2015 (10) TMI 945 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Exclude M/s. Accel Transmatics Ltd. (Seg) and M/s. KALS Infosystems Ltd. from the set of comparables from companies in the software development services segment of the assessee. Following the decision of the ITAT, Hyderabad Bench in the case of CES Pvt. Ltd. 2014 (4) TMI 930 - ITAT HYDERABAD for Assessment Year 2006-07, we hold and direct that this company i.e. Infosys Technologies Ltd.,Megasoft Ltd., Tata Elxsi Ltd is to be excluded from the set of comparable companies for the software development services segment of the assessee. Maple e-Solutions Ltd., Datamatics Financial Services Ltd., Vishal Information Technologies Ltd., Asit C Mehta Financial Services Ltd., Goldstone Infratech Ltd. companies cannot be considered as a comparable for the purpose of determining the ALP in this case Apex Knowledge Solutions Pvt. Ltd.is not functionally comparable to ITES provider as it provides services such as e-publishing knowledge based services, etc. Spanco Telesystems Solutions Ltd. and Allsec Technologies Ltd. - these companies are not to be selected on various reasons, we uphold the objections of Assessee and direct the T PO/AO to work out the arithmetic mean of PLI on the balance of companies. Grounds raised by Assessee on this issue are allowed. 16.3.2 Following the aforesaid decision of the ITAT, Hyderabad Bench in the case of CES Pvt. Ltd. for Assessment Year 2006-07 (supra), for the factual reasons cited therein and also brought before us, we hold and direct that these two companies namely, Spanco and Allsec Technologies Ltd. are to be excluded from the set of comparable companies for the ITES segment of the assessee. Genisys International Corp. Ltd. company did not come to be selected in the search process of either the TPO or the assessee. That being the case, we find that the assessee has not brought on record any factual evidence to establish its claim that this company satisfies all the conditions and filters for comparability. In this view of the matter, the contentions of the assessee for inclusion of this company as a comparable are not acceptable and we, therefore, dismiss this ground raised by the assessee. Computation of deduction u/s. 10A - Held that - Taking into consideration the decision rendered by the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT) we are of the view that it would be just and appropriate to direct the Assessing Officer that data communication charges and lease line charges incurred in foreign currency are to be excluded from both export turnover as well as total turnover while computing the deduction under Section 10A of the Act, as has been prayed by the assessee in its alternate plea. Charging of interest under Sections 234B, 234C and 234D - Held that - The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (2001 (10) TMI 4 - SUPREME Court ) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable u/s. 234B, 234C and 234D of the Act, if any, while giving effect to this order. - Decided partly in favour of assessee.

Issues Involved:
1. Validity of the TPO's jurisdiction and order.
2. Rejection of the assessee's benchmarking analysis.
3. Use of single-year data vs. multiple-year data for comparables.
4. Inclusion and exclusion of specific companies in the list of comparables.
5. Treatment of foreign exchange fluctuation in operating margin computation.
6. Application of the 5% range for arm's length margin.
7. Working capital and risk adjustments.
8. Exclusion of data communication expenses from export turnover for Section 10A deduction.
9. Computation of interest under Sections 234B, 234C, and 234D.

Detailed Analysis:

1. Validity of the TPO's Jurisdiction and Order:
The assessee challenged the jurisdiction of the TPO and the validity of the order under Section 92CA of the Act. The Tribunal did not find merit in this argument, and the order was upheld.

2. Rejection of the Assessee's Benchmarking Analysis:
The TPO rejected the assessee's detailed benchmarking analysis and conducted a fresh search for comparables. The Tribunal reviewed the TPO's approach and upheld the rejection of the assessee's benchmarking analysis, citing appropriate reasons provided by the TPO.

3. Use of Single-Year Data vs. Multiple-Year Data for Comparables:
The TPO used single-year data (FY 2005-06) instead of multiple-year data. The Tribunal upheld the TPO's approach, stating that the use of single-year data is permissible under the provisions of the Act.

4. Inclusion and Exclusion of Specific Companies in the List of Comparables:
The Tribunal analyzed the comparability of various companies included by the TPO and sought to be excluded by the assessee:
- Accel Transmatics Ltd. and KALS Infosystems Ltd.: Excluded due to functional differences and product development activities.
- Infosys Technologies Ltd.: Excluded as it is a giant company with significant brand value and not comparable to a captive software service provider.
- Megasoft Ltd.: Excluded due to product development activities and failing the Related Party Transaction (RPT) filter.
- Tata Elxsi Ltd.: Excluded as it is engaged in product design services and other activities not comparable to software development services.
- Maple eSolutions Ltd., Datamatics Financial Services Ltd., Vishal Information Technologies Ltd., Asit C Mehta Financial Services Ltd., and Goldstone Infratech Ltd.: Excluded based on various grounds such as unreliable financial statements, high RPT, functional differences, and extraordinary events.
- Apex Knowledge Solutions Pvt. Ltd.: Excluded as it is engaged in electronic publishing services and GIS, which are functionally different from ITES.

5. Treatment of Foreign Exchange Fluctuation in Operating Margin Computation:
The Tribunal upheld the exclusion of foreign exchange fluctuation gain or loss in computing the operating margin of the assessee and the comparable companies.

6. Application of the 5% Range for Arm's Length Margin:
The Tribunal did not specifically address this issue, as the focus was on the comparability of the companies selected by the TPO.

7. Working Capital and Risk Adjustments:
The Tribunal upheld the TPO's decision not to make further downward margin adjustments for working capital and risk differentials, rejecting the assessee's arguments.

8. Exclusion of Data Communication Expenses from Export Turnover for Section 10A Deduction:
The Tribunal directed the Assessing Officer to exclude data communication charges and lease line charges incurred in foreign currency from both export turnover and total turnover while computing the deduction under Section 10A of the Act, following the decision of the Hon'ble Karnataka High Court in CIT v. Tata Elxsi Ltd.

9. Computation of Interest under Sections 234B, 234C, and 234D:
The Tribunal upheld the charging of interest under Sections 234B, 234C, and 234D as mandatory and consequential. The Assessing Officer was directed to recompute the interest chargeable while giving effect to the Tribunal's order.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the exclusion of certain companies from the list of comparables and modifying the computation of Section 10A deduction and interest under Sections 234B, 234C, and 234D.

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