Four companies rejected as unsuitable comparables for software development transfer pricing under section 92C

ITAT Delhi held that four companies were not suitable comparables for transfer pricing analysis of software development services: Larsen Tourbro Infotech Ltd. (due to amalgamation and significant intangibles), Tata Elxsi Ltd. (functionally dissimilar with internally generated intangibles), Infobeans Technologies Ltd. (rejected for captive service providers), and Cybercom Datamatics Information Solutions Ltd. After excluding these comparables, assessee's margin fell within arm's length range, requiring no adjustment. Additionally, ITAT deleted transfer pricing adjustment on notional interest for delayed receivables from associated enterprises, following precedent that mere receivables don't constitute international transactions under section 92B explanation, particularly for debt-free companies. Appeal allowed.

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Issues Involved:
1. Addition on account of transfer pricing adjustment concerning international transactions of software development services.
2. Addition with respect to interest on delay in receipt of receivables from Associated Enterprises (AEs).

Issue-Wise Detailed Analysis:

1. Addition on Account of Transfer Pricing Adjustment:
The assessee, a wholly-owned subsidiary of Global Logic Inc., engaged in software development services, reported international transactions with AEs for AY 2017-18. The primary transactions included software development services to Global Logic Inc. and Global Logic Israel Ltd. The assessee used the Transactional Net Margin Method (TNMM) to determine the Arm's Length Price (ALP) and reported an operating margin of 14.72%, which it claimed was within the comparable companies' range of 11.66% to 16.54%.

The Assessing Officer (AO) referred the case to the Transfer Pricing Officer (TPO), who accepted TNMM but applied additional filters, resulting in a final set of 15 comparable companies with a median operating profit margin of 17.24%. The TPO made adjustments, leading to an additional Rs. 7,44,36,493/- on the international transaction of software development services.

The assessee objected to the inclusion of nine comparables, arguing functional dissimilarity, lack of segmental data, and ownership of significant tangibles. The Dispute Resolution Panel (DRP) retained these comparables, leading the assessee to appeal.

The Tribunal examined the comparability of four specific companies: Larsen & Toubro Infotech Ltd., Tata Elxsi Ltd., Infobeans Technologies Ltd., and Cybercom Datamatics Information Solutions Ltd. The Tribunal found these companies functionally dissimilar due to factors like brand leverage, segmental data issues, and extraordinary events. Consequently, these companies were excluded from the final set of comparables, leading to the assessee's margin falling within the ALP range, negating the need for a transfer pricing adjustment.

2. Addition with Respect to Interest on Delay in Receipt of Receivables from AEs:
The TPO re-characterized the delay in receipt of receivables as unsecured loans to AEs and imputed a notional interest of 4.485%, resulting in an addition of Rs. 7,12,59,891/-. The assessee argued that this issue was covered in its favor by previous Tribunal decisions for AYs 2010-11 and 2012-13, where it was held that no adjustment could be made for notional interest on receivables, especially when the company was debt-free and had similar delays with unrelated third parties.

The Tribunal, referencing its earlier decisions and the Delhi High Court's ruling in Kusum Health Care Pvt. Ltd., reiterated that not every item of receivables constitutes an international transaction. It emphasized that the impact on working capital must be considered, and if the operating margins are within the arm's length range, no further adjustment is warranted. The Tribunal found no change in the factual or legal position for AY 2017-18 and directed the deletion of the transfer pricing adjustment concerning interest on delayed receivables.

Conclusion:
The Tribunal allowed the appeal, directing the exclusion of specific comparables and the deletion of the transfer pricing adjustment related to interest on delayed receivables, aligning with previous rulings and the Delhi High Court's guidance on similar issues.

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