2020 (10) TMI 663 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee as engaged in the business of software development and support services to its parent company and exceeding tolerance range of 15% of the RPT need to be deselected from final list.

Summary

Issues Involved:
1. Transfer pricing addition made by the TPO in respect of provision of software services.
2. Selection of comparable companies by the TPO and their exclusion as requested by the assessee.

Issue-wise Detailed Analysis:

1. Transfer Pricing Addition:
The primary issue concerns the transfer pricing addition made by the Transfer Pricing Officer (TPO) regarding the provision of software services by the assessee to its parent company. The assessee, engaged in software development and support services, adopted the Transactional Net Margin Method (TNMM) as the most appropriate method, declaring a net margin of 11.81%. The TPO, however, rejected the assessee's transfer pricing study and selected a different set of comparable companies, resulting in an adjusted margin of 22.61% and a transfer pricing adjustment of ?3,24,80,968. This adjustment was confirmed by the Dispute Resolution Panel (DRP), leading to the appeal by the assessee.

2. Selection and Exclusion of Comparable Companies:
The assessee contested the inclusion of certain comparable companies selected by the TPO. Specifically, the assessee sought the exclusion of six companies: Bodhtree Consulting Ltd., Infosys Ltd., Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., and Tata Elxsi Ltd. The assessee argued that these companies were not functionally comparable to its business of providing captive software development services.

Exclusion of Comparable Companies:
- Bodhtree Consulting Ltd.: Excluded due to its involvement in software product development and end-to-end web solutions, which is not comparable to the assessee's software development services.
- Infosys Ltd.: Excluded as it is a giant company with significant intangibles and assumes all risks, unlike the assessee, which is a captive unit assuming limited risk.
- Larsen & Toubro Infotech Ltd.: Excluded due to related party transactions exceeding 15% of sales.
- Persistent Systems Ltd.: Excluded because it is involved in product designing services and software product development, unlike the assessee.
- Sasken Communication Technologies Ltd.: Excluded due to significant R&D expenditure and ownership of intellectual property, making it functionally dissimilar.
- Tata Elxsi Ltd.: Excluded as it operates in segments like embedded product design services and industrial design, which are not comparable to the assessee's services.

The Tribunal followed previous decisions in similar cases, such as M/s. Schneider Electric IT Business India Pvt. Ltd. and M/s. Infinera India Pvt. Ltd., to justify the exclusion of these companies. The Tribunal directed the exclusion of the contested companies from the list of comparables, thereby allowing the appeal of the assessee.

Conclusion:
The Tribunal concluded that the six contested companies were not functionally comparable to the assessee's business of providing captive software development services to its parent company. Consequently, the Tribunal directed the exclusion of these companies from the list of comparables, resulting in the appeal being treated as allowed. This decision was based on the functional dissimilarity and previous rulings in similar cases, ensuring that the transfer pricing adjustment was made on a fair and comparable basis.