2015 (4) TMI 147 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Avani Cimcon Technologies Ltd. cannot be treated as comparable as this company is into product development. As segmental details of operating income of software development services and sale of software products are not available, it could not be ascertained whether the profit ratio of this company can be taken into consideration for comparing with the assessee. Celestial Labs Ltd. is not comparable to the assessee as the functions are not similar. Further, on a perusal of the order of the DRP, it is to be seen that two of the members of the panel on considering the fact that in many other cases Celestial Labs Ltd., was not treated as comparable on the ground that it is not involved in development of software services have differed from the final order passed by the panel. Infosys Technologies Ltd. and Wipro Ltd. cannot be considered as comparables to the assessee as they are industrial giants not only on account of quantum of revenue earned by them but due to various other factors like reputation, brand value, goodwill etc. Mega Soft Ltd.cannot as it is predominantly a product development company and the margin from software development services is only 23.11% we direct Assessing Officer/TPO to consider only segmental margin of this company for the relevant AY for computing ALP. Thus direct the Assessing Officer/TPO to compute the ALP afresh Exemption u/s 10A manner of computation - Communication and freight expenses reduced from the export turnover only while computing deduction u/s 10A of the Act - Held that - Following the decision of CIT Vs.Gemplus Jewellery, 2010 (6) TMI 65 - BOMBAY HIGH COURT and ITO Vs Saksoft Ltd (32009 (3) TMI 243 - ITAT MADRAS-D) we direct the AO to exclude the communication expenses from export turnover as well as total turnover while computing deduction u/s 10A of the Act. Appeal of the assessee is partly allowed.

Summary

Issues:
Transfer pricing adjustments based on comparables selection, Deduction under section 10A for communication and freight expenses.

Transfer Pricing Issues:
The appeal was against the assessment order passed under sections 143(3) and 144C of the Income Tax Act for the AY 2007-08. The Assessing Officer made a TP adjustment under section 92CA based on the Transfer Pricing Officer's (TPO) selection of comparables. The TPO selected 25 comparables with an average PLI of 25.51% after rejecting the TP study conducted by the assessee. The assessee raised objections before the Dispute Resolution Panel (DRP) challenging the selection of certain comparables by the TPO. The DRP rejected the objections, leading to the final assessment order. The assessee appealed, focusing on the selection of comparables by the TPO and sustained by the DRP. The appellate tribunal analyzed objections to specific comparables raised by the assessee.

1. Avani Cimcon Technologies Ltd.: The AR objected to this company citing its product sales, lack of segment-wise data, and abnormal profit margin. The tribunal, following previous decisions, directed the TPO not to consider this company as comparable due to its involvement in product development.

2. Celestial Labs Ltd.: The AR argued that this company's research and development activities made it functionally different from the assessee. Despite initial acceptance of this argument by the panel, the company was retained as comparable. The tribunal ruled that Celestial Labs cannot be treated as comparable to the assessee.

3. Infosys Technologies Ltd. and Wipro Ltd.: The AR contended that these companies, being industrial giants with diversified activities and premium pricing, should not be considered comparable to the assessee. Relying on previous decisions, the tribunal directed the TPO to exclude these companies from the list of comparables.

4. Mega Soft Ltd.: The AR argued against considering this company as comparable due to its focus on product development and impacted profits. Following previous decisions, the tribunal directed the TPO to consider only the segmental margin of this company for computing ALP.

The tribunal directed the Assessing Officer/TPO to recompute the ALP based on the directions provided and after affording a reasonable opportunity to the assessee. All other TP issues raised by the assessee were considered dismissed as not pressed.

Deduction under Section 10A:
The only other issue related to the Assessing Officer's reduction of communication and freight expenses from the export turnover while computing the deduction under section 10A. The tribunal, following relevant judgments, directed the AO to exclude communication expenses from both export turnover and total turnover when computing the deduction under section 10A. Consequently, the appeal of the assessee was partly allowed.