2016 (9) TMI 1313 - AT - Income Tax

TPA - selection of comparable - Held that - Assessee company is engaged in development of software services for captive consumption thus companies functionally dissimilar with that of assessee will be deselected from final list of comparable. Kals Information Systems Ltd., Spry Resources India Pvt Ltd. and Taksheel Solutions Ltd. fairly rejected.

Summary

Issues:
- Appeal against direction of Dispute Resolution Panel (DRP) under section 144C for assessment year 2010-11.
- Exclusion of comparables by Transfer Pricing Officer (TPO) challenged by Revenue.
- Dispute over comparables: Kals Information Systems Ltd., Spry Resources India Pvt Ltd., Taksheel Solutions Ltd.

Analysis:
1. The appeal was against the direction of the DRP regarding the assessment year 2010-11. The TPO had determined a shortfall in the Profit Level Indicator (PLI) of the assessee, resulting in an upward adjustment to international transactions related to software development.

2. The assessee objected to various comparables selected by the TPO, such as FCS Software Sales Ltd., Kals Information Systems Ltd., ICRA Techiio Analytics Limited, Spry Resources India Pvt Ltd., and Taksheel Solutions Ltd. The objections were based on differences in revenue generation and business activities compared to the assessee.

3. The Revenue challenged the exclusion of Kals Information Systems Ltd., Spry Resources India Pvt Ltd., and Taksheel Solutions Ltd. The DRP had directed the exclusion of these comparables due to various reasons provided by the parties.

4. Regarding Kals Information Systems Ltd., the DRP's direction to exclude was based on the absence of segmental data for the two activities of providing software services and sale of software products. However, the financial statements of the comparable company showed predominant provision of software development services.

5. Concerning Spry Resources India Pvt Ltd., the DRP's exclusion was due to the lack of a clear breakup of revenue from software sale and services. The Revenue argued that the comparable primarily provided software development services, and the absence of specific revenue breakup did not justify exclusion.

6. For Taksheel Solutions Ltd., the DRP's exclusion was based on the low employee cost to turnover ratio. The Revenue contended that the actual ratio was significantly higher, indicating the comparable's involvement in software services. The exclusion was deemed unjustified.

7. The Tribunal upheld the DRP's decisions on the comparables. It noted the lack of segmented data for Kals Information Systems Ltd., the insufficient revenue breakup for Spry Resources India Pvt Ltd., and the significant difference in employee cost ratios for Taksheel Solutions Ltd. The Tribunal dismissed the Revenue's appeal.

8. As a result, the appeal of the Revenue was dismissed, and the cross objections filed by the assessee were also dismissed as infructuous. The judgment was pronounced on 23rd September 2016 in Chennai.