2020 (10) TMI 32 - AT - Income Tax

TP Adjustment - addition in respect of international transaction of software development services rendered by the Appellant to its parent company in USA - comparable selection - HELD THAT - Persistent Systems Ltd - The mandate of the law clearly provides that FAR should be compared for this reason also we reject the reliance placed by the assessee on other judicial precedents, as there was no comparability made of the functional profiles of the assessee with the assessee in whose case such comparables are held to be excluded or included. No infirmity in the order of the learned transfer pricing officer as well as the direction of the learned that DRP in holding that persistent Systems Ltd is a good comparable. Therefore, we reject the argument for its exclusion. L T Infotech Ltd - As assessee submitted that it filed an objection before the ld DRP as per para No. 4.5.2 however same has not been considered by the DRP, therefore, we set aside this comparable before the learned dispute resolution panel to decide on the objections of the assessee. Sasken Communication Technology Ltd. - Only objection of the assessee is that above comparable company has different margin shown in the show cause notice and order of the TPO - order the margins of this comparable was shown to be 7.28% whereas in the TP order as well as the effect order passed by the TPO on direction of the learned dispute resolution panel the margin of this comparable were taken at 33.2%. There is no justification or reasons were found in the TP order for change in the margins and the basis of such changes. Therefore, we set aside this comparable to the file of the learned transfer pricing officer to show assessee how he has changed the above margin and on what basis the margins have gone up to 33.2% from 7.28%. Cybercom Datamatics information solutions Ltd - as challenged by the assessee stating that it was never part of the show cause notice issued by the learned transfer pricing officer but featured in the final order of the learned transfer pricing officer - As carefully gone through the showcause notice issued by the learned transfer pricing officer dated 18 August 2017 and find that in para number seven this comparable company was not at all considered in the show cause notice but was taken into the order u/s 92CA (3) of the act straight. In view of this, we direct the learned transfer pricing officer to exclude the above comparable company from the comparability analysis as no proper opportunity was given to the assessee to contest the same before the learned transfer pricing officer. Adjustment of the margins with respect to the working capital and risk adjustment - There were no arguments raised before the learned transfer pricing officer also with respect to the adjustment of margin on account of working capital differences. On careful perusal is of the objections raised before the learned dispute resolution panel, where six objections were raised, we do not find any objection with respect to granting of the working capital adjustment and other risk adjustment. Even before us, no working of the working capital adjustment or other risk adjustment is provided. Therefore, in absence of any working, provided by assessee before us or before the lower authorities or even raising this claim before the lower authorities we do not find any merit in this ground. Hence dismissed. Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Selection of Comparables
3. Working Capital and Risk Adjustment
4. Interest and Penalty Charges

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue in this appeal was the addition made by the Assessing Officer (AO) on account of the arm's length price of the international transaction amounting to ?32,614,009. The AO assessed the total income of the assessee at ?1,416,117,999 against the returned income of ?113,503,990 after making the transfer pricing adjustment for software development services rendered to its parent company.

2. Selection of Comparables:
The assessee contested the inclusion of certain companies as comparables by the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP).

- Persistent Systems Ltd: The assessee argued for its exclusion, citing functional dissimilarity and lack of segmental information. The Tribunal, after considering the facts and previous orders, directed the TPO/AO to exclude Persistent Systems Ltd from the comparable analysis, noting that the revenue was derived solely from software services without product sales for the current year.

- Larsen & Toubro Infotech Ltd: The assessee's objections were not considered by the DRP. The Tribunal remanded this issue back to the DRP for reconsideration.

- Sasken Communication Technology Ltd: The assessee pointed out discrepancies in the margin figures used by the TPO. The Tribunal directed the TPO to clarify the basis for the change in margins from 7.28% to 33.2%.

- Cybercom Datamatics Information Solutions Ltd: The assessee argued that this company was not included in the TPO’s show cause notice but was added in the final order. The Tribunal directed the exclusion of this company from the comparability analysis due to the lack of opportunity for the assessee to contest its inclusion.

3. Working Capital and Risk Adjustment:
The assessee sought adjustments for working capital and risk differences. However, no specific arguments or workings were provided to substantiate these claims. The Tribunal noted that these claims were not raised before the lower authorities or supported with necessary documentation. Consequently, this ground was dismissed.

4. Interest and Penalty Charges:
Grounds related to the chargeability of interest under Sections 234B and 234C and the initiation of penalty under Section 271(1)(c) were dismissed as they lacked merit and no specific arguments were presented.

Conclusion:
The appeal was partly allowed. The Tribunal directed the exclusion of Persistent Systems Ltd and Cybercom Datamatics Information Solutions Ltd from the comparability analysis, remanded the issue of Larsen & Toubro Infotech Ltd to the DRP, and sought clarification on the margin figures for Sasken Communication Technology Ltd. Claims for working capital and risk adjustments were dismissed due to lack of substantiation. Interest and penalty charges were also dismissed.