Transfer pricing adjustments in software services: remittals for comparable selection, profit adjustments, notional interest and goodwill verification.

Transfer pricing review for software development and services directs multiple remittals to the assessing officer/transfer pricing officer for fresh consideration and verification of comparability, functional analysis and margin computations, with specific directions to allow specified comparables if they pass FAR analysis. The RPT ratio must be computed on an aggregate basis (RPT income plus RPT expenses by sales). Fixed asset write-offs are to be treated as non-operating per earlier directions. Provision for doubtful debts is to be treated as operating only if attributable to the current year; otherwise non-operating. Cash PLI adoption is confirmed. Notional interest on overdue receivables is an international transaction to be computed at 6-month LIBOR plus 300 bps. Goodwill depreciation arising on amalgamation requires verification to avoid double benefits.

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Issues Involved:
1. Transfer Pricing Adjustments.
2. Notional Interest on Trade Receivables.
3. Depreciation on Goodwill.
4. Incorrect Computation of Operating Profit Margins.
5. Adoption of Cash PLI.
6. Risk Adjustment.
7. Credit of Advance Tax.
8. Levy of Interest under Section 234B.

Summary:

Transfer Pricing Adjustments:
The assessee challenged the rejection of certain comparables and the inclusion of others by the TPO and DRP. The Tribunal remitted several issues back to the TPO/AO for fresh consideration, including the inclusion of Akshay Software Technologies Limited, Evoke Technologies Private Limited, E-Zest Solutions Limited, Nitor Infotech Private Limited, Sasken Communication Technologies Limited, and Sankhya Infotech Ltd., following the decision in the case of MetricStream Infotech (India) Pvt. Ltd. For companies like Infosys Ltd., Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., and Mindtree Ltd., the Tribunal directed their exclusion based on functional dissimilarity and other factors.

Notional Interest on Trade Receivables:
The Tribunal upheld that notional interest on receivables is an international transaction. However, it directed the TPO to apply 6 months LIBOR + 300 basis points beyond the credit period for calculating the notional interest on receivables.

Depreciation on Goodwill:
The issue of depreciation on goodwill was remitted back to the AO for fresh consideration. The Tribunal directed the AO to verify the aspects of goodwill arising from amalgamation and ensure no double benefit is given to the amalgamating/amalgamated company.

Incorrect Computation of Operating Profit Margins:
The Tribunal directed the AO/TPO to verify the correct margins of the comparables while computing the operating margin used for determining the ALP. The assessee was directed to furnish the relevant details before the authorities.

Adoption of Cash PLI:
The Tribunal directed the AO/TPO to adopt the Cash PLI for computation of the arm's length price, following the decisions in the case of PCIT v Novell Software Development India (P.) Ltd and the assessee's own case for previous assessment years.

Risk Adjustment:
The Tribunal remitted the issue to the AO/TPO for fresh examination and directed the assessee to provide the details of quantification of risk adjustment.

Credit of Advance Tax:
The Tribunal remitted the issue to the AO for verification and decision as per law regarding the credit of advance tax paid relating to the transferor company merged with the assessee.

Levy of Interest under Section 234B:
The Tribunal noted that the levy of interest under section 234B is consequential in nature and will depend on the final computation of tax liability.

Conclusion:
The appeals were partly allowed for statistical purposes, and the stay petitions were dismissed as infructuous.

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