Velocity Tech-Sol India Pvt. Ltd. Vs ACIT (ITAT Pune)
The Income Tax Appellate Tribunal (ITAT) adjudicated the assessee’s appeal against the final assessment order passed under Sections 143(3) read with 144C(13) of the Income-tax Act, 1961 for Assessment Year 2014-15. The assessee, a wholly owned subsidiary of its US parent company, was engaged in providing software development services on a cost-plus mark-up basis. It benchmarked its international transaction of software development and IT enabled services using the Transactional Net Margin Method (TNMM), adopting Operating Profit to Total Cost (OP/TC) as the Profit Level Indicator. The assessee claimed its operating margin of 10.34% exceeded the average margin of its selected comparables.
The Transfer Pricing Officer (TPO) accepted TNMM and the Profit Level Indicator but rejected most of the assessee’s comparables, selected a fresh set of comparable companies, computed an average margin of 34.74%, and proposed an upward transfer pricing adjustment of ₹6,94,47,074. The Dispute Resolution Panel (DRP) upheld the TPO’s approach, leading to the present appeal.
Grounds challenging the transfer pricing adjustment generally were not separately adjudicated. The principal dispute before the Tribunal related to inclusion of three comparables, namely Cybercom Datamatics Information Solutions Ltd., Thirdware Solutions Ltd., and Infobeans Systems India Ltd. Grounds relating to other comparables were dismissed as not pressed.
Regarding Cybercom Datamatics Information Solutions Ltd., the assessee contended that the company carried on diversified activities, including consultancy, advisory, surveyor services, software products and technical services, and that no segmental information was available. It was also argued that the company earned abnormally high profits of 83.99%. The Revenue submitted that the company derived its revenue from software services and could not be excluded merely because of high profitability. After examining the annual report, the Tribunal observed that the company was engaged in both technical and software services without segmental information. It also noted the exceptionally high profit margin and the absence of any enquiry by the TPO to determine whether such profits arose under normal business conditions. Following an earlier Tribunal decision, the ITAT directed exclusion of Cybercom Datamatics Information Solutions Ltd. from the final set of comparables.
With respect to Thirdware Solutions Ltd., the assessee argued that the company earned revenue from sale of products and software licences and therefore could not be compared with a pure software development service provider. The Tribunal examined the annual report and found that revenue from software licence sales was insignificant compared with total operating revenue. It further observed that the balance sheet did not indicate the presence of intangible assets or closing stock suggesting software product development. Accordingly, it upheld inclusion of Thirdware Solutions Ltd. as a comparable.
The assessee also challenged inclusion of Infobeans Systems India Ltd., contending that it earned supernormal profits and was engaged in product development. The Tribunal examined the financial statements and found that revenue was derived solely from software exports. It observed that the absence of closing stock or work-in-progress did not support the contention that the company was engaged in software product development. The Tribunal further held that supernormal profits alone could not justify exclusion without establishing that they arose from abnormal business conditions. Consequently, it upheld inclusion of Infobeans Systems India Ltd. in the final set of comparables.
The assessee also sought admission of an additional ground contending that foreign exchange gains or losses should be treated as operating revenue while determining the Profit Level Indicator. The Tribunal held that the issue required factual examination of the financial statements of both the tested party and comparable companies and was therefore not a pure question of law. As the assessee had not produced the necessary financial records or computation supporting its claim, the Tribunal declined to admit the additional ground.
A second additional ground seeking inclusion of Cat Technologies Ltd. and Maverick Systems Ltd. as comparables was not pressed and was dismissed accordingly.
Accordingly, the Tribunal partly allowed the assessee’s appeal.
