Revenue TP appeal fails as key software comparables excluded, including Infosys and Wipro u/s 92B(2)

HC dismissed Revenue's appeal in a TP dispute involving a captive software development service provider. It upheld ITAT's exclusion of Infosys Ltd. as a comparable due to its huge intangibles, diversified functions, high-risk profile and significantly larger scale, rendering it functionally dissimilar. Wipro Technology Services Ltd. was rightly excluded because, post-acquisition, its services to Citi Group constituted a deemed international transaction under Section 92B(2), causing it to fail the 25% RPT filter and cease to be an uncontrolled comparable. Persistent Systems Ltd. and Thirdware Solutions Ltd. were also properly excluded owing to functional differences and absence of segmental data separating software services from product sales.

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Issues Involved:
1. Exclusion of four comparables by the Transfer Pricing Officer (TPO) for benchmarking the international transaction of software services.
2. Whether the Tribunal was correct in deleting the four comparable companies for the purpose of assessment of the arm's length price (ALP).

Detailed Analysis:

1. Exclusion of Four Comparables:
The respondent-assessee, engaged in software development services, benchmarked its international transaction using the Transactional Net Margin Method (TNMM) and selected 14 comparables. The TPO introduced four additional comparables—Infosys Ltd., Wipro Technology Services Ltd., Persistent Systems Ltd., and Thirdware Solutions and Sales Ltd.—and computed an arithmetic mean PLI of 27.86%, resulting in an addition of Rs. 5,49,05,106 to the assessee's taxable income. The ITAT excluded these comparables, leading to the present appeal.

2. Tribunal's Deletion of Comparables:
The Tribunal conducted a FAR (Functions, Assets, and Risks) analysis and excluded the four comparables based on functional dissimilarity and other factors:

- Infosys Ltd.: The Tribunal found Infosys Ltd. functionally different due to its diversified profile, significant brand value, and high entrepreneurial risk, unlike the risk-mitigated captive service provider nature of the assessee.
- Wipro Technology Services Ltd.: This comparable was excluded as it failed the Related Party Transaction (RPT) filter, with its revenue primarily from services rendered to Citi Group under a pre-acquisition understanding.
- Persistent Systems Ltd.: The Tribunal noted the absence of segmental information distinguishing revenue from software services and product sales, making it unsuitable as a comparable.
- Thirdware Solutions and Sales Ltd.: This company was excluded due to functional dissimilarity and lack of segmental data, similar to the exclusion in the case of Finserv India Pvt. Ltd., a group company of the assessee.

Question of Law:
The primary question was whether the Tribunal was correct in deleting the four comparable companies for assessing the ALP.

Submissions on Behalf of the Appellant/Revenue:
The Revenue argued that under TNMM, broad functional similarity suffices for comparability. They contended that high turnover alone should not exclude a comparable unless there is functional dissimilarity. The Revenue also argued that the Tribunal erred in deleting the comparables without considering the TPO and DRP's findings.

Submissions on Behalf of the Respondent/Assessee:
The assessee's counsel argued that the comparables must be functionally similar and operate in a similar business environment. They cited previous judgments supporting the exclusion of comparables based on functional dissimilarity, brand value, and lack of segmental data.

Analysis/Reasoning:
The Court emphasized that comparables must be functionally similar to the assessee, adhering to Rule 10B(2) of the Income Tax Rules. The Court upheld the Tribunal's exclusion of the four comparables based on detailed functional dissimilarity:

- Infosys Ltd.: The Court agreed with the Tribunal's finding of significant functional differences, including diversified operations, substantial intangibles, and high entrepreneurial risk.
- Wipro Technology Services Ltd.: The Court upheld the exclusion due to the entire revenue being from related party transactions, making it a deemed international transaction under Section 92B(2) of the Act.
- Persistent Systems Ltd. and Thirdware Solutions and Sales Ltd.: The Court found the exclusion justified due to the absence of segmental data and functional dissimilarity, consistent with previous decisions involving the assessee's group companies.

Conclusion:
The Court concluded that the Tribunal's exclusion of the four comparables was correct, affirming the need for functional similarity in comparability analysis under TNMM. The appeal was dismissed, with no order as to costs.

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