2023 (9) TMI 605 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Cybercom Datamatics Information Solutions Ltd. -M/s Cybercom Datamatics as a right comparable to M/s Steria India Ltd. for software development services and the facts of the instant case are identical to the facts of the Steria India Ltd. 2020 (10) TMI 24 - ITAT DELHI - Since the primary conditions are met with, we hold that Cybercom Datamatics Information Solutions Ltd. can be considered as a right comparable. Mindtree Ltd. - At heading quantitative details it is clearly mentioned that the assessee is involved in software development services only and accordingly no other segment is applicable in the case of the assesee. Thus the assessee contention about no segmental information is not tenable. Further, with regard to the intangible of Rs. 6.7 crore comes to 0.2% of turnover of Rs. 3031.6 crore. However, the assessee also owns intangible of Rs. 6.03 crore including goodwill, which is 13.85% of turnover of Rs. 43.53 crore. Thus this contention of assesssee is without any basis and thus based on the above analysis, the assessee company is functionally similar comparable to M/s Mindtree Ltd. Persistent Systems Ltd. - We find that the turnover is within the acceptable range, the FAR matching, the segmental information is not required as there is single common segment of revenue and in the absence of financial implication on the occurrence of extraordinary events and having found intangibles being 1.35% as negligible and same with the R D activities which is 0.3% of the turnover and hence, we hold that Persistent Systems Ltd. can be considered as a right comparable. Tata Elxsi Ltd. - The case was selected by the assessee itself in the A.Y. 2012-13. The turnover of the company s 20 times that of the company which is within the acceptable range and the FAR has been similar, hence, we hold that it can be considered as a right comparable. Comviva Technologies Ltd. - By claiming that the company is not functionally comparable to the assessee company and also it has high turnover. At the outset, it is seen from the records and the assessee written contentions that this company was in the list of assessee's own comparables and both at the stage of TPO as well as DRP. Since, this comparable has nor be examined by the authorities below, in the fitness of things, the matter is referred to the file of the TPO/DRP to examine the issue afresh.

Summary

Issues Involved:
1. Assessment of Total Income
2. Rejection of Transfer Pricing Study
3. Adjustment in International Transaction
4. Levy of Interest under Sections 234B, 234C, and 234D
5. Initiation of Penalty Proceedings under Section 271(1)(c)

Summary:

1. Assessment of Total Income:
The assessee contested the AO's assessment of total income at INR 6,51,03,510 against the returned income of INR 4,24,39,400 under section 143(3) read with section 144C(13) of the Income Tax Act, 1961.

2. Rejection of Transfer Pricing Study:
The AO/DRP/TPO rejected the transfer pricing study prepared by the assessee invoking section 92C(3)(c) of the Act.

3. Adjustment in International Transaction:
The AO/DRP/TPO made an adjustment of INR 2,25,96,348 in respect of the international transaction pertaining to the provision of software development services (SDS).

3.1 Quantitative Filters:
The AO/DRP/TPO did not accept the quantitative filters selected by the assessee and applied their own filters without valid reasoning.

3.2 Functionally Comparable Companies:
The AO/DRP/TPO arbitrarily rejected the set of functionally comparable companies adopted by the assessee.

3.3 Specific Companies Contested:
The assessee contested the inclusion of Cybercom Datamatics Information Solutions Ltd, Mindtree Ltd, Persistent Systems Ltd, Tata Elxsi Ltd, and Comviva Technologies Ltd., arguing they were not functionally comparable.

- Cybercom Datamatics Information Solutions Ltd.: The assessee argued it was functionally not comparable, lacked segmental information, had huge investment in fixed assets, and earned super normal profits. The Tribunal held it as a right comparable based on functional similarity and single segment operation.

- Mindtree Ltd.: The assessee sought exclusion due to functional dissimilarity, different business model, R&D activity, lack of segment data, and high turnover. The Tribunal found it functionally similar and within the acceptable turnover range.

- Persistent Systems Ltd.: The assessee argued it was mainly involved in software product development, lacked segmental financials, had R&D activities, and high turnover. The Tribunal held it as a right comparable, noting its primary involvement in software services and negligible impact of R&D and intangibles.

- Tata Elxsi Ltd.: The assessee argued it was not comparable due to its diverse operations. The Tribunal held it as a right comparable based on functional similarity and acceptable turnover range.

- Comviva Technologies Ltd.: The assessee sought its exclusion due to functional dissimilarity and high turnover. The Tribunal referred the matter back to the TPO/DRP for fresh examination.

3.4 Economic Adjustment:
The AO/DRP/TPO did not provide the benefit of economic adjustment on account of differences in risk profile.

3.5 Current Year Data:
The AO/DRP/TPO considered current year data for comparability, which was not available to the assessee at the time of preparing its transfer pricing documentation.

3.6 Inconsistencies in Operating Margin Calculation:
The AO/DRP/TPO adopted inconsistencies in the calculation of the operating margin of the comparable companies and the assessee.

4. Levy of Interest:
The AO erred in levying interest under sections 234B, 234C, and 234D of the Act.

5. Initiation of Penalty Proceedings:
The AO proposed to initiate penalty proceedings under section 271(1)(c) of the Act mechanically without recording adequate reasons for such initiation.

Conclusion:
The appeal of the assessee was dismissed, and the Tribunal upheld the AO/DRP/TPO's adjustments and comparables except for Comviva Technologies Ltd., which was referred back for fresh examination. The order was pronounced in the Open Court on 11/09/2023.