2014 (6) TMI 324 - AT - Income Tax

TPO directed to re-examine comparables, exclude non-comparable companies

The Tribunal allowed the appeal, directing the Transfer Pricing Officer (TPO) to re-examine comparables, obtain segmental data, and exclude non-comparable ... Transfer pricing adjustment – International transaction of software development research and other services rendered – Held that:- Selection of comparables – Functionally not comparable – Held that:- The assessee’s objections regarding the comparables have not been properly dealt with - the matter pertaining to the above may be sent back to the file of the TPO to consider the issue fresh - the assessee agreed to this proposition – the direction should be given to the TPO that where necessary segmental data are not available the same may be obtained by issuing direction u/s 133(6) and if the comparables are found functionally not comparable, the same may be rejected – thus, the matter is required to be remitted back to the TPO for fresh adjudication – Decided in favour of Assessee. Assessee has elaborately submitted that TCS is engaged not only in software development services but also sale of products, assurance services, cloud consulting, industrial services etc. -The turnover of TCS was ₹ 2,245 crores as against ₹ 31.86 crores of the assessee - There were related party transaction of 59% as against assessee 25% which were engaged in diverse functions - the objections by the assessee are glaring and the same needed to be addressed cogently by the TPO and the DRP - even administrative orders have to be consistent with the law of natural justice - the comparable TCS should be rejected from the list of comparables on both the ground that the same was not functionally comparable as well as the fact that assessee’s objections were not at all addressed – Decided in favour of Assessee. Issues Involved:1. Assessing Officer's assessment of total income.2. Selection of companies for benchmarking international transactions.3. Computation of Profit Level Indicator (PLI) on a segmental basis.Issue-Wise Detailed Analysis:1. Assessing Officer's Assessment of Total Income:The primary issue contested by the assessee was the assessment of total income at Rs. 3,33,95,166/- against the returned income of Rs. 2,33,321/-. This discrepancy arose due to the addition of Rs. 3,31,61,845/- proposed by the Transfer Pricing Officer (TPO) under section 92CA of the Income Tax Act, 1961. The assessee, Open Solutions Software Service Private Limited, a subsidiary of Open Solutions Inc. USA, was engaged in software development and related services. The TPO's determination of arm's length margin at 29.50% of operating cost (OC) led to this significant income enhancement. The Dispute Resolution Panel (DRP) directed adjustments on account of working capital, resulting in an arm's length price of Rs. 35,19,87,629/-, leading to the contested addition.2. Selection of Companies for Benchmarking International Transactions:The assessee challenged the selection of certain companies by the TPO for benchmarking purposes, arguing that they were not functionally comparable. The companies in question included Cat Technologies Ltd., Goldstone Technologies Ltd., Infosys Ltd., Tata Elxsi Ltd., Tata Consultancy Services Ltd. (TCS), L&T Infotech, and Persistent Systems Ltd. The assessee argued that these companies were engaged in various other businesses apart from software development services, and segmental data were not available. The TPO and DRP, however, rejected these submissions in a cryptic manner. The Tribunal found merit in the assessee's objections, noting that the TPO and DRP did not properly address the functional dissimilarities and lack of segmental data. The Tribunal proposed to remit the issue back to the TPO for fresh consideration, with directions to obtain necessary segmental data under Section 133(6) and exclude non-comparable companies.3. Computation of Profit Level Indicator (PLI) on a Segmental Basis:The assessee contended that the TPO erred in not computing the PLI of Mindtree Ltd. and Goldstone Technologies Ltd. on a segmental basis, despite these companies being engaged in various other businesses. The Tribunal observed that the TPO and DRP failed to address the assessee's detailed submissions regarding the functional differences and the absence of segmental data. The Tribunal directed the TPO to re-examine the issue, emphasizing the need for a detailed and cogent analysis of the assessee's objections.Separate Judgment for TCS:The Tribunal provided a separate and detailed judgment regarding Tata Consultancy Services Ltd. (TCS). The assessee argued that TCS was not comparable due to its diverse business activities, significant related party transactions, and substantial turnover differences. The TPO and DRP dismissed these objections without proper examination. The Tribunal found that the objections were valid and should have been addressed thoroughly. Consequently, the Tribunal directed the exclusion of TCS from the list of comparables, citing both functional dissimilarity and procedural lapses by the authorities.Conclusion:The Tribunal allowed the appeal for statistical purposes, directing the TPO to re-examine the comparables in light of the assessee's submissions, obtain necessary segmental data, and exclude non-comparable companies. The Tribunal specifically excluded TCS from the list of comparables due to its diverse business activities and significant related party transactions. The order was pronounced in the Open Court on 27/5/2014.