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2015 (3) TMI 566 - AT - Income TaxTransfer pricing adjustment - selection of comparable - Held that - Exensys Software Solutions Ltd.- there is an extra-ordinary event which resulted in high operating margin of that company and we, therefore, direct the AO to exclude this company from the list of comparables. In the above referred case of Intoto Sof tware India Pvt. Ltd., complete details were not placed on record, therefore, the matter was sent to AO for verif ication whereas in this case assessee has objected even before the AO/ CIT(A), therefore, there is no need to set aside the issue to the f ile of the AO for examination as was done in the case of Intoto Software (2013 (10) TMI 599 - ITAT HYDERABAD). We are, therefore, of the opinion that on the basis of facts placed on record, the case of Exensys Sof tware Solutions Ltd. cannot be taken as comparable. Similarly, the other cases, Bodhtree consulting Ltd, Four Soft Ltd, Infosys, Sankhya Infotech Ltd., Thirdware Solutions Ltd, Tata Elexi (seg) etc, are also to be excluded as they are considered and analysed in various cases relied on about functional ity and why the same are not comparable to the companies like assessee. Bodhtree consulting Ltd also fails RPT filter as contended. In view of this, we are not discussing above comparables in detail, but, suffice to say that assessee s submissions are valid. The AO is directed to exclude the above comparables and re-work out the arm s length margin accordingly. As far as Flextronics Software Limited is concerned, we find that in case of Intoto Software India Pvt. Ltd., (2013 (10) TMI 599 - ITAT HYDERABAD) the co-ordinate Bench of this Tribunal having found it to be functionally different as it is into product development has directed excluding it for comparability analysis. Respectfully following the decision of the coordinate bench of this Tribunal in case of M/s Intoto Software India Pvt.Ltd. (supra) we also direct the Assessing Officer/ TPO to exclude this company. Risk adjustment/working capital adjustment - Held that - Since TPO himself has concluded that risk adjustment to the extent of 0.85% can be allowed, we direct him to allow the risk adjustment to that extent. It may be pertinent to mention here that in case of assessee in the subsequent AY i.e. AY 2007-08, considering similar risk profile, the Tribunal has allowed risk adjustment of 1%. Keeping in view the aforesaid facts, we direct Assessing Officer/TPO to allow risk adjustment at 0.85% while computing ALP. In view of the aforesaid, Assessing Officer/TPO is directed to compute ALP afresh in terms with direction given hereinbefore and thereafter treat the shortfall, if any, as the adjustment to be made to ALP.
Issues Involved:
1. Selection of Comparables 2. Risk Adjustment Detailed Analysis: 1. Selection of Comparables: The primary issue revolves around the selection of comparable companies for determining the arm's length price (ALP) for the assessee, a captive service provider to its Associated Enterprise (AE). The Transfer Pricing Officer (TPO) selected 17 comparables, which included companies that the assessee objected to on grounds of functional dissimilarity and other factors. Objections to Specific Comparables: - Bodhtree Consulting Ltd.: - Related Party Transactions Filter: The company had significant transactions with related parties, which should disqualify it as a comparable. - Functionally Different Filter: The company provides e-paper solutions and data cleansing software, categorizing it under IT-enabled services rather than pure software development. - Exensys Software Solutions Ltd.: - Functionally Different: The company is involved in software products and ITES, owning significant brand intangibles. - Exceptional Year of Operations: The amalgamation with Holool India Ltd. had a material impact on its financial results. - Error in Margin Computation: Deferred revenue expenditure was excluded in margin computation. - Sankhya Infotech Ltd.: - Functionally Different: The company is primarily into software products, as indicated by various disclosures and responses to notices. - Foursoft Ltd.: - Functionally Different: The company derives income from software licenses and AMC's, indicating it is not a pure software development service provider. - Thirdware Solutions Ltd.: - Functionally Different: The company engages in implementation and customer services for ERP software and is a distributor of products. - Tata Elxsi Ltd.: - Specialized Embedded Software Development: The company operates in complex segments, making it incomparable to a software services provider. - Infosys Technologies Ltd.: - Diversified Activities: The company's engagement in products, consultancy, and solutions, along with its significant brand value and economies of scale, makes it incomparable to a small captive service provider. - Flexitronics Ltd.: - Functionally Different: The company is involved in product development and reported very high margins, making it unsuitable as a comparable. Tribunal's Findings: The Tribunal found merit in the assessee's objections, noting that the comparability of these companies had been rejected in previous cases involving similar software development service providers. The Tribunal directed the exclusion of Bodhtree Consulting Ltd., Exensys Software Solutions Ltd., Sankhya Infotech Ltd., Foursoft Ltd., Thirdware Solutions Ltd., Tata Elxsi Ltd., Infosys Technologies Ltd., and Flexitronics Ltd. from the list of comparables. 2. Risk Adjustment: The assessee sought a risk adjustment to account for differences in risk profiles between itself and the comparables. The TPO computed a risk adjustment of 0.85% but did not allow it in the final analysis. Tribunal's Findings: The Tribunal noted that the TPO himself had concluded that a risk adjustment of 0.85% was appropriate. Additionally, in a subsequent assessment year (AY 2007-08), a risk adjustment of 1% had been allowed for the assessee. Consequently, the Tribunal directed the TPO to allow a risk adjustment of 0.85% while computing the ALP. Conclusion: The Tribunal partly allowed the appeal, directing the exclusion of specific comparables and the allowance of a risk adjustment of 0.85%. The Assessing Officer/TPO was instructed to recompute the ALP accordingly and make any necessary adjustments.
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