2019 (5) TMI 313 - AT - Income Tax

TPA - comparable selection - functional profile assessment - HELD THAT - The appellant before The assessee is involved in rendering the software development services to its assessee, thus companies functionally dissimilar with that of assessee need to be deselected from final list. We direct the TPO to exclude these four comparables namely., (a) Genesys International Corpn. Ltd., (b) Infosys Ltd., (c) Larsen and Toubro Infotech Ltd., and (d) Persistent Systems Ltd. from the list of comparable. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Selection of comparables for Transfer Pricing (TP) analysis.
2. Determination of Arm's Length Price (ALP) for international transactions.
3. Exclusion of specific comparables from the final list.

Issue-wise Detailed Analysis:

1. Selection of Comparables for TP Analysis:

The assessee, a subsidiary of Sandvine Incorporated ULC, engaged in software development services, had selected five comparables in its TP study, resulting in an OP/OC margin of 8.86%. However, the Transfer Pricing Officer (TPO) was dissatisfied with the TP study and applied various filters, ultimately selecting ten comparables. The arithmetic mean of the profit margin of these companies was 22.63%.

2. Determination of ALP for International Transactions:

The TPO computed the ALP based on the average arithmetic mean of the profit margins of the selected comparables. The Dispute Resolution Panel (DRP) partially granted relief to the assessee but upheld the TPO's adjustments, resulting in a final TP adjustment of ?97,14,556.

3. Exclusion of Specific Comparables from the Final List:

The assessee challenged the inclusion of four comparables: Genesys International Corpn. Ltd., Infosys Ltd., Larsen and Toubro Infotech Ltd., and Persistent Systems Ltd. The assessee argued that these companies were not functionally comparable. The Tribunal referred to previous decisions, particularly in the case of CGI Information Systems and Management Consultants Pvt. Ltd., where similar comparables were excluded due to functional dissimilarities.

Detailed Analysis:

Selection of Comparables for TP Analysis:

The assessee's initial selection of five comparables was rejected by the TPO, who then selected ten comparables. The TPO's selection included companies with significantly higher profit margins, which led to a substantial TP adjustment. The arithmetic mean of the profit margins of these comparables was 22.63%, significantly higher than the assessee's margin of 8.86%.

Determination of ALP for International Transactions:

The TPO's computation of the ALP was based on the average profit margins of the selected comparables. The DRP, while granting partial relief, largely upheld the TPO's adjustments. The final TP adjustment was ?97,14,556, as reflected in the final assessment order.

Exclusion of Specific Comparables from the Final List:

The assessee's main contention was the exclusion of four comparables. The Tribunal examined the functional profiles and previous decisions, particularly the case of CGI Information Systems and Management Consultants Pvt. Ltd., where similar companies were excluded. The Tribunal found that:

- Infosys Ltd.: Excluded as it is a giant risk-taking company engaged in the development and sale of software products and owns intangible assets, making it not comparable with a software development service provider.
- Larsen & Toubro Infotech Ltd.: Excluded due to its involvement in software products and lack of segmental information on software development services.
- Persistent Systems Ltd.: Excluded for being a software product company without segmental information on software development services.
- Genesys International Corpn. Ltd.: Excluded as it provides Geographical Information Services and not software development services, with significant intangible assets.

The Tribunal directed the TPO to exclude these four comparables from the final list, resulting in the assessee's appeal being allowed.

Conclusion:

The Tribunal's decision to exclude the four comparables was based on functional dissimilarities and previous judicial precedents. The final order directed the TPO to re-compute the ALP after excluding these comparables, leading to the assessee's appeal being allowed. The judgment emphasized the importance of functional comparability in TP analysis and upheld the principles established in previous cases.