2021 (11) TMI 1154 - AT - Income Tax

TP Adjustment - comparable selection - Assessee seeks exclusion of three comparable viz. Larsen Toubro Infotech Ltd. Persistent Systems Ltd. and Tech Mahindra Limited - HELD THAT - As relying on M/S. METRICSTREAM INFOTECH (INDIA) PVT. LTD. case 2019 (2) TMI 1731 - ITAT BANGALORE we direct exclusion of the 3 comparable companies set out in Grd.No.9 (a) of the Assessee s appeal.

Summary

Issues Involved:
1. Determination of Arm’s Length Price (ALP) for Software Development Services (SWD services).
2. Selection of comparable companies for benchmarking the ALP.
3. Exclusion of specific comparable companies from the list used for ALP determination.

Detailed Analysis:

1. Determination of Arm’s Length Price (ALP) for Software Development Services (SWD services):
The Assessee, engaged in providing SWD services to its wholly owned holding company, an Associated Enterprise (AE), filed a Transfer Pricing Study (TP Study) using the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining ALP. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI), arriving at an OP/OC of 13.40%. The Transfer Pricing Officer (TPO) accepted TNMM as the MAM and the use of OP/OC as the PLI. The TPO, after selecting comparable companies, computed an adjusted mean margin of 18.61%, leading to an addition of ?19,36,64,081 to the Assessee’s total income.

2. Selection of comparable companies for benchmarking the ALP:
The Assessee identified 26 companies with similar services for comparison, while the TPO accepted only 5 of these and added 2 more companies. The final list included CG Vak Software & Exports Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., R.S. Software (I) Ltd., ICRA Techno Analytics Limited, and Tech Mahindra Limited. The TPO computed the arithmetic mean of their profit margins, resulting in an adjusted mean margin of 18.61%.

3. Exclusion of specific comparable companies from the list used for ALP determination:
The Assessee sought the exclusion of Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., and Tech Mahindra Limited from the list of comparables. The Assessee relied on the ITAT Bangalore Bench decision in M/S. Metricstream Infotech (India) Ltd. vs. DCIT, where these companies were excluded due to differences in functional profiles and related party transactions (RPT). The Tribunal noted that the functional profile of the Assessee matched the company in the cited case and upheld the exclusion of these companies. Specifically, Persistent Systems Ltd. and L&T Infotech Ltd. were excluded due to involvement in software products and solutions without segmental details. Tech Mahindra Ltd. was remanded for further consideration of RPT exceeding 25%.

Conclusion:
The Tribunal directed the exclusion of Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., and Tech Mahindra Limited from the list of comparables. The TPO was instructed to compute the ALP of the international transaction afresh, considering these exclusions and after providing the Assessee an opportunity to be heard. Consequently, the appeal of the Assessee was partly allowed.