2015 (5) TMI 148 - AT - Income Tax

Transfer Pricing adjustment - whether international transaction of provision of software development services of the Appellant does not satisfy the aim's length principle envisaged under the Income-tax Act, 1961? - selection of comparable - Held that - It quite clear that the activities on account of the Infrastructure Management Services and E-learning and Digital Consulting which constitute 17% and 35% respectively of the total revenue are obviously IT enabled services and are not akin to the software design and development services being rendered by the assessee. On similar considerations, the said concern was found to be incomparable to assessee's segment of Provision of software design and development services in the immediately preceding assessment year 2008-09 (supra) by the Tribunal. Following the aforesaid precedent, which continues to hold the field, in this year also on account of similarity in circumstances, we therefore uphold assessee's plea for exclusion of FCS Software Solutions Ltd. from the final set of comparables. KALS Information Systems Ltd.(Application Software Segment) be excluded from the final set of comparables as the said company was developing software products and was not purely/ mainly a software development service provider. E-infochips Ltd.cannot be excluded from the final set of comparables on the ground that the instant assessment year is an exceptional year of business . It would not be appropriate to compare each and every single item of income and expense in the financial statements in order to measure its comparability. Moreover, we find that for assessment year 2010-11 also, the said concern has been found to a good comparable by the DRP in terms of order dated 29.12.2014. Thus the said concern is liable to be included in the final set of comparables. Persistent Systems Ltd., IT Services Segment of Mindtree Ltd.and Larsen and Toubro Infotech Ltd., the order of the TPO as well as the show-cause notice issued by him in the course of Transfer Pricing proceedings show that no opportunity was allowed to the assessee before applying the turnover filter - we therefore remand the matter back to the file of the Assessing Officer/TPO for consideration afresh. Sasken Communications Technologies Ltd. n the application of the turnover filter, we have already set-aside the matter back to the file of the TPO while considering the Ground of Appeal No.4.6 of the assessee in the earlier paras. Therefore, the aforesaid aspect of the matter shall be re-visited by the TPO/Assessing Officer in the light of our decision in Ground of Appeal No.4.6. RS Software India Ltd. exclusion from the final set of comparables is liable to be affirmed. Akshay Software Technologies Ltd., Thinksoft Global Services Ltd.and Zylog Systems Limited be excluded from the final set of comparables on the ground that the said concerns were predominantly engaged in providing onsite services whereas assessee was providing services to his clients as an offsite service provider. Helios and Matheson Ltd. the financial data available in public domain does not conform to the financial year in which the international transactions in question have been carried out by the assessee. Therefore, the TPO justifiably excluded the said concern from the final set of comparables, which we hereby affirm. Bodhtree Consulting Ltd. margins of the said concern for the year under consideration does not reflect a normal business trend and therefore the inclusion of the said concern in the final set of comparables would not lend credibility to the comparability analysis. - Thus directing the Assessing Officer/TPO to re- compute the arm's length price of the international transactions - Decided partly in favour of assessee.

Issues Involved:
1. Transfer Pricing Adjustment
2. Erroneous Treatment of Foreign Exchange Gain/Loss
3. Error in Not Giving Effect to DRP Directions on Working Capital Adjustment
4. Erroneous Addition/Rejection of Certain Comparables
5. Erroneous Rejection of Economic Adjustment for Differences in Levels of Risks
6. Not Allowing the Use of Multiple Year Data
7. Ignoring the Tax Holiday Entitlement Under Section 10A

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee contested the transfer pricing adjustment of Rs. 3,61,96,655/- made by the Assessing Officer (AO) following the Dispute Resolution Panel (DRP) directions. The adjustment was based on the AO's rejection of the assessee's benchmarking approach for its software development services, claiming it did not meet the arm's length principle under the Income-tax Act, 1961.

2. Erroneous Treatment of Foreign Exchange Gain/Loss:
The assessee argued that the AO and Transfer Pricing Officer (TPO) erred by considering foreign exchange loss/gain as operating cost/income while computing the operating margins of the comparables. The DRP misinterpreted the appellant's objection, confirming the transfer pricing adjustment despite agreeing "in-principle" that foreign exchange gain/loss should be non-operating items.

3. Error in Not Giving Effect to DRP Directions on Working Capital Adjustment:
The AO failed to give effect to the DRP's specific directions to re-compute the operating margin of Goldstone Technologies Ltd. after conducting a working capital adjustment. The AO's computation of the transfer pricing adjustment did not reflect this directive.

4. Erroneous Addition/Rejection of Certain Comparables:
The assessee raised several points regarding the inclusion or exclusion of certain comparables:
- FCS Software Solutions Ltd.: The Tribunal excluded this company as it was primarily engaged in IT-enabled services, not comparable to the assessee's software development services. The Tribunal noted that less than 75% of FCS's revenue came from software development.
- KALS Information Systems Ltd.: Excluded due to its involvement in software product development, which is functionally different from the assessee's activities.
- E-infochips Ltd.: Initially excluded by the TPO for having an "exceptional year of business," but the Tribunal included it, finding no abnormal business conditions specific to the company.
- Avani Cimcon Technologies Ltd.: The assessee did not press for this inclusion.
- Persistent Systems Ltd., Mindtree Ltd., and Larsen and Toubro Infotech Ltd.: Excluded by the TPO using a turnover filter without prior notice to the assessee. The Tribunal remanded this issue for fresh consideration.
- Sasken Communications Technologies Ltd.: Excluded due to business restructuring, but the Tribunal remanded this issue for reconsideration in light of the turnover filter.
- RS Software India Ltd.: Excluded following the precedent in the assessee's own case.
- Akshay Software Technologies Ltd., Thinksoft Global Services Ltd., and Zylog Systems Ltd.: Excluded due to their predominant on-site service model, which is not comparable to the assessee's off-site services.
- Helios and Matheson Ltd.: Excluded as its financial data covered 18 months, not aligning with the assessee's financial year.
- Bodhtree Consulting Ltd.: Excluded due to abnormal profit trends, following precedents that such high-profit margins do not reflect normal business conditions.

5. Erroneous Rejection of Economic Adjustment for Differences in Levels of Risks:
The DRP and AO did not allow an adjustment for the differences in risk levels between the comparable companies and the assessee, who is a routine captive service provider. The Tribunal did not address this issue specifically in the final order.

6. Not Allowing the Use of Multiple Year Data:
The assessee's ground regarding the use of multiple year data was not pressed during the hearing and was dismissed.

7. Ignoring the Tax Holiday Entitlement Under Section 10A:
The assessee's ground regarding the entitlement to a tax holiday under section 10A was not pressed during the hearing and was dismissed.

Conclusion:
The Tribunal directed the AO/TPO to re-compute the arm's length price of the international transactions after considering the Tribunal's decisions on various aspects. The appeal was partly allowed, with some grounds dismissed as not pressed.

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