2015 (6) TMI 288 - AT - Income Tax

Tribunal directs reassessment of comparable companies, risk adjustment, and working capital issues

The Tribunal partly allowed the assessee's appeal, directing the TPO to re-examine comparability of certain companies, exclude others, and reconsider risk ... Transfer pricing adjustment - selection of comparables by TPO - Held that:- Bodhtree Consulting Ltd.is not being considered as a comparable company in the case of companies rendering software development services. Comp-U-Learn Tech India Ltd. as relying on case of Kenexa Technologies P. Ltd., vs. DCIT [[2014 (11) TMI 587 - ITAT HYDERABAD] restore analysis of this company to the file of TPO who should look into the financial statements of the company and re-examine whether the company can be considered as a comparable company. Assessee should be given due opportunity to submit relevant details to substantiate its claim. With these directions, analysis of this company is restored to the file of TPO. I-Gate Global Solutions Ltd. company itself classified that ITES company, being similar to assessee company, assessee’s objection is that the information obtained by the TPO was not provided to the assessee. In view of this, we, in the interest of justice restore the matter to the file of the A.O. to examine afresh. The segmental information pertaining to ITES obtained by the TPO should be provided to the assessee for its objections and then re-consider the issue whether the same is comparable or not. Infosys Technologies Ltd. excluded from the list of comparable companies as it is functionally dis-similar and different from the assessee ince it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. Kals Information Systems (Segmental) should not be regarded as a comparable as this company was developing software products and not purely or mainly software development service provider. Tata Elxsi Ltd., (Segmental) should not be regarded as a comparable as unctionally different from that of the assessee Risk analysis - Held that:- Following the decision in the case of Kenexa Technologies P. Ltd., vs. DCIT, Hyderabad [2014 (11) TMI 587 - ITAT HYDERABAD] We remit the issue to the TPO to consider the risk profile of the assessee. We direct the TPO to allow necessary deductions for risk adjustment, after finalising the list of comparables as directed by us Negative working capital - Held that:- There is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment. Issues Involved:1. Selection of comparables by TPO2. Adjustment for risk difference3. Negative working capital adjustment4. Application of proviso to section 92C(2)5. Interest under section 234B6. Initiation of penalty proceedingsIssue-wise Detailed Analysis:1. Selection of Comparables by TPO:The assessee objected to six comparables selected by the TPO, arguing that these companies were not comparable to its business operations. The Tribunal analyzed each objection:- Bodhtree Consulting Ltd.: The Tribunal found that this company was functionally different and had abnormal margins. It cited the Bangalore Tribunal's decision in the case of Cisco Systems India P. Ltd., where Bodhtree Consulting Ltd. was rejected as a comparable. The Tribunal directed the AO to exclude this company.- Comp-U-Learn Tech India Ltd.: The Tribunal noted that this company was engaged in diversified activities, including IT-enabled services and product development. It cited the decision in Kenexa Technologies P. Ltd. vs. DCIT, which directed a re-examination of this company's comparability. The Tribunal restored the analysis to the TPO for fresh examination.- I-Gate Global Solutions Ltd.: The Tribunal found that segmental information was not available in the public domain and that the information obtained by the TPO was not provided to the assessee. It directed the AO to examine the segmental information afresh and provide it to the assessee for objections.- Infosys Technologies Ltd.: The Tribunal noted that Infosys had significant intangibles and brand value, making it functionally different from the assessee. It cited the Bangalore Tribunal's decision in Cisco Systems India P. Ltd., which excluded Infosys as a comparable. The Tribunal directed the AO to exclude Infosys.- Kals Information Systems (Segmental): The Tribunal found that this company was engaged in both software development and product development, making it functionally different. It cited multiple decisions, including Cisco Systems India P. Ltd., which rejected Kals Information Systems as a comparable. The Tribunal directed the AO to exclude this company.- Tata Elxsi Ltd. (Segmental): The Tribunal found that this company was engaged in complex business operations and had been rejected as a comparable in multiple decisions, including Cisco Systems India P. Ltd. It directed the AO to exclude Tata Elxsi.2. Adjustment for Risk Difference:The Tribunal noted that the issue of risk adjustment was analyzed in Kenexa Technologies P. Ltd. vs. DCIT, where it was held that risk profile adjustments should be made based on the facts of each comparable case. The Tribunal remitted the issue to the TPO to consider the risk profile of the assessee and allow necessary deductions for risk adjustment after finalizing the list of comparables.3. Negative Working Capital Adjustment:The Tribunal observed that the DRP had directed the TPO not to make any negative working capital adjustment in similar cases. It cited the DRP's directions in the cases of Market Tools Research P. Ltd. and Mega Systems Worldwide India P. Ltd., which stated that a captive service provider does not bear working capital risks. The Tribunal directed the TPO not to make a negative working capital adjustment.4. Application of Proviso to Section 92C(2):The Tribunal directed the TPO to consider the proviso to section 92C(2) as per law. The orders were set aside for re-doing the same as per facts and provisions of law.5. Interest Under Section 234B:The Tribunal noted that interest under section 234B is mandatory and consequential in nature, and no adjudication was required on this ground.6. Initiation of Penalty Proceedings:The Tribunal found that the initiation of penalty proceedings was premature in nature and did not require adjudication at this stage.Conclusion:The Tribunal partly allowed the assessee's appeal for statistical purposes, directing the TPO to re-examine the comparability of certain companies, exclude others, and reconsider the issues of risk adjustment and negative working capital adjustment. The Tribunal emphasized the need for compliance with legal provisions and proper analysis of the facts. The order was pronounced in open Court on 25.03.2015.