2018 (1) TMI 1151 - AT - Income Tax

TPA - comparable selection criteria - Held that - Business profile of the assessee is a software development service provider to its AE, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:
1. Adjustment to the international transaction of software development services.
2. Rejection of Transfer Pricing (TP) documentation.
3. Use of data available at the time of assessment proceedings.
4. Rejection of multiple year data.
5. Inclusion of companies in the comparability analysis.
6. Exclusion of companies from the comparability analysis.
7. Not granting risk adjustment.
8. Not granting benefit of +/- 5% under section 92C(2) of the Act.

Issue-wise Detailed Analysis:

1. Adjustment to the International Transaction of Software Development Services:
The assessee challenged the adjustment of ?1,09,45,524 made by the AO/TPO to the international transaction of software development services provided to its AE. The TPO had adopted 26 comparable companies and arrived at an arithmetic mean margin of 25.14%, resulting in the proposed adjustment after allowing working capital adjustment.

2. Rejection of Transfer Pricing (TP) Documentation:
The CIT(A)/AO/TPO rejected the TP documentation maintained by the assessee, which the assessee claimed was prepared in good faith and with due diligence. The rejection included the search process followed by the assessee and the use of contemporaneous information not available at the time of preparing the TP documentation.

3. Use of Data Available at the Time of Assessment Proceedings:
The AO/TPO used data available at the time of assessment proceedings instead of those available at the time of preparing the TP documentation, which the assessee argued was inappropriate.

4. Rejection of Multiple Year Data:
The AO/TPO rejected the use of multiple year data and relied on contemporaneous information, which was not available when the TP documentation was prepared.

5. Inclusion of Companies in the Comparability Analysis:
The AO/TPO included companies in the comparability analysis that were different from the assessee in terms of functions, asset base, and risk profile. The assessee sought the exclusion of seven such companies from the list of comparables.

6. Exclusion of Companies from the Comparability Analysis:
The Tribunal directed the exclusion of several companies from the list of comparables based on functional differences and lack of segmental data:
- Megasoft Ltd: Directed to consider only the segmental results of software development.
- Accel Transmatic Ltd: Excluded due to functional differences and lack of segmental details.
- Avani Cimcon Technologies Ltd: Not excluded as the financials did not support the claim of product development.
- Celestial Labs Ltd: Excluded due to involvement in R&D activities.
- KALS Information Systems Ltd: Excluded as it was engaged in product development.
- Lucid Software Ltd: Excluded due to involvement in product development and lack of segmental data.
- Wipro Ltd: Excluded due to incomparable scale of operations and lack of segmental data.

7. Not Granting Risk Adjustment:
The assessee contended that the AO/TPO did not grant a risk adjustment, which was necessary to account for differences in risk profiles between the assessee and the comparables.

8. Not Granting Benefit of +/- 5% Under Section 92C(2) of the Act:
The assessee argued that the AO/TPO did not grant the benefit of the +/- 5% range under the proviso to section 92C(2) of the Act, which could have impacted the adjustment amount.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the exclusion of certain companies from the list of comparables based on functional differences and lack of segmental data. The remaining grounds of appeal were not specifically contested and thus rejected. The order was pronounced in the Open Court on 24th January 2018.