2018 (12) TMI 1742 - AT - Income Tax

TP Adjustment - determination of ALP in Software Development Service Segment - comparable selection - application of onsite revenue filter - HELD THAT - In the TP cases the onsite revenue filter is generally applied for the purpose of choosing comparable companies. It is however to be noticed that the onsite revenue filter has to be applied by having a threshold limit of say less than 25% or so of the total revenues of the comparable companies. Without such threshold limit being fixed companies cannot be excluded. To this extent there is merit in ground Nos.3 4 of the revenue. However the issue raised in ground Nos.3 4 by the revenue will become academic for the reason that Acropetal Technologies Ltd. was excluded by the DRP on the ground that segmental details of its employee cost was not available. This company was also excluded for the reason that there was absence of segmental information to examine whether it passes export sales filter and for the reason that software revenue was not more than 75% of its total revenue. In the case of Applied Materials (I) P. Ltd. v. ACIT IT(TP) 2016 (9) TMI 1458 - ITAT BANGALORE this Tribunal excluded Acropetal Technologies Ltd. from the list of comparable companies vide para 16.1 to 16.4 of the said order. We are therefore of the view that there is no merit in ground No.5 raised by the revenue in this regard. L T Infotech Ltd. was also excluded by the DRP for the reason that 48.84% of its total expenses are incurred in foreign currency which includes substantial expenses on sub-contracting indicating that the company has high onsite revenue. Besides the above the revenues from all the 3 segments in which this company was engaged was considered by the TPO. This part of the directions of the DRP has not been challenged by the revenue in its appeal and therefore no useful purpose will be served by testing the comparability of this company by applying the onsite revenue filter. R S Software (I) P. Ltd - This company was not sought to be excluded by the assessee in its appeal before the DRP and accepted the action of the TPO in accepting this company as comparable company. The DRP suo motu applied onsite revenue filter to exclude this company from the list of comparable companies. We are therefore of the view that R S Software (I) P. Ltd should be included in the list of comparable companies As functional profile of the assessee in the present case and the assessee in the case of Applied Materials (I) P. Ltd. 2016 (9) TMI 1458 - ITAT BANGALORE are identical and both are software development services provider. We therefore following the decision of the Tribunal in the case of Applied Materials (I) P. Ltd. (supra) restore this issue for fresh consideration with similar directions as was given by the Tribunal in the case of Applied Materials (I) P.Ltd.(supra). Thus ground No. 3(l) raised by the assessee is treated as partly allowed. Excluding E-Infochip Ltd. from the list of comparable companies for the reason that no segmental information regarding its diverse functions was available and it fails the software services income filter. Besides the above there were major fluctuation in its profit which were influenced by extraordinary and peculiar circumstances and therefore this company was regarded as not comparable. Selection of companies only functionally comparable with assessee rendering software development services.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services.
2. Determination of ALP for Marketing Support Services.

Detailed Analysis:

1. Determination of ALP for Software Development Services:

Facts and Initial Determination:
The Assessee, a subsidiary of Autodesk Inc., USA, provided software development and marketing support services to its Associated Enterprises (AEs). The Assessee used the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining the ALP. The Assessee’s profit margin was 9.74%, which was within the range of comparable companies.

TPO and AO’s Adjustments:
The Transfer Pricing Officer (TPO) selected 13 comparable companies and computed an average profit margin of 24.82%. The TPO suggested an addition of ?1,10,42,685/- to the total income, which was added by the Assessing Officer (AO).

DRP's Directions:
The Dispute Resolution Panel (DRP) excluded 10 companies chosen by the TPO and retained only 3. The Assessee was aggrieved by the exclusion of CG Vak Software & Exports Ltd. and LGS Global Ltd., and the inclusion of Persistent Systems & Solutions Ltd., Persistent Systems Ltd., and Sasken Communication Technologies Ltd.

Tribunal's Decision:
- Onsite Revenue Filter: The Tribunal upheld the application of the onsite revenue filter, noting that companies with significant onsite revenues are not comparable.
- Acropetal Technologies Ltd. and L&T Infotech Ltd.: These were excluded due to lack of segmental details and high onsite revenue.
- R S Software (I) P. Ltd.: The Tribunal included this company as it was initially accepted by the Assessee.
- Evoke Technologies P. Ltd.: The Tribunal restored this issue for fresh consideration due to functional comparability and abnormal low profit margins.
- E-Infochip Ltd.: Excluded due to lack of segmental information and failing the software services income filter.
- ICRA Techno Analytics Ltd.: Excluded due to diversified activities and lack of segmental information.
- E-Zest Solutions Ltd.: Excluded for being functionally incomparable.
- Infosys Technologies Ltd.: Excluded due to its giant status, brand value, and huge turnover.
- Tata Elxsi Ltd.: Excluded due to diversified activities.
- CG Vak Software & Export Ltd. and LGS Global Ltd.: Remanded to TPO for fresh consideration regarding employee cost.
- Persistent Systems & Solutions Ltd. and Persistent Systems Ltd.: Excluded due to diverse functions and lack of segmental details.
- Sasken Communication Technologies Ltd.: Remanded for fresh consideration.

2. Determination of ALP for Marketing Support Services:

Facts and Initial Determination:
The TPO selected 3 comparable companies and computed an average mean margin of 18.25%, suggesting an addition of ?3,48,00,637/-.

DRP's Directions:
The DRP excluded ICC International Agencies Ltd. due to insufficient information regarding the nature of services.

Tribunal's Decision:
- ICC International Agencies Ltd.: The Tribunal upheld the exclusion as the company was engaged in indenting activity, which is dissimilar to the Assessee’s marketing support services.

Conclusion:
The Tribunal’s decisions involved detailed examination of the functional comparability of various companies, application of filters, and remanding certain issues for fresh consideration. The appeals by both the Assessee and Revenue were partly allowed.