2020 (4) TMI 402 - AT - Income Tax

TP Adjustment - Rejection of benchmarking analysis performed by the Appellant - comparable selection - Some companies have been excluded by the DRP on the ground that they are loss making companies - HELD THAT - While ascertaining whether the companies are persistent loss making or not, the quantum of loss suffered during the period under consideration is immaterial. The Tribunal in various decisions have only considered the period of loss and not the quantum of loss. Therefore, respectfully following the order of Tribunal in the case of John Deere 2016 (10) TMI 1238 - ITAT PUNE we reject the objections raised by the learned DR on this issue and direct the TPO/Assessing Officer to include PSI Data Systems Ltd., SIP Technologies Exports Ltd. and TVS Infotech Ltd. in the final set of comparables as they are not persistent loss making companies. Exclusion of KALS and E-Zest - KALS being functionally different should be excluded from the list of comparables as compared to assessee engaged in the business of development and distribution of software used in banking and finance industry. E-Zest is a product company and hence, cannot be compared with the assessee engaged in software development services. See AMBER POINT TECHNOLOGY INDIA PVT. LTD. AND VICE-VERSA 2018 (1) TMI 1318 - ITAT PUNE Inclusion of these companies, i.e. Acropetal Technologies Limited, Cepha Imaging Private Limited and Polaris Retail Infotech Limited - HELD THAT - The exercise of conducting transfer pricing study is to ascertain arm s length price of international transactions of assessee with its AE. If in the process, the assessee has selected any wrong comparable, it is the duty of TPO to examine and reject the same before ascertaining arm s length price of the international transactions. An inclusion of certain entity in the list of comparables by the assessee in transfer pricing study report cannot act as estoppel against the assessee if, at a later stage, assessee seeks exclusion of the said comparable on account of functional disparity or it fails to qualify any of the filters applied. Our view is fortified by the decision of Tribunal in the case of DCIT vs Quark Systems Pvt. Ltd 2009 (10) TMI 591 - ITAT, CHANDIGARH - Therefore, we admit the additional ground of appeal raised by the assessee and restore it to the file of TPO/Assessing Officer for de novo examination of the comparables.Appeal allowed for statistical purposes.

Summary

Issues Involved:
1. Dismissal of Revenue's appeal due to low tax effect.
2. Rejection of benchmarking analysis performed by the appellant.
3. Inappropriate approach adopted by the TPO.
4. Inclusion and exclusion of comparables in the final list to determine arm's length price.

Detailed Analysis:

1. Dismissal of Revenue's Appeal Due to Low Tax Effect:
The Department's appeal was dismissed on account of low tax effect as per CBDT Circular No. 17/2019 dated 08.08.2019. The tax effect involved in the appeal was ?11,90,734/-, which is less than the prescribed monetary limit of ?50 lacs for filing appeals before the Tribunal. Consequently, the cross objection filed by the assessee became infructuous and was also dismissed.

2. Rejection of Benchmarking Analysis Performed by the Appellant:
The appellant contended that the AO erred in confirming the rejection of the benchmarking analysis and independent comparable companies selected by the appellant in its Transfer Pricing documentation without providing any cogent reasons. The appellant argued that the fresh benchmarking analysis conducted by the TPO should be quashed as it did not adhere to the rules of natural justice and used data not available on the specified date.

3. Inappropriate Approach Adopted by the TPO:
The appellant argued that the TPO's approach was inappropriate as it did not consider the functions performed, assets employed, and risks assumed. The TPO also failed to share complete details of the benchmarking analysis and used data not available on the specified date. The appellant sought the exclusion of certain comparables that were functionally different.

4. Inclusion and Exclusion of Comparables:
The appellant sought the inclusion of PSI Data Systems Ltd., SIP Technologies & Exports Ltd., and TVS Infotech Ltd., which were excluded by the DRP for being loss-making companies. The Tribunal held that only persistent loss-making companies should be excluded, and since these companies were not persistent loss-makers, they should be included.

The appellant also sought the exclusion of KALS Information Systems Ltd. and E-Zest Solutions Ltd. on the grounds of functional disparity. The Tribunal found merit in the appellant's contentions, noting that KALS is a product development company and E-Zest is engaged in KPO and ITeS services, making them functionally different from the appellant's software development services.

Additional Ground of Appeal:
The appellant raised an additional ground seeking the exclusion of Acropetal Technologies Ltd., Cepha Imaging Pvt. Ltd., and Polaris Retail Infotech Ltd., which were selected as comparables in the Transfer Pricing study but later found to be functionally different. The Tribunal admitted the additional ground and restored it to the TPO for de novo examination.

Conclusion:
The appeal of the Revenue and the cross objection of the assessee were dismissed. The appeal of the assessee was partly allowed, with directions to include PSI Data Systems Ltd., SIP Technologies & Exports Ltd., and TVS Infotech Ltd. in the final set of comparables and to exclude KALS Information Systems Ltd. and E-Zest Solutions Ltd. from the list of comparables. The additional ground raised by the assessee was allowed for statistical purposes and restored to the TPO for fresh examination.