Transfer-pricing benchmarking must recognise documented software costs and follow binding directions on segmental margins and functional comparability.

Documented third-party software licence and support costs could not be assigned a nil arm's length price where invoices, licensing agreements, vendor rates and allocation workings established actual receipt and allocation of services; the adjustment was deleted. IS&T benchmarking could not aggregate cost-to-cost vendor recoveries with low-end services contrary to Dispute Resolution Panel directions, and a materially different company was excluded as functionally non-comparable; recomputation was required. The bonus deduction claim, following an earlier disallowance, required verification of records and could be allowed if admissible.

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Issues: (i) Whether the transfer-pricing adjustment for allocation of third-party software licence costs for AY 2017-18 was sustainable; (ii) Whether cost-to-cost recoveries from associated enterprises could be aggregated with low-end IS&T services for determining the assessee's margin for AY 2018-19, and whether eClerx Services Ltd. was a valid comparable; (iii) Whether deduction of bonus previously disallowed could be allowed on reversal in AY 2018-19.

Issue (i): Whether the transfer-pricing adjustment for allocation of third-party software licence costs for AY 2017-18 was sustainable.

Analysis: The assessee furnished the inter-company invoice, third-party licensing agreement, agreed vendor rates, allocation workings and supporting invoices. The material demonstrated actual availing of software licences and support services, with the allocated costs supported by documentary evidence. Determination of the arm's length price at nil was therefore not justified.

Conclusion: The software-licence-cost adjustment was deleted, in favour of the assessee.

Issue (ii): Whether cost-to-cost recoveries from associated enterprises could be aggregated with low-end IS&T services for determining the assessee's margin for AY 2018-19, and whether eClerx Services Ltd. was a valid comparable.

Analysis: The Dispute Resolution Panel had directed verification of audited segmental accounts and recomputation of the IS&T margin consistently with the preceding year. The transfer-pricing authority was bound by those directions and could not aggregate third-party vendor cost recoveries with the low-end IS&T segment without following them. eClerx Services Ltd. had a materially different business profile and scale of operations from the assessee and was not functionally comparable.

Conclusion: The IS&T adjustment was set aside for fresh computation in accordance with the Dispute Resolution Panel's directions, with eClerx Services Ltd. excluded as a comparable, in favour of the assessee.

Issue (iii): Whether deduction of bonus previously disallowed could be allowed on reversal in AY 2018-19.

Analysis: The prior-year computation showed disallowance of bonus exceeding the amount claimed in the relevant year. The claim required verification of the relevant records before allowance.

Conclusion: The bonus claim was restored for verification and allowance if found admissible, in favour of the assessee.

Final Conclusion: The nil arm's length price for documented third-party software licence costs was unsustainable; the IS&T benchmarking must be recomputed consistently with binding directions and appropriate comparability analysis, while the bonus claim requires factual verification.

Ratio Decidendi: A transfer-pricing adjustment cannot disregard substantiated third-party service costs, and an authority giving effect to Dispute Resolution Panel directions must adhere to those directions in recomputing the taxpayer's margin.

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