Tribunal Excludes Companies with Onsite Revenue, Emphasizes Functional Comparability

The Tribunal upheld the application of the onsite revenue filter and excluded companies with significant onsite revenues from the comparables. It excluded certain companies due to lack of segmental details, high onsite revenue, diversified activities, and functional incomparability. The Tribunal remanded some issues for fresh consideration based on functional comparability and abnormal profit margins. The Tribunal partly allowed the appeals by both the Assessee and Revenue, emphasizing detailed examination of functional comparability, filter application, and remanding for fresh consideration.

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Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services.
2. Determination of ALP for Marketing Support Services.

Detailed Analysis:

1. Determination of ALP for Software Development Services:

Facts and Initial Determination:
The Assessee, a subsidiary of Autodesk Inc., USA, provided software development and marketing support services to its Associated Enterprises (AEs). The Assessee used the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining the ALP. The Assessee’s profit margin was 9.74%, which was within the range of comparable companies.

TPO and AO’s Adjustments:
The Transfer Pricing Officer (TPO) selected 13 comparable companies and computed an average profit margin of 24.82%. The TPO suggested an addition of Rs. 1,10,42,685/- to the total income, which was added by the Assessing Officer (AO).

DRP's Directions:
The Dispute Resolution Panel (DRP) excluded 10 companies chosen by the TPO and retained only 3. The Assessee was aggrieved by the exclusion of CG Vak Software & Exports Ltd. and LGS Global Ltd., and the inclusion of Persistent Systems & Solutions Ltd., Persistent Systems Ltd., and Sasken Communication Technologies Ltd.

Tribunal's Decision:
- Onsite Revenue Filter: The Tribunal upheld the application of the onsite revenue filter, noting that companies with significant onsite revenues are not comparable.
- Acropetal Technologies Ltd. and L&T Infotech Ltd.: These were excluded due to lack of segmental details and high onsite revenue.
- R S Software (I) P. Ltd.: The Tribunal included this company as it was initially accepted by the Assessee.
- Evoke Technologies P. Ltd.: The Tribunal restored this issue for fresh consideration due to functional comparability and abnormal low profit margins.
- E-Infochip Ltd.: Excluded due to lack of segmental information and failing the software services income filter.
- ICRA Techno Analytics Ltd.: Excluded due to diversified activities and lack of segmental information.
- E-Zest Solutions Ltd.: Excluded for being functionally incomparable.
- Infosys Technologies Ltd.: Excluded due to its giant status, brand value, and huge turnover.
- Tata Elxsi Ltd.: Excluded due to diversified activities.
- CG Vak Software & Export Ltd. and LGS Global Ltd.: Remanded to TPO for fresh consideration regarding employee cost.
- Persistent Systems & Solutions Ltd. and Persistent Systems Ltd.: Excluded due to diverse functions and lack of segmental details.
- Sasken Communication Technologies Ltd.: Remanded for fresh consideration.

2. Determination of ALP for Marketing Support Services:

Facts and Initial Determination:
The TPO selected 3 comparable companies and computed an average mean margin of 18.25%, suggesting an addition of Rs. 3,48,00,637/-.

DRP's Directions:
The DRP excluded ICC International Agencies Ltd. due to insufficient information regarding the nature of services.

Tribunal's Decision:
- ICC International Agencies Ltd.: The Tribunal upheld the exclusion as the company was engaged in indenting activity, which is dissimilar to the Assessee’s marketing support services.

Conclusion:
The Tribunal’s decisions involved detailed examination of the functional comparability of various companies, application of filters, and remanding certain issues for fresh consideration. The appeals by both the Assessee and Revenue were partly allowed.

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