2015 (5) TMI 303 - AT - Income Tax

Transfer pricing adjustment - segment relating to the Provision of software services - wrong selection of comparable - Held that - The point made out by the assessee for exclusion of KALS Information Systems Ltd. (Application Software Segment) is on a sound footing inasmuch as the said concern is functionally distinct from the activities of Provision of software services rendered by the assessee. Transworld Infotech Ltd. (earlier known as Sterling International Enterprises Ltd.) the data to be used in analyzing the comparability of an uncontrolled transaction with the international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Ostensibly in the present situation the financial data adopted of Transworld Infotech Ltd. does not relate to the financial year in which the international transactions in question have been carried out by the assessee. We therefore are in agreement with the submissions of the assessee that the said concern is excludible from the final set of comparables CSA (India) Ltd. (ESS Segment) functionally different as pointed out by the assessee vis- -vis the R s length price with regard to the international transactions of Provision of back office support services - Held that - the present case that the activities undertaken by Infosys BPO Ltd. cannot be qualitatively compared with the activities being carried out by the assessee in its back office support services segment. Undoubtedly Infosys BPO Ltd. owns significant intangibles and eminent brand value whereas in the case of the assessee before us there is no such situation. The turnover achieved by Infosys BPO Ltd. is many times higher in comparison to the assessee; the said concern is a giant in comparison to the assessee. In our view the presence of the aforesaid factors justify assessee s assertion that the said concern be excluded from the list of comparables. Cosmic Global Ltd. is liable to the excluded from the final set of comparables having regard to the difference in the business model brought out by the assessee. M/s Omega Healthcare Management Services Pvt. Ltd. in the absence of any adverse finding that the activities of the said concern are not comparable to assessee s activity of rendering back office support services to its associated enterprises we deem it fit and proper to direct the lower authorities to include the said concern in the final set of comparables as was contended by the assessee in the course of the Transfer Pricing proceedings. M/s In House Productions Ltd. (Healthcare Division) he only reason advanced by the TPO to reject the said concern was his perception that the financial data of the said concern was not reliable. The perception of the TPO is based on the fact that a fire destroyed major portion of the account books of the concern. The point made out by the assessee is that the audited financial statements have not been adversely commented by the statutory auditors of the said concern with regard to the reliability of the data. The said stand of the assessee cannot be brushed aside lightly. On the other hand the TPO has not advanced any credible basis which could demonstrate unreliability of the financial data. In our considered opinion it would meet the ends of justice if the TPO is called upon to re-visit the controversy with regard to its inclusion. Galaxy Commercial Ltd. (BPO Segment) in the immediately preceding assessment year the said concern had a positive margin. Nevertheless in order to examine as to whether it is a consistent loss-making or not a trend over more than one year is required to be evaluated. For the said purpose we deem it fit and proper to restore the matter back to the file of the TPO who shall examine the financial results of the said concern for two years prior and subsequent to the assessment year under consideration so as to formulate a belief as to whether or not it is a consistently loss-making concern - Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for IT and ITES Services
2. Selection and Rejection of Comparables
3. Use of Single Year vs. Multiple Year Data
4. Risk and Asset Adjustments
5. Rectification of Transfer Pricing Order
6. Tax Computation Errors

Detailed Analysis:

1. Transfer Pricing Adjustment for IT and ITES Services:
The primary dispute in the appeal revolves around a transfer pricing adjustment of Rs. 9,39,51,619 made by the Assessing Officer (AO) regarding the arm's length price of international transactions entered by the assessee with its associated enterprises (AEs). The transactions in question pertain to the provision of software services and back-office support services. The Transfer Pricing Officer (TPO) had determined the arm's length price to be higher than the stated values, leading to the adjustment.

2. Selection and Rejection of Comparables:
The core issue under this head is the inclusion and exclusion of certain companies in the final set of comparables used for benchmarking the transactions. The TPO had rejected some comparables selected by the assessee and introduced new ones, leading to a higher Profit Level Indicator (PLI) for comparables.

- Exclusion of KALS Information Systems Ltd.: The Tribunal found that KALS Information Systems Ltd. was not functionally comparable as it was engaged in both software development services and product development, whereas the assessee was only providing software development services.

- Exclusion of Transworld Infotech Ltd.: This entity was excluded because its financial data did not correspond to the financial year of the assessee, violating Rule 10B(4) of the Income Tax Rules, 1962.

- Exclusion of ICSA (India) Ltd.: The Tribunal noted that this company had significant Research and Development (R&D) expenses and was involved in providing embedded software solutions, making it functionally dissimilar to the assessee.

- Exclusion of Compucom Software Ltd.: The Tribunal found that this company was engaged in diversified activities, including software product development and IT infrastructure services, which were not comparable to the assessee's activities.

- Adjustment for Mindtree Consulting Ltd.: The Tribunal directed the TPO to consider only the IT services segment of Mindtree Consulting Ltd. for comparability, not the entire entity.

3. Use of Single Year vs. Multiple Year Data:
The TPO used single-year data for the comparables, while the assessee had used multiple-year data. The Tribunal did not explicitly address this issue separately, implying that the primary focus was on the functional comparability of the selected companies.

4. Risk and Asset Adjustments:
The assessee argued for adjustments due to differences in the level of risk borne and assets employed compared to the comparables. However, the Tribunal's decision primarily focused on the functional comparability of the selected companies rather than explicitly addressing these adjustments.

5. Rectification of Transfer Pricing Order:
The assessee contended that the AO did not follow the Dispute Resolution Panel (DRP) directions for rectifying certain mistakes in the transfer pricing order. The Tribunal did not provide a detailed discussion on this issue, indicating that the primary focus was on the selection of comparables.

6. Tax Computation Errors:
The assessee argued that the AO erred in computing the tax liability by not considering the advance tax and tax deducted at source (TDS) amounts. The Tribunal directed the AO to consider the plea of the assessee on merits and pass an appropriate order as per law.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to re-compute the arm's length price of international transactions by excluding certain comparables and considering only the relevant segments of others. The Tribunal also restored some issues back to the TPO for fresh consideration, particularly regarding the inclusion of certain comparables. The Tribunal dismissed some grounds as "Not Pressed" and directed the AO to address the tax computation errors.