2021 (3) TMI 1411 - AT - Income Tax

TP adjustment - Comparable selection - functional dissimilarity - HELD THAT - Celestial Biolabs Ltd company is into product development. It is also to be noted though this company is providing various kinds of services and also developing products; however segmental details of the services provided and products developed are not available in public domain. Considering these aspects the co-ordinate bench of this Tribunal in case of UCB India Pvt Ltd vs Addl.CIT 2016 (7) TMI 1445 - ITAT MUMBAI has rejected this company as comparable to a software development service provider. Thus reject this company from being treated as a comparable to the assessee. E-zest solutions Ltd. provided high-end ITES to its AEs and segmental information regarding various services provided are not available in public domain. Considering the fact that the aforesaid company is engaged in providing high-end ITES or knowledge process outsourcing (KPO) services it has been rejected as a comparable to a software development service provider in the above referred decisions. Since the aforesaid decisions cited before us pertain to the very same assessment year and there is no major change in the factual position following these decisions we reject this comparable. Acropatel Technologiies Ltd - TPO in case of the present assessee while selecting comparable companies he has applied certain filters which include Income from software development services more than 75% of the operating revenue and Employee cost to operating revenues more than 25%. On perusal of the annual report of the company placed in the paper book the contention of learned Senior Counsel appears to be correct. Further it is observed while considering similar objections raised on behalf of the assessee in case of Accenture Services Pvt Ltd 2018 (7) TMI 1877 - ITAT MUMBAI Tribunal has excluded this company from being treated as comparable as it does not qualify the aforesaid filters. The same view has been re-iterated by the co-ordinate bench in case of Dialogic Networks (India) Pvt Ltd 2018 (7) TMI 1878 - ITAT MUMBAI Following the aforesaid decisions of the co-ordinate bench we direct the assessing officer to exclude this company from the list of comparables. Softsol India Ltd. - In our considered opinion assessee s contention that certain adjustments have to be made in computing the margin of this company requires consideration. In case of Dialogic Networks (India) Pvt Ltd 2018 (7) TMI 1878 - ITAT MUMBA which is for the very same assessment year the Tribunal while accepting similar claim made by the assessee has directed the assessing officer to compute the margin of this company at 15%. Therefore following the aforesaid decision of the co-ordinate bench we direct the assessing officer to compute the margin of this company at 15%.

Summary

Issues Involved:
1. Addition on account of transfer pricing adjustment.
2. Transfer pricing adjustment made to the payment of management charges.

Detailed Analysis:

I. Addition on Account of Transfer Pricing Adjustment:

1. Background:
The assessee, a resident company engaged in providing software consultancy and design services through its overseas associated enterprises (AEs), earned revenue of Rs.19,11,81,023/-. The assessee used the transactional net margin method (TNMM) with operating profit/operating cost (OP/OC) as the profit level indicator (PLI) to benchmark the transaction. The assessee's PLI was shown at 27.42%, claiming the price charged was at arm’s length. However, the Transfer Pricing Officer (TPO) rejected the assessee's comparables and its margin computation, selecting nine independent comparables with an average PLI of 32.14% and computed the PLI of the assessee at 13.65%. This resulted in an upward adjustment of Rs.4,48,60,208/- to the price charged, which was added to the income by the assessing officer and upheld by the Dispute Resolution Panel (DRP).

2. Specific Comparables:
The assessee contested the selection of three comparables and sought adjustments for another.

A. Celestial Biolabs Ltd:
The assessee argued that Celestial Biolabs Ltd is engaged in different services like bio-informatic services and drug development, with no segmental information available. The Tribunal, noting the company’s involvement in product development and lack of segmental details, rejected it as a comparable, following precedents from similar cases.

B. E-Zest Solutions Limited:
The assessee contended that E-Zest Solutions Limited provides IT-enabled services (ITES) and not software development services. The Tribunal, observing that the company provides high-end ITES and lacks segmental information, rejected it as a comparable, adhering to previous decisions.

C. Acropatel Technologies Limited:
The assessee claimed that Acropatel Technologies Limited does not meet the TPO’s filters, such as revenue from IT segment being less than 75% and employee costs less than 25% of total expenses. The Tribunal, agreeing with the assessee and referencing similar cases, directed the exclusion of this company from the comparables.

D. Softsol India Ltd:
The assessee did not object to retaining Softsol India Ltd as a comparable but requested adjustments for non-operating revenues like rental income and other items. The Tribunal, considering similar adjustments allowed in previous cases, directed the assessing officer to compute the margin of this company at 15%.

3. Outcome:
With the removal of the contested comparables and the adjustment of Softsol India Ltd’s margin, the assessee’s PLI fell within the acceptable range, negating the need for further adjustment. Thus, the ground was partly allowed.

II. Transfer Pricing Adjustment to Payment of Management Charges:

1. Background:
The assessee challenged the TP adjustment made to the payment of management charges. However, the Senior Counsel for the assessee noted that the final assessment order did not include a separate addition for this adjustment.

2. Outcome:
Based on the counsel’s submission, the ground was dismissed as not pressed.

Conclusion:
The appeal was partly allowed, with specific directions to exclude certain comparables and adjust the margin of another, thereby addressing the transfer pricing adjustment issue comprehensively. The second ground regarding management charges was dismissed as not pressed.

Order Pronounced on 11/03/2021.