2015 (5) TMI 258 - AT - Income Tax

Transfer pricing adjustment - addition to the stated value of international transactions entered with the associated enterprises so as to bring the same to the arm's length price - wrong selection of comparable - As per TPO there are no segmental accounts with reference to the AE and the non-AE and therefore the Operating cost has been allocated on proportionate basis and thus no interference is called for - Held that - We may observe on this point that the Assessing Officer has taken the Operating costs on a proportionate basis considering the respective revenues whereas assessee canvases that the non-identifiable expenses be apportioned on head count basis. Without going into the merits of the two contrary stands, we leave it open for the Assessing Officer to adopt one or the other method, which he shall justify on the basis of a speaking order having regard to the facts and circumstances of the case. Therefore, on the aforesaid limited point, we hereby remand the matter back to the file of the Assessing Officer to carry out the aforesaid exercise. Needless to say, the Assessing Officer shall allow the assessee a reasonable opportunity of being heard and to put-forth the material and submissions in support of its stand and only thereafter the Assessing Officer shall pass an order afresh on this limited aspect as per law. Thus, on this aspect, assessee succeeds for statistical purposes. Adoption of Kals Information Systems Limited as a comparable - Held that - Said concern has been sought to be excluded from the list of comparables on account of functional dissimilarities. The Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd. (2014 (12) TMI 612 - ITAT BANGALORE) has considered the functions undertaken by the said concern during the previous year relevant to the assessment year under consideration before us, and it has been found that the said concern was engaged in the business of developing and selling software products and was not purely or mainly a software service provider. There is no dispute to the fact position that the appellant before us has undertaken mainly software development services for its associated enterprises and the non-associated enterprises and that such activity is quite distinct from the developing and selling of software products. Thus Kals Information Systems Limited is liable to be excluded from the list of comparables for the purposes of benchmarking international transactions of provision of software development services. E-Zest Solutions Limited is rendering product development services and technology services, and the latter falls in the category of KPO services and the same have not been held by the Bangalore Bench of the Tribunal to be similar to a concern engaged in rendering of software development services, as is the assessee before us. Following the ratio of the decision of the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) we hold that E-Zest Solutions Limited is liable to be excluded from the list of comparables for the period under consideration.

Summary

Issues Involved:
1. Non-consideration of segmental details of the assessee's financial statements and confining of adjustments only to the associated enterprises (AE) segment.
2. Exclusion of Kals Information System Limited from the list of comparables or alternatively, considering the margins of Kals at 18.53% instead of 30.92%.
3. Exclusion of E-Zest Solutions Limited from the list of comparables.

Issue-wise Detailed Analysis:

1. Non-consideration of segmental details of the assessee's financial statements and confining of adjustments only to the AE segment:

The assessee raised a grievance regarding the addition of Rs. 7,42,04,322/- made by the Assessing Officer to the stated value of international transactions entered with the associated enterprises (AE) to bring the same to the arm's length price. The core issue was the erroneous computation of operating margins of the assessee's AE segment. The assessee contended that the Operating costs relating to the AE segment were wrongly computed by the Assessing Officer. The Tribunal observed that the best method is to identify expenses on an actual basis wherever possible. The Tribunal remanded the matter back to the Assessing Officer to carry out the exercise of identifying costs on an actual basis to the extent possible and to adopt a rational and scientific method for the expenses that cannot be allocated on an actual basis. The Tribunal directed the Assessing Officer to allow the assessee a reasonable opportunity to present material and submissions in support of its stand.

2. Exclusion of Kals Information System Limited from the list of comparables:

The assessee argued that Kals Information System Limited should be excluded from the list of comparables due to functional dissimilarities. The Tribunal noted that Kals Information Systems Limited was engaged in developing and selling software products, which was distinct from the software development services provided by the assessee. The Tribunal referenced precedents, including the decision of the Pune Bench of the Tribunal in the case of Bindview India Pvt. Ltd. and the Bangalore Bench of the Tribunal in the case of M/s 3DPLM Software Solutions Ltd., which excluded Kals Information Systems Limited from comparables due to similar functional dissimilarities. The Tribunal concluded that Kals Information Systems Limited should be excluded from the list of comparables for benchmarking the international transactions of the provision of software development services.

3. Exclusion of E-Zest Solutions Limited from the list of comparables:

The assessee contended that E-Zest Solutions Limited should be excluded from the list of comparables as it was engaged in providing e-business services and technology consultancy services, which are more in the nature of ITES and not comparable to the software development services provided by the assessee. The Tribunal noted that E-Zest Solutions Limited was engaged in product development services and technology services, which fall in the category of KPO services. The Tribunal referenced the decision of the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd., which held that KPO services are not comparable to software development services. The Tribunal concluded that E-Zest Solutions Limited should be excluded from the list of comparables for the period under consideration.

Conclusion:

The Tribunal partly allowed the appeal of the assessee, remanding the issue of segmental details back to the Assessing Officer for fresh consideration and directing the exclusion of Kals Information Systems Limited and E-Zest Solutions Limited from the list of comparables. The Tribunal emphasized the need for a rational and scientific method for expense allocation and allowed the assessee a reasonable opportunity to present its case. The order was pronounced in open Court on 30th April, 2014.