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2015 (5) TMI 390 - AT - Income TaxTransfer pricing adjustment - selection of comparable - Held that - Tata Elxsi Ltd. (seg), Sasken Communication Technologies Ltd.,Persistent Systems Ltd., Zylog Systems Ltd.,Mindtree Ltd. (seg), Larsen & Toubro Infotech & Infosys Ltd. be excluded from the list of comparable as having turnover of more than ₹ 200 Crores from the list of comparables since the assessee s turnover was less than ₹ 200 Crores. Bodhtree Consulting Ltd to be excluded as functionally different. KALS Information Systems Ltd. to be excluded as this company was developing software products and not purely or mainly software development service provider. Flextronics Software Systems Ltd. ould be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not available
Issues Involved:
1. Transfer Pricing Adjustment 2. Deduction under Section 10A of the Income Tax Act Detailed Analysis: 1. Transfer Pricing Adjustment: Background: The assessee-company, engaged in software development services for its overseas Associated Enterprises (AEs), filed its return for the Assessment Year 2009-10. The Assessing Officer (AO) referred the case to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) of the international transactions. The TPO proposed an adjustment to the ALP, which was incorporated into the AO's draft and final assessment orders. Assessee's Appeal: The assessee challenged the transfer pricing adjustment on several grounds, including the rejection of its Transfer Pricing (TP) documentation, the use of inappropriate comparables, and the disregard of multiple year/prior year data. Tribunal's Analysis: TPO's Approach: The TPO rejected the assessee's TP study and selected 11 comparable companies, resulting in a proposed adjustment. The assessee argued that certain companies should be excluded based on turnover and functional differences. Turnover Filter: The Tribunal held that companies with a turnover exceeding Rs. 200 Crores should be excluded from the list of comparables, as the assessee's turnover was less than Rs. 200 Crores. This decision was supported by previous Tribunal rulings in similar cases, such as Genisys Integrating Systems (India) Ltd. and Airbus India Operations Pvt. Ltd. Functional Differences: - Bodhtree Consulting Ltd.: The Tribunal excluded this company, citing its functional dissimilarity with the assessee, as it was engaged in software development and software products. - KALS Information Systems Ltd.: Excluded for being functionally different, as it was involved in software development and training. - Infosys Technologies Ltd. and Tata Elxsi Ltd. (Seg.): Both companies were excluded due to their significant intangibles, revenues from software products, and functional differences from the assessee. Conclusion on TP Issues: The Tribunal directed the exclusion of the aforementioned companies from the list of comparables and ordered the TPO to recompute the Arithmetic mean by excluding these companies. Consequently, grounds related to the comparability of companies and other general grounds were rendered infructuous. 2. Deduction under Section 10A of the Income Tax Act: Background: The assessee contended that the CIT(A) had not adjudicated on the exclusion of traveling expenses from the export turnover while computing the eligible deduction under Section 10A. Tribunal's Decision: The Tribunal remitted this issue to the CIT(A) for consideration and adjudication in accordance with the law, after affording the assessee an opportunity to present details and submissions. Final Order: The assessee's appeal for the Assessment Year 2009-10 was partly allowed. The Tribunal directed the TPO to exclude certain companies from the list of comparables and remitted the issue of deduction under Section 10A to the CIT(A) for further consideration. The order was pronounced in the open court on 24th April, 2015.
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