Tribunal upholds CIT(A)'s directions on comparables and working capital adjustments. Revenue's appeal dismissed.

The Tribunal dismissed both the appeal by the Revenue and the cross objections by the assessee. The CIT(A)'s directions for exclusion of certain comparables and allowance of working capital adjustments were upheld, while the additional ground raised by the Revenue regarding Infosys was found to be without merit.

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Issues Involved:
1. Deletion of addition made by AO on account of transfer pricing adjustment.
2. Exclusion of two companies, L&T Infotech and Thirdware Solution Ltd, from the final set of comparables.
3. Allowance of working capital adjustment.
4. Inclusion of Infosys as a comparable.

Detailed Analysis:

1. Deletion of Addition Made by AO on Account of Transfer Pricing Adjustment:
The Revenue contended that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the addition of Rs. 1,27,01,985/- made by the Assessing Officer (AO) on account of transfer pricing adjustment. The Transfer Pricing Officer (TPO) had determined the arm's length price under section 92CA(3) for the international transactions entered into by the assessee during the Financial Year 2004-05. The CIT(A) found that the TPO had not made working capital adjustments and had included companies with related party transactions in the comparables. The CIT(A) directed the exclusion of such companies and allowed working capital adjustments, leading to the deletion of the addition.

2. Exclusion of L&T Infotech and Thirdware Solution Ltd from the Final Set of Comparables:
The CIT(A) directed the exclusion of L&T Infotech and Thirdware Solution Ltd from the final set of comparables. The TPO had initially included L&T Infotech despite it having related party transactions, which was contradictory. The CIT(A) found merit in the assessee's contention and directed its exclusion. For Thirdware Solution Ltd, the CIT(A) noted that it had supernormal profits and lacked segmental reporting, making it unsuitable as a comparable. Although the Tribunal did not agree with the exclusion based on supernormal profits, it upheld the exclusion due to the absence of segmental reporting.

3. Allowance of Working Capital Adjustment:
The CIT(A) allowed working capital adjustments, noting that it was logical to make such adjustments to account for differences in trade receivables, trade payables, and inventory. The CIT(A) observed that similar adjustments had been made in the assessee's case for the assessment year 2007-08. The Tribunal agreed with this principle, citing the decision in Sun Life India Service Centre Private Limited, which allowed working capital adjustments even for service industries. The Tribunal directed the TPO to grant working capital adjustment after examining the detailed working provided by the assessee.

4. Inclusion of Infosys as a Comparable:
The Revenue raised an additional ground that the CIT(A) erred in not including Infosys as one of the comparables, which was allegedly left out by the TPO due to inadvertence. The Tribunal noted that the assessee had included Infosys in its TP study, but the TPO had conducted a fresh search and made a final list of comparables, intentionally excluding Infosys. The Tribunal found no merit in the Revenue's plea, as the CIT(A) could not have adjudicated on the inclusion of Infosys unless exercising enhancement powers. The additional ground raised by the Revenue was dismissed.

Conclusion:
The Tribunal dismissed both the appeal by the Revenue and the cross objections by the assessee. The CIT(A)'s directions for exclusion of certain comparables and allowance of working capital adjustments were upheld, while the additional ground raised by the Revenue regarding Infosys was found to be without merit. The order was pronounced in the open court on 11.03.2019.

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