Software support services transfer pricing comparables selection requires functional similarity and segmental data availability

ITAT Mumbai ruled on transfer pricing comparable selection for software support and development services. The tribunal excluded Infosys Technologies and Wipro Limited as functionally different, and Persistent Systems Limited due to licensing revenues and unavailable segmental results. Three comparables (iGate Global Solutions, Tata Elxsi, LGS Global) were remanded to AO for reconsideration. Five companies with high turnover were remanded for appellant to establish exclusion grounds. Kals Information Technology, Bodhtree Consulting, Acropetal Technologies, and Softsol India were excluded for functional dissimilarity or lack of segmental data. The matter was remanded to AO for final comparable determination and working capital adjustment consideration.

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Issues Involved:
1. Determination of arm's length mark-up for software support, development, and related services.
2. Rejection of Transfer Pricing (TP) documentation and comparability analysis.
3. Use of current year financial data versus multiple year data for benchmarking.
4. Granting of working capital and risk adjustment.
5. Application of 5 percent range as per proviso to section 92C(2) of the Act.
6. Levy of interest under sections 234A and 234B of the Act.
7. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Summary:

1. Determination of Arm's Length Mark-Up:
The Appellant challenged the arm's length mark-up determined at 26.21% by the Assessing Officer (AO), leading to an addition of Rs. 2,21,07,342/- to the total income. The AO conducted a fresh search and included 21 comparables, resulting in a higher Net Operating Profit on Cost (NCP) of 26.21% compared to the Appellant's 9.99%. The Tribunal directed the exclusion of Infosys Technologies and Wipro Limited from the final set of comparables, and remanded the issue of exclusion of iGate Global Solutions Ltd., Tata Elxsi Ltd., and LGS Global Limited back to the AO for reconsideration.

2. Rejection of TP Documentation and Comparability Analysis:
The Appellant's TP documentation was rejected by the AO, who conducted a fresh search for comparables. The Tribunal noted that the CIT(A) had not properly addressed the objections raised by the Appellant regarding functional dissimilarity and high turnover of certain comparables. The Tribunal directed the exclusion of Persistent Systems Limited, Kals Information Systems, Bodhtree Consulting Ltd., Acropetal Technologies Limited, and Softsol India Limited from the final set of comparables due to functional dissimilarity and lack of segmental data.

3. Use of Current Year Financial Data:
The Tribunal did not provide specific directions on this issue as it was not pressed by the Appellant during the hearing.

4. Granting of Working Capital and Risk Adjustment:
The Tribunal granted the Appellant an opportunity to establish entitlement to working capital adjustment before the AO, directing the AO to decide the claim for working capital adjustment as per law.

5. Application of 5 Percent Range:
The Tribunal did not provide specific directions on this issue as it was not pressed by the Appellant during the hearing.

6. Levy of Interest:
The Tribunal disposed of the ground relating to the levy of interest under sections 234A and 234B as being consequential in nature.

7. Initiation of Penalty Proceedings:
The Tribunal dismissed the ground related to the initiation of penalty proceedings under section 271(1)(c) of the Act as being premature.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to re-compute the arm's length price and transfer pricing adjustment after determining the final set of comparables, and to decide on the working capital adjustment claim. The appeal was disposed of with specific directions on the selection of comparables and other related issues.

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