES and determine the arm's length price by applying the average margin of the comparables selected under the ITES segment, subject to our direction contained in this order with regard to the comparables under ITES segment. Working capital adjustment - HELD THAT - As decided in assessee's own case TPO himself has allowed working capital adjustment to the assessee. That being the case, we direct the Assessing Officer/Transfer Pricing Officer to consider assessee s claim of working capital adjustment while computing the margins of the comparables. Claim of deduction u/s 10A and 10AA on consolidated basis after set off of losses - HELD THAT - As could be seen, while deciding identical issue arising in assessee s own case for the assessment year 2008 09 2018 (7) TMI 1877 - ITAT MUMBAI the Tribunal following the decision of the Hon'ble Supreme Court in Yokogawa India Ltd 2016 (12) TMI 881 - SUPREME COURT has allowed assessee s claim of deduction u/s 10A unit wise. Disallowance of deduction claimed u/s 10A /10AA on income derived under the IPSA - HELD THAT - As noticed that learned DRP in assessee s own case for assessment year 2013 14 and 2014 15, has directed the Assessing Officer to allow assessee s claim of deduction under section 10AA in respect of revenue earned under IPSA. In view of the aforesaid, we direct the AO to compute deduction u/s 10A / 10AA in respect of IPSA income following the direction of the Tribunal and DRP as referred to above TP Adjustment to be restricted only to the international transaction - HELD THAT - No infirmity in the decision of learned DRP on the issue as the arm's length price of the transaction which requires adjustment is the international transaction with the AE. Therefore, any adjustment on account of arm's length price has to be restricted to the international transaction with AE. This view has also been approved by the Hon'ble Jurisdictional High Court in CIT v/s Hindustan Unilever Ltd. 2016 (7) TMI 1245 - BOMBAY HIGH COURT In view of the above, ground raised is dismissed. TP adjustment on IT segments - selection / rejection of certain comparables - TNMM - HELD THAT - In course of hearing learned Sr. Counsel has submitted, on exclusion of Thirdware Solutions Ltd., Persistent Systems Ltd. and FSC Solutions Ltd. and inclusion of CAT Technologies Ltd., assessee s margin would fall within 5% range of the arithmetic mean of the rest of the comparables in software development (IT) service segment. In view of the aforesaid, we do not intend to dwell upon the issues relating to the other comparables in IT service segment and leave the issue open relating to these comparables for adjudication. TP adjustment on ITES segments - ACCENTIA TECHNOLOGIES LTD - On a perusal of the annual report placed in the paper book it is noticed that the company has different segments, whereas, the segmental information relating to all the segments are not available. Moreover, during the year under consideration there is an extra ordinary event by way of amalgamation of another company. Thus, by virtue of such amalgamation, there could have been impact on the profitability of the company. Considering the aforesaid aspect, the Tribunal in assessee s own case for the assessment year 2008 09 has rejected this company as a comparable. Following the same we direct the Assessing Officer to exclude this company as a comparable. Considering the submissions of the learned Sr. Counsel for the assessee that with exclusion of this company, operating margin of the assessee would fall within 5% of the arithmetic mean of the rest of the comparables selected by the Transfer Pricing Officer, we do not intend to deal with the acceptability or otherwise of the rest of the comparables.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Selection/Rejection of Comparables
3. Working Capital Adjustment
4. Deduction under Sections 10A and 10AA
5. Disallowance of Brought Forward Unabsorbed Depreciation

Detailed Analysis:

1. Transfer Pricing Adjustment:
The major issue pertains to the transfer pricing adjustment concerning the selection/rejection of certain comparables for benchmarking the international transaction with Associated Enterprises (AEs) relating to the provision of Information Technology Enabled Services (ITES). The assessee, an Indian company and part of the Accenture Group, provides services under three segments: software development service (SDS), ITES, and consultancy services under IPSA. The Transfer Pricing Officer (TPO) directed the assessee to benchmark SDS and ITES segments separately. The TPO selected seven companies as comparables for the ITES segment, resulting in an upward adjustment to the arm's length price. The Dispute Resolution Panel (DRP) granted partial relief by including R. Systems International Ltd. as a comparable.

2. Selection/Rejection of Comparables:
- Genesys International Corporation Ltd.: The assessee objected to this company's selection due to functional differences and an exceptional year of performance. The Tribunal found the company functionally different from the assessee and directed its exclusion from the list of comparables.
- Crossdomain Solutions Ltd.: The TPO included this company as a comparable, but the Tribunal found it functionally different and lacking adequate public domain information, thus directing its exclusion.
- R. Systems International Ltd.: The DRP included this company as a comparable despite its different financial year ending. The Tribunal upheld this decision as the financial results for the relevant financial year were available.
- Thirdware Solutions Ltd. and Persistent Systems Ltd.: The Tribunal excluded these companies due to functional differences and lack of segmental details.
- CAT Technologies Ltd.: The Tribunal included this company as a comparable, finding it functionally similar to the assessee.
- FCS Software Solutions Ltd.: The DRP rejected this company as a comparable due to its failure to meet the 75% IT income filter. The Tribunal upheld this rejection.

3. Working Capital Adjustment:
The Tribunal directed the Assessing Officer (AO) to consider the assessee’s claim of working capital adjustment while computing the margins of the comparables, following the decision in the assessee’s own case for the assessment year 2008–09.

4. Deduction under Sections 10A and 10AA:
- Unit-wise Deduction: The AO allowed deduction under sections 10A/10AA on a consolidated basis after setting off losses, contrary to the assessee’s claim of unit-wise deduction. The Tribunal directed the AO to compute the deduction unit-wise, following the decision in the assessee’s own case for the assessment year 2008–09.
- Income Derived under IPSA: The AO disallowed the deduction claimed under section 10A/10AA on income derived under the IPSA. The Tribunal directed the AO to allow the deduction, following the decision in the assessee’s own case for the assessment year 2008–09.

5. Disallowance of Brought Forward Unabsorbed Depreciation:
The AO disallowed the set-off of brought forward unabsorbed depreciation claimed by the assessee. The Tribunal directed the AO to consider the assessee’s claim after giving effect to the orders of the Tribunal in the assessment years 2007–08 and 2008–09.

Conclusion:
The assessee's appeals were partly allowed, and the Revenue's appeals were dismissed. The Tribunal provided specific directions on the selection/rejection of comparables, working capital adjustment, and deductions under sections 10A and 10AA, ensuring compliance with previous judicial decisions and factual accuracy.