Tax Tribunal partially allows appeal, excludes companies from comparison, grants adjustments, limits transfer pricing, dismisses other grounds.

The appeal was partly allowed by the Tribunal. It directed the exclusion of four specified companies from the comparable list, restored the inclusion of three companies for re-examination, granted the working capital adjustment, and restricted the transfer pricing adjustment to the value of international transactions. Other grounds raised by the assessee were dismissed as not pressed.

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Issues Involved:
1. Transfer Pricing Adjustment for software development segment and I.T. enabled services.
2. Exclusion of four comparable companies.
3. Inclusion of three comparable companies.
4. Grant of working capital adjustment.
5. Restriction of transfer pricing adjustment to the value of international transactions only.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The appeal is directed against the final assessment order dated 10.10.2019 for the assessment year 2015-16, following directions from the Dispute Resolution Panel (DRP). The primary issue concerns Transfer Pricing Adjustment in the software development segment and I.T. enabled services. The revised order u/s. 92CA of the I.T. Act accepted the international transactions for I.T. enabled services to be at Arm's Length. The focus of the appeal is on the exclusion and inclusion of certain comparable companies in the software development segment.

2. Exclusion of Four Comparable Companies:
The assessee sought the exclusion of four comparable companies: Larsen & Toubro Infotech Limited, Infobeans Technologies Limited, Persistent Systems Limited, and Infosys Limited. The Tribunal referenced previous decisions, including the case of Yahoo Software Development India Pvt. Ltd., to support the exclusion of these companies based on various grounds such as high Related Party Transactions (RPT), functional dissimilarities, and significant onsite activities.

- Persistent Systems Ltd.: Excluded due to RPT exceeding 25% of sales, significant onsite revenue, and the presence of product and service segments without clear segmentation.
- Larsen & Toubro Infotech Ltd.: Excluded due to involvement in trading software, lack of segmental break-up, and substantial onsite revenue activities.
- Infosys Ltd.: Excluded due to functional dissimilarities, diversified business activities, significant R&D costs, and substantial brand value.
- Infobeans Technologies Ltd.: Excluded as it was functionally dissimilar, providing custom-developed services to offshore clients, and not operating in a 100% risk-mitigated environment.

3. Inclusion of Three Comparable Companies:
The assessee also sought the inclusion of three comparable companies: I2T2 India Limited, Evoke Technologies Limited, and Melstar Information Technologies Limited. The Tribunal restored these companies to the file of the AO/TPO for re-examination, following the decision in the case of Goldman Sachs Services Pvt. Ltd. The Tribunal directed the AO/TPO to verify the facts and material related to these companies.

4. Grant of Working Capital Adjustment:
The assessee claimed that the working capital adjustment was rejected by the TPO and DRP. The Tribunal noted that it is consistently held that working capital adjustment is permissible and directed the AO/TPO to grant the working capital adjustment.

5. Restriction of Transfer Pricing Adjustment to International Transactions:
The assessee contended that the transfer pricing adjustment should be restricted to the value of international transactions only. The Tribunal found merit in this contention, stating that the purpose of the transfer pricing exercise is to determine the Arm's Length Price of international transactions. The AO/TPO was directed to restrict the adjustment accordingly.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal directed the exclusion of the four specified companies from the comparable list, restored the inclusion of three companies for re-examination, granted the working capital adjustment, and restricted the transfer pricing adjustment to the value of international transactions. Other grounds raised by the assessee were dismissed as not pressed. The order was pronounced on 3rd September 2021.

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