2018 (5) TMI 1584 - AT - Income Tax

Transfer pricing addition - comparable selection criteria - functional similarity - Held that - The assessee was engaged in business of software development, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:
1. Exclusion of certain comparables by the TPO/DRP.
2. Disallowance of severance costs.

Issue-wise Detailed Analysis:

1. Exclusion of Certain Comparables by the TPO/DRP:

Infosys Ltd.:
The assessee argued for the exclusion of Infosys Ltd. as a comparable, citing its rejection in previous assessment years (2006-07 and 2007-08) by the Tribunal and confirmed by the Delhi High Court. The Tribunal noted that Infosys was not functionally similar due to its significant turnover, proprietary products, and brand value, which the assessee lacked. Consequently, the Tribunal directed the TPO/AO to exclude Infosys Ltd. from the final list of comparables.

KALS Information Systems Ltd.:
The assessee contended that KALS Information Systems Ltd. should be excluded, referencing its rejection in previous assessment years (2006-07 and 2007-08). The Tribunal agreed, noting that KALS earned revenue from software products and was not functionally comparable to the assessee. The Tribunal directed the TPO/AO to exclude KALS Information Systems Ltd. from the final list of comparables.

Bodhtree Consulting Ltd.:
The assessee argued for the exclusion of Bodhtree Consulting Ltd., citing its rejection in previous assessment years (2006-07 and 2007-08). The Tribunal noted that Bodhtree's revenue recognition policy was unreliable, leading to fluctuating margins. The Tribunal directed the TPO/AO to exclude Bodhtree Consulting Ltd. from the final list of comparables.

Tata Elxi Ltd.:
The assessee sought the exclusion of Tata Elxi Ltd., referencing its rejection in previous assessment years (2006-07 and 2007-08). The Tribunal noted that Tata Elxi was engaged in the development of specialized/niche products, making it not functionally comparable. The Tribunal directed the TPO/AO to exclude Tata Elxi Ltd. from the final list of comparables.

Avani Cincom Technologies Ltd.:
The assessee argued for the exclusion of Avani Cincom Technologies Ltd. due to its involvement in both software products and services without segmental data. The Tribunal agreed, noting the absence of segmental data and directed the TPO/AO to exclude Avani Cincom Technologies Ltd. from the final list of comparables.

Wipro Ltd.:
The assessee contended that Wipro Ltd. should be excluded due to its diversified operations and lack of segmental data. The Tribunal agreed, noting the absence of segmental data and directed the TPO/AO to exclude Wipro Ltd. from the final list of comparables.

E-Zest Solutions Ltd.:
The assessee sought the exclusion of E-Zest Solutions Ltd., arguing it dealt in product development services and high-end technical services (KPO services). The Tribunal agreed, noting the functional difference and directed the TPO/AO to exclude E-Zest Solutions Ltd. from the final list of comparables.

Persistent Systems Ltd.:
The assessee argued for the exclusion of Persistent Systems Ltd. due to its diversified operations and lack of segmental data. The Tribunal agreed, noting the absence of segmental data and directed the TPO/AO to exclude Persistent Systems Ltd. from the final list of comparables.

Softsol Ltd.:
The assessee contended that Softsol Ltd.'s margin included expenses related to rental income, which should be excluded. The Tribunal agreed, referencing a previous decision and directed the TPO/AO to recompute the margin of Softsol India Ltd. and determine the average margins accordingly.

2. Disallowance of Severance Costs:

The assessee argued that the AO/DRP erred in disallowing ?6,67,62,386/- in severance costs for the financial year 2008-09, claiming the expense was incurred and crystallized in that year. The Tribunal noted that the severance cost's crystallization date was unclear and remanded the issue back to the AO for further examination, ensuring the assessee is given an opportunity to be heard.

Conclusion:

The appeals for A.Y. 2008-09 and A.Y. 2009-10 filed by the assessee were partly allowed for statistical purposes, directing the exclusion of certain comparables and recomputation of margins. The appeal filed by the Revenue for A.Y. 2009-10 was dismissed. The Tribunal emphasized following principles of natural justice and provided the assessee an opportunity for a hearing.

← Previous Next →