2018 (7) TMI 2087 - AT - Income Tax

TP Adjustment - Comparable selection - functional dissimilarity - HELD THAT - Assessee is engaged in the provision of software development services in the designing of Cypress range of products. The Assessee provides services to its parent company in the designing and development of integrated circuits, software and computer aided design tools thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:
1. Exclusion of Persistent Systems Ltd., Persistent Systems and Solutions Ltd., and Sasken Communication Technologies Ltd. as comparables.
2. Inclusion of R S Software (India) Ltd., Mindtree Ltd., and Evoke Technologies Ltd. as comparables.
3. Working capital adjustment.
4. Exclusion of Acropetal Technologies Ltd. and L & T Infotech Ltd. as comparables.
5. Exclusion of e-Infochips Ltd. as a comparable.

Detailed Analysis:

1. Exclusion of Persistent Systems Ltd., Persistent Systems and Solutions Ltd., and Sasken Communication Technologies Ltd. as comparables:
The assessee sought the exclusion of Persistent Systems Ltd., Persistent Systems and Solutions Ltd., and Sasken Communication Technologies Ltd. due to functional dissimilarities. Persistent Systems Ltd. was argued to be functionally dissimilar as it invests in intellectual property and earns income from licensing and royalty, without separate segmental information. Similarly, Persistent Systems and Solutions Ltd. was excluded due to its diversified activities and extraordinary increase in turnover. Sasken Communication Technologies Ltd. was excluded because it engages in software product development, has inventories, intangible assets, and high R&D expenditure, making it functionally incomparable. The tribunal upheld these exclusions, referencing previous decisions in similar cases, such as Applied Materials India Pvt. Ltd. and Commscope Networks (I) Pvt. Ltd.

2. Inclusion of R S Software (India) Ltd., Mindtree Ltd., and Evoke Technologies Ltd. as comparables:
The assessee argued for the inclusion of R S Software (India) Ltd., Mindtree Ltd., and Evoke Technologies Ltd., which were initially accepted by the TPO but later excluded by the DRP. The tribunal found these companies to be functionally comparable with the assessee and noted that both the assessee and the Revenue sought their inclusion. Consequently, the tribunal directed the inclusion of these companies in the final list of comparables, aligning with previous decisions in similar cases.

3. Working Capital Adjustment:
The assessee contested the TPO's restriction of the working capital adjustment to 1.63%, arguing for an adjustment based on actual data without any cap, as per Rule 10B(3). The tribunal agreed, citing the decision in VMware Software India P. Ltd., and directed the TPO to recompute the working capital adjustment based on actual data.

4. Exclusion of Acropetal Technologies Ltd. and L & T Infotech Ltd. as comparables:
The Revenue appealed against the exclusion of Acropetal Technologies Ltd. and L & T Infotech Ltd. The tribunal upheld the exclusion, noting that these companies failed the software development services revenue filter and the employee cost filter. The tribunal referenced previous decisions, such as Applied Materials India Pvt. Ltd. and Commscope Networks (I) Pvt. Ltd., which found these companies to be functionally dissimilar due to their diversified activities and lack of segmental information.

5. Exclusion of e-Infochips Ltd. as a comparable:
Both the assessee and the Revenue contested the exclusion of e-Infochips Ltd. The tribunal upheld the exclusion, noting that the company failed the software service income filter and had significant revenue from hardware maintenance, making it functionally dissimilar. The tribunal referenced the decision in Saxo India P. Ltd., which supported the exclusion of e-Infochips Ltd. due to the lack of segmental information and functional dissimilarities.

Conclusion:
The tribunal allowed the appeal of the assessee and partly allowed the appeal of the Revenue, directing the inclusion of R S Software (India) Ltd., Mindtree Ltd., and Evoke Technologies Ltd., and the exclusion of Persistent Systems Ltd., Persistent Systems and Solutions Ltd., Sasken Communication Technologies Ltd., Acropetal Technologies Ltd., L & T Infotech Ltd., and e-Infochips Ltd. The tribunal also directed the TPO to recompute the working capital adjustment based on actual data.

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