2019 (1) TMI 1895 - AT - Income Tax

TP Adjustment - comparable selection - Higher profitability criteria - HELD THAT - Assessee as characterised as a value added distributor of printed courseware/e-books in India which assumes normal/significant risks associated with carrying out such marketing/distribution activities in India, companies functinally dissimilar with that of assessee need to be deselected. Acropatel Technologies Ltd., (Information Technology service segment) company is engaged in provision of high end healthcare services and develops owns related intellectual property providing substantial competitive advantage to this company, leading to higher profitability. As per annual report, this company is engaged in sale of software products. It is observed that assessee is undertaking software development relating to presentation of course material by way of including animation, graphics and audio training aids etc. Therefore, Acropetal Technologies Limited is functionally different from that of assessee and should have been excluded by Ld.TPO. The company is also engaged in two business segments, i.e., sale of products and sale of services but segmental profitability is not available in audited financial statements. Therefore, we direct Ld.TPO to exclude this company from comparables. E-Infochips Ltd since no segmental data of this company is available indicating operating profit from software development services, we order to exclude this company from the list of comparables. Wipro Technology Solutions Ltd disqualifies to become a comparable uncontrolled transaction for the purposes of inclusion in the final list of comparables under Rule 10B(1)(e)(ii). We, therefore, direct removal of this company from the list of comparables. Sasken Communication Technologies - As revenue generated from sale of software services/ products and other services are to the tune of ₹ 39,419.62 crores. Further it is observed from order of Ld.TPO that this company has been selected as a comparable only because it satisfies filter of applicability of 75% of its income from services. However on perusal of accounts, no segmental financials are available. Moreover in our considered opinion functionally itself this company is not comparable with that of assessee. Accordingly we direct this comparable to be excluded from the final list.

Summary

Issues Involved:
1. Inclusion and exclusion of certain companies in the final set of comparables for Transfer Pricing (TP) purposes.
2. Re-characterization of services provided by the assessee.
3. Application of filters by the Transfer Pricing Officer (TPO).
4. Adjustment proposed by the TPO and upheld by the Dispute Resolution Panel (DRP).

Detailed Analysis:

1. Inclusion and Exclusion of Certain Companies in the Final Set of Comparables:

The primary issue raised by the assessee pertains to the inclusion and exclusion of certain companies by the TPO in the final set of comparables for determining the Arm's Length Price (ALP) of international transactions. The assessee objected to the inclusion of Acropatel Technologies Ltd., E-Infochips Ltd., Wipro Technology Solutions Ltd., Infosys Technologies Ltd., and Sasken Communication Technologies, arguing functional dissimilarity and lack of segmental data.

Acropatel Technologies Ltd.:
The TPO included this company, but the assessee contended it is functionally dissimilar due to its diversified activities, including high-end healthcare services and sale of software products. The Tribunal observed that Acropatel Technologies Ltd. is engaged in high-end healthcare services and owns related intellectual property, leading to higher profitability. The company also has two business segments without available segmental profitability in audited financial statements. Thus, the Tribunal directed the TPO to exclude Acropatel Technologies Ltd. from the list of comparables.

E-Infochips Ltd.:
The TPO included this company, considering its income from software development and IT services. However, the assessee argued functional dissimilarity and lack of segmental data. The Tribunal found that E-Infochips Ltd. has operating revenue from software development, hardware maintenance, consultancy, etc., without segmental information available. Since the assessee is engaged in rendering software development services without selling software products, the Tribunal ordered the exclusion of E-Infochips Ltd. from the comparables.

Wipro Technology Solutions Ltd.:
The TPO included this company despite the assessee's objections regarding functional differences, insufficient segmental information, and significant related party transactions. The Tribunal noted that Wipro Technology Services Ltd. earned revenue from a master service agreement between its parent company, Wipro Ltd., and Citigroup Inc., making it an international transaction under section 92B(2). Consequently, it is not an uncontrolled transaction and should be excluded from the comparables.

Infosys Technologies Ltd.:
The Tribunal observed that Infosys Technologies Ltd. was excluded in the assessee's own case for earlier assessment years and by the Hon’ble Delhi High Court. The Tribunal directed the TPO to exclude Infosys Technologies Ltd. from the list of comparables, following the same precedent.

Sasken Communication Technologies:
The TPO included this company, but the assessee argued it is engaged in the sale of software products and owns branded products and IPR, making it functionally dissimilar. The Tribunal noted that Sasken Communication Technologies generates revenue from software services/products without segmental financials available. Thus, the Tribunal directed the exclusion of Sasken Communication Technologies from the final list of comparables.

2. Re-characterization of Services Provided by the Assessee:

The assessee did not object to the re-characterization of its services as a ‘software development service provider’ by the TPO. Consequently, the grounds related to this issue were dismissed as not pressed.

3. Application of Filters by the TPO:

The TPO applied several filters, including the use of current year data, export sales filters, different financial year ending filter, exclusion of very small companies, and persistent loss-making companies. The assessee objected to the comparables selected based on these filters, leading to the exclusion of certain companies as discussed above.

4. Adjustment Proposed by the TPO and Upheld by the DRP:

The TPO proposed an adjustment of ?1,10,21,853/- in the hands of the assessee, which was upheld by the DRP. The final assessment order included this addition. The Tribunal's decision to exclude certain comparables will impact the final adjustment amount.

Conclusion:

The Tribunal directed the exclusion of Acropatel Technologies Ltd., E-Infochips Ltd., Wipro Technology Solutions Ltd., Infosys Technologies Ltd., and Sasken Communication Technologies from the final set of comparables. The appeal filed by the assessee was partly allowed, with specific grounds dismissed as not pressed. The Tribunal's decision will necessitate a revised computation of the ALP and corresponding adjustment.