2019 (12) TMI 358 - AT - Income Tax

Transfer Pricing (TP) adjustments - selection of comparable - various companies - Held that - Keeping in view the findings returned in the preceding paras, the appeal filed by the taxpayer is allowed for statistical purposes and AO/TPO to computer the TP adjustment, if any, accordingly.

Issues Involved:
1. Addition to total income regarding international transactions for software development and IT-enabled services.
2. Economic analysis and determination of Arm’s Length Price (ALP).
3. Use of multiple-year data and financial year data.
4. Rejection and selection of comparable companies.
5. Use of information obtained under section 133(6) of the Income-tax Act.
6. Selection of companies with super normal profits.
7. Erroneous rejection and ad-hoc addition of comparable companies.
8. Treatment of operating and non-operating items and computational errors.
9. Adjustments for differences in risk profiles.
10. Conformity with the directions of the Dispute Resolution Panel (DRP).
11. Initiation of penalty proceedings under section 271(1)(c).
12. Levy of interest under sections 234B and 234C.

Detailed Analysis:

1. Addition to Total Income:
The TPO/AO/DRP made an addition of INR 180,674,599 to the total income of the taxpayer for international transactions related to software development services and IT-enabled services provided to associated enterprises (AEs).

2. Economic Analysis and ALP Determination:
The TPO/AO/DRP did not accept the economic analysis undertaken by the taxpayer and modified it for determining the ALP, concluding that the international transactions were not at arm’s length.

3. Use of Multiple-Year Data:
The TPO/AO/DRP erred in not accepting the use of multiple-year data as adopted by the taxpayer in its Transfer Pricing (TP) documentation and instead used data pertaining only to the financial year 2006-07.

4. Rejection and Selection of Comparable Companies:
The TPO/AO/DRP rejected certain comparable companies selected by the taxpayer based on inappropriate criteria such as turnover, diminishing revenue, different accounting year, employee cost, and onsite revenues. They also selected certain companies with super normal profits and added them to the final set of comparables.

5. Use of Information under Section 133(6):
The TPO/AO/DRP erred by exercising powers under section 133(6) to obtain non-public information for comparability purposes.

6. Selection of Companies with Super Normal Profits:
The TPO/AO/DRP selected companies earning super normal profits as comparables, which was contested by the taxpayer.

7. Erroneous Rejection and Ad-Hoc Addition of Comparables:
The TPO/AO/DRP erroneously rejected the comparable companies selected by the taxpayer and added certain companies on an ad-hoc basis, resulting in cherry-picking of comparables.

8. Treatment of Operating and Non-Operating Items:
The TPO/AO/DRP erred in the treatment of operating and non-operating items while computing the margins of the taxpayer and comparable companies, leading to computational errors.

9. Adjustments for Differences in Risk Profiles:
The TPO/AO/DRP did not make suitable adjustments to account for differences in the risk profile of the taxpayer vis-a-vis the comparable companies.

10. Conformity with DRP Directions:
The AO did not pass an assessment order in conformity with the directions of the DRP regarding certain items, acting in contravention of section 144C(10).

11. Initiation of Penalty Proceedings:
The AO initiated penalty proceedings under section 271(1)(c), which was contested by the taxpayer.

12. Levy of Interest:
The AO levied interest under sections 234B and 234C, disregarding the provisions of the Act and judicial precedence.

Detailed Judgments on Specific Comparables:

Wipro Limited (BPO Segment):
Wipro was excluded as a comparable due to its significant intangibles, product sales, acquisitions, and being a giant company with a huge turnover compared to the taxpayer. The Tribunal followed precedents where Wipro was excluded for similar reasons.

Maple Esolutions Ltd.:
Maple was excluded due to abnormal growth in sales and profits resulting from mergers and acquisitions, which affected its financial results. The Tribunal followed precedents where Maple was excluded for similar reasons.

Triton Corp. Ltd.:
Triton was excluded due to acquisition and financial irregularities committed by its directors, making its financials not credible. The Tribunal followed precedents where Triton was excluded for similar reasons.

Infosys BPO Ltd.:
Infosys BPO was excluded due to its giant size, significant intangibles, brand expenditure, and functional dissimilarity. The Tribunal followed precedents where Infosys BPO was excluded for similar reasons.

HCL Comnet Systems & Services Ltd.:
The issue of HCL Comnet was set aside to the TPO for fresh examination due to reliance on data obtained under section 133(6), which related to the succeeding assessment year.

Accentia Technologies Ltd.:
Accentia was excluded due to extraordinary events like amalgamation affecting its financial results and functional dissimilarity. The Tribunal followed precedents where Accentia was excluded for similar reasons.

Infosys Technologies Ltd.:
Infosys Technologies was excluded due to its giant size, significant intangibles, R&D expenditure, and functional dissimilarity. The Tribunal followed precedents where Infosys Technologies was excluded for similar reasons.

Kals Info Systems Ltd.:
The issue of Kals was set aside to the TPO for fresh examination due to contradictions in the data regarding its functional profile and inventory.

Persistent Systems Ltd.:
Persistent was excluded due to its involvement in software products, R&D expenditure, and functional dissimilarity. The Tribunal followed precedents where Persistent was excluded for similar reasons.

Tata Elxsi Ltd.:
Tata Elxsi was excluded due to its involvement in embedded product design services, R&D expenditure, and functional dissimilarity. The Tribunal followed precedents where Tata Elxsi was excluded for similar reasons.

Megasoft Ltd.:
Megasoft was excluded due to its involvement in software products, amalgamation, and functional dissimilarity. The Tribunal followed precedents where Megasoft was excluded for similar reasons.

Ishir Infotech Ltd.:
Ishir was excluded due to failing the employee cost filter applied by the TPO. The Tribunal followed precedents where Ishir was excluded for similar reasons.

Helios & Matheson Information Technologies Ltd.:
Helios & Matheson was excluded due to its involvement in software sales and services with no segmental financials available. The Tribunal followed precedents where Helios & Matheson was excluded for similar reasons.

Thirdware Solutions Ltd.:
The taxpayer did not press for the exclusion of Thirdware, hence it was retained.

Avani Cimcon Technologies Ltd.:
The issue of Avani was set aside to the TPO for fresh examination due to contradictions in the data regarding its functional profile.

Sasken Communication Technologies Ltd.:
Sasken was excluded due to acquisitions, mergers, R&D expenditure, and functional dissimilarity. The Tribunal followed precedents where Sasken was excluded for similar reasons.

Flextronic Software Systems Ltd.:
Flextronic was excluded due to its involvement in product sales, R&D expenditure, and functional dissimilarity. The Tribunal followed precedents where Flextronic was excluded for similar reasons.

Conclusion:
The appeal filed by the taxpayer was allowed for statistical purposes, and the AO/TPO was directed to compute the TP adjustment accordingly.

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