2024 (8) TMI 543 - AT - Income Tax

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

Pegasystems Worldwide India (P) Ltd Versus Income Tax Officer Ward 16 (3) Hyderabad

ITAT Hyderabad ruled on transfer pricing adjustments regarding comparable company selection for software development services. The tribunal directed ... TP Adjustment - inclusion of certain comparable companies like Evoke Technologies Pvt Ltd, Akshay Software Technologies Ltd, Mindtree Ltd and R.S. Software India Ltd. - HELD THAT:- FAR analysis of Evoke Technologies Ltd is similar to appellant company which is evident from revenue earned from software development services which is similar to services rendered by the appellant to its AEs. Therefore, we are of the considered view that the DRP is erred in excluding Evoke Technologies (P) Ltd by applying new filters which was not at all applied by the appellant and the TPO. This principle is supported by the decision of the ITAT Bangalore Benches in the case of Aspect Technology Center (India) Private Limited [2020 (9) TMI 1093 - ITAT BANGALORE] We therefore, direct the TPO/AO to include Evoke Technologies (P) Ltd in the list of comparables. Exclusion of Akshay Software Technologies Ltd, Mindtree Ltd and R.S Software India (P) Ltd, the DRP - Suo motto applied on site revenue filters and excluded the above companies on the ground that these companies are engaged in predominantly onsite development and is not comparable to appellant company - Unless the TPO and DRP makes out a case that the appellant has incurred higher cost which is on account of providing onsite development services, in our considered view, onsite revenue filter cannot be applied. Further, when the appellant and the TPO are accepted a particular company as comparable after analyzing their functions, then the DRP cannot Suo motto exclude the above company by applying new filter and this principle is supported by the decision of the ITAT Bangalore Bench in the case of Aspect Technology Center (India) Private Limited [2020 (9) TMI 1093 - ITAT BANGALORE] Therefore, we set aside the findings of the learned DRP and direct the TPO/AO to include Akshay Software Technologies Ltd, Mindtree Ltd and R.S. Software India Ltd in the list of comparables. Exclude Persistent Systems Ltd from the list of comparables held to be not comparable to a software development. Sasken Communication Technologies Ltd is predominantly a product company which cannot be compared with the appellant company which is engaged in providing software development services to its AE on cost plus mark up. This company has been held to be not comparable to a software development service provider in the case of Conexant Systems (P) Ltd [2018 (1) TMI 1152 - ITAT HYDERABAD] Therefore, we direct the TPO/AO to exclude Sasken Communication Technologies Ltd from the list of comparables. 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.