2016 (7) TMI 445 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Nine companies are to be excluded from the list of twenty comparables and these nine companies are M/s Aztec Software Ltd., 2) Geometric Software Ltd.(Seg.) 3) M/s iGate Global Solutions Ltd.,(Seg.) 4) M/s Kals Info Systems Ltd., 5) M/s Persistent Systems Ltd., 6) M/s Tata Elxsi Ltd.,(Seg.) 7) M/s Accel Transmatics Ltd (Seg.) 8) M/s Megasoft Ltd and 9) M/s Flextronics Software Systems Ltd.. The average PLI of the remaining 11 comparables have been worked out by the ld. AR of the assessee at 12.02% before working capital adjustment and 10.40% after working out adjustment as against operating profit to cost ratio of the assessee company at 10.36%. We hold that the AO/TPO should check the working of the assessee and if the same is correct that the average PLI of remaining 11 comparables is only 12.02% then the same is within / - 5% range and as a consequence, no TP adjustment is called for and for the limited purpose of checking the working of average PLI of the 11 comparables, we restore the mater back to the file of AO. - Decided in favour of assessee for statistical purposes. Deduction u/s 10A computation - Held that - The total turnover is sum total of export turnover and domestic turnover and therefore, as a consequence, if an amount is excluded from export turnover, the total turnover also goes down by the same amount. See CIT Vs M/s Tata Elxsi Ltd., reported in 2011 (8) TMI 782 - KARNATAKA HIGH COURT

Issues Involved:
1. Transfer Pricing (TP) Documentation Rejection
2. Arm's Length Price (ALP) Determination
3. Comparability Analysis of Selected Companies
4. Deduction under Section 10A of the Income Tax Act
5. Computation of Export Turnover and Total Turnover
6. Levy of Interest under Section 234B

Detailed Analysis:

1. Transfer Pricing (TP) Documentation Rejection:
The appellant argued that the TP documentation was prepared bona fide and in good faith, with a detailed Functional Asset and Risk analysis conducted with due diligence. The AO and the Dispute Resolution Panel (Panel) upheld the rejection of the TP documentation by the TPO, which the appellant contended was erroneous.

2. Arm's Length Price (ALP) Determination:
The AO and the Panel erred in ignoring the limited risk nature of the services provided by the appellant and upheld the TPO's conclusion that no adjustment on account of risk differential was required. The TPO made an adjustment of ?1,03,97,210 to the transfer price, holding that the international transactions did not satisfy the arm's length principle. The appellant argued that the TPO collected selective information not available in the public domain and relied on it for comparability purposes, denying natural justice.

3. Comparability Analysis of Selected Companies:
The appellant objected to the inclusion of certain companies as comparables due to functional dissimilarity or high Related Party Transactions (RPT). The Tribunal examined each comparable in detail:
- Aztec Software & Technology Services Ltd.: Excluded due to RPT of 17.78%.
- Geometric Software Ltd (Seg.): Excluded due to RPT of 19.34%.
- Infosys Limited: Excluded due to functional dissimilarity and brand value.
- Kals Info Systems Ltd.: Excluded due to functional dissimilarity and lack of segmental information.
- Persistent Systems Ltd.: Excluded due to deriving revenue from software products and lack of segmental information.
- Tata Elxsi Ltd (Seg.): Excluded due to functional dissimilarity.
- Accel Transmatics Ltd (Seg.): Excluded due to functional dissimilarity.
- Megasoft Ltd.: Excluded due to RPT of 17.08%.
- Flextronics Software Systems Ltd.: Excluded due to incurring significant R&D expenses and functional dissimilarity.

The Tribunal directed the AO/TPO to exclude these companies from the list of comparables and to check the working of the average PLI of the remaining 11 comparables. If the average PLI is within the +/- 5% range, no TP adjustment is required.

4. Deduction under Section 10A of the Income Tax Act:
The appellant contended that the AO erred in not allowing the deduction under Section 10A for the entire profit of the undertaking registered with the Software Technology Parks of India. The AO also erred in treating internet access charges and foreign currency expenditure as attributable to the delivery of software outside India. The Tribunal directed the AO to compute the total turnover as the sum of export turnover and domestic turnover, following the judgment of the Hon'ble Karnataka High Court in the case of CIT Vs M/s Tata Elxsi Ltd.

5. Computation of Export Turnover and Total Turnover:
The Tribunal held that if an amount is excluded from export turnover, the total turnover should also be reduced by the same amount. This was in line with the judgment of the Hon'ble Karnataka High Court.

6. Levy of Interest under Section 234B:
The appellant contended that the AO erred in levying interest under Section 234B of the Act. The Tribunal did not provide a specific ruling on this issue, as it was consequential to the other grounds.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the AO/TPO to exclude certain companies from the comparables list and to recompute the total turnover as per the judgment of the Hon'ble Karnataka High Court. The Tribunal also directed the AO to check the working of the average PLI of the remaining comparables and to allow the deduction under Section 10A accordingly.

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