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2021 (8) TMI 1334 - AT - Income TaxTP Adjustment - comparable selection - exclusion of Infosys Ltd. as a comparable company - turnover filter - HELD THAT - As relying on Autodesk India Pvt. Ltd. 2018 (7) TMI 1862 - ITAT BANGALORE we are of the view that the CIT(A) ought to have excluded Infosys Ltd. as a comparable company by applying the turnover filter. We direct that this company should be excluded as a comparable company. Excluding Persistent Systems Ltd . - Persistent Systems Ltd. was excluded from the list of comparable companies on the ground that these companies were engaged in diversified activities and earning revenue from various activities including licensing of products and income from maintenance contracts and there was no segmental reporting so that the operating margins of SWD services of this company can be compared with the assessee. In the light of the aforesaid decision CSG Systems International (I) P. Ltd 2019 (8) TMI 350 - ITAT BANGALORE we do find merit in ground raised by the Assessee and allow the same. Adjustment towards working capital differences - CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since the CIT(A) has not found any error in the TPO s working of working capital adjustment the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences if any between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. - Thus we hold that the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly. Computation of deduction u/s 10A - HELD THAT - Taking into consideration the decision rendered by the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT we are of the view that whatever is excluded from export turnover should also be excluded from total turnover while computing deduction u/s. 10A of the Act. We are of the view that as of today law declared by the Hon ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Moreover the order of the Hon ble Karnataka High Court has been upheld by the Hon ble Supreme Court in the case of CIT v. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT Exclusion of M/S. Kals Information Systems Ltd. by the CIT(A) as not comparable with the Assessee - The company is engaged in the development of software products and providing related services. It also provides implementation and maintenance of software products. It has developed a range of products such as Shine ERP software Docuflo Dac 4 Cast CMSS La Vision Virtual Insure and Aldon. The annual report also confirms that the company is engaged in development of software and software products. The company holds significant inventories which account for 27% of the total current assets which demonstrates that it is a product development company as against a pure software service provider like the assessee. The functions carried out by the two companies being substantially different this company ought to stand rejected as a comparable. The company is being consistently excluded from the list of comparables in similar cases. Since the circumstances leading to it being excluded as being functionally dissimilar in the previous assessment continue to remain same the company ought to remain excluded in the current assessment year. Thus this company to be excluded in the case of assessees similar to the Assessee herein. Persistent Systems Ltd - This is the claim of the assessee before us that VAT is leviable only on sale of goods and therefore it has to be seen that what is the quantum of sale of goods by that company and whether segmental information in that regard is available or not. It has been submitted that as per the remaining three Tribunal orders rendered in the case of WM Global Technology Services (India) (P.) Ltd. 2018 (4) TMI 429 - ITAT BANGALORE and in the case of Tecnotree Convergence Pvt. Ltd. 2018 (6) TMI 1688 - ITAT BANGALORE the matter was remanded back to the TPO for fresh decision and therefore in our considered opinion and in the facts of present case we feel that this issue should also be restored back to the file of TPO for fresh decision in the light of all these four Tribunal orders after providing adequate opportunity of being heard to the assessee. Software development services segment - We restore the matter back to the AO/TPO for fresh decision regarding the assessee s claim for exclusion of Larsen Toubro Infotech Ltd. and Persistent Systems Ltd. after providing adequate opportunity of being heard to the assessee and the issue should be decided after considering all available Tribunal orders for Assessment Year 2013-14 in respect of exclusion of these two companies. Accordingly ground Nos. 9 and 10 are allowed for statistical purposes. CG - VAK Software Exports Ltd. - CG - VAK Software Exports Ltd. is a software development company and was doing the work of integration assimilation or patch work for its client and for that purposes is also rendering some services on-site. Therefore it cannot be urged that it was a product company. These findings are directly contradictory to the findings of the Tribunal rendered in the case of Hewlett Packard India Software operation Pvt. Ltd. 2021 (3) TMI 1379 - ITAT BANGALORE Hence we deem it proper to remand the issue of comparability of this company also to the TPO/AO for consideration afresh to find out from the financials and annual report and if necessary to issue notice u/s. 133(6) of the Act and in other manner provided in the Act to find out the true position with regard to the AO.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services (SWD) and Information Technology enabled Services (ITeS). 2. Inclusion and exclusion of certain comparable companies. 3. Adjustment for working capital differences. 4. Computation of deduction under Section 10A of the Act. Issue-wise Detailed Analysis: 1. Determination of Arm's Length Price (ALP) for SWD and ITeS: The assessee, engaged in providing SWD and ITeS to its wholly owned holding company, filed a Transfer Pricing Study (TP Study) using the Transaction Net Margin Method (TNMM) and selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The Transfer Pricing Officer (TPO) accepted TNMM and OP/OC but identified additional comparable companies, leading to a computed average margin of 22.99% and an addition to total income of Rs. 24,99,43,839/- for AY 2010-11. 2. Inclusion and Exclusion of Comparable Companies: - Infosys Ltd.: The Tribunal excluded Infosys Ltd. as a comparable due to its significantly larger scale, brand profits, intangible assets, and high sales and marketing expenses, following precedents from similar cases. - Persistent Systems Ltd.: Excluded due to its involvement in diversified activities, including licensing of products and maintenance contracts, without segmental reporting. - Kals Information Systems Ltd.: Excluded by CIT(A) due to functional dissimilarity, as it was engaged in software product development and held significant inventories. - CG Vak Software & Exports Ltd., Larsen & Toubro Infotech Ltd., and Persistent Systems Ltd. (AY 2013-14): Tribunal remanded the issue of comparability to the TPO/AO for fresh consideration in light of previous Tribunal decisions. - Spry Resources India Pvt. Ltd.: Included as a comparable company, following the Tribunal's decision in a similar case. 3. Adjustment for Working Capital Differences: The CIT(A) denied working capital adjustment, but the Tribunal, following the assessee's own case for AY 2012-13, held that working capital adjustment should be allowed. The Tribunal emphasized that adjustments should be made to account for differences in working capital levels between the tested party and comparable companies to ensure accurate comparability. 4. Computation of Deduction under Section 10A: The Tribunal upheld the CIT(A)'s decision that expenses reduced from Export Turnover must also be reduced from Total Turnover, following the jurisdictional High Court's decision in the case of Tata Elxsi Ltd., which has been upheld by the Supreme Court. Conclusion: The Tribunal partly allowed the assessee's appeals for both AY 2010-11 and AY 2013-14, directing the exclusion of certain comparables and allowing working capital adjustments. The Revenue's appeal was dismissed, affirming the CIT(A)'s decisions on the computation of deduction under Section 10A and exclusion of certain comparables. The Tribunal remanded some issues to the TPO/AO for fresh consideration, ensuring that the comparability analysis is accurate and consistent with established precedents.
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