2016 (1) TMI 1132 - AT - Income Tax

Transfer pricing adjustment - comparable selection - Held that - E infochips Bangalore Ltd - this company cannot be selected as comparable company for TP analysis. First of all, this company is engaged in both software development as well as ITES. Assessee being only captive service provider, the above company cannot be considered as comparable on functional basis. Not only that, as pointed out, segmental information pertaining to the above company is not available. As seen from the TP orders, documents placed on record, TPO relied on later year s annual report in extracting the information. Variation in profitability over the years alone cannot be a reason to exclude the company from comparability analysis but as rightly pointed, the absence of segmental information, how much profit earned was on the software development or ITES cannot be examined. In the absence of clarity on operational details and comparable company having diversified activities, we are of the opinion that this company cannot be chosen as a comparable company in Assessee s case in this assessment year Kals Information Systems Ltd - Since no segmental data is available, considering the software development services as a segment by TPO cannot be considered as segmental data, unless the services rendered by that company are similar to the services rendered by Assessee. In view of this, we are of the opinion that this company cannot be selected as comparable. AO is directed to exclude the same. L & T Infotech Ltd. cannot be selected as a comparable company. AO/TPO is directed to exclude the same from the list of comparables.

Summary

Issues Involved:

1. Transfer Pricing Adjustment
2. Selection of Comparable Companies

Detailed Analysis:

1. Transfer Pricing Adjustment:

The appeal concerns the transfer pricing adjustment made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) under section 143(3) read with section 144C(5) of the I.T. Act, following the directions given by the Dispute Resolution Panel (DRP). The primary issue is the inclusion and rejection of certain comparable companies in the determination of the Arm's Length Price (ALP) for the assessee's international transactions.

2. Selection of Comparable Companies:

a. E-Infochips Bangalore Ltd.:

The assessee objected to the inclusion of E-Infochips Bangalore Ltd., arguing that the company is functionally different, engaged in both software development services and ITES, and lacks segmental information. The TPO included it based on later year's annual report, despite the absence of public domain information for FY 2009-10. The Tribunal found that the company is not comparable due to its engagement in multiple segments and lack of segmental data, directing its exclusion from the comparables.

b. Kals Information Systems Ltd.:

The assessee contended that Kals Information Systems Ltd. is engaged in the development of software and software products, making it functionally different. The TPO included it based on its classification as a software development service provider. The Tribunal noted that the company's activities and inventories indicate it is engaged in software product development, thus not comparable to the assessee. Consequently, the Tribunal directed the exclusion of this company.

c. Tata Elxsi Ltd. (Seg.):

The assessee argued that Tata Elxsi Ltd. specializes in embedded software development and has multiple segments, making it functionally different. The TPO included it based on its revenue from software development services. The Tribunal, referencing previous ITAT decisions, found that the company's complex activities and lack of segmental data make it incomparable. The Tribunal directed the exclusion of Tata Elxsi Ltd. from the comparables.

d. L & T Infotech Ltd.:

The assessee objected to L & T Infotech Ltd. on grounds of functional dissimilarity and lack of segmental information. The TPO included it based on its software development services revenue. The Tribunal, considering the DRP's exclusion of this company in a similar case (M/s. Sumtotal Systems India Pvt. Ltd.), found that the absence of segmental details and the mixed nature of its revenues render it incomparable. The Tribunal directed the exclusion of L & T Infotech Ltd. from the comparables.

Conclusion:

The Tribunal allowed the appeal, directing the TPO to exclude the four contested comparables (E-Infochips Bangalore Ltd., Kals Information Systems Ltd., Tata Elxsi Ltd., and L & T Infotech Ltd.) and to re-examine whether the Profit Level Indicator (PLI) determined is within the permissible range under section 92C(2) of the Act. The appeal of the assessee was thus allowed, and the order was pronounced in open court on 08.01.2016.