6th Floor, New No.1655, of Income Tax, Menon Eternity Building, Circle 4(1)(1), St. Mary's Road, Alwarpet, Bangalore. Chennai 600 018. PAN: AACCK 3468K APPELLANT RESPONDENT Appellant by : Shri Nageshwar Rao, Advocate Respondent by : Shri Pradeep Kumar, CIT(DR)(ITAT), Bengaluru. Date of hearing : 13.01.2020 Date of Pronouncement : 29.01.2020 ORDER Per N.V. Vasudevan, Vice President This is an appeal by the assessee against the final order dated 28.9.2018 passed by the DCIT, Circle 4(1)(2), Bangalore u/s. 143(3) r.w.s 144C of the Incometax Act, 1961 [the Act]. 2. The first issue that arises for consideration in this appeal is in respect of correctness of determination of arm's length price (ALP) in respect of an international transaction of rendering software development services by the assessee to its Associated Enterprises (AE). It is not in ITA No.3189/Bang/2018 Page 2 of 12 dispute that the transaction of rendering of software development services by the assessee to its AE is an international transaction and that the ALP of the same has to be determined as per the provisions of section 92 of the Act. It is also not in dispute that Transaction Net Margin Method (TNMM) is the most appropriate method for determination of ALP and the Profit Level Indicator (PLI chosen for the purpose of comparison of the assessee's profit margin with the comparable companies is OP/OC. 3. The TPO did not accept the comparables chosen by the assessee in its TP study and the TPO on his own chose 8 comparables and the arithmetic mean of profit margin of those companies was as follows: Amounts in Rs. Lakh S OP/OC NAME OF TAX PAYER OR/SALES OC OP (in % NO 1 Infosys Ltd. 46,91,700 32,77,700 11,84,200 36.13% 2 Larsen & Toubro Infotech Ltd. 4,54,360 3,64,619 89,741 24.61% 3 Mindtree Ltd. 2,99,010 2,48,290 5,072 20.43% 4 Persistent Systems Ltd. 1,18,412 87.649 3,07,625 35.10% 5 R S Software (India) Ltd. 35,188 28,321 6,867 24.25% 6 Cigniti Technologies Ltd. 5,563 4,359 1,204 27.62% 7 S Q S India B F S I Ltd. 20,061 16,394 3,667 22.37% 8 Thirdware Solution Ltd. 19,883 13,742 6,140 44.68% Average 29.40% 4. The assessee was aggrieved by the inclusion of certain comparables in the final list of comparable companies chosen by the TPO. The assessee was also aggrieved by the action of the TPO in not accepting some other comparable companies chosen by the assessee in its TP analysis. The TPO ultimately determined the ALP of the international transactions and addition to be made to the total income as follows: ITA No.3189/Bang/2018 Page 3 of 12 SWD Arm's Length Mean Margin on cost 29.40 % Operating Cost 162140385 Price Received 187853506 Arm's Length Price(ALP)@ 129.40% of Operating Cost) 209809658 Variation in price 21956152 3% of price received 5635605 Shortfall being adjustment 21956152 "The above shortfall of Rs.2,19,56,152/ is treated as transfer pricing adjustment u/s. 92CA in respect of software development segment of the taxpayer's international transactions." 5. The AO incorporated the additions suggested by the TPO in his draft order of assessment against which the assessee filed objections before the DRP, but without much success. Hence the assessee has filed the present appeal against the final orde