2023 (8) TMI 1170 - AT - Income Tax

TP Adjustment - comparable selection - functional dissimilarity - HELD THAT - Admittedly, the assessee is a captive service provider to its AE. FAR analysis of assessee establishes that it does not undertake any risk in terms of projects undertaken or services rendered. The functions carried out by the assessee are strictly on the basis of directions from its AE and the payment by the AE to the assessee is on cost markup. The comparables sought by assessee herein for exclusion carry out diverse activities and has significant brand values. These companies are owning huge intangibles and also undertakes its own R D which is not the case of the assessee before us. The decisions herein above relied by the assessee on functional dissimilarities goes to establish that these are functionally not similar with that of the assessee. The relevant extract of the observation in case of Yahoo Software Development India Pvt. Ltd. 2022 (7) TMI 1349 - ITAT BANGALORE in respect of Larsen Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd. and Infosys Ltd direct exclusion from the final list. Exclusion of Nihilent Ltd. and OFS Technologies Ltd. from the final list as not functionally similar to that of assessee. Case followed SUBEX LIMITED 2023 (4) TMI 224 - ITAT BANGALORE Assessee seeking inclusion of only two comparables Maveric Systems Ltd. and Evoke Technologies Pvt. Ltd. - We note that the authorities below has not verified the annual reports to come to a conclusion that the export revenue filter is not satisfied. In the interest of justice, we direct these comparables back to the Ld.AO/TPO to verify the FAR analysis of these comparables with that of assessee and to consider its inclusion in case it satisfies all the relevant filters. Margins of Harbinger Systems Pvt. Ltd. and CG-Vak Software and Exports Limited has been wrongly computed - We direct the Ld.AO/TPO to recompute the margins of these comparables in accordance with law. Considering bad debts and provision for bad debts as non-operating expenses while computing the operating margin of comparable companies - HELD THAT - As relying on M/S. MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT. LTD. 2020 (11) TMI 563 - ITAT BANGALORE we direct the Ld.AO to consider the bad and doubtful debts and provision for bad debts to be operating in nature while computing the PLI of the comparable companies.

Summary

Issues Involved:
1. General grounds challenging the assessment order.
2. Grounds relating to transfer pricing matters.
3. Consequential grounds regarding penal proceedings and demand notice.
4. Admission of additional grounds of appeal.
5. Specific comparables for inclusion/exclusion in transfer pricing analysis.

Summary:

General Grounds:
1. The assessee challenged the assessment order dated 25.01.2022, contending it is erroneous, bad in law, and contrary to the facts and circumstances of the case.

Transfer Pricing Matters:
2. The AO erred by not following the DRP's binding directions, failing to grant appropriate relief to the appellant.
3. An addition of INR 19,65,61,201 was made to the appellant's total income due to adjustment in the arm's length price (ALP) for international transactions with its associated enterprise.
4. The AO/TPO/DRP erred by not accepting the appellant's economic analysis and conducting a fresh analysis, incorrectly applying quantitative and qualitative filters, rejecting and accepting certain comparables, and not making suitable adjustments for differences in working capital and risk profiles. The adjustment was not restricted to international transactions, affecting third-party transactions as well.

Consequential Grounds:
5. The AO erred in initiating penal proceedings under section 274 read with section 270A of the Act.
6. The AO erred in issuing a demand notice under section 156 of the Act.

Admission of Additional Grounds:
2.1 The assessee filed applications on 19.08.2022 and 17.02.2023 seeking admission of additional grounds for inclusion/exclusion of specific comparables without requiring verification of new facts.
2.2 The CIT-DR opposed the admission but could not challenge the assessee's right under the Act.
2.3 The Tribunal admitted the additional grounds, noting they are directly connected with the main issue of transfer pricing additions.

Specific Comparables:
8. The assessee sought exclusion of six comparables (Larsen & Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., Nihilent Ltd., OFS Technologies Ltd., and Infosys Ltd.) due to failure to satisfy the turnover filter and functional dissimilarities. The Tribunal directed the exclusion of these comparables based on precedents.
9. The assessee sought inclusion of Maveric Systems Ltd. and Evoke Technologies Pvt. Ltd., which were remanded back to the AO/TPO for verification of FAR analysis and relevant filters.
10. The Tribunal directed the AO/TPO to recompute the margins of Harbinger Systems Pvt. Ltd. and CG-Vak Software and Exports Limited.
11. The Tribunal directed the AO to consider bad debts and provision for bad debts as operating expenses while computing the operating margin of comparable companies, following precedents.

Conclusion:
The appeal filed by the assessee was partly allowed, with specific directions for exclusion and inclusion of comparables and recomputation of margins, while other grounds and comparables not argued were left open for future contestation.