2022 (7) TMI 1382 - AT - Income Tax

TP Adjustment - comparable selection - SDS segment - exclude Bhilwara Infotechnology Ltd. From the final set of comparables for software development services segment - HELD THAT - CIT(A) holds that this company earns its entire revenue from software and its related segment from the domestic market. The extract of the annual report clearly specifies that Software Development Services (SDS) segment is 100% domestic. Therefore this company was rightly removed as a comparable in the software development service segment by the ld. CIT(A). Ground No. 2 of the Revenue s appeal is dismissed. Inclusion of Aspire Systems (India) Pvt. Ltd. in the final set of comparables for software development services segment - CIT(A) has directed exclusion of this company - As in view of the judgment of Hon ble Jurisdictional High Court in the case of PCIT Vs. J.P. Morgaon India (P) Ltd. 2019 (1) TMI 1274 - BOMBAY HIGH COURT this company was excluded from the final list of comparable companies. Considering the totality of the facts and circumstances the finding of the ld. CIT(A) does not call for any interference and the same is upheld. IT Enabled Services segment - Revenue wants exclusion of Jindal Intellicom Ltd. from the final set of comparables in IT Enabled Services segment - We find that the view taken by the learned T.P.O is taken to reject this company from the list of comparable due to foreign exchange less than 75%. In the case of this company its export turnover ratio is 70.80% and it cannot be said that there is only a minor deviation from the percentage of filter of 75% as applied by the ld. T.P.O. Therefore in the given facts and circumstances the reliance placed by the assessee on the decision of Mercer Consulting 2016 (8) TMI 1163 - PUNJAB AND HARYANA HIGH COURT is misplaced. Even going by spirit by the aforesaid decision what is minor deviation and what is major deviation it all depends on the facts of each case. In our considered view in this case failure regarding export filter at 70.8% instead of 75% is not a minor deviation. Therefore we uphold the order of the T.P.O directing rejection of this company as comparable. Ground No. 4 of the Revenue is allowed. Excluding MPS Ltd. from the final set of comparables for ITes segment - MPS Limited is functionally different from that of the assessee company in more-so that high end activities of MPS Ltd is akin to IT services and not ITes - we direct the AO/TPO to exclude MPS Limited from final list of comparable companies. M/s. Domex E-Data Pvt. Ltd. CES Ltd. and Manipal Digital Systems Pvt. Ltd. deselected from the final set of comparables as dissimilar with regard to ITes segment Exclusion of One Touch Solutions (India) Pvt. Ltd.- It has been analysed by the ld. CIT(A) that this company is into ITES activity and therefore it is included as comparable in the final set of comparables. Taking the totality of the facts and circumstances and the functional spectrum of the assessee we are in conformity with the view taken by the ld. CIT(A) and we uphold the inclusion of this company in the final set of comparables in respect of the assessee.

Summary

Issues Involved:
1. Exclusion of Bhilwara Infotechnology Ltd. from the final set of comparables for Software Development Services (SDS).
2. Inclusion of Aspire Systems (India) Pvt. Ltd. in the final set of comparables for SDS.
3. Exclusion of Jindal Intellicom Ltd. from the final set of comparables in IT Enabled Services (ITES) segment.
4. Exclusion of MPS Ltd. from the final set of comparables for ITES segment.
5. Inclusion of M/s. Domex E-Data Pvt. Ltd., CES Ltd., and Manipal Digital Systems Pvt. Ltd. in the final set of comparables for ITES segment.
6. Exclusion of One Touch Solutions (India) Pvt. Ltd. from the final set of comparables for ITES segment.

Detailed Analysis:

1. Exclusion of Bhilwara Infotechnology Ltd.:
The Revenue disputed the exclusion of Bhilwara Infotechnology Ltd. from the final set of comparables for the SDS segment. The CIT(A) excluded this company because its entire earnings from the software and IT segment were from the domestic market, failing the export filter applied by the TPO. The Tribunal upheld the CIT(A)'s decision, confirming that Bhilwara Infotechnology Ltd. was rightly removed as a comparable in the SDS segment.

2. Inclusion of Aspire Systems (India) Pvt. Ltd.:
The Revenue sought the inclusion of Aspire Systems (India) Pvt. Ltd. in the final set of comparables for the SDS segment. The CIT(A) excluded this company due to its failure to meet the Related Party Transactions (RPT) filter, with an RPT ratio of 37%, above the 25% threshold. Additionally, the company underwent amalgamation during the relevant financial year, making it functionally different. The Tribunal upheld the CIT(A)'s decision, referencing a similar judgment by the Hyderabad Bench in the case of Infor (India) Pvt. Ltd. vs. DCIT.

3. Exclusion of Jindal Intellicom Ltd.:
The Revenue wanted the exclusion of Jindal Intellicom Ltd. from the final set of comparables in the ITES segment. The TPO rejected this company due to its foreign exchange earnings being less than 75%. The CIT(A) included it as a comparable, noting its functional comparability and previous acceptance in earlier assessment years. However, the Tribunal upheld the TPO's decision, stating that the export turnover ratio of 70.80% was a significant deviation from the 75% filter, thus rejecting Jindal Intellicom Ltd. as a comparable.

4. Exclusion of MPS Ltd.:
The Revenue contested the exclusion of MPS Ltd. from the final set of comparables for the ITES segment. The CIT(A) excluded MPS Ltd. based on its functional differences, as it was engaged in high-end activities akin to IT services rather than ITES. The Tribunal upheld the CIT(A)'s decision, referencing previous Tribunal decisions that highlighted MPS Ltd.'s involvement in knowledge processing outsourcing services, making it functionally different from the assessee's ITES activities.

5. Inclusion of M/s. Domex E-Data Pvt. Ltd., CES Ltd., and Manipal Digital Systems Pvt. Ltd.:
The Revenue sought the inclusion of these companies in the final set of comparables for the ITES segment. The CIT(A) excluded them, referencing the Pune Tribunal's decision in the case of Credence Resource Management Pvt. Ltd. The Tribunal upheld the CIT(A)'s decision, noting that these companies were functionally different, engaged in high-end research, IT activities, and KPO services, which were not comparable to the assessee's low-end back-office ITES activities.

6. Exclusion of One Touch Solutions (India) Pvt. Ltd.:
The assessee sought the exclusion of One Touch Solutions (India) Pvt. Ltd. from the final set of comparables for the ITES segment. The CIT(A) included this company, noting that it was engaged in ITES activities as defined under Rule 10TA(e). The Tribunal upheld the CIT(A)'s decision, confirming the inclusion of One Touch Solutions (India) Pvt. Ltd. as a comparable, given its functional similarity to the assessee's ITES activities.

Conclusion:
The Tribunal partially allowed the Revenue's appeal and partly allowed the assessee's appeal for statistical purposes, upholding the CIT(A)'s decisions on the exclusion and inclusion of various comparables based on functional differences and adherence to relevant filters and thresholds.