STEELWEDGE TECHNOLOGIES PRIVATE LIMITED, HYDERABAD,HYDERABAD vs. DCIT, CIRCLE-3(2), HYDERABAD, HYDERABAD

Brief facts of the case are that the assessee company, engaged in the business of Software Development, IT Consulting and IT enabled solutions, filed its return of income for the A.Y 2012-13 on 29.11.2012, declaring a total income of Rs.1,90,09,809 under the normal provisions and Rs.1,81,39,584 under the MAT provisions. During the assessment proceedings u/s 143(3) of the Act, the AO observed that the assessee has entered into an international transaction with its AE for ‘providing of software development services’. Therefore, a reference was made to the TPO for determination of the Arms’ Length Price of the said international transaction.

Before the TPO, the assessee furnished its T.P. study wherein it had adopted 12 companies as comparable, out of which the AO has accepted only 7 companies as comparable. Thereafter, he proceeded to conduct an independent search and arrived at the final 13 companies as comparable to the assessee and arrived at the average margin of 20.84%. After allowing the working capital adjustment, the ALP was arrived at 17.93% as against the assessee’s margin of 10.54%. Therefore, the TPO proposed an adjustment of Rs.1,19,94,159. Consequently, the AO proposed the draft assessment order against which the assessee preferred its objections to the DRP. The DRP accepted the assessee’s contention that out of the total of 13 comparables, 9 companies are not comparable to the assessee. However, it observed that the mean margin of the balance 4 companies comes to 21.37% as against the mean margin of 20.05% computed by the TPO based on 13 comparables. Therefore, it was of the opinion that the larger set of the comparables takes care of the differences, if any. The DRP thus, has upheld all comparables taken by the TPO, against which the assessee is in appeal before us.

The learned Counsel for the assessee submitted that the DRP, having come to the conclusion that 9 companies selected are not comparable to the assessee, ought not to have upheld all the comparables selected by the TPO. He submitted that even out of the balance 4 companies, the assessee is challenging the comparability of two companies and only the balance of the 2 companies should be considered for the ALP determination.

The learned DR was also heard. He supported the orders of the authorities below.

Having regard to the rival contentions and the material on record, we find that the DRP has examined and found that 9 out of the total of 13 comparables selected by the TPO are functionally dissimilar to the assessee. Having held so, it is not proper and correct on the part of the DRP to uphold the larger set of 13 comparables selected by the TPO. In case they were of the opinion, that a larger set of comparables is required, the DRP ought to have referred the matter to the TPO to conduct fresh search and adopt more number of comparable companies. We find that out of the 4 companies, the assessee is challenging the comparability of Persistent Systems Ltd and L & T Infotech Ltd. We find that the assessee itself has taken Persistent Systems Ltd as one of the comparable and had not raised any objection against the same before the DRP. Therefore, it cannot now turnaround and challenge the same before us, without raising a specific ground of appeal. That leaves us only to deal with only one comparable i.e. L&T Infotech Ltd. At this stage, the learned Counsel for the assessee also agreed with the suggestion of the Bench that in order to determine the ALP, the TPO may conduct fresh search and for this purpose, the issue of adopting some more companies is comparables are referred to the TPO. The learned DR also had no objection to this suggestion by the Bench. In view of the same, we deem it fit and proper to direct to the TPO to conduct search afresh some other comparable companies to arrive at the ALP. Needless to mention that the assessee shall be given a fair opportunity of hearing.

In the result, assessee’s appeal is treated as partly