2021 (11) TMI 32 - AT - Income Tax

TP Adjustment - Comparable selection - Functional dissimilarity - upward adjustment in respect of the international transactions pertaining to Information Technology ( IT ), Information Technology Enabled Services ( ITeS ) and Business Support Service ( BSS ) segment - HELD THAT - Exclusion of companies functionally different with that of assessee from the final set of comparables in respect of the assessee for IT ,ITES segment and BSS Segment.

Summary

Issues Involved:
1. Upward adjustment in respect of international transactions for IT, ITeS, and BSS segments.
2. Rejection of the economic analysis undertaken by the appellant for determining the arm's length price (ALP).
3. Rejection/modification of the search process and filters used by the appellant.
4. Upward TP adjustment for the IT segment.
5. Rejection of functionally comparable companies/segments for IT segment benchmarking.
6. Upward TP adjustment for the ITeS segment.
7. Rejection of functionally comparable companies/segments for ITeS segment benchmarking.
8. Upward TP adjustment for the BSS segment.
9. Selection/retention of certain companies for benchmarking the BSS segment.
10. Incorrect computation of operating margins for IT, ITeS, and BSS segments.
11. Non-provision of appropriate economic adjustments.
12. Ignoring the provisions of Rule 10B(4) and judicial pronouncements advocating multiple year data usage.
13. Non-provision of the benefit of 5% range.
14. Non-credit for advance tax and self-assessment tax.

Issue-wise Detailed Analysis:

1. Upward Adjustment in International Transactions:
The AO/TPO made an upward adjustment of ?1,87,58,681, alleging that the international transactions for IT, ITeS, and BSS segments were not at arm's length. The assessment was completed at ?16,09,84,540 against the returned income of ?14,22,25,857.

2. Rejection of Economic Analysis:
The AO/DRP/TPO rejected the economic analysis conducted by the appellant for determining the ALP of the international transactions. They also rejected the fresh search conducted by the appellant using current single-year data.

3. Rejection/Modification of Search Process and Filters:
The AO/DRP/TPO arbitrarily rejected or modified the search process and filters adopted by the appellant for benchmarking its international transactions.

4. Upward TP Adjustment for IT Segment:
An upward TP adjustment of ?1,49,86,139 was made for the IT segment, alleging that the transactions were not at arm's length as per section 92C of the Act read with Rule 10D.

5. Rejection of Functionally Comparable Companies for IT Segment:
The AO/DRP/TPO arbitrarily rejected certain functionally comparable companies selected by the appellant for the IT segment and included functionally incomparable companies.

- KALS Information Systems Ltd.:
The Tribunal directed the TPO to exclude KALS Information Systems Ltd. from the list of comparables, following the decision of the Hon'ble Bombay High Court in CIT vs. PTC Software India (Pvt.) Ltd., as KALS was engaged in software product development, unlike the appellant.

- Acropetal Technologies Ltd.:
The Tribunal directed the exclusion of Acropetal Technologies Ltd. due to its significant onsite development expenses, making it functionally different from the appellant.

- Thirdware Solutions Ltd.:
The Tribunal directed the exclusion of Thirdware Solutions Ltd. as it was engaged in software products and lacked segmental data, making it non-comparable.

- Goldstone Technologies Ltd.:
The Tribunal remanded the issue back to the AO/TPO to follow the DRP's directions regarding the computation of margins.

6. Upward TP Adjustment for ITeS Segment:
An upward TP adjustment of ?23,38,531 was made for the ITeS segment, alleging that the transactions were not at arm's length.

7. Rejection of Functionally Comparable Companies for ITeS Segment:
The AO/DRP/TPO arbitrarily rejected certain functionally comparable companies selected by the appellant for the ITeS segment.

- Accentia Technologies Ltd.:
The Tribunal directed the exclusion of Accentia Technologies Ltd., following the decision in Schlumberger India Technology Centre (P.) Ltd. vs. DDIT, due to its functional differences and extraordinary financial events.

- Informed Technologies Ltd.:
The Tribunal directed the exclusion of Informed Technologies Ltd., following the decision in Vishay Components (P.) Ltd. vs. ACIT, as it was engaged in KPO services.

- Jeevan Softech Ltd. (Seg):
The Tribunal remanded the issue back to the AO/TPO to work out the correct margin and determine the average margin of comparables.

8. Upward TP Adjustment for BSS Segment:
An upward TP adjustment of ?14,34,011 was made for the BSS segment, alleging that the transactions were not at arm's length.

9. Selection/Retention of Companies for BSS Segment:
The AO/DRP/TPO selected/retained Future Capital Investment Advisors Limited and Future Capital Holdings Ltd. for benchmarking the BSS segment.

- Future Capital Holdings Limited:
The Tribunal remanded the issue back to the AO/TPO for verification of Related Party Transactions (RPT) and comparability analysis.

- Future Capital Investment Advisors Limited:
The Tribunal remanded the issue back to the AO/TPO to follow the DRP's directions regarding margin determination.

10. Incorrect Computation of Operating Margins:
The AO/TPO incorrectly computed the operating margins of the appellant's IT, ITeS, and BSS segments, despite specific directions from the DRP.

11. Non-provision of Appropriate Economic Adjustments:
The AO/DRP/TPO failed to provide appropriate economic adjustments as required under Rule 10B(1)(iii).

12. Ignoring Provisions of Rule 10B(4) and Judicial Pronouncements:
The AO/DRP/TPO ignored the provisions of Rule 10B(4) and judicial pronouncements advocating the usage of multiple-year data for determining the ALP.

13. Non-provision of 5% Range Benefit:
The AO/DRP/TPO did not provide the benefit of the 5% range as provided by the proviso to section 92C(2).

14. Non-credit for Advance Tax and Self-assessment Tax:
The AO failed to give full credit for advance tax amounting to ?88,53,478 and self-assessment tax amounting to ?1,88,55,880 while determining the total tax liability.

Conclusion:
The appeal was partly allowed for statistical purposes, with several issues remanded back to the AO/TPO for reconsideration and compliance with the principles of natural justice.