Yahoo Software Development India Pvt. Ltd. Vs JCIT (ITAT Bangalore)
AY 2014-15: Transfer Pricing Adjustment for Software Development Services
The assessee, a wholly owned subsidiary of Yahoo, was engaged in software design, development, testing, support and implementation of computer software. During the relevant year, it provided software development (SWD) services to its Associated Enterprise for Rs.867,17,41,441.
The assessee applied the Transactional Net Margin Method (TNMM) and used Operating Profit to Operating Cost (OP/OC) as the Profit Level Indicator. Its operating profit margin was 19.92%, compared with an arithmetic mean margin of 11.41% of the seven comparables selected by the assessee.
The Transfer Pricing Officer (TPO) rejected the assessee’s comparables and selected eight companies having an average margin of 29.40%. The TPO also denied working capital adjustment and determined a transfer pricing adjustment of Rs.69,22,26,380.
The Dispute Resolution Panel (DRP) retained the TPO’s comparables and directed inclusion of CG Vak Software & Exports Ltd., E-Zest Solutions Ltd. and Daffodils Software Ltd. The resulting average margin was 24.46%, reducing the transfer pricing adjustment to Rs.35,26,13,483.
Exclusion of Three Comparables
The assessee sought exclusion of Thirdware Solutions Ltd., Infosys Ltd. and Persistent Systems Ltd.
The Tribunal relied on the decision of the ITAT Hyderabad Bench in Kony IT Services P. Ltd. v. DCIT. It held that the functional profile of the assessee was akin to software development services and that the three companies were not pure software development service providers.
