2022 (12) TMI 996 - AT - Income Tax

TP Adjustment - Software development segment - Comparable selection - application of turnover filter of Rs.200 crores - HELD THAT - Bangalore Bench of the Tribunal in the case of BORQS Software Solutions Pvt. Ltd. 2021 (10) TMI 1351 - ITAT BANGALORE has considered various judicial pronouncements on this issue including that of the Hon ble High Courts wherein divergent views were taken with respect to the application of different filters. It was held by the Tribunal that application of turnover filter is justified on the basis of classification of companies as per the report of Dun and Bradstreet. As regards the specific plea of the learned DR that if turnover of a comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparable company, we find this plea was rejected in the case of Northern Operating Services Pvt Ltd. 2019 (2) TMI 1707 - ITAT BANGALORE We direct the AO / TPO to apply appropriate upper turnover filter and exclude above mentioned seven companies from the list of comparables. R Systems International Limited - The issue is restored to the files of the AO / TPO. The AO / TPO is directed to exclude M/s R Systems International Limited, if it is found the said company has prepared financials for the year ending December 2016. It is ordered accordingly. TP adjustment made under the MSS segment needs fresh TP analysis by the TPO. Accordingly, the issues restored to the files of the AO / TPO for conducting fresh TP study analysis in support services segment of the assessee. It is ordered accordingly

Issues Involved:

1. Application of upper turnover filter for TP Adjustment in the Software Development segment.
2. Characterization of activities in the Market Support Service (MSS) segment.
3. Exclusion of R Systems International Limited from the list of comparables.
4. Fresh TP analysis for the MSS segment.
5. Dismissal of grounds 10 and 11.
6. Dismissal of stay application.

Detailed Analysis:

1. Application of Upper Turnover Filter for TP Adjustment in the Software Development Segment:

The assessee contested the inclusion of seven companies in the list of comparables due to their high turnover, arguing for the application of an upper turnover filter of Rs.200 crores. The Tribunal noted that the TPO erred by not applying the upper turnover filter while excluding companies with a turnover of less than Rs.1 crore. The Tribunal referenced the Dun & Bradstreet classification, which categorizes companies based on turnover, and concluded that companies with a turnover exceeding Rs.200 crores should be excluded. The Tribunal cited previous cases, such as BORQS Software Solutions Pvt. Ltd. v. ITO and Northern Operating Services Pvt. Ltd., to support the application of the turnover filter. Consequently, the Tribunal directed the AO/TPO to exclude the seven companies from the list of comparables.

2. Characterization of Activities in the Market Support Service (MSS) Segment:

The assessee argued that the TPO and DRP incorrectly characterized its activities as MSS instead of ITES. The Tribunal reviewed the functions performed by the assessee, including support, demand generation, sales reps, and solutions consultants. The Tribunal found that the TPO did not conduct a proper study to justify the MSS characterization and noted the assessee's contention that its activities fall under ITES as defined under Rule 10TA(e). The Tribunal concluded that the TP addition made in the MSS segment could not be sustained without a proper study.

3. Exclusion of R Systems International Limited from the List of Comparables:

The assessee sought the exclusion of R Systems International Limited due to its turnover exceeding Rs.200 crore and its different financial year. The Tribunal restored the issue to the files of the AO/TPO, directing them to exclude R Systems International Limited if it was found that the company prepared financials for the year ending December 2016.

4. Fresh TP Analysis for the MSS Segment:

The Tribunal noted that the TPO did not conduct a proper study for the MSS segment and that the DRP did not address the assessee's objections regarding the re-characterization of support services. Therefore, the Tribunal restored the issues raised in ground 9 and its sub-grounds to the AO/TPO for a fresh TP study analysis of the support services segment.

5. Dismissal of Grounds 10 and 11:

No arguments were raised regarding grounds 10 and 11, leading to their dismissal.

6. Dismissal of Stay Application:

Since the appeal was disposed of, the stay application became infructuous and was dismissed.

Conclusion:

The appeal filed by the assessee was partly allowed, and the stay application was dismissed. The Tribunal directed the AO/TPO to apply the appropriate upper turnover filter, exclude certain companies from the list of comparables, and conduct a fresh TP study analysis for the MSS segment.

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