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2018 (1) TMI 1143 - AT - Income TaxTPA - comparable selection criteria - Held that - Companies functionally dissimilar with that of assessee need to be deselected from final list of comparable when compared to assessee as engaged in rendering software services. We find that if the comparables selected by the assessee and approved by us and BCL are considered for benchmarking, the arithmetic average mean would be within the plus/minus 5% limit. In other words, the IT. s entered into by the assessee for the year under appeal would be at Arm s length. Therefore, we can say that no TP adjustment was required. We also find that the assessee was not given benefit of working capital adjustment. In the case of Capgemini India (P. )Ltd. (2015 (4) TMI 586 - ITAT MUMBAI), it was held that working capital adjustment cannot be denied to the assessee only on the ground that the assessee had not made any claim in the TP study if it is possible to make such adjustment as working capital adjustment will improve the comparability. In our opinion, the claim made by the assessee should have been considered.
Issues Involved:
1. Transfer Pricing Adjustment 2. Selection of Comparables 3. Application of Filters by Transfer Pricing Officer (TPO) 4. Working Capital Adjustment Detailed Analysis: 1. Transfer Pricing Adjustment: The primary issue in the appeal is the transfer pricing adjustment of ?4.81 crores made by the Assessing Officer (AO) based on the Transfer Pricing Officer's (TPO) recommendations. The assessee, engaged in rendering software services, declared an income of ?72.92 lakhs which was later revised. The AO determined the income at ?5.84 crores after making the adjustment. 2. Selection of Comparables: During the assessment, the TPO excluded six companies from the assessee's list of comparables and proposed ten new companies for benchmarking. The TPO's final list included nine comparables after rejecting Wipro. The Dispute Resolution Panel (DRP) upheld the TPO's selection and the exclusion of certain comparables. The assessee objected to the inclusion of seven comparables, arguing that they were not functionally similar and failed certain filters. The Tribunal examined each comparable in detail: - FCS Software Solutions Ltd. (FSSL): Engaged in product development and R&D activities, hence not a valid comparable. - Infosys Technologies Ltd. (Infosys): Owned proprietary software, significant R&D, and brand presence, making it incomparable due to its large scale. - KALS Information Systems Ltd. (KALS): Involved in software products development, hence not comparable. - Larsen and Toubro Infotech Ltd. (L&T): Engaged in software products development with significant intangibles, not comparable. - Persistent Systems Ltd. (PSL): Involved in software products development and brand building, hence not comparable. - Sasken Communication Technologies Ltd. (SCTL): Owned significant intangible assets and was IP-driven, not comparable. - Sonata Software Ltd. (SSL): Engaged in software products development with significant R&D activities, not comparable. - Thirdware Solutions Ltd. (TSL): Engaged in product development and trading, segmental information not available, hence not comparable. The Tribunal found that the TPO's selected comparables were mainly engaged in product development, brand building, or had significant R&D activities, making them unsuitable for comparison with the assessee, which was a software services company. 3. Application of Filters by TPO: The TPO applied filters such as year-end data, export revenue, and related party transactions (RPT) to select comparables. The assessee argued that these filters were applied arbitrarily and without a scientific basis. The Tribunal noted that the TPO's filters were inconsistent and not justified. The Tribunal emphasized that the correct approach should be based on the specific financial year and the actual activities carried out during that year. 4. Working Capital Adjustment: The assessee claimed that the TPO and DRP failed to provide for working capital adjustment, which impacts the profitability of companies. The Tribunal agreed, citing the case of Capgemini India (P.) Ltd., which held that working capital adjustment should be considered even if not claimed in the TP study, as it improves comparability. Conclusion: The Tribunal held that the comparables selected by the TPO were not valid due to their involvement in product development, significant R&D activities, and other dissimilar functions. The Tribunal accepted the comparables proposed by the assessee, excluding those engaged in software products. It also directed that working capital adjustment should be considered. Consequently, the Tribunal decided in favor of the assessee, allowing the appeal and ruling that no transfer pricing adjustment was required. The order was pronounced on 24th January 2018.
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