2022 (3) TMI 338 - AT - Income Tax

TP Adjustment - comparability - exclude the Infobeans Systems Private Limited from the final set of comparable companies - HELD THAT - As no segmental details were available and the said company was earning foreign exchange from export of goods on FOB basis which is clear from paper book. In our opinion, when there is no information the proper comparability cannot be examined in view of absence of segmental details. As demerger of business of Seed Enterprises Private Limited was taken place wherein the said concern had filed revised accounts which clearly shows the financial statements of the said concern included the financial statements of software business of demerged company which in our opinion is an extraordinary event which has taken place making the said concern has not comparable to the company. Thus we direct the AO/TPO to exclude Infobeans Systems Private Limited from the final set of comparables. Thirdware Solutions Limited cannot be included in the final list of comparables - As we note that this Tribunal directed the AO/TPO for detailed factual verification based on annual report and other relevant documents in order to verify nature and scope of functions of Thirdware Solutions Limited. The ld. DR agreed for remand the said issue to the file of AO/TPO for its fresh verification in terms of direction rendered by this Tribunal in assessee s own case in A.Y. 2012-13. Accordingly, we direct the AO/TPO follow the same direction as contained in order 2021 (5) TMI 481 - ITAT PUNE for A.Y. 2012-13. Thus, the additional ground raised by the assessee is allowed for statistical purpose. Seeking deduction paid towards Education Cess under Finance Act while computing the taxable income - HELD THAT - We note that the assessee paid Education Cess while computing the taxable income. The Hon ble High Court of Bombay in the case of Sesa Goa Ltd 2020 (3) TMI 347 - BOMBAY HIGH COURT was pleased to hold that the Education Cess is an allowable expenditure as per the provision of the I.T. Act - We direct the AO to allow deduction in respect of Education Cess paid by the assessee. Accordingly, the additional ground No. 14 raised by the assessee is allowed. Include the M/s. Lucid Software Limited as comparable in the final list of comparable companies as engaged in rendering software development services and 95% of operating revenues were derived from software services. Evoke Technologies Private Limited should be considered as comparable in view of the finding of TPO in earlier order concerning A.Y. 2012-13. Harbinger Software Limited is a comparable company. Saven Technologies Limited be excluded from the final list of comparable companies as it was engaged in 100% Related Party Transaction (RPT) sales to the total revenue and accordingly held the same as not comparable.

Summary

Issues Involved:

1. Exclusion of Infobeans Systems Private Limited from the final set of comparable companies.
2. Initiation of penalty proceedings under sections 234B, 234C, and 271(1)(c) of the Income Tax Act.
3. Exclusion of Thirdware Solutions Limited from the list of comparable companies.
4. Deduction of Education Cess while computing taxable income.
5. Inclusion of Lucid Software Limited and Evoke Technologies Private Limited in the list of comparable companies.
6. Exclusion of Harbinger Software Limited and Saven Technologies Limited from the list of comparable companies.

Detailed Analysis:

1. Exclusion of Infobeans Systems Private Limited:
The assessee contended that Infobeans Systems Private Limited should not be included in the final set of comparable companies due to the lack of detailed business description and the occurrence of an extraordinary event, i.e., the demerger of the software business. The Tribunal noted that Infobeans did not provide segmental details and was involved in a demerger, making it incomparable. The Tribunal referred to its decision in the assessee's own case for A.Y. 2012-13, where Infobeans was excluded for similar reasons. Consequently, the Tribunal directed the AO/TPO to exclude Infobeans from the final set of comparables.

2. Initiation of Penalty Proceedings:
The assessee challenged the initiation of penalty proceedings under sections 234B, 234C, and 271(1)(c) of the Income Tax Act. The Tribunal held that such a challenge at this stage was premature and dismissed the ground.

3. Exclusion of Thirdware Solutions Limited:
The assessee raised an additional ground for the exclusion of Thirdware Solutions Limited, arguing that it was involved in trading activities without segmental data. The Tribunal noted that the issue was similar to the one in the assessee's case for A.Y. 2012-13, where the AO/TPO was directed to verify the nature and scope of functions of Thirdware Solutions Limited. The Tribunal remanded the issue to the AO/TPO for fresh verification.

4. Deduction of Education Cess:
The assessee sought a deduction for Education Cess while computing taxable income. The Tribunal referred to the decision of the Hon'ble Bombay High Court in the case of Sesa Goa Ltd., which held that Education Cess is an allowable expenditure under the Income Tax Act. The Tribunal directed the AO to allow the deduction for Education Cess.

5. Inclusion of Lucid Software Limited and Evoke Technologies Private Limited:
The Revenue challenged the CIT(A)'s direction to include Lucid Software Limited and Evoke Technologies Private Limited in the list of comparable companies. The Tribunal noted that the CIT(A) had examined the annual reports and found both companies functionally comparable to the assessee. The TPO had accepted these companies as comparables in the assessee's case for A.Y. 2012-13. The Tribunal upheld the CIT(A)'s direction to include these companies in the final list of comparables.

6. Exclusion of Harbinger Software Limited and Saven Technologies Limited:
The Revenue challenged the CIT(A)'s exclusion of Harbinger Software Limited and Saven Technologies Limited from the list of comparable companies. The Tribunal noted that the assessee had mistakenly challenged the inclusion of Harbinger Software Limited before the CIT(A), and thus, it should remain as a comparable company. Regarding Saven Technologies Limited, the Tribunal agreed with the CIT(A) that it should be excluded due to its 100% Related Party Transactions, which made it incomparable. The Tribunal affirmed the CIT(A)'s decision to exclude Saven Technologies Limited.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, and the appeal by the Revenue was dismissed. The Tribunal directed the AO/TPO to exclude Infobeans Systems Private Limited and Saven Technologies Limited from the final set of comparables, include Lucid Software Limited and Evoke Technologies Private Limited, and allow the deduction for Education Cess. The challenge to penalty proceedings was dismissed as premature.