2019 (2) TMI 1753 - AT - Income Tax

Tribunal partially allows appeal, condones filing delay, excludes comparables, remands issues, directs working capital adjustment.

The appeal was partly allowed by the Tribunal. The delay in filing the appeal was condoned, certain comparable companies were excluded, and issues were ... TP Adjustment - comparable selection - HELD THAT:- Determination of arm's length price (ALP) in respect of international transaction of rendering software development services by the assessee to its Associated Enterprise (AE) u/s. 92 - determination of ALP of international transaction is concerned, it is not in dispute that TNMM is the most appropriate method of determination of ALP and that the Profit Level Indicator (PLI) chosen for the purpose of comparison was profit margins of the assessee and that of the comparable companies was Operating Profit (OP) to Operating Cost (OC). The OP to OC of assessee was 13.01% , thus companies functionally dissimilar with that of assessee need to be deselected from final list. Exclusion of company by application of RPT filter @ 25% Working capital adjustment - After perusal of the DRP's order, we are of the view that the statement of the DRP in its order that the Tribunals have not examined the issues highlighted in its order is a general sweeping statement bereft of any basis. How to compute the working capital adjustment and the extent of adjustment to be granted to a particular assessee would depend on the facts of each individual case. We, however, observe that the factors mentioned by the DRP in its order could be of relevance only in deciding the quantum of working capital adjustment. We, therefore, set aside the finding of the DRP that the assessee is not to be granted working capital adjustment and in the interest of justice, we direct the TPO to examine, recompute and grant the assessee's working capital adjustment as per law after affording the assessee adequate opportunity of being heard in the matter and to file details / submissions required. Issues Involved:1. Condonation of delay in filing the appeal.2. Determination of arm's length price (ALP) for international transactions.3. Inclusion and exclusion of certain comparable companies for ALP determination.4. Working capital adjustment in ALP computation.Detailed Analysis:1. Condonation of Delay in Filing the Appeal:The assessee initially filed an appeal on 19.06.2017, signed by the Country Controller of Finance & Administrative Operations. Realizing that the Director should sign the appeal, a second appeal was filed on 15.12.2017. The assessee also filed an application for condonation of delay, supported by an affidavit. The Tribunal found that a similar issue had been considered in the assessee's case for AY 2012-13, where the delay was condoned. The Tribunal concluded that the appeal filed on 15.12.2017 was within time and dismissed the appeal in ITA No.1418/Bang/2017 as superfluous and infructuous.2. Determination of Arm's Length Price (ALP):The core issue in the appeal was the determination of ALP for the international transaction of rendering software development services. The Tribunal noted that the Transactional Net Margin Method (TNMM) was the most appropriate method for determining ALP, with the Profit Level Indicator (PLI) being Operating Profit (OP) to Operating Cost (OC). The assessee's OP to OC was 13.01%, compared to an arithmetic mean of 11.83% for 26 comparable companies. The Transfer Pricing Officer (TPO) chose 7 comparable companies and determined an adjusted mean margin of 18.18%, leading to an addition of Rs. 4,94,30,630 to the assessee's income.3. Inclusion and Exclusion of Comparable Companies:The assessee sought the exclusion of three companies: L&T Infotech Ltd., Persistent Systems Ltd., and Tech Mahindra Ltd. The Tribunal referred to previous decisions where Persistent Systems Ltd. and L&T Infotech Ltd. were excluded due to their involvement in software products and solutions without segmental details. For Tech Mahindra Ltd., the Tribunal remanded the issue to the AO/TPO for reconsideration based on the Related Party Transaction (RPT) filter.The assessee also sought the inclusion of Lucid Software Ltd., Maverick Systems Ltd., and Thinksoft Global Services Ltd., which were excluded by the TPO due to the unavailability of data. The Tribunal remanded this issue to the TPO for reconsideration. However, the Tribunal upheld the exclusion of Akshay Software Technologies Ltd., agreeing with the DRP's findings that the company was involved in ERP products and services, not software development.4. Working Capital Adjustment:The TPO allowed a working capital adjustment of 1.85%, which the DRP later disallowed. The Tribunal referred to a similar case (Microsoft Research Cable P. Ltd. v. DCIT) and held that the taxpayer should be granted a working capital adjustment to bring the assessee on par with comparable companies. The Tribunal directed the TPO to recompute and grant the working capital adjustment as per law.Conclusion:The appeal was partly allowed. The Tribunal condoned the delay in filing the appeal, excluded certain comparable companies, remanded some issues to the AO/TPO for reconsideration, and directed the TPO to allow working capital adjustment. All other grounds relating to transfer pricing were dismissed as not pressed.