2014 (7) TMI 127 - AT - Income Tax

Transfer pricing adjustments - Selection of comparables - Extra ordinary event - Exensys Software Solutions Ltd. Bodhtree consulting Ltd, Four Soft Ltd, Infosys,., Sankhya Infotech Ltd., Thirdware Solutions Ltd, Tata Elexi (seg) - Held that - The decision in Intoto Software India (P.) Ltd. Versus Assistant Commissioner of Income-tax, Circle -2(1), Hyderabad 2013 (10) TMI 599 - ITAT HYDERABAD followed - there is an extra-ordinary event which resulted in high operating margin of that company thus, the AO is directed to exclude this company from the list of comparables. Inclusion of cpmparables Birla Technologies Ltd. - VJIL Consulting Limited - The assessee is requesting for inclusion of the above companies on the reason that TPO erred in not selecting these companies of extraneous reasons stating that Birla Technologies Limited was incurring persistent losses - inclusion or exclusion of these companies would require further examination of contentions by TPO thus, the matter is to be remitted back to the AO/TPO for consideration as to whether to include or exclude the above two comparables selected by assessee Decided in favour of Assessee. Working capital adjustment and risk adjustment Held that - With reference to quantification of risk adjustment, assessee arrived at the same at 4.63% based on difference in the average prime lending rate and the average bank rate it cannot be accepted that the difference in prime lending rate and bank rate has to be considered as risk adjustment, TPO should examine the risk profile of the assessee and other comparables and arrive at appropriate risk adjustment if it can be quantified on any reasonable basis - on negative working capital adjustment as well as risk adjustment, the issue is restored to the TPO, as selection of comparables were also restored to the file of the TPO - TPO should examine the aspects and arrive at revised ALP, after giving due opportunity to the assessee Decided in favour of Assessee.

Issues Involved:
1. Transfer Pricing Adjustment
2. Exclusion of Satellite Link Expenses from Export Turnover
3. Selection of Comparables
4. Inclusion of Additional Comparables
5. Negative Working Capital Adjustment
6. Risk Adjustment
7. Levy of Interest under Section 234B

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee, engaged in software development, filed a return showing income of Rs. 9,61,490 after claiming a deduction under section 10A of Rs. 3,02,23,927. The AO noticed international transactions with Associated Enterprises (AE) and referred the matter to the TPO. The TPO determined the Arm's Length Price (ALP) of transactions under software development and support services at Rs. 44,11,05,783, suggesting an adjustment of Rs. 7,07,47,467. The AO added this amount to the income of the assessee.

2. Exclusion of Satellite Link Expenses from Export Turnover:
The AO observed that the assessee incurred Rs. 41,04,403 towards satellite link expenses, which were in the nature of telecommunication charges. Since the software was delivered through satellite links in India, the AO excluded this amount from the export turnover, reducing the eligible export turnover and the allowable deduction under section 10A.

3. Selection of Comparables:
The CIT(A) approved 16 comparables with an average operating profit margin of 26.41%. The assessee objected to seven comparables, including Exensys Software Solutions Ltd., Sankhya Infotech Ltd., Four Soft Ltd., Thirdware Solutions Ltd., Bodhtree Consulting Ltd., Infosys Technologies Ltd., and Tata Elxsi Ltd. The ITAT found merit in the assessee's objections, noting issues such as functional differences, exceptional events like mergers, and significant brand intangibles.

4. Inclusion of Additional Comparables:
The assessee requested the inclusion of Birla Technologies Ltd. and VJIL Consulting Ltd. The ITAT directed the AO/TPO to re-examine these companies, considering the contentions raised by the assessee.

5. Negative Working Capital Adjustment:
The assessee contested the negative working capital adjustment made by the TPO. The ITAT directed the TPO to examine the risk profile of the assessee and comparables, and to arrive at an appropriate risk adjustment if it can be quantified on a reasonable basis.

6. Risk Adjustment:
The assessee argued for a risk adjustment, citing various cases. The ITAT acknowledged the need for risk adjustment and directed the TPO to examine this aspect, considering the risk profile differences between the assessee and the comparables.

7. Levy of Interest under Section 234B:
The issue of interest under section 234B on additional income due to T.P. adjustment was remanded to the TPO/AO for re-adjudication, depending on whether T.P. adjustments were necessary.

Conclusion:
The ITAT allowed the appeal for statistical purposes, directing the AO/TPO to re-examine the selection and inclusion of comparables, and to consider the risk and working capital adjustments. The levy of interest under section 234B was also to be re-adjudicated. The order was pronounced on 13.06.2014.

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