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2019 (4) TMI 45 - AT - Income TaxTransfer pricing adjustment - exclusion and inclusion of some companies as comparables - functinal similarity - HELD THAT:- Avani Cincom - No income is shown to result from sale of software product named Dxchange, the fact that the revenue and, therefore, the margin earned by Avani Cincom was impacted by use of such internally developed and owned software as an asset justified the exclusion of Avani Cincom from the final set of comparable companies. Helios Mathesan - This company is included by the TPO by overruling the objection of the assessee without citing any reasons. It is also noticed that the CIT (A) has also summarily rejected the contention about the failure of the employee cost filter and has upheld the inclusion of this company. It is seen that this company fails the employee cost filter of 25% as Helios Mathesan’s employee cost is only 1.07% of sales. We notice that employee cost filter is one of the filters adopted by the TPO himself at Para 8 of his order. The totality of above facts and circumstances as noticed in the above paragraphs clearly shows that FAR and, therefore, the margin earned by Helios Mathesan is totally different in comparison to the FAR of the assessee. It is therefore, directed that Helios Mathesan be excluded from final list of comparable companies. Ishirinfotech Limited - company failed the 25% employee cost filter based on data available in Capitoline database - Employee cost details are shown separately under schedule 15 to the financials. The company recognizes income by application of percentage of completion method unlike cost plus mark-up basis of compensation applicable to captive service providers like the present assessee. Thus, it appears that in addition to this company not qualifying the employee cost filter applied by the TPO, the FAR of Ishirinfotech Limited is different compared to that of Kaplan India Private Limited. Reference to the chart filed by the Ld. AR during the hearing indicates that other coordinate benches, details of which are mentioned in the chart, also concluded that Ishirinfotech Limited is not a valid comparable for AY 2007-08 for software development services segment. Accordingly, we direct exclusion of this company from the final set of comparable companies. Megasoft Ltd - the material available on record and also the decisions of the coordinate benches for the very same year. We are inclined to agree with the submissions of the Ld. Counsel for the assessee as this company is clearly engaged in multifarious activities including sale of software products. Further, the impact of the extraordinary event of amalgamation is also not possible to be quantified and adjusted. We also notice that the TPO himself has accepted that 19% of the revenue earned by this company is from software products - we direct exclusion of this company from the final set of comparable companies. TATA Elxsi Limited - the segment of software development services in Tata Elxsi includes Design services including hardware design and hence is not comparable to simple software development services. We find that these observations are fully applicable in the facts of present case - we direct exclusion of this company from the final set of comparable companies. We direct the TPO/AO to re-determine the arm’s length price of international transaction of software development services in case of Kaplan India Private limited after excluding Avanicincom Technologies Limited, Helios & Matheson Limited, Ishirinfotech Limited, Megasoft Limited and Tata Elxsi Ltd. from the final list of comparables. The TPO/AO will also decide afresh the comparability and inclusion or otherwise of Indium Software (India) Limited and VMF Softech after affording an opportunity of being heard as directed above. Disallowance of group medical insurance expenditure - scheme of ICICI Lombard is not recognised is incorrect as the material available in the public domain like Directors report (copy of which was handed over during the hearing) clearly indicated that ICICI Lombard offered schemes which were approved by IRDA - the schemes offered by ICICI Lombard had approval of IRDA on 03.08.2001. In the interests of justice, we direct the AO to consider afresh all the relevant material available in public domain. The assessee is directed to produce the same before the AO, who will decide the issue afresh after affording suitable opportunity of being heard to the Assessee. - Appeal of the assessee is partly allowed.
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