2014 (1) TMI 1031 - AT - Income Tax

Selection of comparables - Held that - Exensys Software Solutions Ltd. - Where there are extraordinary events then those events have to be taken note of and where no adjustment can be made on account of this extraordinary event then such company cannot be considered as a comparable - Following Intoto Software India Pvt. Ltd. 2013 (10) TMI 599 - ITAT HYDERABAD - there is an extraordinary event which has resulted in the high operating margin of the company - The issue has been remitted back for fresh adjudication. Sankhya Infotech Ltd. and Four Soft Ltd - Following Hellosoft India Pvt. Ltd. 2013 (10) TMI 747 - ITAT HYDERABAD - Both the companies were having onsite income/expenses of more than 75% - The issue has been remitted back for fresh adjudication. Thirdware Solutions Ltd. - Held that - Following Intoto Software India Pvt. Ltd. 2013 (10) TMI 599 - ITAT HYDERABAD - there are software products that the company invoiced during the FY and the financial results are in respect of services only but still it held that though there is no sale of software products during the year but the said company might have incurred expenditure towards development of software products - The company should not be taken as comparable. Infosys Technologies Ltd. - This being a big company in all respects including the range of turnover is not a comparable to small companies which are captive service providers having considerably low turnover - Merely because the assessee had selected it as a comparable it cannot operate as an estoppel in raising objections with regard to comparability of the aforesaid company - The company should not be taken as comparable. Tata Elxsi Ltd - It cannot be treated as comparable with any other company since it is a specialized embedded software development provider - Because of the specialization and also because of diverse nature of its business it is very difficult to scale-up the operations of Tata Elxsi Limited - Decision in Intoto Software India Pvt. Ltd. 2013 (10) TMI 599 - ITAT HYDERABAD followed - The issue has been remitted back for fresh adjudication. Bodhtree Consulting Ltd. - Its related party transaction as a percentage to the total revenue is 34% which is more than the accept/reject matrix of more than 25% fixed by the TPO - The issue has been remitted back for fresh adjudication. Vishal Information Technologies Ltd. - The aforesaid company unlike the assessee has outsourced considerable portion of its business to third party vendor in A.Y. 2008-09 - It cannot be considered as a comparable - The TPO was directed to verify whether similar situation exists in the impugned assessment year also - If the employee cost of the aforesaid comparable is also in similar low range then it has to be assumed that the said company has outsourced its business activities to third party vendor - The issue has been restored for fresh adjudication. Maple E Solutions Ltd. - It provides design service on line and outline media ranging from interface to logo design. The service include website evaluation intranet/extranet email list management content management security etc. Hence the companies is functionally dissimilar to the assessee - The said company cannot also be treated as comparable as the directors of the said company were found to be involved in fraud hence financial results of the company cannot be trusted as reliable - The company should not be taken as comparable. Nucleus Netsoft and GIS India Ltd - Held that - the employee cost as a percentage of the operating revenue is much lower compared to the assessee - Decidion in HSBC Electronic Data Processing India Pvt. Ltd 2013 (9) TMI 485 - ITAT HYDERABAD followed - The company outsourced its work - The company cannot be selected as a comparable on account of its low employee cost. WIPRO BPO Solutions Ltd - WIPRO is a big company owning intangible and having substantial brand value. It had generated considerable goodwill reputation and brand value in the market. It is also a fact that it earns substantial revenue from products which are sold at a premium unlike the assessee which is only a contract service provider to its AE - Only after examining the impact of all the factors like owning of intangibles brand value goodwill reputation on profitablity the aforesaid company can at all be treated as a comparable to the assessee - The issue has been restored for fresh adjudication.

Summary

Issues Involved:
1. Selection of comparables for determining the Arm's Length Price (ALP) under the Transactional Net Margin Method (TNMM) in the software services segment.
2. Exclusion of certain companies from the list of comparables in the ITES segment.
3. Charging of interest under section 234B of the Income Tax Act.

Detailed Analysis:

1. Selection of Comparables for Determining ALP under TNMM in Software Services Segment:
- Exensys Software Solutions Ltd.: The assessee objected to this company's selection as a comparable due to its involvement in software product development and an extraordinary event of merger with Holool India Ltd. during the relevant financial year. The Tribunal directed the AO/TPO to examine the issue afresh, following the decision in Intoto Software India Pvt. Ltd., where it was held that extraordinary events affecting financial results disqualify a company from being a comparable.

- Sankhya Infotech Ltd. and Four Soft Ltd.: The assessee argued that these companies are engaged in product development and have significant onsite income/expenses. The Tribunal directed the AO/TPO to verify if the onsite income/expenditure exceeds 75%, in which case these companies should be excluded as comparables.

- Thirdware Solutions Ltd.: The assessee contended that this company is involved in product development and distribution activities. The Tribunal, following the decision in Intoto Software India Pvt. Ltd., directed the AO/TPO to exclude this company from the list of comparables.

- Infosys Technologies Ltd.: The assessee objected to this company being treated as a comparable due to its high turnover and brand value. The Tribunal upheld the view that Infosys, being a giant in the sector with significant turnover and brand value, is not comparable to smaller companies like the assessee. The AO/TPO was directed to exclude Infosys Technologies Ltd. from the list of comparables.

- Tata Elxsi Ltd.: The assessee argued that this company, being a specialized embedded software development provider, cannot be treated as a comparable. The Tribunal remitted the issue back to the AO/TPO for reconsideration, following the decision in Intoto Software.

- Bodhtree Consulting Ltd.: The assessee contended that this company fails the Related Party Transaction (RPT) filter of more than 25% set by the TPO. The Tribunal directed the AO to examine this aspect and exclude the company if the RPT exceeds the threshold.

2. Exclusion of Certain Companies from the List of Comparables in the ITES Segment:
- Vishal Information Technologies Ltd.: The assessee argued that this company outsources a considerable part of its business, as indicated by its low employee cost. The Tribunal directed the TPO to verify this and exclude the company if the employee cost is similarly low, indicating outsourcing.

- Maple E Solutions Ltd.: The assessee objected to this company being treated as comparable due to its involvement in design services and the involvement of its directors in fraud. The Tribunal, following the decision in CRM Services India Pvt. Ltd., directed the AO/TPO to exclude this company from the list of comparables.

- Nucleus Netsoft and GIS India Ltd.: The assessee contended that this company fails the employee cost filter, indicating it outsources its work. The Tribunal directed the AO/TPO to examine this aspect and exclude the company if there is a substantial difference in employee costs.

- WIPRO BPO Solutions Ltd.: The assessee argued that WIPRO, due to its brand value, goodwill, and substantial revenue from premium products, cannot be compared to a captive service provider like the assessee. The Tribunal remitted the issue back to the AO/TPO for detailed examination of these factors and to decide on the comparability.

3. Charging of Interest under Section 234B:
- Interest under Section 234B: The issue of charging interest under section 234B was deemed consequential and not required to be adjudicated at this stage. The Tribunal dismissed this ground.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, with directions for the AO/TPO to re-examine and exclude certain companies from the list of comparables based on specific criteria and previous Tribunal decisions. The issue of charging interest under section 234B was dismissed as consequential. The order was pronounced on 17th January 2014.