ADAPTEC (INDIA) PVT LTD v ACIT (ITA No.1758/Hyd/2012 dated 21/03/2014) – Hyderabad ITAT

Background:

The asseseee is engaged in the business of software design, development and testing in the areas of high performance storage solutions. The assessee renders software development services to its Associated Enterprise (AE) i.,e., Adaptec Inc, USA. The assessee is registered as 100% EOU under the STPI Scheme.  The assessee being a captive service provider to its AE is remunerated on a cost plus mark up basis for the services provided. On the basis of FAR analysis, the assessee categorized it as a risk mitigated contract service provider and selected itself as the tested party. Transactions Net Margin Method (TNMM) was chosen as the most appropriate method for determining ALP. Operating profit/operating cost was selected as the profit hence Indicator (PLI). The assessee conducted search from the database to select comparable companies and finally selected 28 companies as comparables with weighted average arithmetic mean of 14.53%. As the assessee’s net margin from the provision of services to AE at 14.03% was within the arm’s length, no adjustment was made in the TP study. 

The TPO, though accepted TNMM as the most appropriate method and the PLIOP/OC, he nevertheless rejected the TP study of the assessee by observing that multiple year data was considered while selecting comparables and companies engaged in software development have been treated as comparables irrespective of the verticals/horizontals of software services which has made the comparability analysis defective and unreliable.  TPO also applied certain additional filters, one of them being companies having turnover of less than 1 crore were rejected. The TPO finally selected 19 companies as comparables with average margin of 26.20% and after allowing working capital adjustments of 3.58% arrived at the adjusted arithmetic mean PLI of 22.62% and determined the ALP at Rs.19,48,41,447. The TPO treated the shortfall of Rs.1,82,73,532/- as the transfer pricing adjustments u/s 92CA of the Act.

HELD:

• It is very much evident that the assessee specifically contended before the TPO that if companies having turnover of less than Rs.1 crore is to be excluded, then applying the same principle, companies having extraordinary high turnover should also be excluded for comparability analysis. 
• As it appears, the TPO has totally brushed aside such contention of the assessee. While the TPO has excluded companies having less than Rs.1 crore turnover from ITES services but he has considered companies having extraordinary high turnover like Infosys Technologies Limited and Wipro Limited. 
• Therefore, considering enormity of the turnover of these two companies, they cannot be considered as comparable to the assessee, by applying the same logic on which TPO has excluded companies having turnover of less than Rs.1 crore.
  
• Hon’ble Delhi High Court in case of CIT vs. Agnity India has also held that big companies like Infosys Technologies Limited cannot be considered as comparable to small captive service providers. Respectfully following the decision of Hon’ble Delhi High Court as aforesaid and the decision of the co-ordinate bench in assessee’s own case for the assessment year 2007-08, we hold that Infosys Technologies Limited and Wipro Limited cannot be considered as comparable to the assessee.