2019 (7) TMI 1921 - AT - Income Tax

TP Adjustment - Exclusion of companies from list of comparables (software Development Services segment - Comparability of M/s. Larsen Toubro Infotech Ltd., and M/s. Persistent Systems Ltd., to an assessee who only provides software development services to its AEs; like the assessee in the case on hand - HELD THAT - We find that a Co-ordinate Bench of this Tribunal in the case of CGI Information Systems Management Consultants Pvt. Ltd. where the assessee was also providing software development services to its AEs; in its order in 2018 (4) TMI 1755 - ITAT BANGALORE , considered the comparability of Larsen Toubro Infotech Ltd., and Persistent Systems Ltd., and directed the exclusion of these two companies.

Summary

Issues Involved:
1. Adjustment to the transfer price of the assessee.
2. Determination of the arm's length price (ALP) for the contract software development services segment.
3. Exclusion of certain companies from the list of comparables for the software development services segment.

Detailed Analysis:

1. Adjustment to the Transfer Price of the Assessee:
The assessee, a subsidiary of EMC Corporation, USA, engaged in marketing, distribution, consultancy, and software development services, filed its return of income for AY 2012-13. The case was selected for scrutiny, and the Assessing Officer (AO) referred it to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of international transactions with its Associated Enterprises (AEs). The TPO proposed adjustments to the software development services segment and ITES segment. The Dispute Resolution Panel (DRP) provided partial relief, but the AO included a TP adjustment in the final assessment order.

2. Determination of the Arm's Length Price (ALP) for the Contract Software Development Services Segment:
The assessee objected to the TPO's approach of determining the ALP by invoking provisions of section 92C(3) read with section 92CA of the Act, disregarding the use of multiple year/prior year data, using non-public data, and conducting a fresh comparability analysis by rejecting certain filters applied by the assessee. The TPO conducted his own TP study and selected 10 companies with an average margin of 22.63% as comparable to the assessee, leading to a proposed TP adjustment. The DRP's directions led to a final TP adjustment in the impugned assessment order.

3. Exclusion of Certain Companies from the List of Comparables for the Software Development Services Segment:
During the appeal, the assessee sought the exclusion of Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. from the TPO's list of comparables, arguing that these companies were software product companies and functionally different. The Tribunal considered the rival contentions and judicial pronouncements, including a Co-ordinate Bench decision in a similar case, which directed the exclusion of these companies based on their functional differences and lack of segmental information on software development services.

Judgment:
The Tribunal, following the decision of a Co-ordinate Bench in a similar case, directed the AO/TPO to exclude Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. from the TPO's list of comparables. Consequently, the assessee's appeal was partly allowed, and the specific ground regarding the exclusion of these companies was upheld.

Conclusion:
The Tribunal's decision focused on the proper determination of comparables for the software development services segment and upheld the exclusion of certain companies based on functional differences and lack of segmental information. The assessee's appeal was partly allowed, providing relief in the specific ground contested.