2015 (2) TMI 981 - AT - Income Tax

Transfer pricing adjustment - international transactions in the Back office support services segment - selection of comparables - Held that - Accel Transmatic Ltd. (Seg.) - it can be seen from the Annual report of this company has three divisions, namely, Systems and Services Division, Technologies Division and Animation Division. A bare perusal of the nature of activities done by this company under this segment divulges that it is into software development services and also the sale of software products. On the other hand, the assessee in question is involved into rendering software non-development services, which are far away different from software development services. We, therefore, order for the exclusion of this company from the list of comparables. Avani Cimcon Technologies Ltd. - from the Annual report of this company, a copy of which is available in the paper book, it can be seen that this company is engaged in providing software development services. In view of the fact that the assessee is not providing any software development services, this company cannot be considered as comparable. We, therefore, order to eliminate this company from the list of comparables. Celestial Labs Ltd. - it is manifest from the Annual report of this company that the same cannot be considered as comparable on entity level when it has dealt not only with software products, but has also engaged itself into software development and also rendering services. In comparison with that, the assessee company is simply providing software nondevelopment services to its AEs. Flextronics Software Systems Ltd. (Seg.) - it is a software products company and is also providing software development services, even the segmental results of software development services cannot be equated with the activities undertaken by the assessee for its AEs. We, therefore, order to exclude this company from the list of comparables. Helios & Matheson Information Technology Ltd. - as find from the Annual accounts of this company it is engaged into similar business activity as is done by the assessee. After going through some pages of the Annual report, giving details about the nature of business activity done by this company, the ld. AR also candidly accepted that functional profile of this company is comparable with the assessee company. We, therefore, uphold the impugned order on the inclusion of this company in the list of comparables. Infosys Technologies Ltd. - It is an undisputed fact that the assessee rendered services to its AEs as a captive unit without retaining any rights in intellectual property in the work done by it. In contrast to that, Infosys Ltd. is a giant company in terms of risk profile, scale, nature of services, revenue ownership of branded/proprietary products, on site and offshore services, etc. As decided in CIT vs. Agnity India Technologies Pvt. Ltd. 2013 (7) TMI 696 - DELHI HIGH COURT this company cannot be considered a comparable. Infosys Technologies Ltd., has been held to be not comparable with a company engaged in the business of development of software for its parent company - we direct not to consider this company as a comparable. KALS Information Systems Ltd. (Seg.) - The company consisting of STPI unit engaged software products and in development of software is also undertaking training activity of software professionals on online projects. Not only the revenues of the segment considered by the TPO also include the revenue from software products, but also from training imparted on commercial basis. When we consider the assessee s functional profile, the only irresistible conclusion which can be drawn is that it is not a comparable company. Accordingly, this company is ordered to be expunged from the set of comparables. Lucid Software Ltd. - Considering the assessee s balance sheet, it turns out that the assessee has also shown a particular amount under the head Software in its Schedule of fixed assets, and, thereafter, it also claimed deduction on account of amortization during the year, leaving the balance unamortized amount under the head Software. It shows that the assessee is also using its software for rendering the services in the similar manner as is done by Lucid Software Ltd. Apart from that, the ld. AR could not point out any functional difference with Lucid Software Ltd. We, therefore, approve the inclusion of this company in the list of comparables. Megasoft Ltd. (Seg.) - It is patent that the mergers/demergers largely influence the profitability of a company during the year of happening of such event, which makes it incomparable. As there have been acquisitions by Megasoft Ltd., during the year in question and the financial results of the erstwhile company stand included in the overall profitability of this company, respectfully following the precedents, we hold that this company cannot be considered as a comparable. Persistent Systems - The acquisition took place in this company during the relevant to the assessment year under consideration. Following the reasons given above while discussing the case of Megasoft Ltd., we order for the exclusion of this company from the list of comparables. Sasken Communication Technologies Ltd.- we find that the financial results of this company stand distorted due to certain acquisitions made by it during the relevant year. It also transpires from this Annual report that the companies getting merged with the assessee company also provided software services focused on telecom operating systems. Thus, it is abundantly patent that the segmental results taken by the TPO of this company have been influenced by the mergers and acquisitions taken place during the year, thereby making such financial results as incomparable. Following the reason given above, we order for the exclusion of this company from the list of comparables. Tata Elxsi Ltd. (Seg.) - Since the assessee is engaged in providing software non-development services to its AEs, this segment of Tata Elxsi Ltd., being that of software development services cannot be considered as comparable. It is, therefore, directed to be eliminated from the list of comparables. Wipro Ltd. (Seg.) - As the TPO has himself noticed that this company is engaged in providing software development services as against the assessee s provision of software non-development services, we hold that this company cannot be considered as comparable. Non approving the use of multiple year data of comparables - Held that - Nothing has been placed on record by the ld. AR to demonstrate that the case falls under proviso to rule 10B(4), which provides that the data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. In view of a plethora of decisions including the Special Bench decision in the case of Aztech Software Technologies Ltd. (2007 (7) TMI 50 - ITAT BANGALORE), we approve the view taken by the authorities below in considering only the current year s data. - Decided against assessee. Seeking information u/s 133(6) by the TPO from the companies considered as comparable - Held that - No embargo on the powers of the TPO in seeking the relevant information from the companies. Unless germane information is obtained, we fail to see as to how the TPO can be sure about the comparability or otherwise of a particular company with the assessee. However, the rider is that such information obtained from the companies must be confronted to the assessee before using against it. As the needful has been done by the TPO, we see no reason to disturb the view taken by the TPO in collecting information u/s 133(6) of the Act.- Decided against assessee.

Summary

Issues Involved:
1. Selection of comparables for determining the Arm's Length Price (ALP) in the Back Office Support Services segment.
2. Use of multiple year data of comparables.
3. Seeking information under section 133(6) of the Income-tax Act by the Transfer Pricing Officer (TPO).
4. Risk adjustment.

Detailed Analysis:

1. Selection of Comparables for Determining the ALP in the Back Office Support Services Segment

The primary issue in the appeal concerns the selection of comparables for the international transactions in the Back Office Support Services segment. The assessee, a joint venture between MH, USA, and the Tata Group of India, reported certain international transactions and adopted the Transactional Net Margin Method (TNMM) as the most appropriate method. The TPO was not satisfied with the comparables selected by the assessee and shortlisted 26 companies with an average OP/TC at 25.96%. The TPO then made a transfer pricing adjustment amounting to Rs. 59,14,548/-. The assessee contested the selection of certain companies as comparable, arguing that the nature of services rendered by it did not fall in the realm of 'software development services' but were 'software non-development services.'

The Tribunal examined each disputed comparable:

- Accel Transmatic Ltd. (Seg.): Excluded as it was involved in software development services and sale of software products, which differed from the assessee's software non-development services.

- Avani Cimcon Technologies Ltd.: Excluded as it was engaged in software development services, unlike the assessee.

- Celestial Labs Ltd.: Excluded due to its involvement in software development and software products, which were not comparable to the assessee's services.

- Flextronics Software Systems Ltd. (Seg.): Excluded as it provided software development services and products, differing from the assessee's services.

- Helios & Matheson Information Technology Ltd.: Included as it was engaged in similar business activities as the assessee.

- Infosys Technologies Ltd.: Excluded due to its high turnover, risk profile, and ownership of branded/proprietary products, making it incomparable with the assessee.

- KALS Information Systems Ltd. (Seg.): Excluded as it was involved in software products and training, which were not comparable to the assessee's services.

- Lucid Software Ltd.: Included as it developed software products for internal use, similar to the assessee.

- Megasoft Ltd. (Seg.): Excluded due to mergers and acquisitions during the year, which influenced its financial results.

- Persistent Systems: Excluded due to acquisitions during the relevant year.

- Sasken Communication Technologies Ltd.: Excluded due to acquisitions and mergers during the year, affecting its financial results.

- Tata Elxsi Ltd. (Seg.): Excluded as it was involved in software development services, unlike the assessee.

- Wipro Ltd. (Seg.): Excluded as it provided software development services, differing from the assessee's services.

The Tribunal remitted the matter to the AO/TPO for determining the ALP afresh in accordance with these observations.

2. Use of Multiple Year Data of Comparables

The assessee argued for the use of multiple year data of comparables, which the TPO modified to only the current year's data. The Tribunal upheld the view taken by the authorities, citing Rule 10B(4) and decisions including the Special Bench decision in Aztech Software Technologies Ltd., approving the use of only the current year's data.

3. Seeking Information under Section 133(6) of the Income-tax Act by the TPO

The assessee contested the TPO's seeking of information under section 133(6) from the companies considered as comparable. The Tribunal found no restriction on the TPO's powers to seek relevant information but emphasized that such information must be confronted to the assessee before being used. As the TPO had done so, the Tribunal saw no reason to disturb the TPO's view.

4. Risk Adjustment

No specific argument was advanced regarding the risk adjustment, and the Tribunal upheld the impugned order on this issue.

Conclusion

The appeal was partly allowed for statistical purposes, remitting the matter to the AO/TPO for fresh determination of the ALP in accordance with the Tribunal's observations. The order was pronounced in the open court on 20.02.2015.