2018 (4) TMI 1759 - AT - Income Tax

Tribunal rulings on comparable companies for software and IT services

The Dy. Commissioner of Income-tax, Circle-2 (1) (2), Bengaluru Versus M/s EMC Software and Services (India) Pvt. Ltd.,

The Tribunal allowed the Revenue's appeal to include RS Software (India) Ltd. as a comparable for Software Development Services (SWD Services) but ... TP Adjustment - comparable selection - HELD THAT:- As Company’s software development service revenue for FY 2010-11 was less than 75% of its total operating revenue for that year. Thus, above action of the DRP in rejecting the company is correct. Company comparable with the ITES company as that of assessee need to be selected for final list. Issues Involved:1. Determination of Arm's Length Price (ALP) for Software Development Services (SWD Services).2. Inclusion and exclusion of certain companies as comparables for ALP determination.3. Application of specific filters like onsite software development filter.4. Determination of ALP for Information Technology Enabled Services (ITES).Issue-wise Detailed Analysis:1. Determination of Arm's Length Price (ALP) for Software Development Services (SWD Services):The Assessee, a wholly owned subsidiary of EMC Corporation, USA, engaged in providing contract software development services (SWD Services) and ITES to its Associated Enterprises (AE), contested the ALP determined by the Transfer Pricing Officer (TPO). The TPO suggested an addition of Rs. 20,32,27,064/- to the Assessee's total income. The Assessee's Transfer Pricing Analysis showed an operating income of Rs. 223,06,23,932/- and an operating profit margin of 13.21%, which was higher than the arithmetic mean of 13% of the 16 comparable companies selected by the Assessee. However, the TPO accepted only two of these companies and identified 11 others, arriving at an arithmetic mean profit margin of 24.82% before working capital adjustment and 23.52% after adjustment. The DRP directed the exclusion of several companies and included others, resulting in a final list of comparables that brought the Assessee's NCP mark-up within the +/-5% range, leading to the deletion of the TP adjustment in the final assessment order.2. Inclusion and Exclusion of Certain Companies as Comparables for ALP Determination:The Revenue appealed against the exclusion of RS Software (India) Ltd. and Acropetal Technologies Ltd. The DRP excluded Acropetal Technologies Ltd. due to the lack of segmental information and substantial outsourcing of software development activities. RS Software (India) Ltd. was excluded by the DRP on the basis of predominantly engaging in onsite development, which the Tribunal found unjustified since both the Revenue and the Assessee wanted to retain it as a comparable. The Tribunal upheld the DRP's exclusion of E-Infochips Ltd. due to the absence of segmental information and failure to meet the software service income filter at 75%.3. Application of Specific Filters like Onsite Software Development Filter:The Revenue challenged the DRP's introduction of an onsite software development filter, which led to the exclusion of certain companies. The Tribunal upheld the DRP's application of this filter, noting that onsite revenue filter is an accepted method under Rule 10B(2) of the Income Tax Rules, 1961. The Tribunal found no merit in the Revenue's grounds challenging this filter, as the companies in question were excluded for other reasons as well.4. Determination of ALP for Information Technology Enabled Services (ITES):In the ITES segment, the TPO's final list included 10 companies, leading to an addition of Rs. 3,66,42,275/-. The DRP's directions reduced this list to four comparables. The Revenue's appeal contested the exclusion of Acropetal Technologies Ltd., while the Assessee's cross-objection sought the exclusion of Accentia Technologies Ltd. The Tribunal upheld the DRP's exclusion of Acropetal Technologies Ltd. due to diverse activities and unallocated expenses. Accentia Technologies Ltd. was excluded based on its engagement in high-end services and lack of segmental results, following the Tribunal's decision in a similar case for AY 2010-11.Conclusion:The Tribunal allowed the Revenue's appeal to the extent of including RS Software (India) Ltd. as a comparable but dismissed all other grounds. The Assessee's cross-objection was dismissed as infructuous for the SWD Services segment. In the ITES segment, the Tribunal upheld the DRP's exclusion of Acropetal Technologies Ltd. and allowed the Assessee's objection to exclude Accentia Technologies Ltd., directing the AO to recompute the ALP accordingly.