2021 (2) TMI 183 - AT - Income Tax

TP Adjustment - Comparable selection - application of turnover filter in choosing comparable companies - companies had turnover which was in excess of ₹ 200 crores and therefore these companies cannot be regarded as a comparable in the case of the assessee whose turnover was only ₹ 18 crores - HELD THAT - As decided in in the case of Autodesk India (P.) Ltd. 2018 (7) TMI 1862 - ITAT BANGALORE decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies accordingly. Assessee seeks inclusion of only 1 comparable being, Akshay Software Technologies Ltd. - As decided in case of M/s NXP India Pvt Ltd. 2020 (5) TMI 86 - ITAT BANGALORE this company is engaged in providing professional services, implementation, support and maintenance of ERP products and other services. These are nothing but software development services, as is evident from the notes forming part of financial statements which is placed in paper book at page 1825. Further the revenue from software services accounts for 99.45% of the total revenue of the company is evident from the financial statements placed on record. Being so, we direct TPO to consider this company as comparable to assessee s case while selecting the comparables. Negative working capital adjustment without appreciating the fact that assessee is a captive service provider - We find that in the case of M/S. SOFTWARE AG BANGALORE TECHNOLOGIES PVT. LTD. 2016 (3) TMI 1384 - ITAT BANGALORE passed by this Tribunal, it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. We therefore direct Ld.TPO to compute the ALP in accordance with the directions contained in this order after affording assessee opportunity of being heard.

Issues Involved:
1. Addition to total income due to adjustment to the arm's length price (ALP) of software development services.
2. Non-acceptance of the economic analysis undertaken by the appellant.
3. Use of information obtained under section 133(6) of the Act for comparability purposes.
4. Use of data pertaining only to FY 2012-13 for determining ALP.
5. Rejection of certain comparable companies based on different quantitative and qualitative filters.
6. Acceptance/rejection of companies based on unreasonable comparability criteria.
7. Adverse working capital adjustment.
8. Lack of adjustments for differences in risk profiles.
9. Non-consideration of self-assessment tax paid.
10. Imposition of interest under sections 234B and 234C.
11. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Addition to Total Income Due to Adjustment to ALP:
The learned AO/TPO and the DRP made an addition of ?1,36,50,206 to the total income of the appellant due to an adjustment to the arm's length price (ALP) of the software development services transaction with its associated enterprise.

2. Non-Acceptance of Economic Analysis:
The AO/TPO and DRP did not accept the economic analysis conducted by the appellant according to the provisions of the Act and the Income Tax Rules, 1962. They conducted a fresh economic analysis and concluded that the appellant’s international transaction was not at arm's length.

3. Use of Information Obtained Under Section 133(6):
The AO/TPO exercised their powers under section 133(6) of the Act to obtain information not available in the public domain and relied on it for comparability purposes, which the appellant contested.

4. Use of Data Pertaining Only to FY 2012-13:
The AO/TPO and DRP used data pertaining only to FY 2012-13, which was not available to the appellant at the time of complying with the transfer pricing documentation requirement.

5. Rejection of Comparable Companies:
The AO/TPO and DRP rejected certain comparable companies identified by the appellant using different quantitative and qualitative filters:
- Companies with different accounting years.
- Companies with employee costs greater than 25% of total revenues.
- Companies with export earnings greater than 75% of sales.
- Applying only the lower cap on the turnover filter of ?1 crore without an upper cap.

6. Acceptance/Rejection Based on Unreasonable Comparability Criteria:
The AO/TPO and DRP accepted/rejected companies based on unreasonable comparability criteria. The Tribunal, however, allowed the exclusion of comparables with turnovers exceeding ?200 crores, following the precedent set by the Tribunal in similar cases.

7. Adverse Working Capital Adjustment:
The AO/TPO and DRP provided an adverse working capital adjustment without considering that the appellant is a captive service provider. The Tribunal directed that negative working capital adjustments should not be made for captive service providers, referencing prior decisions where such adjustments were deemed inappropriate.

8. Lack of Adjustments for Differences in Risk Profiles:
The appellant argued that suitable adjustments were not made to account for differences in the risk profile between the appellant and the comparable companies.

9. Non-Consideration of Self-Assessment Tax Paid:
The AO did not consider the self-assessment tax amounting to ?4,78,111 paid by the appellant.

10. Imposition of Interest Under Sections 234B and 234C:
The AO imposed interest under sections 234B and 234C of the Act, which the appellant contested as erroneous.

11. Initiation of Penalty Proceedings Under Section 271(1)(c):
The AO initiated penalty proceedings under section 271(1)(c) of the Act, which the appellant argued was unjustified.

Conclusion:
The Tribunal allowed the appeal partly. The grounds related to the exclusion of comparables with turnovers exceeding ?200 crores and the negative working capital adjustment were decided in favor of the appellant. Other grounds were either not pressed or dismissed. The Tribunal directed the AO/TPO to recompute the ALP in accordance with the directions provided and after affording the appellant an opportunity of being heard. The appeal was thus partly allowed as indicated.

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