2023 (1) TMI 1201 - AT - Income Tax

TP Adjustment - comparable selection - Functional dissimilarity - HELD THAT - Assessee does Software development as per the basic design provided by its AEs. It is also mentioned in the TPSR that assessee also undertakes the design and other services in the entire Software development life cycle. Assessee also undertakes software coding, thus companies functionally dissimilar will be excluded.

Summary

Issues Involved:
1. Inappropriate transfer pricing adjustment.
2. Inappropriate rejection of transfer pricing documentation.
3. Inappropriate rejection of comparable companies.
4. Inappropriately considering additional companies as comparable.
5. Inappropriate modification of export earning filter.
6. Inappropriate rejection of turnover filter.
7. Inappropriately applying employee cost filter.
8. Inappropriately applying foreign exchange spending filter.
9. Inappropriately rejecting adjustment for differences in risk profile.
10. Deduction in respect of education cess.
11. Inappropriate levy of interest and initiation of penalty proceedings.

Detailed Analysis:

Transfer Pricing Adjustment:
- The Assessee challenged the transfer pricing adjustment of INR 8,25,09,762, arguing that their international transactions were at arm's length.
- The Tribunal noted that the Transfer Pricing Officer (TPO) accepted the Transaction Net Margin Method (TNMM) but conducted a fresh search for comparables, leading to an adjustment of INR 8,69,53,667.
- The Tribunal concluded that the only issue for consideration was the transfer pricing adjustment.

Rejection of Transfer Pricing Documentation:
- The Assessee argued that the TPO inappropriately rejected their transfer pricing documentation.
- The Tribunal did not find this issue pressing as it was not argued further by the Assessee.

Rejection of Comparable Companies:
- The Assessee contested the rejection of Maveric Systems Limited as a comparable, arguing that software testing is part of the software development lifecycle.
- The Tribunal held that Maveric Systems Limited, which provides software testing services, is not functionally comparable to the Assessee, who provides comprehensive software development services.
- Akshay Software Technologies Ltd was excluded as it primarily provides staffing services, which are not comparable to software development services.
- Exilant Technologies Private Limited's comparability was remanded to the Dispute Resolution Panel (DRP) for a detailed examination of its FAR analysis.

Inclusion of Additional Comparables:
- Aspire Systems India Pvt Ltd was excluded due to an amalgamation event affecting its financials, making it incomparable.
- Pure Software Private Limited was excluded as it provides a digital wallet platform, which is not comparable to the Assessee's services.
- Infobeans Technologies Ltd was excluded as its services in custom application development, content management, and big data analytics are not comparable to the Assessee's software development services.
- E-Infochips Ltd was excluded due to an extraordinary event (merger) affecting its comparability.
- Dun & Bradstreet Technologies & Data Services Pvt Ltd was excluded as it provides predictive analytics services, which are functionally different from the Assessee's services.

Other Grounds:
- The Assessee did not press for several grounds, including modification of export earning filter, rejection of turnover filter, application of employee cost filter, application of foreign exchange spending filter, and rejection of risk adjustment.
- The Tribunal dismissed these grounds as not pressed.

Conclusion:
- The Tribunal partly allowed the Assessee's appeal, excluding certain comparables and remanding one issue for further examination.
- The Tribunal pronounced the order on 1st November 2022.