2016 (1) TMI 1321 - AT - Income Tax

TPA - selection of comparable - selection criteria - Held that - Assessee is into software development and support services to its parent company (AE) in USA, thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparability.

Issues Involved:
1. Non-speaking order by the Dispute Resolution Panel (DRP).
2. Incorrect selection and rejection of comparable companies for Transfer Pricing (TP) analysis.
3. Incorrect computation of margins for certain comparable companies.
4. Inclusion of additional comparable companies without providing the assessee an opportunity to respond.
5. Rejection of comparable companies based on turnover filter.

Issue-wise Detailed Analysis:

1. Non-speaking order by the Dispute Resolution Panel (DRP):
The assessee argued that the DRP's order should be set aside as it was not a speaking order. However, this issue was not elaborated further in the judgment, indicating that the Tribunal did not find it necessary to address this point in detail.

2. Incorrect selection and rejection of comparable companies for Transfer Pricing (TP) analysis:
The assessee contended that certain companies selected by the Transfer Pricing Officer (TPO) were not functionally comparable. These companies included KALS Info Systems Ltd., Tata Elxsi Ltd. (Seg), Infosys Technologies Ltd., Accel Transmatic Ltd., and Megasoft Ltd. The Tribunal examined these objections based on precedents and functional dissimilarities:

- KALS Info Systems Ltd. and Accel Transmatic Ltd.: The Tribunal referred to earlier decisions where these companies were excluded as comparables due to their functional differences from pure software development service providers. The Tribunal directed the exclusion of these companies.

- Infosys Technologies Ltd.: The Tribunal noted that Infosys was engaged in diversified activities and had a large scale of operations, making it incomparable to the assessee, a small captive service provider. Infosys was excluded from the list of comparables.

- Tata Elxsi Ltd. (Seg): The Tribunal found that Tata Elxsi was a specialized embedded software development company and not comparable to the assessee. It was excluded based on precedents.

- Megasoft Ltd.: The Tribunal directed the TPO to consider only the segmental details pertaining to software development services, as the company also engaged in selling products.

3. Incorrect computation of margins for certain comparable companies:
The assessee argued that the TPO had wrongly computed the margins for Megasoft Ltd., Tata Elxsi Ltd., and Accel Transmatic Ltd. The Tribunal addressed this by excluding Tata Elxsi and Accel Transmatic from the list of comparables. For Megasoft Ltd., the Tribunal directed the TPO to consider only the segmental profit related to software development services.

4. Inclusion of additional comparable companies without providing the assessee an opportunity to respond:
The assessee claimed that six additional comparable companies were included by the TPO without giving an opportunity to respond. The Tribunal found that many of these companies had been thoroughly examined in other cases for the same assessment year. It concluded that no useful purpose would be served by referring the matter back to the TPO for further opportunity, as considerable time had passed and many issues had already been settled. This ground was rejected.

5. Rejection of comparable companies based on turnover filter:
The assessee argued that certain companies should be rejected based on a turnover filter, as their turnovers were significantly higher than the assessee's turnover of Rs. 22.55 crores. The Tribunal examined the turnover of the objected companies and found that while some had turnovers just above Rs. 200 crores, others had turnovers above Rs. 500 crores. The Tribunal noted that the assessee had not objected to lower turnover companies and concluded that the scale of turnover was not extraordinary to warrant exclusion solely on this basis. This ground was also rejected.

Conclusion:
The Tribunal directed the TPO to modify the order by excluding the specified companies and considering segmental details for Megasoft Ltd. The appeal was partly allowed, and the order was pronounced in the open court on 27.01.2016.

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