Tribunal Upholds Inclusion of Cybermate Infotek as Comparable for ALP Determination

The Tribunal upheld the Assessing Officer's decision to include Cybermate Infotek Ltd. (CIL) as a comparable for determining the Arm's Length Price (ALP). The Tribunal emphasized that functional and product/services comparability under the Transactional Net Margin Method (TNMM) was sufficient, despite some differences highlighted by the assessee. The appeal was dismissed, confirming the validity of CIL's inclusion and sustaining the adjustment made by the AO.

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Issues Involved:
1. Inclusion of Cybermate Infotek Ltd. (CIL) as a comparable by the AO for determining Arm’s Length Price (ALP).

Issue-wise Detailed Analysis:

1. Inclusion of Cybermate Infotek Ltd. (CIL) as a Comparable:

During the proceedings, the assessee restricted the argument to the inclusion of Cybermate Infotek Ltd. (CIL) by the AO. The core contention was that CIL should not be considered a comparable for determining the ALP due to various functional dissimilarities.

Arguments by the Assessee:
- Functional Dissimilarity: The assessee argued that CIL is engaged in custom-built software development, product development, and IT services, whereas the assessee provides low-end software development and localization services.
- Revenue Sources: CIL earns revenue from both services and products, and it does not provide segmental information, making it difficult to compare with the assessee.
- R&D Activities: CIL undertakes R&D activities for creating new technologies, which is not the case for the assessee.
- Employee Cost Disparity: The percentage of employee cost to total operating cost for CIL is significantly lower (6.83%) compared to the assessee (48.37%), indicating that CIL is not predominantly a service company.
- Intangible Assets: CIL has intangible assets under development and capitalizes web development expenses, unlike the assessee.

Legal Precedents Cited by the Assessee:
- CIT v. PTC Software (I) (P.) Ltd. (2016): Emphasized the need for using data from the same financial year for comparability analysis.
- Rampgreen Solutions Pvt. Ltd. v. CIT (2015): Highlighted the need for higher product and functional similarity in comparability analysis.
- Lionbridge Technologies (P.) Ltd. v. ITO (2015): CIL was not considered a comparable in previous assessment years.
- CIT v. Tata Power Solar Systems Ltd. (2017): Allowed the exclusion of functionally different companies from the list of comparables.

Arguments by the Revenue:
- The Revenue supported the inclusion of CIL, stating that the primary criterion for comparability is whether the company is broadly in the software development business. The nature of software development (high-end or low-end) and the presence of an R&D center or low employee cost do not significantly affect the comparability.

Tribunal's Analysis and Decision:
- Functional Similarity: The Tribunal noted that both the assessee and CIL are engaged in software development, albeit at different levels (low-end for the assessee and high-end for CIL). The Tribunal emphasized that under the Transactional Net Margin Method (TNMM), broad functional and product/services comparability is sufficient.
- Revenue Recognition: The Tribunal compared the revenue recognition policies of both companies and found them to be broadly similar.
- Legal Precedents: The Tribunal distinguished the cited cases based on the specific facts of the present case, noting that the services/products and functions rendered by the assessee and CIL fall broadly in a similar domain.
- TNMM Applicability: The Tribunal reiterated that TNMM requires only broad functional and product/services comparability, unlike traditional transactional methods like CUP or RPM, which need closer comparability.

Conclusion:
The Tribunal upheld the AO's decision to include CIL as a comparable, emphasizing that the initial inclusion by the assessee was valid and confirmed by the TPO/AO. The appeal was dismissed, and the adjustment made by the AO was sustained.

Order Pronouncement:
The order was pronounced in the open Court on 07/11/2017.

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