Tribunal Orders Reassessment of Turnover Filter, Software Firms' Inclusion, and Margin Errors in Appeal Decision.

The appeal was partly allowed by the Tribunal, directing the AO/TPO to apply an upper turnover filter, exclude Infobeans Technologies Limited, reassess the inclusion of Akshay Software Technologies Limited and Evoke Technologies Limited, permit working capital adjustments, and correct the margin computation error. The matter was remanded to the AO/TPO for these specific adjudications.

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Issues Involved:
1. Application of upper turnover filter for comparable companies.
2. Functional comparability of Infobeans Technologies Limited.
3. Inclusion of Akshay Software Technologies Limited and Evoke Technologies Limited as comparables.
4. Adjustment on account of working capital differences.
5. Correction of margin computation error.

Detailed Analysis:

Issue 1: Application of Upper Turnover Filter for Comparable Companies
The assessee argued for the exclusion of seven companies based on the application of an upper turnover filter, asserting that the TPO/DRP should have applied this filter since a lower turnover filter was already used. The Tribunal referenced previous rulings, including BORQS Software Solutions Pvt. Ltd. v. ITO and ANSR Global Corporation Pvt. Ltd. v. ACIT, which supported the application of a higher turnover filter to exclude companies with turnovers exceeding Rs.200 crore. Since the assessee's turnover was Rs.20.06 crore, the Tribunal directed the AO/TPO to apply the appropriate upper turnover filter and exclude companies with turnovers above Rs.200 crore.

Issue 2: Functional Comparability of Infobeans Technologies Limited
The assessee sought the exclusion of Infobeans Technologies Limited on the grounds of functional dissimilarity. The Tribunal reviewed the company's financials and found that it was engaged in diverse activities, including custom application development, content management systems, and big data analytics, which differed significantly from the routine software development services provided by the assessee. The Tribunal noted the absence of segmental details and significant intangible assets, foreign currency expenses, abnormal revenue increases, and sales tax liabilities. Consistent exclusion of this company in similar cases was also highlighted. Consequently, the Tribunal directed the AO/TPO to exclude Infobeans Technologies Limited from the list of comparables.

Issue 3: Inclusion of Akshay Software Technologies Limited and Evoke Technologies Limited as Comparables
The assessee argued for the inclusion of Akshay Software Technologies Limited and Evoke Technologies Limited, which were rejected by the TPO on grounds of functional dissimilarity and unreliable financial statements, respectively. The Tribunal noted that the DRP did not adjudicate on functional comparability and simply remarked on their absence from the TPO's search matrix. The Tribunal remanded the matter back to the TPO to specifically adjudicate on the comparability of these companies based on the information and documentation provided by the assessee.

Issue 4: Adjustment on Account of Working Capital Differences
The assessee contended that the TPO did not allow any working capital adjustment, and the DRP also denied relief on this count. The Tribunal referenced its ruling in M/s. Huawei Technologies India (P) Ltd. v. JCIT, which held that working capital adjustments should be allowed as per actuals. The Tribunal criticized the DRP's basis for rejection and directed the AO/TPO to consider the workings in light of the Huawei Technologies ruling and allow appropriate adjustments to arrive at an arm's length price.

Issue 5: Correction of Margin Computation Error
The assessee claimed that the AO erred in computing the ALP Net Cost Plus markup as 27.66% instead of 25.60% and sought correction of margins for CG-VAK Software Exports Limited and Inteq Software Private Limited. The Tribunal acknowledged the pendency of the rectification application and remanded the matter back to the AO/TPO to examine the claims regarding the erroneous computation of margins.

Conclusion:
The appeal filed by the assessee was partly allowed, with the Tribunal directing the AO/TPO to apply the appropriate upper turnover filter, exclude Infobeans Technologies Limited, reassess the inclusion of Akshay Software Technologies Limited and Evoke Technologies Limited, allow working capital adjustments, and correct the margin computation error. The matter was remanded back to the AO/TPO for these specific adjudications.

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