In Lear Automotive India (P.) Ltd. vs. Assistant Commissioner of Income-tax, it was held that a company providing exclusive software related services or both software related services and software development services jointly cannot be compared to assessee providing simple software development services.   

Facts of the case:

The assessee is a subsidiary company of Lear Corporation USA which holds the entire share capital of the assessee-company through its affiliate viz., Lear Corporation (Mauritius) Ltd. It is engaged in the manufacture/ assembly of automotive seating systems (i.e. seats and seat trims) and interior parts. The assessee provides design and engineering support services along with embedded software development support services to group companies, and design and engineering services to automotive industry customers, like General Motors Ltd. and Mahindra & Mahindra (M&M).

• The assessee reported a payment of Rs.1,99,22,532/- to its Associated Enterprises (AEs) towards ‘Cost allocation’. For this transaction, the AO made the reference to the Transfer Pricing Officer (TPO). The TPO noticed that the assessee had paid certain allocated costs to group companies. Such cost allocation transaction shall be computed using CUP method.

In the absence of the assessee providing any details of invoices and other back-up documents to show that such payments actual represented reimbursement of costs incurred by the group companies to the third parties, the TPO held that the arm’s length price (ALP) of this transaction was to be taken as Nil. The assessee remained unsuccessful before the DRP. That is how, an addition of Rs.1,99,22,532/- was made in the final order passed by the AO.

 

• The assessee incurred certain costs/expenses through group companies towards third parties and reimbursed the same on cost to cost basis. The TPO found that assessee’s explanation that such costs were charged by group companies to the assessee without any mark-up was found to be not substantiated with any evidence. Hence, the TPO held that the said payment was unjustified and took the ALP of this transaction at Nil. Thus, the addition was made to the income.
• The assessee was providing software development services to its AE. The assessee determined the ALP of this transaction by applying TNMM as the most appropriate method with Profit Level Indicator (PLI) of Operating Profit / Total Cost (OP/TC). For this, the TPO selected 26 companies as comparables. By considering the arithmetic mean margin of these comparables, the TPO computed adjustment and made additions. On appeal to Tribunal the assessee assailed the inclusion of fourteen companies in the list of comparables by contending that their functional profile was different.

It was held that:

• The Tribunal observed that he instant issue was also there in the preceding year. he assessee submitted that for such immediately preceding year, the assessee placed some additional evidence before the Tribunal indicating that the payment made to its foreign AEs represented a simple reimbursement of cost incurred by them to third parties. After going through the entire gamut of the available material, but without commenting on such additional evidence, the Tribunal restored the entire issue to the TPO for taking a fresh decision in accordance with law after allowing a reasonable opportunity of being heard to the assessee.
• It is noticed that the assessee failed to furnish the relevant documents called for by the TPO to corroborate its explanation. Since the necessary details in this regard were not filed before the TPO and the DRP also chose not to comment upon the same. Accordingly the order is set aside and the TPO/Assessing Officer is directed to decide this issue afresh as per law after allowing the reasonable opportunity of being heard to the assessee.
• The group companies understand the total requirements of the customer and conceptualize the designs. The assessee, based on such specifications, prepares the designs, tests and simulates to ensure the proper functioning of the product when all its components would be assembled. The work done by the assessee goes back to the AE, who then gets such designs approved from the final customers and, thereafter, prototypes are made as per the designs which are tested for functionality and then approved by the customer. Once the prototypes are approved, the AEs get manufactured tools and moulds for the purposes of manufacturing components.

Thus, the assessee is simply engaged in providing software development services to its AE.

In the instant case, the TPO has classified the assessee as providing software development services. On keeping the fine distinction between the software related services and software development services in mind, it becomes noticeable that the scope of the activity of Toluna is wider than that of the assessee inasmuch as Toluna India (P.) Ltd.(supra) is both a software related service provider and also a software developer. On the other hand, the assessee is only engaged in providing software development services. Seen from that angle, it becomes manifest that the activity done by the assessee is a part of the activities carried on by Toluna India (P.) Ltd.

The said case shall be  incomparable to the assessee also unless it is shown that such comparable was engaged either in providing exclusive software related services or both software related services and software development services jointly, which are different from simple software development services provided by the assessee. No such distinction has been brought by the revenue in respect of the companies challenged by the assessee as not comparable.

The impugned order on this issue is set aside and the matter is send back to the file of TPO/Assessing Officer for the determination of the ALP of the international transaction.