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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.
Issues Involved:
1. Erroneous Comparability Analysis 2. Non-exclusion of comparables with turnover exceeding Rs. 500 Crores 3. Companies with diverse activities not comparable 4. Comparables accepted by TPO but excluded by DRP 5. Non-acceptance of comparables taken by the appellant 6. Non-provision of Working Capital Adjustment 7. Depreciation adjustment not provided 8. Unutilized capacity adjustment 9. Other Adjustments not provided (Return on Net Worth, CPM as a supplementary method, Risk adjustment) 10. Issues for Rectification Detailed Analysis: 1. Erroneous Comparability Analysis: The appellant argued that the comparability analysis carried out by the TPO and the DRP was erroneous and opposed to the facts and circumstances of the case. The Tribunal examined the objections and found that the comparables selected were appropriate based on the Functions, Assets, and Risks (FAR) analysis. 2. Non-exclusion of comparables with turnover exceeding Rs. 500 Crores: The appellant contended that comparables with a turnover exceeding Rs. 500 Crores, such as Mindtree Limited, Larsen & Toubro Infotech Ltd, and Persistent Systems Ltd, should be excluded. The Tribunal noted that the appellant failed to demonstrate how the high turnover impacted the margins and upheld the inclusion of these comparables, citing that turnover alone is not a sufficient criterion for exclusion under the TNMM method. 3. Companies with diverse activities not comparable: The appellant argued for the exclusion of Thirdware Solutions Limited, Acropetal Technologies Limited, and Spry Limited due to functional dissimilarity. The Tribunal remitted the issue of Thirdware Solutions Ltd back to the AO for further verification. Acropetal Technologies Ltd was directed to be excluded based on functional dissimilarity and significant intangibles, following the decision of the ITAT Bangalore in a similar case. The Tribunal upheld the inclusion of Spry Resources Pvt. Ltd, finding no substantial evidence of functional dissimilarity or impact on margins. 4. Comparables accepted by TPO but excluded by DRP: The DRP excluded Sankhya Infotech, KALS Information Systems, and Goldstone Technologies Ltd from the list of comparables. The Tribunal upheld the DRP’s decision, noting that Sankhya Infotech was involved in research and development with significant intangibles, KALS Information Systems was engaged in diverse activities without segmental information, and Goldstone Technologies Ltd was primarily in the ITES segment, not software development. 5. Non-acceptance of comparables taken by the appellant: The appellant’s request to include CG-VAK Software Systems Ltd and Avani Cimcon Technologies was rejected. The Tribunal upheld the exclusion of CG-VAK due to persistent losses. The issue of Avani Cimcon Technologies was remitted back to the AO for verification of functional similarity. 6. Non-provision of Working Capital Adjustment: The DRP rejected the working capital adjustment due to the absence of negative working capital and failure to demonstrate a material impact on margins. The Tribunal directed the AO to examine the facts and allow suitable adjustments if warranted, following the observations made in a similar case. 7. Depreciation adjustment not provided: The DRP rejected the appellant’s request for depreciation adjustment, relying on the decision in Lason India Pvt. Ltd. The Tribunal upheld this decision, noting that the appellant failed to provide sufficient evidence to warrant the adjustment. 8. Unutilized capacity adjustment: The appellant claimed an adjustment for unutilized capacity, which was rejected by the DRP. The Tribunal upheld this decision, noting that the appellant was not a start-up and failed to provide evidence of similar comparables working at 100% capacity. 9. Other Adjustments not provided: The appellant’s requests for adjustments based on Return on Net Worth, CPM as a supplementary method, and Risk adjustment were rejected by the DRP. The Tribunal upheld these rejections due to the lack of evidence provided by the appellant. 10. Issues for Rectification: The appellant raised issues for rectification against the order passed u/s 154. The Tribunal noted that these issues should be addressed in a separate appeal and dismissed this ground. Conclusion: The Tribunal partly allowed the appeal, directing the AO to re-examine certain issues and make necessary adjustments while upholding the decisions of the DRP on other grounds. The Tribunal emphasized the importance of functional similarity and adequate evidence in determining the comparability of companies.
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