2018 (4) TMI 578 - HC - Income Tax

TPA - comparable selection criteria - functional similarity - Held that - The appellant is engaged in providing software and BPO services to its AE, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:
1. Inclusion of M/s. Thirdware Solutions Limited in the List of Comparables.
2. Exclusion of M/s. CG-VAK Software and Exports Limited.
3. Exclusion of Quintegra Solutions Limited.

Detailed Analysis:

1. Inclusion of M/s. Thirdware Solutions Limited in the List of Comparables:
The appellant, Steria India Ltd., challenged the inclusion of Thirdware Solutions Limited as a comparable for benchmarking international transactions under the software development services segment. The Transfer Pricing Officer (TPO) included Thirdware Solutions Limited based on its compliance with requisite filters, such as significant export-oriented earnings and maintaining separate books of accounts for different segments. The Income Tax Appellate Tribunal (ITAT) upheld this inclusion, noting that the TPO had considered only the 'Overseas' segment of Thirdware, which matched the appellant's software services segment. The High Court agreed, stating that Thirdware's operations in software development, implementation, and support services were comparable to the appellant's services. Consequently, the inclusion was deemed appropriate and could not be interfered with.

2. Exclusion of M/s. CG-VAK Software and Exports Limited:
The TPO excluded CG-VAK Software and Exports Limited, citing its failure to meet the employee cost filter, with only 5.56% of total costs being employee expenses, and its persistent losses in the software services segment. The ITAT supported this exclusion, highlighting that CG-VAK earned income from both software services and business process outsourcing services, with no segmental information available for software services alone. The High Court concurred, noting the lack of segmental data and persistent losses, thus justifying the exclusion of CG-VAK from the list of comparables.

3. Exclusion of Quintegra Solutions Limited:
The TPO identified Quintegra Solutions Limited as an abnormal company due to declining sales, increasing receivables and write-offs, and significant debtors from previous years affecting its working capital. The ITAT observed a consistent decline in Quintegra's sales and persistent losses, indicating abnormal functional circumstances. The High Court upheld this finding, noting that Quintegra's financial instability and operational irregularities rendered it non-comparable. Consequently, the exclusion of Quintegra Solutions Limited was justified and could not be interfered with.

Conclusion:
The High Court dismissed the appeal, concluding that the inclusion of Thirdware Solutions Limited and the exclusion of CG-VAK Software and Exports Limited and Quintegra Solutions Limited were appropriate based on the factual findings and applicable filters. No substantial question of law arose from the case, affirming the decisions made by the TPO and ITAT.