2021 (5) TMI 481 - AT - Income Tax

TP Adjustment - comparable selection - functional dissimilarity - HELD THAT - Assessee is primarily engaged in providing software development and software consultancy services to AEs. These services have been collectively referred as 'Software services', thus companies functionally dissimilar with that of assessee need to be deselected. Thinksoft Global Services Limited - Having perused the Director's report, Annual report of Thinksoft Global Services Limited, it is evident that datas are available in public domain as the company is listed with the Bombay Stock Exchange. These facts were not refuted by the Ld. DR. Further, the Ld. DR also could not bring on record any materials contrary to these facts. Having heard the parties herein, taking totality of facts and circumstances, we direct the AO/TPO to include Thinksoft Global Services Limited as comparable Company with that of the assessee company in the final list of comparables. Thus, Ground No. 8 raised in appeal by the assessee is allowed. Exclude Cybermate Infotek Limited, Infobeans Systems Private Limited from the final list of comparable companies as regards the assessee as functionally dissimilar. Cybercom Datamatics Information Solutions Limited - It is an undisputed fact, the assessee had submitted annual report for AY 2013-14 and not for AY 2012-13. Thus, qualitative as well as quantitative data regarding this company i.e. Cybercom Datamatics Information Solutions Limited was not available before the Ld. CIT(Appeals) for proper adjudication to decide whether this company should be excluded from the final list of comparables or not. In view thereof, in the interest of justice, we set aside the order of the Ld. CIT(Appeals) on this comparable and remand the same to the file of the AO/TPO to determine from company's annual report for the year under consideration in respect of Director's report, notes of accounts and audit report regarding the functional comparability of the company. Thirdware Solutions Limited - As DR submitted that this issue may be remanded to the file of the AO/TPO for detailed factual verification based on annual report and other relevant documents in order to verify the nature and scope of the function of Thirdware Solutions Limited. The Ld. Counsel for the assessee did not raise any objection to this proposition. We are of the considered view, in the interest of justice, we agree with the submissions of the Ld. DR and considering the facts and circumstances, we restore this ground to the file of the AO/TPO for determining functionality of this company

Issues Involved:
1. Transfer Pricing Adjustment
2. Use of Financial Data for Comparable Companies
3. Export Earnings Filter
4. Turnover Filter
5. Super Normal Profit Companies
6. Rejection of Functionally Comparable Companies
7. Financial Year End Differences
8. Rejection and Inclusion of Comparable Companies
9. Risk Profile Adjustment
10. Levy of Interest and Penalty Proceedings
11. Remand of Comparable Company Examination

Detailed Analysis:

Transfer Pricing Adjustment:
The assessee contested the transfer pricing adjustment made by the TPO, arguing that the pricing of their international transactions was at arm's length. The TPO determined the average PLI of comparable companies at 26.19% against the assessee's 10.77%, resulting in an upward adjustment of ?10,31,89,058.

Use of Financial Data for Comparable Companies:
The assessee argued against the use of single-year financial data for comparable companies, advocating for the inclusion of multiple years' data. The TPO, however, used only the financial year ending 31 March 2012 data, which the assessee claimed was not available during their compliance with transfer pricing regulations.

Export Earnings Filter:
The assessee applied a 25% export earnings filter, while the TPO modified this to 75%. The assessee did not press this ground during the hearing.

Turnover Filter:
The TPO applied a turnover filter of ?1 Crore to ?500 Crores, rejecting the assessee's filter of ?1 Crore to ?200 Crores. This ground was also not pressed by the assessee during the hearing.

Super Normal Profit Companies:
The TPO included companies with super normal profits as comparables, which the assessee contested. This ground was not pressed by the assessee.

Rejection of Functionally Comparable Companies:
The assessee's transfer pricing study rejected companies with persistent losses, but the TPO rejected companies solely based on incurring losses during AY 2012-13. This ground was not pressed by the assessee.

Financial Year End Differences:
The TPO rejected companies with different financial year ends than the assessee. This ground was not pressed by the assessee.

Rejection and Inclusion of Comparable Companies:
- Thinksoft Global Services Limited: The TPO rejected this company due to the unavailability of its annual report in the public domain. The assessee provided the annual report, showing it satisfied all comparability criteria. The Tribunal directed the AO/TPO to include Thinksoft Global Services Limited as a comparable company.
- Cybermate Infotek Limited: The Tribunal excluded this company due to its involvement in product development and lack of segmental details, following previous Tribunal decisions.
- Infobeans Systems Private Limited: Excluded due to an extraordinary event of demerger and involvement in product sales, following Tribunal precedents.
- Cybercom Datamatics Information Solutions Limited: Remanded to AO/TPO for detailed examination of the company's annual report to determine functional comparability.

Risk Profile Adjustment:
The assessee argued for adjustments to account for differences in risk profiles between them and comparable companies. This ground was not pressed by the assessee.

Levy of Interest and Penalty Proceedings:
The assessee contested the levy of interest under section 234B and initiation of penalty proceedings under section 271(1)(c). This ground was deemed premature and consequential, requiring no adjudication.

Remand of Comparable Company Examination:
The CIT(A) remanded the examination of Thinksoft Global Services Limited to the AO, which the assessee contested as beyond CIT(A)'s powers. This ground was dismissed as not pressed.

Revenue's Appeal:
1. Cigniti Technologies Ltd.: The CIT(A) directed the AO/TPO to consider this company as comparable, ignoring the AMD/Sales filter applied by the TPO. The Tribunal upheld the TPO's order as the assessee did not contest this appeal.
2. Presidential Systems and Solutions Ltd.: The CIT(A) directed AO/TPO to consider this company as comparable despite significant turnover differences and Safe Harbour Rules criteria. The Tribunal upheld the TPO's order as the assessee did not contest this appeal.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, while the Revenue's appeal was allowed. The Tribunal provided detailed directions on the inclusion and exclusion of specific comparable companies and remanded certain issues for further examination by the AO/TPO.

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