Tribunal allows appeal in transfer pricing case, excludes comparables, remands interest issue for verification

The appeal was partly allowed by the Tribunal in a transfer pricing case involving software development and IT enabled services transactions. The Tribunal directed the exclusion of specific companies from the list of comparables based on turnover and functional dissimilarity. Additionally, the Tribunal remanded the issue of interest levied under section 234A to the Assessing Officer for verification and deemed the interest under section 234B as consequential and mandatory.

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Issues Involved:

1. Transfer Pricing - Software Development Services Transaction and IT enabled Services Transaction.
2. Interest Levied Under Section 234A and 234B of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Transfer Pricing - Software Development Services Transaction and IT enabled Services Transaction:

Grounds of Appeal:
The assessee raised multiple grounds pertaining to the determination of the arm's length price (ALP) for international transactions, including the rejection and selection of comparable companies based on various criteria such as foreign earnings, employee cost, related party transactions, income from core services, turnover filter, accounting year, intellectual property, and extraordinary events. However, during the hearing, the assessee pressed only specific grounds (Nos. 14, 16, 18, and 19), and other grounds were dismissed as not pressed.

IT Enabled Services Segment:
The assessee sought the exclusion of three comparables (Infosys BPM Services Pvt. Ltd., SPI Technologies India Pvt. Ltd., and Tech Mahindra Business Services Ltd.) based on the turnover filter. The Tribunal consistently held that companies with a turnover above Rs. 200 crores cannot be considered comparable to the assessee, whose turnover in the segment is less than Rs. 200 crores. The Tribunal directed the exclusion of these companies.

Software Development Service Segment:
The assessee confined arguments to exclude eight comparables (L&T Infotech Limited, Mind Tree Limited, Persistent Systems Ltd., Infosys Ltd., Cybage Software Ltd., Tata Elxi Ltd., Nihilent Technologies Ltd., and R. Systems Ltd.) based on the turnover filter. The Tribunal applied the same consistent view and directed the exclusion of these companies as their turnover exceeded Rs. 200 crores.

Functional Dissimilarity:
The assessee argued for the exclusion of certain companies based on functional dissimilarity:
- Datamatics Business Solutions Ltd.: The Tribunal found this company to be a Knowledge Process Outsourcing (KPO) service provider and directed its exclusion.
- Manipal Digital Systems Pvt. Ltd.: The Tribunal noted that this company is engaged in multiple high-end services, including web development and mobile application development, and directed its exclusion.
- CES Limited: The Tribunal observed that this company provides both BPO and KPO services and directed its exclusion.

2. Interest Levied Under Section 234A and 234B of the Income-tax Act:

The assessee contended that the interest levied under section 234A was erroneous as the return of income was filed within the due date prescribed under section 139(1). The Tribunal directed the Assessing Officer (AO) to verify this claim. The interest levied under section 234B was deemed consequential and mandatory.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the exclusion of certain companies from the list of comparables based on turnover and functional dissimilarity. The issue of interest under section 234A was remanded to the AO for verification, and the interest under section 234B was to be computed accordingly.

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