2017 (9) TMI 1831 - AT - Income Tax

TP Adjustment - comparable selection - exclusion of FCS Software Solutions Ltd - HELD THAT - Assessee is engaged in providing software development services to its associated enterprises and is captive service provider thus companies functionally dissimilar with that of assessee need to be deselected from final list. This view has been laid down by the Tribunal in TIBCO Software India Pvt. Ltd. Vs. DCIT 2017 (1) TMI 1574 - ITAT PUNE and ACIT Vs. M/s. Synechron Technologies Pvt. Ltd. 2017 (6) TMI 1295 - ITAT PUNE . Following the same parity of reasoning and because of the said concern being a product company we find no merit in including in the list of comparables while benchmarking international transactions undertaken by the assessee with its associated enterprises where it is providing software services to the associated enterprises. Another aspect which needs to be kept in mind is that the CIT(A) had noted from the annual report of the company that the said concern had earned revenue from IT consulting (42%) education (30%) and infrastructure management (21%). However no breakup of business segment profitability is available and in the absence of the same the margins of said concern cannot be compared. Another aspect is the activity of education being imparted by the said concern in the field of IT education to corporate companies and institutions Central and State Government Departments etc. the said concern thus is functionally different from the activities undertaken by the assessee and cannot be included in the final list of comparables. Accordingly we uphold the order of CIT(A) in this regard. The modified ground of appeal No.1 raised by the Revenue is thus dismissed. The modified ground of appeal No.2 raised by the Revenue becomes academic in nature in view of the pleading of learned Authorized Representative for the assessee after the dismissal of modified ground of appeal No.1 raised by the Revenue.

Issues Involved:
1. Exclusion of FCS Software India Ltd. from comparables.
2. Inclusion of Quintegra Solutions Ltd., R.S. Software (I) Ltd., Zylog Systems Ltd., and Thinksoft Global Services Ltd. in comparables.
3. Non-consideration of contemporaneous data.
4. Non-consideration of multiple year data.
5. Use of inappropriate filters for screening companies.
6. Rejection of certain comparable companies identified by the respondent.
7. Considering certain additional companies as comparable.
8. Ignoring certain additional companies which can be taken as comparable.
9. Selection of companies having abnormal profits.
10. Incorrect computation of operating margins of certain comparable companies.
11. Non-consideration of workings submitted for working capital adjustment.
12. Denial of adjustment for risk differences.
13. Application of transfer pricing provisions to a tax holiday unit.

Detailed Analysis of the Judgment:

1. Exclusion of FCS Software India Ltd. from Comparables:
The CIT(A) excluded FCS Software India Ltd. from the list of comparables due to the non-availability of segmental accounts and the functional differences between the company and the assessee. The Tribunal upheld this exclusion, noting that FCS Software India Ltd. earned revenue from IT consulting (42%), education (30%), and infrastructure management (21%), making it functionally different from the assessee, which was engaged in providing software services to its associated enterprises. The Tribunal referenced previous decisions in similar cases (TIBCO Software India Pvt. Ltd. Vs. DCIT and ACIT Vs. M/s. Synechron Technologies Pvt. Ltd.) to support this exclusion.

2. Inclusion of Quintegra Solutions Ltd., R.S. Software (I) Ltd., Zylog Systems Ltd., and Thinksoft Global Services Ltd. in Comparables:
The CIT(A) directed the inclusion of these companies in the final list of comparables, provided they met all the filters used by the TPO. However, this issue became academic in nature following the exclusion of FCS Software India Ltd., as the margins shown by the assessee would then be within the acceptable range.

3. Non-Consideration of Contemporaneous Data:
The assessee argued that the TPO conducted the analysis based on information that was not available at the time of complying with transfer pricing regulations. The Tribunal did not specifically address this issue in detail, as it became academic following the resolution of the primary issue.

4. Non-Consideration of Multiple Year Data:
The assessee contended that the TPO erred by not considering multiple year data for determining the arm's length price. This issue also became academic in light of the Tribunal's decision on the primary issue.

5. Use of Inappropriate Filters for Screening Companies:
The assessee argued that the TPO applied inappropriate filters for screening companies. The Tribunal did not delve into this issue in detail, as it became academic following the resolution of the primary issue.

6. Rejection of Certain Comparable Companies Identified by the Respondent:
The assessee objected to the rejection of certain companies from the set of comparables identified in their transfer pricing study. This issue became academic following the Tribunal's decision on the primary issue.

7. Considering Certain Additional Companies as Comparable:
The assessee argued against the inclusion of additional companies as comparables. This issue also became academic following the resolution of the primary issue.

8. Ignoring Certain Additional Companies Which Can Be Taken as Comparable:
The assessee contended that certain additional companies should be considered as comparables based on updated data. This issue became academic in light of the Tribunal's decision on the primary issue.

9. Selection of Companies Having Abnormal Profits:
The assessee argued against the selection of companies earning abnormal profits during the FY 2009-10. This issue became academic following the resolution of the primary issue.

10. Incorrect Computation of Operating Margins of Certain Comparable Companies:
The assessee contended that the TPO incorrectly computed the operating margins of certain comparable companies. This issue also became academic following the Tribunal's decision on the primary issue.

11. Non-Consideration of Workings Submitted for Working Capital Adjustment:
The assessee argued that the TPO did not correctly compute the working capital adjustment required. This issue became academic following the resolution of the primary issue.

12. Denial of Adjustment for Risk Differences:
The assessee contended that the TPO did not make any risk adjustment for differences between the functional and risk profile of comparable companies and the assessee. This issue became academic following the Tribunal's decision on the primary issue.

13. Application of Transfer Pricing Provisions to a Tax Holiday Unit:
The assessee argued against the application of transfer pricing provisions, as they were enjoying a tax holiday and had no motive to shift profits outside India. This issue became academic following the resolution of the primary issue.

Conclusion:
The Tribunal dismissed both the appeal of the Revenue and the Cross Objections of the assessee, primarily focusing on the exclusion of FCS Software India Ltd. from the list of comparables due to its functional differences and the non-availability of segmental accounts. This decision rendered the other issues academic in nature.

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