2023 (12) TMI 20 - AT - Income Tax

TP Adjustment - comparable selection - ALP for provision of software support, development and related services - HELD THAT - Infosys Technology Wipro Limited comparables were excluded by the CIT(A) in appeal for the immediately preceding assessment year has also not been controverted. Therefore, in view of the aforesaid, we direct the Assessing Officer to exclude Infosys Technologies and Wipro Limited from the final set of comparables as functionally different. Persistent Systems Limited earned revenues from licensing of the products and royalty which are in the nature of research and development services. Segmental results were not available. Therefore, Persistent Systems Limited should be excluded from the list of comparables. We note that similar objections were raised by the Appellant before CIT(A). Therefore, taking a view consistent with the view taken in the above decision by the Tribunal, we conclude that the reasons stated hereinabove, Persistent Systems Limited cannot be taken as a comparable and therefore, the same is excluded from the final set of comparables. iGate Global Solutions Ltd., Tata Elxsi Ltd, and LGS Global Limited - CIT(A) has not dealt with the objections raised by the Appellant while the Assessing Officer had included the same given the reasoning that the primary source of income is from software development. Therefore, we deem it appropriate to remand the issue of exclusion of the aforesaid comparable back to the file of the AO. Mindtree Limited, R Systems Ltd., Sasken Technologies Ltd., Sonata Software Limited Aricent Technology excluded on account of high turnover - CIT(A) had observed that Sonata Software Limited was a giant company having turnover of INR 1,380 Crores. Before the Tribunal, the Appellant had contended that 11 companies having high turnover be excluded from the list of comparables. As already directed exclusion of 3 companies (i.e. Infosys Technology, Wipro Limited and Persistent Systems Limited), though for different reasons. Out of the balance 8 companies, the issue related to exclusion of 3 companies (namely iGate Global Solutions Ltd., Tata Elxsi Ltd, LGS Global Limited) has been remanded back to the file of the Assessing Officer in paragraph 4.7 above. Therefore, we permit the Appellant to also raise contention of high turnover for seeking exclusion of the aforesaid 3 comparables before the Assessing Officer. As regards the balance 5 comparables (i.e.Mindtree Limited, R Systems Ltd., Sasken Technologies Ltd., Sonata Software Limited Aricent Technology), we grant the Appellant an opportunity to establish before the Assessing Officer that the aforesaid 5 comparables should be excluded on account of high turnover as the high turnover would result in a material difference which cannot be eliminated and direct the Assessing Officer to decide the issue keeping in view the ratio of the said judgments of the Hon ble High Courts. Accordingly, the issue of inclusion/exclusion of the aforesaid 5 comparables is also remanded to the file of the Assessing Officer. Kals Information Technology Systems was not only engaged in providing software development services but was also dealing in software products under the relevant segment. Since the company was engaged in selling software products which was different from the activity undertaken by the Appellant in that case, namely, rendering of software service to its holding company, the company was excluded from the list of comparables. Bodhtree Consulting Ltd. - As there is no change in the segmental reporting made by this company for the relevant previous year the company is stated to be operational in only one segment namely software development, which involves providing open and end-to-end web solutions, Off-shore Data Management, Data Warehousing, software consultancy, design and development of solutions, using the latest technologies. Concurring with the reasoning given by the Tribunal for excluding this company as a comparable in the case of the Appellant for the Assessment Year 2009-10, we direct the Assessing Officer to exclude Bodhtree Consulting Ltd. from the list of final set of comparable. Acropetal Technologies Limited be excluded as it continues to show inventories under the head Current Assets Loans and Advances suggesting that this company is engaged in manufacturing. Further, during the course of hearing, the Learned Authorised Representative had relied upon the decision of the Tribunal in the case of M/s John Deere India Pvt. Ltd. 2019 (5) TMI 97 - ITAT PUNE pertaining to the Assessment Year 2010-11 wherein it was held that even if the segmental accounts are taken into consideration this company would still not qualify as a comparable. Softsol India Limited - As entire income has been recorded under the head software exports and no bifurcation or details of the same have been provided. It is stated therein that the company does not have separate reportable segments - we find merit in the contention advanced on behalf of the Appellant that Softsol India Ltd. cannot be selected as a comparable on account of functional dissimilarly and lack of segmental data. Working Capital Adjustment - We grant the Appellant an opportunity to establish before the Assessing Officer that the Appellant is entitled to working capital adjustment in respect of the comparables finally selected. The Assessing Officer is directed to decide the claim for working capital adjustment, if any made by the Appellant before the Assessing Officer as per law. Thus, in accordance with the above, the Assessing Officer is directed to determine the final set of comparables; re-compute arm s length price; and transfer pricing adjustment, if any, after giving the Appellant a reasonable opportunity of being heard.

Summary

Issues Involved:
1. Determination of arm's length mark-up for software support, development, and related services.
2. Rejection of Transfer Pricing (TP) documentation and comparability analysis.
3. Use of current year financial data versus multiple year data for benchmarking.
4. Granting of working capital and risk adjustment.
5. Application of 5 percent range as per proviso to section 92C(2) of the Act.
6. Levy of interest under sections 234A and 234B of the Act.
7. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Summary:

1. Determination of Arm's Length Mark-Up:
The Appellant challenged the arm's length mark-up determined at 26.21% by the Assessing Officer (AO), leading to an addition of Rs. 2,21,07,342/- to the total income. The AO conducted a fresh search and included 21 comparables, resulting in a higher Net Operating Profit on Cost (NCP) of 26.21% compared to the Appellant's 9.99%. The Tribunal directed the exclusion of Infosys Technologies and Wipro Limited from the final set of comparables, and remanded the issue of exclusion of iGate Global Solutions Ltd., Tata Elxsi Ltd., and LGS Global Limited back to the AO for reconsideration.

2. Rejection of TP Documentation and Comparability Analysis:
The Appellant's TP documentation was rejected by the AO, who conducted a fresh search for comparables. The Tribunal noted that the CIT(A) had not properly addressed the objections raised by the Appellant regarding functional dissimilarity and high turnover of certain comparables. The Tribunal directed the exclusion of Persistent Systems Limited, Kals Information Systems, Bodhtree Consulting Ltd., Acropetal Technologies Limited, and Softsol India Limited from the final set of comparables due to functional dissimilarity and lack of segmental data.

3. Use of Current Year Financial Data:
The Tribunal did not provide specific directions on this issue as it was not pressed by the Appellant during the hearing.

4. Granting of Working Capital and Risk Adjustment:
The Tribunal granted the Appellant an opportunity to establish entitlement to working capital adjustment before the AO, directing the AO to decide the claim for working capital adjustment as per law.

5. Application of 5 Percent Range:
The Tribunal did not provide specific directions on this issue as it was not pressed by the Appellant during the hearing.

6. Levy of Interest:
The Tribunal disposed of the ground relating to the levy of interest under sections 234A and 234B as being consequential in nature.

7. Initiation of Penalty Proceedings:
The Tribunal dismissed the ground related to the initiation of penalty proceedings under section 271(1)(c) of the Act as being premature.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to re-compute the arm's length price and transfer pricing adjustment after determining the final set of comparables, and to decide on the working capital adjustment claim. The appeal was disposed of with specific directions on the selection of comparables and other related issues.