2015 (4) TMI 919 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Infosys Technologies Ltd is not functionally comparable since it owns significant intangible 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. Thus we hold that Infosys Ltd. be excluded from the list of comparable companies. KALS Information Systems Ltd. company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company. Tata Elxsi Ltd. company is concerned, it is not in dispute before us that in assessee s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment. Comp-U Learn Global Tech India Ltd. the company has nil onsite revenue and satisfied all the filters applied by the TPO. We are of the opinion that some more analysis has to be done and we direct the TPO to look into the financial statement of the company and also provide an opportunity to the assessee to submit relevant details to substantiate its claim that Comp-U-Learn Tech India Ltd. is not a comparable company Persistent Systems Pvt. Ltd.is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Thus in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. R Systems International ltd. Unless the financial year-end of a comparable case matches with that of the assessee, it cannot be considered as comparable because the figures of different financial year endings are distorted. He relied on an order passed by the Mumbai Bench of the Tribunal in case of Sandstone Advisors (P) Ltd. Vs. ACIT, 2013 (9) TMI 401 - ITAT MUMBAI , the Tribunal after considering the prescription of Rule 10B(4) has held that it is mandatory for the purposes of comparing the data of an uncontrolled transaction with an international transaction that the same must relate to the financial year ending similar to that of the assessee. Thus this case should be excluded from the list of comparables Think Soft Global Services Ltd. cannot be treated as comparable to assessee as software testing services cannot be equated with software development services. Thirdware Solutions excluded from the list of comparables the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. I-Gate Global Solutions Ltd. be excluded on the basis of high turnover. Zylog Systems Ltd. excluded from the list of comparables as from the extracts of the annual report, it is seen that there is substantial increase in revenue in the impugned AY compared to the preceding AY. Therefore, considering the fact that the acquisitions made by the company during the relevant FY could have impacted the revenue earning and profitability of the company, it will not be safe to treat the aforesaid company as a comparable. Sasken Communication Technologies Ltd the entire annual report has not been placed before us, we are not in a position to give a conclusive finding in this regard. We, therefore, remit the issue relating to comparability of this company for fresh adjudication by the AO/TPO. Treating the deferred revenue expenditure as operating cost by TPO/DRP/AO - Held that - We agree with the submissions of the ld. AR that every expenditure debited to the P&L account cannot be considered as operational in nature. From the observations made by TPO, it appears, he has rejected assessee s claim only for the reason that no such entries were found in the annual report. The TPO has not properly examined the nature of expenditure. However, at the same time, assessee has to demonstrate that such expenditure was not claimed in any preceding assessment years. Therefore, considering the facts of the case, we are inclined to remit this issue back to the file of AO/TPO for deciding the issue afresh. Non-exclusion of a reasonable amount of employee cost from the operating cost while calculating the operating margin - Held that - The matter requires re-examination by AO/TPO after verifying the cause for quantum jump of salary in the impugned AY. If it is found that part of the employee cost is non-operational, then, suitable adjustment may be given from the operating cost. Risk adjustment and negative working capital adjustment - Held that - neither in its TP study nor before the TPO and DRP, assessee has submitted any computation made on a scientific basis towards risk adjustment. Though benefit of risk adjustment can be given in an appropriate case, but, it has to be on the basis of facts and evidence and cannot be granted in a routine manner. Though, it may be true, in case of a captive service provider AE takes all major risks. But, at the same time assessee also bears single customer risk, as in the event of any loss or damage to the business of AE assessee is also likely to suffer. Moreover, assessee has to demonstrate risk assumed by each of the comparable companies vis- -vis the assessee. The basis for adjustment towards risk must come from assessee s side. As assessee has not properly established its case either before the TPO or DRP by bringing facts and materials on record, we are inclined to remit this issue back to the file of AO/TPO for deciding afresh .

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Selection of Comparables
3. Deferred Revenue Expenditure
4. Employee Cost Adjustment
5. Risk and Working Capital Adjustments
6. Exclusion of Communication Charges from Export Turnover for Section 10A Deduction

Detailed Analysis:

1. Transfer Pricing Adjustments:
The appeals pertain to the assessment year (AY) 2009-10, involving the determination of the arm's length price (ALP) for international transactions between the assessee, an Indian subsidiary of Planet Soft Inc., USA, and its Associated Enterprises (AE). The Transfer Pricing Officer (TPO) accepted the Transaction Net Margin Method (TNMM) but rejected the assessee's Transfer Pricing (TP) report, citing defects such as the use of multiple year data and inappropriate filters. The TPO selected 17 comparables, resulting in a TP adjustment of Rs. 6,88,46,979.

2. Selection of Comparables:
The assessee objected to the selection of certain comparables by the TPO. The ITAT examined each comparable and provided detailed reasons for exclusion or inclusion:
- Bodhtree Consulting Ltd.: Excluded as it is engaged in software products.
- Infosys Ltd.: Excluded due to functional dissimilarity and ownership of significant intangibles.
- KALS Information Systems Ltd.: Excluded for being functionally different.
- Tata Elxsi Ltd.: Excluded for functional dissimilarity and lack of segment revenue.
- Persistent Systems Pvt. Ltd.: Excluded due to engagement in product development and lack of segmental data.
- R Systems International Ltd.: Excluded for having a different financial year ending.
- Thinksoft Global Services Ltd.: Excluded for providing testing services, not software development.
- Thirdware Solutions Ltd.: Excluded due to involvement in product development and lack of segmental expenditure details.
- Igate Global Solutions Ltd.: Remitted for fresh examination due to high turnover and potential product development.
- Zylog Systems Ltd.: Excluded due to acquisitions affecting revenue.
- Sasken Communication Technologies Ltd.: Remitted for fresh adjudication due to involvement in product development and lack of segmental cost details.

3. Deferred Revenue Expenditure:
The assessee claimed that amortization of deferred revenue expenditure should not be considered operational. The TPO and DRP rejected this claim. The ITAT remitted the issue back to the AO/TPO for fresh examination, directing the assessee to demonstrate that such expenditure was not claimed in preceding years.

4. Employee Cost Adjustment:
The assessee argued for the exclusion of excess employee costs from operating costs. The DRP rejected this claim, stating that maintaining excess staff is common practice. The ITAT remitted the issue back to the AO/TPO for re-examination, directing verification of the cause for the quantum jump in salary.

5. Risk and Working Capital Adjustments:
The TPO did not allow any risk adjustment, and made a negative working capital adjustment of (-)3.64%. The ITAT remitted the issue back to the AO/TPO for fresh consideration, directing the assessee to provide a scientific basis for risk adjustment and to examine the working capital adjustment.

6. Exclusion of Communication Charges from Export Turnover for Section 10A Deduction:
The DRP directed the AO to reduce communication charges from both export turnover and total turnover while computing the deduction under Section 10A. The ITAT upheld the DRP's direction, dismissing the department's appeal on this issue.

Conclusion:
- The assessee's appeal was partly allowed for statistical purposes, with several issues remitted back to the AO/TPO for fresh consideration.
- The department's appeal was dismissed, upholding the DRP's direction on the exclusion of communication charges from export turnover for Section 10A deduction.