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2022 (8) TMI 1193 - AT - Income TaxTP Adjustment - Comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee as software service provider company need to be deselected. Working capital adjustment - There would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed.
Issues Involved:
1. Exclusion of certain companies as comparables. 2. Non-allowance of working capital adjustment. Detailed Analysis: Issue 1: Exclusion of Certain Companies as Comparables L&T Infotech Ltd.: The appellant argued that L&T Infotech Ltd. should be excluded as a comparable due to functional dissimilarity, absence of segmental details, presence of intangibles, brand presence, and failure to meet the upper turnover filter. The Tribunal noted that in the previous assessment year (AY 2015-16), L&T Infotech Ltd. was excluded for similar reasons. The Tribunal reiterated that L&T Infotech Ltd. is not comparable due to its diversified services, brand impact, and absence of segmental information. Therefore, the Tribunal directed the AO/TPO to exclude L&T Infotech Ltd. from the list of comparables. Persistent Systems Ltd.: The appellant contended that Persistent Systems Ltd. should be excluded as it is a product-based company with significant intangibles and diverse activities without segmental information. The Tribunal referenced its earlier decision for AY 2015-16, where Persistent Systems Ltd. was excluded due to its product development services, significant onsite expenses, and related party transactions. The Tribunal upheld this exclusion, directing the AO/TPO to exclude Persistent Systems Ltd. from the list of comparables. Infosys Technologies Ltd.: The appellant argued for the exclusion of Infosys Technologies Ltd. due to its functional dissimilarity, revenue from software products, significant R&D activities, brand presence, and failure to meet the upper turnover filter. The Tribunal, referencing its decision for AY 2015-16, noted that Infosys Ltd. is engaged in diversified business activities and has significant intangibles and brand impact. The Tribunal directed the AO/TPO to exclude Infosys Technologies Ltd. from the list of comparables. Thirdware Solutions Ltd.: The appellant asserted that Thirdware Solutions Ltd. should be excluded due to its functional dissimilarity, absence of segmental details, and brand promotion expenses. The Tribunal referred to its prior decision where Thirdware Solutions Ltd. was excluded due to its engagement in product development and lack of segmental details. The Tribunal directed the AO/TPO to exclude Thirdware Solutions Ltd. from the list of comparables. Issue 2: Non-Allowance of Working Capital Adjustment The appellant argued that the TPO did not allow any working capital adjustment, which was confirmed by the DRP. The Tribunal referenced its decision in the case of Huawei Technologies Ltd., where it was held that working capital adjustments should be allowed to account for differences in the time value of money between the tested party and comparables. The Tribunal emphasized that Rule 10B(1)(e)(iii) mandates adjustments for material differences affecting net profit margins. The Tribunal concluded that the CIT(A) was not justified in denying working capital adjustments and directed the AO/TPO to grant working capital adjustment on an actual basis. Conclusion: The Tribunal directed the exclusion of L&T Infotech Ltd., Persistent Systems Ltd., Infosys Technologies Ltd., and Thirdware Solutions Ltd. from the list of comparables. Additionally, the Tribunal mandated the AO/TPO to grant working capital adjustment on an actual basis. The appeal filed by the assessee was partly allowed.
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