ITAT excludes eight companies from transfer pricing analysis due to functional differences and related party transactions

ITAT Kolkata directed exclusion of eight comparable companies from transfer pricing analysis due to functional dissimilarities, excessive related party transactions, or failure to meet employee cost filters. Companies excluded included Lucid Software Ltd, Sagarsoft India Ltd, Prelude Sys India Ltd, E-infochips Bangalore Ltd, Acropetal Technologies Ltd, Axis IT Ltd, Zylog Systems India Ltd, and 8K Miles Software Services Ltd. However, Akshay Software Technologies Ltd, Maveric Systems Ltd, and Thinksoft Global Services Ltd were directed to be included as comparable companies. The tribunal also directed implementation of working capital adjustment as per DRP directions.

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Issues Involved:
1. Determination of the most appropriate method for transfer pricing (CUP vs. TNMM).
2. Exclusion of certain companies from the list of comparables.
3. Inclusion of certain companies in the list of comparables.
4. Application of Working Capital Adjustment (WCA).

Detailed Analysis:

1. Determination of the Most Appropriate Method for Transfer Pricing:
The appellant, Atlas Healthcare Software India Private Limited, contended that the Comparable Uncontrolled Price (CUP) method should be the most appropriate method (MAM) for determining the arm’s length price (ALP) of its international transactions. The Transfer Pricing Officer (TPO) had rejected CUP and applied the Transactional Net Margin Method (TNMM) instead. Both parties agreed that the Tribunal need not adjudicate whether CUP or TNMM is the MAM in this appeal, leaving the issue open for future adjudication.

2. Exclusion of Certain Companies from the List of Comparables:
The appellant argued for the exclusion of several companies from the list of comparables used by the TPO for computing the ALP. The Tribunal directed the exclusion of the following companies based on various grounds:

- Lucid Software Ltd.: Excluded due to its engagement in both software product development and services without segmented data, making its functional profile different from the appellant.
- Sagarsoft (India) Limited: Excluded as it is engaged in the full software development cycle and has a Related Party Transaction (RPT) of 56.49%, exceeding the 20% filter applied by the TPO.
- Prelude Sys India Limited: Excluded due to its multiple service offerings and an RPT of 87%, which is not comparable to the appellant’s profile.
- E-infochips Bangalore Ltd.: Excluded for providing a wide range of IT services and having an RPT of 37.96%.
- Acropetal Technologies Limited: Excluded due to its low employee cost percentage of 11.51%, compared to the 25% filter applied by the TPO.
- Axis IT & T Ltd.: Excluded as it primarily provides engineering design services rather than software services, with an RPT of 43.18%.
- Zylog Systems (India) Ltd.: Excluded for providing broadband and wireless internet-based communication services, with an employee cost percentage of 20.14%.
- 8K Miles Software Services Limited: Excluded due to its specialized cloud consulting services and numerous acquisitions, making it functionally different from the appellant.

3. Inclusion of Certain Companies in the List of Comparables:
The appellant requested the inclusion of certain companies as comparables for computing the ALP. The Tribunal directed the inclusion of the following companies:

- Akshay Software Technologies Limited: Included as it has a positive net worth and is not a persistent loss-making company.
- Maveric Systems Limited: Included as it is engaged in software development and testing services, with 99% of its revenue from software development.
- Thinksoft Global Services Limited: Included as it provides software validation and verification services, recognized as software development services.

4. Application of Working Capital Adjustment (WCA):
The appellant argued for the application of WCA as directed by the Dispute Resolution Panel (DRP). The Tribunal upheld that the TPO is bound by the DRP’s directions and must provide WCA, with the appellant furnishing the necessary data.

Conclusion:
The Tribunal partially allowed the appeal, directing the exclusion and inclusion of specific companies from the list of comparables and mandating the application of WCA as per the DRP’s directions. Other grounds raised by the appellant were not adjudicated as they were considered academic exercises.

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