Tribunal sets aside ALP order in software development, IT services, sales support

The Tribunal set aside the order on the ALP determination in the software development, IT enabled services, and sales support services segments, remitting the matter for fresh assessment by the AO/TPO. The assessee is granted a hearing opportunity before any decision. Appeals were partly allowed.

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Issues Involved:

1. Provision of Software Development Services
2. Provision of IT Enabled Services (ITES)
3. Provision of Sales Support Services
4. Working Capital Adjustment
5. Risk Adjustment

I. Provision of Software Development Services:

The first issue concerns the transfer pricing addition of Rs. 15,11,98,577/- made by the AO in the international transaction of "Software Development services." The assessee declared the value of the international transaction at Rs. 2,49,14,47,288/- and applied the Transactional Net Margin Method (TNMM) as the most appropriate method. The TPO determined the ALP at Rs. 2,77,77,86,057/- leading to a proposed adjustment of Rs. 28,46,97,425/-. After the DRP's intervention, the adjustment was recomputed to Rs. 15,11,98,577/-. Both parties appealed on their respective stands.

The Tribunal noted that the dispute was confined to the comparability of certain companies included or excluded by the DRP. The assessee provides Software Development services, including new product development and modifications based on specifications from BMC overseas entities. The Tribunal examined the functional profile of the assessee and the comparables.

Comparables Analysis:

- Kals Information Technology System Ltd.: Excluded due to involvement in both software products and services, unlike the assessee which only provides software development services.
- Acropetal (Segmental): Excluded due to rendering on-site development services and involvement in software products.
- Thirdware Solution Ltd.: Excluded due to engagement in software products and lack of segmental information.
- Persistent Systems Private Ltd.: Remitted to AO/TPO to examine functional dissimilarities as the issue was raised for the first time before the Tribunal.
- Maveric Systems Ltd.: Remitted to AO/TPO to examine comparability on merits as the Annual report is now available.
- Quintegra Solutions Ltd.: Included as it did not persistently incur losses and there was no evidence of rendering on-site services.

Revenue's Appeal:

- RS Software India Ltd.: Included as there was no evidence of rendering on-site services.
- Silverline Technologies Ltd.: Excluded due to substantial revenue from on-site services.
- Thinksoft Global Services Pvt. Ltd.: Excluded due to revenue from on-site services.

II. Provision of IT Enabled Services (ITES):

The assessee declared an international transaction of Rs. 10,21,67,498/- and applied TNMM. The TPO made alterations to the list of comparables, and the assessee challenged four companies.

Comparables Analysis:

- Accentia Technologies Ltd.: Excluded as per the Tribunal's order for the preceding year.
- Coral Hubs Ltd. (Vishal Technologies Ltd.): Excluded due to outsourcing business model and involvement in KPO services.
- Jeevan Softech (BPO segment): Included only the BPO segment as it matches the assessee's services.
- Informed Technologies Ltd.: Remitted to AO/TPO for examination as it was challenged for the first time before the Tribunal.

III. Provision of Sales Support Services:

The assessee reported an international transaction of Rs. 12,86,10,541/- and applied TNMM. The TPO included ICRA Online Ltd. (Segment), which the assessee challenged.

Comparables Analysis:

- ICRA Online Ltd.: Excluded as its revenue from the Information Services segment pertains to software products, not comparable to sales support services.

IV. Working Capital Adjustment:

The DRP directed the AO to examine the computation of working capital adjustment, which was not complied with. The Tribunal directed the AO/TPO to give effect to the DRP's direction.

V. Risk Adjustment:

The issue was remitted to AO/TPO for computing risk adjustment following the Tribunal's orders in the assessee's own case for earlier years.

Conclusion:

The Tribunal set aside the impugned order on the determination of ALP in the three segments and remitted the matter to the AO/TPO for fresh determination in light of the observations made. The assessee is to be given a reasonable opportunity of hearing before any decision is taken. Both appeals were partly allowed.

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