2018 (3) TMI 1759 - AT - Income Tax

TP Adjustment - comparable selection - functional dissimilarity - inclusion of Infosys Technologies Ltd as comparable taken by TPO where the PLI of that comparable was 40.38% - whether the Infosys Ltd can be excluded from the comparability analysis for the software support services segment or not ? - HELD THAT - The assessee diagnosis and correct the software and further updated for the bugs in those software. It also performs routine maintenance for the software. Whereas, the Infosys Technologies operates at full fledged risk and performs the services of application design, software engineering and the technology lapse. As per the management discussion and analysis for the year ended on 31.03.2007 it generates revenue on fixed time frame. It also has revenue from sale of user licenses for software applications. It has the software development expenditure also and its prime software is Finacle which is used worldwide as pioneer in banking industry. In the case of CIT Vs. Agnity India Technologies Pvt. Ltd 2013 (7) TMI 696 - DELHI HIGH COURT similar arguments has approved the order of the coordinate bench for exclusion of this company compared with a company which is engaged in the business of development of software. In the present case the assessee is not even the developer of the software but merely providing software support services. Direct the TPO to exclude Infosys Technologies Ltd from the comparability analysis of software support systems segment of the assessee while determining Arm s length price of international transactions. - Decided in favour of assessee.

Summary

Issues:
1. Arm's length adjustment to international transactions
2. Jurisdictional error in reference made by the Assessing Officer
3. Errors in determining arm's length price in software support services segment
4. Incorrect application of additional filters
5. Inclusion of inappropriate comparables
6. Failure to consider fresh search for comparables
7. Failure to make adjustments for working capital and business risks
8. Disregard of multiple year data in transfer pricing documentation
9. Charging of interest under sections 234B, 234C, and 234D
10. Initiation of penalty proceedings under section 271(l)(c)

Analysis:

1. The appeal was filed against the order of the CIT(A) for the Assessment Year 2007-08. The primary issue was the arm's length adjustment to the appellant's international transactions, resulting in an enhanced income. The appellant challenged the jurisdictional error in the reference made by the Assessing Officer to the Transfer Pricing Officer.

2. The main contention revolved around errors in determining the arm's length price in the software support services segment. The appellant's selection of comparables was challenged, with specific objections to the rejection of certain companies based on quantitative filters lacking valid reasoning. The Transfer Pricing Officer's adjustments were disputed.

3. The incorrect application of additional filters and the inclusion of inappropriate comparables were highlighted as errors. The appellant argued that certain companies should not have been rejected based on financial ratios and year ending differences. The appellant also raised concerns about the exclusion of certain companies despite their financial data being available in the public domain.

4. The exclusion of Infosys Technologies Ltd. as a comparable was a significant issue. The appellant argued that Infosys had a different functional and economic profile compared to the appellant's software support services. The appellant's objections were based on the nature of services, risk profile, brand value, and turnover differences.

5. The Tribunal considered the functional profiles of the appellant and Infosys in the software support segment. It was noted that Infosys was engaged in full-fledged software development with global solutions, unlike the appellant providing low-end software services. Following a decision by the Delhi High Court, Infosys was excluded from the comparability analysis, leading to the partial allowance of the appellant's appeal.

6. The Tribunal dismissed other grounds not pressed by the appellant, such as interest charges and penalty proceedings. The decision to exclude Infosys from the comparability analysis was pivotal in the judgment, aligning with the appellant's arguments and the High Court's precedent.

7. In conclusion, the appeal was partly allowed based on the exclusion of Infosys Technologies Ltd. from the comparability analysis, addressing the key issue raised by the appellant. Other grounds were dismissed or deemed premature, emphasizing the specific focus on the comparability of companies in the software support services segment.