Case Law Details
PCIT Vs Open Solutions Software Services Pvt. Ltd. (Delhi High Court)
Conclusion:Since none of the comparables had been excluded on the ground of high turnover alone, the test of functional similarity applied by the Tribunal was in consonance with the legal position and moreover, assessee could not be denied a chance to challenge the inclusion of a comparable merely for the reason that the selected comparable cleared the filters.
Held: Assessee was engaged in the business of development of computer software and related services. During the relevant previous year, assessee had rendered services to its AE and declared its income and a book profit under section 115JB. Assessee benchmarked the aforesaid international transaction using Transactional Net Margin Method (‘TNMM’) and computed the Profit Level Indicator (‘PLI’) of the international transaction at 11.87%. Assessee selected 14 comparable companies engaged in software development services and the arithmetic mean of the PLI was computed at 11.91%. Based on the above, assessee declared that its profit margins were at arm’s length price (‘ALP’) when compared to similarly situated companies. AO picked up the case for scrutiny and a reference was made to the Transfer Pricing Officer (‘TPO’) to determine the ALP. TPO rejected the transfer pricing study undertaken by assessee and further undertook an extensive study by applying fresh filters for benchmarking the international transaction entered into by assessee and substituted its own ALP with the ALP determined by assessee. In this exercise, the TPO, inter alia introduced the four comparables which were subject matter of the present dispute: (i) Infosys Ltd,(ii) Wipro Technology Services Ltd., (iii) Persistent Systems Ltd. and (iv) Thirdware Solutions and Sales Ltd. By taking the aforesaid comparables into consideration, TPO computed the arithmetic mean of PLI of transactions entered by similarly situated 21 companies at 27.86%, and, therefore, an addition of Rs. 5,49,05,106/- was proposed to the total taxable income of the assessee. Tribunal deleted four comparable companies for the purpose of assessment of the arm’s length price for bench marking the present assesee’s international transaction. On appeal by AO. It was held that it emerged that none of the comparables had been excluded on the ground of high turnover alone. The test of functional similarity applied by the Tribunal was in consonance with the legal position. Also, meritless was the contention of the Revenue regarding the bar to challenge the comparables after the acceptance of the filters. The filters were applied to narrow down the search to find the comparables that were closest to the assessee. The use of filters had to be necessarily validated from the annual reports. Since TPO would have to do this exercise on the basis of the actual data in the report of the comparables, he would surely have the freedom to adopt or reject the comparables. Merely because a comparable clears the filters, its inclusion in the list of comparables is immune to challenge by the assessee was not justified.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
1. By way of the present appeal under Section 260A of the Income Tax Act, 1961 (‘the Act’), the Appellant (Revenue) assails the order dated 17.04.2017 (‘impugned order’) passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITA No. 7078/Del/2014 for the Assessment Year (‘AY’) 2010-11. The grievance of the appellant is against the exclusion of four comparables introduced by the Transfer Pricing Officer (‘TPO’) for benchmarking the international transaction of rendition of software services by the Respondent- assessee to its parent company -Open Solutions Inc., USA, the Associated Enterprise (‘AE’).
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