2015 (5) TMI 649 - AT - Income Tax

Tribunal Excludes Comparables, Resolves Transfer Pricing Issue, Dismisses Other Tax Matters

The Tribunal allowed the appeal by excluding specific comparables in the transfer pricing adjustment issue, bringing the transactions within the arm's ... Transfer pricing adjustment - wrong selection of comparable - Held that:- Plea of the assessee for exclusion of Infosys Technologies Ltd. cannot be shut out merely because the said concern was initially adopted by the assessee as a comparable in its Transfer Pricing Study. Quite clearly, the turnover of Infosys Technologies Ltd. stands at ₹ 15,051 crores (approx) whereas assessee’s turnover from software development services is to the tune of ₹ 73 crores (approx). It is also clear from the Tabulation above, that the said concern is undertaking diversified activities whereas assessee is providing software services, at minimal risk as 100% activities are to its associated enterprise. In-fact, assessee has rightly relied upon the judgement of the Hon’ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (2013 (7) TMI 696 - DELHI HIGH COURT ) wherein in a somewhat similar situation the action of the Tribunal in excluding Infosys Technologies Ltd., from the list of final comparables was affirmed. Thus M/s. Infosys Technologies Ltd. was liable to be excluded from the final set of comparables. E-Zest Solutions Limited. notably, Symphony Services Pune Pvt. Ltd. (2015 (5) TMI 258 - ITAT PUNE) was also a concern which was engaged in provision of software development and related services to its associated enterprises on cost plus markup basis. The Tribunal vide its order dated 30-04-2014 (Supra) considered the inclusion of E-Zest Solutions Ltd. for the purpose of comparability analysis of the transaction of development services for the very same assessment year, i.e. 2008-09, which is also the year before us. Following the aforesaid discussion which squarely covers the controversy in the present case, we direct that E-Zest Solutions be excluded from the final set of comparables. Kals Information Systems Limited is liable to be excluded from the list of comparables on account of functional dissimilarities for the purposes of benchmarking international transactions of provision of software development services. Bodhtree Consulting Ltd., the revenue recognition model of Bodhtree Consulting Ltd. is quite different from the model being pursued by assessee as the revenue is being recognized based on the cost plus markup basis and such distinction prevailed to exclude Bodhtree Consulting Ltd. from the list of comparables. M/s. FCS Software Solutions Ltd. the operating margins of the said concern do not reflect a consistent trend over the years, and in any case, the current year’s operations in comparison to the earlier years are quite abnormal. Considering the entirety of circumstances, in our view, the financial results declared by the said concern do not reflect a normal business trend and therefore in our view the said concern is liable to be excluded from the final set of comparables - Decided in favour of assessee. Issues Involved:1. Transfer Pricing Adjustment2. Non-granting of Credit for Advance Tax and Taxes Deducted at Source3. Erroneous Recovery of Refund4. Initiation of Penalty Proceedings5. Erroneous Levy of InterestDetailed Analysis:1. Transfer Pricing AdjustmentThe primary issue in this appeal concerns the transfer pricing adjustment of Rs. 61,378,174. The appellant, engaged in software development services for its group affiliates, contested the adjustment made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO). The TPO had rejected the appellant's comparability analysis and selected different comparables, leading to the adjustment. The appellant raised multiple objections, including:- Non-consideration of contemporaneous data: The TPO used data not available at the time of compliance.- Non-consideration of multiple year data: The TPO considered only single-year data.- Rejection and acceptance of certain comparables: The TPO rejected some comparables identified by the appellant and included others not initially considered.- Selection of companies with super normal profits: The TPO included companies with abnormal profit margins.- Working capital and risk adjustments: The appellant argued that the TPO ignored its workings for working capital adjustments and did not account for risk differences.The Tribunal examined the inclusion of specific companies as comparables:- Infosys Technologies Ltd.: Excluded due to significant differences in scale, risk profile, and ownership of intangibles.- E-Zest Solutions Ltd.: Excluded as it provided ITES services and did not have segmental data for software development services.- Kals Information Systems Ltd.: Excluded for being involved in both software development and product sales.- Bodhtree Consulting Ltd.: Excluded due to its engagement in product engineering services and different revenue recognition model.- FCS Software Solutions Ltd.: Excluded due to abnormally high and fluctuating profit margins.The Tribunal concluded that excluding these companies from the final set of comparables brought the appellant's transactions within the acceptable arm's length range, negating the need for the adjustment.2. Non-granting of Credit for Advance Tax and Taxes Deducted at SourceThe appellant claimed that the AO erred in not granting credit for advance tax payments and taxes deducted at source totaling Rs. 32,760,251. This issue was not discussed in detail in the judgment, implying it may have been rendered academic due to the resolution of the primary issue.3. Erroneous Recovery of RefundThe appellant contended that the AO erroneously recovered Rs. 3,416,409, stating it was a refund allowed earlier, which the appellant never received. This issue was also not elaborated upon in the judgment, likely due to the resolution of the main transfer pricing issue.4. Initiation of Penalty ProceedingsThe appellant argued against the initiation of penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income due to the transfer pricing adjustment. The Tribunal's resolution of the transfer pricing issue in favor of the appellant likely nullified the basis for penalty proceedings.5. Erroneous Levy of InterestThe appellant contested the levy of interest under section 234B, arguing it was due to unanticipated additions from the transfer pricing adjustment. With the adjustment issue resolved, this ground also became academic.Conclusion:The Tribunal allowed the appeal, primarily addressing and resolving the transfer pricing adjustment issue by excluding certain comparables, which brought the appellant's transactions within the arm's length range, thereby negating the need for the adjustment. Other grounds related to tax credits, erroneous recovery, penalty proceedings, and interest levy were rendered academic due to this resolution.