2021 (1) TMI 72 - AT - Income Tax

Assessee's Appeal Partially Allowed, Remitted for Further Examination - Emphasis on Transfer Pricing Comparability

The appeal of the assessee was partly allowed for statistical purposes, with various issues remitted back to the AO/TPO for further examination. The ... TP Adjustment - comparable selection - HELD THAT:- On perusal of DRP's order and the ITAT, Bangalore's order in the case of Advice America Software Development Center Pvt. Ltd., [2018 (5) TMI 1536 - ITAT BANGALORE] it is found that segmental details are available in the financials of Persistent Systems Ltd. and the company is engaged in the software development services and, therefore, this company is comparable. Since the details are available as per the order of the ITAT, Bangalore in the case of Advice America Software Development Centre Pvt. Ltd. and in the order of DRP, we are of the view that this issue needs verification by AO/TPO to decide whether the company is comparable or not with the segmental details. Therefore, we deem it fit to remit the matter back to the file of TPO/AO to examine financials of the Persistent Systems Ltd., and decide the issue afresh on merits. Infobeans Technologies Ltd exclusion on the ground that the company is found to be functionally similar - DR submitted that the company Infobeans is functionally similar, no material was placed before us to substantiate the contention of the DRP/TPO. AR also except stating that the company engaged in providing high end software services no other information was provided. As observed from the order of the DRP, we find that the company Infobeans satisfies all the filters and engaged in software services. Since, both the parties failed to substantiate their claim for inclusion or exclusion, we remit this issue back to the file of the AO/TPO to examine the contention of the ld. AR and DR with regard to functions/financials for exclusion/inclusion of comparable in the final list and decide the issue on merits after giving opportunity of being heard to the assessee. This issue is allowed for statistical purposes. Larsen & Toubro Infotech Ltd - As decided in M/S. EPAM SYSTEMS VERSUS ACIT, INDIA PVT LTD., CIRCLE-17 (1) , HYDERABAD. [2018 (11) TMI 1710 - ITAT HYDERABAD ] L&T Infotech Ltd. is functionally dissimilar. Inclusion of CAT Technologies Ltd - whether income from software services is 75% and more for inclusion in the final list of comparables - Out of total receipts of ₹ 7.44 crores, as seen from the order of ITAT, software development receipts amounts to ₹ 5.5 crores and the remaining receipts were consultancy fee receipts and medical transcription receipts etc. Ld. DR objected for inclusion of consultancy receipts, medical transcription receipts as software development receipts and the Ld. AR did not place any material to support it's claim. Therefore, this issue needs verification at the end of the AO/TPO whether the same constitutes SDS or not. Therefore, we remit the issue back to the file of AO/TPO to examine whether the receipts from software development services are more than 75% or not in the case of CAT Technologies Ltd. and in case, the revenue from software development services are more than 75%, the assessee succeeds in the filter and CAT technologies is required to be included in the final list of comparables. This issue is allowed for statistical purposes. Adjustment of international transaction to the value of international transaction as against adjustment made by the AO at the entity level - HELD THAT:- Both the parties have agreed to remit this issue to the file of AO to examine the issue and to make adjustment of transfer pricing to the value of international transaction. Accordingly, we remit this issue back to the file of AO/TPO to make appropriate adjustments. This ground is allowed for statistical purposes. Issues Involved:1. Exclusion of Persistent Systems Ltd. as a comparable.2. Exclusion of Infobeans Technologies Ltd. as a comparable.3. Exclusion of Larsen & Toubro Infotech Ltd. as a comparable.4. Inclusion of CAT Technologies Ltd. as a comparable.5. Adjustment of international transaction value to the actual value of international transactions.Issue-wise Detailed Analysis:1. Exclusion of Persistent Systems Ltd. as a Comparable:The assessee argued for the exclusion of Persistent Systems Ltd. on the grounds of functional dissimilarity, stating that the company is engaged in software products, services, and technology innovation, and lacks segmental data in its annual report. The Tribunal in the assessee's own case for AY 2008-09 and in the case of M/s. EPAM Systems India Pvt. Ltd. for AY 2013-14 had previously excluded Persistent Systems Ltd. for these reasons.The DR opposed the exclusion, contending that Persistent Systems Ltd. is functionally similar to the assessee and relied on decisions by the ITAT Bangalore Bench, which included Persistent Systems Ltd. as a comparable. The DRP also found Persistent Systems Ltd. comparable, noting that its core activity was software services, and the revenue from operations was from software services.The Tribunal considered the rival submissions and previous decisions, noting that the segmental details were not available, and the company was involved in software products and services. However, it also acknowledged the DRP's detailed examination, which found Persistent Systems Ltd. predominantly engaged in software development services. The Tribunal decided to remit the matter back to the TPO/AO to verify the segmental details and decide afresh on the inclusion of Persistent Systems Ltd. This issue was allowed for statistical purposes.2. Exclusion of Infobeans Technologies Ltd. as a Comparable:The assessee challenged the inclusion of Infobeans Technologies Ltd. on grounds of functional dissimilarity, citing the decision of M/s. Kony India Pvt. Ltd. for AY 2014-15. The DR opposed the exclusion, arguing that Infobeans Technologies Ltd. is functionally similar.The Tribunal noted that the TPO and DRP found Infobeans Technologies Ltd. functionally similar and satisfying all filters. However, since both parties failed to substantiate their claims, the Tribunal remitted the issue back to the AO/TPO to examine the functions and financials of Infobeans Technologies Ltd. and decide on its inclusion. This issue was allowed for statistical purposes.3. Exclusion of Larsen & Toubro Infotech Ltd. as a Comparable:The assessee argued that Larsen & Toubro Infotech Ltd. is functionally dissimilar and should be excluded, relying on the decision in the case of EPAM Systems India Pvt. Ltd. The DR opposed, citing decisions by the ITAT Bangalore Bench, which included Larsen & Toubro Infotech Ltd. as a comparable.The Tribunal referred to its previous decision in EPAM Systems India Pvt. Ltd., which excluded Larsen & Toubro Infotech Ltd. due to its significant turnover, brand value, and lack of segmental data. The Tribunal found the decision favorable to the assessee and directed the AO/TPO to exclude Larsen & Toubro Infotech Ltd. from the final list of comparables. This issue was allowed.4. Inclusion of CAT Technologies Ltd. as a Comparable:The assessee requested the inclusion of CAT Technologies Ltd., arguing it is functionally similar, relying on the decision in NXP India Pvt. Ltd. The DR opposed, noting that the revenue from software development was less than 75%, failing the TPO's filter.The Tribunal noted that the TPO and DRP rejected the inclusion due to functional dissimilarity and revenue from software development being less than 75%. However, the Tribunal referred to the decision in NXP India Pvt. Ltd., which included CAT Technologies Ltd. due to its significant revenue from software development services. The Tribunal remitted the issue back to the AO/TPO to verify if the revenue from software development services exceeds 75% and decide on the inclusion of CAT Technologies Ltd. This issue was allowed for statistical purposes.5. Adjustment of International Transaction Value:Both parties agreed to remit the issue of adjusting the international transaction value to the actual value of international transactions back to the AO. The Tribunal directed the AO/TPO to make appropriate adjustments. This ground was allowed for statistical purposes.Conclusion:The appeal of the assessee was partly allowed for statistical purposes, with several issues remitted back to the AO/TPO for further examination and verification. The Tribunal emphasized the need for a detailed analysis of functional similarities and segmental data to ensure accurate comparability in transfer pricing assessments.