2020 (11) TMI 1082 - AT - Income Tax

TP Adjustment - determination for ALP for provision of SWD services - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected from final list. Addition u/s 40A(7) - assessee company had failed to communicate the changes/ alterations made to the fund, as required under Rule 4(2) of the Fourth Schedule of IT Act and the contribution to fund is only a provision and not an actual expense under the purview of section 37(1) - HELD THAT - Identical issue arose in assessee s own case for AY 2010-11 2017 (11) TMI 1861 - ITAT BANGALORE as upheld the action of the DRP in deleting the addition made by AO.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services (SWD).
2. Determination of ALP for Marketing Support Services (MSS).
3. Exclusion of specific comparable companies by the Dispute Resolution Panel (DRP).
4. Addition under Section 40A(7) of the Income Tax Act.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for Software Development Services (SWD):
The assessee did not submit a Transfer Pricing Study (TP Study) for the SWD services. The Transfer Pricing Officer (TPO) used the Transaction Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The TPO selected 13 comparable companies and calculated an average arithmetic mean margin of 23.19%, leading to an addition of Rs. 28,08,864 to the total income of the assessee. The DRP later excluded 10 of these comparable companies, retaining only three. The Tribunal upheld the exclusion of seven companies based on precedents but directed the inclusion of RS Software (I) Ltd. and Evoke Technologies Ltd. as comparable companies.

2. Determination of ALP for Marketing Support Services (MSS):
The assessee used TNMM with OP/OC as PLI, showing a margin of 7.84% against the selected comparables' average margin of 9%. The TPO rejected the comparables chosen by the assessee and selected three new ones, calculating an ALP adjustment of Rs. 29,31,344. The DRP excluded ICC International Agencies Ltd. from the comparables. The Tribunal upheld this exclusion based on functional dissimilarity and directed the exclusion of Asian Business Exhibition and Conference Ltd. from the comparables.

3. Exclusion of Specific Comparable Companies by the DRP:
The DRP excluded several companies based on functional dissimilarity and lack of segmental information. The Tribunal upheld the exclusion of:
- Acropetal Technologies Ltd. (engaged in computer product development)
- L&T Infotech Ltd. (high related party transactions)
- Tata Elxsi Ltd. (diversified activities)
- e-Infochips Ltd. (revenue from both software services and products)
- e-Zest Solutions Ltd. (engaged in Knowledge Process Outsourcing)
- ICRA Techno Analytics Ltd. (diversified activities without segmental data)
- Infosys Technologies Ltd. (engaged in software products and a giant company assuming various risks)

4. Addition under Section 40A(7) of the Income Tax Act:
The DRP deleted the addition made by the AO under Section 40A(7), and the Tribunal upheld this decision, referencing a similar ruling in the assessee's case for AY 2010-11. The Tribunal noted that the CBDT had approved the relevant trust retrospectively, nullifying the AO's objections.

Conclusion:
The Tribunal's judgment addressed the determination of ALP for SWD and MSS, upheld the exclusion of several comparable companies based on functional dissimilarity, and confirmed the deletion of the addition under Section 40A(7). The appeal by the revenue and the cross-objection by the assessee were both partly allowed.