2020 (5) TMI 211 - AT - Income Tax

TP Adjustment - comparable selection - Functional dissimilarity - HELD THAT - Main function performed by assessee, is in respect of R D functions, wherein assessee focuses on developing existing technologies for direct customer application. Assessee has been characterised to be working on a risk mitigated environment on a contract basis strictly providing services, as per needs/requirements of associated enterprise, thus companies functionally dissimilar with that of assessee need to deselected from final list.

Summary

Issues Involved:
1. Transfer pricing matters specific to the software development services segment.
2. Other matters including the restriction of Minimum Alternate Tax (MAT) credit and interest levied under sections 234B and 234C of the Act.

Detailed Analysis:

Transfer Pricing Matters Specific to Software Development Services Segment:

Economic Analysis and Determination of ALP:
The assessee contested the economic analysis conducted by the TPO/AO, arguing that their international transaction was at arm’s length. The TPO, however, used only FY 2012-13 data, which was not available to the assessee at the time of documentation. The Tribunal observed that the TPO applied various filters and rejected comparables selected by the assessee, leading to an adjustment proposal of ?25,04,82,139.

Comparability Criteria:
The Tribunal examined the comparability criteria used by the TPO/AO, which included the rejection of companies based on export sales less than 75%, employee cost less than 25% of total revenues, and other specific filters. The Tribunal found that the TPO/AO erred in applying these filters without proper justification.

Inclusion/Exclusion of Comparables:
- Larsen & Toubro Infotech Ltd: The Tribunal excluded this company due to its involvement in products and intangibles, which made it functionally dissimilar to the assessee.
- Persistent Systems Ltd: Excluded due to its engagement in both product and software development services, significant R&D expenditure, and ownership of intangibles.
- CG-VAK Software & Exports Ltd: The Tribunal admitted the ground for exclusion but did not adjudicate it separately as the margin of comparables was within the permissible range after other exclusions.
- Akshay Software Technologies Ltd: Excluded due to lack of clarity on the nature of services and segmental information.
- IDBI Intech Ltd: Included as it met the forex filter of 75% of sales, earning revenue primarily from export services.
- Spry Resources India Pvt. Ltd: Set aside for re-verification by the AO/TPO due to discrepancies in trade receivables.

Risk Profile Adjustments:
The Tribunal noted that the TPO/AO did not make suitable adjustments for differences in the risk profile between the assessee and the comparables, which was an error in the computation of the arm's length price.

Use of Section 133(6) Information:
The Tribunal found that the TPO/AO erred by using information obtained under section 133(6) without providing the assessee an opportunity to rebut the same.

Other Matters:

Restriction of Minimum Alternate Tax (MAT) Credit:
The AO restricted the credit for MAT while computing the total tax payable by the assessee. The Tribunal did not provide a specific ruling on this issue in the detailed analysis.

Levy of Interest under Sections 234B and 234C:
The AO levied interest under sections 234B and 234C, which the assessee contested. The Tribunal did not provide a specific ruling on this issue in the detailed analysis.

Conclusion:
The Tribunal partly allowed the appeal, directing the exclusion of certain comparables and inclusion of others. The Tribunal also set aside the inclusion of Spry Resources India Pvt. Ltd. for re-verification. The modified grounds of appeal were partly allowed, and additional grounds were dismissed as academic in nature. The appeal was pronounced in the open court on 19th March 2020.