2022 (8) TMI 1283 - AT - Income Tax

TP Adjustment - Comparable selection - Application of turnover filter - functional dissimilarity - HELD THAT - The Bangalore Bench of the Tribunal in the case of BORQS Software Solutions Pvt. Ltd. 2021 (10) TMI 1351 - ITAT BANGALORE has considered a host of rulings on this issue including that of the High Courts wherein divergent views were taken with respect to the application of different filters. It was held by the Tribunal that the application of the turnover filter is justified on the basis of the classification of companies as per the report of Dun and Bradstreet. Similarly, the Tribunal, in the case of ANSR Global Corporation Pvt. Ltd. 2022 (4) TMI 1441 - ITAT BANGALORE directed the application of a higher turnover filter to exclude companies with a turnover of more than Rs.200 crore. Since the assessee in the present case has a turnover of Rs.20.06 crore, companies reporting turnover above a threshold are not considered comparable. Accordingly, by following the above orders of the Tribunal, we direct the AO / TPO to apply the appropriate upper turnover filter and consider exclusion of the above seven companies having turnover in excess of Rs.200 crore. Exclusion of Infobeans Technologies Limited on the ground of functional comparability - Tribunal held the finding of DRP has not been countered by the assessee in the said case. However, the company s response to the notice u/s 133(6) of the I.T.Act is contrary to the functions set out in the audited financial statements (enclosed as Annexure-A), and therefore, the same cannot be relied upon. Moreover, the website of the company shows tht the company is engaged in diverse service, which are not similar to functions of the assessee in the instant case. Since the learned AR has been able to clearly established that Infobean Technologies Limited is not functionally comparable to that of the assessee, we follow the orders of the ITAT referred and direct the AO / TPO to exclude Infobean Technologies Limited from comparable list. It is ordered accordingly. Working capital adjustment - In the view of the ruling in the case of M/s.Huawei Technologies India (P) Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE the basis of rejection of the relief by the DRP is no longer valid. We therefore, direct the AO/TPO to consider the workings in the light of the aforesaid ruling and allow appropriate adjustment in arriving at an arm s length price. We hold and direct accordingly. Correction of margin - In view of the principles of natural justice and pendency of the application for rectification of mistake apparent from the records, we deem it appropriate to remand the matter back to the file of the AO / TPO to examine the claims of the assessee with regard to erroneous computation of margin. Accordingly, groundraised by the assessee is allowed for statistical purposes.

Issues Involved:
1. Application of upper turnover filter for comparable companies.
2. Functional comparability of Infobeans Technologies Limited.
3. Inclusion of Akshay Software Technologies Limited and Evoke Technologies Limited as comparables.
4. Adjustment on account of working capital differences.
5. Correction of margin computation error.

Detailed Analysis:

Issue 1: Application of Upper Turnover Filter for Comparable Companies
The assessee argued for the exclusion of seven companies based on the application of an upper turnover filter, asserting that the TPO/DRP should have applied this filter since a lower turnover filter was already used. The Tribunal referenced previous rulings, including BORQS Software Solutions Pvt. Ltd. v. ITO and ANSR Global Corporation Pvt. Ltd. v. ACIT, which supported the application of a higher turnover filter to exclude companies with turnovers exceeding Rs.200 crore. Since the assessee's turnover was Rs.20.06 crore, the Tribunal directed the AO/TPO to apply the appropriate upper turnover filter and exclude companies with turnovers above Rs.200 crore.

Issue 2: Functional Comparability of Infobeans Technologies Limited
The assessee sought the exclusion of Infobeans Technologies Limited on the grounds of functional dissimilarity. The Tribunal reviewed the company's financials and found that it was engaged in diverse activities, including custom application development, content management systems, and big data analytics, which differed significantly from the routine software development services provided by the assessee. The Tribunal noted the absence of segmental details and significant intangible assets, foreign currency expenses, abnormal revenue increases, and sales tax liabilities. Consistent exclusion of this company in similar cases was also highlighted. Consequently, the Tribunal directed the AO/TPO to exclude Infobeans Technologies Limited from the list of comparables.

Issue 3: Inclusion of Akshay Software Technologies Limited and Evoke Technologies Limited as Comparables
The assessee argued for the inclusion of Akshay Software Technologies Limited and Evoke Technologies Limited, which were rejected by the TPO on grounds of functional dissimilarity and unreliable financial statements, respectively. The Tribunal noted that the DRP did not adjudicate on functional comparability and simply remarked on their absence from the TPO's search matrix. The Tribunal remanded the matter back to the TPO to specifically adjudicate on the comparability of these companies based on the information and documentation provided by the assessee.

Issue 4: Adjustment on Account of Working Capital Differences
The assessee contended that the TPO did not allow any working capital adjustment, and the DRP also denied relief on this count. The Tribunal referenced its ruling in M/s. Huawei Technologies India (P) Ltd. v. JCIT, which held that working capital adjustments should be allowed as per actuals. The Tribunal criticized the DRP's basis for rejection and directed the AO/TPO to consider the workings in light of the Huawei Technologies ruling and allow appropriate adjustments to arrive at an arm's length price.

Issue 5: Correction of Margin Computation Error
The assessee claimed that the AO erred in computing the ALP Net Cost Plus markup as 27.66% instead of 25.60% and sought correction of margins for CG-VAK Software Exports Limited and Inteq Software Private Limited. The Tribunal acknowledged the pendency of the rectification application and remanded the matter back to the AO/TPO to examine the claims regarding the erroneous computation of margins.

Conclusion:
The appeal filed by the assessee was partly allowed, with the Tribunal directing the AO/TPO to apply the appropriate upper turnover filter, exclude Infobeans Technologies Limited, reassess the inclusion of Akshay Software Technologies Limited and Evoke Technologies Limited, allow working capital adjustments, and correct the margin computation error. The matter was remanded back to the AO/TPO for these specific adjudications.

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