2016 (3) TMI 1256 - AT - Income Tax

TPA - selection criteria for comparables - Held that - Assessee is a wholly owned subsidiary of Novell Inc., USA (Novell US). Novel US, helps customers realise the value of their information and deliver it securely and economically to their stake holders across any platform. Assessee provided software development and support services to Novel, US Inc. Financial, thus functionally dissimilar companies to be deselected from final list.

Issues Involved:

1. Selection of comparables.
2. Application of filters by the AO.
3. Application of 25% criteria for RPTs.
4. Exclusion of certain companies from the list of comparables.
5. Segmentation of results for Megasoft Ltd.
6. Reworking the list of comparables with working capital adjustment.

Detailed Analysis:

1. Selection of Comparables:
The assessee, a wholly owned subsidiary of Novell Inc., USA, provided software development and support services. The Transfer Pricing Officer (TPO) rejected most of the 55 comparables selected by the assessee, retaining only 10. The TPO applied various filters and arrived at a list of 26 comparables with an average PLI of 25.14%.

2. Application of Filters by the AO:
The TPO applied filters such as non-comparability of results, export revenues being less than 75% of total revenue, RPT in excess of 25%, onsite revenue of more than 75% of export revenue, functional dissimilarity, employee cost being less than 25% of revenue, consistent losses, and diminishing revenues.

3. Application of 25% Criteria for RPTs:
The assessee contested the 25% threshold for RPTs, advocating for a 15% threshold based on the decision in 24/7 Customer.com Pvt Ltd v. DCIT. The TPO, however, maintained the 25% threshold citing statutory mandates.

4. Exclusion of Certain Companies from the List of Comparables:
The Tribunal accepted the assessee's plea to exclude several companies based on functional dissimilarity and other grounds. These included:
- Accel Transmatic Ltd.: Excluded due to functional differences and significant related party transactions.
- Avani Cimcon Technologies Ltd.: Excluded due to revenue from software products and abnormal profit margins.
- Celestial Labs Ltd.: Excluded as it was primarily a research and development company.
- E-Zest Solutions Ltd.: Excluded for being a knowledge process outsourcing (KPO) service provider.
- Flextronics Software Systems Ltd. (Seg.): Excluded due to discrepancies between annual report and information obtained u/s 133(6).
- Helios & Matheson Information Technology Ltd.: Excluded for being engaged in development and sale of software products.
- Infosys Technologies Ltd.: Excluded due to significant intangibles, revenue from software products, and substantial R&D expenditure.
- Ishir Infotech Ltd.: Excluded for outsourcing work and failing the employee cost filter.
- KALS Information Systems Ltd.: Excluded due to engagement in both software development and software products.
- Lucid Software Ltd.: Excluded for being involved in software product development.
- Persistent Systems Ltd.: Excluded for being engaged in product development and product design services.
- Sasken Communication Technologies Ltd. (Seg.): Excluded due to significant R&D expenditure and ownership of IPR.
- Tata Elxsi Ltd. (Seg.): Excluded for being engaged in product design services.
- Thirdware Solutions Ltd. (Seg.): Excluded due to involvement in product development and sale of licenses.
- Wipro Ltd. (Seg.): Excluded for owning significant intangibles and using consolidated financial statements for comparability.

5. Segmentation of Results for Megasoft Ltd.:
The Tribunal directed the TPO to compute the correct margin for Megasoft Ltd. by considering only the software services segment, as the company was involved in both software development and software product segments.

6. Reworking the List of Comparables with Working Capital Adjustment:
The Tribunal directed the TPO to rework the list of comparables applying the working capital adjustment relatable to the final set of comparables remaining in the list.

Conclusion:
The Tribunal allowed the grounds raised by the assessee regarding the exclusion of certain comparables and directed the TPO to rework the list of comparables with appropriate adjustments. The appeal of the assessee was treated as partly allowed.

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