Tribunal adjusts comparables in transfer pricing dispute, remits Arm's Length Price determination for reassessment

The Tribunal partially allowed the assessee's appeal, directing the Transfer Pricing Officer to re-examine and adjust the list of comparables by excluding Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd., and including Akshay Software Technologies Ltd. and Spry Resources India Pvt. Ltd. The final determination of Arm's Length Price (ALP) was remitted back to the Transfer Pricing Officer for fresh consideration. The order was pronounced on 30th September 2019.

---

---

Issues Involved:
1. Rejection of Transfer Pricing (TP) documentation and adjustment to the transfer price of the appellant in respect of software development services.
2. Inclusion of Larsen & Toubro Infotech Ltd. as a comparable.
3. Inclusion of Persistent Systems Ltd. as a comparable.
4. Exclusion of Akshay Software Technologies Ltd. as a comparable.
5. Exclusion of Spry Resources India Pvt. Ltd. as a comparable.

Detailed Analysis:

1. Rejection of Transfer Pricing (TP) Documentation and Adjustment to Transfer Price:
The assessee filed an appeal against the final assessment order, challenging the rejection of TP documentation by the Deputy Commissioner of Income Tax and the Dispute Resolution Panel (DRP). The TPO had observed that the assessee's TP study was unsatisfactory and applied filters to the software development and IT-enabled services segments. The TPO selected 7 comparables for software development services and 10 for IT-enabled services, leading to an adjustment of Rs. 17,84,82,272/-. The assessee filed a rectification petition, resulting in a revised adjustment of Rs. 16,85,38,618/-. The final assessment order, passed after considering the DRP's directions, was challenged by the assessee before the Tribunal.

2. Inclusion of Larsen & Toubro Infotech Ltd. as a Comparable:
The assessee argued for the exclusion of Larsen & Toubro Infotech Ltd., citing functional dissimilarity and lack of segmental data. The DR supported the inclusion, referencing a decision where intangibles used in the process of rendering software development services were not a basis for exclusion. The Tribunal considered previous decisions, including CGI Information Systems Management Consultant Pvt. Ltd. and M/s. Advice America Software Development Center Pvt. Ltd., and concluded that Larsen & Toubro Infotech Ltd. should be excluded. The matter was remitted to the AO/TPO for fresh consideration.

3. Inclusion of Persistent Systems Ltd. as a Comparable:
The assessee contended that Persistent Systems Ltd. was functionally dissimilar, involved in extraordinary events, and lacked segmental data. The DR opposed the exclusion, referencing a decision where the company was deemed comparable. The Tribunal referred to a subsequent decision in M/s. Metric Stream Infotech (India) Pvt. Ltd., which excluded Persistent Systems Ltd. due to its involvement in software products and solutions without segmental details. The Tribunal restored the matter to the TPO for re-examination and exclusion from the list of comparables.

4. Exclusion of Akshay Software Technologies Ltd. as a Comparable:
The assessee argued for the inclusion of Akshay Software Technologies Ltd., citing its functional similarity and previous acceptance as a comparable. The Tribunal referred to decisions in the assessee's own case and M/s. Labvantage Solution Pvt. Ltd., where Akshay Software Technologies Ltd. was included as a comparable. The Tribunal directed the TPO to include Akshay Software Technologies Ltd. in the final list of comparables for determining the ALP.

5. Exclusion of Spry Resources India Pvt. Ltd. as a Comparable:
The assessee sought the inclusion of Spry Resources India Pvt. Ltd., arguing functional similarity. The Tribunal referred to a decision in M/s. WM Global Technology Services (India) Pvt. Ltd., where the DRP's dismissal of the assessee's contention was deemed incorrect. The Tribunal remitted the issue to the TPO for fresh examination and directed the inclusion of Spry Resources India Pvt. Ltd. in the final list of comparables.

Conclusion:
The Tribunal allowed the assessee's appeal partly for statistical purposes, directing the TPO to re-examine and adjust the list of comparables by excluding Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd., and including Akshay Software Technologies Ltd. and Spry Resources India Pvt. Ltd. The final determination of ALP was remitted back to the TPO for fresh consideration. The order was pronounced on 30th September 2019.

---