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2016 (7) TMI 1573 - AT - Income TaxTP Adjustment - adjustment in respect of International transactions of the assessee with its AE in providing fees for software development and related services - comparable selection - HELD THAT - Assessee is engaged in providing software development services and related services to its AE. The assessee used TNMM to Bench mark the international transactions and arrived at margin of 14.5%, thus companies functionally dissimilar with that of assessee need to be deselected from final list.
Issues Involved:
1. Adjustment of ?1,84,22,714/- in respect of international transactions. 2. Exclusion of certain comparables from the final set for Transfer Pricing (TP) adjustments. Issue-wise Detailed Analysis: 1. Adjustment of ?1,84,22,714/- in respect of international transactions: The appeal was filed by the assessee challenging the order of the DRP-II, Mumbai, which sustained an adjustment of ?1,84,22,714/- made in respect of international transactions between the assessee and its Associated Enterprises (AE) for software development and related services. The assessee used the Transactional Net Margin Method (TNMM) to benchmark these transactions, arriving at a margin of 14.5%. However, the Transfer Pricing Officer (TPO) rejected the search methodology adopted by the assessee, conducted a fresh study, and selected 23 comparables, resulting in a TP adjustment of ?2,93,92,757/-. The Dispute Resolution Panel (DRP) directed the TPO to exclude 15 comparables and include one comparable, Synetarios Technologies Ltd., based on functionality. The DRP also directed the adoption of a margin of 21.30% for Acropetal Technologies Ltd. instead of 39.06%, resulting in a revised average margin of 24.09% and a TP adjustment of ?1,84,22,714/-. 2. Exclusion of certain comparables from the final set for Transfer Pricing (TP) adjustments: The assessee argued for the exclusion of Persistent Systems Ltd., Thirdware Solutions Ltd., and KALS Information Systems Ltd. from the final set of comparables, citing functional dissimilarities and lack of segmental information. Persistent Systems Ltd.: The assessee contended that Persistent Systems Ltd. should be excluded as it derives revenues from both software services and products without segmental details available. The company is engaged in 'Outsourced Product Development Services,' which includes product life cycle services and revenue from royalties and licensing. This functional dissimilarity was supported by various decisions, including CIT v. Intoto Software India (P.) Ltd., Lionbridge Technologies (P.) Ltd. v. ITO, NXP Semi Conductors India (P.) Ltd. v. Dy. CIT, and Planet Online (P.) Ltd. v. Asstt. CIT. Thirdware Solutions Ltd.: The assessee argued that Thirdware Solutions Ltd. should be excluded due to its revenue from software services, sale of licenses, subscription fees, and exports from tax holiday units, with no bifurcation of expenditure available. The DRP excluded Aditya Birla Minacs IT Services Ltd. for similar reasons. This exclusion was supported by decisions in Planet Online (P.) Ltd. and Approva Systems (P.) Ltd. v. CIT. KALS Information Systems Ltd.: The assessee maintained that KALS Information Systems Ltd. should be excluded as it derives revenue from software services and products, with only two segments: Application Software and Training. The TPO chose the application software segment, but there was no further revenue breakdown. The company's involvement in developing various software products and running training centers made it functionally dissimilar. This exclusion was supported by decisions in Intoto Software India (P.) Ltd., ITO v. Prana Studios (P.) Ltd., Lionbridge Technologies Pvt. Ltd. v. ITO, NXP Semi Conductors India (P.) Ltd., Planet Online (P.) Ltd., and Approva Systems (P.) Ltd. Final Judgment: The tribunal heard the rival contentions and reviewed the orders and decisions cited. It concluded that the comparables Persistent Systems Ltd., Thirdware Solutions Ltd., and KALS Information Systems Ltd. should be excluded due to functional dissimilarities and lack of segmental information. The tribunal directed the TPO to exclude KALS Information Systems Ltd. from the comparables and reconsider the inclusion of Persistent Systems Ltd. and Thirdware Solutions Ltd. after evaluating the assessee's contentions and relevant decisions. The appeal was partly allowed for statistical purposes.
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