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2015 (5) TMI 637 - AT - Income TaxTransfer pricing adjustment - selection of comparable - Held that - Avani Cimcon Technologies Ltd. - As the profits of the software development portion cannot be ascertained, we hold that it cannot be considered as comparable on entity level. We, therefore, order for the exclusion of this company from the final set of comparables. Celestial Bio Labs Ltd. we direct not to treat this company as comparable as it is mainly engaged in a bio-pharma and biotech manufacturing and customized IT solutions, manufacture of drugs, clinical trials and contract research activities. This company also owns IPRs in respect of biotechnology. No segmental information of this company is available so as to find out the operating profits from the software development segment. Flextronics Software Systems Ltd. directed to be treated as incomparable as the assessee is simply engaged in providing software related services and is not into sale of software products, this company cannot be considered as comparable. Helios and Matheson Information Technology Ltd. direct it to be considered as not comparable by observing that it was into the software development services. Infosys Ltd. & Wipro Ltd.cannot be considered a comparable as Infosys Ltd. is a giant company in terms of risk profile, scale, nature of services, revenue ownership of branded/proprietary products, on site and offshore services, etc. KALS Information Systems Ltd.the revenues of this company under the segment taken by the TPO include not only Software development services, but also Training. Since the assessee is only engaged in rendering software development services without carrying out any specific commercial training activity, we fail to appreciate as to how this company on a segmental level, consisting of revenues from both Software development and Training, can be considered as comparable. Lucid Software Ltd. direct not to treat this company as comparable as this company is valuing the software products developed in-house on the basis of costs directly attributable to the development of software and in respect of each of the products so developed, it is amortizing total expenditure over a period of 36 months from the launch data. This is a different and unique method of amortizing cost over a period of three years, which is not specific to the assessee. Megasoft Ltd. the total revenue under this segment of Megasoft Ltd. comprises 35% from the sale of software products, we fail to comprehend as to how this segment of the company can be considered as comparable with the assessee company, which is not into selling any software products but is a captive software developer. Persistent Systems Ltd. & Sasken Communications Ltd. the very fact of merger or acquisition or demerger etc., being an extraordinary event, makes a company incomparable with the other functionally similar companies. Tata Elxsi Ltd. company offers integrated hardware and packaged software solutions, the same cannot be considered as comparable to the assessee company which is simply providing software related services. Thus set aside the impugned order and send the matter back to the AO/TPO for a fresh computation of ALP of the international transaction undertaken by the assessee in conformity with our above decision - Decided in favour of assessee for statistical purposes. Deduction u/s 10A - assessee s contention that 20% of use of Telephone and internet should be attributed to the delivery of software, was rejected - Held that - It is noticed that similar issue came up for consideration before the Tribunal in the assessee s own case for AY 2006-07. The assessee s contention on this issue has been rejected by the Tribunal thereby affirming the view of the AO. In the absence of any distinguishing fact relevant to the year in question, respectfully following the precedent, we uphold the impugned order on this issue. This ground fails. - Decided against assessee.
Issues Involved:
1. Transfer pricing adjustment. 2. Reduction of communication expenses from export turnover for section 10A deduction. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment: The primary issue was the addition of Rs. 7,03,80,590/- due to transfer pricing adjustment. The assessee, a wholly-owned subsidiary of Global Logic, US, engaged in software development services, reported an international transaction worth Rs. 93,64,04,329/-. The assessee used the transactional net margin method (TNMM) with a profit level indicator (PLI) of operating profit to total cost (OP/TC) to justify that its international transaction was at arm's length price (ALP). The assessee declared an operating profit margin of 13.34%, compared to the average operating profit margin of 14.53% from selected comparable companies, falling within the permissible range of +/- 5%. The Transfer Pricing Officer (TPO) selected 26 comparable companies, leading to an arithmetic mean margin of 23.47% after working capital adjustments, resulting in a proposed transfer pricing adjustment of Rs. 7,03,80,590/-. The assessee's objections before the Dispute Resolution Panel (DRP) were unsuccessful, and the Assessing Officer (AO) made the addition. The assessee argued against the inclusion of certain comparable companies, referencing decisions in similar cases (Motorola Solutions India Pvt. Ltd. and Toluna India Pvt. Ltd.). The Tribunal analyzed the functional profiles of these companies and concluded that the assessee's activities were similar to those of Motorola and Toluna. Consequently, the Tribunal excluded several companies from the final list of comparables based on functional dissimilarities and other factors: - Avani Cimcon Technologies Ltd.: Excluded due to high operating margins and involvement in software products without segmental break-up. - Celestial Bio Labs Ltd.: Excluded due to involvement in bio-pharma, biotech manufacturing, and lack of segmental information. - Flextronics Software Systems Ltd.: Excluded due to inclusion of software products in the segment considered. - Helios and Matheson Information Technology Ltd.: Excluded due to engagement in ITES BPO services and other non-comparable activities. - Infosys Ltd.: Excluded due to significant differences in risk profile, scale, and ownership of branded/proprietary products. - KALS Information Systems Ltd.: Excluded due to revenues from training activities without segmental break-up. - Lucid Software Ltd.: Excluded due to involvement in software products and unique amortization methods. - Megasoft Ltd.: Excluded due to significant revenue from software products. - Persistent Systems Ltd.: Excluded due to mergers and acquisitions during the year. - Sasken Communications Ltd.: Excluded due to acquisitions and mergers. - Tata Elxsi Ltd.: Excluded due to involvement in integrated hardware and packaged software solutions. - Wipro Ltd.: Excluded due to significant differences in risk profile, nature of services, and ownership of proprietary products. The Tribunal directed the AO/TPO to recompute the ALP of the international transaction, excluding the aforementioned companies and providing the assessee a reasonable opportunity of being heard. 2. Reduction of Communication Expenses from Export Turnover for Section 10A Deduction: The second issue involved the reduction of 100% communication expenses from the export turnover for the purposes of section 10A deduction. The AO reduced communication expenses amounting to Rs. 43.44 lakh from both the 'export turnover' and the 'total turnover' while computing the deduction under section 10A. The assessee's contention that only 20% of telephone and internet expenses should be attributed to the delivery of software was rejected. The Tribunal upheld the AO's decision, referencing a similar issue in the assessee's own case for AY 2006-07, where the Tribunal had affirmed the AO's view. The Tribunal found no distinguishing facts for the year in question and thus upheld the impugned order on this issue. Conclusion: The appeal was partly allowed for statistical purposes, with the Tribunal directing a fresh computation of the ALP for the transfer pricing adjustment and upholding the reduction of communication expenses from the export turnover for section 10A deduction. The order was pronounced in the open court on 22.01.2015.
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