2020 (5) TMI 355 - AT - Income Tax

TP Adjustment - Comparable selection - Software Development Service Segment - HELD THAT - No infirmity in excluding Infosys Ltd., Larson Tubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Technologies Ltd., Infosys Ltd., and TATA Elxsi Ltd., for having high turnover as compared to a captive service provider like assessee. Risk adjustment at 1% on ad hoc basis - HELD THAT - Risk adjustment has been provided at risk adjustment on ad hoc basis at 1%. Ld.CIT DR submitted that there is no scientific manner which has been applied by DRP. Assessee is a low risk bearing company for SWD and ITES segment. Therefore while computing risk adjustment, risk assumed by comparables for earning revenue under particular segment needs to be analysed. Assessee is directed to provide for necessary details in respect of all comparables finally selected. If that information is insufficient, and it is beyond the power of Assessee to produce correct information about comparable companies. Revenue on the other hand has sufficient powers u/s.133(6) to compel production of required details from comparable companies. If this power is not exercised to find and get information required, then it is no defense to say that Assessee has not furnished required details to deny any adjustment on account of working capital/risk differences. Ld.AO/TPO shall then compute risk as adjustment in accordance with law. Revenue s appeal stands allowed for statistical purposes. Computing deduction under section 10A - excluding band width expense and travel expense incurred in foreign currency from export turnover - HELD THAT - DRP while considering the issue referred to view of Hon ble Karnataka High Court in case of Tata Elxsi Ltd vs CIT 2011 (8) TMI 782 - KARNATAKA HIGH COURT correctly directed Ld.AO to follow the view taken therein, while computing deduction under section 10 A. In the absence of segmental details companies need to be rejected. Inclusion of companies functionally comparable with assessee that is rendering captive services to its associated enterprises. Exclusion of companies as undergone acquisition which is an extraordinary event and can impact the profits for the year under consideration. Working capital adjustment - claim denied since assessee did not filed requisite details in respect of comparables - HELD THAT - As held by various decisions of coordinate benches of this Tribunal, we direct Ld.TPO to recompute working capital adjustment in actual, and to consider the same for purposes of computing arm s length margin as per the view expressed by this Tribunal in case of Huawei Technologies India Pvt. Ltd vs JCIT 2018 (10) TMI 1796 - ITAT BANGALORE Assessee is directed to provide for necessary details in respect of all the comparables finally selected. If that information is insufficient, it is beyond the power of Assessee to produce correct information about comparable companies. Revenue on the other hand has sufficient powers u/s.133(6) to compel production of required details from comparable companies. If this power is not exercised to find to get information required, then it is no defence to say that Assessee has not furnished required details to deny any adjustment on account of working capital. Ld.AO/TPO shall then compute working capital adjustment in accordance with law.

Summary

Issues Involved:

1. Non-consideration of the second Proviso to section 92C(2) of the Act in computing the arm's length price.
2. Functional comparability of certain companies for software development and IT-enabled services.
3. Restriction of working capital adjustment.
4. Set-off of brought forward loss.
5. Exclusion of certain expenditures from export turnover for section 10A deduction.
6. Turnover criteria for comparables.
7. Risk adjustment computation.

Issue-wise Detailed Analysis:

1. Non-consideration of the second Proviso to section 92C(2) of the Act:
The Tribunal did not explicitly address this issue in the judgment, indicating it may not have been a significant point of contention or was resolved in favor of the assessee without detailed discussion.

2. Functional Comparability:
Software Development Services:
- Persistent Systems and Solutions Ltd: Excluded due to lack of segmental details in the annual report and involvement in both software development services and product licensing.
- ICRA Techno Analytics Ltd: Excluded for being engaged in diverse activities without segmental details, making it functionally incomparable to the assessee.
- KALS Information Systems Ltd: Remanded to DRP for verification of functional dissimilarities, particularly regarding the sale of software products.

IT-enabled Services:
- Accentia Technologies Ltd: Excluded due to involvement in high-end KPO services and significant intangibles, making it not comparable to the assessee's back-office services.
- ICRA Online Ltd: Remanded to AO/TPO for fresh consideration due to functional dissimilarities and failure of the RPT filter.

3. Restriction of Working Capital Adjustment:
The Tribunal directed the AO/TPO to recompute the working capital adjustment in actual terms, emphasizing the need for the assessee to provide necessary details of comparables. If the information is insufficient, the AO/TPO should use their powers under section 133(6) to obtain the required details.

4. Set-off of Brought Forward Loss:
The Tribunal remanded the issue to the AO/TPO for verification of the assessee's claim regarding the set-off of brought forward losses from AY 2009-10. If verified, the claim should be allowed in accordance with the law.

5. Exclusion of Certain Expenditures from Export Turnover:
The Tribunal upheld the DRP's direction to exclude bandwidth and travel expenses from export turnover while computing the deduction under section 10A, in line with the Karnataka High Court's decision in Tata Elxsi Ltd.

6. Turnover Criteria for Comparables:
The Tribunal supported the exclusion of companies with turnovers exceeding ?200 crores, aligning with the principle that turnover is a relevant criterion for comparability. This decision followed the precedent set by the Bombay High Court in Pentair Water Pvt. Ltd.

7. Risk Adjustment Computation:
The Tribunal found the DRP's ad hoc 1% risk adjustment without a scientific basis to be inappropriate. It directed the AO/TPO to compute risk adjustment in accordance with the law, considering the risk assumed by comparables for earning revenue under the relevant segments.

Separate Judgments:
The judgment was delivered collectively by the members of the Tribunal, and no separate judgments by individual judges were mentioned.

Conclusion:
The Tribunal's decision addressed various issues related to transfer pricing adjustments, functional comparability, working capital adjustments, and deductions under section 10A. The appeals were partly allowed, with several issues remanded for further verification and computation by the AO/TPO.