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2019 (11) TMI 1744 - AT - Income TaxTP Adjustment - comparable selection - HELD THAT - Since the assessee company is primarily engaged in custom-built mobile applications and software support and maintenance related services to M/s. Kony Group of Companies we are of the view that comparable company as functionally dissimilar with that of assessee need to be deselected. Since the assessee had declared profit margin on cost @ 18.08% which is within the range of ( / -) 3% of 20.31% as per the second proviso to section 92C(2) of the Act we are of the considered view that TP Adjustment is not required in the case of the assessee towards assessee s international transaction with respect to software development services.
Issues Involved:
1. Selection of comparable companies for Transfer Pricing (TP) adjustment. 2. Methodology for determining Arm's Length Price (ALP) and profit margin. 3. Adjustment for interest on trade receivables. Issue-wise Detailed Analysis: 1. Selection of Comparable Companies for Transfer Pricing (TP) Adjustment: The primary issue raised by the assessee was the erroneous selection of certain comparable companies by the Transfer Pricing Officer (TPO). The TPO selected twelve comparable companies, including E-Infochips Limited, Thirdware Solutions Limited, Infobeans Technologies Limited, Infosys Limited, and Persistent Systems Limited. The assessee contended that these companies were functionally dissimilar to its business of captive software development services. E-Infochips Limited: The TPO considered E-Infochips Limited as functionally comparable. However, the assessee argued that E-Infochips was engaged in IT services, IT-enabled services, software products, and physical products without segmental details in its annual report. Additionally, it was involved in R&D activities, leading to super-profits, making it an unsuitable comparable. Thirdware Solutions Limited: The assessee contended that Thirdware Solutions was a product-based company with no revenue from services during the relevant year. It had various revenue sources, including training and subscription, and did not provide segmental details in its annual report. The acquisition of intangibles further differentiated it from the assessee. Infobeans Technologies Limited: Infobeans Technologies was engaged in exporting goods and services without segmental details in its annual report. The presence of MODVAT and sales tax deposits indicated involvement in the sale of goods, making it functionally dissimilar to the assessee. Infosys Limited: Infosys underwent extraordinary events, including acquisitions and mergers, impacting its profitability. Its turnover and expenditure on R&D and marketing were significantly higher than the assessee's, making it an unsuitable comparable. Persistent Systems Limited: Persistent Systems was engaged in product development, platform solutions, and services, with substantial R&D expenditure and no segmental details in its annual report. These factors rendered it functionally dissimilar to the assessee. The Tribunal found merit in the assessee's contentions and excluded these companies from the list of comparables. 2. Methodology for Determining Arm's Length Price (ALP) and Profit Margin: The assessee adopted the Transaction Net Margin Method (TNMM) as the most appropriate method to determine the ALP for its software development services. The TPO rejected the assessee's TP study for using multiple year data and conducted a fresh search, selecting twelve comparable companies and computing an average margin of 34.31%. The TPO proposed a TP adjustment by enhancing the profit by Rs. 5,74,14,856/-. The Tribunal, after excluding functionally dissimilar companies, arrived at a final list of comparables with an arithmetic mean of 20.31%. Since the assessee's declared profit margin of 18.08% was within the +/- 3% range of the arithmetic mean, the Tribunal concluded that no TP adjustment was required. 3. Adjustment for Interest on Trade Receivables: The TPO observed that the assessee did not charge interest on trade receivables from its Associated Enterprises (AE) beyond the agreed 90-day realization period. The TPO proposed an adjustment by enhancing the profit by Rs. 97,193/-. However, the Dispute Resolution Panel (DRP) directed the TPO to compute the ALP interest rate considering the 90-day credit period stipulated in the inter-company agreements, effectively deleting the TP adjustment on interest receivables. Conclusion: The Tribunal allowed the appeal of the assessee, concluding that the selected comparable companies were functionally dissimilar and that the assessee's profit margin was within the acceptable range, negating the need for TP adjustment. The Tribunal also upheld the DRP's direction regarding the interest on trade receivables, resulting in the deletion of the proposed adjustment. The appeal was pronounced in favor of the assessee on 20th November 2019.
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