Software development services transfer pricing case sees tribunal direct inclusion of comparable companies while excluding product-focused entities

ITAT Hyderabad ruled on transfer pricing adjustments regarding comparable company selection for software development services. The tribunal directed inclusion of Evoke Technologies Ltd, finding its functional analysis similar to the appellant's software development services. The tribunal also ordered inclusion of Akshay Software Technologies Ltd, Mindtree Ltd, and R.S. Software India Ltd, holding that DRP erred in suo moto applying onsite revenue filters without establishing higher costs. However, the tribunal directed exclusion of Persistent Systems Ltd and Sasken Communication Technologies Ltd, finding them not comparable as they were predominantly product companies rather than software development service providers operating on cost-plus markup basis.

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Issues Involved:
1. Inclusion/Exclusion of certain comparables.
2. Exclusion of Persistent Systems Ltd and Sasken Communication Technologies Ltd.

Detailed Analysis:

1. Inclusion/Exclusion of Certain Comparables:
- Inclusion of Evoke Technologies Pvt Ltd, Akshay Software Technologies Ltd, Mindtree Ltd, and R.S. Software India Ltd:
- Evoke Technologies Pvt Ltd: The Dispute Resolution Panel (DRP) excluded Evoke Technologies Pvt Ltd citing abnormally low margins due to increased consultancy charges. However, the Tribunal found that the increase in consultancy charges was proportionate to the increase in turnover, and there were no peculiar economic circumstances leading to low margins. The Tribunal directed the inclusion of Evoke Technologies Pvt Ltd in the list of comparables, referencing the ITAT Bangalore Bench decision in Aspect Technology Center (India) Private Limited.
- Akshay Software Technologies Ltd, Mindtree Ltd, and R.S. Software India Ltd: The DRP excluded these companies based on the onsite revenue filter, which was not applied by the Transfer Pricing Officer (TPO) or the appellant. The Tribunal found that substantial services were rendered offshore, similar to Pegasystems Worldwide, and onsite development is part of software development activities. The Tribunal directed the inclusion of these companies, citing the ITAT Bangalore Bench decision in Aspect Technology Center (India) Private Limited.

2. Exclusion of Persistent Systems Ltd and Sasken Communication Technologies Ltd:
- Persistent Systems Ltd: The Tribunal noted that Persistent Systems Ltd derives revenue from the sale of software products and services without a clear break-up, making it predominantly a product company. The Tribunal referenced the ITAT Hyderabad Bench decision in Conexant Systems (P) Ltd, concluding that Persistent Systems Ltd is not comparable to Pegasystems Worldwide, which provides software development services on a cost-plus mark-up basis.
- Sasken Communication Technologies Ltd: The Tribunal found that Sasken Communication Technologies Ltd derives revenue from software development and product design services without clear expenditure allocation. It is predominantly a product company, not comparable to Pegasystems Worldwide. The Tribunal referenced the ITAT Hyderabad Bench decision in Conexant Systems (P) Ltd, directing the exclusion of Sasken Communication Technologies Ltd from the list of comparables.

Other Issues:
- The assessee raised various other grounds, including computation of net margin, incorrect selection of filters, selection of multiple year data, negative working capital adjustment, and adjustment for risk differences. However, since the assessee's counsel restricted submissions to the comparables discussed, these grounds were treated as not pressed and dismissed.

Conclusion:
The appeal filed by the assessee is partly allowed. The Tribunal directed the inclusion of Evoke Technologies Pvt Ltd, Akshay Software Technologies Ltd, Mindtree Ltd, and R.S. Software India Ltd in the list of comparables and the exclusion of Persistent Systems Ltd and Sasken Communication Technologies Ltd from the list of comparables. Other grounds raised by the assessee were dismissed as not pressed. The order was pronounced in the Open Court on 7th August 2024.

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