2014 (12) TMI 612 - AT - Income Tax

Transfer pricing adjustment - Export of software development services – Selection of comparables – Functionally dissimilar company - Avani Cincom Technologies Ltd. – Persistent Systems Ltd. - Softsol India Ltd. - Held that:- As decided in assessee’s own case for the earlier assessment year, decided in Delmia Solutions Pvt. Versus Deputy Commissioner of Income Tax, Circle-11(1), Bangalore [2013 (11) TMI 189 - ITAT BANGALORE] - It was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables - Non-furnishing the information obtained u/s 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable - even in the earlier year, this company was not selected on the basis on any search process carried out by the TPO but only on the basis of information collected u/s 133(6) - the assessee has brought on record evidence that this company is functionally dissimilar and different from the assessee and hence is not comparable - the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also – thus, this company cannot be considered as a comparable to the assessee – Decided in favour of assessee.

Bodhtree Consulting Ltd. – Held that:- The assessee had never objected to the inclusion of this company in the set of comparbales in earlier proceedings before the TPO and the DRP - the assessee has only pointed out fluctuating margins in the results of this company over the years - This, in itself, cannot be reason enough to establish differences in functional profile or any clinching factual reason warranting the exclusion of this company from the list of comparables - the contentions of the assessee are rejected and this company is held to be comparable to the assessee and its inclusion in the list of comparable companies is upheld.

Functionally dissimilar company – Celestial Biolabs Ltd. - KALS Information Systems Ltd. - Held that:- As decided in assessee’s own case for the earlier assessment year, decided in Delmia Solutions Pvt. Versus Deputy Commissioner of Income Tax, Circle-11(1), Bangalore [2013 (11) TMI 189 - ITAT BANGALORE] - this company is held to be functionally dissimilar and different from a software service provider informatics as it is into bio software products and is not comparable to a mere software service provider - the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09 – thus, this company is functionally different and cannot be considered as a comparable to the assessee who is a software service provider and AO is directed to omit this company from the final list of comparables.

Functionally dissimilar company – Infosys Technologies Ltd. – Held that:- This company be omitted from the final set of comparables for the reason that this company is functionally different as it has its own intangibles, IPR, brand and has huge revenues from software products, whereas the assessee is a mere software services provider - assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable - this company owns its own intangibles, has huge software product revenues, brand, etc. and therefore cannot be considered as a comparable to the assessee who is a mere software service provider – Decided in favour of assessee.

Functionally dissimilar company – Wipro Ltd. – Tata Elxsi Ltd. - Lucid Software Ltd. - Held that:- this company be omitted from the final set of comparables for the reason that it is not functionally comparable to software service providers as it is into development of software products, etc. - this company is engaged both in software development and product development services - There is no information on the segmental bifurcation of revenue from sale of product and software service - this company being into software development, etc is functionally different and cannot be considered as a comparable to the assessee who is a software service provider.

E-Zest Solutions Ltd. – Held that:- The TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee - while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services – in Capital IQ Information Systems (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax (International Taxation) [2014 (3) TMI 626 - ITAT HYDERABAD] it has been held that KPO services are not comparable to software development services and are therefore not comparable.

Thirdware Solutions Ltd. (Segment) – Held that:- This company is to be excluded from the final list of comparables as it is engaged in product development and its income is also from trading in software licences and is, therefore, not comparable to a software development service provider like the assessee – thus, this company cannot be considered as a comparable to the assessee.

Quintegra Solutions Ltd. – Held that:- Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider - this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs – in 24/7 Customer. Com (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle 11(2), Bangalore [2013 (1) TMI 45 - ITAT BANGALORE] it has been held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted from the list of comparables.

Risk Adjustment – Held that:- The TPO has not allowed any adjustment by observing that this has been considered and discussed in detail in the order for earlier years – as held in Intellinet Technologies India (P.) Ltd. v. ITO [2012 (6) TMI 237 - ITAT BANGALORE] - the TPO ought to have given risk adjustment to the margins of the comparables for bringing them on par with the assessee and remanded the issue back to the file of the TPO – thus, the matter is remitted back to the AO/TPO for market risk adjustment.