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2014 (12) TMI 1195 - AT - Income TaxTransfer pricing adjustment - selection of comparabels - Held that - Infosys is not a suitable comparable to the case of the present assessee i.e. Pyramid India because there is a vast difference between functional profile of Infosys and the assessee company. We also note that the assessee is only providing contract software development services and IT staffing services and, on the other hand, Infosys being a high turnover giant company having a different functional profile, along with huge expenses on advertising and marketing and having substantial intangible assets, cannot be held to be a suitable comparable for the assessee company which is only having turnover of ₹ 7.24 crore from the contract software development services segment. KALS Information Systems is not a suitable comparable as this company was developing software products and was not merely, purely or mainly a software provider company. Avani Cincom Technologies earns revenue from sale of software products and software services and in absence of segmental details and data, AvaniCincom Technologies cannot be considered as comparable to the assessee company who was providing contract software development services only. Persistent Systems Ltd. in absence of segmental details/information about segregated income from both the segments, the company cannot be taken into account for comparability analysis and, therefore, Persistent Systems Ltd. ought to have been omitted from the final set of comparable. Quintegra Solutions Ltd. ought to have been omitted from the final set of comparables for the year under consideration as undisputedly, present assessee company is primarily engaged in provision of contract software development services (CSD segment) and IT staffing services Tata Elxsi (Seg) not fit for comparability analysis for determining the ALP of the assessee having turnover of more than ₹ 200 crore and more than 50 times of the assessee s turnover, also owns several intellectual property rights and intangible assets worth 11.86 crores which are 12% of its total net fixed assets. Lucid Software is not a suitable comparable for the purpose of determination of ALP of the impugned transaction of the present assessee and this entity deserves to be deleted from the final set of comparables as Lucid Software has developed a software product named Muulam and for this purpose, the company has employed heavy capital in development of a specific product, then profitability in the sale of product would be certainly high in comparison to the company which is only involved in the service sector.
Issues Involved:
1. Validity of the assessment order passed by the Learned Assessing Officer (Ld. AO). 2. Enhancement of income by Rs. 78,53,275 due to non-compliance with the arm's length principle in international transactions. Detailed Analysis: 1. Validity of the Assessment Order: The appellant challenged the assessment order dated 26.9.2012, passed under section 143(3) read with section 144C, arguing that it was void ab initio and bad in law. The appellant contended that the directions of the Dispute Resolution Panel (DRP) were not justified. However, this issue was not pressed further by the appellant during the proceedings, and thus, it was dismissed as not pressed. 2. Enhancement of Income by Rs. 78,53,275: 2.1 Background: The appellant, engaged in providing Software Development and IT consulting services, undertook international transactions with its Associated Enterprises (AEs). The transactions included contract software development services valued at Rs. 7,24,75,317 and staffing services valued at Rs. 6,97,70,977. The appellant initially applied the Cost Plus Method (CPM) for benchmarking but later, under the Transfer Pricing Officer's (TPO) direction, used the Transaction Net Margin Method (TNMM). 2.2 TPO's Adjustments: The TPO rejected the appellant's transfer pricing analysis and made adjustments, enhancing the income by Rs. 78,76,782 for the contract software development segment. The TPO included seven companies as comparables, which the appellant contested, arguing they were not functionally comparable. 2.3 Analysis of Comparables: i) Infosys Ltd.: The appellant argued that Infosys Ltd. was not comparable due to its different functional profile, branding, intangibles, high turnover, and significant expenses on advertising and marketing. The Tribunal agreed, citing decisions from Agnity India Technologies Pvt. Ltd., Telcordia Technologies India Pvt. Ltd., and others, concluding that Infosys Ltd., being a giant company, was not a suitable comparable. ii) Kals Information Systems: The appellant contended that Kals Information Systems was engaged in software products and services, lacking segmental information. The Tribunal, referencing decisions from Bindview India P. Ltd. and others, found Kals Information Systems functionally different and not a suitable comparable. iii) Avani Cincom Technologies: The appellant argued that Avani Cincom Technologies, involved in software products, lacked segmental information. The Tribunal, following the decision in M/s Trilogy E-Business, agreed that Avani Cincom Technologies was not comparable due to its product sales and absence of segmental details. iv) Persistent Systems Ltd.: The appellant highlighted Persistent Systems Ltd.'s involvement in product development and high turnover. The Tribunal, referencing decisions from Bindview India P. Ltd. and others, concluded that Persistent Systems Ltd. was not comparable due to its product development activities and lack of segmental details. v) Quintegra Solutions Ltd.: The appellant argued that Quintegra Solutions Ltd. experienced abnormal growth and was involved in product engineering services. The Tribunal, citing the decision in M/s 3DPLM Software Solutions Ltd., agreed that Quintegra Solutions Ltd. was not comparable due to its product engineering services and abnormal growth. vi) Tata Elxsi (Seg): The appellant contended that Tata Elxsi, with its high turnover and involvement in product design and development, was not comparable. The Tribunal, referencing the decision in Telcordia Technologies India Pvt. Ltd., agreed that Tata Elxsi was not suitable due to its different functional profile and significant R&D activities. vii) Lucid Software: The appellant argued that Lucid Software, focused on product development and R&D, was not comparable. The Tribunal, citing the decision in Telcordia Technologies India Pvt. Ltd., agreed that Lucid Software was not suitable due to its product development activities and lack of segmental details. 2.4 Conclusion: The Tribunal concluded that the TPO was not justified in including the seven companies as comparables. The Tribunal ordered the exclusion of these companies from the final set of comparables, allowing ground no. 2.3 and 2.4 of the appellant. Final Judgment: The appeal of the appellant was allowed, and the order was pronounced in the open court on 11.12.2014.
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