2016 (2) TMI 931 - AT - Income Tax

Transfer pricing adjustment - comparable selection - Held that - In view of the matter, following the decision of this Tribunal in the case of Pegasystems Worldwide India Pvt. Ltd. Hyderabad 2015 (10) TMI 2495 - ITAT HYDERABAD we accept the contentions of the assessee in its appeal and direct the Assessing Officer/TPO to redetermine the transfer pricing adjustment, if any, warranted, after excluding the above three comparables E-Infochips Bangalore ltd., Kals information Systems ltd. and Tata Elxsi Ltd.(Seg) from the TP study.

Summary

Issues Involved:
1. Addition of Rs. 1,11,51,669 on account of Transfer Pricing Adjustment.
2. Inclusion of three companies (E-Infochips Bangalore Ltd., Kals Information Systems Ltd., and Tata Elxsi Ltd.) in the list of comparables for determining the Arm's Length Price.

Detailed Analysis:

Issue 1: Addition of Rs. 1,11,51,669 on account of Transfer Pricing Adjustment
The appeal concerns an addition of Rs. 1,11,51,669 made by the Assessing Officer (AO) due to Transfer Pricing Adjustment related to the international transactions of the assessee. The AO's order was passed under S.143(3) read with S.144(5) of the Income Tax Act, 1961, following directions from the Dispute Resolution Panel (DRP), Hyderabad. The Transfer Pricing Officer (TPO) selected eighteen comparables and determined the Arithmetic Mean Margin of OP/TC of the comparables post working capital adjustment at 20.59%. Applying this margin to the operating cost of Rs. 17,96,31,488, the TPO determined the arm's length price at Rs. 21,66,17,611, resulting in a transfer price adjustment of Rs. 1,31,63,541. The DRP accepted the assessee's objections for five comparables but upheld the inclusion of three companies, leading to the final addition of Rs. 1,11,51,669.

Issue 2: Inclusion of Three Companies in the List of Comparables
The core grievance of the assessee pertains to the inclusion of three companies-E-Infochips Bangalore Ltd., Kals Information Systems Ltd., and Tata Elxsi Ltd.-in the list of comparables for determining the Arm's Length Price.

E-Infochips Bangalore Ltd.:
The assessee objected to this company's inclusion, arguing that the information for FY 2009-10 was not publicly available and that the company is functionally different, engaged in both software development and ITES. The TPO used the annual report of FY 2010-11 to extract information for FY 2009-10, which the assessee contested. The Tribunal noted that the company is engaged in diversified activities without segmental information, making it incomparable to the assessee. The Tribunal upheld the assessee's plea to exclude E-Infochips Bangalore Ltd. from the comparables.

Kals Information Systems Ltd.:
The assessee argued that Kals Information Systems Ltd. is functionally different, engaged in software development and software products, with significant inventories. The TPO included it as a comparable, but the Tribunal found that the company is engaged in both software development and software products, making it functionally different from the assessee. The Tribunal directed the exclusion of Kals Information Systems Ltd. from the comparables.

Tata Elxsi Ltd.:
The assessee contended that Tata Elxsi Ltd. is engaged in specialized services, including embedded software development, making it functionally different. The Tribunal noted that Tata Elxsi Ltd. has complex activities and lacks segmental information, rendering it incomparable. The Tribunal directed the exclusion of Tata Elxsi Ltd. from the comparables.

Conclusion:
The Tribunal accepted the assessee's contentions and directed the AO/TPO to redetermine the transfer pricing adjustment after excluding the three contested comparables. The appeal was allowed in favor of the assessee.

Order Pronounced:
The order was pronounced in the court on 19.02.2016.