2014 (12) TMI 50 - AT - Income Tax

Selection of comparables Exensys Software Solutions Extraordinary event - Held that - Following the decision in Invensys Development Centre (India) Pvt. Ltd. Versus The Addl. CIT Hyderabad 2014 (3) TMI 171 - ITAT HYDERABAD - There is merger of Holool Ltd. as a result of which the company s income for the year under consideration was 737.79 lakhs - there is a clear mention that the company s income is possible with the amalgamqation of Holool India Ltd. - Assessee company has got benefit by advanced latest technical expertise on various technology domains of the transferor company - claim was with reference to the AS-14 and also due to amalgamation of two companies - Not only in the correspondence with the TPO that Assessee expressed its inability to furnish separate accounts for two amalgamated companies but also further it has clearly mentioned to the TPO that there is a gap in the expenditure expected to incur and actual expenditure incurred which made the company record high operating margin on cost - there is an extra-ordinary event which resulted in high operating margin of that company thus the AO is directed to exclude the company from the list of comparables. Thirdware Solutions Ltd. software development business - Held that - Following the decision in Intoto Software India (P.) Ltd. Versus Assistant Commissioner of Income-tax Circle -2(1) Hyderabad 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 company might have incurred expenditure towards development of software products - the AO/TPO is directed to exclude the company from the list of comparables. Bodhtree Consulting Ltd. Related party transaction - Held that - Related party transaction as a percentage to the total revenue is 34.68% which is more than the accept/reject matrix of more than 25% fixed by the TPO - in final filters adopted by the TPO he himself has excluded companies having RPT of more than 25% - the matter is remitted back to the AO/TPO to examine this aspect and exclude it from the list of comparables. Tata Elxsi Ltd. Held that - The company itself acknowledges that it is a specialized embedded software development service provider hence cannot be compared with any other software development company - The company also informed because of specialization and diverse nature of its business it is very difficult to scale up its operations - this company not to be a comparable to a pure software development service provider like the present assessee the AO/TPO is directed to exclude it from list of comparables Decided partly in favour of assessee.

Summary

Issues Involved:
1. Selection of comparables for Transfer Pricing analysis.
2. Exclusion of certain companies from the list of comparables.
3. Computation of Arm's Length Price (ALP).

Issue-Wise Detailed Analysis:

1. Selection of Comparables for Transfer Pricing Analysis:
The assessee, a wholly-owned subsidiary of an overseas holding company, provides software design, development, and testing services exclusively to its Associated Enterprises (AE). The assessee used the Transaction Net Margin Method (TNMM) and selected 12 comparables with an average margin of 16.98%. The Transfer Pricing Officer (TPO) rejected the assessee's TP study for inconsistencies and selected 17 comparables with an average margin of 26.59%. After adjustments, the TPO determined a shortfall of Rs. 1,01,43,123 as a transfer pricing adjustment.

2. Exclusion of Certain Companies from the List of Comparables:
The assessee challenged the inclusion of six companies as comparables, arguing they were functionally different or had extraordinary events affecting their profitability.

Exensys Software Solutions Ltd.:
The Tribunal found that the merger of Holool India Ltd. significantly impacted Exensys' profitability, making it an unsuitable comparable. The Tribunal directed the AO to exclude Exensys Software Solutions Ltd. from the list of comparables.

Sankhya Infotech Ltd. and Four Soft Ltd.:
These companies were involved in product development, unlike the assessee, which is a pure software development service provider. The Tribunal directed the AO/TPO to exclude these companies from the list of comparables.

Thirdware Solutions Ltd.:
Despite no sale of software products during the year, the Tribunal noted potential expenditures towards software product development. Following previous decisions, the Tribunal directed the AO/TPO to exclude Thirdware Solutions Ltd. from the list of comparables.

Bodhtree Consulting Ltd.:
The Tribunal noted that Bodhtree Consulting Ltd. had related party transactions constituting 34.68% of its total revenue, exceeding the 25% threshold set by the TPO. The Tribunal directed the AO/TPO to examine this aspect and exclude the company if the contention was correct.

Tata Elxsi Ltd.:
Tata Elxsi Ltd. was found to be a specialized embedded software development service provider, making it incomparable to the assessee. The Tribunal directed the AO/TPO to exclude Tata Elxsi Ltd. from the list of comparables.

3. Computation of Arm's Length Price (ALP):
The Tribunal directed the AO/TPO to recompute the ALP after excluding the aforementioned companies and allowing adjustments for working capital. The final adjustment should reflect the Tribunal's directions and ensure that the ALP is computed accurately.

Conclusion:
The Tribunal partially allowed the appeal, directing the AO/TPO to exclude specific companies from the list of comparables and recompute the ALP accordingly. The decision emphasized the importance of selecting appropriate comparables that align with the functional profile of the assessee. The Tribunal's directions aimed to ensure a fair and accurate determination of the ALP for the assessee's international transactions.