2020 (11) TMI 335 - AT - Income Tax

TP Adjustment - Comparable selection - functional similarity - HELD THAT - The assessee is primarily engaged in the business of development of software and other allied services to its AE thus companies functionally dissimilar with that of assessee need to be deselected. Acropetal Technologies Limited - Income from software development services is less than 75% of the total revenue and the company is not comparable towards software development service provider. e-Zest Solutions Limited rendering product development and end to end technical services which comes under the category of KPO services and this cannot be compared to software development providers. E-Infochips Limited company is engaged in diverse activities such as product development and provisions for IT enabled services for which no separate segmental information is available in its Annual Report. On the contrary, the diverse activities of software development and IT enabled services are considered and reported together in one segment. Thus, in the absence of such segmental details, the company is functionally not comparable to assessee which is a captive software development provider. ICRA Techno Analytics Limited - company has significant growth in the business intelligence and analytics space which shows that the activities carried out are different from that the assessee. The revenue recognition policy of the company also shows that the company is engaged in rendering diverse services. The services rendered by the company as per its website also include services akin to IT enabled services/KPO services. Persistent Systems Solutions Limited to be excluded from the list of comparables as composite data of revenue as well as margins of this company pertaining to the sale of software services and products cannot be considered as comparable with the software development services segment of the assessee. Since we have directed the exclusion of five comparables, the final list of comparable is only Evoke Technologies Private Limited and R S Software (India) Limited. The assessee's margin being 14.87% for provision for software development services would be more than the arithmetical means of the working capital adjusted margin of the above two comparables. Therefore, the international transaction of provision of software development services by the assessee to its AE for the relevant assessment year is to be concluded as being at Arm's length. It is ordered accordingly. Non-receipt of refund for the assessment year 2011-2012 - HELD THAT - As DRP had directed the A.O. to verify the objections of the assessee and take necessary action in the matter. However, we find that in the final assessment order no such examination/verification has been done by the A.O. Therefore, we direct the A.O. to examine the objections of the assessee whether it was not in receipt of refund for the relevant assessment year.

Summary

Issues Involved:
1. Transfer Pricing Adjustment towards provision for software development services.
2. Non-receipt of refund for assessment year 2011-2012.
3. Interest under Section 234D of the Income Tax Act.

Issue-wise Detailed Analysis:

A. Transfer Pricing Adjustment:

1. Background:
The assessee, a wholly owned subsidiary of JDA Software Inc., engaged in software development services, reported an operating margin of 14.87% for the assessment year 2011-2012. The Transfer Pricing Officer (TPO) rejected the assessee's Transfer Pricing (TP) study and selected new comparables, resulting in an adjusted mean margin of 25.58% and an ALP adjustment of ?10,51,12,366.

2. DRP Directions:
The Dispute Resolution Panel (DRP) directed the exclusion of certain comparables, reducing the TP adjustment to ?10,08,70,033. The final list of comparables included Acropetal Technologies Limited, e-Zest Solutions Limited, E-Infochips Limited, Evoke Technologies Private Limited, ICRA Techno Analytics Limited, Persistent Systems & Solutions Limited, and R S Software (India) Limited.

3. Tribunal's Analysis:
The Tribunal examined each of the comparables the assessee sought to exclude:

I. Acropetal Technologies Limited:
- The Tribunal noted that the company's income from software development services was less than 75% of total revenue, making it non-comparable. The Tribunal relied on previous orders and directed its exclusion.

II. e-Zest Solutions Limited:
- The Tribunal found that the company was engaged in product development and diverse services, including KPO services, with no segmental details available. Based on previous rulings, the Tribunal directed its exclusion.

III. E-Infochips Limited:
- The Tribunal observed that the company engaged in diverse activities without segmental information and had significant inventory. It failed the software service income filter. The Tribunal directed its exclusion, relying on previous decisions.

IV. ICRA Techno Analytics Limited:
- The Tribunal noted the company's engagement in diverse services, including business intelligence and analytics, making it functionally different from the assessee. The Tribunal directed its exclusion based on prior rulings.

V. Persistent Systems & Solutions Limited:
- The Tribunal found the company engaged in software development and product development without segmental details. It directed its exclusion, referencing previous Tribunal decisions.

4. Conclusion:
With the exclusion of the five comparables, the remaining comparables were Evoke Technologies Private Limited and R S Software (India) Limited. The assessee's margin of 14.87% was more than the arithmetical mean of the working capital adjusted margin of these comparables. Therefore, the international transaction was concluded to be at Arm's Length.

B. Non-receipt of Refund for Assessment Year 2011-2012:

1. Background:
The Assessing Officer (AO) stated that a refund of ?1,08,37,220 had been issued to the assessee. However, the assessee claimed non-receipt of the refund.

2. Tribunal's Directive:
The Tribunal noted that the DRP had directed the AO to verify the assessee's claim but found no verification in the final assessment order. The Tribunal directed the AO to examine the assessee's objection regarding the non-receipt of the refund.

C. Interest under Section 234D of the I.T. Act:

1. Background:
The calculation of interest under Section 234D is consequential to the issue of non-receipt of refund.

2. Tribunal's Conclusion:
Since the issue of non-receipt of refund was remitted to the AO for verification, the ground regarding interest under Section 234D was rendered infructuous and dismissed.

Final Order:
The appeal filed by the assessee was partly allowed. The order was pronounced on 19th October 2020.