2015 (8) TMI 980 - AT - Income Tax

Transfer pricing adjustment - selection on comparable - Held that - Respectfully following the decision of Trilogy E-Business Software India P. Ltd. (2013 (1) TMI 672 - ITAT BANGALORE), we hold that the following companies should be excluded from the list of comparable companies, i.e. Flextronics Software Systems Ltd.,iGate Global Solutions Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd. (Seg.), Infosys Technologies Ltd., Tata Elxsi Ltd., KALS Information Systems Ltd.. M/s. Lucid Software Ltd., M/s. Celestial Biolabs Ltd. E-Zest Solution Ltd., Thirdware Solutions Ltd.,M/s. Softsol India Ltd. and M/s. Avani Cincom Technologies Ltd. - This Tribunal in the case of 3DPLM Software Solutions Ltd. v. Deputy CIT 2014 (12) TMI 612 - ITAT BANGALORE held that this company is not functionally comparable with a software development service provider. Also see E-Gain Communications P. Ltd. case 2008 (6) TMI 299 - ITAT PUNE-A Method of computation of deduction under section 10A - Held that - 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 and travelling expenses incurred in foreign currency both from export turnover and total turnover, as has been prayed for in the alternative by the assessee. - Decided in favour of assessee. Non deduction of TDS - According to the assessee the payment in question was reimbursement of expenses incurred by the non-resident on behalf of the assessee and therefore there was no obligation to deduct tax at source as the payment does not constitute income of the non-resident - assessee did not raise any objection on the proposed addition in the draft assessment order before the Dispute Resolution Panel - Held that - A perusal of the above provisions of section 144C of the Act makes it clear that the draft assessment order of the Assessing Officer will attain finality to the extent that the assessee does not object to the proposals in the draft assessment order. The Dispute Resolution Panel is at liberty to consider any issue after due opportunity to the Assessing Officer and the assessee. The directions issued by the Dispute Resolution Panel are binding on the Assessing Officer.We are of the view that in the light of the above statutory provisions, the assessee cannot seek to raise an issue before the Tribunal in respect of which he has not filed any objection before the Dispute Resolution Panel nor has the Dispute Resolution Panel considered the issue in exercise of their powers under section 144C(8) of the Act. - Decided against assessee.

Summary

Issues Involved:
1. Adjustment to Arm's Length Price (ALP)
2. Exclusion of Comparable Companies
3. Method of Computation of Deduction under Section 10A
4. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS

Detailed Analysis:

1. Adjustment to Arm's Length Price (ALP):

The assessee rendered software development services to its associated enterprise (AE) and claimed that the transaction price was at arm's length, supported by a report under section 92E using the Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) selected 20 comparable companies and determined an adjusted arithmetic mean PLI of 19.06%, resulting in an ALP adjustment of Rs. 1,56,54,745. The Dispute Resolution Panel (DRP) confirmed the adjustment, leading the assessee to appeal.

2. Exclusion of Comparable Companies:

The Tribunal considered the exclusion of certain comparable companies based on turnover and functional dissimilarity:
- Turnover Filter: Companies with a turnover exceeding Rs. 200 crores were excluded, following the Tribunal's decision in the case of Trilogy E-Business Software India Pvt. Ltd. and others. The excluded companies were Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., Infosys Technologies Ltd., and Tata Elxsi Ltd.
- Functional Dissimilarity: KALS Information Systems Ltd. and Lucid Software Ltd. were excluded due to their involvement in software products and training rather than pure software development services. Avani Cincom Technologies Ltd., Celestial Biolabs Ltd., E-Zest Solutions Ltd., Thirdware Solutions Ltd., and Softsol India Ltd. were also excluded based on similar grounds, including functional differences and related party transactions.

3. Method of Computation of Deduction under Section 10A:

The assessee claimed a deduction under section 10A, but the Assessing Officer excluded telecommunication and foreign travel expenses from the export turnover. The Tribunal directed the Assessing Officer to exclude these expenses from both export turnover and total turnover, in line with the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd.

4. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS:

The assessee challenged the disallowance of Rs. 23,47,709 paid to a non-resident without TDS, claiming it was a reimbursement. The Tribunal dismissed this ground as the assessee did not raise objections before the DRP, and the issue was not considered by the DRP under section 144C(8).

Conclusion:

The Tribunal directed the TPO to recompute the ALP by excluding the specified comparable companies and accepted the alternative prayer regarding the computation of deduction under section 10A. The appeal was partly allowed, with specific directions to the Assessing Officer and TPO.