2019 (2) TMI 1731 - AT - Income Tax

TP Adjustment - determination of arm's length price (ALP) in respect of international transaction of rendering software development services by the assessee to its Associated Enterprise (AE) u/s. 92 - comparable selection - HELD THAT - In the case of software development services provided by the assessees such as the assessee in the present case, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Exclusion of companies with related party transaction as more than 25% Working capital adjustment to be allowed - It is settled principle by a plethora of judicial pronouncements by various benches of the Tribunals that the taxpayer shall be granted working capital adjustment in order to bring the assessee on par with the comparable companies selected. After perusal of the DRP's order, we are of the view that the statement of the DRP in its order that the Tribunals have not examined the issues highlighted in its order is a general sweeping statement bereft of any basis. How to compute the working capital adjustment and the extent of adjustment to be granted to a particular assessee would depend on the facts of each individual case

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Determination of Arm's Length Price (ALP) for international transactions.
3. Exclusion and inclusion of comparable companies for ALP determination.
4. Working capital adjustment.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The assessee initially filed an appeal on 19.06.2017, which was signed by the Country Controller of Finance & Administrative Operations. Realizing the requirement for the Director's signature, a second appeal was filed on 15.12.2017. The assessee submitted an application for condonation of delay, supported by an affidavit from the Director. The Tribunal referenced a similar case from AY 2012-13, where the delay was condoned due to the Director being outside India and the initial filing being within time, though defective. The Tribunal concluded that the appeal in ITA No.1418/Bang/2017 was superfluous and dismissed it, while considering IT(TP)A No.2735/Bang/2017 for adjudication.

2. Determination of Arm's Length Price (ALP):
The primary issue was the determination of ALP for the international transaction of rendering software development services to the Associated Enterprise (AE). The Transactional Net Margin Method (TNMM) was accepted as the most appropriate method, with the Profit Level Indicator (PLI) being Operating Profit (OP) to Operating Cost (OC). The assessee's OP to OC was 13.01%, and it chose 26 comparable companies with an arithmetic mean profit margin of 11.83%. The Transfer Pricing Officer (TPO) accepted some comparables and chose 7 companies, determining an ALP and an addition to the total income based on a working capital adjusted margin of 18.18%.

3. Exclusion and Inclusion of Comparable Companies:
The assessee sought the exclusion of L&T Infotech Ltd., Persistent Systems Ltd., and Tech Mahindra Ltd. The Tribunal referenced ITAT Hyderabad's decision in M/s. EPAM Systems (I) P. Ltd. for AY 2013-14, excluding Persistent Systems Ltd. due to its involvement in software products and lack of segmental details, and L&T Infotech Ltd. for similar reasons. For Tech Mahindra Ltd., the Tribunal remanded the issue to the AO/TPO for reconsideration based on the Related Party Transaction (RPT) filter.

The assessee also sought the inclusion of Lucid Software Ltd., Maverick Systems Ltd., and Thinksoft Global Services Ltd., which were excluded by the TPO due to lack of public domain data. The Tribunal remanded the issue to the TPO for reconsideration. Akshay Software Technologies Ltd. was excluded by the TPO due to its involvement in ERP products and services, not software development. The Tribunal upheld this exclusion, agreeing with the DRP's findings.

4. Working Capital Adjustment:
The TPO initially allowed a working capital adjustment of 1.85%, but the DRP held that no adjustment was needed. The Tribunal referenced its decision in Microsoft Research Cable P. Ltd. v. DCIT, directing the TPO to examine, recompute, and grant the working capital adjustment as per law.

Conclusion:
The appeal was partly allowed, with directions to the TPO for reconsideration on specific issues and granting of working capital adjustment. The Tribunal dismissed other grounds related to transfer pricing as not pressed for adjudication.