Tribunal allows appeal, adds comparable, excludes high turnover firms, considers working capital adjustments.

The Tribunal partly allowed the appeal, directing the inclusion of Akshay Software Technologies Limited as a comparable, the exclusion of companies with huge turnovers, and the consideration of working capital adjustments. The other grounds raised by the appellant were dismissed as not pressed.

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Issues Involved:
1. Assessment and Reference to Transfer Pricing Officer (TPO)
2. Determination of arm's length price (ALP) by the TPO/AO in relation to the 'Software development Services' segment
3. Erroneous data used by the TPO/AO
4. Working capital adjustments to the comparable companies
5. Variation of 3% from the arithmetic mean
6. Initiation of penalty proceedings
7. Levying interest under Section 234B of the Act
8. Levying interest under Section 234C of the Act
9. Relief

Detailed Analysis:

1. Assessment and Reference to Transfer Pricing Officer (TPO):
The appellant contended that the Assistant Commissioner of Income Tax (AO) erred in making a reference to the Deputy Commissioner of Income Tax (TPO) without recording an opinion that any conditions in section 92C(3) of the Income Tax Act, 1961 were satisfied. Additionally, the TPO failed to demonstrate that the appellant's motive was to shift profits outside India by manipulating prices in its international transactions. The order passed by the AO was argued to be without jurisdiction as it purported to give effect to an invalid order of the TPO.

2. Determination of arm's length price (ALP) by the TPO/AO in relation to the 'Software development Services' segment:
The appellant raised multiple grounds under this issue, but only Ground Nos. 2.2 and 2.7 were pressed during the hearing.

Ground No. 2.2:
The appellant argued against the exclusion of Akshay Software Technologies Limited from the final list of comparables. The TPO rejected this company as a comparable, stating it was engaged in providing professional services, procurement, installation, implementation, support, and maintenance of ERP products and services. The DRP upheld this rejection, noting the absence of data to support the claim that the company was only in software development activities. However, the appellant relied on the decision of the ITAT, Bangalore Bench in the case of Metric Stream Infotech (2017) to support its case. The Tribunal found force in the appellant's argument and directed the retention of Akshay Software Technologies Limited as a comparable.

Ground No. 2.7:
The appellant objected to the selection of companies with huge turnovers as comparables, arguing that their turnover was significantly higher than the appellant's. The Tribunal agreed with the appellant, noting that companies with huge turnovers cannot be compared with the appellant, which had a turnover of only Rs. 26.46 crores. The Tribunal directed the exclusion of Larsen & Toubro Infotech, Mindtree Ltd., and Persistent Systems Ltd. from the list of comparables.

3. Erroneous data used by the TPO/AO:
The appellant contended that the TPO/AO used non-contemporaneous data that was not available in the public domain at the time of conducting the transfer pricing study. This issue was not pressed during the hearing.

4. Working capital adjustments to the comparable companies:
The appellant argued that the DRP erred in disallowing working capital adjustments under Rule 10B of the Income Tax Rules, 1962. The DRP had directed the TPO to disallow the working capital adjustment, stating that the average working capital does not show the actual working capital employed during the year. The Tribunal, relying on the decision of the ITAT, Chennai Bench in the case of Foxteq Services India (P) Ltd. vs. ACIT, directed the AO to consider the working capital adjustment while determining the ALP of the international transactions.

5. Variation of 3% from the arithmetic mean:
The appellant contended that the AO/TPO erred in not granting the benefits of the proviso to section 92C(2) of the Act. This issue was not pressed during the hearing.

6. Initiation of penalty proceedings:
The appellant argued that there was no basis for the AO to initiate proceedings under section 274 read with section 271 of the Act. This issue was not pressed during the hearing.

7. Levying interest under Section 234B of the Act:
The appellant contended that the AO erred in levying interest under Section 234B of the Act amounting to Rs. 23,73,650. This issue was not pressed during the hearing.

8. Levying interest under Section 234C of the Act:
The appellant argued that the AO erred in levying interest under Section 234C of the Act amounting to Rs. 61,428. This issue was not pressed during the hearing.

9. Relief:
The appellant prayed for directions to grant all relief arising from the above grounds and any consequential relief. The Tribunal partly allowed the appeal, granting relief on the grounds that were pressed and adjudicated.

Conclusion:
The Tribunal allowed the appeal in part, directing the inclusion of Akshay Software Technologies Limited as a comparable, the exclusion of companies with huge turnovers, and the consideration of working capital adjustments. The other grounds raised by the appellant were dismissed as not pressed.

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