No comparables to be selected in ALP determination if comparables differs in turnover

NXP India Pvt. Ltd. Vs DCIT (ITAT Bangalore)

Conclusion: Exclusion of comparables from the list of comparables on basis of turnover, functional difference for determination of Arms Length Price was valid.

Held: Assessee-company was engaged in the activities in India, which included design and sales agent support services NXP’s design competence centre in Bangalore offered user solutions for vibrant media technologies and focused on automotive, identification and software businesses. For the above determination of Arms Length Price (ALP), assessee selected 25 comparables, however, TPO limited the comparables to the extent of 10 out of which 4 selected by the assessee were retained by the TPO. TPO made transfer pricing adjustment. However, DRP confirmed 9 comparables out of the above 10 comparables. Assessee had challenged for the exclusion of the five comparables – Persystent Systems Limited, Larsen & Toubro Infotech Limited, Infosys Limited, Genesys International Corporation Limited,  Sasken Communication Technologies Limited. It was held that Persystent Systems Limited  was having revenue of 8103.64 Million from software services and other income of 323.76 million from income from other sources. Assessment year 2012-2013 was an abnormal year of operation to Persystent Systems Limited, which was evident from the annual report placed on record by the assessee in its paper book. Further, Persystent Systems Limited was having intangibles to the tune of 2402.67 million as evident from its balance sheet ended on 31.03.2012. Being so, it was not comparable to assessee’s case. As regarding Larsen & Toubro Infotech Limited engaged in development of software onsite and its overseas revenue for the financial year 2011-2012 was Rs.27,838,752,995 and domestic revenue was Rs. 1,756,792,454. Further in the case of Huawei Technologies India Pvt. Ltd. in IT(TP)A No.1939/Bang/2017 for assessment year 2012-2013 – order dated 31.10.2018 has taken the same view that it could not be a comparable with that of the assessee. Being so,TPO was directed to exclude the same from the list of comparables. Infosys Limited was engaged in a leading global technology services corporation. The company provided business consulting, technology, engineering and outsourcing services to help clients build tomorrows enterprise. In addition, the company offered software products for the banking industry. It owned high brand value at Rs. 56,286 crore in the year 2012 and brand value as a percentage of market capitalization was 34.2%, and also incurred huge amount for research and development at Rs.5 crore as a capital expenditure and Rs.655 crore as a revenue expenditure for the year ended 31^st March, 2012. Therefore, it could not be said to be a comparable. TPO was directed to exclude Infosys Limited from the list of comparables. Genesys International Corporation Limited was functionally different from assessee’s case. Further, no segmental information was available. It had high research and development expenditure incurred as on 31.03.2012. Intangible was very high and also have high brand value. Being so, this company could not be considered as a comparable company. Sasken Communication Technologies Limited earned revenue from 3 segments. However, the segmental operating margins were not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data could not be considered as comparable with the assessee for software development services segment. Accordingly, the above five were excluded from the list of comparables.

FULL TEXT OF THE ITAT JUDGEMENT

These appeals filed by the assessee are directed against two separate orders of the CIT(A), dated 30.01.2017 and 24.10.2017 for the assessment years 2012-2013 and 2013­2014, respectively.

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