Transfer pricing adjustments challenged, comparables excluded, appellant successful in tax appeal

The appellant challenged the assessment order but did not press the issue further, leading to its dismissal. Regarding the enhancement of income due to transfer pricing adjustments, the Tribunal found that the Transfer Pricing Officer's inclusion of seven companies as comparables was unjustified. The Tribunal agreed with the appellant's arguments against the comparability of these companies, leading to the exclusion of the companies and allowing the appellant's grounds. Consequently, the appeal was allowed, and the order was pronounced in open court on 11.12.2014.

---

---

Issues Involved:
1. Validity of the assessment order passed by the Learned Assessing Officer (Ld. AO).
2. Enhancement of income by Rs. 78,53,275 due to non-compliance with the arm's length principle in international transactions.

Detailed Analysis:

1. Validity of the Assessment Order:
The appellant challenged the assessment order dated 26.9.2012, passed under section 143(3) read with section 144C, arguing that it was void ab initio and bad in law. The appellant contended that the directions of the Dispute Resolution Panel (DRP) were not justified. However, this issue was not pressed further by the appellant during the proceedings, and thus, it was dismissed as not pressed.

2. Enhancement of Income by Rs. 78,53,275:

2.1 Background:
The appellant, engaged in providing Software Development and IT consulting services, undertook international transactions with its Associated Enterprises (AEs). The transactions included contract software development services valued at Rs. 7,24,75,317 and staffing services valued at Rs. 6,97,70,977. The appellant initially applied the Cost Plus Method (CPM) for benchmarking but later, under the Transfer Pricing Officer's (TPO) direction, used the Transaction Net Margin Method (TNMM).

2.2 TPO's Adjustments:
The TPO rejected the appellant's transfer pricing analysis and made adjustments, enhancing the income by Rs. 78,76,782 for the contract software development segment. The TPO included seven companies as comparables, which the appellant contested, arguing they were not functionally comparable.

2.3 Analysis of Comparables:

i) Infosys Ltd.:
The appellant argued that Infosys Ltd. was not comparable due to its different functional profile, branding, intangibles, high turnover, and significant expenses on advertising and marketing. The Tribunal agreed, citing decisions from Agnity India Technologies Pvt. Ltd., Telcordia Technologies India Pvt. Ltd., and others, concluding that Infosys Ltd., being a giant company, was not a suitable comparable.

ii) Kals Information Systems:
The appellant contended that Kals Information Systems was engaged in software products and services, lacking segmental information. The Tribunal, referencing decisions from Bindview India P. Ltd. and others, found Kals Information Systems functionally different and not a suitable comparable.

iii) Avani Cincom Technologies:
The appellant argued that Avani Cincom Technologies, involved in software products, lacked segmental information. The Tribunal, following the decision in M/s Trilogy E-Business, agreed that Avani Cincom Technologies was not comparable due to its product sales and absence of segmental details.

iv) Persistent Systems Ltd.:
The appellant highlighted Persistent Systems Ltd.'s involvement in product development and high turnover. The Tribunal, referencing decisions from Bindview India P. Ltd. and others, concluded that Persistent Systems Ltd. was not comparable due to its product development activities and lack of segmental details.

v) Quintegra Solutions Ltd.:
The appellant argued that Quintegra Solutions Ltd. experienced abnormal growth and was involved in product engineering services. The Tribunal, citing the decision in M/s 3DPLM Software Solutions Ltd., agreed that Quintegra Solutions Ltd. was not comparable due to its product engineering services and abnormal growth.

vi) Tata Elxsi (Seg):
The appellant contended that Tata Elxsi, with its high turnover and involvement in product design and development, was not comparable. The Tribunal, referencing the decision in Telcordia Technologies India Pvt. Ltd., agreed that Tata Elxsi was not suitable due to its different functional profile and significant R&D activities.

vii) Lucid Software:
The appellant argued that Lucid Software, focused on product development and R&D, was not comparable. The Tribunal, citing the decision in Telcordia Technologies India Pvt. Ltd., agreed that Lucid Software was not suitable due to its product development activities and lack of segmental details.

2.4 Conclusion:
The Tribunal concluded that the TPO was not justified in including the seven companies as comparables. The Tribunal ordered the exclusion of these companies from the final set of comparables, allowing ground no. 2.3 and 2.4 of the appellant.

Final Judgment:
The appeal of the appellant was allowed, and the order was pronounced in the open court on 11.12.2014.

---