2020 (11) TMI 939 - AT - Income Tax

TP Adjustment - adjustment on account of adjustment of software development services segment for exclusion of only two comparables namely Infosys technologies Ltd and Tata Elexi Ltd - HELD THAT - Infosys technologies Ltd - In view of huge turnover of the comparable company, relying on the decision of Pentair water private limited 2016 (5) TMI 137 - BOMBAY HIGH COURT and Agnity India technologies Ltd 2013 (7) TMI 696 - DELHI HIGH COURT the above comparable is directed to be excluded. Tata Elxis Ltd - comparable company is a design company that blends technology, creative and engineering to help customers transform ideas into world-class products and solutions. DRP though has considered the above functions of the comparable company however it is directed that the comparable company provides software development services which are similar to the IT services provided by the assessee. In view of this we find that the direction of the learned dispute resolution panel is not based on the appreciation of the functions and the product profile of the comparable company. In view of this, we direct the learned transfer pricing officer to exclude the above comparable. Adjustment on account of the overdue receivable from the associated enterprises - working capital adjustment allowed - HELD THAT - When working capital adjustment is granted to the assessee there is no requirement once again of making any adjustment on account of the overdue receivable from associated enterprises as the sundry debtors outstanding of the assessee includes outstanding receivable from associated enterprise. In view of this, we direct the learned transfer pricing officer to delete the adjustment on account of outstanding receivable from associated enterprise.

Issues Involved:
1. Enhancement of income under Section 143(3) of the Income Tax Act, 1961.
2. Adjustment of income related to international transactions and arm's length principle.
3. Inclusion and exclusion of comparable companies for benchmarking.
4. Adjustment on account of outstanding receivables from associated enterprises.
5. Initiation of penalty proceedings under Section 271(1)(C) of the Act.
6. Charging of interest under Sections 234A, 234B, 234C, and 234D of the Act.

Issue-wise Detailed Analysis:

1. Enhancement of Income under Section 143(3):
The assessee contested the enhancement of income by INR 2,05,42,843 by the Deputy Commissioner of Income Tax (DCIT) following the directions of the Dispute Resolution Panel (DRP). The Tribunal noted that the enhancement was based on the adjustments proposed by the Transfer Pricing Officer (TPO) and upheld by the DRP.

2. Adjustment of Income Related to International Transactions:
The assessee challenged the enhancement of income by INR 88,20,574 related to the provision of software development services, arguing that the international transaction did not satisfy the arm's length principle. The Tribunal examined the grounds, including the rejection of multiple year/prior years' data, the inclusion of companies with abnormal margins, and the rejection of companies with turnover less than INR 5 crore. The Tribunal directed the exclusion of two comparables, Infosys Technologies Ltd and Tata Elxsi Ltd, based on functional and quantitative dissimilarities.

3. Inclusion and Exclusion of Comparable Companies for Benchmarking:
The Tribunal addressed the inclusion of Infosys Technologies Ltd and Tata Elxsi Ltd in the final set of comparables. The assessee argued that these companies were functionally dissimilar and had significantly higher turnovers. The Tribunal agreed, noting the substantial differences in turnover, asset base, and brand expenditure. Therefore, it directed the exclusion of these companies from the comparability analysis.

4. Adjustment on Account of Outstanding Receivables from Associated Enterprises:
The assessee contested the adjustment of INR 1,17,22,269 for interest on receivables from associated enterprises. The Tribunal noted that the TPO treated the outstanding receivables as a deemed loan and made adjustments accordingly. However, since the working capital adjustment had already been granted, the Tribunal held that no separate adjustment was warranted. It directed the deletion of the adjustment on account of outstanding receivables.

5. Initiation of Penalty Proceedings under Section 271(1)(C):
The assessee argued against the initiation of penalty proceedings under Section 271(1)(C) of the Act. The Tribunal did not specifically address this issue in detail, as the primary focus was on the adjustments related to transfer pricing and comparables.

6. Charging of Interest under Sections 234A, 234B, 234C, and 234D:
The assessee contended that the interest under Sections 234A, 234B, 234C, and 234D was charged mechanically without satisfactory reasons. The Tribunal did not provide a detailed analysis on this issue, as it was primarily concerned with the adjustments related to transfer pricing and comparables.

Conclusion:
The Tribunal partly allowed the appeal, directing the exclusion of Infosys Technologies Ltd and Tata Elxsi Ltd from the comparables and the deletion of the adjustment on account of outstanding receivables. The other contentions raised by the assessee were not specifically addressed in detail. The final order pronounced on 27/11/2020 resulted in partial relief for the assessee.

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