2015 (8) TMI 227 - AT - Income Tax

Appeal partly allowed re-compute ALP, exclude comparables for Transfer Pricing Adjustment. Deduction under Section 10A allowed post-change in ownership. Interest under Sections 234B and 234D deemed consequential.

GXS India Technology Centre Pvt. Ltd Versus The Income-tax Officer, Ward-11 (2), Banglore

The appeal was partly allowed with directions to re-compute the Arm's Length Price (ALP) by excluding certain comparables for Transfer Pricing Adjustment. ... Transfer pricing adjustment - selection of comparable - Held that:- Avani Cimcon company is engaged in the development of software products as well as software services. However, there are no segmental details available in the financial account of this company. Therefore, this company cannot be considered as a good comparable of the assessee company which is purely a software development company and not in software product. See M/s. 3DPLM Software Solutions Ltd. [2014 (12) TMI 612 - ITAT BANGALORE] Bodhtree Ltd is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology unlike a software development services company as like assessee, thus we direct the AO/TPO to exclude this company from the list of comparables. See M/s CISCO Systems India Pvt. Ltd case [2014 (11) TMI 849 - ITAT BANGALORE]. Celestial Labs Ltd. ompany is functionally dis-similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also, thus we direct the TPO/AO to exclude this company from the list of comparables. E-Zest Solutions Ltd. is engaged in the business of consultancy services and technical services which is categorized as KPO services hence, it is functionally not comparable to the assessee Infosys Technologies Ltd. cannot be considered as good comparables of the assessee because this company own intangibles apart from the industry leader in the field. Kals Information Systems Ltd was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. Persistent Systems Ltd. in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company ought to be omitted from the set of comparables for the year under consideration Quintegra Solutions Limited be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. Tata Elxsi Ltd should not be regarded as a comparable as software segment of this company comprises the activity of product designing services and therefore, this company is not purely software development service provider Thirdware Solutions Ltd company is engaged in the software development products as well as software development. However, no segmental information is available on this company. Further this company acquired intangible assets and derived revenue based on sales of licences. Thus this company was found to be functionally dissimilar to that of pure software development service provider. Wipro Ltd company is a industry leader and also owns tangibles. He has further submitted that this company is engaged in product development and services. However, the segmental information is not available. He has pointed out that there is a amalgamation during the year and the software service revenue to the sales is less than 75%., thus we direct the AO/TPO to exclude this company from the list of comparables. Softsol India Ltd - if the filter of RPT at 15% is applied in a particular comparable then, this filter should also applied to all other comparables companies. The assessee has also disputed functional comparability of this company and contended that this company is engaged in the software product development. However, the relevant record has not been produced before us to show the functional profile and the revenue generated activity of this company. In view of the facts and circumstances of the case, we are of the considered opinion that the functional comparability as well as the applicability of RPT filter is required to be properly examined at the level of TPO. Accordingly, we set aside the functional comparability and application of the RPT filter to the record of the TPO. Mindtree in the absence of relevant facts and record, we are not in a position to give any finding regarding the comparability of this company. Therefore, a lapse on the part of TPO in some other case cannot be a ground of rejection of this company in the present case. Accordingly, in the facts and circumstances of the case, we remit this issue to the record of the TPO/AO to re-examine the functional comparability of this company by verifying the relevant facts. Lucid Software be omitted from the list of comparables for the period under consideration in the case on hand as , is engaged in the software product development and not software development services, it is functionally different and dis-similar Denial of deduction u/s 10A - Held that:- Following the order of the co-ordinate bench of this Tribunal in assessee’s own case we decide this issue in favour of the assessee and direct the AO to allow the claim of deduction u/s 10A of the IT Act, 1961 as where a firm is converted into a company and there was change only in the composition of ownership and not the undertaking and business, the exemption allowed to the firm u/s 10A of the Act, could not be denied to the company merely because it had been separately granted recognition. - Decided in favour of assessee. Issues Involved:1. Transfer Pricing Adjustment2. Denial of Deduction under Section 10A3. Chargeability of Interest under Sections 234B and 234DIssue-wise Detailed Analysis:1. Transfer Pricing Adjustment:The assessee, a company engaged in software development services, reported international transactions with its Associated Enterprise (AE) amounting to Rs. 27,42,51,262/-. The assessee selected 18 comparables in its Transfer Pricing (TP) study, arriving at a mean margin of 10.28%. However, the Transfer Pricing Officer (TPO) rejected 14 of these comparables and selected 20 companies, including four from the assessee's list, arriving at a mean margin of 23.65%. This led to an upward adjustment of Rs. 3,42,18,209.The assessee raised objections against 13 companies selected by the TPO, arguing they were functionally dissimilar. The Tribunal considered each objection:- Avani Cimcon: The Tribunal noted that this company is engaged in software products and services without segmental details, citing previous Tribunal decisions to exclude it from comparables.- Bodhtree Ltd: Found to be engaged in software products and consultancy, the Tribunal excluded it based on precedent cases.- Celestial Labs Ltd: Engaged in biotech and pharmaceutical product development with significant R&D expenditure, the Tribunal excluded it.- E-Zest Solutions Ltd: Engaged in KPO services and lacking segmental data, the Tribunal excluded it.- Infosys Technologies Ltd: The Tribunal excluded it due to its significant intangibles and software product revenues, following previous decisions.- Kals Information Systems Ltd: Engaged in software products and training services, the Tribunal excluded it based on functional dissimilarity.- Persistent Systems Ltd: Engaged in product development without segmental details, the Tribunal excluded it.- Quintegra Solutions Ltd: Engaged in product engineering services and owning IPRs, the Tribunal excluded it.- Tata Elxsi Ltd: Engaged in product design services with significant intangibles, the Tribunal excluded it.- Thirdware Solutions Ltd: Engaged in product development and lacking segmental data, the Tribunal excluded it.- Wipro Ltd: Engaged in product development and owning intangibles, the Tribunal excluded it.- Softsol India Ltd: The Tribunal remanded this issue to the TPO to re-examine functional comparability and related party transactions filter.- Lucid Software and Mindtree: The Tribunal remanded the issue to the TPO to re-examine functional comparability.The Tribunal directed the TPO to re-compute the Arm's Length Price (ALP) by selecting suitable comparables, excluding the rejected ones.2. Denial of Deduction under Section 10A:The assessee claimed a deduction under Section 10A, which was denied by the Assessing Officer (AO) on grounds that the undertaking was formed by splitting or reconstructing an existing business. The Tribunal referred to its previous decision in the assessee's own case for AY 2004-05, where it was held that the undertaking continued in the same form and business post-change in ownership. The Tribunal directed the AO to allow the deduction under Section 10A.3. Chargeability of Interest under Sections 234B and 234D:The Tribunal noted that the levy of interest under Sections 234B and 234D is consequential in nature and does not require a specific finding.Conclusion:The appeal was partly allowed, with directions to re-compute the ALP excluding certain comparables and to allow the deduction under Section 10A. The interest under Sections 234B and 234D was deemed consequential.