2020 (12) TMI 460 - AT - Income Tax

TP Adjustment - international transaction of Rendering of software development and support services' - Comparable selection - HELD THAT - Cybermate Infotek Limited - this company has its own intangible assets worth ₹ 4.95 crore at the end of the year. Segmental reporting of this company given at page 41 of the Report records that the entire operations of the company relate only to one segment i.e. Computer Segment . This deciphers that albeit the company is engaged in rendering software development services as well but it has a mixed bag of financial statements comprising results not only of software development services but also software products dealt with by it. There is no information available on record to demonstrate the revenue from software development services and corresponding operating costs, which part of its activity is analogous to the operations carried out by the assessee-company. In the absence of such a vital information, Cybermate Infotek Limited cannot be considered, on an entity level, as comparable to the assessee company. We, therefore, direct to exclude Cybermate Infotek Limited from the list of comparables. Acropetal Technologies Limited (Segmental) - There is no choice with the AO to follow or not to follow the direction rendered by the DRP u/s 144C(5). Such a direction is binding in nature upon the AO, who is supposed to follow the same in letter and spirit. Since in the instant case, the DRP categorically directed to include the amount of operating profit of Acropetal Technologies Limited at ₹ 11.83 crore, in our considered opinion, the AO/TPO went on a wrong premise in tinkering with such a figure and substituting it with a different figure. In view of the fact that the AO was bound by the directions of the DRP, we vacate the impugned order to this extent in substituting the amount of operating profit of Acropetal Technologies Limited at ₹ 22.26 crores, which is hereby ordered to be adopted as ₹ 11.83 crore as was directed by the DRP. Comp-u-Learn Tech India Limited (CTIL) - We find that the DRP was conscious of the purview of its power u/s 144C(8). That is why it directed 'satisfaction of other filters applied by him'. Such direction refers to past tense qua the application of filters and did not empower the AO/TPO to resort to new filters, a course of action which would not have satisfied the command of sub-section (8). We, ergo, hold that the direction of the DRP is clear that CTIL Ltd. was functionally comparable but its inclusion was left to be decided on the basis of the filters already applied by the TPO. Since the filter of Employee cost to sales was not applied by the TPO at the time of passing his order u/s 92CA(3) of the Act, we hold that the AO/TPO were not justified in applying it and ex consequenti jeopardising the direction of the DRP that found CTIL Ltd. to be functionally comparable. This company is ergo directed to be included in the list of comparables. We therefore, set aside the order and remit the matter to the file of the AO for a fresh determination of arm's length price of the international transaction of Rendering of software development and support services' in the light of our observations on the three companies discussed above.

Summary

Issues Involved:
1. Inclusion of Cybermate Infotek Ltd. as a comparable.
2. Correct computation of Profit Level Indicator (PLI) for Acropetal Technologies Ltd.
3. Inclusion of Comp-u-Learn Tech India Limited (CTIL) as a comparable.

Detailed Analysis:

1. Inclusion of Cybermate Infotek Ltd. as a Comparable:
The assessee objected to the inclusion of Cybermate Infotek Ltd. by the Transfer Pricing Officer (TPO) on the grounds that it developed its own 38 software products. The TPO and the Dispute Resolution Panel (DRP) did not find merit in this objection and included the company in the list of comparables. However, the Tribunal analyzed the nature of services rendered by the assessee, which involved software development and support services exclusively for its parent company without any developed software products for commercial exploitation. The Tribunal examined the balance sheet and other financial details of the assessee, confirming that it did not hold any intangible assets or capital work-in-progress, indicating it was not a software product company. Conversely, Cybermate Infotek Ltd. was found to be engaged in both software development services and product development with significant inventories, capital work-in-progress, and intangible assets. Due to the mixed nature of Cybermate Infotek Ltd.'s operations and the absence of segmental information, the Tribunal directed its exclusion from the list of comparables.

2. Correct Computation of Profit Level Indicator (PLI) for Acropetal Technologies Ltd.:
The dispute regarding Acropetal Technologies Ltd. was not about its inclusion but the correct computation of its PLI. The assessee computed the PLI on a segment basis at 4.66%, while the TPO initially computed it at 29.62%. The DRP identified mistakes in the TPO's computation and directed the adoption of segmental operating profit at ?11.83 crore. However, the Assessing Officer (AO), while giving effect to the DRP's directions, incorrectly computed the operating profit at ?22.26 crore, resulting in a PLI of 20.44%. The Tribunal emphasized that Section 144C(13) mandates the AO to complete the assessment in conformity with the DRP's directions without deviation. Hence, the Tribunal vacated the AO's order to the extent of the incorrect computation and directed the adoption of the operating profit as ?11.83 crore as per the DRP's directions.

3. Inclusion of Comp-u-Learn Tech India Limited (CTIL) as a Comparable:
The TPO excluded CTIL, citing its involvement in the BPO sector and lack of segmental analysis. The DRP, however, found CTIL to be functionally comparable on a standalone basis and directed its inclusion subject to other filters applied by the TPO. The AO, in the final assessment order, excluded CTIL again, applying the Employees cost to sales filter, which was not originally applied by the TPO. The Tribunal clarified that the DRP's direction to apply "other filters" referred only to those initially considered by the TPO, and no new filters could be introduced at the stage of giving effect to the DRP's directions. The Tribunal found the AO's exclusion of CTIL based on a new filter to be impermissible and directed its inclusion in the list of comparables.

Conclusion:
The Tribunal set aside the order and remitted the matter to the AO for a fresh determination of the arm's length price of the international transaction of rendering software development and support services, considering the Tribunal's observations on the three companies discussed. The assessee is to be provided an opportunity of being heard. The appeal was allowed for statistical purposes.