2019 (4) TMI 1609 - AT - Income Tax

TPA - comparable selection - functional similarity - HELD THAT - Assessee has categorized itself as a professional service provider in the I.T. industry thus companies functionally dissimilar with that of assessee need to be deselected from final list. Thirdware Solution Pvt Ltd - perusal of the annual report reveals that there is no segmental reporting. In our understanding of the facts, even if the Revenue from the three services mentioned at b), c) and d) above comprises of 90% of the total sales, still segmental reporting is a must to justify the inclusion of this comparable. Though the first appellate authority has excluded this company on the ground that it has supernormal profits, but that is not a good reason for excluding this company, but having no segmental accounts make this company excluded from the final set of comparables. Though we do not agree with the exclusion on the point of super normal profits, but nevertheless, for want of segmental reporting, we direct for exclusion of this company from the final set of comparables. L T - there is no dispute that the same was excluded by the TPO for related party transactions. Therefore, inclusion of the same in the final set of comparables is uncalled for and deserves to be excluded. Working capital adjustment - since the assessee has filed a detailed working of the working capital adjustment the same cannot be dismissed on the ground that the assessee is in the service industry - we direct the TPO to grant working capital adjustment. See SUN LIFE INDIA SERVICE CENTRE PVT. LTD VERSUS DCIT, CIRCLE-2, GURGAON. 2015 (10) TMI 2431 - ITAT DELHI The assessee is directed to furnish afresh a detailed working of the working capital adjustment. The TPO is directed to examine the same and decide the issue. Admission of additional ground - ground raised by the Revenue which states that the CIT(A) erred in not including M/s Infosys as one of the comparables, which was left out by the TPO due to inadvertence - HELD THAT - We are of the opinion that merely because of provisions of section 154 or section 263 of the Act were available with the revenue, it cannot preclude revenue to raise additional ground before us. Therefore, additional ground is admitted. A perusal of the TP study shows that the assessee did include M/s Infosys in its list of comparables. The TPO made a fresh search during the TP assessment proceedings and from his fresh search, the TPO excluded certain comparables and made a final list of comparables as mentioned elsewhere. The exercise so done by the TPO does not leave any room for assumption that inadvertently he has not included M/s Infosys in the final set of comparables. On the contrary, it appears that non inclusion was intentional. Plea of the Revenue that the ld. CIT(A) erred in not including M/s Infosys as one of the comparable is ill-founded because the assessee was in appeal before the ld. CIT(A) and since the assessee had no grievance for non inclusion of M/s Infosys how could the ld. CIT(A) have adjudicated on inclusion of Infosys unless he wanted to exercise his powers of enhancement. No merit in additional ground raised by the Revenue.

Summary

Issues Involved:
1. Deletion of addition made by AO on account of transfer pricing adjustment.
2. Exclusion of two companies, L&T Infotech and Thirdware Solution Ltd, from the final set of comparables.
3. Allowance of working capital adjustment.
4. Inclusion of Infosys as a comparable.

Detailed Analysis:

1. Deletion of Addition Made by AO on Account of Transfer Pricing Adjustment:
The Revenue contended that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the addition of ?1,27,01,985/- made by the Assessing Officer (AO) on account of transfer pricing adjustment. The Transfer Pricing Officer (TPO) had determined the arm's length price under section 92CA(3) for the international transactions entered into by the assessee during the Financial Year 2004-05. The CIT(A) found that the TPO had not made working capital adjustments and had included companies with related party transactions in the comparables. The CIT(A) directed the exclusion of such companies and allowed working capital adjustments, leading to the deletion of the addition.

2. Exclusion of L&T Infotech and Thirdware Solution Ltd from the Final Set of Comparables:
The CIT(A) directed the exclusion of L&T Infotech and Thirdware Solution Ltd from the final set of comparables. The TPO had initially included L&T Infotech despite it having related party transactions, which was contradictory. The CIT(A) found merit in the assessee's contention and directed its exclusion. For Thirdware Solution Ltd, the CIT(A) noted that it had supernormal profits and lacked segmental reporting, making it unsuitable as a comparable. Although the Tribunal did not agree with the exclusion based on supernormal profits, it upheld the exclusion due to the absence of segmental reporting.

3. Allowance of Working Capital Adjustment:
The CIT(A) allowed working capital adjustments, noting that it was logical to make such adjustments to account for differences in trade receivables, trade payables, and inventory. The CIT(A) observed that similar adjustments had been made in the assessee's case for the assessment year 2007-08. The Tribunal agreed with this principle, citing the decision in Sun Life India Service Centre Private Limited, which allowed working capital adjustments even for service industries. The Tribunal directed the TPO to grant working capital adjustment after examining the detailed working provided by the assessee.

4. Inclusion of Infosys as a Comparable:
The Revenue raised an additional ground that the CIT(A) erred in not including Infosys as one of the comparables, which was allegedly left out by the TPO due to inadvertence. The Tribunal noted that the assessee had included Infosys in its TP study, but the TPO had conducted a fresh search and made a final list of comparables, intentionally excluding Infosys. The Tribunal found no merit in the Revenue's plea, as the CIT(A) could not have adjudicated on the inclusion of Infosys unless exercising enhancement powers. The additional ground raised by the Revenue was dismissed.

Conclusion:
The Tribunal dismissed both the appeal by the Revenue and the cross objections by the assessee. The CIT(A)'s directions for exclusion of certain comparables and allowance of working capital adjustments were upheld, while the additional ground raised by the Revenue regarding Infosys was found to be without merit. The order was pronounced in the open court on 11.03.2019.