2021 (3) TMI 989 - AT - Income Tax

Assessee's Appeal Partly Allowed: Tribunal Orders Exclusion of Comparables, Recalculation of Working Capital Adjustment

Replicon Software (India) Pvt. Ltd. Versus The Asst. Commissioner of Income-Tax, Circle-5 (1) (1), Bengaluru.

The appeal filed by the assessee was partly allowed. The Tribunal directed the AO/TPO to exclude certain comparables, remand others for fresh ... TP Adjustment - comparable selection - Functional dissimilarity - HELD THAT:- Assessee is a company engaged in the business of software development , IT enabled services, technical marketing and support services - It is a captive service provider rendering services only to its AE as per the directions and requirement of AE. As relying on M/s.Indicom Global Services (India) Pvt. [2019 (8) TMI 1664 - ITAT BANGALORE ] we direct Ld.AO/TPO to exclude Infosys BPO Ltd., TCS e-Serve Ltd., Excel Infoways Ltd., from the final list of comparables. And remand the Universal Print Systems Ltd. and BNR Udyog Ltd. to the Ld.TPO for considering it afresh. Inclusion of comparable being Crystal Voxx Ltd. - Admittedly, this comparable has been filed by assessee before the Transfer Pricing officer for consideration. However the same was ignored by the Ld.TPO. It has been submitted that this comparable is functionally similar with that of assessee however as the same has not been verified and looked into by the Ld.TPO be deem it fit and proper to remand this comparable to the Ld.TPO to consider it in the light of the functions performed, assets owned and risk assumed by it vis-a-vis that of assessee. In the event the FAR analysis is found to be similar with that of assessee the same may be included in the final list of comparables. This ground raised by assessee stands allowed for statistical purposes. Inclusion of Accentia Technologies Ltd., and Informed Technologies Ltd. - DRP rejected these comparables suo moto for the reason that, M/s Accentia Technologies were functionally different and the data of M/s.Informed Technologies India Ltd., was not reliable in view of the fact that segmental data was not available - From the transfer pricing order, we note that, the Ld.TPO has not raised any objection regarding the functional profile of these comparables. However since the DRP raised certain objections which needs to be verified, the same is remanded to the Ld.TPO for due verification. We are therefore of the opinion that the comparables needs to be verified by the Ld.TPO afresh. Needless to say that assessee shall furnish all relevant details in respect of these comparables available with it in support of its inclusion. The Ld.TPO shall verify these details/documents filed by assssee and consider these comparables for inclusion, if found functionally similar with that of assessee. Working capital adjustment - HELD THAT:- We note from the directions of the DRP that the Ld.TPO was asked to verify the correctness of the figures adopted by him. The DRP had directed the Ld.TPO to verify the calculations of working capital adjustment and rectify the mistakes if any. It has been submitted that assessee was granted negative working capital adjustment, which is not in accordance with procedure laid down in the statute. In fact, there is no need for making any negative working capital adjustment, when assessee does not carry on with any working capital risk. All the Ld.TPO was supposed to do was to carry out necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to assessee, rather than making negative working capital adjustment. We accordingly, remand this issue back to the Ld.AO/TPO to recompute the working capital adjustment necessary to bring the comparables on par with that of assessee. Considering the income reported in revised return filed by assessee which has not been followed by the Ld. AO as directed by DRP - HELD THAT:- DRP had directed the Ld.AO to consider the income reported in the revised return of income however the same has not been followed. We thus direct the Ld.AO AO to follow the directions of the DRP, which is in accordance with law for computing income in the hands of assessee.Accordingly this ground raised by assessee stands allowed for statistical purposes. Issues Involved:1. Adjustment of transfer price for international transactions.2. Rejection of Transfer Pricing (TP) documentation.3. Rejection of comparability analysis.4. Consideration of previous financial data for comparables.5. Application of different financial year ending filters.6. Application of export earning filter.7. Application of related party filter.8. Application of upper turnover limit.9. Inclusion/exclusion of specific comparable companies.10. Computation of working capital adjustment.11. Risk differential adjustment.12. Consideration of income from revised return.Detailed Analysis:1. Adjustment of Transfer Price:The learned Assessing Officer (AO), Transfer Pricing Officer (TPO), and Dispute Resolution Panel (DRP) erred in adjusting the transfer price by INR 2,32,56,458 of the Appellant's international transactions with its Associated Enterprises (AEs) concerning Information Technology enabled Services (ITeS) rendered by the taxpayer under section 92CA of the Income-tax Act, 1961.2. Rejection of TP Documentation:The AO, TPO, and DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of subsection (3) of section 92C of the Act.3. Rejection of Comparability Analysis:The AO, TPO, and DRP erred in rejecting the comparability analysis carried out in the TP documentation and conducting a fresh comparability analysis by introducing various filters in determining the Arm's Length Price (ALP).4. Consideration of Previous Financial Data:The AO, TPO, and DRP erred in not considering the previous two years' financial data of the comparable companies while determining the ALP.5. Application of Different Financial Year Ending Filters:The AO, TPO, and DRP erred in applying different financial year ending filters while selecting the comparable companies, thereby not considering the fact that the relevant data for the concerned financial year could be deduced from the corresponding financials.6. Application of Export Earning Filter:The AO, TPO, and DRP erred in applying an export earning filter of 75% instead of 25% of the total sales, leading to a narrower comparable set.7. Application of Related Party Filter:The AO, TPO, and DRP erred in applying a related party filter of 25% without giving any cogent reason for doing so.8. Application of Upper Turnover Limit:The AO, TPO, and DRP erred in not applying the upper limit on turnover while selecting the comparable companies. The lower limit on turnover had already been applied mutually by the Appellant and the TPO.9. Inclusion/Exclusion of Specific Comparable Companies:The Tribunal considered the exclusion of specific comparables such as Universal Print Systems Ltd., Infosys BPO Ltd., TCS e-Serve Ltd., BNR Udyog Ltd., and Excel Infoways Ltd. based on functional dissimilarity and other criteria. The Tribunal also remanded the inclusion of Accentia Technologies Ltd. and Informed Technologies Ltd. back to the TPO for verification.10. Computation of Working Capital Adjustment:The Tribunal noted that the AO did not rectify the working capital adjustment as directed by the DRP. The Tribunal remanded this issue back to the AO/TPO to recompute the working capital adjustment necessary to bring the comparables on par with the assessee.11. Risk Differential Adjustment:The Tribunal did not adjudicate the risk adjustment as the counsel did not press for it.12. Consideration of Income from Revised Return:The Tribunal noted that the DRP had directed the AO to consider the income reported in the revised return of income. The Tribunal directed the AO to follow the DRP's directions for computing income in the hands of the assessee.Conclusion:The appeal filed by the assessee was partly allowed. The Tribunal directed the AO/TPO to exclude certain comparables, remand others for fresh consideration, and recompute the working capital adjustment. The Tribunal also directed the AO to consider the income reported in the revised return as per the DRP's directions.