2019 (9) TMI 658 - AT - Income Tax

TP Adjustment - assessee used TNMM as most appropriate method and OP/OC as PLI and determined margin to be 15% for software and hardware development service segment - HELD THAT - Assessee provides software and hardware development services to NI U.S., operating as an independent contractor. The foreign AE compensates assessee on cost plus markup basis for services rendered in accordance with agreement entered into between assessee and NI US, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:
1. Inclusion of Acropetal Technologies Ltd.
2. Inclusion of E-Infochips Ltd.
3. Inclusion of ICRA Techno Analytics Ltd.
4. Inclusion of Infosys Ltd.
5. Inclusion of Persistent Systems Limited.
6. Inclusion of Sasken Communication Technologies Limited.
7. Inclusion of Tata Elxsi Limited.
8. Exclusion of LGS Global Limited.
9. Exclusion of Spry Resources India Limited.
10. Exclusion of Thinksoft Global Services Limited.
11. Exclusion of Akshay Software Technologies Limited.
12. Rejection of FCS Software Solutions Limited.

Issue-wise Detailed Analysis:

1. Inclusion of Acropetal Technologies Ltd.:
The assessee challenged the inclusion of Acropetal Technologies Ltd. due to functional dissimilarities and failure to meet the service revenue filter. The Tribunal observed that Acropetal Technologies Ltd. operates in three segments, with revenue from software development services being only ?81.40 crores out of a total operating revenue of ?141 crores, failing the service revenue filter of more than 75%. The Tribunal directed the exclusion of this company, following precedents from similar cases.

2. Inclusion of E-Infochips Ltd.:
The assessee argued for the exclusion of E-Infochips Ltd. due to failing the service income filter. The Tribunal noted that previous decisions excluded E-Infochips Ltd. for lacking segmental information and having major fluctuations in profits. The Tribunal directed the exclusion of E-Infochips Ltd., adhering to the rationale of earlier judgments.

3. Inclusion of ICRA Techno Analytics Ltd.:
The assessee contended that ICRA Techno Analytics Ltd. is engaged in diverse IT solutions services, not solely software development. The Tribunal found that the company derives revenue from various activities without segmental reporting, making it functionally dissimilar to the assessee. The Tribunal ordered the exclusion of ICRA Techno Analytics Ltd., aligning with prior decisions.

4. Inclusion of Infosys Ltd.:
The assessee opposed the inclusion of Infosys Ltd. due to its significantly higher turnover and diversified activities. The Tribunal acknowledged that Infosys Ltd. engages in a wide range of services and possesses substantial intangibles, making it incomparable to the assessee, a small captive service provider. The Tribunal directed the exclusion of Infosys Ltd., citing consistent judicial views.

5. Inclusion of Persistent Systems Limited:
The assessee objected to the inclusion of Persistent Systems Limited, arguing it engages in outsourced product development. The Tribunal observed that Persistent Systems Limited earns revenue from diverse activities, including licensing and royalties, without segmental information. The Tribunal directed the exclusion of Persistent Systems Limited, following similar case precedents.

6. Inclusion of Sasken Communication Technologies Limited:
The assessee argued against the inclusion of Sasken Communication Technologies Limited due to its revenue recognition from product sales and network engineering services. The Tribunal found that the company owns substantial intellectual properties and earns revenue from cross-licensing patents, making it functionally dissimilar to the assessee. The Tribunal directed the exclusion of Sasken Communication Technologies Limited.

7. Inclusion of Tata Elxsi Limited:
The assessee opposed the inclusion of Tata Elxsi Limited, citing functional dissimilarities and significant R&D activities. The Tribunal noted that Tata Elxsi Limited is predominantly engaged in product designing services, not purely software development. Following the Mumbai Tribunal's decision in a similar case, the Tribunal directed the exclusion of Tata Elxsi Limited.

8. Exclusion of LGS Global Limited:
The Tribunal did not provide a detailed analysis for the inclusion of LGS Global Limited, focusing instead on other comparables.

9. Exclusion of Spry Resources India Limited:
The Tribunal did not provide a detailed analysis for the inclusion of Spry Resources India Limited, focusing instead on other comparables.

10. Exclusion of Thinksoft Global Services Limited:
The Tribunal did not provide a detailed analysis for the inclusion of Thinksoft Global Services Limited, focusing instead on other comparables.

11. Exclusion of Akshay Software Technologies Limited:
The Tribunal did not provide a detailed analysis for the inclusion of Akshay Software Technologies Limited, focusing instead on other comparables.

12. Rejection of FCS Software Solutions Limited:
The assessee argued for the inclusion of FCS Software Solutions Limited, which was initially proposed by the TPO but later rejected. The Tribunal noted that the CIT (A) had already included this comparable and directed the TPO to verify the computation provided by the assessee. The Tribunal retained FCS Software Solutions Limited in the final list.

Conclusion:
The Tribunal directed the exclusion of Acropetal Technologies Ltd., E-Infochips Ltd., ICRA Techno Analytics Ltd., Infosys Ltd., Persistent Systems Limited, Sasken Communication Technologies Limited, and Tata Elxsi Limited from the final list of comparables. The Tribunal retained FCS Software Solutions Limited in the final list. The grounds for inclusion of other comparables were not elaborated in detail. The order was pronounced on 12-09-2019.