2019 (9) TMI 1686 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee's software development services need to be deselected.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for Software Development Services (SDS).
2. Transfer Pricing Adjustment for IT Enabled Services (ITES).
3. Exclusion of specific comparables in SDS and ITES segments.
4. Rejection of TP documentation and economic analysis by the assessee.
5. Application of multiple year/prior year data.
6. Risk differential adjustment.
7. Interest under section 234B and 234C.

Detailed Analysis:

1. Transfer Pricing Adjustment for Software Development Services (SDS):
The assessee, engaged in software development, filed a return admitting total income of Rs. Nil and book profits under section 115JB. The case was selected for scrutiny, and the AO referred the matter to the TPO for determining the arm's length price (ALP) of international transactions. The TPO rejected the assessee's comparables and conducted an independent analysis, selecting 17 comparables with an arithmetic mean margin of 19.46%. After adjustments, the ALP was determined at Rs. 5,23,41,257, leading to an adjustment of Rs. 33,34,083. The DRP retained five comparables, resulting in an adjusted arm's length margin of 16.09% and an adjustment of Rs. 29,58,074.

2. Transfer Pricing Adjustment for IT Enabled Services (ITES):
For ITES, the TPO selected 13 comparables with an arithmetic mean margin of 25.73%. After adjustments, the ALP was determined at Rs. 94,98,937, leading to an adjustment of Rs. 10,80,937. The DRP retained four comparables, resulting in an adjusted arm's length margin of 16.71% and an adjustment of Rs. 5,55,782. The AO computed the total TP adjustment at Rs. 35,13,856.

3. Exclusion of Specific Comparables:
The assessee sought exclusion of Persistent Systems Ltd. and Sasken Communication Technologies Ltd. in SDS and Crossdomain Solutions Pvt. Ltd. in ITES, citing functional differences. The Tribunal referred to previous decisions where these companies were excluded based on functionality. Persistent Systems was excluded due to its engagement in both software services and products without segmental details. Sasken was excluded due to its involvement in software services and products with no segmental cost details. Crossdomain was excluded for its high-end KPO services and lack of bifurcation in service verticals.

4. Rejection of TP Documentation and Economic Analysis:
The AO/DRP rejected the TP documentation maintained by the assessee, invoking section 92C(3) and contending that the data used was not reliable. The Tribunal found the rejection of comparability analysis and the application of additional filters without providing an opportunity for hearing to the assessee as erroneous.

5. Application of Multiple Year/Prior Year Data:
The AO/DRP upheld the use of current year data (FY 2010-11) for comparables, disregarding the assessee's application of multiple year/prior year data as prescribed under Rule 10B(4).

6. Risk Differential Adjustment:
The AO/DRP ignored the limited risk nature of the services provided by the assessee and concluded that no adjustment on account of risk differential was required while determining the ALP.

7. Interest under Section 234B and 234C:
The assessee contested the charging of interest under sections 234B and 234C.

Conclusion:
The Tribunal directed the AO/TPO to exclude Persistent Systems Ltd., Sasken Communication Technologies Ltd., and Crossdomain Solutions Pvt. Ltd. from the list of comparables and to recompute the ALP for both SDS and ITES segments. The appeal of the assessee was allowed, and the AO/TPO was instructed to recompute the arm's length price accordingly.