2015 (6) TMI 717 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Celestial Biolabs Ltd., Infosys Technologies Ltd., Tata Elxsi Ltd., Wipro Ltd., Kals Information Systems Ltd., Persistent Systems Ltd., Avani Cimcon Technologies Ltd., Thirdware Solutions Ltd., Lucid Software Ltd., Quintegra Solutions Ltd., E-Zest Solutions Ltd. and Softsol India Ltd. are to be excluded from the list of final comparables as to be functionally dissimilar with that of assessee. See case of 3DPLM Software Solutions Ltd. 2014 (12) TMI 612 - ITAT BANGALORE - Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Selection of Comparable Companies
3. Functional Dissimilarity of Comparable Companies

Detailed Analysis:

1. Transfer Pricing Adjustment:
The appeal concerns the assessment order dated 15/10/2012, which included a transfer pricing adjustment of Rs. 2,40,00,290/-. This adjustment was made by the Transfer Pricing Officer (TPO) and confirmed by the Dispute Resolution Panel (DRP). The adjustment was based on the determination of the arm's length price (ALP) for international transactions between the assessee-company and its Associated Enterprise (AE).

2. Selection of Comparable Companies:
The core issue in the appeal is the selection of comparable companies used to determine the ALP. The assessee adopted the Transactional Net Margin Method (TNMM) and proposed 7 comparable companies, of which 6 were rejected by the TPO. The TPO selected 20 comparables, out of which the assessee challenged 12 on the grounds of functional dissimilarity.

3. Functional Dissimilarity of Comparable Companies:
The Tribunal examined whether the companies selected by the TPO were functionally similar to the assessee, which provides software support and development services. The Tribunal referred to its earlier decision in the case of 3DPLM Software Solutions Ltd. for the assessment year 2008-09, where similar issues were addressed.

i) Celestial Biolabs Ltd.:
The Tribunal found that the TPO did not conduct an independent Functional, Asset, and Risk (FAR) analysis for the assessment year 2008-09. The company was deemed functionally dissimilar as it was engaged in activities different from software development services. The Tribunal directed the exclusion of Celestial Biolabs Ltd. from the list of comparables.

ii) Infosys Technologies Ltd.:
The Tribunal noted that Infosys Technologies Ltd. owns significant intangible assets and generates substantial revenue from software products, making it functionally dissimilar to the assessee. The Tribunal ordered its exclusion from the set of comparables.

iii) Tata Elxsi Ltd.:
Tata Elxsi Ltd. was found to be engaged in product designing services rather than purely software development services. The Tribunal referred to the Mumbai Tribunal's decision in Telecordia Technologies India Pvt. Ltd. and directed the exclusion of Tata Elxsi Ltd. from the comparables.

iv) Wipro Ltd.:
The Tribunal observed that Wipro Ltd. engages in both software and product development services without segmental revenue bifurcation. Additionally, Wipro owns intellectual property, making it incomparable to the assessee. The Tribunal directed its exclusion.

v) KALS Information Systems Ltd.:
The Tribunal found that KALS Information Systems Ltd. was involved in software product development, not purely software services. The Tribunal directed its exclusion based on the assessee's own case for the previous assessment year and other supporting decisions.

vi) Persistent Systems Ltd.:
Persistent Systems Ltd. was engaged in product development and product design services without segmental details. The Tribunal excluded it from the comparables, following the principle that companies without segmental information cannot be considered for comparability analysis.

vii) Avani Cimcon Technologies Ltd.:
The Tribunal noted that the TPO included Avani Cimcon Technologies Ltd. based on information obtained under section 133(6) without sharing it with the assessee. The company was found functionally dissimilar and was directed to be excluded.

viii) Thirdware Solutions Ltd.:
Thirdware Solutions Ltd. was found to be engaged in product development with revenue from licenses and subscriptions. The Tribunal directed its exclusion, following the decision in E-Gain Communications Pvt. Ltd.

ix) Lucid Software Ltd.:
Lucid Software Ltd. was engaged in software product development, not software development services. The Tribunal directed its exclusion, referencing multiple Tribunal decisions.

x) Quintegra Solutions Ltd.:
Quintegra Solutions Ltd. was involved in product engineering services and proprietary software products with significant R&D activities. The Tribunal directed its exclusion due to its ownership of intangible assets and extraordinary events affecting performance.

xi) E-Zest Solutions Ltd.:
E-Zest Solutions Ltd. was engaged in product development and high-end technical services categorized as KPO services. The Tribunal directed its exclusion, following the decision in Capital I-Q Information Systems (India) (P) Ltd.

xii) Softsol India Ltd.:
Softsol India Ltd. was excluded due to having Related Party Transactions (RPT) in excess of 15%, consistent with the assessee's own case for the previous year and the decision in 24/7 Customer.Com Pvt. Ltd.

Conclusion:
The Tribunal directed the exclusion of the 12 challenged companies from the list of comparables and ordered the Assessing Officer to re-compute the ALP in accordance with the law. The assessee's appeal was allowed in its entirety. The judgment was pronounced in open court on 11th June 2015.