Tribunal revises ALP order for software services, directs fresh determination.

The Tribunal set aside the order on the determination of Arm's Length Price (ALP) for software development and maintenance support services and back office support services, remitting the matter to the Assessing Officer/Transfer Pricing Officer for fresh determination. The Tribunal directed recalculating working capital adjustments and excluding lease line charges from total turnover, providing the assessee with a reasonable opportunity to be heard. The appeal was partly allowed with specific instructions for the reassessment process.

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Issues Involved:
1. Transfer pricing adjustment for software development and maintenance support services.
2. Transfer pricing adjustment for back office support services and finance and accounts (F&A) support services.
3. Working capital adjustment.
4. Inclusion of specific companies in the list of comparables.
5. Exclusion of lease line charges from total turnover for section 10A benefit.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for Software Development and Maintenance Support Services:
The assessee, an Indian company part of Sun Life Group, provided software development and maintenance support services to its associated enterprises (AEs). The Transfer Pricing Officer (TPO) observed that the assessee's Operating Profit to Total Cost (OP/TC) in this segment was 13.23%. The TPO selected 20 comparables with an average OP/TC of 20.96%, resulting in a transfer pricing adjustment of Rs. 2,05,24,879/-. The assessee challenged the inclusion of five companies in the final tally of comparables and the non-allowance of working capital adjustment.

2. Transfer Pricing Adjustment for Back Office Support Services and F&A Support Services:
The TPO merged the segments of back office support services and F&A support services for benchmarking, resulting in an OP/TC of 14.30%. The TPO selected four comparables with an average OP/TC of 22.85%, leading to a transfer pricing adjustment of Rs. 44,12,714/-. The assessee did not object to the merger but challenged the inclusion of two companies in the comparables list and the non-allowance of working capital adjustment.

3. Working Capital Adjustment:
The TPO refused the working capital adjustment due to the consolidated profit and loss account and the segmental reporting done only for the TP study. The Dispute Resolution Panel (DRP) added that daily average working capital deployment was necessary. The Tribunal disagreed, stating that working capital adjustment is crucial to neutralize differences in inventory, trade receivables, and payables. The Tribunal directed the AO/TPO to compute the adjustment based on annual averages of opening and closing figures, allowing the assessee an opportunity for hearing.

4. Inclusion of Specific Companies in the List of Comparables:
- Avani Cimcon Ltd.: Excluded due to being a product-based company with intellectual property rights, unlike the assessee, which provides software development and maintenance services.
- KALS Information Systems Ltd. (Seg.): Excluded because it includes software products in its segment, making it non-comparable with the assessee.
- Infosys Technologies Ltd.: Excluded due to its giantness, risk profile, nature of services, and ownership of branded products, which are incomparable to the assessee's captive service provider model.
- Thirdware Solutions Ltd.: Excluded due to significant revenue from SEZ/STPI units and sale of licenses, making it non-comparable.
- Helios and Matheson Information Technology Ltd.: Included as it passes the employee cost filter and is functionally comparable.

5. Exclusion of Lease Line Charges from Total Turnover for Section 10A Benefit:
The AO reduced lease line charges of Rs. 2,09,67,887/- from export turnover but did not exclude it from total turnover. The Tribunal held that if an item is excluded from export turnover, it should also be excluded from total turnover. This view was supported by precedents in the assessee's own case and judgments from higher courts.

Conclusion:
The Tribunal set aside the impugned order on the determination of ALP under both segments and remitted the matter to the AO/TPO for fresh determination in line with the Tribunal's directions, allowing the assessee a reasonable opportunity of being heard. The appeal was partly allowed, with specific directions for recalculating working capital adjustments and excluding lease line charges from total turnover.

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