2016 (7) TMI 1370 - AT - Income Tax

TPA - comparable selection criteria - Held that - The assessee is a wholly owned subsidiary of Bay Backets Incorporation USA providing software development services to its overseas Associated Enterprises and operated as a limited risk bearing captive service provider thus companies functionally dissimilar with that of assessee need to be deselected fro final list of comparable.

Issues Involved:
1. Exclusion of 11 comparables by the TPO/AO post the direction of the DRP.
2. Functional dissimilarity and risk profiles of the comparables.
3. Impact of non-availability of segmental details.
4. High turnover and high R&D expenses of the comparables.
5. Erroneous margin computation and high volatility in margins.

Detailed Analysis:

1. Exclusion of 11 Comparables:
The primary issue in this appeal was whether the following 11 comparables were correctly retained by the TPO/AO post the direction of the DRP:
1. Avani Cincom Technologies
2. e-Zest Solutions Ltd.
3. Flextronics (Aricent)
4. iGate Global Solution Ltd.
5. Infosys
6. Kals Information Systems Ltd. (seg)
7. Persistent Systems Ltd.
8. Softsol India Ltd.
9. Tata Elxsi (Seg)
10. Thirdware Solution Ltd.
11. Wipro Ltd. (Seg)

The assessee argued for their exclusion based on functional dissimilarity, high turnover, high R&D expenses, and non-availability of segmental details.

2. Functional Dissimilarity and Risk Profiles:
Avani Cincom Technologies Ltd.: The assessee argued that Avani Cincom Technologies Ltd. was functionally different as it owned software products and lacked segmental details. The Tribunal found that segmental details were obtained under section 133(6) and restored the issue back to the TPO to confront the information to the assessee.

e-Zest Solutions Ltd.: The assessee claimed e-Zest Solutions Ltd. was functionally different due to its diversified services. The Tribunal noted that the TPO had obtained information under section 133(6) showing it was engaged in software development services. The Tribunal upheld the inclusion of e-Zest Solutions Ltd. as a comparable.

Infosys Technologies Ltd.: The assessee argued Infosys was a full-fledged risk-taking enterprise with diversified businesses and high R&D expenses. The Tribunal noted that only 3.82% of Infosys's revenue was from software products, and 96% was from software development services. The Tribunal retained Infosys as a comparable but directed the TPO to examine the impact of brand value on pricing.

Wipro Ltd. (Seg): The assessee contended Wipro Ltd. was a full-fledged risk-taking enterprise with diversified services and substantial patents and trademarks. The Tribunal noted that segmental details were considered, and the standalone financial data was used. The Tribunal restored the issue to the TPO to examine the impact of brand value on pricing.

3. Impact of Non-Availability of Segmental Details:
KALS Information Systems Ltd. (Seg): The assessee argued for exclusion due to the lack of segmental details and mathematical errors in margin computation. The Tribunal restored the issue to the TPO to confront the segmental information to the assessee and address the computational errors.

Softsol India Ltd.: The assessee sought exclusion due to high-end services, product development, and high volatility in margins. The Tribunal restored the issue to the TPO to address the computational errors and high volatility in margins.

4. High Turnover and High R&D Expenses:
Flextronics (Aricent): The assessee argued for exclusion due to high R&D expenses and high turnover. The Tribunal noted that Flextronics had 87.69% of its revenue from services, far exceeding the 75% filter, and retained it as a comparable.

Persistent Systems Ltd.: The assessee argued for exclusion due to revenue from software products and high R&D expenses. The Tribunal noted that 96% of Persistent Systems Ltd.'s revenue was from software development services and retained it as a comparable.

5. Erroneous Margin Computation and High Volatility in Margins:
Thirdware Solutions Ltd. (Seg): The assessee argued for exclusion due to diversified income sources and non-availability of segmental details. The Tribunal restored the issue to the TPO to address the procedural deficiencies and confront the segmental information to the assessee.

iGate Global Solutions Ltd.: The assessee sought exclusion due to diversified business operations. The Tribunal restored the issue to the TPO to address whether segmental details were confronted to the assessee.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, restoring several issues to the TPO for fresh determination and directing the TPO to confront the information obtained under section 133(6) to the assessee and pass a speaking order in accordance with law.

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