2020 (2) TMI 259 - AT - Income Tax

TP Adjustment - providing of software development services by the assessee to its AE - Claim of the assessee that sub-contracting charges incurred by the assessee should be given pass-through status and hence, should be excluded from the operating cost and income while computing arm s length price - HELD THAT - As decided in own case 2016 (9) TMI 1458 - ITAT BANGALORE cost of software development services cannot be treated in this fashion as claimed by the assessee. Hence we do not find any merit or substance in the contention raised by the assessee on this issue. Comparable selection - assessee seeks inclusion of only two companies, viz., Powersoft Global Solutions Limited and Evoke Technologies Private Limited - Tax Authorities have rejected the claim for inclusion of them as comparables only for the reason that financial data relating to these two companies are not available - HELD THAT - Since the assessee submits that the financial details of these two companies are available on record, we are of the view that these two companies should be restored to the file of the AO / TPO for examining the claim of the assessee for their inclusion as comparables. Accordingly, we restore these two companies to the file of the AO / TPO. Exclusion of Larsen Toubro Infotech Limited and Persistent Systems Limited - The assessee is a captive service provider of software services to its AE. There is no dispute that the facts are identical in the assessee s case and in the cases decided by the co-ordinate bench. Accordingly, respectfully following the decision of the co-ordinate Bench rendered in the case of CGI Information Systems and Management Consultants P Ltd 2018 (4) TMI 1755 - ITAT BANGALORE we direct the AO / TPO to exclude Larsen Toubro Infotech Limited and Persistent Systems Limited from the final list of comparables. Since the ALP of the international transaction relating to software development services are to be determined afresh in the light of our decisions rendered above, we restore this issue to the file of the AO / TPO.

Summary

Issues Involved:
1. Determination of Net Cost Margin of the Appellant.
2. Inclusion of Powersoft Global Solutions Ltd. and Evoke Technologies Pvt. Ltd. as comparables.
3. Exclusion of Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd. as comparables.

Issue-wise Detailed Analysis:

1. Determination of Net Cost Margin of the Appellant:
The appellant challenged the assessment order for the assessment year 2012-2013, arguing that the sub-contracting charges should be considered as pass-through costs and excluded from operating costs and income while computing the arm's length price. The Tribunal noted that this issue was previously addressed in the assessee's own case for the assessment year 2011-2012, where it was decided against the assessee. The Tribunal reiterated that since the assessee charges a markup on software development services provided to its AE, the cost of subcontracting cannot be excluded as pass-through. The Tribunal emphasized that outsourcing costs in software development services are integral to providing services to the AE and should be included in operating costs and revenue. Consequently, this ground was rejected.

2. Inclusion of Powersoft Global Solutions Ltd. and Evoke Technologies Pvt. Ltd. as comparables:
The appellant sought the inclusion of Powersoft Global Solutions Ltd. and Evoke Technologies Pvt. Ltd. as comparables, arguing that the financial data for these companies were available but overlooked by the Tax Authorities. The Tribunal acknowledged the appellant's submission and decided to restore these two companies to the file of the AO/TPO for re-examination of their inclusion as comparables. This decision was based on the availability of relevant financial details in the appellant's records.

3. Exclusion of Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd. as comparables:
The appellant argued for the exclusion of Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd., citing their exclusion in the appellant's own case for the assessment year 2011-2012 and in similar cases like M/s. CGI Information Systems and Management Consultants Pvt. Ltd. The Tribunal noted that both companies were excluded in previous cases due to their functional dissimilarity and lack of segmental information on software development services. The Tribunal referenced the decision in the case of Agilis India Technologies (P.) Ltd., where these companies were excluded for similar reasons. Respectfully following these precedents, the Tribunal directed the AO/TPO to exclude Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd. from the final list of comparables. Consequently, the issue of determining the ALP of the international transaction relating to software development services was restored to the file of the AO/TPO for fresh consideration.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific directions for the AO/TPO to re-examine the inclusion of Powersoft Global Solutions Ltd. and Evoke Technologies Pvt. Ltd. as comparables and to exclude Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd. from the final list of comparables. The Tribunal's order was pronounced on February 5, 2020.