2023 (6) TMI 874 - AT - Income Tax

Assessee's Appeal Partly Allowed for TP Adjustments: Issues Remanded for Fresh Adjudication

MetricStream Infotech (India) Private Limited Versus The Assistant Commissioner of Income Tax, Circle 4 (1) (2), Bangalore

The appeal of the assessee was partly allowed for statistical purposes. Several issues, including TP adjustments in software development and marketing ... TP Adjustment - Comparable selection - RPT Filter - HELD THAT:- As in the case of M/s.Toyota Kirloskar Motors Private Limited [2021 (9) TMI 12 - ITAT BANGALORE] has held that the RPT ratio has to be consistently calculated on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales - we direct the AO to calculate RPT ratio on aggregate basis considering the RPT income plus RPT expenses by sales for all the comparable companies. Adoption of 15% RPT filter - HELD THAT:- As tribunal in the case of Barracuda Networks India Pvt Ltd. [2022 (5) TMI 322 - ITAT BANGALORE] wherein it was noted that Karnataka in PCIT v. Yodlee Infotech P. Ltd [2018 (6) TMI 1783 - KARNATAKA HIGH COURT] had upheld the application of 15% RPT filter. Similarly, 15% RPT filter was upheld in the decision cited by the ld. AR in the case of Autodesk India (P) Ltd [2018 (7) TMI 1862 - ITAT BANGALORE]. Exclusion of companies on different parameters - Sagarsoft India Limited - AR submitted that, the company is engaged in the business of software development service segment along with system administration and that this fact has been not considered by the Ld.TPO 0- we remit this issue to the TPO/AO for fresh verification and decision in accordance with law, after providing assessee opportunity of hearing. Evoke Technologies Private Limited - In the absence of the correct reporting of the financial data by the comparable company, even if it satisfies the FAR & filters applied by the TPO, this company cannot be considered as comparable company. Sasken Communication Technologies Limited - DRP in Appellant’s own case for AY 2018-19 has held Sasken to be functionally similar - we remit the issue to the AO/TPO for verification of the facts in AY 2018-19 and present year and for fresh decision in accordance with law. Sankhya Infotech Limited - TPO & DRP held that the company is functionally different as it is engaged in diversified activities and segmental data is not available - AR submitted that the company is functionally similar as it provides solutions and services in relation to software development and it passes all filters applied by the TPO - Considering the arguments from both the sides and findings recorded by the lower authorities, we remit this issue to the AO/TPO for fresh consideration. E-Zest Solutions Limited - In the present case the assessee is engaged in the business of software development services whereas E-Zest Solutions Ltd. is ITeS company. The software development service business company cannot be compared with the ITeS company. We reject the contention of the assessee and uphold the orders of lower authorities. Isummation Technologies Private Limited - We direct the AO/TPO to include this company in the list of comparables. Nitor Infotech Private Limited - During the course of hearing, the ld. AR submitted that the data is available in public domain and it is functionally comparable, but during the course of search process by the ld. TPO, it was not appearing in the search process. Assessee has filed paperbook in which the financial statement of this company is placed - We remit this issue to the AO/TPO for examination whether this company passes the FAR and decide the issue afresh as per law. Incorrect computation of margin of Harbinger Systems Pvt Ltd. - AR submitted that the TPO has taken margin at 11.16% whereas the correct margin of this company comes to 8.12% - We remit this issue to the AO/TPO for verification of the correct margin of Harbinger Systems Pvt Ltd. and accordingly adopt the same for margin computation as per law. Grant of working capital adjustment in the SWD and MSS segments - The coordinate Bench of the Tribunal in the case of Airlinq Technology Pvt. Ltd [2022 (8) TMI 1283 - ITAT BANGALORE] held that in keeping with the OECD guidelines, endeavour should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. Issues Involved:1. General Grounds2. Transfer Pricing (TP) Legal Issues3. TP Adjustment in Software Development Segment4. TP Adjustment in Marketing Support Segment5. Incorrect Computation of Margin6. Working Capital Adjustment7. Miscellaneous Errors in AssessmentSummary:General Grounds:Grounds No.1, 4 & 5(i) are general in nature and do not require adjudication. Grounds No.2 & 3, which are legal issues, were not argued by the assessee and thus dismissed as not pressed.Transfer Pricing (TP) Legal Issues:The appellant contended that the AO erred in referring the determination of the Arm's Length Price (ALP) of international transactions to the TPO without demonstrating the necessity and expediency for such a reference. The appellant also argued that the lower authorities did not demonstrate any motive of tax evasion by the appellant.TP Adjustment in Software Development Segment:The AO made a TP adjustment of Rs. 26,54,86,758/- towards international transactions in the software development segment. The appellant raised several issues, including inappropriate filters and selection of comparables. The Tribunal directed the AO to calculate the Related Party Transaction (RPT) ratio on an aggregate basis and apply a 15% RPT filter. The Tribunal also remanded issues regarding functional comparability and other filters to the DRP for fresh consideration.TP Adjustment in Marketing Support Segment:The AO made a TP adjustment of Rs. 3,73,16,901/- towards international transactions in the marketing support segment. The Tribunal remanded the issue to the DRP for fresh adjudication on the exclusion and inclusion of certain comparables based on functional comparability. The appellant's request for exclusion and inclusion of specific companies was also remanded to the DRP for fresh consideration.Incorrect Computation of Margin:The appellant contended that the TPO incorrectly computed the operating profit margin of Harbinger Systems Pvt Ltd. The Tribunal remitted this issue to the AO/TPO for verification and correct computation of the margin.Working Capital Adjustment:The appellant argued for the grant of working capital adjustment, which was rejected by the TPO and DRP. The Tribunal directed the AO/TPO to grant working capital adjustment following the decisions in similar cases.Miscellaneous Errors in Assessment:The appellant pointed out an error in the computation of total income in the final assessment order. The Tribunal remitted this issue to the AO for verification and correct computation of the total income and tax liability. Grounds No.12, 13 & 14 were deemed consequential in nature.Conclusion:The appeal of the assessee was partly allowed for statistical purposes, with several issues remanded to the DRP and AO/TPO for fresh adjudication and verification.