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2019 (10) TMI 986 - AT - Income TaxTP Adjustment - Comparable selection - HELD THAT - Infosys was engaged in diversified fields and it performed various functions as against the profile of the assessee wherein it was only providing Software Development Services to the group companies of Lucent Inc. Another aspect which needs to be kept in mind is the ownership of the branded / proprietary products by Infosys Technologies Limited, as against the facts that the assessee owns no intangible product company, even if it had meagre income cannot be compared with a non product company. Such is the proposition laid down in Rampgreen Solutions Pvt. Ltd. vs. Commissioner Of Income Tax, 2015 (8) TMI 931 - DELHI HIGH COURT . Accordingly, we direct the AO to exclude the concern Infosys Technology Limited from the final list of the comparables. mPhasis BFL Limited - The business model of mPhasis was different wherein it was providing onsite services to its third parties, wherein out of Software charges of ₹ 161 Crores debited to cost of Revenue, sum of ₹ 157 Crores had been incurred in foreign currency. Such fact also makes the said concern as functionally not comparable to the assessee. Though segmental details are available but the segmental are at fault as large part of expenses have been booked as an unallocable expenditure. In such facts and circumstances, we are of the view that the concern mPhasis is not functionally comparable to the assessee, hence the same is not to be included in the final list of said comparables, while benchmarking the international transactions undertaken by the assessee. - Appeal of the assessee is allowed.
Issues Involved:
1. Jurisdictional error in the reference made by the AO to the TPO. 2. Non-speaking nature of the TPO's order. 3. Observations made by the TPO on matters not restored by the ITAT. 4. Proposed enhancement of income by the AO/TPO. 5. Initiation of penalty under section 271(1)(c) of the Act. Issue-wise Detailed Analysis: 1. Jurisdictional Error in Reference by AO to TPO: The assessee contended that the AO did not record any reason in the original draft assessment order for referring the matter to the TPO for computation of the Arm's Length Price (ALP), which is a requirement under section 92CA(1) of the Income Tax Act, 1961. This was argued to be a jurisdictional error. 2. Non-speaking Nature of TPO's Order: The assessee argued that the TPO's order, which was supposed to give effect to the directions issued by the ITAT, did not contain any observations on the specific contentions raised by the assessee regarding the rejection of Infosys Technologies Limited and mPhasis BFL Limited. The order was thus claimed to be non-speaking. 3. Observations on Matters Not Restored by ITAT: The assessee claimed that the TPO made observations on matters that were neither restored to the TPO by the ITAT nor contended by the assessee before the TPO. This was seen as an overreach by the TPO. 4. Proposed Enhancement of Income by AO/TPO: The assessee objected to the proposed enhancement of its income by ?21,88,50,219/- by the AO/TPO, arguing that the international transaction pertaining to the provision of software development and support services did not meet the arm's length principle. The assessee raised several sub-issues under this ground: - Disregarding the Arm's Length Price determined by the assessee in its TP documentation. - Disregarding multiple year/prior years' data and insisting on current year data. - Arbitrary rejection of low-profit/loss-making companies. - Arbitrary application of a wages/sales filter. - Excluding certain companies on the ground of functional non-comparability without sound reasons. - Ignoring the business reality that the assessee, being remunerated on a cost-plus basis, undertakes minimal business risks compared to full-fledged risk-taking entrepreneurs, and not allowing a risk adjustment accordingly. 5. Initiation of Penalty under Section 271(1)(c): The assessee contended that the AO erred in initiating penalty under section 271(1)(c) mechanically and without recording any satisfaction for its initiation. Judgment Analysis: Jurisdictional Error: The tribunal did not specifically address the jurisdictional error raised by the assessee regarding the AO's reference to the TPO. The focus was more on the comparability analysis and the functional profiles of the selected companies. Non-speaking Nature of TPO's Order: The tribunal acknowledged the assessee's contention that the TPO's order did not address the specific contentions raised by the assessee regarding the inclusion of Infosys Technologies Limited and mPhasis BFL Limited. Observations on Matters Not Restored by ITAT: The tribunal did not specifically address this issue but focused on the functional comparability of the selected companies. Proposed Enhancement of Income: The tribunal extensively analyzed the comparability of Infosys Technologies Limited and mPhasis BFL Limited with the assessee. It was noted that Infosys Technologies Limited had a very high turnover and was engaged in diversified functions, including ownership of branded/proprietary products, making it functionally different from the assessee. Similarly, mPhasis BFL Limited was engaged in diversified fields, including product ownership and providing onsite services, which were different from the assessee's offsite software development services. The tribunal directed the AO to exclude both Infosys Technologies Limited and mPhasis BFL Limited from the final list of comparables. Initiation of Penalty: The tribunal did not specifically address the issue of penalty initiation under section 271(1)(c). Conclusion: The tribunal allowed the assessee's appeal, directing the exclusion of Infosys Technologies Limited and mPhasis BFL Limited from the final list of comparables, thereby making the assessee's margins at arm's length. The appeal was allowed in favor of the assessee.
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