2020 (11) TMI 869 - AT - Income Tax

TP Adjustment - comparable selection - software development services segment of assessee - HELD THAT - Infosys technologies Ltd directed to exclude from comparability analysis based on the reason of comparable company is having huge brand value.The honourable Bombay High Court in case of CIT versus Pentair water India private limited 2016 (5) TMI 137 - BOMBAY HIGH COURT has held that where comparable has multiple times of turnover over the size of the assessee, same is not comparable. Wipro Ltd s turnover is ₹ 9668 crores against the assessee s total sales and turnover is of ₹ 17 crores. The turnover of the comparable is more than 500 times the size of the assessee - Following case of M/S. PENTAIR WATER INDIA PVT. LTD. 2016 (5) TMI 137 - BOMBAY HIGH COURT we direct the learned transfer pricing officer/assessing officer to exclude Wipro Ltd as a comparable company from the comparability analysis. Persistent Systems Ltd need to be rejected as relying on EQUANT SOLUTIONS INDIA PVT. LTD. VERSUS DCIT, CIRCLE 3, GURGAON 2016 (1) TMI 1260 - ITAT DELHI

Issues Involved:
1. Enhancement of income by ?75,207,938 without appreciating factual positions/submissions.
2. Inclusion of certain companies as comparables against Tribunal's directions.
3. Non-following of rule of consistency by DRP.
4. Enhancement of income by ?75,207,938 by AO/TPO.
5. Non-adoption of Safe Harbour Rules, 2013.
6. Disregarding detailed submissions by the appellant.
7. Charging of interest under sections 234 A, B, C, and D.
8. Initiation of penalty under section 271(1)(C) mechanically.

Issue-wise Detailed Analysis:

1. Enhancement of Income by ?75,207,938:
The appellant argued that the AO/TPO, following the DRP's directions, erred in enhancing the income without considering the factual submissions. The Tribunal noted that the DRP included companies like Maple E-Solutions Ltd and Triton Corp Ltd, whose directors were involved in fraud, thus their financials were unreliable. Similarly, companies like Vishal Information Technologies Limited, which acted merely as intermediaries, and companies with extraordinary circumstances like mergers were included against the Tribunal's previous directions. The Tribunal directed the exclusion of these companies from the comparability analysis.

2. Inclusion of Certain Companies as Comparables:
The appellant contended that the DRP included companies that were functionally dissimilar or had extraordinary circumstances, against the Tribunal's directions. The Tribunal observed that the DRP included Persistent Systems Limited, Sasken Communications Technologies Limited, and others, which were previously directed to be excluded by the Tribunal. The Tribunal reiterated the exclusion of these companies from the comparability analysis.

3. Non-following of Rule of Consistency:
The appellant argued that the DRP included companies like Accentia Technologies and Vishal Information Technologies Limited as comparables for AY 2007-08 but held them incomparable for AY 2008-09, violating the rule of consistency. The Tribunal acknowledged this inconsistency and directed the exclusion of these companies from the comparability analysis.

4. Enhancement of Income by ?75,207,938 by AO/TPO:
The appellant argued that the AO/TPO erred in enhancing the income by holding that the international transactions did not satisfy the arm's length principle. The Tribunal noted that the AO/TPO disregarded the functional analysis and the arm's length price determined by the appellant, instead using their own filters and selecting comparables. The Tribunal directed the exclusion of certain high-margin and functionally dissimilar companies from the comparability analysis.

5. Non-adoption of Safe Harbour Rules, 2013:
The appellant contended that the AO/TPO did not adopt the computation of operating mark-up of comparable companies as per Safe Harbour Rules, 2013, as directed by the DRP. The Tribunal noted that the DRP's directions are binding on the AO as per Section 144C(13) of the Act and directed the AO/TPO to comply with these directions.

6. Disregarding Detailed Submissions by the Appellant:
The appellant argued that the DRP disregarded detailed arguments and submissions during the proceedings. The Tribunal observed that the DRP did not fully consider the appellant's submissions and directed a fresh adjudication considering these submissions.

7. Charging of Interest under Sections 234 A, B, C, and D:
The appellant argued that the AO erred in charging interest under sections 234 A, B, C, and D. The Tribunal did not provide a specific ruling on this issue, as it was contingent on the final determination of the appellant's income.

8. Initiation of Penalty under Section 271(1)(C):
The appellant contended that the AO initiated penalty proceedings under section 271(1)(C) mechanically without recording satisfaction. The Tribunal did not provide a specific ruling on this issue, as it was contingent on the final determination of the appellant's income.

Conclusion:
The Tribunal directed the exclusion of Infosys Technologies Ltd, Wipro Ltd, and Persistent Systems Ltd from the comparability analysis for the software development segment. Consequently, the appeal of the assessee was partly allowed, and all other grounds of appeal were dismissed without further adjudication. The order was pronounced in the open court on 25/11/2020.

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