2016 (6) TMI 1255 - AT - Income Tax

Addition on the basis of the Transfer Pricing Officer s order u/s 92CA(3) - criteria for comparable selection - Held that - Assessee is primarily engaged in the business of providing middle and back office service fund administration for age fund etc. Assessee also provides independent service essential to the launch and operation of private investment entities with activities ranging across and wide spectrum of traded instruments thus functionally dissimilar companies with that of assessee need to be deselected from final list of comparable.

Issues Involved:
1. Deletion of Transfer Pricing Adjustment by Commissioner (Appeals)
2. Selection/Rejection of Comparables in ITES Segment
3. Selection/Rejection of Comparables in Software Development Services Segment

Detailed Analysis:

1. Deletion of Transfer Pricing Adjustment by Commissioner (Appeals):
The Department appealed against the order of the Commissioner (Appeals) who deleted the addition of ?2,62,84,830 made by the Assessing Officer based on the Transfer Pricing Officer's (TPO) order under section 92CA(3) of the Income Tax Act. The assessee, an Indian company providing IT-enabled and software development services, benchmarked its international transactions using the Transaction Net Margin Method (TNMM) with operating profit to total cost (OP/TC) as the Profit Level Indicator (PLI). The TPO accepted TNMM as the appropriate method but disagreed with the assessee's use of multiple year data for comparability analysis, insisting on current year data.

2. Selection/Rejection of Comparables in ITES Segment:
- ICRA Online Ltd.: The TPO rejected this company for being consistently loss-making, but the Commissioner (Appeals) included it, noting it showed profits in subsequent years. The Tribunal remitted the issue back to the TPO for a functional analysis.
- National Securities Depository Ltd.: Initially rejected by the TPO for providing demat services, the Commissioner (Appeals) included it, finding ITES to be a significant business segment. The Tribunal upheld this inclusion.
- Data Matrix Technologies Pvt. Ltd. and Tricom India Ltd.: Excluded by the Commissioner (Appeals) due to substantial related party transactions (62% and 58%, respectively). The Tribunal upheld this exclusion.
- Ultramarine Pigments Ltd.: Excluded by the Commissioner (Appeals) due to abnormally high margins and unreliable financials from past decisions. The Tribunal remitted the issue back to the TPO for a detailed functional analysis.
- Vishal Information Technologies Ltd.: Excluded by the Commissioner (Appeals) because it outsourced its ITES activities, acting as an intermediary. The Tribunal upheld this exclusion.

3. Selection/Rejection of Comparables in Software Development Services Segment:
- FCS Software Solutions Ltd.: Included by the Commissioner (Appeals) as it primarily engaged in software development services. The Tribunal upheld this inclusion.
- Goldstone Technologies Ltd.: Included by the Commissioner (Appeals) after finding it earned its entire revenue from exports. The Tribunal upheld this inclusion.
- ICRA Techno Analytics Ltd.: Included by the Commissioner (Appeals) despite the TPO's rejection due to lack of segmental information. The Tribunal remitted the issue back to the TPO for further examination.
- Powersoft Global Solutions Ltd.: Included by the Commissioner (Appeals) as it provided various software development services. The Tribunal remitted the issue back to the TPO for segmental analysis.
- Compulink Systems Ltd.: Excluded by the Commissioner (Appeals) due to diversified operations without segmental reporting. The Tribunal upheld this exclusion.
- Exensys Software Solutions Ltd.: Excluded by the Commissioner (Appeals) due to abnormal gains from amalgamation. The Tribunal upheld this exclusion.
- Flextronics Software Systems Ltd.: Excluded by the Commissioner (Appeals) due to its hybrid model of product and service supply. The Tribunal upheld this exclusion.
- Geometric Software Solutions Co. Ltd.: Excluded by the Commissioner (Appeals) as it was engaged in product development. The Tribunal upheld this exclusion.
- Infosys Technologies Ltd.: Excluded by the Commissioner (Appeals) due to its diversified operations, significant intangibles, and brand value. The Tribunal upheld this exclusion.
- Sankhya Infotech Ltd.: Excluded by the Commissioner (Appeals) due to its engagement in product development. The Tribunal upheld this exclusion.
- Satyam Computer Services Ltd.: Excluded by the Commissioner (Appeals) due to diversified activities and unreliable financial data from a financial scam. The Tribunal upheld this exclusion.
- Thirdware Solutions Ltd.: Excluded by the Commissioner (Appeals) due to engagement in trading/resale of software products and substantial related party transactions. The Tribunal upheld this exclusion.

Conclusion:
The Tribunal partly allowed the Department's appeal for statistical purposes, directing the Assessing Officer/Transfer Pricing Officer to recompute the arm's length price of the international transactions in line with the Tribunal's observations.

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