2023 (3) TMI 707 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Companies functionally dissimilar with that of Assessee s IT services segment need to be delsected.

Issues Involved:
1. Inappropriate confirmation of transfer pricing adjustment.
2. Non-consideration of comparability analysis.
3. Modification of turnover criteria.
4. Application of inappropriate qualitative filters.
5. Acceptance of companies with supernormal profit.
6. Rejection of certain companies identified by the appellant.
7. Acceptance of certain additional companies as comparable.
8. Incorrect methodology for computing related party filter.
9. Foreign exchange difference considered non-operating.
10. Errors in computing operating margins.
11. Non-consideration of risk adjustment.
12. Initiation of penalty proceedings under section 271(1)(c).
13. Proposed levy of interest under section 234B.

Detailed Analysis:

1. Inappropriate Confirmation of Transfer Pricing Adjustment
The appellant contested the transfer pricing adjustment of INR 7,90,08,000 related to IT services provided to Associated Enterprises (AEs). The Tribunal noted that the appellant pressed only Ground No. 7, dismissing all other grounds as not pressed.

2. Non-consideration of Comparability Analysis
The appellant argued that the data provided in the transfer pricing study report for benchmarking analysis was not considered. However, this ground was not pressed during the appeal.

3. Modification of Turnover Criteria
The appellant contended that the turnover filter applied by the authorities was inappropriate. This ground was also not pressed during the appeal.

4. Application of Inappropriate Qualitative Filters
The appellant claimed that certain qualitative filters were inappropriately applied. This ground was not pressed during the appeal.

5. Acceptance of Companies with Supernormal Profit
The appellant argued against the inclusion of companies with supernormal profits as comparables. This ground was not pressed during the appeal.

6. Rejection of Certain Companies Identified by the Appellant
The appellant contested the rejection of certain companies from the set of comparables. This ground was not pressed during the appeal.

7. Acceptance of Certain Additional Companies as Comparable
The main issue pressed by the appellant was the inclusion of certain companies in the final set of comparables. The appellant argued that these companies were functionally dissimilar and should be excluded.

Thirdware Solutions Ltd.
- The appellant argued that Thirdware Solutions Ltd. was functionally dissimilar as it dealt in software products and had supernormal profits. The Tribunal found that Thirdware Solutions Ltd. was not comparable due to its diversified services and lack of segmental information, directing its exclusion from the final set of comparables.

Aspire Systems (India) Pvt. Ltd.
- The appellant contended that Aspire Systems was functionally different and had supernormal profits. The Tribunal remitted the issue back to the AO/TPO to examine the business model and determine comparability.

E-Infochips Ltd.
- The appellant argued that E-Infochips was engaged in diversified activities and had supernormal profits. The Tribunal directed the exclusion of E-Infochips from the final set of comparables due to its diversified activities and lack of segmental data.

Dun and Bradstreet Technologies & Data Services Pvt. Ltd.
- The appellant claimed that Dun and Bradstreet was functionally different and engaged in diversified activities. The Tribunal remitted the issue back to the AO/TPO for verification of the company's business model and comparability.

Exilant Technologies Pvt. Ltd.
- The appellant argued that Exilant Technologies was functionally dissimilar and engaged in diversified activities. The Tribunal directed the exclusion of Exilant Technologies from the final set of comparables due to its diversified activities and lack of segmental data.

Puresoftware Pvt. Ltd.
- The appellant contended that Puresoftware was functionally different and engaged in diversified activities. The Tribunal remitted the issue back to the AO/TPO for detailed verification of the company's functions and comparability.

8. Incorrect Methodology for Computing Related Party Filter
The appellant argued that the related party filter was computed incorrectly. This ground was not pressed during the appeal.

9. Foreign Exchange Difference Considered Non-operating
The appellant contested the treatment of foreign exchange difference as non-operating. This ground was not pressed during the appeal.

10. Errors in Computing Operating Margins
The appellant argued that there were errors in computing operating margins. This ground was not pressed during the appeal.

11. Non-consideration of Risk Adjustment
The appellant claimed that risk adjustments were not considered. This ground was not pressed during the appeal.

12. Initiation of Penalty Proceedings under Section 271(1)(c)
The appellant contested the initiation of penalty proceedings. This ground was not pressed during the appeal.

13. Proposed Levy of Interest under Section 234B
The appellant argued against the proposed levy of interest under Section 234B. This ground was not pressed during the appeal.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal directing the exclusion of certain companies from the final set of comparables and remitting some issues back to the AO/TPO for further examination. The order was pronounced on July 12, 2022.

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