2015 (9) TMI 1398 - AT - Income Tax

Transfer pricing adjustment - Held that - Accel Transmatic Ltd. - in this case the assessee does not have any objection in making this company i.e software segment of Accel Transmatic Ltd. as a comparable to that of the assessee. Avani Cimcon Technologies Ltd. was rightly included in the list of comparables as find from the description of business activity of this company as reproduced on internal page 90 of the TPO s order that it is a pure software development service provider. Celestial Labs Ltd. - exclusion of this company from the list of comparables directed as this company can t be considered as functionally similar to that of the assessee . Datamatics Ltd. - The assessee has no objection to the inclusion of this company in the list of comparables. E-Zest Solutions Ltd. -TPO has rightly included the said comparable in the list of comparables. Therefore the objection of the assessee is rejected. Flextronics Software Systems Ltd. (Seg.) - exclusion of this company from the list of comparables as the year ending of this company is not coinciding with that of the assessee and it is not known as to how the TPO has adopted the relevant figures for comparison. Geometric Limited (Seg.) - The assessee has no objection to the inclusion of this company in the list of comparables. Helios & Matheson Information Technology Ltd. - direct the exclusion of this company from the list of comparables as the assessee is not engaged in software sales unlike Helios & Matheson Information Technology Ltd IGate Global Solutions Ltd. - The assessee has no objection to the inclusion of this company in the list of comparables. Infosys Technologies Ltd. - direct the exclusion of this company from the list of comparables as is a giant company in terms of risk profile scale nature of services revenue ownership of branded/proprietary products onsite and offshore services etc. cannot be compared with the assessee. Ishir Infotech Ltd. - exclusion of this company from the list of comparables as functional difference of this company vis-a-vis the assessee. So the assessee s objection is upheld. KALS Information Systems Ltd. (Seg.) exclusion from the list of comparables LGS Global Ltd. (Lanco Global Solutions Ltd.) - The assessee has no objection to the inclusion of this company in the list of comparables. Lucid Software Ltd. - direct the exclusion of this company from the list of comparables as this company developed software products in-house. The expenditure so incurred on product development has been duly capitalized by Lucid Software Ltd. These facts amply bring out that Lucid Software Ltd. cannot be considered as comparable Mediasoft Solutions Ltd - The assessee has no objection to the inclusion of this company in the list of comparables. Megasoft Ltd. (Seg.) -rect the exclusion of this company from the list of comparables because of exceptional financial results due to mergers/demergers etc. Mindtree Ltd. - The assessee has no objection to the inclusion of this company in the list of comparables. Persistent Systems Ltd. - Because of the merger of subsidiary into this company we hold that the financial position of this company cannot be construed as normal capable of a good comparison Quintegra Solutions Ltd., R S Software (India) Ltd. and R Systems International Ltd. (Seg.) SIP Technologies & Exports Ltd. - The assessee has no objection to the inclusion of this company in the list of comparables. Sasken Communication Technologies Ltd. (Seg.) - we direct the exclusion of this company from the list of comparables because the company has undergone significant restructuring during the relevant FY and the company also failed on R&D filter and also owns of intangibles Tata Elexi Ltd. (Seg.) - we direct the exclusion of this company from the list of comparables as the nature of activity carried out by the assessee in question is nowhere close to that of Tata Elxsi Ltd. Thirdware Solutions Ltd. (Seg.) - A perusal of the annual report of Thirdware Solutions Ltd. reveals that the said company has made income from sale of licence to the tune of more than Rs. 1 crore which means the company is into production of software products which apparently cannot be a comparable to assessee dealing with contract software development and not into sale of any product. Therefore we direct TPO/AO to exclude this company from the list of comparables. Wipro Ltd. (Seg.) - we direct the exclusion of this company from the list of comparables as as it is a giant company in terms of parameters Accentia is into high end service (KPO) which cannot be compared with the assessee. So we direct its exclusion from the list of comparables. Allsec Technologies Ltd. - uphold the decision of TPO to include this comparable in the list of comparables. Asit C Mehta Financial Services Ltd. (earlier known as Nucleus Netsoft & GIS Ltd. Caliber Point Business Solutions Ltd. HCL Comnet Systems & Services Ltd. and Informed Technologies India Ltd. - we find that in this list of comparables considered by the TPO the assessee itself had accepted eleven (11) comparables as comparable with that of the assessee. In such a scenario we are of the opinion that the TPO may take into consideration only those comparables where related party transactions are to the extent of 15% because it is not a case of the revenue that by applying threshold limit of 15% it will not get sufficient number of comparables. Since we are not entering into any other grounds raised by the assessee against these companies the other grounds are left open. Eclerx Services Ltd. and Vishal Information Technologies Ltd. - both these companies cannot be compared with the low end service provider like the appellant in this case. Infosys BPO Ltd. - is into high end service to financial industries manufacture and telecom so on that account it should be excluded cannot be countenanced because we are not able to find any functional dissimilarity with that of the assessee in this case. So we uphold the action of the TPO to include this company as a comparable Maple eSolutions Ltd. and Triton Corp Ltd. - Both companies directed to be excluded due to extra ordinary events taking place in the instant financial year Mold Tex Technologies Ltd. - the assessee is engaged in low end BPO services whereas the Moldtek is involved in high skilled KPO services which cannot be compared with that of the assessee s company Wipro Ltd. -we find where there is amalgamation then the accounts do not portray the correct picture in the profits due to the merging of accounts. So the financial results cannot be relied upon for the computation of PLI of this comparable. Therefore due to this extra ordinary events taking place in the instant financial year of this company we are of the opinion that this company should be excluded from the list of comparables Aditya Birla Minacs Worldwide Limited (earlier known as Transworks Information Services Ltd.) Apex Knowledge Solutions Pvt. Ltd. Appollo Healthstreet Ltd. Cosmic Global Ltd. Datamatics Financial Services Ltd. (Seg.) Flextronics Ltd. (Seg.) Genesys International Corporation Ltd. ICRA Techno Analytics Ltd. (seg) IServices India Pvt. Ltd. R Systems International Ltd (Seg) and Spanco Ltd. (Seg.) (earlier known as Spanco Telesystems & Solution Ltd.) - AR submitted that the assessee has no objection in including the same in the list of comparables. Risk adjustment - Held that - Risk adjustment sought by the assessee has not been dealt with as per Rule 10B(1)(e)(iii). The ld. AR pointed out to the order of the coordinate Bench in Motorola Solutions India Private Limited (2014 (10) TMI 358 - ITAT DELHI ) wherein in an identical matter the Tribunal has given direction as afore-stated when the TPO repelled similar contention of the assessee. Since the risk adjustment sought by the assessee has also been turned down by the TPO on similar reasons it has to be set aside and a computation exercise as envisaged under Rule 10B(1)(e)(iii) need to be done. Therefore we restore this matter back to the file of the TPO/AO to consider the computation of risk adjustment as per CAPM model by availing the services of technical experts.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for Software Services Segment.
2. Transfer Pricing Adjustment for Back Office Support Services Segment.
3. Risk Adjustment.

Detailed Analysis:

1. Transfer Pricing Adjustment for Software Services Segment:

Comparability Analysis:
- Accel Transmatic Ltd.: The assessee did not object to this company being a comparable.
- Avani Cimcon Technologies Ltd.: Despite the assessee's objections, the Tribunal upheld its inclusion based on a previous decision in Toluna India Private Limited.
- Celestial Labs Ltd.: Excluded due to functional dissimilarity and involvement in developing software tools and owning IPRs.
- Datamatics Ltd.: No objection from the assessee.
- E-Zest Solutions Ltd.: Despite objections, included based on functional similarity as per Toluna.
- Flextronics Software Systems Ltd. (Seg.): Excluded due to significant R&D activities and product development.
- Geometric Limited (Seg.): No objection from the assessee.
- Helios & Matheson Information Technology Ltd.: Excluded due to diversified services and failing employee cost filter.
- IGate Global Solutions Ltd.: No objection from the assessee.
- Infosys Technologies Ltd.: Excluded due to significant size, ownership of intangibles, and substantial R&D.
- Ishir Infotech Ltd.: Excluded due to high A&M ratio indicating marketing intangibles.
- KALS Information Systems Ltd. (Seg.): Excluded due to revenue from products and training without segmental details.
- LGS Global Ltd.: No objection from the assessee.
- Lucid Software Ltd.: Excluded due to being a product company with proprietary software.
- Mediasoft Solutions Ltd.: No objection from the assessee.
- Megasoft Ltd. (Seg.): Excluded due to significant restructuring and ownership of intangibles.
- Mindtree Ltd.: No objection from the assessee.
- Persistent Systems Ltd.: Excluded due to merger affecting financial results.
- Quintegra Solutions Ltd.: No objection from the assessee.
- R S Software (India) Ltd.: No objection from the assessee.
- R Systems International Ltd. (Seg.): No objection from the assessee.
- Sasken Communication Technologies Ltd. (Seg.): Excluded due to acquisition and R&D activities.
- SIP Technologies & Exports Ltd.: No objection from the assessee.
- Tata Elexi Ltd. (Seg.): Excluded due to specialized embedded software development.
- Thirdware Solutions Ltd. (Seg.): Excluded due to revenue from software products.
- Wipro Ltd. (Seg.): Excluded due to significant size and diversified business operations.

2. Transfer Pricing Adjustment for Back Office Support Services Segment:

Comparability Analysis:
- Accentia Technologies Ltd.: Excluded due to involvement in high-end KPO services.
- Allsec Technologies Ltd.: Included despite objections regarding risk profile and advertising expenditure.
- Asit C Mehta Financial Services Ltd., Caliber Point Business Solutions Ltd., HCL Comnet Systems & Services Ltd., Informed Technologies India Ltd.: Excluded due to related party transactions exceeding 15%.
- Eclerx Services Ltd., Vishal Information Technologies Ltd.: Excluded due to involvement in KPO services.
- Infosys BPO Ltd.: Included despite objections regarding high-end services and substantial turnover.
- Maple eSolutions Ltd., Triton Corp Ltd.: Excluded due to involvement in fraud and mergers.
- Mold-Tek Technologies Ltd.: Excluded due to involvement in high-end KPO services.
- Wipro Ltd.: Excluded due to acquisitions affecting financial results.
- Aditya Birla Minacs Worldwide Limited, Apex Knowledge Solutions Pvt. Ltd., Appollo Healthstreet Ltd., Cosmic Global Ltd., Datamatics Financial Services Ltd. (Seg.), Flextronics Ltd. (Seg.), Genesys International Corporation Ltd., ICRA Techno Analytics Ltd. (seg), IServices India Pvt. Ltd., R Systems International Ltd (Seg), Spanco Ltd. (Seg.): No objection from the assessee.

3. Risk Adjustment:

Risk Adjustment Analysis:
- The TPO rejected the risk adjustment claim, stating that the taxpayer's risk and the comparables' risk nullify each other.
- The Tribunal referred to the decision in Motorola Solutions India Private Limited, which emphasized the need for risk adjustment as per Rule 10B(1)(e)(iii).
- The Tribunal directed the TPO/AO to reconsider the risk adjustment using the CAPM model with the help of technical experts.

Conclusion:
The Tribunal partially allowed the appeal, directing the exclusion of certain comparables and remanding the risk adjustment issue back to the TPO/AO for reconsideration. The final order was pronounced on September 18, 2015.