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2015 (6) TMI 724 - AT - Income TaxTransfer pricing adjustment - adjustment in the arm s length price(ALP) of international transaction - selection of comparable - Held that - M/S.Accel Transmatic Limited (seg.), Avani Cincom Technologies Ltd., Celestial labs Limited and KALS Infosystems Ltd. need to be excluded from the list of comparable as decided in ase of First Advantage Offshore Services Pvt.Ltd. Vs. DCIT IT 2012 (2) TMI 478 - ITAT BANGALORE . Avani Cincom Technologies Ltd. ( Avani Cincom )unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. Even the growth of software industry for the previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average, thus accordinglr rejected Celestial Labs Ltd. company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable. KALS Information Systems Ltd. t this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. Accel Transmatic Ltd. to be excluded from the final list of comparable companies for the purpose of determining ALP M/S.Ishir Infotech Ltd. is out-sourcing its work and, therefore, has not satisfied the 25% employee cost filter and thus has to be excluded from the list of comparables And Lucid Software Ltd.nvolved in the development of software as compared to the assessee, which is only into software services. omputation of the net margin for Mega Soft Ltd. Is therefore remitted to the file of the TPO to compute the correct margin by following the direction of the Tribunal in the case of Trilogy E-Business Software India Pvt.Ltd. M/S.Infosys Technologies Limited, Tata Elxsi Ltd. (Seg.) & Wipro Limited re not comparable companies in the case of software development services provider. M/S. E-Zest Solutions Ltd., Persistent Systems Ltd., Quintegra Solutions Limited and Third ware Solutions Ltd., this Tribunal in the case of 3DPLM Software Solutions Ltd. (2014 (12) TMI 612 - ITAT BANGALORE ) was pleased to hold that the aforesaid companies are not comparable with a company engaged in Software Development Services such as the Assessee. M/S.Helios & Matheson Information Technology Ltd., we find that the said company has been held to be not comparable with a software service provider like the Assessee . The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. According to the learned counsel for the Assessee, if the submissions of the assessee are accepted, then the arithmetic mean of the comparables retained would be within the range of /- 5% of the Assessee s Net Margin. Computation of deduction u/s.10A - Held that - Hon ble Court in the case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT held that whatever is excluded from the export turnover should also be excluded from the total turnover for the purpose of computing deduction u/s.10A of the Act.
Issues Involved:
1. Addition made by the AO on account of adjustment in the arm's length price (ALP) of international transactions. 2. Exclusion of certain companies from the list of comparables. 3. Method of computation of deduction u/s.10A of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Addition Made by the AO on Account of Adjustment in the Arm's Length Price (ALP) of International Transactions: The assessee, a wholly owned subsidiary providing software development services, contested the addition of Rs. 8,76,50,141/- made by the AO due to an adjustment in the ALP of international transactions with its Associated Enterprise (AE). The AO determined the ALP based on comparables selected by the Transfer Pricing Officer (TPO), resulting in an arithmetic mean of 25.14%. After factoring in a working capital adjustment of 0.70%, the adjusted arithmetic mean was 24.44%. The ALP was computed at 124.44% of the operating cost, leading to a shortfall and subsequent adjustment. 2. Exclusion of Certain Companies from the List of Comparables: The Tribunal considered the comparability of companies chosen by the TPO. Several companies were excluded based on previous Tribunal decisions, as they were found not to be functionally comparable to the assessee, which provides software development services. The excluded companies included: - Accel Transmatic Ltd., Avani Cimcon Technologies Ltd., Celestial Labs Ltd., and KALS Information Systems Ltd.: Excluded due to functional differences, as established in the case of First Advantage Offshore Services Pvt. Ltd. and Trilogy E-Business Software India Pvt. Ltd. - Ishir Infotech Ltd. and Lucid Software Ltd.: Excluded based on the Tribunal's findings in the case of Mercedes Benz Research & Development India Pvt. Ltd. - Megasoft Ltd.: The correct margin was to be computed based on segmental data, as directed in the case of First Advantage Offshore Services Pvt. Ltd. - Infosys Technologies Ltd., Tata Elxsi Ltd. (Seg.), and Wipro Ltd.: Excluded due to functional dissimilarities, as held in the case of Curam Software International Pvt. Ltd. - E-Zest Solutions Ltd., Persistent Systems Ltd., Quintegra Solutions Ltd., and Thirdware Solutions Ltd.: Excluded based on the Tribunal's findings in the case of 3DPLM Software Solutions Ltd. - Helios & Matheson Information Technology Ltd.: Excluded based on the Tribunal's decision in the case of PTC Software (India) Pvt. Ltd. 3. Method of Computation of Deduction u/s.10A of the Income Tax Act, 1961: The assessee contested the exclusion of foreign travel expenses and telecommunication expenses from export turnover while computing the deduction u/s.10A. The Tribunal allowed the alternate prayer that expenses excluded from export turnover should also be excluded from total turnover, following the decision of the Hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd. Conclusion: The Tribunal directed the AO/TPO to exclude the specified companies from the final list of comparables and to recompute the arithmetic mean. The alternate prayer regarding the computation of deduction u/s.10A was accepted, aligning with the Karnataka High Court's ruling. The appeal by the assessee was partly allowed.
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