Tribunal Decision on Transfer Pricing Adjustments for Software Services

The Tribunal partly allowed the assessee's appeal regarding adjustments under Section 92CA for software development services. The Tribunal rejected the exclusion of CG-VAK Software Exports Ltd. and inclusion of Akshay Software Technologies Ltd. and Thinksoft Global Services Ltd. It remanded Larsen & Toubro Ltd., Persistent Systems Ltd., and four comparables back to the TPO for further examination. Regarding the levy of interest under Section 234B, the Tribunal remanded the working capital adjustment issue back to the TPO and rejected the request for risk adjustment. The order was pronounced on 28th February 2018.

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Issues Involved:
1. Adjustment under Section 92CA to International Transaction of Provision of Software Development Services.
2. Levy of Interest under Section 234B of the Act.

Detailed Analysis:

1. Adjustment under Section 92CA to International Transaction of Provision of Software Development Services:

Grounds Raised by the Assessee:
- The assessee argued that the transfer pricing documentation was prepared in good faith and complied with Section 92D of the Income-tax Act, 1961, and Rule 10D of the Income-tax Rules, 1962.
- The DRP confirmed the AO/TPO's adjustment of INR 116,865,282 to the price charged for software development services, claiming it did not meet the arm's length principle.

Key Points of Contention:
- Comparability Analysis: The DRP upheld the TPO's rejection of the assessee's comparability analysis and accepted the TPO's comparability analysis based on additional filters.
- Multiple Year/Prior Year Data: The DRP upheld the TPO's use of current year data alone for comparability, rejecting the use of multiple year/prior year data.
- Data Usage: The DRP supported the TPO's use of data available at the time of assessment proceedings instead of the data available when preparing the TP documentation.
- Selection of Comparable Companies: The DRP upheld the TPO's selection of comparable companies and rejected the inclusion of companies functionally comparable to the assessee.
- Risk Adjustment: The DRP upheld the TPO's decision not to provide risk adjustment, ignoring the risk-insulated nature of the services provided by the assessee.

Tribunal's Findings:
- CG-VAK Software Exports Ltd.: The Tribunal found no merit in the assessee's argument for exclusion, stating that CG-VAK is a software development company and not a product company.
- Larsen & Toubro Infotech Ltd. & Persistent Systems Ltd.: The Tribunal remanded the matter back to the TPO for fresh examination, citing the need to consider the functionality of these companies.
- Akshay Software Technologies Ltd.: The Tribunal rejected the inclusion of Akshay Software Technologies Ltd., stating that it is involved in product development and thus not comparable.
- Thinksoft Global Services Ltd.: The Tribunal rejected the inclusion, noting that software testing services are distinct from software development.
- Acropetal Technologies Ltd., Cigniti Technologies Ltd., Sasken Communications Ltd., Spry Resources India Pvt. Ltd.: The Tribunal remanded the matter back to the TPO for fresh examination, as these companies were not part of the initial TP study.

Summary of TP Grounds:
- Exclusion of CG-VAK Software and Exports Ltd. is rejected.
- Larsen & Toubro Ltd. and Persistent Systems Ltd. are remitted back to the TPO.
- Inclusion of Akshay Software Technologies Ltd. and Thinksoft Global Services Ltd. is rejected.
- Four comparables (Acropetal Technologies Ltd., Cigniti Technologies Ltd., Sasken Communications Ltd., Spry Resources India Pvt. Ltd.) are remitted back to the TPO.

2. Levy of Interest under Section 234B of the Act:

Grounds Raised by the Assessee:
- The assessee challenged the disallowance of working capital adjustment and the resulting interest charged under Section 234B.

Tribunal's Findings:
- Working Capital Adjustment: The Tribunal remanded the issue back to the TPO, noting that the assessee failed to demonstrate how working capital differences impacted its profits.
- Risk Adjustment: The Tribunal rejected the request for risk adjustment due to the lack of details and working provided by the assessee.

Conclusion:
- The appeal of the assessee is partly allowed, with specific issues remanded back to the TPO for fresh examination.

Order Pronounced:
- The order was pronounced in the open court on 28th February 2018.

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