2019 (6) TMI 1670 - AT - Income Tax

TP Adjustment - comparability analysis - determination of Arm s Length Price (ALP) in respect of an international transaction of rendering Software Development Services (SWD services) by the Assessee to its Associated Enterprise (AE) i.e. its holding company Verisign Inc. US and Versign SARL - comparable selection - HELD THAT - Infosys Ltd. Larsen Toubro Infotech Ltd. and Persistent Systems Ltd. need to be deslected from comparable list when compared to assessee providing SWD services to its AE as relying on AGILIS INFORMATION TECHNOLOGIES INDIA PVT. LTD. (NOW KNOWN AS INFOGIX INTERNATIONAL PVT. LTD.) 2017 (11) TMI 908 - ITAT DELHI Companies as functionally dissimilar with that of assessee as involved in providing SWD services to its AE need to be deselected from final list.

Summary

Issues Involved:
1. Correctness of the determination of Arm’s Length Price (ALP) in respect of an international transaction of rendering Software Development Services (SWD services) by the Assessee to its Associated Enterprise (AE).

Detailed Analysis:

Issue 1: Correctness of the determination of Arm’s Length Price (ALP) in respect of an international transaction of rendering Software Development Services (SWD services) by the Assessee to its Associated Enterprise (AE)

Background:
The Assessee, engaged in providing contract Software Development Services (SWD Services) to its holding company, received Rs.24,79,60,171 from its AE. To justify the price received as at Arm’s Length, the Assessee adopted the Transaction Net Margin Method (TNMM) with Operating Profit/Total Cost (OP/TC) as the profit level indicator (PLI). The Transfer Pricing Officer (TPO) accepted TNMM and the chosen PLI but selected only one out of the 14 comparable companies suggested by the Assessee and added 9 others, resulting in an arithmetic mean of 22.64% (unadjusted) and 23.80% (adjusted) for the comparables.

TPO’s Computation:
The TPO computed the ALP of the SWD services rendered by the Assessee as follows:
- Arm's Length Mean Markup: 22.63%
- Less: Working Capital Adjustment: 2.51%
- Adjusted Margin: 20.12%
- Operating Cost: Rs.22,46,44,069
- Arm's Length Price (120.12% of Operating Cost): Rs.26,98,42,456
- Price Received: Rs.24,79,60,171
- Shortfall (Adjustment u/s. 92CA): Rs.2,18,82,285

CIT(A) Directions:
The CIT(A) directed the exclusion of ICRA Techno Analytics Ltd., Datamatics Global Services Ltd., and Sasken Communications Technologies Ltd. from the list of comparables, agreeing with the Assessee that these were not functionally comparable. However, the CIT(A) rejected the exclusion of Genesys International Corpn. Ltd., Infosys Ltd., Larsen and Toubro Infotech Ltd., Persistent Systems Ltd., and Spry Resources India Pvt. Ltd.

Assessee’s Appeal:
The Assessee appealed against the CIT(A) order, seeking the exclusion of the five aforementioned companies and the inclusion of Celstream Technologies Private Limited.

Tribunal’s Analysis:
1. Exclusion of Infosys Ltd., Larsen & Toubro Infotech Ltd., and Persistent Systems Ltd.:
- The Tribunal referred to the case of Agilis Information Technologies India (P.) Ltd., where these companies were excluded due to their large scale, risk-taking nature, and engagement in development and sale of software. The Tribunal found the functional profile of the Assessee identical to that in Agilis Information Technologies India (P.) Ltd., thus justifying exclusion.

2. Exclusion of Genesys International Corpn. Ltd.:
- The Tribunal noted that Genesys was engaged in GIS-based services, not software development services. The presence of substantial intangible assets further indicated functional dissimilarity. Hence, it directed the exclusion of Genesys from the list of comparables.

3. Exclusion of Spry Resources India Pvt. Ltd.:
- The Tribunal noted that the issue of receivables as a percentage of turnover was not raised before the TPO or CIT(A). Hence, it remanded the issue back to the TPO for fresh consideration.

4. Inclusion of Celstream Technologies Private Limited:
- The Tribunal found it necessary to ascertain the nature of "related services" mentioned in the company's annual report. It remanded the issue to the TPO for fresh consideration to determine if the company was solely providing SWD services.

Conclusion:
The Tribunal directed the TPO to recompute the ALP as per the directions provided, after affording the Assessee an opportunity of being heard. The appeal by the Assessee was treated as partly allowed for statistical purposes.

Pronouncement:
The judgment was pronounced in the open court on June 14, 2019.