2016 (12) TMI 1745 - AT - Income Tax

TPA - Comparable selection criteria - functinal dissimilarity - Held that - Appellant is purely engaged in the business of providing software development services to its parent company. Therefore the companies functionally dissimilar shall be excluded from the list of comparables to determine the arm s length price in the appellant s case. TPO shall re-work the PLI after incorporating our findings with respect to comparables.

Summary

Issues Involved:
1. Re-computation of Arm's Length Price (ALP)
2. Natural Justice
3. Procedural Grounds
4. Charge of Income Tax
5. Comparables and Rejection of Transfer Pricing (TP) Analysis
6. TP Analysis by the Transfer Pricing Officer (TPO)

Detailed Analysis:

1. Re-computation of Arm's Length Price (ALP):
The primary issue revolves around the TPO's adjustment of ?2,04,50,189/- to the ALP declared by the assessee. The assessee contested this adjustment, claiming that the TPO erred in the re-computation. The Dispute Resolution Panel (DRP) upheld the TPO's additions, leading to the assessee's appeal.

2. Natural Justice:
The assessee argued that the lower authorities failed to consider all submissions and did not properly appreciate the facts and applicable law. They also claimed that the assessment order was passed without affording a proper opportunity of being heard, thus violating principles of natural justice. Additionally, the assessee contended that the assessment order was barred by limitation.

3. Procedural Grounds:
The assessee challenged the procedural correctness of the reference made to the TPO, arguing that the Assessing Officer (AO) did not record any reasons to justify the necessity of such a reference under Section 92CA(1). The DRP upheld the reference made by the AO. The assessee also argued that the authorities did not demonstrate any motive of tax evasion on their part.

4. Charge of Income Tax:
The assessee contended that the lower authorities failed to appreciate that the definition of 'income' under the Income Tax Act does not include amounts computed under Chapter X. They argued that there is no provision in Chapter X that overrides the computation provisions of business income or the normal understanding of 'income.'

5. Comparables and Rejection of TP Analysis:
The assessee argued that the TPO unjustifiably rejected the comparables selected by them and their TP analysis. The TPO's rejection of the TP documentation maintained by the assessee as per the rules was also contested. The assessee claimed that the filters applied by the TPO were arbitrary and that the TPO erred in adopting additional filters such as the export sales filter of 75% and a minimum employee cost of 25% over sales.

6. TP Analysis by the TPO:
The assessee contended that the TPO conducted a fresh TP analysis without identifying any defects in their original analysis. They argued that the TPO's use of financial year data not available in the public domain at the time of filing the return violated the principle of 'contemporaneous documentation' and resulted in 'impossibility of performance.' The assessee also claimed that the TPO disregarded their functional and risk profile by comparing them with companies having entirely different profiles.

Comparables Analysis:
- The assessee's comparables included companies like Akshay Software Technologies Ltd, Bodhtree Consulting Limited, and others, with an average margin of 13.45%.
- The TPO's comparables included companies like Kals Information Systems Ltd, Bodhtree Consulting Ltd, and others, with an average margin of 24.32%.
- The assessee sought to exclude certain high turnover companies like Tata Elxi Ltd, Sasken Communication Technologies Limited, and Persistent Systems Ltd, based on decisions in similar cases (e.g., Mcafee Software (India) Pvt. Ltd. v. DIT).

Tribunal's Findings:
- The Tribunal excluded companies like Tata Elxi Ltd, Sasken Communication Technologies Limited, Persistent Systems Ltd, Zylog Systems Ltd, Mindtree Ltd, Larsen & Toubro Infotech, and Infosys Limited, citing previous decisions where these companies were not considered comparables for software development services.
- Bodhtree Consulting Ltd was also excluded, following the Tribunal's decision in Logica (P.) Ltd. v. Dy. CIT and Cisco Systems (India) (P.) Ltd. v. Dy. CIT, which held that Bodhtree Consulting Ltd is primarily a software product company.
- The Tribunal retained R.S. Software (India) Ltd and Akshay Software Technologies Ltd as comparables, as they passed all filters applied by the TPO and were engaged in software development services.
- Kals Information Systems Ltd was initially contested by the assessee but was ultimately agreed to be included as a comparable.

Conclusion:
The Tribunal allowed the assessee's appeal for statistical purposes, directing the TPO to re-work the Profit Level Indicator (PLI) after incorporating the Tribunal's findings on comparables. The appeal highlighted significant issues related to TP adjustments, procedural fairness, and the selection of appropriate comparables in determining the ALP.