2021 (1) TMI 358 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - The assessee is engaged in the business of developing software titled as computer radiated designing and development of commercial vehicle systems . The assessee is developing specific software for its Associated Enterprises, i.e., it is captive software developer. Acropetal Technologies Ltd - As revenue from Information Technology transactions services is less than 75% and consequently this company does not satisfy the filter of information technology revenue applied by the TPO itself. E-infochips Ltd - There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that from the common pool of income from both the streams of software products and software services, one cannot deduce the revenue from software services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from software development services, we order to exclude this company from the list of comparables. Persistent Systems and Solutions Ltd - As per Schedule 11, the entire revenue has been shown under one segment i.e., sale of software services and products. Therefore, no separate segment has been given in respect of software services. Accordingly, the 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. In view of the above facts and circumstances, we do not find any error or illegality in the directions of the DRP in excluding this company from the list of comparables. Include M/s. CG VAK Software and Export Ltd. as a comparable company ALP of the transactions relating to Software segment requires to be re-determined. Accordingly, we restore this issue to the file of AO/TPO with the direction to re-compute the ALP of Software development Services segment.

Summary

Issues Involved: Transfer Pricing Adjustment, Exclusion of Comparable Companies, Inclusion of Comparable Companies.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee, a subsidiary of M/s. Meritor Inc., USA, engaged in developing specific software for its Associated Enterprises (AEs), challenged the assessment order dated 23.12.2015. The adjustment made by the Transfer Pricing Officer (TPO)/Assessing Officer (AO) related to the Software development services segment for the assessment year 2011-12. The assessee followed the Transactional Net Margin Method (TNM) with a profit level indicator (PLI) of Operating profit/Operating cost, declaring a margin of 11.21%. The TPO rejected the assessee's transfer pricing study and selected 13 comparable companies, resulting in an average margin of 24.82%, and after adjustments, proposed an addition of ?2,14,99,676/-.

2. Exclusion of Comparable Companies:
The assessee sought the exclusion of three comparable companies: Acropetal Technologies Ltd., E-Infochips Ltd., and Persistent Systems & Solutions Ltd., from the list confirmed by the Dispute Resolution Panel (DRP).

(A) Acropetal Technologies Ltd.:
The Tribunal excluded this company, referencing the case of M/s. Applied Materials India P. Ltd., where it was noted that Acropetal Technologies Ltd. did not satisfy the employee cost filter of 25% and the software development services revenue filter of 75%, as its income from software development was ?81.40 Crores out of a total revenue of ?141 Crores.

(B) E-Infochips Ltd.:
The Tribunal cited the case of Saxo India P. Ltd., where E-Infochips Ltd. was excluded due to its engagement in software development, IT-enabled services, and products, with 15% of its revenue from products. The absence of segmental information made it unsuitable as a comparable for the assessee, which was solely engaged in software development services.

(C) Persistent Systems & Solutions Ltd.:
Referencing the case of DCIT vs. Electronics for Imaging India P. Ltd., the Tribunal noted that Persistent Systems & Solutions Ltd. earned revenue from both software services and products without segmental details, making it incomparable to the assessee's software development services segment.

3. Inclusion of Comparable Companies:
The assessee sought the inclusion of M/s. CG Vak Software & Exports Ltd., which was previously held to be a good comparable in the case of Aspect Technology Centre India P. Ltd. The Tribunal directed the inclusion of this company, noting that it engaged in routine software development services and passed the employee cost filter.

Conclusion:
The Tribunal directed the AO/TPO to re-compute the Arm's Length Price (ALP) of the Software development Services segment, considering the exclusion of Acropetal Technologies Ltd., E-Infochips Ltd., and Persistent Systems & Solutions Ltd., and the inclusion of M/s. CG Vak Software & Exports Ltd. The appeal was treated as partly allowed for statistical purposes, with the order pronounced on 5th Jan, 2021.