2013 (11) TMI 422 - AT - Income Tax

Tribunal excludes comparables in Transfer Pricing analysis, provides specific directions for re-evaluation

Virtusa (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax

The Tribunal directed the exclusion of certain comparables for Transfer Pricing (TP) analysis, including Avani Cimcon Technologies Ltd., Infosys ... Selection of companies as comparables by the TPO – Held that:- The issue of comparability of Infosys to companies which are merely captive service provider is no longer RES INTEGRA as different benches of the Tribunal have held that Infosys being a giant company and into diversified activities cannot be treated as comparable - The fact that Avani Cimcon Technologies Ltd. is earning revenue from product development - The aforesaid company since is involved in software product development cannot be treated as comparable with companies which are providing only software development services and directed exclusion of the said company – As regards, Ishir Infotech Pvt. Ltd., is not a comparable company as it has failed both on account of employee cost filter as well as related party transaction filter – As regards, Lucid Software Ltd. and Megasoft Ltd., relying upon the order passed by the coordinate bench in case of Intoto Software India (P.) Ltd. [2013 (10) TMI 599 - ITAT HYDERABAD], it has been denied as being considered as comparables – As regards, Tata Elxi Ltd., relying upon the judgment of Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. [2012 (6) TMI 388 - ITAT MUMBAI], it was held that Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. Deduction u/s 10A of the Income Tax Act - Chennai and Hyderabad units should be considered as two distinct and separate units for benefit u/s 10A - It was submitted that benefit u/s 10A has to be granted separately for both the units as each of the unit has separate source of income – Held that:- Reliance has been placed on the assessee’ own case [2013 (11) TMI 1311 - ITAT HYDERABAD] - Chennai Unit is not formed by reconstruction of the Hyderabad unit, but, they ultimately held that Chennai Unit and Hyderabad Unit are not two distinct and independent units - Following the decision of the coordinate bench, allowed the ground of the assessee and direct the AO to allow benefit u/s 10A of the Act to the Chennai Unit – Decided in favor of Assessee. Whether there should be rejection of reimbursement of expenses to Virtusa Corporation, USA of an amount of ₹ 62,71,942/- from the export turnover while computing deduction u/s 10A of the Act – Held that:- Reliance has been placed on the decision of the Hon'ble Mumbai High Court in case of CIT v. Gem Plus Jewellery (India) Ltd. [2010 (6) TMI 65 - BOMBAY HIGH COURT], wherein it has been held that if communication charges, insurance charges and reimbursement of expenses attributable to the delivery of computer software outside India, are to be reduced from the export turnover then the same should as well be reduced from total turnover while computing deduction u/s 10A of the Act - Following the aforesaid ratio laid down in the said decisions, AO directed to reduce the amount of ₹ 62,71,942/- both from the export turnover as well as total turnover while computing deduction u/s 10A of the Act – Decided in favor of Assessee. Issues Involved:1. Selection of comparables for Transfer Pricing (TP) analysis.2. Rejection of certain comparables selected by the assessee.3. Inclusion of reimbursement received from Associated Enterprises (AE) in operating cost for determining Arm's Length Price (ALP).4. Denial of deduction under Section 10A for the Chennai unit.5. Rejection of reimbursement of expenses from export turnover while computing deduction under Section 10A.6. Addition of reimbursement expenses received from Virtusa Pvt Ltd., Sri Lanka, to the export turnover.Issue-wise Detailed Analysis:1. Selection of Comparables for Transfer Pricing (TP) Analysis:- Avani Cimcon Technologies Ltd.: The assessee argued that this company is functionally different due to its involvement in product development, specifically a software product named 'D' Exchange. The Tribunal agreed, citing previous decisions where companies involved in product development were excluded as comparables for software service providers. The Tribunal directed the exclusion of Avani Cimcon Technologies Ltd. from the list of comparables.- Infosys Technologies Ltd.: The assessee contended that Infosys, being a giant company with a significant turnover and brand value, is not comparable to a captive service provider. The Tribunal agreed, referencing multiple decisions where Infosys was excluded as a comparable due to its scale and diversified activities. Infosys Technologies Ltd. was directed to be excluded from the list of comparables.- Ishir Infotech Pvt. Ltd.: The assessee argued that this company fails the employee cost filter, with an employee cost of only 3.96% compared to the assessee's 61.23%. The Tribunal, following previous decisions, directed the exclusion of Ishir Infotech Pvt. Ltd. from the list of comparables.- Lucid Software Ltd.: The assessee claimed that this company earns revenue from products and lacks segmental financials. The Tribunal, referencing prior decisions, directed the exclusion of Lucid Software Ltd. from the list of comparables.- Megasoft Ltd.: The assessee argued that Megasoft Ltd. is functionally different and fails the TPO's onsite revenue filter. The Tribunal directed the TPO to consider only the segmental margin of Megasoft Ltd. for the relevant year while computing the ALP.- Tata Elxi Ltd.: The assessee argued that Tata Elxi Ltd. is involved in niche product development and is not comparable to a software services provider. The Tribunal, following previous decisions and considering Tata Elxi's own admission, directed its exclusion from the list of comparables.- Wipro Ltd.: The assessee contended that Wipro Ltd. is a diversified giant company and not comparable to a captive service provider. The Tribunal agreed, referencing previous decisions, and directed the exclusion of Wipro Ltd. from the list of comparables.2. Rejection of Certain Comparables Selected by the Assessee:- The Tribunal found that the DRP did not objectively consider the assessee's contentions regarding the rejection of certain comparables. The Tribunal restored the matter to the AO/TPO to reconsider the comparability of the companies after giving the assessee an opportunity to be heard.3. Inclusion of Reimbursement Received from AE in Operating Cost for Determining ALP:- The Tribunal directed the AO/TPO to verify whether the receipts are mere recovery of expenses without any services. If found to be so, the same should not be added back to the cost base for the purpose of markup.4. Denial of Deduction Under Section 10A for the Chennai Unit:- The Tribunal followed the decision of the coordinate bench in the assessee's own case for the previous year, which held that the Chennai and Hyderabad units are distinct and separate. The Tribunal directed the AO to allow the benefit under Section 10A for the Chennai unit.5. Rejection of Reimbursement of Expenses from Export Turnover While Computing Deduction Under Section 10A:- The Tribunal directed the AO to reduce the amount of Rs. 62,71,942/- both from the export turnover and total turnover while computing the deduction under Section 10A, following the ratio laid down in previous decisions.6. Addition of Reimbursement Expenses Received from Virtusa Pvt Ltd., Sri Lanka, to the Export Turnover:- The Tribunal directed the AO to verify whether the Foreign Inward Remittance Certificate (FIRC) was received within the stipulated time. If found to be so, the amount of Rs. 11,91,214/- should not be added to the income of the assessee.Conclusion:The Tribunal provided detailed directions on the selection and rejection of comparables, the inclusion of reimbursements in operating costs, and the computation of deductions under Section 10A, ensuring that the AO/TPO re-evaluates the issues based on the Tribunal's findings and previous judicial decisions. The appeal was partly allowed, with specific instructions for recomputation and verification.