TPO justified in including L T Infotech and Persistent Systems as comparables for transfer pricing adjustment on software development services

ITAT Hyderabad upheld TPO/DRP's inclusion of L T Infotech and Persistent Systems Ltd as comparables for transfer pricing adjustment on software development services, rejecting assessee's exclusion arguments as inconsistent with their own TP study selections. The tribunal set aside the interest computation on outstanding receivables, directing TPO to reconsider using appropriate currency-based rates rather than SBI PLR. Regarding employee PF contributions, ITAT confirmed disallowance under Section 36(1)(va) following Supreme Court precedent in Checkmate Services, upholding that belated remittance is not deductible even if deposited before return filing deadline.

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Issues Involved:
1. Transfer Pricing Adjustment for Software Development Services
2. Imputing Interest on Outstanding Receivables
3. Disallowance of Employee Contribution to Provident Fund

Detailed Analysis:

1. Transfer Pricing Adjustment for Software Development Services
The primary issue under consideration was the transfer pricing adjustment amounting to Rs. 1,36,52,580/- for software development services provided to the Associated Enterprise (AE). The assessee contested the inclusion of L&T Infotech Ltd and Persistent Systems Ltd as comparables, arguing that these companies were functionally dissimilar. However, it was noted that the assessee had originally included these companies in their transfer pricing study.

The Tribunal upheld the inclusion of L&T Infotech Ltd, stating that the assessee did not provide sufficient reasons for its exclusion and that both companies were engaged in software development services. Similarly, Persistent Systems Ltd was also retained as a comparable, as the assessee failed to justify its exclusion despite having initially selected it. The Tribunal dismissed the other grounds related to transfer pricing adjustments.

2. Imputing Interest on Outstanding Receivables
The assessee challenged the imputation of interest on outstanding receivables from AE, which the Transfer Pricing Officer (TPO) calculated using the SBI PLR rate of 14.75%. The Dispute Resolution Panel (DRP) scaled down the interest after allowing a 30-day credit period. The Tribunal found that outstanding receivables from AE constitute an international transaction under the amended section 92B of the I.T. Act.

The Tribunal ruled that the appropriate interest rate should be based on the currency in which the receivables are denominated. For receivables in foreign currency, the LIBOR rate plus an appropriate markup should be used. The Tribunal remanded the issue back to the TPO/Assessing Officer for reconsideration, directing them to adopt the appropriate interest rate based on the currency of the receivables.

3. Disallowance of Employee Contribution to Provident Fund
The assessee disputed the disallowance of Rs. 51,06,702/- for the belated remittance of employee contributions to the Provident Fund under section 36(1)(va) r.w.s. 2(24)(x) of the I.T. Act. The Tribunal referenced the Supreme Court's decision in Checkmate Services (P) Ltd vs. CIT, which held that belated remittances are not deductible even if deposited before the due date for filing the return of income. Consequently, the Tribunal upheld the disallowance.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal upholding the inclusion of L&T Infotech Ltd and Persistent Systems Ltd as comparables, remanding the issue of interest imputation on receivables for reconsideration, and maintaining the disallowance of the employee contribution to the Provident Fund.

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