2014 (12) TMI 970 - AT - Income Tax

Transfer pricing adjustment - Serviced provided to AE Selection of Companies as comparables Accel Transmatic Ltd. E-Zest Solutions - Held that - Following the decision for all the comparables as decided in M/s. Motorola Solutions India Private Limited Versus ACIT, Circle-2, Udyog Vihar 2014 (10) TMI 358 - ITAT DELHI - the Tribunal restored the issue to the file of the TPO to consider the inclusion/exclusion of this comparable depending upon the finding of RPT with regard to E-Zest Solutions the TPO is directed to examine the reply of the assessee and adjudicate the matter afresh. Avani Cimcon Technologies Ltd. Held that - The Tribunal directed exclusion of the comparable for the reason that it owns certain softwares developed by it and the revenues earned are not merely on account of development of new software from scratch but because of utilisation of own software also - the asset base of the company could not be compared with that of the tested party. Celestial Labs Held that - The Tribunal observed that Celestial Labs is mainly into software development services, in as much as, R&D facilities have been used by it in relation to development of a software for discovery of new drugs - It was engaged in bioforma and biotech manufacturing of customised I.T. solutions, manufacturing of trucks, and contract research activities. KALS Information Systems Held that - The Tribunal directed the AO to exclude this comparable on the ground that there is a difference in the asset base of both the companies. Flextronic Software Systems Ltd.- Ishir Infotech Ltd.- Held that - The Tribunal held that the company cannot include a comparable as there is a clear contradiction in the contents of the annual report and the information obtained u/s 133(6), hence this comparable has to be excluded for the same reason. Sasken Communication Technologies Ltd. Held that - The company has to be excluded as it owns IPRs and had branded products. Tata Elxis Ltd. Held that - The Tribunal directed the exclusion of this comparable for the reason that the software developed by this company were used as tools in development of new softwares Decided partly in favour of assessee.

Summary

Issues Involved:
1. Deduction under Section 10A
2. Transfer Pricing (TP) adjustments
3. Inclusion and exclusion of comparables in TP study
4. Employee cost filter
5. Intangibles and high turnover in comparables
6. Extraordinary circumstances in comparables
7. Related party transactions (RPT) filter

Detailed Analysis:

1. Deduction under Section 10A:
The appellant, Freescale Semiconductor India P. Ltd., claimed a deduction under Section 10A amounting to Rs. 19,32,10,124 for its STPI units in Noida and Bangalore. The claim was based on segmental workings in the TP report for software development and market support services.

2. Transfer Pricing (TP) Adjustments:
The appellant used the Transactional Net Margin Method (TNMM) with Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI). The TP study segmented operations into software development services and market support services, with respective margins of 13% and 11%. The TPO rejected this segmentation and conducted a fresh search, using different quantitative filters and merging both segments, arriving at a margin of 23.28%.

3. Inclusion and Exclusion of Comparables in TP Study:
The appellant argued that the facts were similar to the case of M/s Motorola Solutions India Pvt. Ltd. The Tribunal followed the decision in the Motorola case for each comparable:
- Accel Transmatic Ltd.: Restored to the TPO for consideration based on RPT.
- Avani Cimcon Technologies Ltd.: Excluded due to ownership of software and asset base differences.
- Celestial Labs: Excluded for involvement in R&D and biotech manufacturing.
- KALS Information Systems: Excluded due to asset base differences.
- E-Zest Solutions: Restored to the TPO for fresh adjudication.
- Flextronic Software Systems Ltd.: Excluded due to contradictions in the annual report.
- Infosys Technologies Ltd.: Excluded following the jurisdictional High Court decision.
- Ishir Infotech Ltd.: Restored to the TPO for providing information obtained u/s 133(6).
- Helios & Matheson Information Technologies Ltd.: Restored to the TPO.
- Lucid Software Ltd.: Excluded as per the TPO's decision for AY 2008-09.
- Sasken Communication Technologies Ltd.: Excluded due to ownership of IPRs and branded products.
- Tata Elxis Ltd.: Excluded for using developed software as tools.
- Wipro Ltd.: Excluded for reasons similar to Infosys.
- Persistent Systems Ltd.: Excluded on the same grounds as Megasoft.

4. Employee Cost Filter:
The TPO's filter of selecting companies with employee costs greater than 25% of total revenues was upheld in previous cases. The appellant argued that no software company spends more than 70% on employee costs, supporting the range determined in the Motorola case.

5. Intangibles and High Turnover in Comparables:
The Tribunal in the Motorola case excluded certain comparables due to ownership of intangibles and high turnover. The TPO's stance that possession of intangibles alone should not lead to exclusion was countered by the appellant's argument that the Tribunal had detailed reasons for exclusion.

6. Extraordinary Circumstances in Comparables:
The exclusion of Persistent Systems India Ltd. due to acquisitions was debated. The appellant argued that acquisitions in the same line of business should not lead to exclusion, but the Tribunal restored this issue for fresh adjudication.

7. Related Party Transactions (RPT) Filter:
The TPO's filter for related party transactions was contested. The Tribunal restored the issue for verification by the TPO.

Conclusion:
The Tribunal directed the TPO and AO to follow the judgment in the Motorola case and pass consequential orders. The appeal was allowed in part, with specific directions for inclusion and exclusion of comparables and other adjustments as per the Motorola case precedent. The order was pronounced in the Open Court on 31st October 2014.