Assessee's Appeal Partly Allowed: Redetermination of Arm's Length Price and Ad-Hoc Disallowance for Fresh Consideration

The appeal of the assessee is partly allowed. The Assessing Officer/Transfer Pricing Officer is directed to redetermine the arm's length price of the transactions as per the directions given, and the matter of ad-hoc disallowance of expenditure is restored for fresh consideration.

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Issues Involved:
1. Transfer Pricing - Adjustment on Software Development Services Segment
2. Transfer Pricing - Adjustment on Global Call Center Services Segment
3. Transfer Pricing - General
4. Corporate Tax - Ad-hoc Disallowance of Expenditure

Detailed Analysis:

1. Transfer Pricing - Adjustment on Software Development Services Segment:
The primary issue pertains to an adjustment of Rs. 1,03,43,472/- made to the international transaction of software development services provided by the assessee to its Associated Enterprises (AEs). The assessee, a 100% subsidiary of Veraz Networks Ltd., USA, used the Transactional Net Margin Method (TNMM) with Operating Profit to Total Cost (OP/TC) as the profit level indicator (PLI). The Transfer Pricing Officer (TPO) did not dispute the method or PLI but disagreed on the selection of comparables, resulting in an average margin of 23.23%.

Exclusion of Certain Comparables:
- Persistent Systems & Solutions Ltd.: Excluded due to differences in functions, assets, and risks, including involvement in software product development and research activities.
- Sonata Software Ltd.: Excluded due to related party transactions (RPTs) exceeding 25% of total revenue.
- Igate Global Solutions Ltd.: Excluded as it operates in IT enabled services (ITES), not purely in software development.
- Bodhtree Consulting Ltd.: Excluded due to abnormal high margins not reflecting normal business conditions.
- Genesys International Corporation Ltd.: Excluded as it provides geospatial services and ITES, not comparable to software development services.
- FCS Software Solutions Ltd.: Excluded due to diverse activities and lack of segmental financial information.

Inclusion of Certain Comparables:
- Sagarsoft (India) Ltd.: Matter restored to the Assessing Officer/TPO for verification of export turnover filter compliance.
- CG-Vak Software & Exports Ltd.: Included following the precedent set by the Bangalore Bench of the Tribunal.
- Computech International Ltd.: Matter restored to the Assessing Officer/TPO for verification of employee cost filter compliance.
- Goldstone Technologies Ltd.: Matter restored to the Assessing Officer/TPO for reconsideration as it engages in software development services.

2. Transfer Pricing - Adjustment on Global Call Center Services Segment:
The issue involves an adjustment of Rs. 22,37,025/- to the international transaction of Global Call Center Services. The TPO selected comparables resulting in an average margin of 23.63%.

Exclusion of Certain Comparables:
- Informed Technologies Ltd.: Excluded as it operates as an IT-enabled, knowledge-based back-office processing center, not comparable to call center services.
- Rev IT Systems Ltd.: Excluded due to RPTs exceeding 25% of total revenues.

Inclusion of Certain Comparables:
- Allsec Technologies Ltd.: Included as it was previously considered a good comparable and not a persistently loss-making concern.

3. Transfer Pricing - General:
The assessee raised issues regarding the use of multiple-year financial data, non-allowance of working capital adjustment for comparable companies, and the application of a plus-minus 5% variation while computing the arm's length price under section 92C. These issues were not specifically detailed in the judgment.

4. Corporate Tax - Ad-hoc Disallowance of Expenditure:
The issue pertains to an addition of Rs. 38,97,332/- made by the Assessing Officer out of expenditure in the PSE (Non-domestic Division). The disallowance was made on an ad-hoc basis without specific identification of expenses related to non-PSE divisions. The matter has been restored to the Assessing Officer for reconsideration, with directions to provide the assessee a reasonable opportunity to support its stand.

Conclusion:
The appeal of the assessee is partly allowed. The Assessing Officer/Transfer Pricing Officer is directed to redetermine the arm's length price of the transactions as per the directions given, and the matter of ad-hoc disallowance of expenditure is restored for fresh consideration.

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