Sanjeev Narula JUDGMENT
Sanjeev Narula, J.
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').
Facts in brief
2. The respondent-assessee is engaged in the business of development of computer software and related services. It was set up in India as a separate entity to specifically provide software development, research and other services to its AE. During the relevant previous year, respondent had rendered services to its AE and declared its income at Rs. 6,060/- and a book profit of Rs. 4,37,12,441/- under section 115JB of the Act. The price for the international transactions with its AE was valued at Rs. 38,40,88,682/-. The 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%. The 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, the assessee declared that its profit margins were at arm's length price ('ALP') when compared to similarly situated companies.
3. The Assessing Officer ('AO') picked up the case for scrutiny and a reference was made to the Transfer Pricing Officer ('TPO') under section 92CA of the Act to determine the ALP. The TPO vide order dated 16.01.2014 rejected the transfer pricing study undertaken by the assessee and further undertook an extensive study by applying fresh filters for benchmarking the international transaction entered into by the respondent-assessee and substituted its own ALP with the ALP determined by the respondent. In this exercise, the TPO, inter alia introduced the four comparables which are 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, the 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.
4. A draft assessment order was passed by the AO under Section 143(3) read with Section 144C (1) of the Act and the total assessed income was computed at Rs. 5,76,91,078/-, by making two-fold additions to the assessee's taxable income: (a) Addition on account of transfer pricing adjustment at Rs. 5,49,05,106/-; (b) Disallowance of excess depreciation at Rs. 27,79,910.
5. Aggrieved by the draft assessment order, assessee filed its objections before the Dispute Resolution Panel ('DRP') with regard to the inclusion of the above-noted four comparables. However, the DRP vide order dated 29.10.2014 partially allowed and affirmed the inclusion of the said comparables. Accordingly, the TPO vide order dated 11.11.2014, complied with the direction of the DRP and revised the ALP ad........