2020 (5) TMI 662 - AT - Income Tax

Transfer pricing adjustment to the international transaction of provision of software development services - Comparable selection - HELD THAT - Assessee is into developing software for the associated enterprises thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:
1. Validity of assessment order under Section 143(3) read with Section 144C.
2. Adjustment to the arm’s length price of international transactions for software development services.
3. Adjustment to the arm’s length price for delay in receipt of outstanding receivables.
4. Levy of interest under Section 234A and 234B of the Income-tax Act.

Detailed Analysis:

1. Validity of Assessment Order:
The appellant challenged the assessment order framed by the Assessing Officer (AO) under Section 143(3) read with Section 144C of the Income-tax Act, 1961, arguing that it was bad in law, violated principles of natural justice, and was void ab initio. However, these grounds were general in nature and not separately adjudicated.

2. Adjustment to Arm’s Length Price of International Transactions:
The primary issue revolved around the adjustment of ?18,16,82,680 to the arm’s length price (ALP) of international transactions related to software development services.

Foreign Exchange Fluctuation Income:
The AO/TPO erroneously excluded foreign exchange fluctuation income of ?10,51,15,282 from operating income, contrary to the DRP's direction to include it.

Comparable Companies:
The appellant sought the exclusion of certain companies from the final set of comparables, arguing functional dissimilarity:
- Mindtree Ltd.: The Tribunal upheld its inclusion, noting that the appellant also develops software products and services, similar to Mindtree.
- Larsen & Toubro Infotech Ltd.: Excluded due to functional dissimilarity at the entity level and an extraordinary event (demerger of the Product Engineering Services business).
- Persistent Systems Ltd.: Excluded due to functional dissimilarity, as it derives significant revenue from IP-led business products, unlike the appellant.
- Tata Elxsi Ltd.: Excluded due to functional dissimilarity, as it earns revenue from product design and other activities different from software development services.
- Thirdware Solutions Ltd.: Retained as comparable, as it primarily earns revenue from software services, and the appellant's argument of product sales was not substantiated.
- Infobeans Technologies Ltd.: Retained as comparable, as the services provided (automation engineering, Service Now, UX/UI) were part of software development services.

Risk Adjustment:
The appellant argued for a risk adjustment due to its status as a low-risk captive service provider. The TPO rejected this, citing a lack of robust and reliable data.

3. Adjustment for Delay in Receipt of Outstanding Receivables:
The AO/TPO made an adjustment of ?4,75,27,934, treating the delay as an unsecured loan to associated enterprises. The appellant contended that delay in receipt of receivables is not an international transaction per se under Section 92B but a consequence of services rendered. The Tribunal noted that working capital adjustment is a more appropriate measure than applying an interest rate and referenced previous Tribunal decisions in favor of the appellant.

4. Levy of Interest under Sections 234A and 234B:
The appellant contested the levy of interest under Sections 234A and 234B. However, the Tribunal did not provide a detailed discussion on this issue.

Conclusion:
The Tribunal allowed the appeal partly for statistical purposes, directing the AO/TPO to recompute the adjustment to the transaction of software development services based on the inclusion/exclusion of specific comparables and other relevant considerations. The issues related to the validity of the assessment order and levy of interest were not separately adjudicated.

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