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2015 (10) TMI 2647 - AT - Income TaxTPA - comparable selection - Held that - Assessee is engaged in providing software development services. The assessee has two software development centers in Chennai and Hyderabad, both of which are registered under the STPI scheme of Government of India as 100% export oriented units, thus companies dissimilar with that of assessee need to be deselected from final list of comparable. Since the information considered by the A.O. said to be belonging to e-Infochips Bangalore Ltd., and the information filed by the assessee before us are at variance with each other, we deem it fit and proper to remand the comparability of this company with the assessee to the file of A.O./TPO to ascertain the correct facts and take a decision in accordance with law. It is no doubt settled by various judicial precedents that where segmental data is not available, such company cannot be taken as a comparable. Further, it has also been held that if there is an extraordinary event such as merger/amalgamation, even then, such company cannot be taken as a comparable to an assessee. The A.O./TPO shall take into consideration such judicial precedents before taking a decision about the comparability of e-Infochips Bangalore Ltd., with the assessee company. Accordingly, assessee s appeal is treated as partly allowed for statistical purposes. Infosys Technology Ltd., be excluded from the list of comparables on account of functional dissimilarity and owning of significant intangibles and brand value. As regards L & T Infotech Ltd.be excluded as segmental data is not available and was rejected by the TPO in the earlier years on this ground alone. As regards Tata Elxsi Ltd. this company be excluded on functional dissimilarity.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions. 2. Inclusion and exclusion of certain companies as comparables. 3. Functional dissimilarity and availability of segmental data. Detailed Analysis: 1. Determination of Arm's Length Price (ALP) for International Transactions: The assessee, a wholly-owned subsidiary of Virtusa Corporation, USA, engaged in software development services, filed its return for the assessment year 2010-2011. The Assessing Officer (A.O.) referred the determination of the ALP of international transactions to the Transfer Pricing Officer (TPO) under section 92CA of the I.T. Act. The TPO conducted his own search and identified 19 companies as comparables, computing an average margin of 22.69% and an adjusted arm's length margin of 21.74%, resulting in a shortfall of Rs. 13,05,57,916 under section 92CA of the Act. The A.O. passed the draft assessment order based on the TPO's findings, which was contested by the assessee before the Dispute Resolution Panel (DRP). 2. Inclusion and Exclusion of Certain Companies as Comparables: The DRP directed the exclusion of Infosys Technologies Ltd., L & T Infotech Ltd., and Tata Elxsi Ltd. from the list of comparables due to functional dissimilarity. The Revenue appealed against this exclusion, while the assessee contested the inclusion of certain other companies. At the hearing, the assessee primarily challenged the inclusion of e-Infochips Bangalore Ltd., arguing that it was functionally different, engaged in both IT and ITES services, and lacked segmental data. Additionally, the company had an amalgamation status during the relevant financial year, and there were errors in its margin computation. 3. Functional Dissimilarity and Availability of Segmental Data: The Tribunal examined the objections raised by the assessee regarding e-Infochips Bangalore Ltd. and found variations in the financial details considered by the TPO and those submitted by the assessee. The Tribunal noted that the company was engaged in both software development and IT-enabled services without segmental data, and it had an amalgamation status during the relevant financial year. The Tribunal remanded the issue to the A.O./TPO to ascertain the correct facts and determine the comparability of e-Infochips Bangalore Ltd. with the assessee, considering judicial precedents that exclude companies without segmental data or those undergoing extraordinary events like mergers/amalgamations. Revenue's Appeal Against DRP's Directions: The Revenue's appeal against the exclusion of Infosys Technologies Ltd., L & T Infotech Ltd., and Tata Elxsi Ltd. was dismissed. The Tribunal upheld the DRP's decision, noting that these companies were excluded in the assessee's own case for the A.Y. 2007-08 due to functional dissimilarity, lack of segmental data, and significant intangibles and brand value owned by Infosys Technologies Ltd. The Tribunal found no evidence that the facts differed in the current year from those in A.Y. 2007-08. Conclusion: The assessee's appeal was partly allowed for statistical purposes, with the issue of e-Infochips Bangalore Ltd.'s comparability remanded to the A.O./TPO. The Revenue's appeal was dismissed, affirming the exclusion of Infosys Technologies Ltd., L & T Infotech Ltd., and Tata Elxsi Ltd. from the list of comparables. The order was pronounced in the open court on 23.12.2015.
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