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2016 (5) TMI 1330 - AT - Income TaxTPA - ALP determination - comparables selection - Held that - Bodhtree Consultancy Ltd. - Since there is no segmental details in the data provided by this company therefore it is not possible to ascertain whether the revenue earned by this company during the year is from one of these activities or some of these activities or all of these activities. As far as the net work storage and data management solutions are concerned, the assessee is also providing software solutions to its AEs group who are leaders in net work storage and data management solution. Therefore in the facts and circumstances of the case, we are of the view that in the absence of complete information and details of the financials, it is not possible to conclude that this company is engaged in the similar business activity as of the assessee or in a different activity. Tata Elxsi Ltd. (Seg.) - as emerging from the Annual Report of this company and therefore this company cannot be considered as functionally comparable to that of software development services provided by the assessee to its AEs. Accordingly, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. Infosys Technology Ltd. - direct the Assessing Officer / TPO to exclude this company from the list of comparables. Thinksoft and FCS Software - Once these companies were considered for inclusion in the list of comparables and the assessee has not objected against the inclusion then even if the TPO decides to exclude these companies from the final set of comparables, the assessee would have been given an appropriate opportunity of hearing on the reasons and criteria on the basis of which the TPO proposed to exclude these companies. Sasken Communications Technologies Ltd. (Seg.) - we are of the view that the assessee has made out prima facie case of incorrect computation of margin of this company and therefore we set aside this issue to the record of the Assessing Officer/TPO to consider the objections of the assessee in respect of incorrect computation of margin. Working Capital Adjustment - we direct the Assessing Officer/TPO to give the working capital adjustment after considering the objections of the assessee as well as after exclusion of the companies as directed by us from the list of comparables. Acentia Technology Ltd is directed to be excluded from the list of comparables Cosmic Global Limited we direct the AO/TPO to exclude this company from the list of comparables for the purpose of determining the ALP Eclerx Services - this company is mainly engaged in providing high end services involving specialized knowledge and automation expertise in the field and therefore the same cannot be compared with a low end service provider company. Following the earlier decisions of this Tribunal, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. Exclusion of the telecommunication expenses incurred in foreign currency both from export turnover as well as total turnover.
Issues Involved:
1. Adjustment to the arm's length price (ALP) for software development services and IT-enabled services (ITES). 2. Comparability analysis and selection of comparable companies. 3. Computation of working capital adjustment. 4. Risk differential adjustments. 5. Charging of interest under sections 234B and 234D. 6. Exclusion of telecommunication expenses from export turnover and total turnover for section 10A deduction. Detailed Analysis: 1. Adjustment to the Arm's Length Price (ALP) The assessee challenged the adjustments made to the ALP by the Transfer Pricing Officer (TPO) amounting to ?257,620,255 for software development services and ?8,710,695 for ITES. The TPO's adjustments were based on the comparability analysis and the selection of comparable companies. 2. Comparability Analysis and Selection of Comparable Companies Software Development Services: - The TPO accepted six comparable companies from the assessee's list and added five more, determining the ALP based on 11 comparables with a mean margin of 24.32%. - The assessee sought the exclusion of three companies: Bodhtree Consultancy Ltd., Tata Elxsi Ltd. (Seg.), and Infosys Technologies Ltd. (Now Infosys Ltd.). Bodhtree Consultancy Ltd.: - The Tribunal found Bodhtree Consultancy Ltd. not comparable due to its engagement in software products and solutions, which differs from the assessee's software development services. This decision was supported by various Tribunal rulings, including M/s. Citrix Research & Development India Pvt. Ltd. vs. DCIT. Tata Elxsi Ltd. (Seg.): - Tata Elxsi Ltd. was excluded from the comparables as it operates in multiple segments, including product design services and visual computing labs, which are not comparable to the assessee's software development services. Infosys Technologies Ltd.: - Infosys Ltd. was excluded due to its significant brand value, ownership of intangibles, and engagement in R&D, making it incomparable to the assessee's captive service provider model. This exclusion was supported by the Tribunal's decision in M/s. Citrix Research & Development India Pvt. Ltd. and affirmed by the Hon'ble Delhi High Court in Agnity India Technology Ltd. ITES Segment: - The TPO included eight comparables for ITES, with an average PLI of 25.03%. The assessee sought the exclusion of three companies: Accentia Technologies Limited, Cosmic Global Limited, and Eclerx Services Limited. Accentia Technologies Limited: - Excluded due to extraordinary events like mergers and acquisitions during the year, affecting its financial results. This was supported by the Tribunal's decision in Unisys India Pvt. Ltd. vs. DCIT. Cosmic Global Limited: - Excluded as it primarily engages in translation services, which are functionally different from the assessee's ITES. The Tribunal supported this exclusion in e4e Business Solutions India Pvt. Ltd. vs. DCIT. Eclerx Services Limited: - Excluded due to its engagement in high-end knowledge process outsourcing (KPO) services, which are not comparable to the assessee's low-end ITES. This exclusion was supported by the Special Bench decision in Maersk Global Services. 3. Computation of Working Capital Adjustment The TPO restricted the working capital adjustment to 1.71% for software development services and 0.09% for ITES. The Tribunal directed the TPO to reconsider the working capital adjustment without artificial limitations, as per the decision in M/s. Citrix Research & Development India Pvt. Ltd. 4. Risk Differential Adjustments The assessee's request for appropriate adjustments towards risk differential while determining the ALP was not specifically addressed in the Tribunal's order. 5. Charging of Interest under Sections 234B and 234D The assessee contested the interest charges under sections 234B and 234D amounting to ?35,869,312 and ?765,434, respectively. However, the Tribunal's order did not provide specific relief on this issue. 6. Exclusion of Telecommunication Expenses The Tribunal upheld the CIT (Appeals) decision to exclude telecommunication expenses incurred in foreign currency from both export turnover and total turnover for section 10A deduction. This was in line with the Hon'ble Karnataka High Court's judgment in Tata Elxsi Ltd. and the Tribunal's decision in the assessee's case for AY 2006-07. Conclusion: The Tribunal partly allowed the assessee's appeal by excluding certain companies from the comparables and directed the TPO to reconsider the working capital adjustment. The revenue's appeal was dismissed, affirming the exclusion of telecommunication expenses from both export turnover and total turnover for section 10A deduction.
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