2020 (2) TMI 79 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee engaged in the business of rendering software development services hereinafter referred to as the SWD services and Information Technology enabled Services ITES . need to be deselected from final list. Working capital adjustment - Neither the TPO nor the DRP have gone into the quantum of adjustment that is to be given towards working of working capital adjustment, we are of the view that it would be just and appropriate to remand the issue of granting of working capital adjustment to the TPO/AO for fresh consideration in accordance with law after due opportunity of being afforded to the Assessee. We hold and direct accordingly.

Summary

Issues Involved:

1. Determination of Arm's Length Price (ALP) for Software Development (SWD) services.
2. Exclusion and inclusion of certain comparable companies for SWD services.
3. Grant of working capital adjustment for SWD services.
4. Determination of ALP for Information Technology enabled Services (ITeS).
5. Exclusion and inclusion of certain comparable companies for ITeS.
6. Grant of working capital adjustment for ITeS.

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for SWD services:

The assessee, engaged in rendering SWD services and ITeS to its Non-Resident Associated Enterprise (AE), adopted the Transaction Net Margin Method (TNMM) with Operating Profit to Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The assessee's OP/OC was 13.75%, higher than the average arithmetic profit margin of 10.82% from 22 comparable companies. However, the Transfer Pricing Officer (TPO) chose 8 comparable companies with an average arithmetic mean profit margin of 30.68%, resulting in a proposed Transfer Pricing adjustment of ?40,55,15,722 under section 92CA.

2. Exclusion and inclusion of certain comparable companies for SWD services:

The Dispute Resolution Panel (DRP) excluded two companies, Cignity Technologies Ltd. and SQS India BFSI Ltd., from the list of comparables. The assessee sought further exclusion of Infosys Ltd., Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., and Thirdware Solutions Ltd. Based on precedents, the Tribunal directed the exclusion of Infosys Ltd., Persistent Systems Ltd., and Thirdware Solutions Ltd. due to functional dissimilarities and segmental detail issues. The Tribunal also excluded Larsen & Toubro Infotech Ltd. due to extraordinary events, brand intangibles, and lack of segmental information.

3. Grant of working capital adjustment for SWD services:

The DRP refused working capital adjustment, citing the inability to demonstrate material differences and the complexity of accurately adjusting for various factors. However, the Tribunal referenced the ITAT Bangalore decision in Huawei Technologies India Pvt. Ltd., which emphasized the necessity of working capital adjustments as per Rule 10B(1)(e)(iii) and OECD guidelines. The Tribunal remanded the issue to the TPO for fresh consideration, directing the allowance of working capital adjustment after due opportunity to the assessee.

4. Determination of ALP for ITeS:

For the ITeS segment, the assessee's OP/OC was 12.57%, compared to an average arithmetic mean profit margin of 13.67% from 11 comparable companies. The TPO chose 5 comparable companies, resulting in a proposed Transfer Pricing adjustment of ?5,95,10,509. The DRP excluded BMR Udyog Ltd., but the assessee sought further exclusion of Infosys BPO Ltd., Microland Ltd., and Cross Domain Solutions Pvt. Ltd.

5. Exclusion and inclusion of certain comparable companies for ITeS:

The Tribunal, referencing the Hyderabad Bench decision in Infor (I) Pvt. Ltd., directed the exclusion of Infosys BPO Ltd. due to its large scale, brand value, and substantial intangible assets. Microland Ltd. was excluded due to its R&D activities and abnormal growth. Cross Domain Solutions Pvt. Ltd. was excluded for rendering KPO services. The Tribunal remanded the inclusion of Ace BPO Services Ltd., Informed Technologies India Ltd., and Jindal Intellicom Pvt. Ltd. to the TPO for fresh consideration, directing the use of powers under section 133(6) to obtain required details.

6. Grant of working capital adjustment for ITeS:

The Tribunal directed the TPO to allow working capital adjustment for the ITeS segment, consistent with the decision in the SWD services segment. The Tribunal set aside the CIT(A)'s order and directed the AO to allow the adjustment after affording the assessee an opportunity to be heard.

Conclusion:

The Tribunal partly allowed the assessee's appeal, directing the TPO/AO to compute the ALP for both SWD services and ITeS segments as per the given directions, after affording the assessee an opportunity to be heard.