Alcatel Lucent India Limited Vs DCIT (Delhi High Court)
Inclusion/ Exclusion of comparable to determine Arm’s Length Price depends on similarity of functional filters & business model for arriving at ALP
Conclusion: Inclusion/ exclusion of certain uncontrolled entities as comparable for purpose of determining arm’s length price (ALP) of assessee company/ Appellant depends on similarity of functional filters, product homogeneity and business model, in order to arrive at suitable comparable for determination of arm’s length price. Hence, the matter was remanded back to the ITAT for deciding afresh the assessee’s objections regarding to selection of Ishir Infotech, Tata Elxsi, Sasken Communication Technologies, and Akshay Software Technologies, as comparable.
Held: The controversy involved in these appeals relates to the enhancement of total income chargeable to tax on the basis of orders passed by TPO. ALTIPL and ADIPL [hereafter also referred to as the assessee(s)] adopted the Transactional Net Margin Method (hereafter TNMM) with the ratio of operating profit (OP) to costs as the Profit Level Indicator (PLI) for determining the arm’s length price (ALP) in respect of transactions of the assessees with their associate enterprises (hereafter also referred to as AEs). TPO rejected the Transfer Pricing Studies furnished by assessees and determined the ALP on the basis of filters selected certain uncontrolled comparable entities for determining the PLI on arm’s length basis. In the case of ALTIPL, TPO determined its operating profit margin to costs at 25.44%, which was significantly higher than ADIPL’s operating profit margin to cost of 10.57%. Accordingly, TPO passed an order under Section 92CA(3) proposing an upward adjustment of ₹27,91,55,906/- in respect of the ADIPL’s software development segment. In view of the said order of the TPO, AO passed a draft assessment order assessing ADIPL’s total income as ₹29,46,35,755/-. Accordingly, TPO passed an order under Section 92CA(3) proposing an upward adjustment of ₹27,91,55,906/- in respect of the ADIPL’s software development segment. In view of the said order of the TPO, AO passed a draft assessment order assessing ADIPL’s total income as ₹29,46,35,755/-. It was held that ITAT’s inclusion of Avani Cincom Technologies Ltd was ex facie erroneous as ITAT proceeded on the assumption that Avani was not a product company but was engaged in software development for its clients/customers. The Bench further noted that TPO had concluded that 97% of the company’s income was from software development and no part of the income was from product export. At the same time, the Bench observed that such assumption was not supported by information available on the company’s website, as the company, in its response to the notice u/s. 133(6) stated that it was a ‘pure software development service provider’. However, the Bench clarified that the statement by company did not imply that it did not sell software products developed by it. Also, the Bench noted that TPO/ DRP proceeded without ascertaining whether the products as mentioned on its website were, in fact, sold /licensed during FY 2006-07. Since the company derived revenue from both software development services and sale of software products, the Bench observed that both TPO and ITAT erred in not excluding Avani as a comparable entity. As regards Ishir Infotech Ltd, assessee’s submission that the business model followed by Ishir was largely outsourcing its activities and sub-contracting services. As regards exclusion of Akshay Software Technologies, the Bench highlighted that even though assessee’s challenge to the same before ITAT was sketchy as no specific ground was taken or articulated, nonetheless, there was an apparent error inasmuch as assessee’s basis for challenging the exclusion was not considered by the ITAT. Assessee’s challenge to inclusion of Tata Elxsi Limited and Sasken Communication Technologies Limited, as also set out in the miscellaneous applications filed by assessee, was not adjudicated by ITAT. The matters were remanded back to the Tribunal for deciding afresh the appellant’s objections in regard to inclusion and exclusion of Ishir Infotech Ltd, Tata Elxsi Limited, Sasken Communication Technologies Limited and Akshay Software Technologies Limited for determining the ALP adjustment, if any.
