Software company wins transfer pricing appeal with multiple comparables excluded as functionally dissimilar

ITAT Bangalore allowed the appeal for statistical purposes in a transfer pricing case involving software development and IT services. The tribunal directed exclusion of multiple companies from comparable lists including RS Software, L&T Infotech, Infosys, and others as functionally dissimilar to the assessee. For companies like Akshay Software and Sasken Communication, the matter was remitted to AO/TPO for fresh consideration after DRP failed to properly adjudicate inclusion claims. The tribunal also directed re-computation of margins for certain comparables and exclusion of ITeS companies like Infosys BPM and Eclerx Services as functionally dissimilar. Additionally, the tribunal allowed deduction under section 80G after directing AO to verify supporting documents.

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Issues Involved:

1. Validity of the AO's order under Section 143(3) read with Section 144C(13) of the Income Tax Act.
2. Transfer Pricing adjustments made by the TPO.
3. Determination of the arm's length price for software development services (SWD) and information technology-enabled services (ITeS).
4. Exclusion and inclusion of certain comparable companies in the transfer pricing analysis.
5. Non-granting of deduction under Section 80G.
6. Computation of interest under Section 234B.
7. Initiation of penalty proceedings under Section 271(1)(c).

Summary:

1. Validity of AO's Order:
The assessee challenged the AO's order dated 25-03-2021, contending it was bad in law and liable to be quashed.

2. Transfer Pricing Adjustments:
The TPO did not conform to the directions of the Dispute Resolution Panel (DRP) in entirety, making adjustments to the transfer price of the assessee.

3. Arm's Length Price Determination:
The TPO's approach in determining the arm's length price for the SWD and ITeS segments involved several errors:
- Rejection of the value of international transactions as recorded in the books.
- Rejection of the Transfer Pricing documentation maintained under Section 92D.
- Application of Rules 10B(1), 10CA(2), and 10CA(4) for fresh benchmarking analysis.
- Conducting a fresh comparability analysis by rejecting certain filters applied by the assessee and applying additional/modified filters.

4. Exclusion and Inclusion of Comparable Companies:
Exclusions:
- The Tribunal excluded several companies from the final set of comparables for the SWD segment, including R S Software (India) Ltd., Larsen & Toubro Infotech Ltd., Nihilent Ltd., Inteq Software Pvt. Ltd., Persistent Systems Ltd., Infobeans Technologies Ltd., Thirdware Solution Ltd., Infosys Ltd., Aspire Systems (India) Pvt. Ltd., and Cybage Software Pvt. Ltd., based on functional dissimilarities and other factors such as significant intangibles, related party transactions, and peculiar economic circumstances.

Inclusions:
- The Tribunal remitted the inclusion of Akshay Software Technologies Ltd. and Sasken Communication Technologies Pvt. Ltd. back to the AO/TPO for fresh consideration.
- The Tribunal also directed the AO/TPO to reconsider the inclusion of Microgenetic Systems Ltd., Ace BPO Services Pvt. Ltd., and Suprawin Technologies Ltd. for the ITeS segment.

5. Deduction under Section 80G:
The AO did not grant the deduction under Section 80G amounting to INR 54,16,090. The Tribunal directed the AO to verify the documents and allow the deduction as per law.

6. Computation of Interest under Section 234B:
The AO erred in not granting consequential relief in the computation of interest under Section 234B. The Tribunal directed the AO to recompute the interest.

7. Penalty Proceedings under Section 271(1)(c):
The AO initiated penalty proceedings for concealment of income and furnishing inaccurate particulars of income. The Tribunal did not provide specific directions on this issue in the judgment.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for the AO/TPO to reconsider certain comparables and verify the deduction under Section 80G. The Tribunal excluded several companies from the final set of comparables for the SWD segment and directed the AO/TPO to recompute the interest under Section 234B.

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