Companies with turnover over Rs. 200 crores excluded as comparables for software services under transfer pricing rules

The ITAT Bangalore held that companies with turnover exceeding Rs. 200 crores must be excluded as comparables for software development services, excluding several large firms from the list. Certain companies were remanded to the AO/TPO for fresh examination of financial data and comparability, including Minvesta Infotech Ltd., Sagar Soft (India) Ltd., and Evoke Technologies Pvt. Ltd. For IT enable services, data from two of the three preceding years may be used if current year data is unavailable. Interest on delayed receivables was treated as a separate international transaction, with the arm's length interest rate set at LIBOR plus 2%. The disallowance of deduction under section 80G for CSR donations was remitted to the AO for verification and appropriate allowance based on eligibility. The assessee was directed to provide relevant details and cooperate with the proceedings.

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Issues Involved:
1. Transfer Pricing Adjustment for Software Development Services (SWD) and Information Technology Enabled Services (ITES).
2. Notional Interest on Delayed Receivables.
3. Disallowance of Deduction claimed under Section 80G of the Income Tax Act, 1961.

Detailed Analysis:

1. Transfer Pricing Adjustment for SWD and ITES:

Software Development Services (SWD):
- Net Mark-up on Cost: The TPO computed the net mark-up on cost earned by the assessee as 14.53%.
- Selection of Comparables: The assessee selected 11 comparables, of which the TPO accepted 4 and rejected 7. The TPO applied fresh filters and arrived at a new set of comparables.
- TP Adjustment: The TPO determined a TP adjustment of Rs. 20,53,36,725/- based on the final list of comparables.
- DRP Directions: The DRP directed the inclusion of Exhilant Technologies Pvt. Ltd. and upheld the rejection of other comparables. The final list of comparables was revised accordingly.
- Assessee's Grounds:
- Ground 5: The TPO erred in not applying an upper turnover filter, leading to the exclusion of companies with turnover exceeding Rs. 200 Crores.
- Ground 9: Exclusion of Persistent Systems Ltd., Nihilent Ltd., Aspire Systems (India) Pvt. Ltd., Infosys Ltd., Thirdware Solution Ltd., Cybage Software Pvt. Ltd., and Larsen & Toubro Infotech Ltd. on the basis of functional dissimilarity.
- Ground 10: Inclusion of Minvesta Infotech Ltd. as it is functionally comparable.
- Ground 11: Inclusion of Sagarsoft (India) Ltd. and Evoke Technologies Pvt. Ltd. as they are functionally comparable.
- Ground 14: Re-computation of margins for certain comparables.
- Tribunal's Decision:
- Ground 5: The Tribunal upheld the application of an upper turnover filter and excluded companies with turnover exceeding Rs. 200 Crores.
- Ground 9: Since companies were excluded based on turnover, functional dissimilarity was not separately adjudicated.
- Ground 10: The Tribunal remitted the issue of Minvesta Infotech Ltd. back to the AO/TPO for examination.
- Ground 11: The Tribunal remitted the issue of inclusion of Sagarsoft (India) Ltd. and Evoke Technologies Pvt. Ltd. back to the TPO for fresh consideration.
- Ground 14: Directed the AO/TPO to consider the correct margins for the final list of comparables.

ITES:
- Net Mark-up on Cost: The TPO computed the net mark-up on cost earned by the assessee as 14.53%.
- Selection of Comparables: The assessee selected 10 comparables, of which the TPO accepted 1 and rejected 9. The TPO applied fresh filters and chose a new set of comparables.
- TP Adjustment: The TPO determined a TP adjustment of Rs. 1,60,93,297/- based on the final list of comparables.
- DRP Directions: The DRP upheld the order of the TPO.
- Assessee's Grounds:
- Ground 5: The TPO erred in not applying an upper turnover filter, leading to the exclusion of companies with turnover exceeding Rs. 200 Crores.
- Ground 9: Exclusion of Infosys BPO Ltd., Eclerx Services Ltd., and SPI Technologies India Pvt. Ltd. on the basis of functional dissimilarity.
- Ground 10: Inclusion of Ace BPO Services Pvt. Ltd., Microgenetic Systems Ltd., and R Systems International Ltd. as they are functionally comparable.
- Ground 11: Inclusion of Informed Technologies India Ltd. and Crystal Voxx Ltd. as they are functionally comparable.
- Ground 14: Re-computation of margins for Eclerx Services Ltd.
- Tribunal's Decision:
- Ground 5: The Tribunal upheld the application of an upper turnover filter and excluded companies with turnover exceeding Rs. 200 Crores.
- Ground 9: Since companies were excluded based on turnover, functional dissimilarity was not separately adjudicated.
- Ground 10: The Tribunal remitted the issue of inclusion of Ace BPO Services Pvt. Ltd., Microgenetic Systems Ltd., and R Systems International Ltd. back to the TPO for fresh consideration.
- Ground 11: The Tribunal remitted the issue of inclusion of Informed Technologies India Ltd. and Crystal Voxx Ltd. back to the TPO for fresh consideration.
- Ground 14: Directed the AO/TPO to consider the correct margins for the final list of comparables.

2. Notional Interest on Delayed Receivables:
- TPO's Adjustment: The TPO proposed a notional interest on outstanding receivables amounting to Rs. 7,29,62,864/- taking Prime Lending Rate of SBI at 5.39% as arm's length interest rate.
- Assessee's Contentions: The assessee argued that outstanding receivables should not be treated as loans and that the arm's length price of the transaction is subsumed in the principal transaction of rendering of services.
- Tribunal's Decision: The Tribunal held that deferred receivables constitute an independent international transaction and should be benchmarked independently. The interest rate to be adopted is LIBOR rate + 2%.

3. Disallowance of Deduction claimed under Section 80G:
- AO's Disallowance: The AO disallowed the deduction claimed under Section 80G on the ground that the donation was in pursuance of CSR policy and not voluntary in nature.
- Assessee's Contentions: The assessee argued that the donation had already suffered disallowance under Section 37 and further disallowance under Section 80G would lead to double disallowance.
- Tribunal's Decision: The Tribunal remitted the issue to the AO with a direction to verify the details and allow the deduction to the extent of eligibility, following the decision in the case of First American (India) Pvt. Ltd.

Conclusion:
The appeal filed by the assessee was partly allowed, with directions for re-examination and fresh consideration of certain issues by the AO/TPO.

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