TPO directed to exclude five companies from comparables for transfer pricing analysis due to functional dissimilarity

The ITAT Bangalore directed the TPO to exclude five companies from comparables in the ITES segment for ALP determination, finding them functionally dissimilar to the assessee. The tribunal dismissed the appeal regarding negative working capital adjustment, upholding the TPO's computation of 36.81% adjusted margin. On TDS under section 40(a)(ia) for software expenses, the matter was restored to the AO for verification of tax payment by recipients. Similarly, the issue of loyalty bonus provision in book profit computation under section 115JB was remanded to the AO for verification, following a coordinate bench decision in the assessee's own case.

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Issues Involved:
1. Exclusion of comparables in the software development services segment.
2. Negative working capital adjustment in the software development services segment.
3. Exclusion of comparables in the ITES segment.
4. Negative working capital adjustment in the ITES segment.
5. Disallowance of software expenses under Section 40(a)(ia) for non-deduction of TDS.
6. Addition of provision for loyalty bonus while computing book profits under Section 115JB.

Detailed Analysis:

1. Exclusion of Comparables in the Software Development Services Segment:
The assessee argued that four companies (Genesys International Corporation Limited, Infosys Limited, L&T InfoTech Limited, and Persistent Systems Limited) should be excluded from the list of comparables for the software development services segment due to functional dissimilarity and turnover criteria. The Tribunal found:
- Genesys International Corporation Limited: Turnover of Rs.96.09 Crores and engaged in geographical information services. The DRP's order was cryptic, and the issue was remitted to the DRP for a speaking order.
- Infosys Limited: Turnover of Rs.31,255 Crores with global brand and intangible assets, functionally different. Excluded based on the turnover filter criteria.
- L&T InfoTech Limited: Turnover of Rs.2,959 Crores, substantial onsite operations, high brand value. Excluded based on the turnover filter criteria.
- Persistent Systems Limited: Turnover of Rs.810 Crores, high R&D expenses, amalgamation, and extraordinary events. Excluded based on the turnover filter criteria.

2. Negative Working Capital Adjustment in the Software Development Services Segment:
The assessee argued against the negative working capital adjustment. The Tribunal found that the TPO computed the arithmetic mean margin on cost at 22.63% with a negative working capital adjustment of -1.31%, resulting in an adjusted margin of 23.84%. The Tribunal, relying on the decision in Tecnotree Convergence Pvt. Ltd. vs. DCIT, held that there was no merit in the assessee's claim and dismissed this ground.

3. Exclusion of Comparables in the ITES Segment:
The assessee argued that five companies (Infosys BPO Limited, TCS e-serve Ltd., Universal Print Systems Ltd., BNR Udyog Ltd., and Excel Info ways Ltd.) should be excluded from the list of comparables for the ITES segment. The Tribunal found:
- Infosys BPO Limited: Turnover of Rs.1,312 Crores, global brand value, functionally different, failed the RPT filter. Excluded based on the decision in Zyme Solutions Pvt. Ltd. vs. ACIT.
- TCS e-serve Ltd.: Turnover of Rs.1578 Crores, engaged in BPO services, high brand value, functionally different. Excluded based on the decision in Zyme Solutions Pvt. Ltd. vs. ACIT.
- Universal Print Systems Ltd.: Turnover of Rs.6.17 Crores, functionally different, engaged in printing services, failed the employee cost filter. Restored to the TPO for fresh adjudication.
- BNR Udyog Ltd.: Turnover of Rs.1.47 Crores, failed the RPT filter, functionally different. Excluded based on the decision in Zyme Solutions Pvt. Ltd. vs. ACIT.
- Excel Info ways Ltd.: Turnover of Rs.7.91 Crores, failed the employee cost filter, diminishing revenue, peculiar economic circumstances. Excluded based on the decision in Zyme Solutions Pvt. Ltd. vs. ACIT.

4. Negative Working Capital Adjustment in the ITES Segment:
The assessee argued against the negative working capital adjustment. The Tribunal found that the TPO computed the arithmetic mean margin on cost at 28.11% with a negative working capital adjustment of -8.70%, resulting in an adjusted margin of 36.81%. The Tribunal, relying on the decision in Tecnotree Convergence Pvt. Ltd. vs. DCIT, dismissed this ground.

5. Disallowance of Software Expenses under Section 40(a)(ia) for Non-Deduction of TDS:
The assessee argued that software expenses of Rs.15,35,172/- were revenue in nature and there was no requirement for TDS. The Tribunal found that the assessee did not provide sufficient evidence to support the claim. The issue was restored to the Assessing Officer for examination and verification of facts.

6. Addition of Provision for Loyalty Bonus while Computing Book Profits under Section 115JB:
The assessee argued that the provision for loyalty bonus should not be considered for computing book profits under Section 115JB. The Tribunal, considering the decision in the assessee's own case for the Asst. Year 2008-09, restored the issue to the Assessing Officer for verification.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for the exclusion of certain comparables, remittance of some issues to the DRP and TPO for fresh adjudication, and restoration of specific issues to the Assessing Officer for verification.

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