2020 (3) TMI 243 - AT - Income Tax

TP Adjustment - exclusion of comparables relying on the additional ground of appeal of Turnover Criteria - HELD THAT - Companies functionally dissimilar with that of assessee company as engaged primarily in rendering Software Development Research and Development Services to its Associated Enterprise (AE) M.S.Corp need to be deselected from final list. Companies functionally not comparable as the turnover is more than 500 times of the assessee turnover. Direct the TPO to grant the Working Capital and risk profile Adjustment after examining the facts and profiles of comparables.

Issues Involved:
1. Exclusion of certain comparables from the final list for determination of Arm's Length Price (ALP).
2. Inclusion of certain comparables in the final list for determination of ALP.
3. Granting of Working Capital and risk profile adjustment.
4. Legal validity of Notice of Demand under Section 156 and Notice of initiation of penalty proceedings under Section 274 r.w.s. 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Exclusion of Certain Comparables:

(i) Infosys Limited:
The Tribunal directed the exclusion of Infosys Limited from the final list of comparables due to its high turnover (?44,341 Crores) and functional dissimilarity with the assessee. Infosys was engaged in diversified activities, had high brand value, and incurred substantial R&D expenses. This exclusion was consistent with the decision in the case of M/s. Marwell India P. Ltd. vs. DCIT.

(ii) Thirdware Solutions Limited:
The Tribunal excluded Thirdware Solutions Limited due to its turnover (?206.76 Crores) and functional differences, including revenue from product sales and insufficient segmental data. The exclusion aligned with the Tribunal's decision in Marwell India Pvt. Ltd. vs. DCIT.

(iii) Persistent Systems Limited:
Persistent Systems Limited was excluded due to its turnover (?1184.12 Crores), functional differences, and insufficient segmental information. The company was engaged in diversified services, including software product services and technology innovation. The exclusion followed the Tribunal's decision in Marwell India Pvt. Ltd. vs. DCIT.

(iv) L&T Infotech Limited:
L&T Infotech Limited was excluded due to its turnover (?4643.94 Crores) and functional dissimilarity. The company engaged in software sales, lacked segmental information, and had high brand value. The exclusion was consistent with the Tribunal's decision in Marwell India Pvt. Ltd. vs. DCIT.

(v) Mindtree Limited:
Mindtree Limited was excluded due to its turnover (?3,031.06 Crores) and functional dissimilarity, including no segmental data and significant intangibles. The exclusion aligned with the Tribunal's decision in Marwell India Pvt. Ltd. vs. DCIT.

(vi) Cignity Technologies Limited:
Cignity Technologies Limited was excluded due to its specialization in software testing services and functional dissimilarity with the assessee. The exclusion followed the Tribunal's decision in Marwell India Pvt. Ltd. vs. DCIT.

2. Inclusion of Certain Comparables:

(i) Akshay Software Technologies Ltd.:
The Tribunal directed the inclusion of Akshay Software Technologies Ltd., which had a margin of 1.81%. Despite DRP's rejection based on foreign brand expenditure, the company was found functionally similar and included in subsequent assessment years.

(ii) Sagarsoft India Limited:
The Tribunal restored Sagarsoft India Limited to the file of TPO for verification. The company, engaged in software development services, had its annual report available in the public domain and was accepted in subsequent assessment years.

(iii) Pure Soft Private Limited:
Pure Soft Private Limited, with a margin of 13.72%, was restored to the file of TPO for verification. The company was engaged in software design and development services and passed the filters applied by TPO.

(iv) Sybrant Technologies Private Limited:
Sybrant Technologies Private Limited, with a margin of 15.25% and turnover of ?3.52 Crores, was restored to the file of TPO for verification. The company was engaged in embedded software development and project management.

(v) Lucid Software Limited:
Lucid Software Limited, with a margin of (-) 0.57% and turnover of ?3.60 Crores, was restored to the file of TPO for verification. Despite being a loss-making company, it was functionally similar and passed all filters.

3. Granting of Working Capital and Risk Profile Adjustment:
The Tribunal directed the TPO to grant Working Capital and risk profile adjustments after examining the facts and profiles of comparables. The DRP had not granted these adjustments due to a lack of details, but the assessee provided the necessary information.

4. Legal Validity of Notices:
The Tribunal left open the legal issue regarding the validity of the Notice of Demand under Section 156 and the Notice of initiation of penalty proceedings under Section 274 r.w.s. 271(1)(c) of the Act. The decision on these notices was not addressed as the appeal was decided on merits.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, with specific directions to the TPO for inclusion and exclusion of comparables and granting of adjustments. The legal issue regarding the notices was left open. The order was pronounced in the open court on 5th February 2020.

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