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

The Tribunal partly allowed the appeal, excluding six contested comparables in the Transfer Pricing analysis and directing a recalculation of the arm's length price. The adjustment was expected to fall within the permissible range of +/- 5%, eliminating the need for additional adjustments. The decision was issued on 30th September 2014.

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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.

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