2019 (1) TMI 263 - AT - Income Tax

Transfer Pricing Dispute: Exclusion of Comparables, Re-examination Remand, and Tax Verification

The Tribunal directed the exclusion of several companies from the list of comparables in a transfer pricing adjustment dispute due to various reasons, ... TPA - Comparable selection - functional similarity - Held that:- Assessee an Indian company is engaged in the business of software development and distribution of software licenses thus companies functionally dissimilar with that of assessee need to be deselected from final list. The company cannot be treated as comparable as it fails the RPT filter. As applying the employee cost filter, exclusion of companies whose employee cost as a proportion to operating revenue is less than 25%. Addition on account of mismatch in receipt as shown by the assessee and as appearing in the TDS certificates - Held that:- We direct the Assessing Officer to decide the issue afresh after thoroughly examining the submissions and other details filed by the assessee to reconcile the difference in receipts. Assessing Officer must afford reasonable opportunity of being heard to the assessee. This ground is allowed for statistical purposes. Issues Involved:1. Transfer pricing adjustment: Selection/rejection of comparables.2. Corporate tax issue: Addition due to mismatch in receipts and TDS certificates.Detailed Analysis:1. Transfer Pricing Adjustment: Selection/Rejection of Comparablesi) AVANI CIMCON TECHNOLOGIES LTD.The company was selected by the Assessing Officer and retained by the DRP. The assessee objected to this selection on the grounds that the company is functionally different, involved in software solutions, development, consulting, and IT services, and owns products like D-Xchange, Bizrule Exchange, and CARMA. The Tribunal, in various decisions, has held this company not comparable to a software development service provider due to the lack of segmental details. Following these consistent views, the Tribunal directed the exclusion of this company from the list of comparables.ii) BODHTREE CONSULTING LTD.Selected by the Transfer Pricing Officer and retained by the DRP, the assessee objected due to the company's varied activities and abnormal growth in turnover and profit. The Tribunal, in previous decisions, excluded this company as a comparable due to related party transactions exceeding the threshold limit of 25%. Following this consistent view, the Tribunal directed its exclusion.iii) e-ZEST SOLUTIONS LTD.Selected by the Transfer Pricing Officer and retained by the DRP, the assessee objected due to the company's involvement in both software development and products, and rendering high-end technical services akin to KPO. The Tribunal, in previous decisions, consistently held that this company is not comparable due to its involvement in product development and high-end technical services. Thus, the Tribunal directed its exclusion.iv) HELIOS AND MATHESON TECHNOLOGY LTD.Selected by the Transfer Pricing Officer and retained by the DRP, the assessee objected due to the company's involvement in research and development, suggesting product development. The Tribunal, following the decision of the Hon'ble Jurisdictional High Court and other consistent views, directed the exclusion of this company from the list of comparables.v) KALS INFO SYSTEMS LTD.Selected by the Transfer Pricing Officer and retained by the DRP, the assessee objected due to the company's involvement in software development and products, with no segmental details. The Tribunal, following the decision of the Hon'ble Jurisdictional High Court and other consistent views, directed the exclusion of this company from the list of comparables.vi) LUCID SOFTWARE LTD.Selected by the Transfer Pricing Officer and retained by the DRP, the assessee objected due to the company's involvement in product development. The Tribunal, following consistent decisions, directed the exclusion of this company from the list of comparables.vii) MEGASOFT LTD.Selected by the Transfer Pricing Officer and retained by the DRP, the assessee objected due to the company's involvement in software products and lack of segmental details. The Tribunal directed the Assessing Officer to verify if segmental details are available and to consider the profit margin of the software development segment if ascertainable. The issue was remanded for re-examination.viii) PERSISTENT SYSTEMS LTD.Selected by the Transfer Pricing Officer and retained by the DRP, the assessee objected due to the company's involvement in both software services and product development with no segmental details. The Tribunal, following consistent decisions, directed the exclusion of this company from the list of comparables.ix) SASKEN COMMUNICATION LTD.Selected by the Transfer Pricing Officer and retained by the DRP, the assessee objected due to the company's involvement in product development and an extraordinary event of amalgamation/merger affecting profitability. The Tribunal, following consistent decisions, directed the exclusion of this company from the list of comparables.x) TATA ELXSI LTD.Selected by the Transfer Pricing Officer and retained by the DRP, the assessee objected due to the company's involvement in various activities including product development. The Tribunal, following consistent decisions, directed the exclusion of this company from the list of comparables.xi) THIRDWARE SOLUTIONS LTD.Selected by the Transfer Pricing Officer and retained by the DRP, the assessee objected due to the company's involvement in both software development services and product development with no segmental details. The Tribunal, following consistent decisions, directed the exclusion of this company from the list of comparables.xii) R SYSTEMS LTD.Selected by both the assessee and Transfer Pricing Officer, the assessee objected due to the company's involvement in product development and different financial year ending. The Tribunal directed the Assessing Officer to verify segmental details and consider the company's comparability after due verification.xiii) LGS GLOBAL LTD.Selected by the Transfer Pricing Officer and retained by the DRP, the assessee objected due to the company's involvement in product development with no segmental details. The Tribunal remanded the issue for re-examination by the Assessing Officer/Transfer Pricing Officer.xiv) ACCEL TRANSMATIC LTD.Selected by the assessee and accepted by the Transfer Pricing Officer, the assessee later objected due to the company's involvement in product development with no segmental details. The Tribunal remanded the issue for re-examination by the Assessing Officer/Transfer Pricing Officer.xv) ISHIR INFOTECH LTD.Selected by the Transfer Pricing Officer and retained by the DRP, the assessee objected due to the company's low employee cost ratio. The Tribunal, following consistent decisions, directed the exclusion of this company from the list of comparables.xvi) PSI DATA SYSTEMS LTD.Selected by the assessee but rejected by the Transfer Pricing Officer due to high related party transactions. The assessee contended that the related party transaction percentage was below the threshold limit. The Tribunal remanded the issue for verification by the Assessing Officer/Transfer Pricing Officer.The Tribunal directed the Assessing Officer/Transfer Pricing Officer to determine the arm's length price of the transaction with the A.E. relating to the provision of software development services, considering the Tribunal's observations and allowing the benefit of ±5% as per the proviso to section 92C(2) of the Act.2. Corporate Tax Issue: Addition Due to Mismatch in Receipts and TDS CertificatesThe assessee challenged the addition of Rs. 8,23,860 due to a mismatch in receipts as shown by the assessee and as appearing in the TDS certificates. The Tribunal noted that the Assessing Officer did not consider the assessee's submissions and repeated the addition. The Tribunal directed the Assessing Officer to verify the assessee's claim and reconcile the difference in receipts after providing a reasonable opportunity of being heard to the assessee.Conclusion:The assessee's appeal was partly allowed, with directions for re-examination and verification of certain comparables and the corporate tax issue.