2015 (1) TMI 600 - AT - Income Tax

Transfer pricing adjustment - selection of comparables - Held that - Infosys Ltd. as having turnover far in excess of the assessee and assessee was a miniscule company when compared to Infosys Ltd., thus cannot be considered as a comparable and has to be excluded for working out the average PLI of the comparables. KALS and Accel Transmatics Ltd being a software product company, thus excluded from the comparables. Tata Elxsi Ltd. has to be excluded from the list of comparable chosen by the TPO as the assessee before us is not developing any niche product. Lucid Software Ltd. was not functionally similar to the assessee and the same has to be excluded from the comparables There is no dispute that RPT filter in the case of Megasoft Ltd. was 17.08%, that of Aztech Software Ltd. was 17.78% and that of Geometric Software Ltd. was 19.34%. Coordinate Benches of the Tribunal are consistently following 15% as cut off mark for applying the RPT filter. Accordingly, we direct exclusion of Megasoft Ltd., Aztech Software Ltd. and Geometric Software Ltd. from the comparables. Based on the above, direct the AO to recomputed the Profit Level Indicator and work out the arithmetic mean margin of the comparables. Thereafter, the AO has to decide whether the PLI of the assessee is within /- 5% range of the arithmetic mean of the comparables as set out u/s. 92C(2) of the Act and decide on the adjustment, if any, required on the ALP. - Decided in favour of assessee for statistical purposes. Exclusion of telecommunication expenditure from its export turnover - Corporate tax issues - Held that - Alternative ground taken that if such expenditure is excluded from the export turnover, it has to be excluded from the total turnover also is acceptable in view of the judgment in the case of CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT wherein held that if export turnover in the numerator was to be arrived at after excluding certain expenditure, it should also be excluded from the total turnover. Decided partly in favour of assessee.

Issues Involved:
1. Transfer Pricing Issues
2. Corporate Tax Issues

Detailed Analysis:

Transfer Pricing Issues:
1. Selection of Comparables:
- The assessee objected to the inclusion of certain companies as comparables selected by the Transfer Pricing Officer (TPO). The primary contention was against the inclusion of companies with significantly higher turnovers, different functional profiles, or high related party transactions (RPT).

2. Infosys Ltd.:
- The turnover of Infosys Ltd. was Rs. 9028 crores, whereas the assessee's turnover was Rs. 16.11 crores. The Tribunal had previously applied a turnover filter of 1 to 200 crores, excluding Infosys Ltd. from comparability. The Tribunal held that Infosys Ltd. could not be considered as a comparable due to the significant turnover difference.

3. Flextronic Software Systems Ltd., iGate Global Solutions Ltd., Mindtree Consulting Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd.:
- These companies were rejected as comparables based on the turnover filter, which was upheld in the case of EMC Data. The Tribunal directed their exclusion from the comparables.

4. KALS Information Systems Ltd.:
- The assessee argued that KALS was a software product company, not comparable to a software services company. The Tribunal upheld this view, referencing previous decisions that categorized KALS as a software product company, and directed its exclusion.

5. Accel Transmatics Ltd.:
- Similar to KALS, Accel Transmatics Ltd. was considered a software product company. The Tribunal upheld its exclusion based on functional dissimilarity.

6. Tata Elxsi Ltd.:
- The assessee argued that Tata Elxsi Ltd. was engaged in research & development, creating Intellectual Property Rights, and was thus a software product company. The Tribunal agreed, referencing previous decisions, and directed its exclusion.

7. Lucid Software Ltd.:
- The Tribunal found Lucid Software Ltd. to be functionally dissimilar, involved in product development, and directed its exclusion from the comparables.

8. Megasoft Ltd., Aztech Software Ltd., Geometric Software Ltd.:
- The RPT filter for these companies exceeded 15%, which was upheld as a criterion for exclusion in previous decisions. The Tribunal directed their exclusion from the comparables.

9. Recomputation of Profit Level Indicator (PLI):
- The Tribunal directed the Assessing Officer (AO) to recompute the PLI and the arithmetic mean margin of the comparables, and to determine if the PLI of the assessee falls within the +/- 5% range of the arithmetic mean as per Section 92C(2) of the Act.

Corporate Tax Issues:
1. Exclusion of Telecommunication Expenditure:
- The assessee contested the exclusion of telecommunication expenditure from its export turnover. The Tribunal accepted the alternative contention that if such expenditure is excluded from the export turnover, it should also be excluded from the total turnover, referencing the judgment of the Hon'ble jurisdictional High Court in CIT v. Tata Elxsi Ltd., which held that exclusions from the export turnover should also apply to the total turnover.

2. Other Related Grounds:
- Given the acceptance of the alternative ground, the Tribunal found it unnecessary to adjudicate other related grounds raised by the assessee.

General Grounds:
- Ground Nos. 11 & 12 were deemed general and required no adjudication.

Conclusion:
- The appeal of the assessee was partly allowed for statistical purposes, with directions provided for the recomputation of the PLI and the exclusion of specific companies from the comparables list. The Tribunal also accepted the alternative contention regarding the exclusion of telecommunication expenditure from both export and total turnover. The judgment was pronounced in the open court on September 26, 2014.

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