2015 (7) TMI 566 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - We direct the AO/TPO to exclude these companies Flextronics Software Systems Ltd., iGate Global Solutions Ltd.,Mindtree Ltd.,Persistent Systems Ltd., Sasken Communication Technologies Ltd.,Tata Elxsi Ltd.,Wipro Ltd. and Infosys Technologies Ltd. from the list of comparables. It is submitted by the learned counsel for the assessee that if all the above companies are excluded from the list of comparables as not comparable with a software development service provider such as the Assessee, then the operating margin of the assessee would fall within the or -5% of the operating margin of the comparable companies. AO is therefore directed to verify the said contention and compute the ALP accordingly. Further, as the ALP needs no further adjustment as a result of exclusion of all the above companies, we are not inclined to admit the additional ground of appeal seeking inclusion of the companies raised in the additional ground of appeal as comparable companies for the purpose of determination of the ALP of the international transaction, as it would only result in academic exercise. In view of the same, the additional grounds of appeal are not admitted. - Decided partly in favour of assessee.

Issues Involved:
1. Transfer Pricing Adjustment.
2. Comparability of Companies.
3. Application of Turnover Filter.
4. Functional Dissimilarity.
5. Consequential Relief.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee, engaged in software development and ITES services, filed a return declaring 'nil' income after claiming a deduction under section 10A of the Income Tax Act. During assessment proceedings, the Assessing Officer (AO) observed that the assessee had entered into an international transaction with its Associated Enterprises (AE) for software development services. The transaction was referred to the Transfer Pricing Officer (TPO) for determination of the arm's length price (ALP). The TPO proposed a transfer pricing adjustment of Rs. 5,32,53,612, which was confirmed by the Disputes Resolution Panel (DRP) and incorporated into the final assessment order.

2. Comparability of Companies:
The assessee challenged the comparability of 11 companies proposed by the TPO. While two companies were accepted as comparable, the assessee contested the inclusion of others, arguing functional dissimilarity and turnover exceeding Rs. 200 crores. The Tribunal considered the comparability of Bodhtree Consulting Ltd., Tata Elxsi Ltd., Sasken Communication Technologies Ltd., Persistent Systems Ltd., Zylog System Ltd., Mindtree Ltd., Larsen & Toubro Infotech, and Infosys Technologies Ltd.

3. Application of Turnover Filter:
The Tribunal held that companies with turnover exceeding Rs. 200 crores cannot be compared with the assessee, whose turnover was Rs. 68,00,66,852. This decision was based on the Tribunal's earlier rulings in similar cases, emphasizing that size impacts comparability due to differences in economies of scale and market position. Consequently, companies like Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., Infosys Technologies Ltd., Tata Elxsi Ltd., Larsen & Toubro Infotech, and Zylog System Ltd. were excluded from the list of comparables.

4. Functional Dissimilarity:
The Tribunal found that Bodhtree Consulting Ltd. and Tata Elxsi Ltd. were functionally dissimilar to the assessee. Bodhtree Consulting Ltd. was engaged in software products, not software development services. Tata Elxsi Ltd. operated in diverse segments, including embedded product design and engineering services, making it incomparable to the assessee's software development services. Infosys Technologies Ltd. was also excluded due to its significant intangibles and substantial revenue from software products, which were not comparable to the assessee's operations.

5. Consequential Relief:
The Tribunal directed the AO to verify if the exclusion of the contested companies brought the operating margin of the assessee within the permissible range of +/- 5% of the comparable companies' margin. If so, no further adjustment would be required. The Tribunal also directed the AO to provide consequential relief to the assessee in accordance with the law.

Conclusion:
The Tribunal allowed the appeal partly, directing the exclusion of certain companies from the list of comparables based on turnover and functional dissimilarity. The AO was instructed to compute the ALP accordingly and provide any consequential relief. The stay petition filed by the assessee was dismissed as infructuous.

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