2020 (10) TMI 1075 - AT - Income Tax

TP Adjustment - comparable selection - assessee is aggrieved with the removal of 2 comparable companies that is CG Vak and R Systems - HELD THAT - TPO applied turnover filter and the various courts have held that turnover filter is a important filter which is a tool to eliminate large entities which enjoys considerable advantage with their huge revenue generation ability and capability to absorb fixed overheads - turnover of CG Vak is 59 times lessar than the assessee. It is one of the reason that this company s revenues are coming down and its profits also declining. Since this company failed in revenue filter and as submitted by the Ld DR that this segment is declaring consistent losses over the years, we do not see any reason to include this as comparable company. Accordingly, contention of the assessee is rejected. R Systems - We notice from the submissions of the Ld AR that R systems has disclosed their financial information and revenue generation from BPO segment. The financial information clearly indicate that this company has BPO segment and declared their financial results segment-wise. Thus this company is functionally comparable with this assessee company. The separate BPO segment financial results is available for the period January to December. Since the financial results are available only for Jan-December, we notice from the decisions of the coordinate benches that it has consistently approved the method of working out the segmental data from the existing records and obtaining last quarter i.e., January to March from R Systems to compile the data for the period April to March and then directing the TPO to make the analysis of comparability study by including this company as comparable company - refer this issue back to TPO/AO to include this company as comparable company and work out the segmental data for the period April to March 2010. Risk adjustment - Whether the assessee has any marketing and technical risk compared to comparables ?- HELD THAT - Assessee is a captive service provider and earned income out of the transaction by cost plus basis. It can be seen that the assessee has encountered the risk of having a single customer, whereas the same cannot be said with regard to comparables. The comparables may be dealing in market and therefore they were prone to the marketing and technical risks. They may have incurred certain expenditure on marketing in order to mitigate the risk. Therefore, the risk encountered by the assessee cannot be said to be equal risk attached to the comparables in such a situation. TPO output to have calculated the risk adjustment. Working capital adjustment - HELD THAT - Since TPO has not calculated the risk adjustment and working capital adjustment to the net margin of the comparables for bringing them on par with the assessee company. Even though assessee has made its submission before TPO as well as DRP. Therefore we are inclined to remit this issue also back to the file of TPO/AO to calculate the risk adjustment and working capital adjustment by collecting the relevant information. Accordingly ground raised by the assessee is allowed for statistical purpose.

Issues Involved:
1. Transfer pricing adjustment.
2. Rejection of comparable companies.
3. Working capital and risk adjustment.
4. Set-off of losses against profits under section 10A.
5. Penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee reported various international transactions and applied the Transactional Net Margin Method (TNMM) to determine the Arm's Length Price (ALP). The Transfer Pricing Officer (TPO) applied several filters and rejected six out of nine comparables selected by the assessee, leading to a transfer pricing adjustment of ?4,86,45,217. The assessee objected to the rejection of CG-VAK Software and Exports Ltd. and R Systems International Ltd. as comparables, arguing that these companies were functionally similar and had been accepted as comparables in other assessment years.

2. Rejection of Comparable Companies:
The TPO rejected CG-VAK Software and Exports Ltd. on the grounds that it was predominantly an IT services company, with only 14% of its revenue from BPO services. The TPO also rejected R Systems International Ltd. because it was a leading provider of outsourced product development and customer support services, not ITES, and followed a different financial year. The assessee argued that segmental data for BPO services was available and should be considered.

3. Working Capital and Risk Adjustment:
The assessee argued that as a captive service provider, it faced different risks compared to full-fledged ITES providers and that working capital adjustments should be made. The TPO did not consider these adjustments, and the Dispute Resolution Panel (DRP) rejected the assessee's contention.

4. Set-off of Losses Against Profits Under Section 10A:
The Assessing Officer (AO) disallowed the exemption claimed under section 10A by setting off losses of non-STPI units against the profit of the STPI unit. The DRP, relying on the case of Black and Veatch Consulting P Ltd (348 ITR 72), allowed the assessee's contention. The revenue appealed against this decision.

5. Penalty Proceedings Under Section 271(1)(c):
The assessee objected to the initiation of penalty proceedings under section 271(1)(c) for concealment of income or furnishing inaccurate particulars.

Judgment:

Transfer Pricing Adjustment:
The Tribunal found that CG-VAK Software and Exports Ltd. was correctly rejected due to its low turnover and predominant IT services revenue. However, R Systems International Ltd. was deemed functionally comparable, and the Tribunal directed the TPO to obtain the last quarter data to align its financial year with the assessee’s and reconsider its inclusion as a comparable.

Working Capital and Risk Adjustment:
The Tribunal remitted the issue back to the TPO to calculate the risk adjustment and working capital adjustment, considering the assessee's status as a captive service provider.

Set-off of Losses Against Profits Under Section 10A:
The Tribunal dismissed the revenue's appeal, citing the Supreme Court's decision in CIT & Anr. v. M/s Yokogawa India Ltd. (391 ITR 274), which held that the deduction under section 10A should be made before the set-off of losses.

Penalty Proceedings Under Section 271(1)(c):
The Tribunal did not specifically address the penalty proceedings under section 271(1)(c) as it was not pressed by the assessee.

Conclusion:
The appeal filed by the assessee was allowed for statistical purposes, and the appeal filed by the revenue was dismissed. The Tribunal directed the TPO to reconsider the inclusion of R Systems International Ltd. as a comparable and to calculate the necessary adjustments for working capital and risk.

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