2021 (9) TMI 383 - AT - Income Tax

Tribunal directs re-examination of ALP adjustments for SWD and ITES in international transactions

Dell International Services India Pvt. Ltd. Versus The Joint Commissioner of Income Tax (LTU), Bengaluru

The Tribunal partly allowed the appeals, directing the Transfer Pricing Officer (TPO) and Assessing Officer (AO) to re-examine the Arm's Length Price ... TP Adjustment - comparable selection - international transactions of provision of Software Development services ('SWD services' ) and Information Technology Enabled services ('ITES') by the Assessee to its Associated Enterprises ('AE') - HELD THAT:- Companies functionally dissimilar with that of assessee need to be deselected from final list. Larsen & Toubro Infotech Ltd., (L & T) - Assessee did not object to inclusion of this company before the TPO but objected to inclusion of this company before DRP. The DRP did not adjudicate the objection. In these circumstances, we are of the view that exclusion of this company from the list of comparable companies has to be examined by the TPO/AO and we remand the issue to the TPO/AO. The law is well settled that the assessee is entitled to object to inclusion/exclusion of companies at the stage of appellate proceedings and there is no estoppel. Sasken Communication Technologies Ltd - This company derives income from 3 segments viz., (i) software services; (ii) software products and (iii) other services. The segmental operating margins are however not available. Therefore the operating margin for the SWD service segment of this company cannot be compared with that of the assessee. As relying on ELECTRONICS FOR IMAGING INDIA PVT. LTD. [2016 (2) TMI 1123 - ITAT BANGALORE] we direct at exclusion of this company from the list of comparable companies. Persistent Systems Ltd - DRP in its order accepted that the Annual Report of this company and says that this company is both into SWD services and products. No segmental details are available so that the margins of the SWD segment can be compared with that of the assessee. Hence this company cannot be regarded as comparable. For the very same reason this company was regarded as not comparable with a SWD service provider in the case of Electronics for Imaging (supra). DRP suo moto directing the exclusion of Thinksoft Global Services Ltd., R.S. Software (India) Limited and Mindtree Limited from the list of comparables - The said companies were selected by the Assessee and subsequently included by the TPO in the final list of comparables. These companies pass all the filters applied by the TPO. The assessee is seeking inclusion of the aforesaid companies as comparables. The Revenue in its appeal also seeks inclusion of these companies as comparables. In this regard, we find that the DRP has excluded the said comparables by applying the onsite revenue filter that too without putting the Assessee on notice as regards the same. We therefore hold and direct that these three companies be included as comparable companies. The relevant grounds of appeal of the assessee and Revenue are accordingly allowed. Exact comparability.- ICRA Techno Analytics Ltd. ('ICRA') - This company is engaged in software development & consultancy services, licensing and sub-licensing fee, engineering services, web development & hosting, business analytics, business process outsourcing services and product development and therefore, is functionally not comparable to the assessee. This Tribunal in DCIT v. Electronics for Imaging India P. Ltd [2016 (2) TMI 1123 - ITAT BANGALORE] directed this company to be excluded as a comparable in the case of assessees similar to the assessee herein. We therefore find no merit in ground No. 2 raised by the Revenue. Infosys Technologies Ltd. ('Infosys') - We are of the view that the differentiating factors pointed out by the assessee cannot be said to be not material differences. Even if they are to be regarded as immaterial, the quantification of accurate adjustment to account for the differences is not possible. In such circumstances, it is safe to exclude the company as a comparable. This company is being consistently excluded from the list of comparables in similar cases. Tata Elxsi Ltd AND KALS Information Systems Ltd - The difference in functions is evident from the annual report of the company. Profit margin of the assessee adopted in MAP ought to be adopted as ALP mark-up for non-US based AE transactions - HELD THAT:- As the assessee or TPO have not made any distinction between US and Non-US AE transactions. In such circumstances, the margin accepted in MAP in respect of US AE transaction has to be regarded as Arm's Length mark-up cost for the Non-US AE transaction in the ITES segment. We hold and direct accordingly. In view of the above conclusion, the other grounds raised by the Revenue and assessee in their appeals on determination of ALP in the ITES segment become infructuous and calls for no adjudication and are dismissed. Grievance in the action of the TPO in not giving opportunity to assessee before making adjustment on account of negative working capital - We are of the view that this issue was not raised by the assessee before DRP and hence, we deem it appropriate to direct the TPO/AO to consider the same in the proceedings for giving effect to this order in the set aside proceedings. Set off of brought forward loss - HELD THAT:- The assessee had filed its return of income claiming setting off of business loss based on the actual loss incurred and brought forward as per the Return of Income. Although the DRP directed to AO to verify and allow set off of the same, it was not done by the AO in the final Assessment Order. The assessee has therefore prayed that the same be allowed to be set off against income. We deem it proper to direct the AO to consider the claim of the assessee in accordance with law. Computing deduction under section 10A - export turnover inclusion/Exclusion - HELD THAT:- Whatever is excluded from export turnover should also be excluded from the total turnover following the decision of the Hon'ble Karnataka High Court in the case of Tata Elxsi . [2011 (8) TMI 782 - KARNATAKA HIGH COURT] - The decision of case of CIT Vs. HCL Technology Ltd.[2018 (5) TMI 357 - SUPREME COURT] settles the issue and it has been held therein that while computing deduction under section 10A of the Act by applying the formula set out in the said section, whatever is excluded from export turnover should also be excluded from the total turnover. Issues Involved:1. Transfer Pricing Adjustment for Software Development Services (SWD).2. Transfer Pricing Adjustment for Information Technology Enabled Services (ITES).3. Exclusion and inclusion of comparable companies.4. Mutual Agreement Procedure (MAP) under India-US DTAA.5. Negative working capital adjustment.6. Set-off of brought forward loss.7. Computation of deduction under section 10A of the Income Tax Act.Detailed Analysis:1. Transfer Pricing Adjustment for Software Development Services (SWD):The primary issue was the determination of the Arm's Length Price (ALP) for the international transaction of providing SWD services by the assessee to its Associated Enterprises (AE). The Transfer Pricing Officer (TPO) initially made a TP adjustment of Rs. 46,85,29,023/- for the SWD segment, which was later reduced by the Dispute Resolution Panel (DRP) to Rs. 40,62,17,470/-. The TPO and the DRP had differences in the selection of comparable companies, which significantly impacted the final adjustment amount. The Tribunal directed the TPO/AO to re-examine the inclusion of Larsen & Toubro Infotech Ltd., Sasken Communication Technologies Ltd., and Persistent Systems Ltd. as comparable companies, considering their functional dissimilarities and lack of segmental details.2. Transfer Pricing Adjustment for Information Technology Enabled Services (ITES):For the ITES segment, the initial TP adjustment was Rs. 80,05,04,669/-, later reworked to Rs. 71,20,03,322/- by the DRP. The Tribunal addressed the inclusion and exclusion of various comparables selected by the TPO and DRP. The Tribunal admitted an additional ground for the assessee, seeking to apply the same arm's length mark-up on cost for transactions with Non-US based entities as determined under the MAP resolution for US-based transactions. The Tribunal directed the TPO to adopt the MAP margin of 15.69% for Non-US AE transactions in the ITES segment, rendering other related grounds infructuous.3. Exclusion and Inclusion of Comparable Companies:The Tribunal addressed the grievances of both the assessee and the Revenue regarding the inclusion and exclusion of various comparable companies. The Tribunal upheld the DRP's exclusion of companies like ICRA Techno Analytics Ltd., Infosys Technologies Ltd., Tata Elxsi Ltd., and KALS Information Systems Ltd. due to their functional dissimilarities and lack of segmental details. The Tribunal also directed the inclusion of companies like Thinksoft Global Services Ltd., R.S. Software (India) Limited, and Mindtree Limited, which were excluded by the DRP without proper notice to the assessee.4. Mutual Agreement Procedure (MAP) under India-US DTAA:During the pendency of the appeals, the assessee accepted the terms of the MAP resolution under the India-US DTAA for ITES transactions with US-based AEs, leading to the withdrawal of related grounds. The Tribunal directed the TPO to apply the same margin determined under MAP for Non-US AE transactions in the ITES segment.5. Negative Working Capital Adjustment:The Tribunal addressed the issue of negative working capital adjustment, noting that the assessee, being a captive service provider, does not bear working capital risks. The issue was remanded to the TPO/AO for reconsideration in the set-aside proceedings.6. Set-off of Brought Forward Loss:The assessee's claim for the set-off of brought forward business loss of Rs. 2,92,41,160/- was directed to be verified and allowed by the AO as per the directions of the DRP.7. Computation of Deduction under Section 10A:The Tribunal upheld the DRP's direction that while computing deduction under section 10A, whatever is excluded from export turnover should also be excluded from total turnover, in line with the decision of the Hon'ble Supreme Court in CIT Vs. HCL Technology Ltd.Conclusion:The appeals were partly allowed, with directions for re-examination and adjustments by the TPO/AO as per the Tribunal's findings. The Tribunal's order emphasized the need for accurate functional comparability and adherence to legal precedents in determining ALP for international transactions.