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2017 (4) TMI 1511 - AT - Income TaxTP Adjustment - comparable selection - exclusion of comparable cases whose turnover is very high - HELD THAT:- The assessee is in the service sector where fixed costs are nominal and cost of service is proportionate to the services rendered by the assessee. Though turnover is a relevant factor the assessee has to make out case that the huge turnover has materially impacted the margins of the company. In the instant case the assessee has not demonstrated that the high or low turnover has influenced the operating margin of the assessee company. DRP observed that operating margin has no direct relation between the turnover and the margin. In TNMM method merely because of high turnover the comparables cannot be excluded unless the assessee demonstrates that the turnover has materially impacted the margins in relevant assessment year. Accordingly we reject the assessee’s contention to exclude companies as comparables on the basis of turnover filter. Exclusion on functional differences - M/s.Mindtree - assessee has wrongly mixed up the functions of group companies of M/s.Mindtree with that of the company itself to arrive at its conclusion of functional difference. Considering above, the objection of the assessee in relation to this comparable is not accepted. M/s.L&T Infotech - reliance on information from the website for showing different functions performed by the company, the same is misplaced as the same represent the state of affairs at the time when website is accessed and not the past years - details in the website are only indicative of the functions which the company is ready to perform but may not have been necessarily performed by it in some earlier years. So the annual report and not the website needs to be relied upon for the actual functions performed by the company. The objections of the assessee have also been dealt in detail by the TPO in his order, which cannot be faulted with. Considering above, the objection of the assessee in relation to this comparable is not accepted. Persistent Systems Ltd is in software product development, it is observed that the company is developing software for its customers whom turn are in business of software product development and outsourcing the work of onward development to this company. Thus the assessee has wrongly inferred that the M/s.Persistent Systems Ltd., itself is in software product development. In fact, the assessee itself is similarly placed as it is developing software for its AE, which in turn is finally using it in its software products. Considering above, the objection of the assessee is not accepted. M/s.Thirdware Solutions Ltd - Fact with regard to the functional dissimilarity how the functions of the assessee company are not similar has not been demonstrated by the Ld AR and was not verified by the lower authorities. Therefore, we are of the considered opinion that the issue should be remitted back to the file of the AO for further verification of the functions of the comparable company with the tested party and decide the issue afresh on merits. Accordingly, this issue is remitted back to the file of the AO. M/s.Acropetal Technologies Ltd company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing [KPO] would do and not a Business Process Outsourcing [BPOJ]. M/s.Spry Resources Pvt. Ltd - Though the assessee has raised objections for Revenue recognition, we have not come across any objectionable methods which have material impact on margins or inconsistencies in the note of Revenue recognition - Assessee did not bring any functional dissimilarity, assets deployed and the impact of margins in relation to note on Revenue recongnition. The turnover is also comparable to the tested party. Merely because of the assessee is engaged in the government projects, the company cannot be excluded from the list of comparables - objection of the assessee to exclude M/s.Spry Resources Ltd., from the list of comparables is rejected and the decision of the AO/TPO/DRP is upheld. M/s.Sankhya Infotech Ltd also having significant intangibles and functionally dissimilar as observed by the DRP in it’s directions. AR did not bring any evidence to controvert the findings of the DRP. On the similar facts and circumstances we have directed to exclude M/s.Acropetal Technologies Ltd., from the list of comparables. Following the consistency we hold that the Ld.DRP has rightly directed the AO/TPO to exclude M/s.Sankhya Infotech from the list of comparables and the assessee’s appeal on this issue is dismissed. M/s.KALS Information Systems company is functionally not comparable and we do not find any infirmity in the direction of the DRP and the same is upheld. M/s.Goldstone Technologies Ltd - functions of the company were dissimilar and it is only engaged in the IT segment not in software development - this company should not have been taken as a comparable by the TPO. So the TPO is directed to exclude this company from the list of comparables. Exclusion of companies making persistent losses - When the assessee himself has accepted that companies making persistent losses as not good comparables in its transfer documentation, we do not find any reason to dispute with the assessee’s stand and to include the same as comparable since the company is incurring persistent losses. Therefore, the assessee’s request to include M/s.CG-VAK software Systems Ltd., in the list of comparables is rejected. M/s.Avani Cimcon Technologies Ltd - AR argued that the assessee company is engaged in the low end software services and comparable company is also engaged in software development services as evidenced from the Annual Report. Neither the TPO nor the DRP has gone in to the details as to why the company should not be taken as comparable and how the company is functionally not comparable. Therefore, we are of the considered opinion that the case should be remitted back to the file of the AO/TPO to verify the functional similarity and decide the issue afresh on merits. AO is free to select new comparables on functional similarities after giving opportunity to the assessee to determine the ALP. We direct the AO to make a fresh search process and select the new comparables if necessary and determine the ALP afresh. Working capital adjustment - HELD THAT:- DRP has rejected the objections raised by the assessee for giving working capital adjustment since there was no negative working capital and the assessee could not demonstrate the material impact on the margins for adjustment of working capital. The issue is set-aside to the file of the AO to examine the facts with relevance to the observations made by this Tribunal, in the case cited supra with the facts of the assessee’s case. Depreciation adjustment charged in excess of Schedule-4 of Companies Act - HELD THAT:- DRP has rejected the assessee’s request for adjustment of excess Depreciation placing reliance on the decision of Lason India Pvt. Ltd. V. ACIT [2012 (4) TMI 148 - ITAT CHENNAI ] - Decided against assessee. Unutilized capacity adjustment - assessee claimed unutilized capacity adjustment of premises rent - HELD THAT:- During hearings before this Panel, the assessee was asked to provide the details of capacity utilization of other comparables, however it could not provide any data for the same also. Since assessee has not provided any data to show that the other comparables were working at 100% capacity of all their resources and only it was at disadvantage due to underutilization of capacity, so in absence of similar comparables, adjustment cannot be considered in the case of the assessee. The assessee not a start up company and it has commenced its operations way back in 2008. The adjustments relating to unutilised capacity are allowed in the case of start up companies to cover the initial deficiencies and the financial implications. Since the company is established in 2008 and the Ld.AR did not place any material with regard to the observations made by the DRP We are unable to accept the contention of the assessee and the assessee’s appeal on this ground is dismissed. Rectification u/s 154 - HELD THAT:- The appeal against the order u/s.154 is a separate appeal which cannot be decided in this appeal. The Ld.AR also has not brought on record any evidence to controvert the observations made by DRP. Therefore, this ground is dismissed.
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