2016 (9) TMI 1488 - AT - Income Tax

Transfer pricing appeal emphasizes functional comparability and accounting consistency in exclusion and inclusion decisions.

M/s CGI information Systems and Management Consultants Pvt. Ltd. Versus The Deputy Commissioner of Income Tax, Circle-11 (2), Bangalore

The Tribunal partly allowed the appeal, directing the exclusion of 12 comparables due to functional dissimilarity and the inclusion of excess provision ... TPA - Comparable selection - functional similarity - Held that:- Assessee is into providing software development services, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Non considering write off of liability provision in computing AL operating mark on cost - Held that:- As decided in SONY INDIA (P) LIMITED. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 9 (1) [2008 (9) TMI 420 - ITAT DELHI-H] excess provision written back in the P&L account is forming part of operating profit of the assessee. We direct the AO/TPO that excess provision written back in the P&L account should be accepted as forming part of operating profit of the assessee. Including cost reimbursement of expenses received from associated enterprises part of operating cost and operating income in computation of ALP - Held that:- As the issue in dispute was regarding reimbursement of expenses and since full details were not available on record regarding these expenses in that case, the matter was restored back to the file of the AO/TPO for detailed verification. In the present case, this is not in dispute that full details are not available and therefore, this Tribunal order in LG SOFT INDIA (P.) LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 12(2) [2013 (9) TMI 191 - ITAT BANGALORE] is not relevant in the present case. Issues Involved:1. Exclusion of 12 comparables based on functional dissimilarity.2. Inclusion of excess provision written back as part of operating profit.Detailed Analysis:1. Exclusion of 12 Comparables Based on Functional Dissimilarity:The assessee requested the exclusion of 12 comparables selected by the Transfer Pricing Officer (TPO) due to functional dissimilarity. The Tribunal's order in the case of Telelogic India (P) Ltd. vs. DCIT was cited, which had previously excluded these comparables for similar reasons. The Tribunal reviewed the comparability of the 12 companies: AvaniCimcon Technologies Ltd., Celestial Biolabs Ltd., EZest Solutions, Infosys Technologies Ltd., Kals Information Systems Ltd. (Seg.), Persistent Systems Ltd., Quintegra Solutions Ltd., Tata Elxsi Ltd. (Seg.), Thirdware Solutions Ltd. (Seg.), Wipro Ltd., Softsole India Ltd., and Lucid Software Ltd. The Tribunal found that these companies were functionally dissimilar to the assessee, primarily engaged in software development services, and directed the AO/TPO to exclude these comparables from the final list. The Tribunal emphasized the importance of functional comparability and consistency with previous rulings, ensuring that only truly comparable companies are included in the analysis.2. Inclusion of Excess Provision Written Back as Part of Operating Profit:The assessee argued that the excess provision written back in the Profit & Loss (P&L) account should be considered part of the operating profit. The Tribunal referred to its previous order in the case of M/s Sony India (P) Ltd. vs. DCIT, which held that provisions written back are part of operating profit. The Tribunal explained that provisions and their subsequent write-backs are normal business practices and should be included in the operating profit for a true reflection of the company's financial performance. The Tribunal rejected the revenue's argument against this inclusion, noting that the write-back of provisions is a standard accounting practice and should be treated as operating income. The Tribunal directed the AO/TPO to include the excess provision written back as part of the operating profit, aligning with the principles of mercantile accounting and ensuring consistency in the treatment of such entries.Conclusion:The appeal was partly allowed. The Tribunal directed the exclusion of the 12 comparables based on functional dissimilarity and the inclusion of the excess provision written back as part of the operating profit. The Tribunal's decision emphasized the importance of functional comparability and consistent accounting practices in transfer pricing assessments.