2017 (12) TMI 921 - AT - Income Tax

TPA - selection of comparable - Held that - Assessee is a company engaged in the business of designing of semi conductor products, software and electronic systems and providing sales and technical support services. It is providing services to its Associated Enterprise and is wholly owned subsidiary of Freescale Semiconductor Inc. USA. It has a Software Technology Park Unit at Noida and Bangalore, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Appeal filed by the assessee is partly allowed with respect to comparables in software development segment directing ld TPO /AO a. to exclude Infosys Limited and b. to examine the claim of the assessee with respect to exclusion of Bodhtree consulting Limited c. To reexamine the claim of the assessee of Sonata Sonata Software limited not passing the filter of related party transactions d. To not to compute the margins of Software development segments as well market support services as per safe harbor Rules but as per prevalent judicial precedents

Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services (SDS) and Market Support Services (MSS).
2. Selection and rejection of comparables for SDS and MSS.
3. Application of Safe Harbour Rules.
4. Computation of margins of comparables.
5. Penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for Software Development Services (SDS) and Market Support Services (MSS):
The assessee, engaged in designing semiconductor products and providing software and technical support services, entered into international transactions with its Associated Enterprise. The Transfer Pricing Officer (TPO) rejected the assessee's transfer pricing study report and proposed adjustments of ?241,332,135 for SDS and ?3,181,324 for MSS, making a total adjustment of ?244,513,459. The Dispute Resolution Panel (DRP) further modified this adjustment to ?330,636,502, including the impact of working capital adjustment and foreign exchange gain and losses.

2. Selection and Rejection of Comparables for SDS and MSS:
The assessee contested the inclusion of three comparables in the SDS segment: Infosys Ltd, Bodhtree Consulting Ltd, and Sonata Software Ltd.

- Infosys Ltd: The assessee argued for its exclusion due to its huge brand value, significant R&D, and functional differences. The Tribunal directed the TPO to exclude Infosys Ltd, following the decision in the assessee's own case for AY 2007-08.

- Bodhtree Consulting Ltd: The assessee contended that Bodhtree had a different accounting policy and fluctuating margins. The Tribunal set aside this issue back to the TPO to examine the impact of the accounting policies on profitability and to allow the assessee to explain the functional dissimilarity.

- Sonata Software Ltd: The assessee claimed that Sonata had significant related party transactions (RPT) exceeding the acceptable filter. The Tribunal directed the TPO to verify if Sonata breached the 25% RPT filter and exclude it if it did.

3. Application of Safe Harbour Rules:
The DRP directed the TPO to compute the margins of comparables as per Safe Harbour Rules. The Tribunal, however, noted that Safe Harbour Rules are applicable from AY 2010-11 as per CBDT Circular No. 5 dated 03.06.2010 and corrigendum dated 30.09.2010. Therefore, the Tribunal instructed the TPO to compute margins based on judicial precedents instead of Safe Harbour Rules for AY 2009-10.

4. Computation of Margins of Comparables:
The Tribunal directed the TPO to exclude Infosys Ltd from the comparables, re-examine the exclusion of Bodhtree Consulting Ltd based on its accounting policies and functional dissimilarity, and verify the RPT filter for Sonata Software Ltd. The TPO was also instructed to compute margins without applying Safe Harbour Rules.

5. Penalty Proceedings under Section 271(1)(c):
The Tribunal did not specifically address the penalty proceedings under section 271(1)(c) in the detailed analysis, indicating that the primary focus was on the transfer pricing adjustments and comparables.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal directed the TPO to exclude Infosys Ltd, re-examine the exclusion of Bodhtree Consulting Ltd and Sonata Software Ltd, and compute margins based on judicial precedents rather than Safe Harbour Rules. The remaining grounds of appeal were dismissed.

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