Tribunal directs reassessment of comparables selection & risk adjustment for Transfer Pricing appeal

The Tribunal allowed the appeal for statistical purposes, directing the Transfer Pricing Officer (TPO) to re-examine the selection of comparables and risk adjustment. Emphasizing the importance of functional similarity and proper segmental data for comparables, the Tribunal recognized the risk-free nature of the assessee's operations. The TPO was instructed to grant an appropriate risk adjustment after analyzing the risk profile of the assessee vis-a-vis the comparables. The order was pronounced on 12.02.2014.

---

---

Issues Involved:
1. Determination of Arm's Length Price (ALP) on international transactions.
2. Selection of comparable companies.
3. Risk adjustment relief.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) on International Transactions:
The assessee, a private limited company engaged in software development services to its Associated Enterprises (AEs), filed a return of income for AY 2005-2006. The matter was referred to the Transfer Pricing Officer (TPO) due to international transactions. The TPO selected revised comparable companies and determined the arm's length margin at 26.54%, resulting in an upward adjustment of Rs.1,31,16,086/-. The Assessing Officer (A.O.) incorporated the TPO's order in the assessment without allowing any deduction under section 10A on the adjusted amount.

2. Selection of Comparable Companies:
The assessee objected to the inclusion of certain comparables selected by the TPO. The CIT(A) retained all comparables identified by the TPO except one (Satyam Computer Services Ltd.), reducing the arm's length margin to 26.41%. The Tribunal considered the objections to the comparables and provided detailed reasons for their inclusion or exclusion:

- Exensys Software Solutions Ltd.: Excluded due to extraordinary events like amalgamation affecting financial results.
- Infosys Technologies Ltd.: Excluded due to incomparable scale of operations, high turnover, and ownership of branded products.
- Flextronics Software Ltd., Four Soft Ltd., Thirdware Software Solutions Ltd.: Excluded as they are involved in both software services and product development, lacking segmental details for comparison.
- Tata Elxsi Ltd.: Directed TPO to examine segmental profits; if not available, exclude from comparables.
- Geometric Software Solutions Co. Ltd.: Accepted as comparable due to functional similarity.
- Sankhya Infotech Ltd.: Directed TPO to re-examine and include only if functionally similar.

3. Risk Adjustment Relief:
The assessee, being a risk-free entity remunerated on a cost-plus basis, requested a risk adjustment of 7.6% using the Capital Asset Pricing Model (CAPM). The TPO calculated a risk adjustment of 0.85% but did not grant it, considering it insignificant. The Tribunal directed the TPO to re-examine and grant appropriate risk adjustment after analyzing the risk profile of the assessee vis-a-vis the comparables.

Conclusion:
The appeal was allowed for statistical purposes, directing the TPO to re-examine the selection of comparables and risk adjustment. The Tribunal emphasized the need for functional similarity and proper segmental data for comparables and recognized the risk-free nature of the assessee's operations. The order was pronounced in the open court on 12.02.2014.

---