2020 (10) TMI 1170 - HC - Income Tax

Appeal under Income Tax Act resolved with mutual agreement on turnover filters in software industry

The appeal under Section 260-A of the Income Tax Act, 1961, concerning turnover filters in the software industry, comparability analysis of different ... TP Adjustment - comparable selection - Tribunal adopting turnover filter of ₹ 200 crore - Tribunal holding that KALS Information Systems Ltd., Accel Transmatic Ltd., Tata Elxsi Limited and Lucid Software Ltd., cannot be taken as comparables on the basis of facts of different case for different assessee for different assessment year and directing the TPO to apply RPT filter of 15% - HELD THAT:- As assessee submits that the competent authority of USA and India have reached mutual agreement and on the basis of the aforesaid agreement, the AO has passed an Order giving effect to mutual agreement procedure vide order dated 15.12.2015. It is also pointed out that in view of the order passed by the Assessing Officer dated 15.12.2015, the substantial questions of law involved in this appeal have been rendered academic. As revenue submits that the appeal may be disposed of with liberty to the revenue to revive the same, if occasion so arises. Appeal is disposed of with liberty as prayed for. Issues:1. Turnover filter in the software industry2. Comparability analysis of different companies3. Related Party Transactions (RPT) filterIssue 1: Turnover Filter in the Software IndustryThe appeal under Section 260-A of the Income Tax Act, 1961 raised the question of whether the Tribunal was correct in adopting a turnover filter of Rs. 200 crore in the software industry. The appellant argued that turnover is not a relevant filter in the software industry, as turnover and profit margins are not necessarily linked in this sector, unlike capital-intensive companies. The substantial question of law revolved around the appropriateness of using turnover as a filter for assessing companies in the software industry.Issue 2: Comparability Analysis of Different CompaniesAnother substantial question of law raised in the appeal was whether certain companies, namely KALS Information Systems Ltd., Accel Transmatic Ltd., Tata Elxsi Limited, and Lucid Software Ltd., could be considered comparables for the assessee. The Tribunal was questioned on whether these companies could be taken as comparables without a specific Functional Analysis Report (FAR) analysis vis-a-vis the assessee company. The argument was made that these companies satisfied qualitative and quantitative filters applied by the Transfer Pricing Officer (TPO), despite being from different cases and assessment years.Issue 3: Related Party Transactions (RPT) FilterThe third issue in the appeal pertained to the direction given by the Tribunal to the TPO to apply a Related Party Transactions (RPT) filter of 15% instead of 25%. The Tribunal's decision on the RPT filter was challenged, questioning the legality and appropriateness of the directive issued regarding the percentage to be applied in assessing related party transactions.Upon hearing the arguments, the learned counsel for the assessee presented a memo indicating that the competent authorities of the USA and India had reached a mutual agreement. As a result, the Assessing Officer had passed an order giving effect to the mutual agreement procedure, rendering the substantial questions of law in the appeal academic. The counsel for the revenue requested the appeal to be disposed of with liberty to revive it if necessary. Consequently, the appeal was disposed of with the requested liberty, considering the mutual agreement reached between the competent authorities as a significant development in the case.