2016 (2) TMI 1050 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Assessee had considered itself to be software development services provider and the TPO had also accepted this. The most appropriate method selected both by assessee and TPO were TNM method. This method obviates necessity for complete product identity or services identity between the tested party and the comparables. Broad functional similarities would suffice. However, where the functional profile show that the dissimilarity, even within the very same segment was so significant so as to erode the comparability, then there is a good case for exclusion. Assessee has mainly relied on the decision of the Co-ordinate Bench in the case of M/s Cisco Systems (Ind.) Pvt.Ltd (2014 (11) TMI 849 - ITAT BANGALORE ). The said company was also engaged in the business of rendering software development services. Nothing has been brought before us by the revenue to show that the functional profile of M/s Cisco Systems (Ind) Pvt.Ltd(Supra) was so different from that of the assessee so as to erode the comparability of the comparable companies considered in the said case with that of the assessee. In our opinion, assessee is justified in relying on the said decision which was also for the very same assessment year. Hon ble Delhi High Court in the case of CIT Vs M/s Agnity India Technologies Pvt. Ltd. (2013 (7) TMI 696 - DELHI HIGH COURT ) had affirmed an order of this Tribunal were M/s Infosys Technologies Ltd was directed to be excluded from the list of comparables considering the peculiar features of the said company. Hence, no purpose will be served in remitting the question of comparability of M/s Infosys Tech.Ltd back to the TPO/AO. In view of the above discussion, we direct exclusion of M/s Bodhtree Consulting Ltd., M/s Tata Elxsi Ltd.(Seg.) and M/s Infosys Tech.Ltd from the list of comparables. Working capital adjustment - Held that - AO cannot force an artificial limitation to the actual working capital adjustment ratio derived from the comparable companies considered for the arm s length study. The restriction of working capital adjustment based on PLR of SBI will be appropriate since it is based on a presumption with all lending or credit are having uniform interest rates as decided by the SBI. We therefore, direct the AO to give working capital adjustment considering the comparable companies after exclusion of the three companies mentioned above

Summary

Issues Involved:
1. Credit for TDS.
2. Transfer pricing adjustment and exclusion of certain companies from the list of comparables.
3. Working capital adjustment.

Detailed Analysis:

1. Credit for TDS:
The assessee claimed that the credit for TDS was wrongly given for Rs. 2,23,699/- instead of the actual credit available of Rs. 2,27,406/-. The Tribunal directed the Assessing Officer (AO)/Transfer Pricing Officer (TPO) to verify this claim and allow the correct amount if found accurate.

2. Transfer Pricing Adjustment:
The primary contention revolved around the transfer pricing adjustment of Rs. 4,89,61,089/- made by the TPO and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee's appeal focused on the exclusion of three companies from the list of comparables considered by the TPO: M/s Bodhtree Consulting Ltd., M/s Tata Elxsi Ltd (Segmental), and M/s Infosys Ltd.

- M/s Bodhtree Consulting Ltd.:
The Tribunal noted that Bodhtree Consulting Ltd. was primarily a software product company, not a software development services company. This distinction was affirmed by previous Tribunal decisions, including the case of Nethawk Networks Pvt. Ltd. Thus, Bodhtree Consulting Ltd. was excluded from the list of comparables.

- M/s Tata Elxsi Ltd (Segmental):
The Tribunal observed that Tata Elxsi Ltd. was engaged in specialized projects like embedded product design, industrial services, and engineering services, making it functionally different from the assessee, who was solely providing software development services. This exclusion was consistent with previous Tribunal rulings, including the case of M/s Cisco Systems (Ind.) Pvt. Ltd.

- M/s Infosys Ltd.:
Infosys Ltd. was excluded based on its significant intangibles, substantial brand value, and revenue from software products, which made it functionally different from the assessee. The Tribunal relied on the decision of the Hon'ble Delhi High Court in the case of M/s Agnity India Technologies Pvt. Ltd., which affirmed the exclusion of Infosys Ltd. from comparables due to its unique characteristics.

The Tribunal directed the exclusion of these three companies from the list of comparables and ordered a recomputation of the arm's length price (ALP) accordingly.

3. Working Capital Adjustment:
The Tribunal addressed the assessee's contention that the working capital adjustment computed by the TPO at 3.26% was unjustly restricted to 1.71%. It was directed that the AO should not impose an artificial limitation on the working capital adjustment ratio derived from the comparable companies. The adjustment should be based on the Prime Lending Rate (PLR) of SBI, considering the comparable companies after excluding the three aforementioned companies.

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO/TPO to verify and allow the correct TDS credit, exclude M/s Bodhtree Consulting Ltd., M/s Tata Elxsi Ltd (Segmental), and M/s Infosys Ltd. from the list of comparables, and recompute the ALP. Additionally, the working capital adjustment should be recalculated without artificial limitations.