Segmental profitability statement accepted for transfer pricing analysis despite not being audited financial statements

ITAT Kolkata upheld CIT(A)'s acceptance of assessee's segmental profitability statement for transfer pricing analysis despite not being part of audited financial statements. The tribunal ruled that AS-17 segment reporting was not mandatory for small and medium companies, and segmental accounts could be accepted for arm's length price determination under TNMM when AE and non-AE segments perform different functions. The tribunal also accepted several comparables rejected by TPO including Kireeti Soft Technologies Ltd, Akshay Software Technologies Ltd, and Avani Cimcon Technologies Ltd, finding them functionally comparable. Additionally, cash profit margin was accepted as appropriate profit level indicator under TNMM for transfer pricing purposes.

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Issues Involved:
1. Acceptance of the segmental profitability statement by the CIT(A).
2. Rejection of comparables selected by the TPO.
3. Acceptance of certain comparables by the CIT(A) despite failing specific filters applied by the TPO.
4. Acceptance of comparables despite functional dissimilarities.
5. Acceptance of cash profit over sales as a profit level indicator (PLI).

Detailed Analysis:

1. Acceptance of the Segmental Profitability Statement:
The Revenue challenged the segmental profitability statement of the assessee, arguing it was not part of the audited financial statement, lacked supporting working notes, and had improper cost allocation keys. The Tribunal noted that the segmental report was duly verified and certified by the statutory auditor and was submitted during the TPO proceedings. The Tribunal referenced prior decisions, affirming that segmental results need not be audited and can be accepted if maintained in the ordinary course of business. The Tribunal upheld the CIT(A)'s acceptance of the segmental report, dismissing the Revenue's contention.

2. Rejection of Comparables Selected by the TPO:
The Tribunal examined the CIT(A)'s rejection of five comparables selected by the TPO:
- Spry Resources India Ltd: Rejected as it was engaged in software consultancy services, not comparable to the assessee's software services.
- E-Infochips Bangalore Ltd: Rejected due to engagement in both software development and IT-enabled services without segmental income break-up.
- Infinite Data Systems Pvt Ltd (Merged): Rejected as it derived revenue primarily from technical support and infrastructure management services.
- Thirdware Solutions Ltd: Rejected due to engagement in software product development and consulting, unlike the assessee's software services.
- Intech Software Pvt Ltd: Rejected as it was involved in production and sale of software, not comparable to the assessee's software services.

3. Acceptance of Certain Comparables Despite Failing Specific Filters:
The Tribunal upheld the CIT(A)'s acceptance of Cherrytec Intelisolve Ltd, Cigniti Technologies Ltd, and Secure Earth Technologies Ltd, despite failing the TPO's forex filter. The Tribunal noted that these companies had an export turnover to total turnover ratio above 50%, and the TPO's filter was arbitrary. The Tribunal emphasized consistency in the Revenue's approach, referencing prior acceptance of similar filters.

4. Acceptance of Comparables Despite Functional Dissimilarities:
- Kireeti Soft Technologies Ltd: The Tribunal upheld the CIT(A)'s acceptance despite failing the employee cost filter, noting the minuscule difference and functional comparability.
- Akshay Software Technologies Ltd: Accepted as comparable, with the Tribunal referencing prior acceptance for a similar assessment year and noting the company's predominant revenue from software services.
- Avani Cimcon Technologies Ltd: Accepted despite the Revenue's claim of an insignificant cost base, with the Tribunal finding sufficient cost and revenue details to support comparability.
- CAT Technologies Ltd: Accepted despite the lack of related party transaction details, with the Tribunal emphasizing consistency in the Revenue's approach and functional comparability.

5. Acceptance of Cash Profit Over Sales as a Profit Level Indicator (PLI):
The Tribunal upheld the CIT(A)'s acceptance of cash profit over sales as a PLI, noting prior acceptance for a similar assessment year and referencing judicial precedents supporting the use of cash profit margin in transfer pricing analysis. The Tribunal dismissed the Revenue's contention that cash profit margin is only applicable to capital-intensive industries.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds, including the acceptance of the segmental profitability statement, rejection and acceptance of specific comparables, and the use of cash profit over sales as a PLI.

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