2019 (5) TMI 1194 - AT - Income Tax

TP Adjustment - international transaction of provision of software development services - comparable selection - functional similarity - HELD THAT - Cybermate Infotek Ltd . being engaged in both sale of software products and also providing software development services and in the absence of any segmental details of two divisions being available, the margins of said concern cannot be applied in order to benchmark arm's length price of international transactions undertaken by the assessee, which was solely engaged in providing software development services. Cybercom Datamatics Information Solutions Ltd. also cannot be included in final list of comparables while benchmarking international transactions of assessee of providing software development services to its associated enterprises. Infobeans Systems Pvt. Ltd. is also not to be included in the final list of comparables as the financials of said concern clearly reflect that in addition to providing software development services to its associated enterprises, it had also earned foreign exchange from export of goods on FOB basis. The event of export of goods was also mentioned in notes and also in the Profit and Loss Account, where revenue from sale of software was declared. The segmental details of two activities carried on by the said concern were not available and in the absence of the same, the concern could not be equated as functionally comparable to a concern which was providing software development services to its associated enterprises Thirdware Solutions Ltd not functionally comparable to the assessee E -Zest Solutions Ltd. cannot be held to be functionally comparable to the assessee as it was engaged in provision of KPO services. Accordingly, we hold that concerns Cybercom Datamatics Information Solutions Ltd., Cybermate Infotek Ltd., Thirdware Solutions Ltd., Infobeans Systems Pvt. Ltd. and E-Zest Solutions Ltd. are to be excluded from final list of comparables while benchmarking international transactions undertaken by assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Assessment of total income.
2. Transfer pricing adjustment under Chapter X of the Income-tax Act in respect of international transactions for software development services.
3. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Issue-wise Detailed Analysis:

1. Assessment of Total Income:
The assessee contested the assessment of total income at ?810,769,315 against the declared income of ?602,526,660. This discrepancy arose from the adjustments made by the Transfer Pricing Officer (TPO) and the Assessing Officer (AO).

2. Transfer Pricing Adjustment:
The primary issue revolved around the transfer pricing adjustments made concerning the international transaction of software development services provided by the assessee to its associated enterprise (AE), SunGard International INC, amounting to ?39.10 crores. The assessee applied the Transactional Net Margin Method (TNMM) and determined the Profit Level Indicator (PLI) on Operating Profit/Operating Cost at 17.80%. The assessee selected certain comparable companies, and since the mean margins of these comparables were within +/- 5% of the assessee's margins, the arm's length price was considered nil.

However, the TPO revised the filters and selected a different set of comparables, leading to an upward adjustment of ?37.31 crores. The AO issued a draft assessment order, and after the Dispute Resolution Panel (DRP) directions, an upward adjustment of ?20.82 crores was made in the final assessment order.

The assessee challenged the inclusion of certain companies as comparables:
- Cybermate Infotek Ltd.: The Tribunal held that Cybermate Infotek Ltd. was engaged in both software development services and product development without segmental details, making it non-comparable.
- Cybercom Datamatics Information Solutions Ltd.: This company was also a product company and provided software development services without segmental details, thus non-comparable.
- Infobeans Systems Pvt. Ltd.: It earned foreign exchange from export of goods on FOB basis and had undergone an extraordinary event of demerger, making it non-comparable.
- Thirdware Solutions Ltd.: It derived revenue from the sale of licenses, software services export from SEZ units, and subscriptions, and owned intangibles without segmental details, thus non-comparable.
- E-Zest Solutions Ltd.: This company provided Knowledge Process Outsourcing (KPO) services, and following the Tribunal's and Delhi High Court's reasoning, it was held non-comparable to the assessee's software development services.

The Tribunal excluded these companies from the final list of comparables, leading to the allowance of the assessee's appeal on this ground. Consequently, other grounds of appeal became academic and were dismissed.

3. Initiation of Penalty Proceedings:
The initiation of penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income was also contested. However, since the primary issue of transfer pricing adjustment was resolved in favor of the assessee, this ground was not addressed in detail.

Conclusion:
The Tribunal allowed the appeal of the assessee, excluding the contested comparables from the final list and resolving the transfer pricing adjustment issue in favor of the assessee. The other grounds of appeal were dismissed as academic. The order was pronounced on May 17, 2019.