Embassy Tech Square, of Income Tax, Marathahalli Sarjapur Outer Circle 4(1)(1), Ring Road, Bangalore. Marathahalli, Bangalore 560 103. PAN: AAACL 3009P APPELLANT RESPONDENT IT(TP)A No.97/Bang/2016 Assessment year: 201112 The Deputy Commissioner Vs. M/s. LG Soft India Pvt. Ltd., of Income Tax, Bangalore 560 103. Circle 4(1)(1), PAN: AAACL 3009P Bangalore. APPELLANT RESPONDENT Appellant by : Shri K.R. Vasudevan, Advocate Respondent by : Shri Pradeep Kumar, CIT(DR)(ITAT), Bengaluru. Date of hearing : 30.07.2020 Date of Pronouncement : 05.08.2020 IT(TP)A Nos.52 & 97/Bang/2016 Page 2 of 10 ORDER Per N.V. Vasudevan, Vice President IT(TP)A No.97/Bang/2016 is an appeal by the revenue while IT(TP)A No.52/Bang/2016 is an appeal by the assessee. Both these appeals are directed against the final order of assessment dated 30.11.2015 of DCIT, Circle 4(1)(1), Bengaluru, passed u/s. 143(3) r.w.s. 144C of the Incometax Act, 1961 [the Act] in relation to assessment year 201112. 2. The main issue to be decided in this appeal is with regard to the correctness of the determination of Arm's Length Price [ALP] in respect of international transaction entered into by the assessee with its Associate Enterprise [AE]. The assessee is an Indian company and is a 100% owned subsidiary of LG Electronics, South Korea. The assessee provides software development [SWD] services to its AE. It was not in dispute that the rendering of SWD services by the assessee to its AE is an international transaction and that the income arising from the said international transaction has to be determined keeping in view the ALP as is required u/s. 92 of the Act. 3. It is not in dispute between the Assessee and the revenue that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee's profit with that of comparable companies was Operating Profit/Total Cost (OP/TC). The OP/TC of the Assessee was 14.20%. The Assessee in its TP study selected 13 comparable companies whose arithmetic mean of OP/TC was arrived at 13.71%. Since the profit margin of the Assessee was more than the arithmetic mean of OP/TC of the 13 comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in IT(TP)A Nos.52 & 97/Bang/2016 Page 3 of 10 the international transaction was at Arm's Length. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the AO, accepted 2 (Acropetal Technologies Ltd., and R.S. Software India Ltd.) out of the 13 comparable companies suggested in the TP study by the Assessee as comparable with the Assessee. The TPO on his own selected 11 other companies as comparable companies with the Assessee. Thus a final set of 13 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment was as follows: Sl. Name of the company Margin on Cost Adjusted No. (2011) Margin 1. Acropetal Technologies Ltd. 4.58% 30.32% 2. eZest Solutions 21.03% 20.96% 3. EInfochips Ltd. 56.44% 56.68% 4. Evoke Technologies Ltd. 8.11% 10.42% 5. ICRA Techno Analytics Ltd. 24.83% 24.68% 6. Infosys Ltd. 43.39% 44.51% 7. Larsen & Toubro Infotech Ltd 19.83% 21.85% 8. Mindtree Ltd. (Seg) 10.66% 11/62% 9. Persistent Systems & 22.12% 23.10% Solutions Ltd. 10. Persistent Systems Ltd. 22.84% 23.52% 11. R S Software India