2017 (11) TMI 526 - AT - Income Tax

TPA - Comparable selection criteria - Held that - The assessee company is engaged in the business of designing and developing softwares. The assessee is also providing support services through Call Centre. The assessee is providing Information Technology Services (ITS) and Information Technology Enabled Services (ITES) to its holding company M/s. Parametric Technology Corporation (PTC USA). Thus, the assessee is a captive service provider thus functionally dissimilar companies need to deselected from final list of comparable.

Issues Involved:
1. Exclusion of certain companies as comparables in ITS segment.
2. Exclusion of certain companies as comparables in ITES segment.
3. Inclusion of a company in the final set of comparables under ITES segment.
4. Application of +/- 5% range as per Proviso to Section 92C(2) of the Act.
5. Computation of interest liability under Section 234B of the Act.

Detailed Analysis:

ITS Segment:

Exclusion of Kals Information Systems Ltd.:
The assessee argued that Kals Information Systems Ltd. should be excluded due to functional disparity as it is engaged in product development, unlike the assessee, which is involved in software development services. The Tribunal noted that in the preceding and succeeding assessment years, Kals Information Systems Ltd. was excluded from the list of comparables in the assessee’s own case. The Tribunal upheld the exclusion based on functional differences and the Hon’ble Bombay High Court’s confirmation.

Exclusion of FCS Software Solutions Ltd.:
The assessee contended that FCS Software Solutions Ltd. should be excluded due to its diversified services and failure to meet the 75% income filter from software development services. The Tribunal observed that the company’s revenue from ITES activities constituted 26%, falling below the TPO’s filter. Additionally, the Tribunal referenced previous decisions where FCS Software Solutions Ltd. was excluded due to abnormally high profits and functional differences. The Tribunal directed the exclusion of FCS Software Solutions Ltd. from the final set of comparables.

Exclusion of Helios & Matheson Information Technology Ltd.:
The assessee argued for the exclusion of Helios & Matheson Information Technology Ltd. due to its engagement in ITES and BPO services, which are functionally different from the assessee’s ITS. The Tribunal, following its decision in the assessee’s own case for the assessment year 2007-08, directed the exclusion of Helios & Matheson Information Technology Ltd. The Hon’ble High Court had confirmed this exclusion due to functional differences.

Impact on Arithmetic Mean:
With the exclusion of the three companies, the arithmetic mean of the comparables would fall within the +/- 5% range, eliminating the need for TP adjustment.

ITES Segment:

Exclusion of Coral Hubs Ltd.:
The assessee sought the exclusion of Coral Hubs Ltd. due to functional differences and its engagement in new business activities like printing on demand, which are not ITES. The Tribunal noted the absence of segmented financial results and the introduction of a new business line, leading to aberration in financial results. The Tribunal, referencing its decision in the assessee’s own case for the assessment year 2007-08, directed the exclusion of Coral Hubs Ltd. from the final list of comparables.

Exclusion of Accentia Technologies Ltd.:
The assessee argued for the exclusion of Accentia Technologies Ltd. due to its involvement in medical transcription services and the development of software products, along with mergers and acquisitions leading to aberrations in financial results. The Tribunal, following its decision for the assessment year 2009-10, excluded Accentia Technologies Ltd. due to functional differences and extraordinary events affecting financial results.

Inclusion of Aditya Birla Minacs Worldwide Ltd.:
The assessee contended that Aditya Birla Minacs Worldwide Ltd. should be included as it was functionally comparable and not a consistent loss-making company. The Tribunal agreed, stating that a company should not be excluded merely for incurring losses in a particular year unless it is a consistent loss-making entity. The Tribunal directed the inclusion of Aditya Birla Minacs Worldwide Ltd. in the final list of comparables.

Application of +/- 5% Range:
The Tribunal directed the TPO/AO to consider the assessee’s claim for the benefit of the +/- 5% range under Section 92C(2) of the Act while computing the ALP for both ITS and ITES segments.

Computation of Interest Liability:
The assessee’s appeal regarding the erroneous computation of interest liability under Section 234B was dismissed as the levy of interest is consequential and mandatory.

Conclusion:
The appeal of the assessee was partly allowed, directing the exclusion of certain companies from the final set of comparables, the inclusion of Aditya Birla Minacs Worldwide Ltd., and the application of the +/- 5% range for computing the ALP. The appeal regarding the computation of interest under Section 234B was dismissed.

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