Tribunal remits case for Arm's Length Price redetermination in Software Development services appeal.

The Tribunal remitted the case to the AO/TPO for re-determining the Arm's Length Price (ALP) of the international transaction of Provision of Software Development services. The appeal was partly allowed, providing the assessee with an opportunity to present its case, particularly regarding the comparability of companies chosen by the Transfer Pricing Officer.

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Issues Involved:
1. Admission of additional ground.
2. Transfer pricing addition of Rs. 1,35,74,804/-.
3. Comparability of companies chosen by the TPO.

Detailed Analysis:

1. Admission of Additional Ground:
The assessee raised an additional ground elaborating on the grounds taken in the Memorandum of appeal, specifically naming the companies challenged. The DR did not object to the admission of the additional ground, and thus, it was admitted for disposal on merits.

2. Transfer Pricing Addition of Rs. 1,35,74,804/-:
The core issue in this appeal revolves around the transfer pricing addition made by the AO. The assessee, engaged in Software Development and testing services for its AE, reported international transactions with a transacted value of Rs. 25,32,80,385/-. The assessee used the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of Operating profit/Operating cost (OP/OC) at 13.24%. Out of ten comparables chosen by the assessee, the TPO retained two and added seven new companies, resulting in a transfer pricing adjustment of Rs. 3,24,94,980/-. The DRP modified the list, reducing the addition to Rs. 1,35,74,804/-. The dispute primarily concerns the comparability of certain companies chosen by the TPO.

3. Comparability of Companies Chosen by the TPO:

(i) Infobeans Systems Pvt. Ltd.:
The TPO included Infobeans Systems Pvt. Ltd. as a comparable, which the assessee contested due to a merger effective from 26-09-2012. The DRP noted the merger's appointed date as 01-04-2011, relevant to the year under consideration, and upheld its inclusion, stating the merger had no impact on financial results. The Tribunal examined the Annual report, noting that the company started its operations from 01-04-2011, the first day of the relevant financial year, by taking over the Software business of Seed Enterprises Private Limited. The financial results were not distorted by the merger, and thus, Infobeans was deemed comparable. The Tribunal also referenced a previous order in eGain Communications Pvt. Ltd. Vs. DCIT, where the peculiar fact of Infobeans commencing operations with the merger was not highlighted. Therefore, the Tribunal upheld the inclusion of Infobeans Systems Pvt. Ltd.

(ii) Cybercom Datametics Information Solutions Ltd.:
The TPO included Cybercom Datametics Information Solutions Ltd., which the assessee objected to due to functional dissimilarity. The Annual report indicated the company provided Technical and Software services without segmental information to separate profits from these services. The Tribunal noted that the primary onus of demonstrating comparability was on the TPO, who failed to establish this. The DR could not prove that the company rendered only Software services. Consequently, the Tribunal directed the exclusion of Cybercom Datametics Information Solutions Ltd. from the list of comparables.

Conclusion:
The Tribunal set aside the impugned order and remitted the matter to the AO/TPO for re-determining the ALP of the international transaction of Provision of Software Development services, considering the above discussions. The appeal was partly allowed for statistical purposes, ensuring adequate opportunity for the assessee to be heard.

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