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2023 (1) TMI 1356 - AT - Income TaxTP Adjustment - re-computing the margin by treating ESOP expenses as operating in nature - HELD THAT:- We note that the Ld. AO/TPO has not considered the ESOP agreement between the employees and the AE. Unless the expenditure has been incurred by the assessee, it cannot form part of margin computation. What we understand from the submission of the assessee is that the assessee before us has only played the role of deducting the TDS on the discount the employees have received in the ESOP scheme of the AE. However this needs verification of the ESOP agreement. We therefore remand this issue back to the Ld. AO to verify the agreement and the ESOP scheme having regards to the financials of the assessee. The Ld. AO/TPO is directed to consider the issue in accordance with the view taken by this Tribunal in case of Radysis India [2023 (3) TMI 598 - ITAT BANGALORE] Comparable selection - HELD THAT:- Assessee is a captive service provider that renders technical assistance services in the areas of software development and application to its AEs, thus selection of comparables should match with functional profile of assessee. We therefore deem it appropriate to remit them to the Ld. AO/TPO. The Ld. AO/TPO shall look into the functional profile of the comparables and verify the same with that of the assessee. If they are functionally found to be similar with that of assessee, the same may be considered in accordance with law, considering the turnover limit of Rs. 1 to 200 Crores. Exclude Exilant Technologies Pvt. Ltd., Tech Mahindra Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., Nihilent Ltd., Persistent Systems Ltd., Wipro Ltd., Tata Elxsi Ltd., for exceeding turnover limit of Rs. 200 crores. Thirdware Solutions Ltd., to be excluded from the final list as present assessee before us is a captive service provider catering to the needs and at the direction its AE under the SWD segment. As there is no segmental details available, we cannot consider this company to be a good comparable as the entire revenue is catagorised under one head i.e., ‘Revenue from Operation’. Even on RPT filter we note that this company has RPT of more that 25% which does fails the filter applied by the Ld.TPO. Exilant Technologies Pvt. Ltd - We are not able to appreciate the arguments of the Ld.AR regarding no segmental details available. It is also not possible to ascertain the expenditure incurred by this comparable on research and development as the schedules to the account is not there. We therefore remand this company back to the Ld.TPO to verify the above details. Admittedly this comparable has not been considered during A.Y 2017-18. In the event, there are any new materials obtained by the Ld.TPO, the same must be shared with the assessee. After considering the objections and scrutinising the functional similarities, the Ld.TPO shall then consider this comparable if at all it fits into all the necessary criteria. We also note that, merely because this company is into software development, cannot be a reason to consider its inclusion. Needless to say that proper opportunity of being heard must be granted to assessee. B. Tech Mahindra Ltd. - Admittedly, the turnover of this comparable is more than 200 crores. We have already considered and excluded comparables for failing the turnover filter by following the observations of Coordinate Bench of this Tribunal in assessee’s own case. Following same principles, we direct the exclusion of Tech Mahindra Ltd. from the final list. Elveego Circuits Pvt. Ltd. company is in the business of Chip and semiconductor design services where as the assessee before us is into basic SWD services of coding an documentation, Testing and quality assurance, software patches and maintenance. There is no similarity between the functions performed by the assessee vis-à-vis that of this company. We therefore at the threshold reject this company being functionally not similar with that of the assessee. ThreeSixty Logica Testing Services Pvt.Ltd and Black Pepper Technologies Pvt.Ltd - AR submitted that these companies earns revenue for Information technology services and Software development services for which segmental details not available - We remand this company to the Ld.AO/TPO to consider the objections raised by the assessee against its inclusion and to consider the same in accordance with law. Aptus Software Labs Pvt.Ltd and Great Software Laboratory Pvt.Ltd. - AR submitted that these companies earns revenue for Information technology services - We remand this company to the Ld.AO/TPO to consider the objections raised by the assessee against its inclusion and to consider the same in accordance with law. Non granting of WCA and risk adjustment to the assessee - As relying on HUAWEI TECHNOLOGIES INDIA (P.) LTD. [2018 (10) TMI 1796 - ITAT BANGALORE] AO was not justified in denying adjustment on account of working capital adjustment. In the light of the decision referred to above, the assessee is entitled to working capital adjustment. The assessee is directed to provide the working capital adjustment for year under consideration The TPO is accordingly directed to allow the same as per law. Risk adjustment, sought by the assessee, the details will have to be furnished before the Ld.AO/TPO by the assessee itself establishing the differences in the risk. Only then the same could be computed. We are therefore of the view that in the event the assessee is able to file documents/evidences to establish the differences in the risk, the Ld.TPO may consider it and compute is accordance with law. Appeal filed by the assessee stands partly allowed.
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