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2019 (7) TMI 1077 - AT - Income TaxTP Adjustment - CIT(Appeals) had directed to include the company Maveric Systems Ltd in the final list of comparables with that of the assessee - TPO had rejected on account of extraordinary cost/events and also failed the filter export to sales filter of 75% - HELD THAT - On perusal of the Director s Report of the said company, no categorical/specific finding is there that extra ordinary cost has been incurred by this company. The Ld. CIT(Appeals) also has given findings perusing all the relevant factors/criterias and we do not find any infirmity in his order. Therefore, relief provided to the assessee regarding the inclusion of Maveric Systems Ltd. in the final list of comparables is hereby sustained. With regard to the second part of the first ground raised by the Revenue regarding filter export to sales filter of 75% , we observe that no where it is coming from the order of the Transfer Pricing Officer or from Ld. CIT(Appeals). Therefore, we are of the considered view that this is not an issue for adjudication since no where it was considered by the Revenue Authorities in their respective orders and therefore, inclusion of this part in the ground of appeal is infructuous. Ground No.1 of Revenue s appeal is dismissed. Exclude of certain comparables - alleged that excluded only on the ground of higher turnover and without analyzing the FAR of the comparables - HELD THAT - In our considered view on perusal of the relevant findings of the Ld. CIT(Appeals), apart from considering the turnover, has also looked into various other factors. He had considered that the size of the company makes difference in undertaking risks. Bigger sized company is in a position to undertake more risks in the business as compared to the smaller sized companies. The size of the company can be categorized either on the basis of the capital or asset or on the basis of turnover. CIT(Appeals) has also referred to Para 3.43 of the OECD Guidelines mentioning size in terms of sales as one of the comparability criteria. In this regard, reference was also made to Rule 10TD of the Income Tax Rules which provide higher profitability for the companies having turnover of more than ₹ 500 Cr. So while considering size of the company, its capacity of risk taking, capital, assets and turnover have been considered by the CIT(Appeals). We, therefore, do not find any infirmity with the findings of the Ld. CIT(Appeals) and uphold the relief provided to the assessee. Thus, ground No.2 raised in appeal by the Revenue is dismissed. Inclusion of E-infochips Limited - HELD THAT - It is an undisputed fact that the said company i.e. E-infochips Limited is engaged in diversified activities. E-infochips Limited has earned abnormal profit for the year under consideration (i.e. 56.44%) which cannot be considered as comparable. In fact there was extra ordinary fluctuation in profit margins over years from loss of (-) 14.33% in 2008-09 to super profit of 56.44% in 2010-11. Furthermore, segmental information of the activities undertaken is not available. CIT(Appeals) therefore, held that in absence of such segmental information specially IT services, ITes, inclusion of E-infochips Limited in the final set of comparable companies is not justified with that of the assessee. We do not find any infirmity in the findings of the Ld. CIT(Appeals) which is therefore upheld. Thus, additional ground Nos. 1 to 5 raised in appeal by the Revenue are dismissed.
Issues Involved:
1. Inclusion of "Maveric Systems Ltd." in the final list of comparables. 2. Exclusion of certain comparables based on higher turnover and without analyzing the FAR (Functions, Assets, and Risks) of the comparables. 3. Exclusion of "E-infochips Ltd." from the list of comparable companies. Issue-wise Detailed Analysis: 1. Inclusion of "Maveric Systems Ltd." in the final list of comparables: The first ground of the Revenue’s appeal concerns the inclusion of "Maveric Systems Ltd." in the final list of comparables. The Transfer Pricing Officer (TPO) had rejected "Maveric Systems Ltd." on the grounds of it being a loss-making company for the financial year 2010-11 and incurring extraordinary costs. However, the assessee argued that "Maveric Systems Ltd." had been consistently making profits in the past years, as evidenced by the operating margins for financial years 2008-09, 2009-10, and 2010-11. The Ld. CIT(Appeals) held that a company should not be rejected as a comparable merely because it incurred a loss in a given year, especially when it does not charge on a "Cost + Plus" basis but on an hourly basis. The CIT(A) directed the TPO to include "Maveric Systems Ltd." in the final list of comparables, and this decision was upheld by the Tribunal, finding no infirmity in the CIT(A)’s order. 2. Exclusion of certain comparables based on higher turnover and without analyzing the FAR of the comparables: The second ground of the Revenue’s appeal pertains to the exclusion of five comparables by the Ld. CIT(A) based on higher turnover and other factors. The comparables in question were Infosys Technologies Limited, IGate Global Solutions Limited, Larsen and Toubro Infotech Limited, Persistent Systems Limited, and Zylog Systems Limited. The Ld. CIT(A) excluded these companies on the grounds that they had significantly higher turnovers compared to the assessee, possessed significant intangible assets, incurred substantial R&D and marketing expenses, and in some cases, lacked segmental data. The Tribunal upheld the CIT(A)’s decision, noting that the CIT(A) had considered various factors such as the size of the company, its capacity for risk-taking, and compliance with OECD Guidelines and Rule 10TD of the Income Tax Rules. The Tribunal found no infirmity in the CIT(A)’s findings and dismissed the Revenue’s appeal on this ground. 3. Exclusion of "E-infochips Ltd." from the list of comparable companies: The additional grounds raised by the Revenue challenged the exclusion of "E-infochips Ltd." from the list of comparables. The TPO had included "E-infochips Ltd." in the final set of comparables, but the assessee argued that the company was engaged in diversified activities, had abnormal profit margins, and lacked segmental information. The Ld. CIT(A) observed that "E-infochips Ltd." was involved in software development, IT-enabled services, and product sales, without segmental information available for these activities. The CIT(A) held that in the absence of segmental information, including "E-infochips Ltd." in the final set of comparables was unjustified. The Tribunal upheld the CIT(A)’s decision, finding no infirmity in the exclusion of "E-infochips Ltd." from the comparables list. Conclusion: The Tribunal dismissed both the Revenue’s appeal and the assessee’s appeal. The Tribunal upheld the CIT(A)’s decisions regarding the inclusion and exclusion of various comparables, finding no infirmity in the CIT(A)’s orders. The Tribunal’s order was pronounced on 17th July 2019.
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