2021 (3) TMI 1401 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee SWD service provider and employee cost as more than 25% of the revenue need to be deselected.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Inclusion and exclusion of comparable companies in the Transfer Pricing (TP) study.
3. Functional comparability of selected companies.
4. Adjustment of ALP based on the Transaction Net Margin Method (TNMM).

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for International Transactions:
The Assessee, engaged in providing software development services to its Associated Enterprises (AE), was subject to an ALP test under Section 92 of the Income Tax Act, 1961. The Transfer Pricing Officer (TPO) rejected the Assessee's TP study and selected 13 comparable companies, determining an arithmetic mean profit margin of 24.82% before working capital adjustment. This resulted in an upward adjustment of Rs. 1,59,43,443 to the price received by the Assessee.

2. Inclusion and Exclusion of Comparable Companies in the TP Study:
The Dispute Resolution Panel (DRP) excluded several companies chosen by the TPO and retained only three: Persistent Systems Ltd., Persistent Systems & Solutions Ltd., and Sasken Technologies Ltd. The Assessee contested the inclusion of these three companies and the exclusion of Evoke Technologies Ltd., CG Vak Software & Exports Ltd., and RS Software Ltd. The Tribunal accepted the Assessee's plea for the exclusion of the three retained companies and directed the inclusion of Evoke Technologies Ltd. and RS Software Ltd.

3. Functional Comparability of Selected Companies:
The Tribunal examined the functional comparability of the disputed companies. It cited previous decisions, such as in the case of Autodesk India Ltd., where Persistent Systems & Solutions Ltd., Persistent Systems Ltd., and Sasken Communication Technologies Ltd. were deemed not comparable due to diverse functions, absence of segmental details, and engagement in software product development. The Tribunal followed these precedents and excluded these companies from the list of comparables.

4. Adjustment of ALP Based on the Transaction Net Margin Method (TNMM):
The Tribunal directed the TPO to recompute the ALP after including Evoke Technologies Ltd. and RS Software Ltd. and reconsidering CG Vak Software & Export Ltd. The TPO was instructed to verify the employee cost filter and other relevant details for CG Vak Software & Export Ltd. before making a final decision on its inclusion.

Conclusion:
The Tribunal partly allowed the Assessee's appeal and dismissed the revenue's appeal. It directed the TPO to recompute the ALP in accordance with the Tribunal's directions and after affording the Assessee an opportunity of being heard. The decision emphasized the importance of functional comparability and adherence to established precedents in TP assessments.