2015 (7) TMI 46 - AT - Income Tax

Transfer pricing adjustment - selection of comparable challenged - Held that - Respectivly folllowing the judgment of Trilogy E-Business Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax. Circle 12(4). Bangalore 2013 (1) TMI 672 - ITAT BANGALORE Flextronics Software Systems Ltd.,iGate Global Solutions Ltd.,Mindtree Ltd., Persistent Systems Ltd.,Sasken Communication Technologies Ltd.,Tata Elxsi Ltd.,Wipro Ltd. and Infosys Technologies Ltd. should be excluded from the list of comparable companies as held to be software product companies and therefore not comparable with software development service provider such as the Assessee. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. The AO/TPO is directed to compute the arithmetic mean of the profit margins of the remaining comparable companies after excluding the companies from the final list of 26 comparable companies chosen by the TPO and compare the same with the profit margin of the Assessee in accordance with the provisions of Sec.92C of the Act. Computing deduction u/s.10A - Held that - As taking into consideration the decision rendered by the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT we are of the view that it would be just and appropriate to direct the Assessing Officer to exclude telecommunication charges, internet charges etc., both from export turnover and total turnover, as has been prayed for by the assessee

Summary

Issues Involved:

1. Addition to total income due to adjustment in the arm's length price (ALP) of international transactions.
2. Exclusion of certain comparable companies chosen by the Transfer Pricing Officer (TPO).
3. Computation of deduction under Section 10A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition to Total Income Due to Adjustment in ALP:

The Assessee contested the addition of Rs. 3,42,71,224/- to its total income, which was made by the Assessing Officer (AO) based on the adjustments in the ALP of international transactions with its Associated Enterprise (AE) under Section 92 of the Income Tax Act, 1961. The Assessee argued for the exclusion of certain comparable companies chosen by the TPO, specifically Helios and Matheson Information Technology Ltd. and KALS Infosystems Ltd., on the grounds that these companies did not meet the legally acceptable criteria for comparability. The Tribunal referenced the decision of the Special Bench Chandigarh in the case of Quark Systems Pvt. Ltd. 38 SOT 307 (SB) (Chdg.), which supports the taxpayer's right to reject a company as comparable even if the plea is raised for the first time before the Tribunal. Consequently, the Tribunal admitted the additional ground of appeal for adjudication.

2. Exclusion of Certain Comparable Companies Chosen by the TPO:

The Tribunal examined the comparability of the companies listed by the TPO and provided detailed reasons for excluding several companies from the final list of comparables:

- Accel Transmatic Limited (seg.), Avani Cincom Technologies Ltd., Celestial Labs Limited, and KALS Infosystems Ltd.: These companies were excluded based on previous Tribunal decisions that found them not comparable to software development service providers due to functional differences.

- Ishir Infotech Ltd. and Lucid Software Ltd.: Excluded as they were found to be functionally different from the Assessee, which provided software development services.

- Megasoft Limited: The Tribunal directed the AO/TPO to compute the correct margin of Megasoft Ltd. based on segmental data, following previous Tribunal decisions.

- Infosys Technologies Limited, Tata Elxsi Ltd. (Seg.), and Wipro Limited: These companies were excluded as they were found to be functionally different from the Assessee, owning significant intangibles and having substantial revenues from software products.

- E-Zest Solutions Ltd., Persistent Systems Ltd., Quintegra Solutions Limited, and Thirdware Solutions Ltd.: Excluded due to functional differences and the lack of segmental data.

- Helios & Matheson Information Technology Ltd.: Excluded as it was found to be functionally incomparable, being engaged in the development and sale of software products.

The Tribunal also applied a turnover filter, excluding companies with turnovers exceeding Rs. 200 crores, such as Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., Tata Elxsi Ltd., Wipro Ltd., and Infosys Technologies Ltd., based on previous Tribunal decisions.

3. Computation of Deduction Under Section 10A:

The Assessee raised issues regarding the exclusion of telecommunication charges, insurance expenses, and other expenses from export turnover while computing the deduction under Section 10A of the Income Tax Act. The Tribunal, following the decision of the Hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn), directed the AO to exclude these expenses from both the export turnover and total turnover.

Conclusion:

The Tribunal partly allowed the appeal, directing the AO/TPO to exclude certain companies from the list of comparables and to recompute the arithmetic mean of the profit margins. Additionally, the AO was directed to exclude specified expenses from both export turnover and total turnover while computing the deduction under Section 10A.