2019 (11) TMI 1096 - AT - Income Tax

TP Adjustment - adjustment made to the arm's length price of software development services provided to the overseas Associated Enterprises (AEs) - comparable selection - HELD THAT - The assessee basically is engaged in providing software development services to the AE thus companies functionally dissimilar with that of assessee need to be deselected from final list. Company excluded who exceeds more than 25% RPT filter applied by the Transfer Pricing Officer.

Summary

Issues Involved:
1. Transfer Pricing Adjustment and Selection of Comparables.
2. Application of Turnover Filter for Excluding Comparables.

Detailed Analysis:

1. Transfer Pricing Adjustment and Selection of Comparables:

The primary issue in the assessee's appeal was the addition made on account of transfer pricing adjustment to the arm's length price (ALP) of software development services provided to the overseas Associated Enterprises (AEs). The dispute was narrowed down to the selection of seven comparables.

i) Thirdware Solutions Ltd.:
The assessee objected to this company's selection, arguing it was engaged in multiple activities, including software development services, sale of products, and related services, earning substantial revenue from product licenses and extraordinary profit due to intangibles owned. The Tribunal in the assessee's own case for AY 2008-09 and in Saplabs India Pvt. Ltd. v/s ADIT excluded this company as a comparable due to functional dissimilarity. The Tribunal upheld this exclusion.

ii) Tata Elxsi Ltd.:
The assessee argued that this company was engaged in various activities, including product engineering and design services, with no segmental results available. The Tribunal in the assessee's own case for AY 2008-09 and 2009-10, and in Google India Pvt. Ltd. v/s DCIT for the same assessment year, excluded this company as a comparable due to functional dissimilarity. The Tribunal upheld this exclusion.

iii) Foursoft Ltd.:
The assessee contended that this company had a related party transaction (RPT) percentage of 19.9%, exceeding the 15% filter, and was functionally different as it developed software products. The Tribunal in Saplabs India Pvt. Ltd. and Google India Pvt. Ltd. excluded this company for the same reasons. The Tribunal upheld this exclusion.

iv) Exensys Software Solutions Ltd.:
The assessee argued that this company was involved in multiple activities, including software product development, owned significant intangibles, and had an extraordinary event of amalgamation during the year. The Tribunal in Saplabs India Pvt. Ltd. excluded this company due to these factors. The Tribunal upheld this exclusion.

v) Sankhya Infotech Ltd.:
The assessee objected to this company due to its engagement in niche software product development and training, with no segmental information available. The Tribunal in Saplabs India Pvt. Ltd. and Google India Pvt. Ltd. excluded this company for the same reasons. The Tribunal upheld this exclusion.

vi) Geometric Software Solutions Ltd.:
The assessee argued that this company was engaged in software product development with no segmental details available. The Tribunal in Saplabs India Pvt. Ltd. and Google India Pvt. Ltd. excluded this company for the same reasons. The Tribunal upheld this exclusion.

vii) Bodhtree Consulting Ltd.:
The assessee contended that this company had an RPT of 34.68%, exceeding the 25% filter, and showed extreme fluctuation in margins. The Tribunal in the assessee's own case for AY 2006-07 and 2007-08, and in Saplabs India Pvt. Ltd. and Google India Pvt. Ltd. excluded this company for these reasons. The Tribunal upheld this exclusion.

The Tribunal directed the Assessing Officer to compute the ALP afresh after excluding the aforementioned comparables.

2. Application of Turnover Filter for Excluding Comparables:

The Revenue's appeal contested the application of the turnover filter by the learned Commissioner (Appeals) in excluding certain comparables selected by the Transfer Pricing Officer.

The Commissioner (Appeals) excluded Flextronics Software Systems Ltd. (Segmental), L&T Infotech Ltd., Satyam Computer Service Ltd., and Infosys Technologies Ltd. due to their high turnover compared to the assessee's turnover of ?17.30 crore.

The Revenue argued that high turnover should not be a criterion for rejection if the comparables were functionally similar. The assessee countered that turnover is a crucial factor and cited the Tribunal's decisions in their own case for AY 2005-06 and 2007-08, where companies with turnover above ?200 crore were excluded.

The Tribunal upheld the Commissioner (Appeals)' decision, noting that the turnover of the excluded companies was substantially higher and impacted profitability. The Tribunal referenced its own decisions in the assessee's case for AY 2006-07 and 2007-08, affirming that the upper turnover filter is crucial in selecting comparables. The Revenue's appeal was dismissed.

Conclusion:

The Tribunal allowed the assessee's appeal partly by excluding the disputed comparables and directed a fresh computation of the ALP. The Revenue's appeal was dismissed, upholding the application of the turnover filter by the Commissioner (Appeals).