2014 (10) TMI 424 - AT - Income Tax

Selection of comparables Functionally different unit Difference in assets employed and risks assumed Held that - The assessee itself considered this company as functionally comparable by including it in the accept/reject matrix, but, rejected it on the ground that advertisement expenses were more than 3% - the TPO has taken the figures of this company s Software services segment alone, which is admittedly akin to that of the assessee and that the Advertisement, marketing and distribution spend in this segment is less than 3%, being the filter applied by the assessee - the inclusion of the Software service segment of Accel Transmatic Limited in the list of comparables is upheld - from the description of business activity of this company, it is a pure software development service provider - In the absence of any other specific objection against this company, From the annual accounts of this company that it is engaged in rendering ITES BPO services, Application management services, Offshore delivery, Project management services, Public sector services, Maritime practice and Executive education information systems, etc. - the TPO has taken the figures of this company which represent Income from software sales and services - the assessee is not engaged in software sales - the comparability of Flextronics Software Systems Limited is upheld, as the company cannot be considered as comparable and is directed to be excluded from the list of comparables. Ishir Infotech Limited Held that - This company to be comparable to that of the assessee - the company has included Professional fees along with Director s salary, etc., under the head Administrative expenses - When the objection was taken by the assessee before the TPO that the employee cost was only 4% viewing only the Establishment expenses in isolation without considering the employee cost included under the head Administrative expenses , the TPO corrected the position by observing that the employee cost was more than 25% by impliedly including the personnel cost included under the head Administrative expenses - The assessee did not challenge the TPO s calculation before the DRP on this issue - filter of 25% of RPT is good enough to make a controlled transaction and thus expunging it from the list of comparables, which can only be uncontrolled transactions - the view taken by the TPO is upheld in including this case in the list of comparables. KALS Information Systems Limited Held that - The company was engaged in Software development and training - the TPO adopted Software development segment of this company by noticing that this segment also included revenues from software products and training - the assessee is not engaged in imparting any training on commercial basis or selling its software products, the financials of the company under this segment cannot be compared with the assessee - The contribution by the sale of software products or training to the overall revenue of this segment cannot be precisely ascertained to determine the question of its comparability Decided partly in favour of assessee.

Summary

Issues Involved:
1. Inclusion of certain companies in the list of comparables.
2. Functional analysis of the assessee.
3. Use of data obtained under Section 133(6).
4. Previous tribunal decisions on comparability.
5. Specific objections to individual companies included by the TPO.

Detailed Analysis:

1. Inclusion of Certain Companies in the List of Comparables:

The assessee contested the inclusion of certain companies in the list of comparables, arguing that they were functionally incomparable and had differences in assets employed and risks assumed. The Transfer Pricing Officer (TPO) had shortlisted 26 companies as comparables, which led to a transfer pricing adjustment of Rs. 1,55,78,623/-.

2. Functional Analysis of the Assessee:

The assessee, a wholly-owned subsidiary of Greenfield Online Inc., USA, provided software development and related services to its parent group. The TPO's analysis revealed that the assessee was involved in both software service provision and software development, albeit without holding intellectual property rights in the developed software. The assessee's functional divisions included survey programming, sampling, data processing, software development, project management support, help desk, and quality maintenance.

3. Use of Data Obtained Under Section 133(6):

The assessee argued that the TPO obtained information directly from certain companies under Section 133(6) without making it available to the assessee. However, the tribunal found that the TPO had provided all such data to the assessee, and the assessee had made detailed submissions against the comparability of such companies. Therefore, this objection was dismissed.

4. Previous Tribunal Decisions on Comparability:

The assessee contended that certain companies had been held as not comparable in previous tribunal decisions. The tribunal clarified that comparability needs to be assessed based on the functional profile and applicable filters of each company. A company deemed incomparable in one case might still be comparable in another, depending on the specific circumstances.

5. Specific Objections to Individual Companies Included by the TPO:

- Accel Transmatic Limited: Upheld as comparable since the software services segment was functionally similar to that of the assessee.
- Avani Cimcon Technologies Limited: Included as comparable due to its pure software development services.
- Celestial Labs Limited: Excluded as it was engaged in developing software products with intellectual property rights.
- Datamatics Limited: No objection from the assessee.
- E-Zest Solutions Limited: Included as comparable due to its software development services.
- Flextronics Software Systems Limited: Excluded due to its involvement in selling software products.
- Geometric Limited: No objection from the assessee.
- Helios & Matheson Information Technology Limited: Excluded due to its diverse services including ITES BPO and software sales.
- IGate Global Solutions Limited: No objection from the assessee.
- Infosys Technologies Limited: Excluded as it was a giant company with significant differences in risk profile and scale.
- Ishir Infotech Limited: Included as comparable after verifying employee costs and related party transactions.
- KALS Information Systems Limited: Excluded due to its involvement in software products and training.
- LGS Global Limited: No objection from the assessee.
- Lucid Software Limited: Excluded as it developed software products with intellectual property rights.
- Mediasoft Solutions Limited: No objection from the assessee.
- Megasoft Limited: Excluded due to exceptional financial results from mergers.
- Mindtree Limited: No objection from the assessee.
- Persistent Systems Limited: Excluded due to merger impacting financial results.
- Quintegra Solutions Limited: No objection from the assessee.
- R S Software (India) Limited: No objection from the assessee.
- R Systems International Ltd.: Included with correct OP/OC calculation.
- Sasken Communication Technologies Limited: Excluded due to acquisition impacting financial results.
- SIP Technologies & Exports Limited: No objection from the assessee.
- Tata Elxsi Ltd.: Excluded due to different nature of activities.
- Thirdware Solutions Limited: No objection from the assessee.
- Wipro Limited: Excluded as it was a giant company with significant differences in parameters.

Conclusion:

The tribunal set aside the impugned order and remitted the matter to the TPO/AO for fresh determination of the ALP of the assessee's international transactions, considering the directions given regarding the inclusion or exclusion of the 26 comparable companies. The appeal was partly allowed for statistical purposes.