2016 (8) TMI 1231 - AT - Income Tax

TPA - selection of comparable - Held that - Assessee is in software development services and had number of international transactions with its Associated Enterprise AE thus companies functionally dissimilar with that of assessee need to be deleted from final list of comparable.

Summary

Issues Involved:
1. Transfer Pricing Adjustments.
2. Selection of Comparable Companies.

Detailed Analysis:

1. Transfer Pricing Adjustments:

The primary issue in the appeal was the Transfer Pricing adjustments made under Section 92CA(3) of the Income Tax Act, amounting to ?1,66,75,628/-. The assessee, involved in software development services, had numerous international transactions with its Associated Enterprise (AE), M/s. Yasu Technologies Inc, USA. The Transfer Pricing Officer (TPO) initially proposed adjustments of ?3,65,79,234/-, which was later revised to ?1,66,75,628/- by the Addl. DIT (TP). The Assessing Officer (AO) completed the assessment based on this revised adjustment.

Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee contested various filters, parameters, and the selection of comparable companies. However, the CIT(A) upheld the Addl. DIT(TP)'s order, rejecting the assessee's contentions and maintaining the TP adjustments.

2. Selection of Comparable Companies:

The assessee raised objections to the selection of certain comparable companies by the TPO. The TPO had selected 26 companies as comparables, out of which the assessee had no objection to the first twelve. The objections were primarily focused on the remaining 14 companies, which had been adjudicated by various Co-ordinate Benches in similar cases.

The Tribunal considered the rival contentions and reviewed the orders of the authorities. It was noted that the TPO had selected 26 comparables and proposed the adjustments. The assessee restricted its objections to certain comparables, which had been adjudicated as not comparable in similar cases.

The Tribunal excluded the following comparables based on the decisions in various cases:

1. Avani Cimcon Technologies Ltd: Excluded due to its involvement in product development and super normal profits.
2. Infosys Technologies Ltd: Excluded due to its size, turnover, brand value, scale of operation, diversified activities, and ownership of intangibles.
3. Ishir Infotech Ltd: Excluded as it failed the employee cost filter.
4. Lucid Software Ltd: Excluded due to lack of segmental data for product and software services.
5. Megasoft Ltd: Only the segmental margin for software development services was considered.
6. Tata Elxsi Ltd: Excluded due to its complex nature of business and lack of segmental details.
7. Wipro Ltd: Excluded due to its diversified nature and significant turnover.
8. Accel Transmatic Ltd: Excluded as it was functionally different, engaged in various services including 2D/3D animation.
9. KALS Information Systems Ltd: Excluded due to its involvement in both software development and software products.
10. Flextronics Software Systems Ltd: Excluded due to functional dissimilarity and involvement in product development.
11. Helios & Matheson Information Technology Ltd: Excluded due to low employee cost.

Conclusion:

The Tribunal directed the AO/TPO to exclude the above companies from the list of comparables and to re-compute the Arm's Length Price (ALP) accordingly. The appeal was allowed for statistical purposes, and the order was pronounced in the open Court on 31st August 2016.