2013 (4) TMI 741 - AT - Income Tax

TPA - determining the Arm s Length Price - Held that - Assessee is into providing IT-Enabled services thus companies dissimilar with that of assessee need to be deselected from final list of comparable.

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Selection of comparable companies for Transfer Pricing analysis.
3. Application of Related Party Transaction (RPT) filter.
4. Functional comparability of selected companies.
5. Consistency in the application of quantitative filters for R&D expenses.
6. Time period of financial data for comparability analysis.
7. Rejection of comparable companies proposed by the assessee.
8. Consideration of tax exemption under Section 10A of the Income Tax Act.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for International Transactions:
The primary issue in this appeal was the determination of the ALP for the assessee's international transactions. The Assessing Officer (AO) determined the ALP at Rs. 21,63,60,620/- against Rs. 11,25,20,500/- declared by the assessee. This resulted in an upward adjustment of Rs. 10,38,40,122/-.

2. Selection of Comparable Companies for Transfer Pricing Analysis:
The Transfer Pricing Officer (TPO) selected certain comparable companies for determining the ALP. The assessee contested the inclusion of specific companies, arguing they were not functionally comparable.

3. Application of Related Party Transaction (RPT) Filter:
The TPO applied a 25% RPT filter to determine comparability, while the assessee argued for a 10% threshold. The Tribunal found that the TPO's calculation of RPT percentages for FCS Software Solutions Ltd. and Compucom Software Ltd. was incorrect. The Tribunal excluded these companies as they had RPTs exceeding 25%.

4. Functional Comparability of Selected Companies:
The Tribunal examined the functional comparability of several companies:
- KALS Information Systems Ltd. (Seg) and Helios & Matheson Information Technology Ltd. were excluded as they were engaged in software product development, which was functionally different from the assessee's IT services.
- ICSA India Ltd. was excluded due to R&D expenses exceeding the 3% filter.
- Transworld Infotech Ltd. was excluded because its financial data did not correspond to the assessee's financial year.

5. Consistency in the Application of Quantitative Filters for R&D Expenses:
The Tribunal noted inconsistencies in the TPO's application of quantitative filters for R&D expenses. For example, ICSA India Ltd. was included despite exceeding the 3% R&D expense filter. The Tribunal excluded this company from the list of comparables.

6. Time Period of Financial Data for Comparability Analysis:
The Tribunal emphasized the importance of using financial data corresponding to the assessee's financial year. Transworld Infotech Ltd. was excluded because its data did not match the assessee's financial year.

7. Rejection of Comparable Companies Proposed by the Assessee:
The Tribunal addressed the rejection of companies proposed by the assessee:
- Galaxy Commercial Ltd. was included as a comparable because its primary business was BPO services, despite minor income from transportation and rental.

8. Consideration of Tax Exemption Under Section 10A of the Income Tax Act:
The assessee argued that no adjustment was necessary because its income was exempt under Section 10A, implying no motive for tax advantage. The Tribunal rejected this argument, stating that the provisions of Chapter X (Transfer Pricing) are not influenced by the presence or absence of tax motives.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to rework the ALP of the international transactions in both the IT services and IT-Enabled services segments as per the Tribunal's observations. The Tribunal emphasized the correct application of RPT filters, functional comparability, and consistency in applying quantitative filters for R&D expenses.

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