9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2014 (12) TMI 612 - AT - Income TaxTransfer pricing adjustment - Export of software development services Selection of comparables Functionally dissimilar company - Avani Cincom Technologies Ltd. Persistent Systems Ltd. - Softsol India Ltd. - Held that - As decided in assessee s own case for the earlier assessment year, decided in Delmia Solutions Pvt. Versus Deputy Commissioner of Income Tax, Circle-11(1), Bangalore 2013 (11) TMI 189 - ITAT BANGALORE - It was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables - Non-furnishing the information obtained u/s 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable - even in the earlier year, this company was not selected on the basis on any search process carried out by the TPO but only on the basis of information collected u/s 133(6) - the assessee has brought on record evidence that this company is functionally dissimilar and different from the assessee and hence is not comparable - the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also thus, this company cannot be considered as a comparable to the assessee Decided in favour of assessee. Bodhtree Consulting Ltd. Held that - The assessee had never objected to the inclusion of this company in the set of comparbales in earlier proceedings before the TPO and the DRP - the assessee has only pointed out fluctuating margins in the results of this company over the years - This, in itself, cannot be reason enough to establish differences in functional profile or any clinching factual reason warranting the exclusion of this company from the list of comparables - the contentions of the assessee are rejected and this company is held to be comparable to the assessee and its inclusion in the list of comparable companies is upheld. Functionally dissimilar company Celestial Biolabs Ltd. - KALS Information Systems Ltd. - Held that - As decided in assessee s own case for the earlier assessment year, decided in Delmia Solutions Pvt. Versus Deputy Commissioner of Income Tax, Circle-11(1), Bangalore 2013 (11) TMI 189 - ITAT BANGALORE - this company is held to be functionally dissimilar and different from a software service provider informatics as it is into bio software products and is not comparable to a mere software service provider - the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09 thus, this company is functionally different and cannot be considered as a comparable to the assessee who is a software service provider and AO is directed to omit this company from the final list of comparables. Functionally dissimilar company Infosys Technologies Ltd. Held that - This company be omitted from the final set of comparables for the reason that this company is functionally different as it has its own intangibles, IPR, brand and has huge revenues from software products, whereas the assessee is a mere software services provider - assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable - this company owns its own intangibles, has huge software product revenues, brand, etc. and therefore cannot be considered as a comparable to the assessee who is a mere software service provider Decided in favour of assessee. Functionally dissimilar company Wipro Ltd. Tata Elxsi Ltd. - Lucid Software Ltd. - Held that - this company be omitted from the final set of comparables for the reason that it is not functionally comparable to software service providers as it is into development of software products, etc. - this company is engaged both in software development and product development services - There is no information on the segmental bifurcation of revenue from sale of product and software service - this company being into software development, etc is functionally different and cannot be considered as a comparable to the assessee who is a software service provider. E-Zest Solutions Ltd. Held that - The TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee - while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services in Capital IQ Information Systems (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax (International Taxation) 2014 (3) TMI 626 - ITAT HYDERABAD it has been held that KPO services are not comparable to software development services and are therefore not comparable. Thirdware Solutions Ltd. (Segment) Held that - This company is to be excluded from the final list of comparables as it is engaged in product development and its income is also from trading in software licences and is, therefore, not comparable to a software development service provider like the assessee thus, this company cannot be considered as a comparable to the assessee. Quintegra Solutions Ltd. Held that - Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider - this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs in 24/7 Customer. Com (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle 11(2), Bangalore 2013 (1) TMI 45 - ITAT BANGALORE it has been held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted from the list of comparables. Risk Adjustment Held that - The TPO has not allowed any adjustment by observing that this has been considered and discussed in detail in the order for earlier years as held in Intellinet Technologies India (P.) Ltd. v. ITO 2012 (6) TMI 237 - ITAT BANGALORE - the TPO ought to have given risk adjustment to the margins of the comparables for bringing them on par with the assessee and remanded the issue back to the file of the TPO thus, the matter is remitted back to the AO/TPO for market risk adjustment.
Issues Involved:
1. Transfer Pricing Adjustments 2. Risk Adjustment 3. Charging of Interest under Sections 234B and 234D of the Income Tax Act Detailed Analysis: Transfer Pricing Adjustments: Ground Nos. 1 and 2: These grounds were general in nature and did not require specific adjudication. Ground Nos. 3 and 4: These grounds pertain to the grant of suitable adjustments towards differences in the risk profile between the assessee and the comparable companies. This issue was discussed separately later in the order. Ground No. 5: This ground regarding the benefit of +/- 5% while computing the ALP was not pressed. The retrospective amendment to section 92C(2A) of the Act by the Finance Act, 2012, settled the issue, and the benefit of 5% was not allowable to the assessee. Ground No. 6.1: This ground related to the TPO rejecting the assessee's TP Study and conducting a fresh search for deciding the comparable companies. As the general grounds were not pressed, no separate adjudication was called for. Ground No. 6.2: This ground concerned the TPO/AO's action in adopting an ALP mark-up of 23.65% on international transactions. Since this was general in nature, no adjudication was called for. Ground No. 6.3: This ground was about the use of information obtained under section 133(6) of the Act by the TPO for deciding the comparability of companies. As the general grounds were not pressed, no specific adjudication was required. Ground No. 6.4: This ground related to the use of the employee cost filter. As the general grounds were not pressed, no specific adjudication was required. Ground Nos. 6.6 to 6.17: These grounds related to the inclusion of certain companies by the TPO in the final list of comparable companies by applying various filters. The comparability or otherwise of individual companies was considered separately. Assessee's List of Comparables: The assessee selected 18 companies as comparables with an average mean margin of 10.98%. The TPO selected 20 comparables with an average mean margin of 23.65%, leading to a TP adjustment of Rs. 3,81,72,484. Companies Incorrectly Adopted as Comparables by the TPO: 1. Avani Cincom Technologies Ltd.: The company was excluded as it was not functionally comparable, being into software products rather than software development services. 2. Bodhtree Consulting Ltd.: Despite objections, it was included as the assessee had accepted its inclusion in earlier proceedings. 3. Celestial Biolabs Ltd.: Excluded due to functional dissimilarity and failure of the employee cost filter. 4. KALS Information Systems Ltd.: Excluded due to functional dissimilarity and involvement in software products and training services. 5. Infosys Technologies Ltd.: Excluded due to significant intangibles, brand value, and revenue from software products. 6. Wipro Ltd.: Excluded due to engagement in both software and product development services, ownership of intangibles, and use of consolidated financial statements. 7. Tata Elxsi Ltd.: Excluded due to engagement in product designing services rather than purely software development services. 8. E-Zest Solutions Ltd.: Excluded as it provided high-end ITES (KPO services) rather than software development services. 9. Thirdware Solutions Ltd.: Excluded due to engagement in product development and lack of segmental profit and loss accounts. 10. Lucid Software Ltd.: Excluded due to engagement in software product development. 11. Persistent Systems Ltd.: Excluded due to engagement in product development and product design services and lack of segmental details. 12. Quintegra Solutions Ltd.: Excluded due to engagement in product engineering services, proprietary software products, and substantial R&D activities. 13. Softsol India Ltd.: Excluded due to high related party transactions (RPT) exceeding 15%. Risk Adjustment: The assessee argued for risk adjustments due to its limited risk profile compared to the comparables. The Tribunal remanded the issue back to the TPO for examination in light of similar cases, directing the TPO to consider all contentions and material on record. Charging of Interest under Sections 234B and 234D: The charging of interest under sections 234B and 234D was upheld as consequential and mandatory. The AO was directed to recompute the interest chargeable while giving effect to the order. Conclusion: The assessee's appeal was partly allowed, with several companies being excluded from the list of comparables due to functional dissimilarities and other factors. The issue of risk adjustment was remanded back to the TPO for further examination. The charging of interest under sections 234B and 234D was upheld but required recomputation.
|
