2015 (6) TMI 979 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Avani Cincom Technologies Ltd. KALS Information Systems Ltd. and Celestial Labs Ltd. be omitted from the list of comparables. KALS Information Systems Ltd.company was developing software products and was not purely or mainly a software service provider thus need to be excluded Bodhtree Consulting Limited company is not a good comparable in view of the software products produced by the company. As such no segmental data is adequately available too thus need to be excluded. E-Zest Solutions Ltd. and Quintegra Solutions Ltd. are functionally different from the assessee and are not comparable to software development services as are engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. Flextronics Software Systems Ltd. iGate Global Systems Ltd. Infosys Technologies Ltd. Mindtree Ltd. (Seg.) and Sasken Communication Technologies Ltd. (Seg.) companies have been excluded from the list of comparables on the ground that these companies have a turnover filter above Rs. 200 crores and cannot be compared with the assessee whose turnover is only Rs. 66.94 crores. Wipro Ltd. be excluded from the list of comparable companies. Thirdware Solutions Ltd. and Lucid Software Ltd. companies be omitted from the list of comparables for the period under consideration in the case on hand as are not functionally comparable with a software development service provider such as the assessee. Persistent Systems Ltd. is engaged in product development and product design services while the assessee is a software development services provider. Helios & Matheson Information Technology Ltd. in view of the admitted factual position that the employee cost in the case of this company was less than 25% of its sales this company has to be excluded from the list of comparables. Birla Technologies Ltd. company should be taken as a comparable as there is no other basis for rejecting this company as comparable assigned by the TPO Indium Software (India) Ltd t export turnover filter of this company was 37.77% of its total turnover and therefore this company passes the export revenue filter of more than 25% of the turnover and has to be regarded as a comparable. Excluding the lease line expenses from the total turnover as well as the export turnover following the decision of the CIT v. Tata Elxsi Ltd., (2011 (8) TMI 782 - KARNATAKA HIGH COURT ) confirmed.

Issues Involved:

1. Determination of arm's length price (ALP) and selection of comparables.
2. Application of various filters for comparables.
3. Exclusion and inclusion of specific companies as comparables.
4. Charging of interest under section 234B of the Income-tax Act.
5. Exclusion of lease line expenses from total turnover and export turnover.

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Price (ALP) and Selection of Comparables:

The Tribunal addressed the determination of ALP for the international transaction carried out by the assessee with its Associated Enterprise (AE) under section 92 of the Income-tax Act. The assessee had conducted a transfer pricing study, arriving at a set of 20 comparable companies, with an average net cost-plus margin of 14.53%, as against 11.01% for the assessee. The TPO, however, proposed to reject 11 of these comparables and include 17 new companies, determining an arm's length margin of 22.64%, leading to a transfer pricing adjustment of Rs. 70,120,473.

2. Application of Various Filters for Comparables:

The Tribunal considered the application of different filters by the TPO and CIT(A), such as the turnover filter, high-profit margin filter, diminishing revenue filter, different year-ending filter, and employee cost filter. The Tribunal upheld the application of the turnover filter, excluding companies with a turnover above Rs. 200 crores, as these cannot be compared with the assessee, whose turnover was Rs. 66.94 crores. The Tribunal also validated the employee cost filter, holding that companies with employee costs less than 25% of sales should be excluded.

3. Exclusion and Inclusion of Specific Companies as Comparables:

The Tribunal excluded several companies from the list of comparables based on functional dissimilarity and other criteria:

- Avani Cincom Technologies Ltd., KALS Information Systems Ltd., and Celestial Biolabs Ltd.: Excluded as they were not functionally comparable to the assessee, being engaged in software products rather than software development services.
- Bodhtree Consulting Ltd.: Excluded as it was engaged in software products with no segmental data available.
- E-Zest Solutions Ltd. and Quintegra Solutions Ltd.: Excluded as they were engaged in product development services and not purely software development services.
- Flextronics Software Systems Ltd., iGate Global Systems Ltd., Infosys Technologies Ltd., Mindtree Ltd., Sasken Communication Technologies Ltd., Tata Elxsi Ltd., and Wipro Ltd.: Excluded based on the turnover filter, as their turnover exceeded Rs. 200 crores.
- Thirdware Solutions Ltd. and Lucid Software Ltd.: Excluded due to engagement in product development and lack of segmental data.

The Tribunal directed the inclusion of Birla Technologies Ltd. and Indium Software (India) Ltd., as they passed the export revenue filter.

4. Charging of Interest under Section 234B of the Income-tax Act:

The Tribunal did not specifically address the charging of interest under section 234B in detail, but it is implied that the grounds related to this issue were left open for consideration, contingent on the final determination of the ALP.

5. Exclusion of Lease Line Expenses from Total Turnover and Export Turnover:

The Tribunal upheld the CIT(A)'s decision to exclude lease line expenses from the total turnover and export turnover, following the decision of the Karnataka High Court in CIT v. Tata Elxsi Ltd., 349 ITR 98 (Karn). The Tribunal noted that the decision of the jurisdictional High Court is binding, despite the pending SLP before the Supreme Court.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal. The TPO was directed to exclude the companies as per the Tribunal's order and recompute the ALP, allowing the permissible variation under section 92C of the Act. The Tribunal's decision emphasized the importance of functional comparability and appropriate filters in the selection of comparables for transfer pricing purposes.

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