Altair Engineering India Pvt. Ltd. Vs ACIT (ITAT Bangalore)
The ITAT Bangalore considered an assessee’s appeal against the final assessment order dated 25.8.2022 for AY 2018-19, concerning transfer-pricing adjustments for Software Development Services (SWD) and Information Technology Enabled Services (ITeS) provided to its wholly owned Associated Enterprise (AE). The assessee had adopted the Transaction Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator. In the SWD segment, the Transfer Pricing Officer (TPO) initially selected 20 comparable companies and determined a median margin of 23.60%, resulting in an adjustment of Rs.22,47,06,883. After directions of the Dispute Resolution Panel (DRP), 26 comparables remained. The assessee challenged, among other matters, the inclusion of nine companies having turnover exceeding Rs.200 crore.
The Tribunal examined Rule 10B of the Income-tax Rules and the comparability requirements applicable to determination of arm’s length price under Chapter X. It noted that the assessee’s SWD operating revenue, before the TPO’s apportionment, was Rs.106,29,01,011. The Tribunal also examined the revenue and expenditure allocation undertaken by the TPO between the SWD AE and ITeS AE segments. The assessee had furnished revenue and expenditure break-ups, which were not disputed by the TPO. The Tribunal found that the TPO had apportioned non-AE revenue, including revenue from software products and hardware, between the SWD and ITeS AE segments. It also found that the TPO had allocated the entire P&L expenditure between the two AE segments on the basis of operating revenue. The Tribunal held that the TPO’s recomputation of the assessee’s segmental margins was incorrect and directed that the margins computed by the assessee in its transfer-pricing study be accepted. The assessee’s SWD segment margin was 16.18%, compared with the 11.32% margin recomputed by the TPO. The Tribunal nevertheless held that the assessee’s revenue in the SWD segment before such apportionment was relevant for applying the turnover filter.
