2017 (6) TMI 1280 - AT - Income Tax

Tribunal partially allows appeals, remits issues for reconsideration, dismisses cross-objections. Detailed directions for fair review.

The Tribunal partly allowed the appeals of both the assessee and the Revenue, remitting specific issues back to the TPO for reconsideration. The Tribunal ... TPA - Comparable selection criteria - Held that:- Companies functionally dissimilar with that of assessee need to be deselected from final list. A company is said to be not good comparable and should be excluded from the list of comparables only if it is a consistent loss making company. The company is said to have consistent losses, if the company has suffered loss in the last three consecutive assessment years including the assessment year selected for comparison. Where the assessee is providing off-site services it cannot be compared with a company providing services on-site Risk adjustments - Held that:- A perusal of documents furnished by the assessee giving the background of the case reveal that the assessee has admitted that it is a captive service provider with limited functions and negligible risk. Subsequently, the assessee in proceedings before the TPO asked for risk adjustment. The TPO rejected the same. The assessee has also raised objection before the DRP against rejection of risk adjustment, wherein the assessee was unsuccessful in seeking the desired relief. Before Tribunal the ld. AR of the assessee has reiterated the submissions made before the authorities below. The ld. AR of the assessee has not been able to show as to how the findings of authorities below on this issue are bad. We find no merit in the ground raised by the assessee, accordingly, the same is dismissed. Benefit of ± 5% as per the provisions of section 92C(2) - Held that:- The assessee has prayed for granting the benefit of ± 5% as per the provisions of section 92C(2) of the Act. The ld. AR has submitted that if Ancent Software International Limited and Quintegra Solutions Limited are included in the list of comparables; and Acropetal Technologies Ltd. and Thirdware Solutions Limited are excluded from the list of comparables, the average margins of the assessee will fit within ± 5% range. However, before us no working has been furnished by the ld. AR to substantiate his point. Accordingly, we remit this issue back to the file of TPO to consider the contentions of the assessee and decide this issue, in accordance with law. Thus, ground raised by assessee allowed for statistical purpose. TPA - Comparable selection - Held that:- DRP was right in applying turnover filter while selecting comparable companies. After having applied turnover filter, both the companies have been included in the list of comparables. We find merit in the ground raised by the Department. Once, having applied turnover filter there cannot be arbitrary selection of the companies ignoring the turnover. The DRP has drawn our attention to the financial results of both the aforesaid companies. A perusal of profit and loss accounts of the said companies for the financial year ending 31- 03-2010 reveal that both these companies have turnover much more than ₹ 200 crores. Accordingly, both these companies have to be excluded from the list of comparables. Accordingly, ground No. 2 raised by the Department in appeal is allowed. Rejecting “On-site revenue filter‟ applied by the TPO - Held that:- This issue we have already dealt in detail deciding the appeal of the assessee. We have reversed the findings of DRP in rejecting 'On-site revenue filter'. Issues Involved:1. Rejection of loss-making comparables.2. Introduction of functionally different comparables by the TPO.3. Working capital adjustment.4. Risk adjustment.5. Benefit of +/-5%.6. Computational error.7. Levy of interest under Sections 234B and 234D of the Act.8. Penalty proceedings under Section 271(1)(c) of the Act.9. Application of turnover filter.10. Rejection of the on-site revenue filter.Detailed Analysis:1. Rejection of Loss-Making Comparables:The assessee contested the exclusion of Ancent Software International Limited and Quintegra Solutions Limited on the grounds that they were not consistent loss-making entities. The Tribunal noted that a company should only be excluded if it has suffered losses in three consecutive financial years. The financial results of both companies showed profits in the relevant financial years. Therefore, the Tribunal remitted the issue back to the TPO to verify and include these companies if they are not consistent loss-making entities, as per the precedent set in M/s. Carraro Technologies India Pvt. Ltd. vs. Income Tax Officer.2. Introduction of Functionally Different Comparables by the TPO:The assessee argued for the exclusion of Acropetal Technologies Limited and Thirdware Solutions Limited due to functional differences. The Tribunal agreed, noting that Acropetal Technologies Limited engaged in product development and provided on-site services, which differed from the assessee's off-site services. Similarly, Thirdware Solutions Limited was involved in software product development and lacked segmental bifurcation, making it functionally dissimilar. The Tribunal excluded both companies from the list of comparables, citing decisions from other cases such as Tibco Software India Pvt. Ltd. vs. Dy. Commissioner of Income Tax.3. Working Capital Adjustment:The assessee sought working capital adjustments to align the margins of comparable companies. The Tribunal remitted this issue back to the TPO to reconsider the claim in light of the decision in Demag Cranes & Components (India) Pvt. Limited vs. DCIT, emphasizing the legitimacy and necessity of such adjustments.4. Risk Adjustment:The assessee requested risk adjustments, claiming it was a captive service provider with limited functions and negligible risk. The Tribunal found no merit in this ground as the assessee failed to demonstrate how the authorities' findings were incorrect. Consequently, the request for risk adjustments was dismissed.5. Benefit of +/-5%:The assessee argued for the benefit of +/-5% as per Section 92C(2) of the Act. The Tribunal remitted this issue back to the TPO for reconsideration, contingent on the inclusion and exclusion of specific comparables as discussed.6. Computational Error:The assessee claimed a computational error in determining its total income. The Tribunal directed the Assessing Officer to verify and rectify the error, if any, thus allowing this ground for statistical purposes.7. Levy of Interest under Sections 234B and 234D of the Act:The Tribunal noted that the charging of interest under these sections is mandatory and consequential. Therefore, the assessee's grounds for deleting the levy of interest were dismissed.8. Penalty Proceedings under Section 271(1)(c) of the Act:The Tribunal dismissed the ground related to the initiation of penalty proceedings as premature, noting that challenging the recording of satisfaction for penalty at this stage was not appropriate.9. Application of Turnover Filter:The Revenue contested the DRP's application of the turnover filter, arguing that the assessee had not initially applied this criterion. The Tribunal upheld the application of the turnover filter, citing precedents such as Dy. Commissioner of Income Tax vs. Qurark Systems (P) Ltd., and Commissioner of Income Tax vs. Pentair Water India P. Ltd. The Tribunal, however, found merit in the Revenue's argument against the selective use of the turnover filter and excluded Zylog Systems Limited and Persistent Systems Private Limited from the comparables list due to their high turnover.10. Rejection of the On-Site Revenue Filter:The Revenue challenged the DRP's rejection of the on-site revenue filter. The Tribunal reversed the DRP's decision, reinstating the on-site filter applied by the TPO, emphasizing the significant differences in business models between on-site and off-site service providers.Conclusion:The appeals of both the assessee and the Revenue were partly allowed, with specific issues remitted back to the TPO for reconsideration. The cross-objections raised by the assessee were dismissed as infructuous. The Tribunal provided detailed directions and upheld various precedents to ensure a fair and comprehensive review of the issues at hand.