2017 (12) TMI 1683 - AT - Income Tax

TP adjustment - comparable selection for software development services - functinal similarity - need of segmental information - HELD THAT - Infinite data systems private limited to be excluded on functional dissimilarity E info chips Bangalore Ltd company is primarily engaged in software development and IT enabled services which is considered as the only one reportable segments and therefore there is no segmental information available with respect to the software development activities as well as IT enabled services. In view of this the above comparable is required to be excluded from the comparability analysis of the software development service segment of the assessee. Infosys limited has huge brand value, huge turnover, and its Finacle Software is a leading product in banking industry. Therefore, making it functionally different and has significant R&D. Sonata software limited breaches RPT filter adopted by the Ld. transfer pricing officer - reexamine the claim of the assessee of Sonata Software limited not passing the filter of related party transactions Comparable for market support services - TSR Darashaw Ltd is primarily engaged in provision of share registry and related financial services and therefore, cannot be compared with the Assessee, a captive market support service provider. Global procurement consultants Ltd - perusing the functional profile of this comparable company, we are of the view that functions performed by this comparable company are comparable with the functions performed by the Assessee. Hence, we reject the argument of the Ld. Authorised Representative of the functional dissimilarity of this comparable.

Issues Involved:
1. Rejection of transfer pricing study report by the Transfer Pricing Officer (TPO).
2. Selection and rejection of comparable companies for software development services.
3. Selection and rejection of comparable companies for market support services.
4. Application of quantitative filters and economic adjustments.
5. Use of current year data for comparability.
6. Consideration of tax holiday benefits under the Software Technology Park of India (STPI) Scheme.
7. Initiation of penalty proceedings under section 271(1)(c) of the Act.
8. Charging and computing interest under sections 234B and 234D of the Act.

Detailed Analysis:

1. Rejection of Transfer Pricing Study Report:
The TPO rejected the assessee's transfer pricing study report for software development services and market support services, applying different filters and selecting a new set of comparables. The TPO proposed an adjustment of ?297,434,495 for software development services and ?5,389,308 for market support services, leading to a total adjustment of ?302,823,803.

2. Selection and Rejection of Comparable Companies for Software Development Services:
The assessee contested the inclusion of certain companies as comparables. The Tribunal directed the exclusion of:
- Infinite Data Systems Limited: Excluded due to functional dissimilarity, as it provides technical consulting, design, and development of software, which differs from the assessee's low-end chip design services.
- Einfochips Bangalore Ltd: Excluded due to lack of segmental data and involvement in both IT and IT-enabled services, which are not comparable to the assessee's software development services.
- Infosys Limited: Excluded based on previous decisions and functional differences, including significant brand value and high turnover.

3. Selection and Rejection of Comparable Companies for Market Support Services:
The assessee contested the inclusion of:
- TSR Darashaw Ltd: Excluded because it is primarily engaged in share registry and related financial services, which are not comparable to the assessee's market support services.
- Global Procurement Consultants Ltd: Included as its functions, such as procurement advisory services, were found comparable to the assessee's market support services.

4. Application of Quantitative Filters and Economic Adjustments:
The Tribunal addressed the assessee's objections regarding the application of quantitative filters and economic adjustments. The Tribunal directed the TPO to reexamine the claim regarding Sonata Software Limited's related party transactions and to exclude it if it fails the filter.

5. Use of Current Year Data for Comparability:
The Tribunal did not specifically address the issue of using current year data for comparability, as the primary focus was on the selection of comparable companies.

6. Consideration of Tax Holiday Benefits under the STPI Scheme:
The Tribunal did not provide a detailed analysis of the tax holiday benefits under the STPI Scheme, as the primary issues revolved around transfer pricing adjustments.

7. Initiation of Penalty Proceedings under Section 271(1)(c) of the Act:
The Tribunal did not specifically address the initiation of penalty proceedings under section 271(1)(c) of the Act in the judgment.

8. Charging and Computing Interest under Sections 234B and 234D of the Act:
The Tribunal did not provide a detailed analysis of the charging and computing of interest under sections 234B and 234D of the Act.

Conclusion:
The Tribunal partly allowed the appeal, directing the TPO/AO to exclude certain comparables from the software development segment and to reexamine the related party transactions of Sonata Software Limited. The Tribunal also directed the exclusion of TSR Darashaw Limited from the market support services segment. The remaining grounds of appeal were dismissed. The appeal for the Assessment Year 2010-11 was partly allowed.

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