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2021 (2) TMI 1086 - AT - Income TaxTP Adjustment - arm's length price adjustment - comparable selection - assessee's sole argument during the course of hearing is regarding the PLI pertaining to software development services challenges the alleged wrongful inclusion of M/s. Infosys Limited as a comparable entity in the TPO's order - HELD THAT - We notice during the course of hearing that this tribunal's co-ordinate bench decision(s) in M/S. INFOR (INDIA) PVT. LTD. 2020 (12) TMI 235 - ITAT HYDERABAD as held that the very entity M/s. Infosys Ltd. to be not a valid comparable - Also in YAHOO SOFTWARE DEVELOPMENT INDIA PVT. LTD. 2020 (2) TMI 1365 - ITAT BANGALORE has also directed the department to exclude M/s. Infosys Limited from the array of comparables by adopting the very reasoning. We adopt the above detailed reasoning and direct the TPO to redetermine assessee's ALP after excluding Infosys Ltd. in above terms. Import of free of cost software for the purpose of testing services - We express our agreement with the Revenue's arguments supporting the TPO's conclusion that such free of cost import services indeed form international transaction as per provisions of the Act. The fact however remains that the impugned addition made in the TPO's order has not taken into account any comparable or market condition(s) regarding captive service provider segment. Nor the TPO has adopted any of these methods, direct or indirect, provided in the Income Tax Rules so as to make the impugned adjustment. We find no reason to sustain the same on merits therefore. This impugned adjustment is directed to be deleted. Working capital adjustment - We accept assessee's working capital adjustment in principle and direct the TPO to verify the necessary facts as per law.
Issues Involved:
1. Rejection of Arm's Length Price (ALP) computation for Software Development Services (SDS) and Marketing Support Services (MSS). 2. Rejection of transfer pricing study and search process. 3. Use of information under section 133(6) of the Income Tax Act. 4. Errors in comparability analysis for SDS segment. 5. Errors in comparability analysis for MSS segment. 6. Initiation of penalty proceedings under section 271(1)(c) of the Act. 7. Working capital adjustment issue. Detailed Analysis: 1. Rejection of ALP Computation for SDS and MSS: The appellant contended that the Assessing Officer (AO), following the Dispute Resolution Panel (DRP) directions, erred in rejecting the ALP computation for SDS and MSS, resulting in a transfer pricing (TP) adjustment of INR 5,63,19,340 and INR 22,08,862 respectively. The appellant argued that their TP analysis should be accepted, and the adjustments deleted. 2. Rejection of Transfer Pricing Study and Search Process: The appellant argued that the AO, TPO, and DRP erred in rejecting the transfer pricing study maintained in good faith and with due diligence. They also contested the rejection of their search process and the fresh comparability analysis carried out by the authorities. 3. Use of Information Under Section 133(6): The appellant contended that the use of information under section 133(6) amounted to choosing secret comparable companies whose information was not available in the public domain. 4. Errors in Comparability Analysis for SDS Segment: The appellant raised several issues regarding the comparability analysis for the SDS segment: - Modifying certain filters and not appreciating the turnover filter for companies with turnover between INR 1 crore to INR 200 crores. - Including companies with significant onsite expenditure and not considering information available on companies' websites for functional comparability. - Inclusion of companies such as Infosys Ltd., Cybage Software Pvt. Ltd., Persistent Systems Ltd., and others, which the appellant argued were not comparable to their SDS segment. - Exclusion of companies that were comparable to their SDS segment. - Considering provision for doubtful debts as non-operating expenses. - Mark-up on assets received free of cost from AE, resulting in an adjustment of INR 7,336,991. - Not allowing adjustments for differences in risk levels and working capital between the appellant and comparable companies. - Errors in computing the operating margin of final comparable companies for SDS segment. 5. Errors in Comparability Analysis for MSS Segment: The appellant raised similar issues for the MSS segment: - Inclusion of companies such as Ugam Solutions Private Limited, Majestic Research Services & Solutions Pvt. Ltd., and others, which were not comparable to their MSS segment. - Exclusion of companies that were comparable to their MSS segment. - Errors in computing the operating margin of final comparable companies for MSS segment. - Not allowing adjustments for differences in risk levels and working capital between the appellant and comparable companies. 6. Initiation of Penalty Proceedings Under Section 271(1)(c): The appellant argued that the penalty proceedings initiated under section 271(1)(c) were erroneous and should be dropped. 7. Working Capital Adjustment Issue: The appellant contested the denial of working capital adjustment, arguing that they had provided all relevant details of comparable entities. Tribunal's Findings: Rejection of ALP Computation: The appellant did not press for their first, second, third, fifth, and sixth substantive grounds. The tribunal focused on the fourth substantive ground related to the ALP adjustment for SDS segment. Inclusion of Infosys Ltd. as Comparable: The tribunal noted that Infosys Ltd. was included as a comparable entity despite significant differences in turnover (?74.28 crores for the appellant vs. ?45658 crores for Infosys). The tribunal referenced its co-ordinate bench decisions, which held that Infosys Ltd., Larsen & Toubro Infotech Ltd., and Mindtree Ltd. were not valid comparables due to their giant status in software development. The tribunal directed the exclusion of Infosys Ltd. from the comparables. Adjustment for Free of Cost Assets: The tribunal agreed with the Revenue that free of cost import services form an international transaction. However, it found that the TPO did not adopt any methods provided in the Income Tax Rules to make the adjustment. The tribunal directed the deletion of the ?87,55,542/- adjustment. Working Capital Adjustment: The tribunal found that the appellant had provided relevant details for working capital adjustment, contrary to the DRP's findings. It directed the TPO to verify the necessary facts and allow the adjustment as per law. Conclusion: The tribunal partly allowed the appellant's appeal, directing the exclusion of Infosys Ltd. from the comparables and the deletion of the ?87,55,542/- adjustment. The working capital adjustment was accepted in principle, with directions for verification. The appellant's other grounds were rendered academic. Order pronounced in Open Court on 18/02/2021.
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