2023 (3) TMI 707 - AT - Income Tax

Tribunal partially allows appeal, excludes companies from comparables, remits issues for further examination.

The appeal was partly allowed for statistical purposes, with the Tribunal directing the exclusion of certain companies from the final set of comparables ... Comparability - functional comparability - transfer pricing - arm's length price - TNMM - segmental information - related party transactions filter - remand for verificationComparability - functional comparability - segmental information - Exclusion of Thirdware Solutions Ltd. from the final set of comparables - HELD THAT: - The Tribunal examined the annual report and authoritative coordinate-bench decisions for AY 2016-17 and concluded that Thirdware derives the overwhelming majority of its revenue from software services but also carries on diversified activities for which no segmental profit data is available. In the absence of segment-wise profitability it is not possible to determine the impact of product/training/license operations on the software services segment. Following prior Tribunal decisions for the same assessment year, the Tribunal held that Thirdware is functionally not comparable to the assessee and directed the AO/TPO to exclude it from the final set of comparables. [Paras 7]Thirdware Solutions Ltd. to be excluded from the final set of comparables; AO/TPO directed accordingly.Comparability - business model - remand for verification - Comparability of Aspire Systems (India) Pvt. Ltd. remitted to AO/TPO for verification - HELD THAT: - The Tribunal noted conflicting material as to whether Aspire operates a different business model (onsite/offshore mix), whether related party transactions exceed thresholds, and whether the year under review was exceptional. Relying on precedent where limited indicators of onsite activity required further factual verification, the Tribunal observed that aspects of business model and related facts were not fully adjudicated below. Consequently, rather than deciding exclusion or inclusion on the record before it, the Tribunal remitted the matter to the AO/TPO for examination of Aspire's business model and comparability with Ventura India, with directions to follow principles of natural justice. [Paras 9]Issue remitted to AO/TPO for fresh examination and adjudication on comparability.Comparability - functional comparability - segmental information - Exclusion of E Infochips Limited from the final set of comparables - HELD THAT: - The Tribunal evaluated the annual report and prior coordinate-bench findings for the same assessment year which found that although a majority of revenue was from software services, the company also engaged in product sales and possessed intangibles, and segmental profit data was unavailable. On that factual matrix and following the earlier Tribunal reasoning that diversified activities without segmental data preclude meaningful comparability with a pure software development provider, the Tribunal directed exclusion of E Infochips from the comparable set. [Paras 10]E Infochips Limited to be excluded from the final set of comparables; AO/TPO directed accordingly.Comparability - related party transactions filter - remand for verification - Comparability of Dun & Bradstreet Technologies & Data Services Pvt. Ltd. remitted to AO/TPO for verification - HELD THAT: - While the TPO/DRP treated the company as predominantly a software services provider, the Tribunal found a genuine contention that the company's revenue may be largely to its parent/affiliates and that this factual contention was raised for the first time at the appellate stage and requires verification. Given the factual nature of the objection (comparison with uncontrolled transactions and related party concentration), the Tribunal remitted the issue to the AO/TPO for verification of the facts and appropriate adjudication. [Paras 11]Issue remitted to AO/TPO for fresh verification and decision on comparability.Comparability - functional comparability - segmental information - Exclusion of Exilant Technologies Pvt. Ltd. from the final set of comparables - HELD THAT: - Although the TPO/DRP had retained Exilant as a comparable citing a large percentage of revenue from software development, the Tribunal followed a coordinate-bench decision for the same assessment year which analysed the annual report and found the company engaged in both software services and product activities, possessing intangibles and lacking segmental profit data. On that factual basis and applicable precedent, the Tribunal concluded Exilant cannot be compared with a pure software development provider and directed its exclusion. [Paras 12]Exilant Technologies Pvt. Ltd. to be excluded from the final set of comparables; AO/TPO directed accordingly.Comparability - functional verification - remand for verification - Comparability of Puresoftware Pvt. Ltd. remitted to AO/TPO for detailed factual verification - HELD THAT: - The parties disputed whether Puresoftware is functionally similar (software testing and development) while other purported comparables are limited to testing. The Tribunal found factual inconsistency in the TPO's selection and that detailed factual classification of functions was required. In the interest of justice the Tribunal remitted this factual enquiry to the AO/TPO to verify functions of the companies and to decide comparability after affording the assessee opportunity of hearing. [Paras 13]Issue remitted to AO/TPO for detailed verification of functional comparability and fresh decision.Final Conclusion: Only Ground No. 7 was pressed; the Tribunal partly allowed the appeal for statistical purposes by excluding certain companies (Thirdware Solutions Ltd., E Infochips Ltd., Exilant Technologies Pvt. Ltd.) from the final comparable set and remitting issues of comparability in respect of Aspire Systems, Dun & Bradstreet Technologies & Data Services Pvt. Ltd., and Puresoftware Pvt. Ltd. to the AO/TPO for fresh examination. Issues Involved:1. Inappropriate confirmation of transfer pricing adjustment.2. Non-consideration of comparability analysis.3. Modification of turnover criteria.4. Application of inappropriate qualitative filters.5. Acceptance of companies with supernormal profit.6. Rejection of certain companies identified by the appellant.7. Acceptance of certain additional companies as comparable.8. Incorrect methodology for computing related party filter.9. Foreign exchange difference considered non-operating.10. Errors in computing operating margins.11. Non-consideration of risk adjustment.12. Initiation of penalty proceedings under section 271(1)(c).13. Proposed levy of interest under section 234B.Detailed Analysis:1. Inappropriate Confirmation of Transfer Pricing AdjustmentThe appellant contested the transfer pricing adjustment of INR 7,90,08,000 related to IT services provided to Associated Enterprises (AEs). The Tribunal noted that the appellant pressed only Ground No. 7, dismissing all other grounds as not pressed.2. Non-consideration of Comparability AnalysisThe appellant argued that the data provided in the transfer pricing study report for benchmarking analysis was not considered. However, this ground was not pressed during the appeal.3. Modification of Turnover CriteriaThe appellant contended that the turnover filter applied by the authorities was inappropriate. This ground was also not pressed during the appeal.4. Application of Inappropriate Qualitative FiltersThe appellant claimed that certain qualitative filters were inappropriately applied. This ground was not pressed during the appeal.5. Acceptance of Companies with Supernormal ProfitThe appellant argued against the inclusion of companies with supernormal profits as comparables. This ground was not pressed during the appeal.6. Rejection of Certain Companies Identified by the AppellantThe appellant contested the rejection of certain companies from the set of comparables. This ground was not pressed during the appeal.7. Acceptance of Certain Additional Companies as ComparableThe main issue pressed by the appellant was the inclusion of certain companies in the final set of comparables. The appellant argued that these companies were functionally dissimilar and should be excluded.Thirdware Solutions Ltd.- The appellant argued that Thirdware Solutions Ltd. was functionally dissimilar as it dealt in software products and had supernormal profits. The Tribunal found that Thirdware Solutions Ltd. was not comparable due to its diversified services and lack of segmental information, directing its exclusion from the final set of comparables.Aspire Systems (India) Pvt. Ltd.- The appellant contended that Aspire Systems was functionally different and had supernormal profits. The Tribunal remitted the issue back to the AO/TPO to examine the business model and determine comparability.E-Infochips Ltd.- The appellant argued that E-Infochips was engaged in diversified activities and had supernormal profits. The Tribunal directed the exclusion of E-Infochips from the final set of comparables due to its diversified activities and lack of segmental data.Dun and Bradstreet Technologies & Data Services Pvt. Ltd.- The appellant claimed that Dun and Bradstreet was functionally different and engaged in diversified activities. The Tribunal remitted the issue back to the AO/TPO for verification of the company's business model and comparability.Exilant Technologies Pvt. Ltd.- The appellant argued that Exilant Technologies was functionally dissimilar and engaged in diversified activities. The Tribunal directed the exclusion of Exilant Technologies from the final set of comparables due to its diversified activities and lack of segmental data.Puresoftware Pvt. Ltd.- The appellant contended that Puresoftware was functionally different and engaged in diversified activities. The Tribunal remitted the issue back to the AO/TPO for detailed verification of the company's functions and comparability.8. Incorrect Methodology for Computing Related Party FilterThe appellant argued that the related party filter was computed incorrectly. This ground was not pressed during the appeal.9. Foreign Exchange Difference Considered Non-operatingThe appellant contested the treatment of foreign exchange difference as non-operating. This ground was not pressed during the appeal.10. Errors in Computing Operating MarginsThe appellant argued that there were errors in computing operating margins. This ground was not pressed during the appeal.11. Non-consideration of Risk AdjustmentThe appellant claimed that risk adjustments were not considered. This ground was not pressed during the appeal.12. Initiation of Penalty Proceedings under Section 271(1)(c)The appellant contested the initiation of penalty proceedings. This ground was not pressed during the appeal.13. Proposed Levy of Interest under Section 234BThe appellant argued against the proposed levy of interest under Section 234B. This ground was not pressed during the appeal.Conclusion:The appeal was partly allowed for statistical purposes, with the Tribunal directing the exclusion of certain companies from the final set of comparables and remitting some issues back to the AO/TPO for further examination. The order was pronounced on July 12, 2022.