2019 (11) TMI 1805 - AT - Income Tax

TP Adjustment - selection of MAM - CUP or TNMM - HELD THAT - Both the parties agreed that the Tribunal need not adjudicate the issue whether CUP or TNMM is the MAM for determination of ALP for the assessee company s international transactions in this appeal and that the issue may be let open for adjudication in an appropriate year. Comparable selection - Functional dissimilarity - HELD THAT - Lucid Software Ltd s main stream of revenue was out of sale of software products in addition as to software development thus we direct the TPO to exclude this company from the list of comparable companies. Sagarsoft (India) Limited company be excluded from the list of comparable companies for determining ALP as it is engaged in full software development cycle and has the RPT 56.49% of the operating revenue when the filter applied by the TPO was 20% of the operating revenue in the case of the assessee. Prelude Sys India Limited be excluded company provides multiple services like custom software development in addition to cloud computing application services and mobile technology enterprise application services QA and testing BPO and strategic sourcing. The RPT is 87% of the operating revenue as compared to the filter of 20% applied in the case of the assessee company by the TPO. E-infochips Bangalore Ltd be excluded from the list of comparable companies for the reason that this company provides software development and IT enabled services like hardware designing complete product lifecycle development application development enterprise IT consulting. RPT is 37.96% of the operating revenue as compared to the filter of 20% applied by the TPO in the case of the assessee company. Acropetal Technologies Limited company to be excluded from the list of comparable companies for the reason that this company has Employee cost percentage of 11.51% and whereas the filter applied by the TPO was 25% of Employee cost in the case of the assessee company. Axis IT T Ltd. be excluded from the list of comparable companies for the reason that this company provides software services. The RPT is 43.18% of the operating revenue while a filter of 20% has been applied by the TPO. The TPO wrongly applied the entire revenue of 37.16 crores as from software services whereas the fact is that only 3.01 crores was from software services and the balance is 34.15 crores from engineering design charges. Zylog Systems (India) Ltd company provides broadband services and wireless internet-based communication services as well as enterprise computing mobile computing. Employee cost filter of 25% is not met as the assessee s employee cost percentage is only 20.14% thus be excluded. 8K Miles Software Services Limited company has purchased the entire business of M/s. Mentor Minds Solutions Services Inc. a US based company and its subsidiary M/s. Mentor Minds Solutions Services Canada. This aspect was not considered and adjudicated upon by the DRP. Hence we direct the AO to exclude this company from the list of comparable companies for the purpose of computation of ALP. Akshay Software Technologies Limited company has a positive net worth. It is not a loss making enterprise and has reported profits in two of the previous three years i.e. 2008-09 2009-10 and 2010-11. This Bench of the Tribunal in the case of Nomura Research Institute Financial Technologies India (P) Ltd. 2018 (10) TMI 1816 - ITAT KOLKATA has directed the inclusion of this company as a comparable company. Consistent with the view taken therein we direct the AO to include this company as a comparable company. Maveric Systems Limited company is engaged in software development and testing services and it is the only reportable segment. 99% of the operating revenue for the period ending 31.03.2011 was received from software development. Thus we direct the AO to include this company as a comparable company. Thinksoft Global Services Limited company is a software service provider primarily delivering software validation and verification services to the banking and financial services industry worldwide thus be included. Working capital adjustment - DRP has directed the AO/TPO to provide the benefit of WCA to the assessee -HELD THAT - It is well settled that such directions are binding on the TPO. Hence we direct the TPO to implement the DRP directions in this regard. The assessee shall provide the necessary data to the TPO in this regard. In the result this ground of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Determination of the most appropriate method for transfer pricing (CUP vs. TNMM).
2. Exclusion of certain companies from the list of comparables.
3. Inclusion of certain companies in the list of comparables.
4. Application of Working Capital Adjustment (WCA).

Detailed Analysis:

1. Determination of the Most Appropriate Method for Transfer Pricing:
The appellant, Atlas Healthcare Software India Private Limited, contended that the Comparable Uncontrolled Price (CUP) method should be the most appropriate method (MAM) for determining the arm’s length price (ALP) of its international transactions. The Transfer Pricing Officer (TPO) had rejected CUP and applied the Transactional Net Margin Method (TNMM) instead. Both parties agreed that the Tribunal need not adjudicate whether CUP or TNMM is the MAM in this appeal, leaving the issue open for future adjudication.

2. Exclusion of Certain Companies from the List of Comparables:
The appellant argued for the exclusion of several companies from the list of comparables used by the TPO for computing the ALP. The Tribunal directed the exclusion of the following companies based on various grounds:

- Lucid Software Ltd.: Excluded due to its engagement in both software product development and services without segmented data, making its functional profile different from the appellant.
- Sagarsoft (India) Limited: Excluded as it is engaged in the full software development cycle and has a Related Party Transaction (RPT) of 56.49%, exceeding the 20% filter applied by the TPO.
- Prelude Sys India Limited: Excluded due to its multiple service offerings and an RPT of 87%, which is not comparable to the appellant’s profile.
- E-infochips Bangalore Ltd.: Excluded for providing a wide range of IT services and having an RPT of 37.96%.
- Acropetal Technologies Limited: Excluded due to its low employee cost percentage of 11.51%, compared to the 25% filter applied by the TPO.
- Axis IT & T Ltd.: Excluded as it primarily provides engineering design services rather than software services, with an RPT of 43.18%.
- Zylog Systems (India) Ltd.: Excluded for providing broadband and wireless internet-based communication services, with an employee cost percentage of 20.14%.
- 8K Miles Software Services Limited: Excluded due to its specialized cloud consulting services and numerous acquisitions, making it functionally different from the appellant.

3. Inclusion of Certain Companies in the List of Comparables:
The appellant requested the inclusion of certain companies as comparables for computing the ALP. The Tribunal directed the inclusion of the following companies:

- Akshay Software Technologies Limited: Included as it has a positive net worth and is not a persistent loss-making company.
- Maveric Systems Limited: Included as it is engaged in software development and testing services, with 99% of its revenue from software development.
- Thinksoft Global Services Limited: Included as it provides software validation and verification services, recognized as software development services.

4. Application of Working Capital Adjustment (WCA):
The appellant argued for the application of WCA as directed by the Dispute Resolution Panel (DRP). The Tribunal upheld that the TPO is bound by the DRP’s directions and must provide WCA, with the appellant furnishing the necessary data.

Conclusion:
The Tribunal partially allowed the appeal, directing the exclusion and inclusion of specific companies from the list of comparables and mandating the application of WCA as per the DRP’s directions. Other grounds raised by the appellant were not adjudicated as they were considered academic exercises.