2015 (2) TMI 981 - AT - Income Tax

Tribunal remits ALP determination for Back Office Support Services, excludes certain comparables

Tata McGraw Hill Education Pvt. Ltd. Versus ACIT, Circle 16 (1), New Delhi.

Tata McGraw Hill Education Pvt. Ltd. Versus ACIT, Circle 16 (1), New Delhi. - [2015] 38 ITR (Trib) 553 (ITAT [Del]) Issues Involved:1. Selection of comparables for determining the Arm's Length Price (ALP) in the Back Office Support Services segment.2. Use of multiple year data of comparables.3. Seeking information under section 133(6) of the Income-tax Act by the Transfer Pricing Officer (TPO).4. Risk adjustment.Detailed Analysis:1. Selection of Comparables for Determining the ALP in the Back Office Support Services SegmentThe primary issue in the appeal concerns the selection of comparables for the international transactions in the Back Office Support Services segment. The assessee, a joint venture between MH, USA, and the Tata Group of India, reported certain international transactions and adopted the Transactional Net Margin Method (TNMM) as the most appropriate method. The TPO was not satisfied with the comparables selected by the assessee and shortlisted 26 companies with an average OP/TC at 25.96%. The TPO then made a transfer pricing adjustment amounting to Rs. 59,14,548/-. The assessee contested the selection of certain companies as comparable, arguing that the nature of services rendered by it did not fall in the realm of 'software development services' but were 'software non-development services.'The Tribunal examined each disputed comparable:- Accel Transmatic Ltd. (Seg.): Excluded as it was involved in software development services and sale of software products, which differed from the assessee's software non-development services.- Avani Cimcon Technologies Ltd.: Excluded as it was engaged in software development services, unlike the assessee.- Celestial Labs Ltd.: Excluded due to its involvement in software development and software products, which were not comparable to the assessee's services.- Flextronics Software Systems Ltd. (Seg.): Excluded as it provided software development services and products, differing from the assessee's services.- Helios & Matheson Information Technology Ltd.: Included as it was engaged in similar business activities as the assessee.- Infosys Technologies Ltd.: Excluded due to its high turnover, risk profile, and ownership of branded/proprietary products, making it incomparable with the assessee.- KALS Information Systems Ltd. (Seg.): Excluded as it was involved in software products and training, which were not comparable to the assessee's services.- Lucid Software Ltd.: Included as it developed software products for internal use, similar to the assessee.- Megasoft Ltd. (Seg.): Excluded due to mergers and acquisitions during the year, which influenced its financial results.- Persistent Systems: Excluded due to acquisitions during the relevant year.- Sasken Communication Technologies Ltd.: Excluded due to acquisitions and mergers during the year, affecting its financial results.- Tata Elxsi Ltd. (Seg.): Excluded as it was involved in software development services, unlike the assessee.- Wipro Ltd. (Seg.): Excluded as it provided software development services, differing from the assessee's services.The Tribunal remitted the matter to the AO/TPO for determining the ALP afresh in accordance with these observations.2. Use of Multiple Year Data of ComparablesThe assessee argued for the use of multiple year data of comparables, which the TPO modified to only the current year's data. The Tribunal upheld the view taken by the authorities, citing Rule 10B(4) and decisions including the Special Bench decision in Aztech Software Technologies Ltd., approving the use of only the current year's data.3. Seeking Information under Section 133(6) of the Income-tax Act by the TPOThe assessee contested the TPO's seeking of information under section 133(6) from the companies considered as comparable. The Tribunal found no restriction on the TPO's powers to seek relevant information but emphasized that such information must be confronted to the assessee before being used. As the TPO had done so, the Tribunal saw no reason to disturb the TPO's view.4. Risk AdjustmentNo specific argument was advanced regarding the risk adjustment, and the Tribunal upheld the impugned order on this issue.ConclusionThe appeal was partly allowed for statistical purposes, remitting the matter to the AO/TPO for fresh determination of the ALP in accordance with the Tribunal's observations. The order was pronounced in the open court on 20.02.2015.