2017 (11) TMI 800 - AT - Income Tax

TPA - exclusion and inclusions of the comparables - Selection criteria of comparables - Held that - Assessee is established in India to undertake software development and installation of computerized systems, conduct feasibility studies, systems analysis and design as well as design of special software and system and application of software. It is also engaged in the business of rendering technical services related to tabulation, coding and software development. It is established to undertake and engaged in export of software, computer skilled manpower and other computer related activities to carry out development in the area of information technology, computer systems, software, application software, integrated tolls for computer systems and application development, data communication and network, thus companies functionally dissimilar with that of assessee need to deselected from final list of comparable.

Issues Involved:
1. Exclusion of certain comparables for Transfer Pricing analysis.
2. Inclusion of certain comparables for Transfer Pricing analysis.
3. Remand back to the Assessing Officer/Transfer Pricing Officer for fresh consideration.

Detailed Analysis:

1. Exclusion of Certain Comparables for Transfer Pricing Analysis:

Wipro Technologies Ltd. (Wipro Technologies Services Ltd.):
The Tribunal found that Wipro Technologies Ltd. is not functionally identical to the assessee company. Wipro is engaged in program management, third-party data security, quality assurance, and business process management services, which are different from the software development services provided by the assessee. The Tribunal cited the decision in Pitney Bowes Software India Pvt. Ltd. vs. ITO, where Wipro was excluded as a comparable due to its different functional profile and significant transactions with related parties. Hence, the Tribunal directed the TPO to exclude Wipro Technologies Ltd. from the comparables.

Zylog Systems Ltd.:
The Tribunal noted that Zylog Systems Ltd. had an extraordinary event during the year, namely the acquisition of M/s. Brainhunter Inc., Canada. Segmental data for software services and products were not available. The Tribunal referred to several decisions, including Cognizant Technology Services Pvt. Ltd. vs. ACIT, where companies with extraordinary events were excluded. Consequently, Zylog Systems Ltd. was directed to be excluded.

Persistent Systems & Solutions Ltd.:
The Tribunal observed that Persistent Systems & Solutions Ltd. had abnormal profits due to exceptional circumstances in the financial year ending 31st March 2011. The company's turnover and net profit increased significantly, indicating an abnormal year of operation. The Tribunal referred to the decision in ACIT vs. Transcent MT Services Pvt. Ltd., where companies with abnormal profits were excluded. Thus, Persistent Systems & Solutions Ltd. was directed to be excluded.

Sasken Communication Technologies Ltd.:
The Tribunal found that segmental data for software development services were not available for Sasken Communication Technologies Ltd. The Tribunal cited the decision in Saxo India Pvt. Ltd. vs. ACIT, where companies without segmental data were excluded. Additionally, the company had significant intangibles and an extraordinary year of operation. Therefore, Sasken Communication Technologies Ltd. was directed to be excluded.

Larsen & Toubro Infotech Ltd.:
The Tribunal noted that Larsen & Toubro Infotech Ltd. was engaged in both software development services and software products, but segmental data were not available. The Tribunal referred to the decision in Saxo India Pvt. Ltd. vs. ACIT, where companies engaged in multiple segments without segmental data were excluded. Hence, Larsen & Toubro Infotech Ltd. was directed to be excluded.

Persistent Systems Ltd.:
The Tribunal observed that Persistent Systems Ltd. was engaged in product development, product design, and analysis services, which are functionally different from the software development services provided by the assessee. The Tribunal cited the decision in Saxo India Pvt. Ltd. vs. ACIT, where Persistent Systems Ltd. was excluded due to its different functional profile. Thus, Persistent Systems Ltd. was directed to be excluded.

2. Inclusion of Certain Comparables for Transfer Pricing Analysis:

CAT Technologies Ltd.:
The Tribunal found that CAT Technologies Ltd. was engaged in providing technology products and services, but segmental breakups of software services and products were not available. Therefore, the company was not considered a comparable for Arm's Length Price (ALP) analysis and was rejected.

CG-VAK Software & Exports Ltd.:
The Tribunal noted that CG-VAK Software & Exports Ltd. was engaged in software services and BPO services, but segmental data were not available. The company was also functionally different. Hence, it was rejected as a comparable.

Chakkilam Infotech Ltd.:
The Tribunal observed that Chakkilam Infotech Ltd. was engaged in software testing, software development services, and healthcare services, but segmental data were not available. Therefore, it was not considered a comparable for ALP analysis and was rejected.

3. Remand Back to the Assessing Officer/Transfer Pricing Officer for Fresh Consideration:
The Tribunal remanded the matter back to the Assessing Officer (AO)/Transfer Pricing Officer (TPO) to decide afresh by giving a new set of comparables that are functionally similar to the assessee company and meet the segmental data and other filters of the TPO. The assessee was directed to provide the new set of comparables, which would be verified by the TPO before adjudicating the issues. Ground No. 2, 2.1, 2.2, 2.3, 2.4, and 2.5 were partly allowed for statistical purposes. Ground No. 3 was deemed consequential and left to be decided by the AO/TPO.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, with the matter remanded back to the AO/TPO for fresh consideration of comparables. The Tribunal directed the exclusion of certain comparables due to functional differences, lack of segmental data, and extraordinary events, while rejecting the inclusion of others for similar reasons.

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