2015 (2) TMI 944 - AT - Income Tax

Transfer Pricing Adjustment - selection of comparable - Held that - For exclusion of Kals Information System Ltd. the said concern is engaged in development and sale of software product, etc., which is distinct from the software development services rendered by the assessee to its associated enterprise. Thus, we are inclined to uphold the plea of the assessee that the M/s Kals Information System Ltd. (applications software segment) is functionally incomparable to the assessee. - Decided in favour of assessee. For exclusion of M/s. FCS Software Solutions Limited the application support services and infrastructure management services, which constitute 11% and 15% respectively of the total income, are IT enabled services and not linked to the software development services. Once the segment of application support and infrastructure management services are removed along with the exclusion of E-learning and Digital consulting segment, then the income of the said concern from software development services falls below 75% of its total income and therefore, it deserves to be excluded even on the basis of the filter applied by the TPO. - Decided in favour of assessee. For inclusion of CG-VAK Software Systems Limited (Software Services Segment) the said concern cannot be excluded merely because of incurrence of loss in this year, especially when the said loss has not been established to be an abnormal business condition and more so in the context that the said concern is not denied to be functionally comparable to the assessee. Therefore, on this aspect, we uphold the plea of the assessee for including the said concern in the final set of comparables in order to determine the arm's length price of the international transaction. - Decided in favour of assessee. For inclusion of M/s. Thinksoft Global Services Limited The argument being set up by the lower authorities that the Verification and Validation are steps to test the efficiency of the software, but not a part of software development, in our view is a hairsplitting argument, which is not justified in the context of the present comparability analysis. Ostensibly, Verification and Validation are broadly speaking, a part and parcel of the process of software development. Therefore, on this aspect, we are unable to uphold the action of lower authorities in excluding the said concern from the final set of comparables. - Decided in favour of assessee. For exclusion of M/s. Maars Software International Limited TPO justifiably excluded the said concern because it is only the information available in public domain, which can be the basis to effectuate comparable analysis. The assertions in the Directors report, which do not find any contradiction in the other financial statements accompanying such Directors report, have to be relied upon. Thus, on this point itself, we find no merit in the plea of the assessee for including the said concern in the final set of comparables. - Decided in favour of revenue. For exclusion of Akshy Software Technologies Limited TPO was justified in excluding Akshy Software Technologies Limited from the final set of comparables as the business model of the assessee i.e. provision of off-shore services to its associated enterprise stands on a different footing than the on-site services being rendered by Akshy Software Technologies Limited. The assertions of the assessee that its arrangement with associated enterprise does not rule out provision of on-site services does not distract from the fact that the tested transactions undertaken by the assessee involve off-shore rendering of services, which is incomparable to the on-site services being rendered by Akshy Software Technologies Limited to its clients abroad. - Decided in favour of revenue. For exclusion of M/s. R.S. Software (India) Limited the said concern was predominantly an on-site service provider and therefore, it was excludible. Secondly, the TPO also correctly observed that the said concern was engaged in research and development work as mentioned in its Annual accounts. We hereby affirm the stand of the TPO in rejecting M/s. R.S. Software (India) Limited from the final set of comparables.- Decided in favour of revenue. Exclusion of comparable applying a Turnover filter - while in the show-cause notice the TPO had proposed to consider Persistent Systems Ltd., Mindtree Ltd. (IT Services), Larsen & Turbo Infotech Ltd. and Sasken Communication Technologies Ltd. (Telecom Services Segment) as comparables whereas in the subsequent order passed u/s 92CA(3) the TPO has excluded the same by applying a Turnover filter, whereby the concerns with sales/turnover in excess of ₹ 200 crores have been excluded - Held that - In the present case it is axiomatic that so far as the issue of the adoption of Turnover filter of ₹ 200 crores to exclude the aforesaid four concerns in concerned, the same has been adopted by the TPO without giving the assessee any opportunity of being heard and therefore in our view the matter ought to be remanded back to the AO/TPO for consideration afresh. - Decided in favour of assessee for statical purposes.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Erroneous addition/rejection of certain comparables
3. Erroneous rejection of economic adjustment for differences in levels of risks
4. Not allowing the use of multiple year data
5. Not allowing the benefit of +/- 5% range
6. Ignoring the tax holiday entitlement under Section 10A
7. Failure to consider self-assessment tax and TDS while computing tax demand

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue was the addition of Rs. 3,69,97,907/- to the appellant's total income based on the provisions of Chapter X of the Income-tax Act, 1961. The appellant contended that the lower authorities erred in determining the arm's length price of its international transactions with its associated enterprises at Rs. 40,85,97,054/- against the stated value of Rs. 37,15,99,152/-.

2. Erroneous Addition/Rejection of Certain Comparables:
- Kals Information Systems Ltd.: The appellant argued that this company was functionally different as it was engaged in the development and sale of software products, not purely software development services. The Tribunal upheld this plea, noting that the company was indeed engaged in developing software products, which is distinct from the appellant's services.

- FCS Software Solutions Ltd.: The appellant claimed that this company earned income from diversified segments, and its income from software development services was less than 75% of the total income. The Tribunal agreed, noting that significant portions of FCS's revenue came from IT-enabled services, not software development services.

- CG-VAK Software Systems Ltd.: The appellant contended that this company was functionally comparable and should not have been excluded merely because it incurred a loss. The Tribunal upheld this plea, stating that incurrence of loss is a normal business incident and does not warrant exclusion if the company is functionally comparable.

- Thinksoft Global Services Ltd.: The appellant argued that the services provided by Thinksoft, such as software testing and validation, are part of the software development process. The Tribunal agreed, noting that these activities are indeed part of the software development process and should be included as comparables.

- Maars Software International Ltd.: The Tribunal upheld the exclusion of this company, noting that its major revenue came from SAP consulting and implementation, which is distinct from the appellant's activities.

- Akshy Software Technologies Ltd.: The Tribunal upheld the exclusion, noting the difference in business models between on-site and off-shore service provision, which impacts relative margins.

- R.S. Software (India) Ltd.: The Tribunal upheld the exclusion for similar reasons as Akshy Software Technologies Ltd., noting the difference in business models.

3. Erroneous Rejection of Economic Adjustment for Differences in Levels of Risks:
The Tribunal did not specifically address this issue as it was not pressed during the hearing.

4. Not Allowing the Use of Multiple Year Data:
The Tribunal did not specifically address this issue as it was not pressed during the hearing.

5. Not Allowing the Benefit of +/- 5% Range:
The Tribunal did not specifically address this issue as it was not pressed during the hearing.

6. Ignoring the Tax Holiday Entitlement under Section 10A:
The appellant argued that the DRP erred by not appreciating that there was no intention to shift profits outside India, given the tax holiday under Section 10A. The Tribunal did not provide a specific ruling on this issue.

7. Failure to Consider Self-Assessment Tax and TDS While Computing Tax Demand:
The appellant claimed that the AO failed to allow tax credit for TDS and self-assessment tax payments, resulting in increased interest liability under Sections 234B and 234C. The Tribunal did not provide a specific ruling on this issue.

Conclusion:
The Tribunal directed the AO/TPO to recompute the arm's length price of the international transactions after considering the Tribunal's decisions on various aspects. The appeal was partly allowed, and the AO/TPO was instructed to allow the appellant a reasonable opportunity of being heard before determining the arm's length price.