2015 (6) TMI 132 - AT - Income Tax

Tribunal directs reassessment of arm's length price in transfer pricing, stresses importance of comparable companies for fair analysis.

The Tribunal allowed the appeal for statistical purposes, directing the Assessing Officer/Transfer Pricing Officer to recompute the arm's length price of ... Transfer pricing adjustment - Transactional Net Margin Method - selection of comparable - Held that:- Infosys Technologies Ltd., cannot be treated as comparable with the assessee company considering the giantness of Infosys Ltd., in terms of risk profile, nature of services, number of employees, ownership of branded products and brand related profits, etc. See CIT vs. Agnity India Technologies (P) Ltd. 2013 (7) TMI 696 - DELHI HIGH COURT KALS Information Systems Ltd. (seg.) company is into the business of software products and also software development and has merged the revenue from both the streams under the overall segment of ‘Application software’, which has been taken by the TPO for inclusion in the final set of comparables, this company loses the tag of comparability vis-a-vis the assessee company which is exclusively engaged in providing software development services on a contract basis to its AEs as a captive unit. It is manifest that under the circumstances prevailing in the case of this company, the impact of the profit from the sale/licence of software products on the overall profitability of the ‘Application software’ segment cannot be segregated. To what extent the overall profits of this company have been influenced by the revenues from software products, cannot be precisely ascertained. In view of the aforegoing distinguishing facts, this company ceases to be comparable. Persistent Systems Ltd. has been held to be functionally different from a software development service provider company. See FCG Software Services (India) (P) Ltd. Vs. ITO [2014 (12) TMI 681 - ITAT BANGALORE] Tata Elxsi (Seg.) company offers integrated hardware and packaged software solutions, the same cannot be considered as comparable with the assessee company, which is simply providing software related services. Wipro Ltd. (Seg.)A company which does not own any IPRS and carries on the activity of rendering software development services at its own cannot be compared with a company which provides software development services by using its own IPRS in the form of patents of software. Under such circumstances, we hold that this company cannot be considered as comparable at segment level. The same is ex consequenti directed to expelled from the set of comparables. Issues Involved:1. Transfer Pricing Adjustment.2. Inclusion of Specific Companies in the List of Comparables.Detailed Analysis:1. Transfer Pricing Adjustment:The core issue in this appeal is the challenge against the addition of Rs. 12,82,48,777/- due to transfer pricing adjustment. The assessee, an Indian company and a wholly-owned subsidiary of Global Logic, US, primarily provides software development services to its overseas group companies. The assessee reported two international transactions, with the main controversy revolving around the 'Provision of software development services' valued at Rs. 158,09,04,878/-. The assessee used the Transactional Net Margin Method (TNMM) with Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC) to demonstrate that the transaction was at arm's length price (ALP). The Transfer Pricing Officer (TPO) shortlisted 19 companies as comparables, computing their mean margin at 24.82% and proposed a transfer pricing adjustment of Rs. 18,95,48,030/-, which was later reduced by the Dispute Resolution Panel (DRP) to Rs. 12,82,48,777/-.2. Inclusion of Specific Companies in the List of Comparables:The assessee contested the inclusion of six companies in the list of comparables:- Avani Cincom Technologies: The Tribunal excluded this company as it was also engaged in the sale of software products and lacked segregated revenue data, making it incomparable to the assessee.- Infosys Technologies Ltd.: The Tribunal excluded Infosys due to its giantness in terms of risk profile, nature of services, number of employees, ownership of branded products, and brand-related profits, which made it incomparable to the assessee, a captive service provider.- KALS Information Systems Ltd. (seg.): The Tribunal excluded this company as it was engaged in both software development and software products, with merged revenue data, making it functionally different from the assessee.- Persistent Systems Ltd.: The Tribunal excluded this company as it was primarily engaged in software product development, making it functionally different from the assessee.- Tata Elxsi (seg.): The Tribunal excluded this company as it offered integrated hardware and packaged software solutions, unlike the assessee, which provided only software-related services.- Wipro Ltd. (seg.): The Tribunal excluded this company due to its ownership of significant intellectual property rights (IPRs) and engagement in R&D activities, making it incomparable to the assessee.The Tribunal directed the Assessing Officer (AO)/TPO to recompute the ALP of the international transaction after excluding these six companies from the list of comparables. The appeal was allowed for statistical purposes, and the matter was sent back for fresh adjudication, ensuring the assessee is given a reasonable opportunity of being heard.Conclusion:The Tribunal's judgment focused on ensuring that only truly comparable companies were included in the list for transfer pricing analysis. By excluding companies that were functionally different or had significant advantages such as ownership of IPRs, the Tribunal aimed to ensure a fair and accurate determination of the ALP for the assessee's international transactions. The appeal was allowed for statistical purposes, with directions for a fresh computation of the ALP.