Not a Comparable If Majority of Revenue is earned from Principal Service / Object: ITAT [Read Order]

Service Tax - ITAT - Taxscan

The New Delhi bench of Income Tax Appellate Tribunal ( ITAT ) while allowing the appeal held that party will not be a comparable if the company is engaged in diversified services and majority of its revenue is earned from the principal service.

The assessee in the present case is the Indian branch office of M/s Virage Logic International i.e. a company incorporated under the laws of USA. The company is a wholly-owned subsidiary of Virage Logic Corporation (VLC). VLC is a market leader in providing advanced embedded memory Intellectual Property for the design of complex integrated circuits. The assessee subsidiary is engaged in the business of development of computer software for its Associated Enterprises.

The matter reached the Transfer Pricing Officer (TPO) on being referred to by the Assessing Officer (AO) on his observing a number of international transactions carried out by the assessee. The TPO passed an order determining the arm’s length price of international transaction of software development proposing an upward adjustment which was consequently added by the AO to the income of the assessee. The Commissioner of Income Tax (Appeals) (CIT(A)) partly allowed the appeal. Aggrieved, both revenue and assessee have appealed the present Tribunal.

The issue before the present Tribunal pertains to the inclusions of comparables by the Ld. TPO.

After hearing both the parties, the Tribunal ordered the following:

  • Where it was submitted by the assessee that the company was engaged in providing services in the nature of legal processing services, human resources, business process outsourcing services, medical transcription services and infrastructure services and that the majority of revenue is from software development and consulting services and revenue from medical transcription is less than 10% of the total revenue. It was held that such company be excluded from the list of comparables major component of the income is from software development and consulting services.
  • Where exclusions were sought on the ground of extraordinary event, it was held that the comparable company was already acquired by the assessee and was its subsidiary. No increase in profit was observed due to the merger of subsidiary and hence this stands as a reason for its exclusion.
  • Where exclusion was sought on the ground that the company derives income from sources such as sale of license, software services, export from SEZ unit, revenue from subscriptions, etc. It was held that the assessee is having income from sale of licenses and subscription in addition to software services and non-availability of separate segment of software development services, the company is held to be functionally dissimilar.
  • Where it was seen that the company has completed full-length animated commercial film during the year under consideration and no separate revenue and expenditure on this activity of making animated film is reported in the Annual Report, the company is held to be functionally dissimilar.
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