2015 (3) TMI 1024 - AT - Income Tax

Transfer pricing adjustment - Computation of Arms Length Price - selection of comparable - Held that -Flextronics Software Systems Ltd. 595.12 crores and Infosys Technologies Ltd. 9028.00 crores whose turnover is above ₹ 200 Crores should be excluded from the list of comparable companies. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. Respectfully following the decision of of Tektronix Engineering (2015 (3) TMI 267 - ITAT BANGALORE), we direct that KALS InfoSystems Ltd. And Accel Transmatic Ltd. And TATA Elxsi be excluded from the list of 20 comparable arrived at by the TPO. There is no dispute that RPT filter in the case of Megasoft Ltd. was 17.08%, that of Aztech Software Ltd. was 17.78% and that of Geometric Software Ltd. was 19.34%. Coordinate Benches of the Tribunal are consistently following 15% as cut off mark for applying the RPT filter. Accordingly, we direct exclusion of Megasoft Ltd., Aztech Software Ltd. and Geometric Software Ltd. from the comparables. See Agile Software Enterprise Private Limited, C/o. Oracle India Private Ltd. Versus The Income Tax Officer 2015 (1) TMI 600 - ITAT BANGALORE Inclusion of the reimbursement of expenses by the AE to the Assessee as part of the operating cost while working the adjustment on account of ALP - Held that - It is clear from the decision rendered by the co-ordinate bench in the case of L.G.Soft India Pvt.Ltd. (2013 (9) TMI 191 - ITAT BANGALORE) that reimbursement of expenses cannot be considered as receipts for rendering services and should not be added back to the cost base for the purpose of mark up. Following the said decision, we hold that reimbursement of expenses cannot be considered as receipts for rendering services and should not be added back to the cost base for the purpose of mark up. As submitted by the learned DR neither the TPO not the DRP have gone into the question as to whether the receipt in question is reimbursement. We therefore remand the issue to the limited extent of verification regarding the nature of the receipt only and hold that if the receipts are purely reimbursement of expenses they should neither be considered as operating income nor operating expenses for the purpose of calculating margins of the Assessee. - Decided partly in fvaour of assessee for statistical purposes.

Summary

Issues Involved:
1. Exclusion of certain comparable companies due to turnover exceeding Rs. 200 crores.
2. Functional dissimilarity of certain comparable companies.
3. Exclusion of companies with Related Party Transactions (RPT) exceeding 15%.
4. Inclusion of reimbursement of expenses received from AE as part of operating cost.

Issue-wise Detailed Analysis:

1. Exclusion of Certain Comparable Companies Due to Turnover Exceeding Rs. 200 Crores:
The Tribunal held that companies with turnover exceeding Rs. 200 crores should not be considered comparable to the assessee, whose turnover is less than Rs. 100 crores. This decision was based on the principle that size significantly impacts comparability. The Tribunal cited the case of Triology E-Business Software India Pvt. Ltd. and other precedents, emphasizing that a reasonable classification of turnover is necessary for comparability. Consequently, the following companies were excluded:
- Flextronics Software Systems Ltd. (Rs. 595.12 crores)
- Infosys Technologies Ltd. (Rs. 9028.00 crores)

2. Functional Dissimilarity of Certain Comparable Companies:
The Tribunal found that certain companies were not functionally comparable to the assessee, which is engaged in pure software development services. The companies excluded for functional dissimilarity were:
- KALS Information Systems Ltd.
- Tata Elxsi Ltd.
- Accel Transmatic Ltd.
These exclusions were based on previous Tribunal decisions, including Tektronix Engineering Development India Pvt. Ltd., which held that these companies were either engaged in software product development or other activities not comparable to pure software development services.

3. Exclusion of Companies with Related Party Transactions (RPT) Exceeding 15%:
The Tribunal excluded companies with RPT exceeding 15%, following the precedent set in Agile Software Enterprises Pvt. Ltd. The excluded companies were:
- Aztec Software Ltd. (17.78% RPT)
- Geometric Software Ltd. (19.34% RPT)
- Megasoft Ltd. (17.08% RPT)
The Tribunal consistently applied the 15% RPT filter to ensure comparability.

4. Inclusion of Reimbursement of Expenses Received from AE as Part of Operating Cost:
The Tribunal addressed the issue of whether the reimbursement of expenses received from the AE should be included in the operating cost. The assessee argued that these reimbursements were out-of-pocket expenses and should not be considered as operating revenue or expenses. The Tribunal referred to the case of L.G. Soft India Pvt. Ltd., which held that such reimbursements should not be added to the cost base for markup purposes. However, the Tribunal remanded the issue to the TPO for verification of the nature of these receipts. If confirmed as reimbursements, they should neither be considered as operating income nor operating expenses for calculating margins.

Conclusion:
The appeal by the assessee was partly allowed. The Tribunal directed the exclusion of certain companies from the comparables list due to turnover and functional dissimilarity and upheld the exclusion of companies with high RPT. The issue of reimbursement of expenses was remanded for verification.