Tribunal adjusts comparables in appeal, excludes two companies, re-examines two for statistical purposes.

The appeal was partly allowed for statistical purposes. The Tribunal directed the AO/TPO to re-examine the inclusion of Powersoft Global Solutions Ltd. and Evoke Technologies Pvt. Ltd. as comparables and to exclude Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd. from the final list of comparables. The Tribunal's order was pronounced on February 5, 2020.

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Issues Involved:
1. Determination of Net Cost Margin of the Appellant.
2. Inclusion of Powersoft Global Solutions Ltd. and Evoke Technologies Pvt. Ltd. as comparables.
3. Exclusion of Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd. as comparables.

Issue-wise Detailed Analysis:

1. Determination of Net Cost Margin of the Appellant:
The appellant challenged the assessment order for the assessment year 2012-2013, arguing that the sub-contracting charges should be considered as pass-through costs and excluded from operating costs and income while computing the arm's length price. The Tribunal noted that this issue was previously addressed in the assessee's own case for the assessment year 2011-2012, where it was decided against the assessee. The Tribunal reiterated that since the assessee charges a markup on software development services provided to its AE, the cost of subcontracting cannot be excluded as pass-through. The Tribunal emphasized that outsourcing costs in software development services are integral to providing services to the AE and should be included in operating costs and revenue. Consequently, this ground was rejected.

2. Inclusion of Powersoft Global Solutions Ltd. and Evoke Technologies Pvt. Ltd. as comparables:
The appellant sought the inclusion of Powersoft Global Solutions Ltd. and Evoke Technologies Pvt. Ltd. as comparables, arguing that the financial data for these companies were available but overlooked by the Tax Authorities. The Tribunal acknowledged the appellant's submission and decided to restore these two companies to the file of the AO/TPO for re-examination of their inclusion as comparables. This decision was based on the availability of relevant financial details in the appellant's records.

3. Exclusion of Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd. as comparables:
The appellant argued for the exclusion of Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd., citing their exclusion in the appellant's own case for the assessment year 2011-2012 and in similar cases like M/s. CGI Information Systems and Management Consultants Pvt. Ltd. The Tribunal noted that both companies were excluded in previous cases due to their functional dissimilarity and lack of segmental information on software development services. The Tribunal referenced the decision in the case of Agilis India Technologies (P.) Ltd., where these companies were excluded for similar reasons. Respectfully following these precedents, the Tribunal directed the AO/TPO to exclude Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd. from the final list of comparables. Consequently, the issue of determining the ALP of the international transaction relating to software development services was restored to the file of the AO/TPO for fresh consideration.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific directions for the AO/TPO to re-examine the inclusion of Powersoft Global Solutions Ltd. and Evoke Technologies Pvt. Ltd. as comparables and to exclude Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd. from the final list of comparables. The Tribunal's order was pronounced on February 5, 2020.

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