Transfer pricing adjustments upheld on management charges; comparables challenged, leading to profit indicator adjustments.

The case involved transfer pricing adjustments on management charges. The Transfer Pricing Officer made an upward adjustment to the price charged by the assessee, which was added to the income. The Dispute Resolution Panel upheld this decision. The assessee contested the selection of comparables, leading to the exclusion of certain companies and adjustments to the margin of another. As a result, the assessee's profit level indicator fell within an acceptable range, partially allowing the appeal. The second ground concerning management charges was dismissed as not pressed.

---

---

Issues Involved:
1. Addition on account of transfer pricing adjustment.
2. Transfer pricing adjustment made to the payment of management charges.

Detailed Analysis:

I. Addition on Account of Transfer Pricing Adjustment:

1. Background:
The assessee, a resident company engaged in providing software consultancy and design services through its overseas associated enterprises (AEs), earned revenue of Rs.19,11,81,023/-. The assessee used the transactional net margin method (TNMM) with operating profit/operating cost (OP/OC) as the profit level indicator (PLI) to benchmark the transaction. The assessee's PLI was shown at 27.42%, claiming the price charged was at arm’s length. However, the Transfer Pricing Officer (TPO) rejected the assessee's comparables and its margin computation, selecting nine independent comparables with an average PLI of 32.14% and computed the PLI of the assessee at 13.65%. This resulted in an upward adjustment of Rs.4,48,60,208/- to the price charged, which was added to the income by the assessing officer and upheld by the Dispute Resolution Panel (DRP).

2. Specific Comparables:
The assessee contested the selection of three comparables and sought adjustments for another.

A. Celestial Biolabs Ltd:
The assessee argued that Celestial Biolabs Ltd is engaged in different services like bio-informatic services and drug development, with no segmental information available. The Tribunal, noting the company’s involvement in product development and lack of segmental details, rejected it as a comparable, following precedents from similar cases.

B. E-Zest Solutions Limited:
The assessee contended that E-Zest Solutions Limited provides IT-enabled services (ITES) and not software development services. The Tribunal, observing that the company provides high-end ITES and lacks segmental information, rejected it as a comparable, adhering to previous decisions.

C. Acropatel Technologies Limited:
The assessee claimed that Acropatel Technologies Limited does not meet the TPO’s filters, such as revenue from IT segment being less than 75% and employee costs less than 25% of total expenses. The Tribunal, agreeing with the assessee and referencing similar cases, directed the exclusion of this company from the comparables.

D. Softsol India Ltd:
The assessee did not object to retaining Softsol India Ltd as a comparable but requested adjustments for non-operating revenues like rental income and other items. The Tribunal, considering similar adjustments allowed in previous cases, directed the assessing officer to compute the margin of this company at 15%.

3. Outcome:
With the removal of the contested comparables and the adjustment of Softsol India Ltd’s margin, the assessee’s PLI fell within the acceptable range, negating the need for further adjustment. Thus, the ground was partly allowed.

II. Transfer Pricing Adjustment to Payment of Management Charges:

1. Background:
The assessee challenged the TP adjustment made to the payment of management charges. However, the Senior Counsel for the assessee noted that the final assessment order did not include a separate addition for this adjustment.

2. Outcome:
Based on the counsel’s submission, the ground was dismissed as not pressed.

Conclusion:
The appeal was partly allowed, with specific directions to exclude certain comparables and adjust the margin of another, thereby addressing the transfer pricing adjustment issue comprehensively. The second ground regarding management charges was dismissed as not pressed.

Order Pronounced on 11/03/2021.

---