2017 (4) TMI 622 - AT - Income Tax

TPA - selection of comparable - Held that - Companies functionally different and segmental details are not available further have fluctuating margins cannot be selected for final list of comparable.

Summary

Issues Involved:
1. Selection of comparables by the Transfer Pricing Officer (TPO).
2. Exclusion of Bodhtree Consultancy Limited as a comparable.
3. Inclusion of CIP Technologies and Export Limited and VMS Software Technology Ltd. as comparables.
4. Inclusion of FCS Software Solutions Ltd. and CAT Technologies Limited as comparables.

Detailed Analysis:

1. Selection of comparables by the Transfer Pricing Officer (TPO):
The core issue in the appeals was the selection of comparables for determining the Arm's Length Price (ALP) of international transactions. The assessee had adopted the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of 10.15%. The TPO, however, found discrepancies in the comparables selected by the assessee and made adjustments, resulting in an enhancement of international transactions by ?4.97 Crores. The Dispute Resolution Panel (DRP) directed the TPO to rework the comparables, which led to the inclusion and exclusion of certain companies in the final list of comparables.

2. Exclusion of Bodhtree Consultancy Limited as a comparable:
The assessee argued for the exclusion of Bodhtree Consultancy Limited, citing its functional differences and fluctuating margins due to its revenue recognition policy. The Tribunal agreed with the assessee, referencing previous judicial decisions that Bodhtree is engaged in software products and IT consulting services, making it unsuitable as a comparable for software development services. The Tribunal held that Bodhtree's accounting practices did not match expenses with revenue properly, thus deforming its profitability on a year-to-year basis. Consequently, Bodhtree was excluded from the list of comparables.

3. Inclusion of CIP Technologies and Export Limited and VMS Software Technology Ltd. as comparables:
The assessee sought the inclusion of CIP Technologies and Export Limited and VMS Software Technology Ltd. The TPO had rejected CIP Technologies due to its consecutive losses, which the DRP confirmed. The Tribunal found that CIP Technologies had abnormal profits and losses, making it unsuitable as a comparable. Regarding VMS Software Technology Ltd., the TPO had rejected it based on its lower turnover. The Tribunal upheld this rejection, stating that the company's turnover was below the applied filter of one crore, making it financially incomparable to the assessee.

4. Inclusion of FCS Software Solutions Ltd. and CAT Technologies Limited as comparables:
The Revenue appealed for the inclusion of FCS Software Solutions Ltd. and CAT Technologies Limited. The TPO had excluded CAT Technologies due to the unavailability of segmental data. The Tribunal agreed with the TPO, noting that CAT Technologies had fluctuating margins and was functionally different, thus unsuitable as a comparable. The Tribunal dismissed the Revenue's appeal, as no new information was provided to support the inclusion of these companies.

Conclusion:
The Tribunal's judgment focused on the appropriateness of selected comparables for determining the ALP of international transactions. It excluded Bodhtree Consultancy Limited due to its functional differences and accounting practices, upheld the rejection of CIP Technologies and Export Limited and VMS Software Technology Ltd. due to financial incomparability, and confirmed the exclusion of CAT Technologies Limited and FCS Software Solutions Ltd. due to the lack of segmental data and functional differences. The appeals were partly allowed for statistical purposes, and the Revenue's appeal was dismissed.