2021 (12) TMI 1403 - AT - Income Tax

Tribunal's Transfer Pricing Ruling: Functional Similarity & Turnover Filters Key

The Tribunal partly allowed the appeal, directing the exclusion of certain high-turnover companies from the comparables list and reconsidering the ... TP Adjustment - comparable selection - functional dissimilarity - HELD THAT:- As assessee in engaged in the business of provision of Software Development Services (SWD services) and in development, design and implementation of software programmes. Assessee also acts as consultant on matters relating to IT enabled services to its wholly owned holding company, thus companies functionally dissimilar with that of assessee need to deselected . Issues Involved:1. Adjustment under section 92CA for Software Development Services (SWD) and IT Enabled Services (ITES).2. Selection of functionally dissimilar companies as comparables for SWD and ITES segments.3. Rejection of certain companies from the list of comparables.4. Application of turnover filter for selection of comparables.5. Working capital adjustment.6. Rejection of the Transfer Pricing (TP) study by the appellant.7. Non-provision of approval copy by the Commissioner.8. Denial of risk adjustment.9. Levy of interest under sections 234B and 234C.Detailed Analysis:Issue 1: Adjustment under section 92CA for SWD and ITESThe appellant contested the addition of Rs. 3,64,26,460/- for SWD and Rs. 8,90,749/- for ITES, arguing the adjustments were 'bad in law.' The Tribunal reviewed the Transfer Pricing Officer (TPO)'s methodology and the appellant's objections, ultimately proposing adjustments based on the comparables selected.Issue 2: Selection of Functionally Dissimilar Companies as Comparables for SWD SegmentThe appellant argued against the inclusion of CG-VAK Software & Exports Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd. (Seg), Persistent Systems Ltd. (Seg), and Tech Mahindra Ltd. (Seg) due to functional dissimilarities and higher turnover. The Tribunal noted that these companies had turnovers exceeding Rs. 200 crores, making them incomparable to the appellant's turnover of Rs. 64 crores. Citing precedents, the Tribunal excluded these companies from the final list of comparables.Issue 3: Rejection of Certain Companies from the List of ComparablesThe appellant sought the inclusion of Akshay Software Technologies Limited and Evoke Technologies Pvt. Ltd., which were previously accepted as comparables. The Tribunal directed the TPO to reconsider Akshay Software Technologies Limited and remand Evoke Technologies for fresh consideration, emphasizing the need for consistency in comparability.Issue 4: Application of Turnover Filter for Selection of ComparablesThe Tribunal examined the application of the turnover filter, referencing the decision in Autodesk India (P.) Ltd. v. Dy. CIT, which established that companies with turnovers exceeding Rs. 200 crores should not be compared with those having turnovers below Rs. 200 crores. This principle led to the exclusion of companies like Microland Ltd. and Tech Mahindra Ltd. from the ITES segment.Issue 5: Working Capital AdjustmentThe appellant argued for a higher working capital adjustment in both SDS and ITES segments. The Tribunal did not provide specific details on this issue, indicating that it was not pressed by the appellant during the hearing.Issue 6: Rejection of the TP Study by the AppellantThe appellant contended that the TPO, DRP, and Assessing Officer erred in rejecting their TP study and conducting a new study without rejecting all comparables. This issue was not adjudicated as it was not pressed during the hearing.Issue 7: Non-provision of Approval Copy by the CommissionerThe appellant argued that the assessment order was invalid due to the non-provision of the Commissioner's approval copy, violating natural justice principles. This issue was not adjudicated as it was not pressed during the hearing.Issue 8: Denial of Risk AdjustmentThe appellant claimed that they should have received a risk adjustment due to their status as a risk-insulated captive service provider. The Tribunal did not provide specific details on this issue, indicating that it was not pressed by the appellant during the hearing.Issue 9: Levy of Interest under Sections 234B and 234CThe appellant contested the levy of interest under sections 234B and 234C, arguing that the computation details were not provided. This issue was not adjudicated as it was not pressed during the hearing.Conclusion:The Tribunal partly allowed the appeal, directing the exclusion of certain high-turnover companies from the comparables list and reconsidering the inclusion of specific companies. The Tribunal emphasized the importance of functional similarity and consistent application of turnover filters in transfer pricing assessments. The detailed analysis of each issue reflects the Tribunal's adherence to legal precedents and principles of natural justice.