2018 (12) TMI 1070 - AT - Income Tax

TPA - difference in the arm s length price of the international transaction of provision of software development services - comparable selection - Held that - Assessee is engaged in the business of providing end-to-end business solutions in location Intelligence, which combines technology, data and services with domain expertise to enable an organization to measure, compare, visualize its business data thus companies functionally dissimilar with that of assessee need to be deselected from final list. After exclusion of four comparables Birla Soft India Ltd, Wipro Ltd, Larsen & Toubro Infotech Ltd and Tata Technologies Ltd the margin of the assessee comes within the range of /- 5%. Since the operating profit margin of the assessee is within the plus minus 5% of the operating profit margin of the comparables, we do not find any reason why receivables should be considered separately for determining ALP. Interest has already been considered. Accordingly we hold that no interest can be imputed separately and additionally. We direct the Assessing Officer/TPO to delete the addition - decided in favour of assessee.

Summary

Issues:
1. Addition of ?6.87 crores to the income of the assessee for software development services.
2. Exclusion of specific comparables in Transfer Pricing study.
3. Imputation of notional interest on outstanding receivables from the AE.

Analysis:
1. The appeal pertained to the addition of ?6.87 crores to the assessee's income due to a difference in arm's length price for software development services. The assessee used TNMM with OP/OC as PLI and selected 7 comparables with an average margin of 8.36%. The TPO rejected 4 comparables, leading to adjustments. The Tribunal found the exclusion of these comparables unjustified, bringing the margin within an acceptable range, resulting in the deletion of the addition.

2. The TPO's exclusion of certain comparables like Birla Soft India Ltd, Wipro Ltd, Larsen & Toubro Infotech Ltd, and Tata Technologies Ltd was challenged. Each company was analyzed individually. Birla Soft India Ltd was excluded due to high related party transactions. Wipro Ltd was excluded based on significant intangibles and brand presence, following a High Court and Supreme Court decision. Larsen & Toubro Infotech Ltd was excluded due to unallocable expenses in its segmental reporting. Tata Technologies Ltd was excluded for having related party transactions exceeding 25%.

3. The second issue involved the imputation of notional interest on outstanding receivables. After excluding the aforementioned comparables, the margin was within an acceptable range. The Tribunal ruled that since the margin aligned with comparables, no separate imputation of interest was warranted, directing the deletion of the addition of ?81,649. Consequently, the appeal was allowed, and the addition was deleted.

This detailed analysis of the judgment highlights the key issues and the Tribunal's reasoning behind each decision, providing a comprehensive overview of the legal aspects involved in the case.