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2021 (9) TMI 499 - AT - Income TaxTP Adjustment - comparable selection - HELD THAT - The assessee-company provides software development services (SWD) and I.T. enabled services (ITES) to its AEs thus companies functionally dissimilar with that of assessee need to be deselected from final list. Working Capital Adjustment - HELD THAT - There is no dispute with regard to the fact that the difference in working capital would materially effect the price charged for the services rendered. As noticed that the TPO/AO himself has granted working capital adjustment at 1.98%. The grievance of the assessee is that the TPO should have allowed working capital basis on actual basis without placing an upper limit on the said adjustment. As noticed that Rule 10B of the I.T. Rules does not provide for restricting the adjustment. Accordingly, we direct the TPO/AO to grant working capital adjustment on actual rate. Appeal filed by the assessee is partly allowed.
Issues Involved:
1. Exclusion of certain companies from the list of comparables. 2. Working capital adjustment. Detailed Analysis: Issue 1: Exclusion of Certain Companies from the List of Comparables Ground No. 2.8 and Additional Ground Companies to be Excluded: (a) Infosys Technologies Limited (b) Persistent Systems Limited (c) ICRA Techno Analytics Ltd. (d) KALS Information Systems Ltd. (e) Tata Elxsi Ltd. (f) Larsen & Toubro Infotech Limited Brief Facts: The assessee, a subsidiary of Signum International, Luxemburg, provides software development services (SWD) and IT-enabled services (ITES) to its associated enterprises (AEs). The financial results for the year ending 31.03.2010 indicated an operating profit on cost percentage of 8.96%. The Transfer Pricing Officer (TPO) made an Arm's Length Price (ALP) adjustment in the SWD segment, resulting in a shortfall adjustment of ?1,75,66,794. Comparables Exclusion Analysis: (a) ICRA Techno Analytics Ltd.: The assessee argued for exclusion due to functional dissimilarity, citing the company's diverse IT solutions. The Tribunal, referencing the case of Cisco Systems (India) (P.) Ltd., agreed that ICRA Techno Analytics Ltd. is not functionally comparable to a captive service provider like the assessee. (b) Infosys Limited: The assessee sought exclusion based on Infosys' high turnover and diversified activities. The Tribunal, referencing Cisco Systems (India) (P.) Ltd., held that Infosys Limited is not functionally comparable due to its diversified services and product offerings. (c) KALS Information Systems Ltd.: The assessee argued for exclusion due to KALS' engagement in software product development and significant inventory. The Tribunal, referencing Cisco Systems (India) (P.) Ltd., agreed that KALS Information Systems Ltd. is not functionally comparable. (d) Larsen & Toubro Infotech Limited: The assessee sought exclusion due to high turnover, functional dissimilarity, and ownership of intangible assets. The Tribunal, referencing Marlabs Innovations (P.) Ltd. v. ACIT, agreed that Larsen & Toubro Infotech Limited is not functionally comparable. (e) Persistent Systems Limited: The assessee argued for exclusion due to Persistent's engagement in outsourced product development services. The Tribunal, referencing Cisco Systems (India) (P.) Ltd., agreed that Persistent Systems Limited is not functionally comparable. (f) Tata Elxsi Limited: The assessee sought exclusion due to Tata Elxsi's engagement in product design services. The Tribunal, referencing Cisco Systems (India) (P.) Ltd., agreed that Tata Elxsi Limited is not functionally comparable. Conclusion on Comparables: The Tribunal directed the AO/TPO to exclude ICRA Techno Analytics Ltd., Infosys Limited, KALS Information Systems Ltd., Larsen & Toubro Infotech Limited, Persistent Systems Limited, and Tata Elxsi Limited from the final list of comparables. Issue 2: Working Capital Adjustment Ground No. 2.10 Facts: The TPO restricted the working capital adjustment to 1.98%, affirmed by the CIT(A). The assessee argued that Rule 10B of the I.T. Rules does not authorize an upper limit for working capital adjustment and should be granted on an actual basis. Tribunal's Analysis: The Tribunal found merit in the assessee's submission, noting that the difference in working capital materially affects the price charged for services. Rule 10B does not provide for restricting the adjustment. Conclusion on Working Capital Adjustment: The Tribunal directed the TPO/AO to grant working capital adjustment on an actual rate without placing an upper limit. Final Order: The appeal filed by the assessee was partly allowed, with specific directions to exclude certain companies from the list of comparables and to grant working capital adjustment on an actual basis. Order Pronounced: The order was pronounced on the 1st day of September, 2021.
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