2023 (2) TMI 555 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Nihilent Ltd. faced extra ordinary events of acquisition wherein lot of acquisition has taken place during the year. The Tribunal had directed the A.O/T.P.O to exclude this company from the final set of comparables. That, as demonstrated Annual Report of this company there has been a series of acquisitions taken place in respect of this company in view of their global business perspectives and therefore, following the same parity of reasoning in Optiva India Technologies Pvt. Ltd. 2022 (7) TMI 1339 - ITAT PUNE we direct the ld. A.O/T.P.O to exclude this company from the final set of comparables. Aspire Systems (India) Pvt. Ltd. - There is an amalgamation which has taken place and in view of this extra ordinary event of amalgamation this particular company has to be held as not comparable with that of the assessee. Accordingly, the ld. A.O/T.P.O is directed to exclude the same from the final list of compaables. E-Infochips Ltd. - In this case as evident there has been a merger as per the directions of the Hon'ble Gujarat High Court and therefore, because of this extra ordinary event having taken place, we direct the ld. A.O./T.P.O on the same parity of reasonings to exclude E-Infochips Ltd. from the final list of compables with that of the assessee. AcewinAgri tech Ltd - We are of the considered view that the actual position has to be ascertained before excluding or including this company, what exactly are the activities of the company has to be examined. Therefore, the issue of comparability regarding this company is remanded to the file of the ld. A.O/T.P.O for re-adjudication as per law complying with the principles of natural justice. Infobeans Technologies Ltd. has to be excluded as comparable as it is performing varied types of services and that also as per the financials of the company, its segmental financials are not available without which it is difficult to compute the correct profit margin of the relevant segment. Following the same parity of reasoning for A.Y. 2016-17, we direct the ld. A.O/T.P.O to exclude this company from the final list of comparables. Dun and Bradstreet Technologies Data Services Pvt. Ltd. is into providing vide area of sources such as D B analytic services, risk management solutions, sales and marketing solution services, supply management solution etc. It has also come on record that the assessee has earned abnormally high margin of 58.19% as is evident from the annual report of Dun Bradstreet and as such is not a valid comparable vis- -vis assessee who is a routine software development service provider to its AE working on cost mark-up model, hence order to be excluded. Exclusion of Cybercom Datamatics Information solutions Ltd; and (ii) Fixstream India Pvt. Ltd. as comparable companies since such companies were having related party transactions of more than 25% of the sales - D.R.P has given their findings on Cybercom Datamatics Information solutions Ltd and Fixstream India Pvt. Ltd. A.O/T.P.O is directed to exclude this company from the final set of comparables if the ratio of RPT income to the total operating revenue is more than 25% - Admittedly, the ld. A.O/T.P.O has not considered these findings of the ld.D.R.P. The ld. D.R also could not bring any materials on record or evidences to demonstrate that the ld. A.O/T.P.O has complied with such directions of the D.R.P. Considering these facts in the interest of justice, this ground is remitted back to the file of the Ld. A.O/T.P.O for complying with the principles of natural justice and giving effect to the directions given by the ld. D.R.P. regarding the above mentioned companies. Inclusion of Synerzip Softech India Pvt. Ltd.- The findings of the revenue authorities are that there are no clarity of the activities of this company and even in the Annual Report is having conflicting statements where on one hand it is written that the company is engaged in outsourcing software project development and software testing. however, as per the statement of P L account for the year ended 31-03-2016 the total revenue were from software services. Further, in the Directors Report the principle business activity of this company, the name and description of main product/service is mentioned as software development . Therefore, the Annual Report does not provide any clarity regarding the correct activities of this company. Even before us also, the ld. Counsel could not produce any evidence or documents to demonstrate the actual nature of activity of this company. In absence thereof, we uphold the findings of the ld. D.R.P. This part of the ground is also dismissed. Appeal of the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Recomputing the transfer price of international transactions.
2. Computing the Arm's Length Price (ALP) of software development services.
3. Transactions being at Arm's Length Price.
4. Inclusion and exclusion of comparable companies.
5. Exclusion of companies with supernormal profits.
6. Rejection of certain comparable entities.
7. Adjustments to ALP for various differences.
8. Application of turnover filter.

Detailed Analysis:

1. Recomputing the Transfer Price of International Transactions:
The learned A.O./DRP recomputed the transfer price of international transactions relating to software development services, leading to an addition of INR 6,04,95,225/- u/s 92C based on the TPO's order. The assessee contended that none of the conditions prescribed in Section 92C(3) were violated.

2. Computing the Arm's Length Price (ALP) of Software Development Services:
The A.O./DRP computed the ALP by holding that the assessee should have earned an operating margin of 21.74% against the 8.86% earned. The assessee argued that the transactions were at ALP and there was no reason for any addition.

3. Transactions Being at Arm's Length Price:
The assessee maintained that the transactions with its AE were at ALP, contesting the need for any adjustments. The DRP provided relief, but the A.O./T.P.O did not give effect to these directions.

4. Inclusion and Exclusion of Comparable Companies:
- Nihilent Ltd.: Excluded due to extraordinary events of acquisition, following the precedent set in Optiva India Technologies Pvt. Ltd.
- Aspire Systems (India) Pvt. Ltd.: Excluded due to an amalgamation event.
- E-Infochips Ltd.: Excluded due to a merger as per the Gujarat High Court's order.
- Acewin Agritech Ltd.: Remanded back for detailed factual examination due to conflicting observations about its activities.
- Infobeans Technologies Ltd.: Excluded for being functionally different and lacking segmental financials, following the decisions in Red Hat India Pvt. Ltd. and Optiva India Technologies Pvt. Ltd.
- Dun and Bradstreet Technologies & Data Services Pvt. Ltd.: Excluded for functional dissimilarities and abnormally high profits, following the precedent in Red Hat India Pvt. Ltd.

5. Exclusion of Companies with Supernormal Profits:
The DRP rejected the exclusion of companies like Thirdware Solutions Ltd., E-Infochips Ltd., Dun and Bradstreet Technologies and Data Services Pvt. Ltd., and Infobeans Systems India Ltd. based on judicial decisions that Indian law does not permit exclusion of super profit-making companies unless abnormal conditions are demonstrated.

6. Rejection of Certain Comparable Entities:
- Smartcloud Infoservices Pvt. Ltd.: Not pressed by the assessee.
- Synerzip Softech India Pvt. Ltd.: Rejected due to lack of clarity in its activities, as indicated in its Annual Report.

7. Adjustments to ALP for Various Differences:
The assessee's request for adjustments to ALP to account for differences in intangibles, R&D, risk factors, etc., was noted, but specific directions were not provided in the judgment.

8. Application of Turnover Filter:
The DRP upheld the TPO's application of a turnover filter of INR 5.11 Crore to INR 511.14 Crore, aligning with judicial precedents that support turnover filters based on the size and risk-bearing capacity of companies.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for the A.O./T.P.O to follow the DRP's instructions, verify corrected margin computations, and reassess certain comparables. The judgment emphasized the need for a detailed functional analysis and adherence to judicial precedents in transfer pricing matters.