Transfer pricing adjustment in respect of the provision of software development services

IN THE INCOME TAX APPELLATE TRIBUNAL
“B’’ BENCH: BANGALORE

BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER
AND
SHRI B.R. BASKARAN, ACCOUNTANT MEMBER

IT(TP)A No.1824/Bang/2017
 Assessment Year: 2013-14

ARM Embedded Technologies Pvt. Ltd.
Bagmane World Technology Pvt. Ltd., SEZ
Citrine Block, 5th Floor, Marathahalli
Outer Ring Road, Doddanakundi Village
Mahadevapura
Bangalore 560 048
PAN NO : AAECA1582E
APPELLANT 

Vs.

DCIT Circle-1(1)(1)
Bangalore
RESPONDENT

Appellant by : Shri T. Suryanarayana, A.R.
Respondent by : Shri Muzaffar Hussain, D.R.

Date of Hearing : 15.06.2021
Date of Pronouncement : 12.07.2021

O R D E R

PER B.R. BASKARAN, ACCOUNTANT MEMBER:

 The assessee has filed this appeal challenging the assessment order dated 7.7.2017 passed by the Assessing Officer for assessment year 2013-14 u/s 143(3) r.w.s 144C of the Act in pursuance of directions given by Ld. Dispute Resolution Panel (DRP).

2. Though the assessee has raised many grounds in this appeal, they relate to the following issues: - 

a) Transfer pricing adjustment made in respect of provision of software development services.

b) Addition made u/s 28(iv) of the Act treating the assets received free of cost as benefit received by the assessee.

c) Non-granting of MAT credit. The grounds relating to charging of interest u/s 234B and 234C are consequential in nature.

3. The assessee is a subsidiary of M/s. ARM Ltd., UK. The assessee is engaged in the business of providing software development services and marketing support services to its Associated Enterprises. The assessee is contesting the transfer pricing adjustments made in respect of software development services. The revenue from software development services was Rs.131.22 crores. The TPO made TP adjustment of Rs.4.93 crores, which stood enhanced to Rs.5.42 crores on giving effect to the directions of Ld. DRP.

4. The assessee adopted TNM method as most appropriate method and OP/OC as profit level indicator. The assessee declared profit margin of 14.91% for the year under consideration. The assessee selected 9 comparable companies, whose average arithmetic mean of margin was 10.28%. Accordingly, the assessee contended that its international transaction in providing software development services was at arm’s length.

5. The TPO did not accept the TP study of the assessee. He selected following 7 comparable companies whose average margin was 20.90%. After giving working capital adjustment of 1.69% the average margin was arrived at 19.21% by TPO. Accordingly, he made transfer pricing adjustment of Rs.4.93 crores. The comparable selected by TPO are given below: 

6. The Ld. DRP directed exclusion of 3 companies namely ICRA Techno Analytics Ltd., Persistent Systems Ltd. and Tech Mahindra Ltd. Accordingly, the ld. DRP confirmed selection of remaining 4 comparable companies. The order passed by Ld. DRP resulted in enhancement of TP adjustment to Rs.5.42 crores.

7. The ld. A.R. submitted that the assessee seeks exclusion of two comparable companies namely, M/ s. CG-VAK Software Exports Ltd and M/s. Larsen & Toubro Infotech Ltd. He submitted that these companies have been held to be not a good comparable by the coordinate bench in the case of NXP India Pvt. Ltd. Vs. DCIT (2020) 116 Taxmann.com 421 in the order passed for assessment year 2013-14. Accordingly, he pleaded for exclusion of these two companies. The Ld. A.R. further submitted that the assessee seeks inclusion of two companies namely M/s. Akshay Software Technologies Ltd. & M/s. R. Systems International Ltd. These two companies have been held to be a good comparable by the coordinate bench in the case of NXP India Pvt. Ltd. (supra). 

To know more in details fin the attachment file