2015 (9) TMI 1630 - AT - Income Tax

Adjustment in the arm s length price(ALP) of international transaction entered into by the Assessee with it s Associated Enterprise (AE) u/s 92 - Assessee provided Software Development Services to its AE - Comparable selection - Held that - Assessee providing IT Software development Services thus companies functionally dissimilar with that of assessee need to be deselected from final list. Excluding Comparable from the list of comparable chosen by the TPO the arithmetic mean of profit margin of the remaining comparable is directed to be reworked by the TPO/AO after allowing /- 5% adjustment if permissible u/s.92C(2) of the Act. None of the other grounds are adjudicated except comparability of companies chosen by the Assessee as the exclusion of comparable companies chosen by TPO and confirmed by the DRP would itself result in the price charged in the international transaction to be one at Arm s Length.

Summary

Issues Involved:
1. Addition made by the Assessing Officer (AO) on account of adjustment in the arm's length price (ALP) of international transactions under Section 92 of the Income Tax Act, 1961.

Detailed Analysis:

1. Addition Made by the AO on Account of Adjustment in the ALP of International Transactions:
The appeal concerns the addition of Rs. 3,75,68,967 to the total income of the assessee due to an adjustment in the ALP of international transactions with its Associated Enterprise (AE) under Section 92 of the Income Tax Act, 1961. The assessee provided Software Development Services to its AE, and the transaction was subject to the ALP test.

2. Transfer Pricing Adjustment Relating to IT Services (Software Development Services):
The Transfer Pricing Officer (TPO) selected 26 comparable companies to determine the ALP. The arithmetic mean of the profit level indicators (PLI) of these comparables was determined to be 25.14%. After a working capital adjustment of 3.43%, the adjusted arithmetic mean was 21.71%. The TPO computed the ALP based on this adjusted mean, resulting in an ALP of Rs. 37,32,04,111, compared to the price charged by the assessee of Rs. 33,56,35,144, leading to a shortfall of Rs. 3,75,68,967, which was treated as a transfer pricing adjustment.

3. Objections Before the Dispute Resolution Panel (DRP):
The assessee objected to the adjustment proposed by the TPO, but the DRP rejected these objections and confirmed the transfer pricing adjustment, which was added to the total income by the AO.

4. Comparability of Selected Companies:
The assessee argued that some of the comparable companies chosen by the TPO were not functionally comparable. The Tribunal reviewed the comparability of these companies, referencing previous cases where similar issues were adjudicated.

5. Exclusion of Certain Comparable Companies:
The Tribunal, following precedents set in cases such as First Advantage Offshore Services Pvt. Ltd. vs. DCIT and Trilogy E-Business Software India Pvt. Ltd. vs. DCIT, directed the exclusion of certain companies from the list of comparables:
- Accel Transmatic Ltd. (Seg.)
- Avani Cimcon Technologies Ltd.
- Celestial Labs Ltd.
- KALS Information Systems Ltd.
- Ishir Infotech Ltd.
- Lucid Software Ltd.
- Megasoft Ltd.
- Infosys Technologies Ltd.
- Tata Elxsi Ltd. (Seg.)
- Wipro Ltd.
- Thirdware Solutions Ltd.

6. Reworking of Arithmetic Mean:
The Tribunal directed the AO/TPO to rework the arithmetic mean of the profit margins of the remaining comparables and allow for the +/- 5% adjustment as per Section 92C(2) of the Act.

Conclusion:
The Tribunal partly allowed the appeal, directing the exclusion of certain comparables and reworking the arithmetic mean. This exclusion would result in the price charged in the international transaction being at arm's length. The other grounds were not adjudicated as the exclusion of the comparables would suffice to resolve the issue. The judgment was pronounced on September 23, 2015.