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2016 (7) TMI 1481 - AT - Income TaxTPA - comparable selection - functional dissimilarity - Held that - The assessee is engaged in providing software services to Barclays Group worldwide. The assessee company has been set up as an offshore technology centre in India. The software services provided by the assessee include development, maintenance and enhancement of software for new technologies and platforms and up-gradation, modification of existing software applications and systems. The software services rendered by assessee are to support internal software related requirements for the Barclays Group and not for sale to third party, thus companies functional dissimilarity with that of assessee need to be deselected from final list.
Issues Involved:
1. Application of inappropriate filters for screening of companies. 2. Inclusion/exclusion of certain companies in the list of comparables. 3. Determination of Arm's Length Price (ALP) and upward adjustment. 4. Use of contemporaneous and multiple year data. 5. Risk adjustment for differences between functional and risk profiles of comparable companies. Detailed Analysis: 1. Application of Inappropriate Filters for Screening of Companies: The TPO applied several filters to select comparables, including data availability for FY 2008-09, turnover filter, related party transactions (RTP) more than 25%, export sales less than 75% of operating revenue, persistent losses, different accounting year, and functional differences. The Commissioner of Income Tax (Appeals) found some of these filters inappropriate and directed the inclusion of companies like Akshay Software Technologies, Zylog Systems Limited, RS Software Limited, CG VAK Software & Exports Ltd., Mindtree Limited, and Quintegra Solutions Limited, which were initially rejected by the TPO. 2. Inclusion/Exclusion of Certain Companies in the List of Comparables: The TPO included companies like KALS Information Systems, Bodhtree Consulting Limited, and Infosys Technologies Limited in the list of comparables. However, the Commissioner of Income Tax (Appeals) directed the exclusion of Infosys Technologies Limited and Larsen & Toubro Limited due to vast differences in size, scale of business, and nature of activities. The Tribunal upheld the exclusion of Infosys Technologies Limited, KALS Information Systems, and Bodhtree Consulting Limited from the list of comparables, citing functional dissimilarities and abnormal profit margins. 3. Determination of Arm's Length Price (ALP) and Upward Adjustment: The TPO determined the ALP based on the final set of comparables, resulting in an upward adjustment of ?17,46,58,918/-. The Commissioner of Income Tax (Appeals) directed the TPO to rework margins of the comparable companies by following safe harbour rules and granting working capital adjustment. The Tribunal found that excluding Infosys Technologies Limited, KALS Information Systems, and Bodhtree Consulting Limited would bring the assessee's operating margin within the ±5% range allowed under the proviso to section 92C(2) of the Act, negating the need for adjustment. 4. Use of Contemporaneous and Multiple Year Data: The assessee argued for the use of multiple year data and contemporaneous data for determining the ALP. The Tribunal noted that the TPO conducted the analysis based on information available at the time of complying with transfer pricing regulations, rejecting the use of multiple year data. 5. Risk Adjustment for Differences Between Functional and Risk Profiles of Comparable Companies: The assessee contended that the TPO did not make any risk adjustment for differences between the functional and risk profiles of comparable companies and the assessee's captive operations. The Tribunal did not specifically address this issue in detail, as the exclusion of certain comparables resolved the primary dispute. Conclusion: The Tribunal upheld the exclusion of Infosys Technologies Limited, KALS Information Systems, and Bodhtree Consulting Limited from the final set of comparables, resulting in the assessee's operating margin falling within the acceptable range, thus negating the need for any adjustment. The appeal by the Revenue was dismissed, and the Cross Objections filed by the assessee were partly allowed.
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