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2015 (3) TMI 604 - AT - Income TaxTransfer pricing adjustment - selection of comparable - Held that - Exensys Software Solutions Ltd.- there is an extra-ordinary event which resulted in high operating margin of that company and we, therefore, direct the AO to exclude this company from the list of comparables. In the above referred case of Intoto Sof tware India Pvt. Ltd., complete details were not placed on record, therefore, the matter was sent to AO for verif ication whereas in this case assessee has objected even before the AO/ CIT(A), therefore, there is no need to set aside the issue to the f ile of the AO for examination as was done in the case of Intoto Software (2013 (10) TMI 599 - ITAT HYDERABAD). We are, therefore, of the opinion that on the basis of facts placed on record, the case of Exensys Sof tware Solutions Ltd. cannot be taken as comparable. Similarly, the other cases, Bodhtree consulting Ltd, Four Soft Ltd, Infosys, Sankhya Infotech Ltd., Thirdware Solutions Ltd, Tata Elexi (seg) etc, are also to be excluded as they are considered and analysed in various cases relied on about functional ity and why the same are not comparable to the companies like assessee. Bodhtree consulting Ltd also fails RPT filter as contended. In view of this, we are not discussing above comparables in detail, but, suffice to say that assessee s submissions are valid. The AO is directed to exclude the above comparables and re-work out the arm s length margin accordingly. - Decided in favour of assessee.
Issues Involved:
1. Determination of Arm's Length Price (ALP) 2. Selection of comparables for transfer pricing Detailed Analysis: 1. Determination of Arm's Length Price (ALP): In the assessment year 2005-2006, the assessee, a company engaged in software development services, filed a return showing an income of Rs. 6,62,74,720. The assessee had transactions with its Associated Enterprises (AEs) amounting to Rs. 26,18,37,705. The Assessing Officer (A.O.) referred the case to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Income Tax Act to determine the ALP. The TPO, using the Transaction Net Margin Method (TNMM), determined the ALP of these transactions to be Rs. 31,36,49,588, suggesting an addition of Rs. 5,18,11,883 to the declared price. Consequently, the A.O. completed the assessment, determining the total income at Rs. 11,80,86,603. 2. Selection of Comparables for Transfer Pricing: The assessee contested the transfer pricing adjustment before the Commissioner of Income Tax (Appeals) [CIT(A)], who largely rejected the grounds but excluded one company, "Satyam Technologies," from the comparables. The final list of 16 comparables selected by the TPO, after CIT(A)'s adjustment, included companies like iGate Global Solutions Ltd., Flextronics (Seg.), Geometric Software Solutions Co. Ltd., and Infosys Technologies Ltd., among others. The arithmetic mean of the Profit Level Indicator (PLI) for these comparables was calculated at 28.86%. The assessee did not object to the first nine comparables but disputed the remaining seven. The assessee relied on previous decisions of the Hyderabad Tribunal in similar cases, which had excluded these seven companies due to functional dissimilarities and other factors. Analysis of the Seven Disputed Comparables: 1. Bodhtree Consulting Ltd.: - Rejected due to related party transactions constituting 34.68% of total turnover and functional differences as the company provides e-paper solutions and data cleansing software, which fall under IT-enabled services. 2. Exensys Software Solutions Ltd.: - Excluded due to functional differences, significant intangibles, and an exceptional year of operations due to amalgamation with Holool India Ltd., which materially impacted financial results. 3. Sankhya Infotech Ltd.: - Rejected for being functionally different, as it is primarily into software products, with services being supplementary. 4. Four Soft Ltd.: - Excluded for functional differences, as it derives income from software licenses and annual maintenance contracts (AMCs), indicating it is into software products. 5. Thirdware Solutions Ltd.: - Rejected due to functional differences, as it is engaged in implementation and customer services for ERP software and distribution of products. 6. Tata Elxsi Ltd.: - Excluded as it is a specialized embedded software development company, operating in complex segments not comparable to a software services provider. 7. Infosys Technologies Ltd.: - Rejected due to its diversified activities, significant brand value, and economies of scale, making it incomparable to a small captive service provider. Conclusion: The Tribunal, after considering the arguments and previous decisions, directed the A.O. to exclude the seven disputed comparables and re-calculate the ALP accordingly. The appeal of the assessee was partly allowed, providing relief by excluding the non-comparable companies from the transfer pricing analysis. The Tribunal emphasized consistency with previous rulings and the importance of functional similarity in selecting comparables. Order Pronouncement: The order was pronounced in the open court on 10.12.2014, with the appeal being partly allowed.
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