2015 (1) TMI 920 - AT - Income Tax

Transfer pricing adjustment - selection of comparables - Held that - AVANI CIMCON TECHNOLOGIES LIMITED is to be excluded from the company from the list of comparables as this company is functionally dissimilar and different from assessee. E-ZEST SOLUTION LTD be excluded from the set of comparables as while 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. INFOSYS TECHNOLOGIES LTD. is not functionally comparable since it owns significant intangibles and has huge revenues from software products. It is also seen that the break-up of revenue from software services and software products is not available. In this view of the matter we hold that this company ought to be omitted from the set of comparable companies. KALS INFORMATION SYSTEMS LTD be excluded as this company is functionally different from the software activity of assessee as it is into software products. TATA ELXSI LTD is not to be considered for inclusion in the set of comparables in the case on hand as it is engaged in development of niche product and development services which is entirely different from the assessee company. WIPRO LTD cannot be considered as a comparable to the assessee as it 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 services. Risk adjustment - Held that - Consequent to our decision on comparables the risk adjustment may vary. Therefore AO/TPO is directed to re-workout the same after giving due opportunity to assessee for making submissions. Therefore issue of risk adjustment is restored to the file of the Assessing Officer/TPO for fresh consideration. Charging of interest under sections 234B and 234D - Held that - The charging of interest under the aforesaid sections is consequential and mandatory and the Assessing Officer has no discretion in the matter and in this view of the matter we uphold his action in charging the said interest. The Assessing Officer is however directed to re-compute the interest chargeable under section 234B/234D of the Act if any while giving effect to this order. - Appeal decided in favour of assessee for statistical purposes

Summary

Issues Involved:
1. Selection of comparables by the TPO.
2. Rejection of comparables by TPO.
3. Adjustment for risk differences.
4. Charging of interest under sections 234B and 234D of the Act.

Issue-Wise Detailed Analysis:

1. Selection of Comparables by the TPO:
- Avani Cimcon Technologies Limited:
- The assessee objected to its inclusion, arguing it is not functionally comparable as it is into software products. The TPO included it based on information obtained under section 133(6).
- The Tribunal found merit in the assessee's contention, noting the company was functionally dissimilar and directed its exclusion based on precedents like Agnity India Technologies P. Ltd. and 3DPLM Software Solution Ltd.

- E-Zest Solutions Ltd.:
- The assessee contended it was functionally different, engaging in e-Business Consulting Services and KPO services. The TPO included it based on section 133(6) information.
- The Tribunal agreed with the assessee, noting the company's services were more aligned with KPO services, not software development services, and directed its exclusion.

- Infosys Technologies Ltd.:
- The assessee argued it was not comparable due to its brand, intellectual property rights, and market leadership. The TPO included it, dismissing these factors.
- The Tribunal concurred with the assessee, noting the company's significant intangibles and software product revenues, and directed its exclusion, relying on cases like Agnity India Technologies P. Ltd. and Adaptec (India) P. Ltd.

- KALS Information Systems Ltd.:
- The assessee objected based on functional differences and lack of segmental details. The TPO included it, stating software services constituted over 75% of its revenue.
- The Tribunal found the company was developing software products and providing training services, thus functionally dissimilar, and directed its exclusion based on precedents like Bindview India Pvt. Ltd. and Symphony Services Pune P. Ltd.

- Tata Elxsi Ltd.:
- The assessee argued it was engaged in product design and innovation, not purely software development. The TPO included it.
- The Tribunal agreed with the assessee, noting the company's engagement in product design services and significant R&D activities, and directed its exclusion, referencing the Telecordia Technologies Pvt. Ltd. case.

- Wipro Ltd.:
- The assessee contended it was not comparable due to its significant intangibles, patents, and lack of segmental revenue bifurcation. The TPO included it.
- The Tribunal found merit in the assessee's arguments, noting the company's significant intangibles and lack of segmental data, and directed its exclusion, citing cases like Telecordia Technologies India Pvt. Ltd.

2. Rejection of Comparables by TPO:
- The assessee did not press for the inclusion of certain comparables omitted by the TPO, as the exclusion of the aforementioned companies would result in an adjusted ALP similar to the assessee's profit margin. Thus, the Tribunal did not examine the merits of these contentions.

3. Adjustment for Risk Differences:
- The assessee argued for a positive adjustment due to its limited risk profile compared to the comparables. The TPO had allowed a negative adjustment.
- The Tribunal directed the AO/TPO to re-work the risk adjustment after giving the assessee an opportunity to make submissions, restoring the issue for fresh consideration.

4. Charging of Interest under Sections 234B and 234D of the Act:
- The assessee challenged the charging of interest under sections 234B and 234D. The Tribunal upheld the AO's action as consequential and mandatory but directed the AO to re-compute the interest while giving effect to the order.

Conclusion:
The appeal was considered allowed for statistical purposes, with specific directions provided for excluding certain comparables and re-working the risk adjustment and interest computation.