The court established that functional dissimilarity among companies necessitates exclusion from comparability analysis in transfer pricing assessments under the Income Tax Act.

ORDER PER MANJUNATHA G, A.M. :

This appeal has been filed by the assessee against the final assessment order dated 16.10.2019 passed by the Assessing Officer u/sec.143(3) r.w.s.144C(13) in pursuance to the directions of the Disputes Resolution Panel-1, Bengaluru, dated 06.09.2019, passed u/sec.144C(5) of the Income Tax Act, 1961 [in short “the Act”].

2. Brief facts of the case are that, the appellant company is engaged in the business of providing Software Development and Management Services to it’s Associated Enterprises [in short “AE”] which are in the nature of development of modern gaming software and software maintaining services. The appellant undertakes software coding according to functional specifications and software requirement analysis agreed with AE. It receives technical assistance from it’s AE if required during coding coupled with regular reviews and feedback by the AE. It also generates and maintain documentation for the code generated. During the financial year relevant to assessment year under consideration, the appellant had entered into international transactions with it’s AE for providing software services. The appellant applied Transactional Net Marginal Method [in short ‘TNMM”] and Profit Level Indicator [in short “PLI”] Operating Profit/Operating Cost (in short “OP/OC”). The appellant computed the PLI at 16.69% while the PLI range of 14 comparables selected by the appellant were arrived at 4.84% to 18.89% with a median of 9.33%. Accordingly, the software development services of the appellant to it’s AE are concluded to be at Arm’s Length Price [in short “ALP”].

2.1. The assessee had filed it's return of income for the assessment year 2015-2016 on 30.11.2015 declaring total income at Rs.10,20,08,630/- under normal provisions of the Income Tax Act, 1961 . The case of the assessee company was selected for scrutiny and during the course of assessment proceedings, a Reference was also made to Transfer Pricing Officer [in short “TPO”] u/sec.92CA(1) of the Act for determination of ALP of international transactions of the assessee-company with it’s AE. During the TP proceeding, the learned TPO has rejected the TP study report maintained by the appellant and has conducted a fresh TP study and also selected 16 comparables with the arm’s length range of 20.55% to 37.9% with a median of 27.37% vis-à-vis the appellant’s margin at 16.69% and accordingly determined the differential adjustment to the price received by the appellant at Rs.4,01,82,001/-. The learned TPO had also computed interest on receivables on outstanding receivables by applying short term SBI deposit rate of 7.5% and proposed adjustment of Rs.38,33,317/-. Consequent to TP adjustment as suggested by the TPO the Assessing Officer has passed draft assessment order on 13.12.2018 u/sec.143(3) of the Act and made total addition of Rs.4,01,82,001/- on software development segment and also made addition towards TP adjustment on account of interest on receivables on outstanding receivables from AE at Rs.38,33,317/- and determined the total adjustments u/sec.92CA of the Act at Rs.4,40,15,318/-.

2.2. Aggrieved by the adjustment made by the learned Assessing Officer in the Draft Assessment Order, the appellant has filed it’s objections before the DRP-1, Bengaluru. The DRP vide it’s directions dated 06.09.2019 issued u/sec.144C(5) of the Act has allowed partial relief to the assessee-company by directing the learned Assessing Officer/TPO to exclude Thirdware Solution Limited from the list of comparables considered for the purpose of computing the ALP range and also included Cybage Software Private Limited; Inteq Software Private Limited and R S Software (India) Limited