2019 (4) TMI 45 - AT - Income Tax

Transfer pricing adjustment - exclusion and inclusion of some companies as comparables - functinal similarity - HELD THAT - Avani Cincom - No income is shown to result from sale of software product named Dxchange, the fact that the revenue and, therefore, the margin earned by Avani Cincom was impacted by use of such internally developed and owned software as an asset justified the exclusion of Avani Cincom from the final set of comparable companies. Helios Mathesan - This company is included by the TPO by overruling the objection of the assessee without citing any reasons. It is also noticed that the CIT (A) has also summarily rejected the contention about the failure of the employee cost filter and has upheld the inclusion of this company. It is seen that this company fails the employee cost filter of 25% as Helios Mathesan s employee cost is only 1.07% of sales. We notice that employee cost filter is one of the filters adopted by the TPO himself at Para 8 of his order. The totality of above facts and circumstances as noticed in the above paragraphs clearly shows that FAR and, therefore, the margin earned by Helios Mathesan is totally different in comparison to the FAR of the assessee. It is therefore, directed that Helios Mathesan be excluded from final list of comparable companies. Ishirinfotech Limited - company failed the 25% employee cost filter based on data available in Capitoline database - Employee cost details are shown separately under schedule 15 to the financials. The company recognizes income by application of percentage of completion method unlike cost plus mark-up basis of compensation applicable to captive service providers like the present assessee. Thus, it appears that in addition to this company not qualifying the employee cost filter applied by the TPO, the FAR of Ishirinfotech Limited is different compared to that of Kaplan India Private Limited. Reference to the chart filed by the Ld. AR during the hearing indicates that other coordinate benches, details of which are mentioned in the chart, also concluded that Ishirinfotech Limited is not a valid comparable for AY 2007-08 for software development services segment. Accordingly, we direct exclusion of this company from the final set of comparable companies. Megasoft Ltd - the material available on record and also the decisions of the coordinate benches for the very same year. We are inclined to agree with the submissions of the Ld. Counsel for the assessee as this company is clearly engaged in multifarious activities including sale of software products. Further, the impact of the extraordinary event of amalgamation is also not possible to be quantified and adjusted. We also notice that the TPO himself has accepted that 19% of the revenue earned by this company is from software products - we direct exclusion of this company from the final set of comparable companies. TATA Elxsi Limited - the segment of software development services in Tata Elxsi includes Design services including hardware design and hence is not comparable to simple software development services. We find that these observations are fully applicable in the facts of present case - we direct exclusion of this company from the final set of comparable companies. We direct the TPO/AO to re-determine the arm s length price of international transaction of software development services in case of Kaplan India Private limited after excluding Avanicincom Technologies Limited, Helios & Matheson Limited, Ishirinfotech Limited, Megasoft Limited and Tata Elxsi Ltd. from the final list of comparables. The TPO/AO will also decide afresh the comparability and inclusion or otherwise of Indium Software (India) Limited and VMF Softech after affording an opportunity of being heard as directed above. Disallowance of group medical insurance expenditure - scheme of ICICI Lombard is not recognised is incorrect as the material available in the public domain like Directors report (copy of which was handed over during the hearing) clearly indicated that ICICI Lombard offered schemes which were approved by IRDA - the schemes offered by ICICI Lombard had approval of IRDA on 03.08.2001. In the interests of justice, we direct the AO to consider afresh all the relevant material available in public domain. The assessee is directed to produce the same before the AO, who will decide the issue afresh after affording suitable opportunity of being heard to the Assessee. - Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance of Group Medical Insurance Expenditure

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary dispute revolves around the inclusion and exclusion of certain companies as comparables for determining the arm's length price (ALP) of the international transaction of software development services undertaken by the assessee, Kaplan India Private Limited (KIPL).

Avani Cincom Technologies Ltd:
The assessee sought exclusion of Avani Cincom Technologies Ltd., arguing that the company earned revenue from software product sales, which affected its margins. The Tribunal noted that the TPO did not provide detailed information obtained under section 133(6) and found that the revenue from the software product named Dxchange impacted the company's margins. Consistent with previous Tribunal decisions, Avani Cincom Technologies Ltd. was excluded from the set of comparables.

Helios Matheson Limited:
The assessee argued for the exclusion of Helios Matheson Limited, citing its income from ITES activities and the absence of segmental information. The Tribunal observed that Helios Matheson failed the employee cost filter applied by the TPO and had different FAR compared to the assessee. Therefore, Helios Matheson Limited was excluded from the final list of comparables.

Ishirinfotech Limited:
The assessee contested the inclusion of Ishirinfotech Limited, which failed the 25% employee cost filter based on section 133(6) information. The Tribunal noted that the TPO did not provide detailed information and found that Ishirinfotech's FAR was different from that of the assessee. Consequently, Ishirinfotech Limited was excluded from the final set of comparables.

Megasoft Ltd:
The assessee argued for the exclusion of Megasoft Ltd., highlighting its revenue from product licenses and related revenues. The Tribunal noted that Megasoft was engaged in multifarious activities, including software product sales, and an extraordinary event of amalgamation impacted its margins. Following previous Tribunal decisions, Megasoft Ltd. was excluded from the final set of comparables.

TATA Elxsi Limited:
The assessee requested the exclusion of TATA Elxsi Limited, which was engaged in embedded product design services, industrial design, and animation. The Tribunal found that TATA Elxsi's activities were complex and included hardware design, making it incomparable to simple software development services. Therefore, TATA Elxsi Limited was excluded from the final set of comparables.

Indium Software (India) Limited and VMF Soft Tech Limited:
The assessee sought the inclusion of Indium Software (India) Limited and VMF Soft Tech Limited. The Tribunal directed the TPO/AO to reconsider the inclusion of these companies after providing the assessee an opportunity to be heard and considering all relevant material.

2. Disallowance of Group Medical Insurance Expenditure:
The assessee contested the disallowance of group medical insurance expenditure, arguing that the scheme offered by ICICI Lombard was approved by IRDA. The Tribunal directed the AO to reconsider the issue, taking into account all relevant material available in the public domain and providing the assessee an opportunity to be heard.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal directed the TPO/AO to re-determine the ALP of the international transaction of software development services after excluding certain companies from the final list of comparables and reconsider the inclusion of others. The issue of disallowance of group medical insurance expenditure was remanded for fresh consideration.