2015 (4) TMI 916 - AT - Income Tax

Transfer Pricing adjustment in relation to International Transactions - Inclusion of certain companies by TPO in the list of comparables for ALP - Denial of deduction u/s 10A of the Income Tax Act, 1961 - Held that - The Mumbai Bench of the Tribunal in Petro-Aroldite (P) Ltd. 2015 (3) TMI 1010 - ITAT MUMBAI has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers etc. Similar view has been taken by the Delhi Benches of the Tribunal in several cases including Toluna India Pvt. Ltd. 2014 (10) TMI 424 - ITAT DELHI . 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 Aftek Infosys Ltd. in the year in question and the financial results of the erstwhile company stand included in the overall profitability of this company, we hold that the same cannot be considered as a comparable. We find that the predominant view of the Tribunal across the country in several cases is that the transactions of a company having more than 25% of Related Party Transactions (RPTs) are considered as controlled, thereby failing the test of comparability. This view has been taken in several decisions including by the Delhi Bench in Toluna India Pvt. Ltd. 2014 (10) TMI 424 - ITAT DELHI and Actis Advisers Pvt. Ltd. 2012 (10) TMI 779 - ITAT, DELHI and Mumbai Bench in Stream International Services Pvt. Ltd. 2014 (10) TMI 393 - ITAT MUMBAI . The mechanism for calculating the percentage of Related Party Transactions has been broadly laid down in Nokia India Private Ltd. 2014 (11) TMI 101 - ITAT DELHI . Since the authorities below have not examined the extent of the RPT percentage of this company, which the learned AR is claiming to be in excess of 25%, we set aside the impugned order and remit the matter to the file of AO/TPO for fresh determination of the percentage of Related Party Transactions of this company in consonance with the broader principles laid down in the case of Nokia India Private Ltd (supra), to the extent these are applicable. If the Related Party Transactions of this company are found to be more than 25%, then this company should be excluded from the set of comparables and in the otherwise situation, it should continue in the list of comparables. We find from its Annual report, which is available in the paper book, that the business acquisitions of three firms in USA were undertaken by this company giving a substantial boost to its operations. When we come to the Schedule of fixed assets of this company, which is available on page 523 of the paper book, it can be seen that there is an entry with the narration Business acquisitions , during the year with the value of ₹ 8,47,18,999/-. These facts abundantly show that this company undertook acquisitions in the relevant year making it incomparable in the light of the reasoning given above while dealing with Aftek Infosys Ltd. We, therefore, order to delete this company from the list of comparables. Section 10A dis-allowance - The only objection taken by the Assessing Officer for refusing deduction under Section 10A is that the registration was granted by the STPI Society and not the Inter-ministerial Standing Committee. We find that this issue is no more res integra in view of the judgment dated 26.2.2013 of the Hon ble Delhi High Court in Technovate E Solution Pvt. Ltd. 2013 (3) TMI 372 - DELHI HIGH COURT , a copy of which has been placed on record by the ld. AR. In this judgment, it has been held that the approvals given by the Directors of Software Technology Parks of India are valid having the authority of the Inter-ministerial Standing Committee. This position was fairly accepted by the ld. DR also. In view of the binding precedent of the Hon ble jurisdictional High Court, the facts of which are on all fours with those of the assessee company, we are of the considered opinion that no exception can be taken to the view canvassed by the learned CIT(A) on this score. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Inclusion of certain companies in the list of comparables.
2. Exclusion of Genesys International Corporation Ltd. from the list of comparables.
3. Disallowance of deduction claimed under Section 10A of the Income Tax Act.

Detailed Analysis:

1. Inclusion of Certain Companies in the List of Comparables:

The primary issue in the assessee's appeal is the inclusion of certain companies in the list of comparables by the Transfer Pricing Officer (TPO). The assessee, a wholly owned subsidiary of a US-based company, provided software development and marketing support services to its associated enterprises (AEs). The TPO, dissatisfied with the assessee's selection of comparables and use of multiple-year data, shortlisted 16 companies as comparables, leading to a transfer pricing adjustment. The CIT(A) largely upheld the TPO's stance but excluded Genesys International Corporation Ltd. The assessee contested the inclusion of four companies:

(i) Aftek Infosys Ltd.:
The TPO included Aftek Infosys Ltd. with a profit rate of 86.45%. The assessee argued that this company, engaged in software products with its own Intellectual Property Rights (IPR) and involved in acquisitions, was not comparable. The Tribunal agreed, noting that Aftek Infosys Ltd. was involved in software products and acquisitions, making it incomparable. The Tribunal ordered its exclusion from the list of comparables.

(ii) Blue Star Infotech Ltd.:
The TPO included Blue Star Infotech Ltd. with a profit ratio of 37.27%. The assessee did not dispute the functional similarity but argued that the company's Related Party Transactions (RPTs) were substantial. The Tribunal remitted the matter to the AO/TPO to determine the percentage of RPTs. If RPTs exceeded 25%, the company should be excluded; otherwise, it should remain in the list.

(iii) Sark Systems India Ltd.:
The TPO included Sark Systems India Ltd. with a profit rate of 23.51%. The assessee contended that this company, involved in software products with IPR, was not comparable. The Tribunal agreed and directed its exclusion from the list of comparables.

(iv) Zylog Systems Ltd.:
The TPO included Zylog Systems Ltd. with a profit margin of 24.93%. The assessee argued for its exclusion due to fresh acquisitions during the relevant financial year. The Tribunal found that acquisitions made Zylog Systems Ltd. incomparable and ordered its exclusion from the list of comparables.

2. Exclusion of Genesys International Corporation Ltd.:

The Revenue appealed against the exclusion of Genesys International Corporation Ltd. by the CIT(A). The Tribunal noted the lack of specific discussion on this company in the TPO's order and remitted the matter to the AO/TPO to consider the percentage of RPTs. If RPTs exceeded 25%, the company should be excluded; otherwise, it should be included.

3. Disallowance of Deduction Claimed Under Section 10A of the Income Tax Act:

The Revenue contested the deletion of an addition made by the AO by disallowing the deduction under Section 10A. The AO argued that the registration was granted by the Software Technology Park of India (STPI) and not the Inter-ministerial Standing Committee (IMSC), making the assessee ineligible for the deduction. The CIT(A) relied on a Tribunal order favoring the assessee. The Tribunal upheld the CIT(A)'s decision, referencing a Delhi High Court judgment validating approvals by STPI Directors as having the authority of the IMSC, thus allowing the deduction under Section 10A.

Conclusion:

Both cross-appeals by the assessee and the Revenue were partly allowed for statistical purposes. The Tribunal ordered the exclusion of Aftek Infosys Ltd., Sark Systems India Ltd., and Zylog Systems Ltd. from the list of comparables, remitted the matter of Blue Star Infotech Ltd. and Genesys International Corporation Ltd. to the AO/TPO for further examination, and upheld the CIT(A)'s decision on the Section 10A deduction.