Tribunal Sets Profit Margins for Software & IT Services, Orders Tax Credit Verification

The Tribunal directed specific profit margins for Software Development Services and IT enabled services for the relevant assessment years. Adjustments were to be made by the Transfer Pricing Officer based on these margins. The appeals were partly allowed, and the Assessing Officer was instructed to verify and grant credits for tax deducted at source, advance tax, and self-assessment tax in accordance with the law.

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Issues Involved:
1. Validity of the assessment order.
2. Rejection of Transfer Pricing (TP) documentation.
3. Transfer pricing adjustments for Software Development Services and IT enabled services.
4. Comparability analysis and selection of comparables.
5. Working capital adjustment.
6. Benefit of lower range of +/-5% in arm’s length price determination.
7. Consideration of returned income.
8. Credit for tax deducted at source, advance tax, and self-assessment tax.
9. Levying of interest under section 234B.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contended that the assessment order was "bad in law, contrary to facts and circumstances of the case and liable to be quashed." However, this issue was not elaborately discussed in the judgment.

2. Rejection of Transfer Pricing (TP) Documentation:
The AO and the Dispute Resolution Panel (DRP) upheld the rejection of the assessee's TP documentation by the Transfer Pricing Officer (TPO). The TPO rejected most of the comparables selected by the assessee and conducted his own search, leading to significant adjustments.

3. Transfer Pricing Adjustments:
The primary issue was the transfer pricing adjustments for services rendered to non-USA Associated Enterprises (AEs). The adjustments were made for:
- Software Development Services to Fidelity Investments Management (HK) Ltd., Hong Kong, and KVH Systems Solutions Ltd., Bermuda.
- Information Technology enabled services to Fidelity Investments Management (HK) Ltd., Hong Kong, and KVH Co. Ltd., Japan.
The TPO made adjustments amounting to Rs. 121,107,610 for software services and Rs. 164,322,789 for IT enabled services, holding that these transactions did not satisfy the arm’s length principle.

4. Comparability Analysis and Selection of Comparables:
The assessee contested the inclusion of certain comparables selected by the TPO. For the IT segment, the contested comparables included Infosys Technologies Ltd., Persistent Systems Ltd., and Wipro Ltd., among others. For the ITeS segment, comparables like Accentia Technologies Ltd., Infosys BPO Ltd., and Eclerx Services Ltd. were contested. The assessee argued that these comparables were functionally dissimilar, involved mergers, or had significant intangibles, making them unsuitable for comparison.

5. Working Capital Adjustment:
The assessee argued that the working capital adjustment done by the TPO was incorrect. The Tribunal directed the TPO to correctly compute the working capital adjustment for the software development services segment.

6. Benefit of Lower Range of +/-5%:
The assessee sought the benefit of the lower range of +/-5% in determining the arm’s length price. This ground was not pressed during the proceedings and hence not adjudicated.

7. Consideration of Returned Income:
The AO considered the returned income as Rs. 8,82,21,970 instead of Rs. 8,75,60,355 as per the revised return filed by the assessee. This discrepancy was noted but not elaborately discussed in the judgment.

8. Credit for Tax Deducted at Source, Advance Tax, and Self-Assessment Tax:
The AO did not grant credit for tax deducted at source amounting to Rs. 1,70,80,955, advance tax of Rs. 83,00,000, and self-assessment tax of Rs. 53,36,223. The Tribunal directed the AO to verify and allow the credits in accordance with the law.

9. Levying of Interest under Section 234B:
The AO levied interest of Rs. 18,87,61,258 under section 234B. The Tribunal noted that this ground was consequential and did not require separate adjudication.

Conclusion:
The Tribunal directed that for Software Development Services, the profit margin should be 15.70% for AY 2007-08 and 15.91% for AY 2008-09. For IT enabled services, the profit margin should be 14.68% for AY 2007-08 and 14.89% for AY 2008-09. The TPO was instructed to make adjustments based on these margins. The appeals were partly allowed, and the AO was directed to verify and allow the credits for tax deducted at source, advance tax, and self-assessment tax.

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