2015 (6) TMI 67 - AT - Income Tax

Transfer pricing adjustment - Arm s length price adjustment in International Transactions - Matter of exclusion of one comparable company - Comparable company is not functionally same - Held that - From the perusal of the objections filed by the assessee before the DRP as well as annual report of Kals it is seen that the said company is engaged into development of software and software products and also running a training centre for training of software professionals. The said company offers variety of software products in the area of web solutions e-commerce software consultants content management ERP applications etc. It s functional profile is quite different from the assessee company which is purely providing software services in the field of 3D animation. Thus it cannot be held to be a comparable company for the purpose of bench marking the assessee s margin or caring out any comparability analysis. The ITAT Pune Bench in the case of PTC Software (I) Pvt. Ltd. 2015 (1) TMI 466 - ITAT PUNE has held that the Kals which is engaged in the sale of software products cannot be held to be a comparable case with the companies providing software services. Similarly in view of series of other decisions of the Tribunal as noted by the DRP Kals cannot be held to be comparable company for bench marking with the companies providing software services. Thus the order of the DRP as noted above is upheld. Accordingly the ground raised by the Revenue is dismissed. - Decided against the revenue.

Summary

Issues:
1. Whether M/s. Kals Information Systems Ltd. should be excluded from the set of final comparables selected by the TPO.

Comprehensive Analysis:
1. The appeal was filed by the Revenue against the order/direction passed by the Dispute Resolution Panel (DRP)-II, Mumbai, regarding the inclusion of M/s. Kals Information Systems Ltd. in the list of final comparables. The Revenue contended that the TPO had proposed adjustments in the arm's length price based on the comparables selected by the assessee and the TPO.
2. The assessee, engaged in providing 3D animation software content, had benchmarked its margin using certain comparables. The TPO rejected some of the comparables selected by the assessee and included M/s. Kals Information Systems Ltd. in the final list, proposing adjustments in the arm's length price.
3. The sole issue was whether M/s. Kals Information Systems Ltd. should be excluded from the final comparables list. The DRP held that the said company was functionally dissimilar, engaged in software products rather than software services, and should be excluded from comparables.
4. The DRP's decision was based on the functional profile of M/s. Kals Information Systems Ltd. and previous Tribunal decisions supporting the exclusion of functionally dissimilar companies from comparables.
5. The Tribunal upheld the DRP's decision, emphasizing the functional dissimilarity between M/s. Kals Information Systems Ltd. and the assessee, which provided software services in 3D animation. Various Tribunal decisions supported the exclusion of companies engaged in software products from comparables.
6. The Tribunal dismissed the Revenue's appeal, affirming the exclusion of M/s. Kals Information Systems Ltd. from the final comparables list. The Cross Objection by the assessee was also dismissed as the exclusion brought the average profit margin within an acceptable range, making further adjustments unnecessary.

In conclusion, the Tribunal upheld the exclusion of M/s. Kals Information Systems Ltd. from the final comparables list, determining that its functional dissimilarity justified its exclusion for benchmarking purposes. The decision was based on previous Tribunal rulings and the distinct functional profiles of the companies involved in the case.