Tribunal excludes Thirdware & Excel from comparables, allows working capital adjustment. Assessee's appeal partly allowed.

The Tribunal directed the exclusion of Thirdware and Excel from the list of comparables for Software Development and IT Support services, respectively. Additionally, the Tribunal allowed the working capital adjustment for both services. The appeal by the assessee was partly allowed, with other grounds dismissed as not pressed.

---

---

Issues Involved:
1. Transfer Pricing (TP) adjustment for Software Development Services.
2. Transfer Pricing (TP) adjustment for IT Support Services.
3. Working Capital Adjustment.

Detailed Analysis:

1. Transfer Pricing Adjustment for Software Development Services:

The primary issue here was the inclusion of Thirdware Solutions Ltd. ("Thirdware") as a comparable company for benchmarking the Arm's Length Price (ALP) of the assessee's Software Development Services. The assessee argued for the exclusion of Thirdware due to functional disparity, stating that Thirdware is a product company while the assessee is purely a Software Development services provider. The Tribunal had previously upheld the exclusion of Thirdware in the assessee's own cases for assessment years 2010-11, 2011-12, and 2013-14 on similar grounds.

The Department contended that Thirdware should be included as it reported revenue primarily from Software Development services, with no revenue from product sales for the relevant financial year. However, the Tribunal noted that Thirdware's revenue included various activities, making it functionally different from the assessee. The Tribunal reiterated that software products and software development services are distinct activities, referencing the Bombay High Court's decision in CIT vs. PTC Software (I) Pvt. Ltd.

Judgment:
The Tribunal directed the exclusion of Thirdware from the list of comparables for Software Development services, allowing the assessee's ground No. 1.2.6.

2. Transfer Pricing Adjustment for IT Support Services:

The assessee sought the exclusion of Excel Infoways Ltd. ("Excel") from the list of comparables for IT Support Services, citing fluctuating margins and the closure of its ITES segment. The Tribunal noted that Excel had been excluded in similar cases due to its fluctuating margins and diminishing revenue. The Department argued that segmental results were available, and diversification into Real Estate was not relevant.

Judgment:
The Tribunal directed the exclusion of Excel from the list of comparables, referencing previous decisions where Excel was excluded due to abnormal revenue fluctuations. The assessee's ground No. 2.2.6 was allowed.

3. Working Capital Adjustment:

The assessee requested a working capital adjustment for both Software Development and IT Support services, arguing that differences in working capital should be adjusted for proper comparability analysis. The Tribunal had previously allowed such adjustments in the assessee's own cases for assessment years 2010-11, 2011-12, and 2013-14.

Judgment:
The Tribunal directed the Assessing Officer to allow the working capital adjustment for both Software Development and IT Support services, following the precedent set in previous years. Consequently, ground Nos. 1.2.10 and 2.2.9 were allowed.

Conclusion:

The appeal by the assessee was partly allowed. The Tribunal directed the exclusion of Thirdware and Excel from the list of comparables and allowed the working capital adjustment for both Software Development and IT Support services. The other grounds raised by the assessee were dismissed as not pressed. The order was pronounced in the open court on June 29, 2021.

---