2020 (2) TMI 1279 - AT - Income Tax

TP Adjustment - Arm s Length Price (ALP) test as provided u/s.92 - upward revision and adjustment made to the price at which international transaction was carried out by the Assessee with its AE in respect of Software development Services(SWD services) - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected engaged in providing software development services (SWD services) to its Associated Enterprises (AE) from final list. Companies having turnover more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores

Summary

Issues Involved:
1. Transfer Pricing Adjustment related to Software Development Services.
2. Inclusion and Exclusion of Comparable Companies.
3. Application of Turnover Filter for Comparable Companies.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment related to Software Development Services:
The Assessee is engaged in providing software development services to its Associated Enterprises (AE). The transaction was an international one and had to pass the Arm's Length Price (ALP) test under Section 92 of the Income Tax Act, 1961. The dispute concerns the addition made due to the determination of ALP and the subsequent upward revision and adjustment made to the price at which the international transaction was carried out. The Most Appropriate Method chosen was the Transaction Net Margin Method (TNMM) with the Profit Level Indicator (PLI) being Operating Profit to Operating Cost (OP/OC).

2. Inclusion and Exclusion of Comparable Companies:
The Transfer Pricing Officer (TPO) rejected the Assessee's Transfer Pricing Study and selected 13 comparable companies, arriving at an arithmetic mean profit margin of 24.82% before working capital adjustment. The Dispute Resolution Panel (DRP) excluded some companies chosen by the TPO and included foreign exchange gain as part of the operating profit. Both the Assessee and the Revenue appealed against the exclusion of Evoke Technologies Pvt. Ltd. The DRP excluded this company due to its abnormally low margin and increased consultancy charges. However, the Tribunal found the exclusion unsound, noting that both parties agreed on its inclusion and that the DRP did not adequately justify the exclusion. The Tribunal directed the inclusion of Evoke Technologies Pvt. Ltd. in the list of comparable companies.

3. Application of Turnover Filter for Comparable Companies:
The Assessee sought the exclusion of Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., and Sasken Communication Technologies Ltd. due to their high turnover compared to the Assessee's turnover. The Tribunal acknowledged that turnover is a relevant criterion for comparability, following the precedent set by the Bombay High Court in the case of Pentair Water India Pvt. Ltd. The Tribunal concluded that companies with significantly higher turnover cannot be considered comparable to the Assessee. Consequently, the Tribunal directed the exclusion of these three companies from the list of comparables.

Conclusion:
The Tribunal dismissed the Revenue's appeal due to the tax effect being less than ?50 lakhs as per CBDT Circular No.17 of 2019. The Assessee's appeal was partly allowed, with directions to include Evoke Technologies Pvt. Ltd. and exclude Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., and Sasken Communication Technologies Ltd. from the list of comparable companies. The Assessing Officer/Transfer Pricing Officer was directed to compute the ALP in light of these directions after affording an opportunity of hearing to the Assessee. The order was pronounced in the open court on 26th February 2020.