Tribunal orders reassessment of Arm's Length Price for Software Services

The Tribunal directed the Transfer Pricing Officer (TPO) and Assessing Officer (AO) to re-compute the Arm's Length Price (ALP) for the international transaction of Software Development Services, taking into account the inclusion and exclusion of comparable companies. The treatment of foreign exchange gain/loss as operating profit was also to be re-evaluated. The appeals were partly allowed, with specific instructions for reassessment and granting the Assessee a chance to present their case.

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Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services.
2. Selection of Comparable Companies.
3. Treatment of Foreign Exchange Gain/Loss as Operating Profit.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for Software Development Services:
The core issue in these cross appeals is the determination of the ALP for the international transaction of rendering Software Development Services (SWD Services) by the Assessee to its Associated Enterprise (AE). Both parties agreed that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determining the ALP, using Operating Profit/Total Cost (OP/TC) as the profit level indicator. The Assessee's OP/TC was 14.93%. The Transfer Pricing Officer (TPO) selected 10 comparable companies, resulting in an average markup of 22.63% (adjusted to 22.52% after working capital adjustment). This led to an ALP of Rs. 63,45,86,829, with a shortfall of Rs. 6,39,20,444 added to the total income.

2. Selection of Comparable Companies:
The CIT(A) excluded 4 out of the 10 comparable companies chosen by the TPO. The Revenue contested the exclusion of:
- Datamatics Global Services Ltd.: CIT(A) excluded this company based on failing the export filter, but the Revenue argued it had 98% export sales. The Tribunal remanded this issue to the TPO/AO for re-evaluation.
- ICRA Techno Analytics Ltd.: CIT(A) excluded this company based on the export filter, but the Revenue contended it had 92% export sales. The Tribunal remanded this issue for fresh analysis on functional comparability, related party transactions (RPT), and export turnover.
- Mindtree Ltd.: The Tribunal directed the inclusion of this company as the Assessee had no objection.
- Sasken Communication Technologies Ltd.: CIT(A) excluded this company due to functional differences. The Tribunal upheld this exclusion as the Revenue did not challenge the functional comparability.

The Assessee contested the inclusion of:
- Genesys International Corporation Ltd.: The Tribunal excluded this company, noting it was engaged in Geographical Information Services rather than software development.
- Infosys Ltd.: Excluded due to its status as a giant risk-taking company with software products and intangible assets.
- Larsen & Toubro Infotech Ltd.: Excluded as it was a software product company without segmental information on SWD services.
- Persistent Systems Ltd.: Excluded for similar reasons as Larsen & Toubro Infotech Ltd.

3. Treatment of Foreign Exchange Gain/Loss as Operating Profit:
The Assessee argued that foreign exchange gain/loss should be considered as part of the operating profit. The Tribunal referred to its previous decision for AY 2010-11 & 2011-12, directing the TPO/AO to re-evaluate this issue. If the foreign exchange gain/loss pertains to the current year's turnover, it should be included in the TP analysis; otherwise, it should be excluded.

Conclusion:
The Tribunal directed the TPO/AO to re-compute the ALP of the international transaction, considering the exclusions and inclusions of comparable companies as discussed, and to re-evaluate the treatment of foreign exchange gain/loss. The appeals were partly allowed, with specific directions for re-assessment and providing the Assessee an opportunity to be heard.

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