Tribunal directs fresh order, excludes Thirdware Solutions, rectifies errors in transfer pricing case.

The Tribunal partially allowed the assessee's appeal, directing the Assessing Officer to issue a fresh order in accordance with the Tribunal's observations and ensuring the assessee's right to be heard. The appeal was decided on 27th October 2016, with Thirdware Solutions being excluded as a comparable for transfer pricing purposes due to its different business model and outsourcing activities. The Assessing Officer was instructed to rectify errors in including E-Infochips Bangalore Limited as a comparable and in computing Kuliza Technologies' operating profit margin.

---

---

Issues Involved:
1. Rejection of transfer pricing comparables by the Dispute Resolution Panel (DRP).
2. Adjustment under section 144C of the Income Tax Act.
3. Disallowance of claim under section 10B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Rejection of Transfer Pricing Comparables:
The primary grievance of the assessee was the DRP’s approval of the Transfer Pricing Officer’s (TPO) selection of Thirdware Solutions as a comparable, despite the assessee’s contention that Thirdware Solutions was functionally different and engaged in trading software. The DRP rejected the assessee’s objections, stating that Thirdware Solutions was primarily engaged in software development services and not trading, as evidenced by its revenue recognition policies and financial statements.

The assessee argued that Thirdware Solutions outsourced a significant portion of its work, which made it functionally different from the assessee. The assessee cited judicial decisions, including those from the Delhi Tribunal, which excluded Thirdware Solutions from comparables for software development service providers due to its outsourcing activities and revenue from software licenses. The Tribunal agreed with the assessee, noting that Thirdware Solutions was not a suitable comparable due to its different business model and outsourcing activities. Consequently, the Tribunal allowed the assessee’s ground and excluded Thirdware Solutions from the list of comparables.

2. Adjustment under Section 144C:
The assessee contended that the Assessing Officer (AO) made errors while giving effect to the DRP’s order. Specifically, the AO erroneously included E-Infochips Bangalore Limited as a comparable, despite the DRP’s direction to exclude it due to functional differences. Additionally, the AO failed to correctly compute the operating profit margin of Kuliza Technologies by not considering bad debts as an operating expense and other income as non-operating income, as directed by the DRP.

The Tribunal observed that the AO did not give effect to the DRP’s directions regarding the exclusion of E-Infochips Bangalore Limited and the correct computation of Kuliza Technologies’ operating profit margin. The Tribunal directed the AO to frame a fresh order under section 143(3) read with section 144C of the Act, incorporating the DRP’s directions and the Tribunal’s observations, ensuring proper opportunity for the assessee to be heard.

3. Disallowance of Claim under Section 10B:
The assessee’s claim for exemption under section 10B of the Act amounting to Rs. 43,19,987 was disallowed by the AO. The assessee argued that since there were no adjustments under section 92C(4) of the Act, there should not be any disallowance under section 10B. However, this ground was not pressed by the assessee during the appeal, and thus, it was dismissed as not pressed.

Conclusion:
The Tribunal partly allowed the assessee’s appeal for statistical purposes, directing the AO to reframe the order under section 143(3) read with section 144C of the Act, incorporating the Tribunal’s observations and ensuring proper opportunity for the assessee to be heard. The appeal was pronounced in the open court on 27th October 2016.

---