ITAT Bangalore Partly Allows Cross Appeals in Mercedes-Benz R&D India TP Case

Mercedes-Benz Research & Development India Pvt. Ltd. (MBRDI), a captive software development and engineering design service provider to Daimler group entities, filed its return for AY 2017-18, declaring income of Rs. 148.65 crore. Since it had several international transactions, the Assessing Officer made a reference to the Transfer Pricing Officer, who proposed substantial adjustments in both the Engineering Design Services (EDS) and Software Development (SWD) segments.

The TPO’s approach involved fresh filters, rejection of the assessee’s TP study, and selection of a new set of comparables, resulting in adjustments of Rs. 50.99 crore in EDS and Rs. 66.16 crore in SWD. The assessee challenged the adjustments before the CIT(A), who granted partial relief by modifying the list of comparables. Both parties then filed cross-appeals before the Tribunal.

Issue Raised: Whether the comparables selected by the TPO in the EDS and SWD segments were functionally appropriate, and whether the transfer pricing adjustments arising from such selections were sustainable.

ITAT Decided: The Tribunal first dealt with the EDS segment, agreeing with the Revenue that Cadsys (India) Ltd. ought to be included. However, since the assessee demonstrated that even with Cadsys added, its margin of 13.50% remained within the permissible arm’s length range, the Tribunal held that no TP adjustment survived. Thus, all other EDS-related grounds raised by both parties were rendered academic.

The Tribunal upheld the exclusion of Infosys Ltd. due to its massive scale and brand influence, finding it incomparable to a captive service provider. It also affirmed the exclusion of 360 Logica as it derived its entire revenue from software testing, a functionally distinct activity. Indianic Infotech was retained as a valid comparable since it satisfied the export revenue filter. Evoke Technologies was remitted back to the TPO for fresh examination of foreign branch financials. The Tribunal directed the exclusion of Nihilent Ltd. and Cybage Software due to diversified operations and a lack of segmental data. The SWD segment ALP was therefore remanded for recomputation based on the modified comparable set. Both appeals were partly allowed.

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