2014 (12) TMI 429 - AT - Income Tax

Tribunal adjusts Transfer Pricing analysis, excludes comparables, directs recalculation within permissible range

M/s SunGard Solutions (India) Pvt. Ltd. Versus Dy. Director of Income Tax (International Taxation) -I, Pune.

The Tribunal partly allowed the appeal, excluding six contested comparables in the Transfer Pricing analysis and directing a recalculation of the arm's ... Selection of comparables – Held that:- The discussion made by the TPO on the issue shows that he has considered a filter 25% of the RPTs for the purpose of excluding a concern from the list of comparables – in Compucon Software Ltd. he has aggregated the receipts for services rendered and the payments made for services received and thereafter he has divided the total figure by the total turnover of the assessee - if total expenses incurred by the assessee by way of payments to associated enterprises is divided by the total expenses incurred, the ratio of RPTs to the total transactions exceed 25%, as per the working made by the assessee - assessee rightly referred to Bindview India (P.) Ltd. vs. DCIT [2013 (6) TMI 113 - ITAT PUNE] - the RPTs in the case of Compucon Software Ltd. have been accepted as being in excess of 25% of the total transactions - the plea of the assessee to exclude Compucon Software Ltd. from the list of comparables has been wrongly negated by the lower authorities. Inclusion of Avani Cincom Technologies Ltd. as a comparable – Held that:- The assessee is justified in seeking exclusion of Avani Cincom Technologies Ltd. from the final list of comparables - the order of the TPO brings out that the concern is engaged in providing State of Art Technology solution and services to organizations in different verticals like Travel, Insurance, Financial services, Healthcare, Law, Transportation and others - The factum of the concern being engaged in development of products and sale thereof apart from being engaged in software development services is not denied - in such a situation, only the segment relating to development of software services, which can be said to be similar to the assessee, can only be considered for the purposes of comparability analysis - The segmental data is not available and it would be inappropriate to consider the financial results of the concern as a whole for the purposes of carrying out comparability analysis vis-à-vis the tested transactions – the company is liable to be excluded from the list of comparables. Inclusion of SIP Technologies and Export Ltd. - Financial data of the concern which has been considered does not correspond to the financial year of the assessee – Held that:- The financial year of the assessee is from 01.04.2005 to 31.03.2006 whereas the financial year of SIP Technologies and Export Ltd. ending on 31st March, 2006 is comprised of a period of 18 months starting from 01.10.2004 – as per rule 10B(4) of the Rules, the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into - the financial data of SIP Technologies and Export Ltd. adopted by the TPO for the period ended 31.03.2006 does not relate to the FY in which the international transaction has been carried out by the assessee because of the variation in the financial year of the two concerns – the AO is directed to exclude SIP Technologies and Export Ltd. from the list of comparables. The plea setup by the assessee for exclusion of Synetairos Technologies Ltd. from the list of comparables is quite justified - assessee had included the concern as a comparable in its Transfer Pricing Study – in principle assessee cannot be denied an opportunity to seek exclusion of the concern from the list of comparables if the same is founded on justifiable grounds. M/s Synetairos Technologies Ltd. – Held that:- The company is engaged in not only providing software development services but is also engaged in providing software professionals to other software companies, an activity which is not being carried out by the assessee at all - in absence of adequate credible information relating to the said concern, it would be inappropriate to consider it as a comparable concern for the purposes of carrying out the comparability analysis - M/s Synetairos Technologies Ltd. be excluded from the final set of comparables – Decided partly in favour of assessee. Issues Involved:1. Inclusion and exclusion of certain comparable companies in the Transfer Pricing analysis.2. Calculation of the arm's length price for international transactions.3. Application of the +/- 5% range under section 92C(2) of the Income Tax Act.Detailed Analysis:1. Inclusion and Exclusion of Comparable Companies:a. Compucon Software Ltd.:The appellant objected to the inclusion of Compucon Software Ltd. due to substantial Related Party Transactions (RPTs). The TPO aggregated receipts for services rendered and payments made for services received, then divided this by the total turnover. The Tribunal found this approach incorrect as it gave a distorted picture of the RPT ratio. The correct method would be to divide the total expenses incurred by way of payments to associated enterprises by the total expenses incurred. This showed the RPT ratio exceeding 25%, justifying the exclusion of Compucon Software Ltd.b. Avani Cincom Technologies Ltd.:The appellant argued that the financial data of Avani Cincom Technologies Ltd. was not contemporaneous and the company was functionally different. The Tribunal rejected the contemporaneous data argument but accepted the functional difference argument, noting the company was engaged in products, consulting, and other services without segmental data for software development services. Thus, Avani Cincom Technologies Ltd. was excluded.c. SIP Technologies and Export Ltd.:The appellant contended that the financial data of SIP Technologies and Export Ltd. did not correspond to the financial year of the assessee. The Tribunal upheld this, noting the financial year of SIP Technologies and Export Ltd. was from 01.10.2004 to 31.03.2006, different from the assessee's financial year of 01.04.2005 to 31.03.2006. Therefore, SIP Technologies and Export Ltd. was excluded.d. KALS Information Systems Ltd.:The appellant argued that KALS Information Systems Ltd. was engaged in different activities, including software product development, which was distinct from the appellant's software development services. The Tribunal agreed, referencing a similar decision in the case of Bindview India (P.) Ltd., and excluded KALS Information Systems Ltd.e. Transworld Infotech Ltd.:The appellant pointed out that Transworld Infotech Ltd.'s financial year ended on 30th June 2006, differing from the assessee's financial year ending on 31.03.2006. The Tribunal directed the exclusion of Transworld Infotech Ltd. based on this discrepancy.f. Synetairos Technologies Ltd.:The appellant argued that Synetairos Technologies Ltd. was engaged in providing software professionals to other companies, a function not performed by the appellant. The Tribunal found this argument justified and noted the absence of the company's financial report in the public domain. Consequently, Synetairos Technologies Ltd. was excluded.2. Calculation of Arm's Length Price:The TPO initially proposed an adjustment of Rs. 4,17,52,924/- based on a set of 8 comparables. The DRP revised this to Rs. 3,80,98,474/- using a set of 9 comparables. The Tribunal's exclusion of the six companies mentioned above necessitated a recalculation of the arm's length price.3. Application of the +/- 5% Range:The appellant claimed that excluding the six contested comparables would bring the variation within the +/- 5% range stipulated under section 92C(2) of the Act. The Tribunal's acceptance of the appellant's exclusions rendered other grounds of appeal academic, implying the adjustment would indeed fall within the permissible range.Conclusion:The Tribunal partly allowed the appeal, excluding the six contested comparables and directing a recalculation of the arm's length price. This adjustment would likely fall within the permissible +/- 5% range, negating the need for further adjustments. The decision was pronounced in the open Court on 30th September 2014.