2017 (12) TMI 1728 - AT - Income Tax

TP Adjustment - Comparable selection - functional similarity - HELD THAT - The assessee is a subsidiary of ADC Telecommunications Inc., USA and is engaged in the provision of software development services and IT Enabled Services to its AEs thus companies functionally dissimilar with that of assessee. Application of RPT filter at 25% of turnover - Assessee could not controvert the submissions of the Departmental Representative for Revenue that various coordinate benches of this Tribunal have been consistently following application of RPT filter at 25% of turnover - we reject the assessee's claim for exclusion of Aditya Birla Minacs Worldwide Limited, from the list of comparables and consequently uphold inclusion of this company Aditya Birla by the authorities below in the final set of comparables.

Issues Involved:
1. Rejection of Transfer Pricing (TP) documentation and adjustment to transfer price.
2. Exclusion/Inclusion of specific companies in the list of comparables for software development services and ITES segments.
3. Application of multiple year/prior year data for comparability.
4. Functional dissimilarity of certain comparables.
5. Working capital adjustment in the computation of Arm’s Length Price (ALP).

Detailed Analysis:

1. Rejection of TP Documentation and Adjustment to Transfer Price:
The assessee, a company providing software development and ITES services to its AE, filed its return for AY 2009-10 declaring income after claiming a deduction under Section 10A of the Income Tax Act, 1961. The TPO proposed a TP adjustment of ?2,74,00,673, which was included in the final assessment. The CIT (Appeals) provided partial relief, leading the assessee to appeal to the Tribunal. The Tribunal noted that the assessee was not pressing certain grounds related to the rejection of TP documentation and adjustments, rendering those grounds infructuous.

2. Exclusion/Inclusion of Specific Companies in Comparables:
The Tribunal focused on the exclusion/inclusion of certain companies in the comparables list for the software development and ITES segments:

Software Development Services Segment:
- Exclusion:
- KALS Information Systems Ltd.: Excluded due to its involvement in software product development and training, making it functionally dissimilar to the assessee.
- Bodhtree Consulting Ltd.: Excluded as it was engaged in software products, web solutions, and data management, which are functionally different.
- Tata Elxsi Ltd.: Excluded due to its involvement in product design services, engineering services, and visual computing labs, making it functionally different.
- Infosys Technologies Ltd.: Excluded because of its significant intangibles, brand value, R&D activities, and large scale of operations.
- Persistent Systems Ltd.: Excluded as it was involved in software product development and product design services.
- Larsen & Toubro Infotech Ltd.: Included despite objections, as the Tribunal upheld the authorities' view that RPT filter at 25% of turnover is reasonable.

- Inclusion:
- Thinksoft Global Services Ltd. and FCS Software Solutions Ltd.: Initially proposed by the TPO but excluded due to working capital adjustments. The Tribunal directed their inclusion and set aside the issue of working out the correct PLI by computing and allowing working capital adjustment on an actual basis.

ITES Segment:
- Exclusion:
- Infosys BPO Limited, Accentia Technologies Limited, Cosmic Global Limited, and Eclerx Services Limited: Excluded based on functional dissimilarity as decided in the case of Novo Nordisk India Pvt. Ltd.
- Aditya Birla Minacs Worldwide Limited: Included despite objections, as the Tribunal upheld the authorities' view that RPT filter at 25% of turnover is reasonable.

3. Application of Multiple Year/Prior Year Data for Comparability:
The Tribunal dismissed the assessee's grounds regarding the use of multiple year/prior year data, as these were not pressed by the assessee.

4. Functional Dissimilarity of Certain Comparables:
The Tribunal excluded several companies from the comparables list based on functional dissimilarity, as these companies were engaged in activities such as software product development, which were not comparable to the assessee's software development services.

5. Working Capital Adjustment in ALP Computation:
The Tribunal directed the TPO to compute and allow working capital adjustment on an actual basis for the final set of comparables, ensuring a more accurate determination of the ALP.

Conclusion:
The Tribunal partly allowed the assessee's appeal, providing relief by excluding certain companies from the comparables list based on functional dissimilarity and directing the inclusion of others with proper working capital adjustments. The decision emphasized the importance of accurate functional comparability and appropriate adjustments in TP assessments.

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