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2014 (7) TMI 641 - AT - Income TaxTransfer pricing adjustment Selection of comparables Functionally different companies - Avani Cimcon Technologies Limited Held that - The assessee has been categorised as a software development service provider the company is into product development - As segmental details of operating income of software development services and sale of software products are not available, it could not be ascertained whether the profit ratio of this company can be taken into consideration for comparing with the assessee thus, this company cannot be treated as comparable to the assessee the AO/TPO is directed to exclude the company from the list of comparables the decision in Virtusa (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax 2013 (11) TMI 422 - ITAT HYDERABAD followed Decided in favour of Assessee. Infosys Technologies Ltd. Enormity in turnover - Held that - The company cannot be considered as comparable to the assessee due to various factors such as its size, turnover, brand value, scale of operation, diversified activities and owning of intangibles - the turnover of Infosys Technologies Limited isRs.13,149 crores as against ₹ 47 crores of the assessee - considering the enormity of turnover of the company as well as other relevant factors like brand value, scale of operation, size etc. the company cannot be treated as comparable to a purely captive service provider like the assessee in any manner Relying upon CIT Vs. Agnity India Technologies Pvt. Ltd. 2013 (7) TMI 696 - DELHI HIGH COURT - the AO/TPO is directed to exclude the company from the list of comparables Decided in favour of Assessee. Ishir Infotech Ltd. Employee cost filter - Held that - The decision in Virtusa (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax 2013 (11) TMI 422 - ITAT HYDERABAD followed Ishir Infotech Limited cannot be treated as comparable as it does not qualify the employee cost filter as well as RPT filter - the AO/TPO is directed to exclude the company from the list of comparables Decided in favour of Assessee. Lucid Software Limited Segmental data not available - Held that - The decision in Virtusa (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax 2013 (11) TMI 422 - ITAT HYDERABAD followed it earns revenue both from product development as well as software services for which segmental data is not available - segmental data in respect of sale of products and software services are not available thus, the AO /TPO is directed to consider only the segmental margin of this company for the relevant assessment year for computing ALP - Decided in favour of Assessee. Tata Elxsi Limited Functionally different - Held that - The decision in Telcordia Technologies India (P.) Ltd. Versus Assistant Commissioner of Income-tax, Cir 3(3), Mumbai 2012 (6) TMI 388 - ITAT MUMBAI followed Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company - the nature of product developed and services provided by this company are different from the assessee - Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services - the company itself in the information provided in response to the notice issued u/s 133(6) of the Act has admitted that it cannot be considered as comparable with other assessees the AO is directed to exclude the company from the list of comparables while determining ALP - Decided in favour of Assessee. Wipro Limited Held that - The decision in Telcordia Technologies India (P.) Ltd. Versus Assistant Commissioner of Income-tax, Cir 3(3), Mumbai 2012 (6) TMI 388 - ITAT MUMBAI followed the company is a global IT Company having varieties of service and products and looking to the magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis - Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with the assessee company at all - considering the turnover, brand value as well as other dynamics of Wipro Ltd., it comes in the same category as Infosys and certainly cannot be compared with the assessee Decided in favour of Assessee. Rejection of comparables by the TPO Held that - The assessee s contention in respect of Aztecsoft ltd., Birlasoft Technologies ltd. and PSI Data Systems ltd needs to be considered afresh - If the reimbursements are towards expenditure incurred on behalf of the AE and are on cost to cost basis, they have to be excluded for Indium Software India Ltd., exclusion of the company is based on valid reasons, hence, has to be upheld - L & T Infotech was also found to be functionally different as it has products also - not only it has turnover of more than ₹ 600 crores but it has brand value and goodwill - TPO was not in a position to include the above case in the absence of segmental data. So far as VMF Softech Ltd. is concerned, even though this company may be includable on the basis of foreign exchange earnings being 90% of the revenue Relying upon Virtusa (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax 2013 (11) TMI 422 - ITAT HYDERABAD - the company has been rightly rejected as comparable Decided partly in favour of Assessee. Adjustment for risk differences Held that - The TPO has elaborately discussed the issue and concluded that risk adjustment need not be given as the single customer risk/political risk of tax payer combined with arithmetic mean price considered in the case of comparable companies qualifies the risk differential if any between the tax payer and comparable Indian enterprise - the assessee has advanced detailed the DRP has simply endorsed the view of the TPO without dwelling upon in detail the issue requires to be examined afresh by the TPO - the issue of risk adjustment is restored to the file of the TPO Decided in favour of Assessee.
Issues Involved:
1. Selection of comparables by the Transfer Pricing Officer (TPO). 2. Rejection of comparables by the TPO. 3. Adjustment for risk differences. Detailed Analysis: 1. Selection of Comparables by the TPO: AVANI CIMCON TECHNOLOGIES LIMITED: The assessee sought exclusion of this company on the grounds that it has revenue from both product and software services without segment-wise data and shows super normal profit. The Tribunal held that this company cannot be treated as comparable due to lack of segmental details and super normal profits, following the decision in Virtusa (India) Pvt. Ltd. and other cases. INFOSYS TECHNOLOGIES LTD.: The assessee argued that Infosys cannot be compared due to its size, brand value, and diversified activities. The Tribunal agreed, noting the significant differences in turnover and other factors, and directed its exclusion, aligning with various precedents including CIT Vs. Agnity India Technologies Pvt. Ltd. ISHIR INFOTECH LTD: The assessee contended that this company fails the employee cost filter. The Tribunal, following the decision in Virtusa (India) Pvt. Ltd. and other cases, agreed and directed its exclusion. LUCID SOFTWARE LIMITED: The assessee objected due to lack of segmental data for product development and software services. The Tribunal, referencing Virtusa (India) Pvt. Ltd. and other cases, directed exclusion of this company. MEGASOFT LIMITED: The assessee argued this company is predominantly into product development. The Tribunal directed the TPO to consider only the segmental margin for software development services, in line with previous decisions. TATA ELXSI LIMITED: The assessee cited the company's own admission of non-comparability due to complex business nature. The Tribunal, referencing Telcordia Technologies India Pvt. Ltd. and other cases, directed exclusion of this company. WIPRO LIMITED: The assessee argued that Wipro's segmental information is unaudited and it assumes significant market risks. The Tribunal, following the reasoning applied to Infosys, directed exclusion of Wipro due to its size, brand value, and diversified operations. 2. Rejection of Comparables by the TPO: The assessee challenged the rejection of the following companies: Aztec Soft Ltd. and Birla Technologies Ltd.: The Tribunal directed the TPO to reconsider these companies if reimbursements are excluded and they satisfy other filters. Indium Software India Ltd.: The Tribunal upheld the exclusion due to valid reasons. Larsen & Toubro Infotech: The Tribunal upheld the exclusion due to functional differences, significant turnover, and lack of segmental data. PSI Data Systems Ltd.: The Tribunal directed reconsideration if reimbursements are excluded and other filters are satisfied. VMF Softech Ltd.: The Tribunal upheld the exclusion due to doubts about the company's genuineness and activities. 3. Adjustment for Risk Differences: The assessee argued for risk adjustment, claiming it faces single customer risk while comparables face market risk. The Tribunal noted that the TPO had discussed this issue but the DRP did not consider the assessee's detailed arguments. The Tribunal directed the TPO to re-examine the issue of risk adjustment afresh, considering the exclusion of certain comparables. If the PLI after exclusion is within parameters, the risk adjustment may become academic. Conclusion: The Tribunal directed the TPO to re-determine the ALP of international transactions, allowing working capital adjustments and considering further risk adjustments if necessary. The appeal was partly allowed, with specific grounds addressed and others dismissed as not pressed or premature. The order was pronounced on 04-06-2014.
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