2015 (9) TMI 1669 - AT - Income Tax

TP Adjustment - international transaction with the Associated Enterprise (AE) on software development services - inclusion of certain comparable companies by the TPO to benchmark the profit margin of the assessee on such transactions - HELD THAT - The assessee company is a subsidiary of Somero Enterprises Inc Mauritius which in turn is a subsidiary of Dassault Systems France which is premier global software developer and product like Cycle Management Solutions. It is the holding company of Delmia Corporation USA. The assessee was established as 100% export oriented Unit registered under STPI. It is mainly engaged in the provision of software developer and other related services primary to its group companies thus companies functionally dissimilar with that of assessee need to be deselected.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Selection of Comparable Companies
3. Levy of Interest under Sections 234B, 234C, and 234D

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee filed an appeal against the final assessment order passed pursuant to the Dispute Resolution Panel (DRP) directions under section 144C(5) for the assessment year 2009-10. The primary grievance was the Transfer Pricing Adjustment of Rs. 2,59,53,826/- related to international transactions with the Associated Enterprise (AE) for software development services. The Transfer Pricing Officer (TPO) included certain comparable companies to benchmark the profit margin of the assessee. The assessee, a subsidiary of Somero Enterprises Inc Mauritius and ultimately of Dassault Systems France, reported international transactions amounting to Rs. 33,60,14,698 for software development and consultancy, Rs. 1,28,87,202 for recovery of expenses, and Rs. 31,88,736 for the purchase of software licenses. The assessee showed a net margin on OP/OC at 15.29% and used the Transactional Net Margin Method (TNMM) for benchmarking.

2. Selection of Comparable Companies:
The TPO rejected most of the assessee's comparables and selected others with an arithmetic mean margin of 24.32%. The DRP included two additional comparables and directed a working capital adjustment, resulting in a revised Arm's Length Price and a Transfer Pricing Adjustment of Rs. 2,58,53,826. The assessee challenged six comparables: Bodhtree Consulting Ltd., Tata Elxsi Ltd., Sasken Communication Technologies Ltd., Persistent Systems Limited, Larson & Toubro Infotech Ltd., and Infosys Ltd.

Bodhtree Consulting Ltd.:
The Tribunal had previously included this comparable, but the assessee argued it was functionally dissimilar. The Tribunal upheld its inclusion, citing no significant change in facts from previous years.

Tata Elxsi Ltd.:
The Tribunal excluded this comparable, noting it was predominantly engaged in product designing services, not purely software development services, as previously determined.

Infosys Ltd.:
The Tribunal excluded Infosys due to its non-comparability on factors like huge turnover, intellectual property rights, R&D expenditure, and abnormal margins.

Sasken Communication Technologies Ltd.:
The Tribunal excluded Sasken due to significant differences in turnover, patented products, and R&D activities, making it non-comparable.

Larson & Toubro Infotech Ltd.:
The Tribunal excluded this company due to its large turnover and involvement in product development and infrastructure management services, with no segmental information available.

Persistent Systems Limited:
The Tribunal excluded this company, noting it was engaged in product development and design services, unlike the assessee's purely software development services.

The Tribunal directed the Assessing Officer to benchmark the assessee's margin based on the accepted comparables and determine the Arm's Length Price accordingly.

3. Levy of Interest under Sections 234B, 234C, and 234D:
The grounds related to the levy of interest under sections 234B, 234C, and 234D were admitted to be consequential and thus dismissed.

Conclusion:
The appeal was partly allowed, with the Tribunal directing adjustments based on the revised list of comparables and dismissing the grounds related to the levy of interest. The order was pronounced on 7th September 2015.