Tribunal Directs Exclusion of Comparables in Transfer Pricing Analysis

The Tribunal directed the Assessing Officer to exclude seven disputed comparables in the transfer pricing analysis for a software development company. This exclusion provided relief to the assessee by emphasizing the importance of functional similarity in selecting comparables. The appeal was partly allowed, highlighting the significance of consistency with previous rulings in transfer pricing matters.

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Issues Involved:
1. Determination of Arm's Length Price (ALP)
2. Selection of comparables for transfer pricing

Detailed Analysis:

1. Determination of Arm's Length Price (ALP):

In the assessment year 2005-2006, the assessee, a company engaged in software development services, filed a return showing an income of Rs. 6,62,74,720. The assessee had transactions with its Associated Enterprises (AEs) amounting to Rs. 26,18,37,705. The Assessing Officer (A.O.) referred the case to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Income Tax Act to determine the ALP. The TPO, using the Transaction Net Margin Method (TNMM), determined the ALP of these transactions to be Rs. 31,36,49,588, suggesting an addition of Rs. 5,18,11,883 to the declared price. Consequently, the A.O. completed the assessment, determining the total income at Rs. 11,80,86,603.

2. Selection of Comparables for Transfer Pricing:

The assessee contested the transfer pricing adjustment before the Commissioner of Income Tax (Appeals) [CIT(A)], who largely rejected the grounds but excluded one company, "Satyam Technologies," from the comparables. The final list of 16 comparables selected by the TPO, after CIT(A)'s adjustment, included companies like iGate Global Solutions Ltd., Flextronics (Seg.), Geometric Software Solutions Co. Ltd., and Infosys Technologies Ltd., among others. The arithmetic mean of the Profit Level Indicator (PLI) for these comparables was calculated at 28.86%.

The assessee did not object to the first nine comparables but disputed the remaining seven. The assessee relied on previous decisions of the Hyderabad Tribunal in similar cases, which had excluded these seven companies due to functional dissimilarities and other factors.

Analysis of the Seven Disputed Comparables:

1. Bodhtree Consulting Ltd.:
- Rejected due to related party transactions constituting 34.68% of total turnover and functional differences as the company provides e-paper solutions and data cleansing software, which fall under IT-enabled services.

2. Exensys Software Solutions Ltd.:
- Excluded due to functional differences, significant intangibles, and an exceptional year of operations due to amalgamation with Holool India Ltd., which materially impacted financial results.

3. Sankhya Infotech Ltd.:
- Rejected for being functionally different, as it is primarily into software products, with services being supplementary.

4. Four Soft Ltd.:
- Excluded for functional differences, as it derives income from software licenses and annual maintenance contracts (AMCs), indicating it is into software products.

5. Thirdware Solutions Ltd.:
- Rejected due to functional differences, as it is engaged in implementation and customer services for ERP software and distribution of products.

6. Tata Elxsi Ltd.:
- Excluded as it is a specialized embedded software development company, operating in complex segments not comparable to a software services provider.

7. Infosys Technologies Ltd.:
- Rejected due to its diversified activities, significant brand value, and economies of scale, making it incomparable to a small captive service provider.

Conclusion:

The Tribunal, after considering the arguments and previous decisions, directed the A.O. to exclude the seven disputed comparables and re-calculate the ALP accordingly. The appeal of the assessee was partly allowed, providing relief by excluding the non-comparable companies from the transfer pricing analysis. The Tribunal emphasized consistency with previous rulings and the importance of functional similarity in selecting comparables.

Order Pronouncement:

The order was pronounced in the open court on 10.12.2014, with the appeal being partly allowed.

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