2024 (10) TMI 765 - HC - Income Tax

TP Adjustment - comparable selection - Appeals is confined to including certain uncontrolled entities as comparables for determining the ALP and excluding certain uncontrolled entities as comparables as suggested by the appellant - HELD THAT -We set aside the impugned order to the limited extent of rejecting the appellant s challenge to inclusion of Avani Cincom Technologies Limited, Ishir Infotech Limited, Tata Elxsi Limited and Sasken Communication Technologies as comparables for the purpose of determining ALP and excluding Akshay Software Technologies Limited as comparable for the purpose of determining the ALP. The matters are remanded back to the Tribunal for deciding afresh the appellant s objections in regard to inclusion and exclusion of Ishir Infotech Ltd, Tata Elxsi Limited, Sasken Communication Technologies Limited and Akshay Software Technologies Limited for determining the ALP adjustment, if any. It is clarified that all contentions of the parties on the merit whether the said companies are required to be included or excluded, are reserved.

Issues Involved:

1. Exclusion of Avani Cincom Technologies Ltd. and Ishir Infotech Ltd. as comparables for determining the Arm's Length Price (ALP).
2. Inclusion of Akshay Software Technologies Limited as a comparable for determining the ALP.
3. Exclusion of Tata Elxsi Limited and Sasken Communication Technologies Limited as comparables.

Issue-wise Detailed Analysis:

1. Exclusion of Avani Cincom Technologies Ltd. and Ishir Infotech Ltd. as Comparables:

The appellant contended that Avani Cincom Technologies Ltd. should not be included as a comparable entity due to its functional dissimilarity. Avani was argued to be a product company with significant revenues from software products, which was not segregated in its financials. The Tribunal, however, included Avani as a comparable, relying on the TPO's conclusion that 97% of Avani's revenue was from software development services. The Tribunal overlooked prior decisions, such as in Infogain India (P) Ltd., where Avani was excluded due to its product revenue and lack of segmental details. The High Court found that the Tribunal erred in not excluding Avani, as the information on its website indicated it was engaged in selling software products.

Regarding Ishir Infotech Ltd., the appellant argued that Ishir failed the employee cost filter and had a different business model focused on outsourcing. The Tribunal included Ishir as a comparable, stating it met the employee cost filter based on information provided under Section 133 (6). The High Court noted that the Tribunal did not address the appellant's argument about Ishir's business model and cited the decision in Infogain India (P) Ltd., which excluded Ishir due to its outsourcing model. The High Court concluded that the Tribunal's decision to include Ishir was erroneous.

2. Inclusion of Akshay Software Technologies Limited as a Comparable:

The appellant argued for the inclusion of Akshay Software Technologies Limited, asserting it met all the filters applied by the TPO. The TPO excluded Akshay based on its onsite revenue exceeding 75% of export revenues, which the appellant contested. The Tribunal rejected the inclusion of Akshay, citing non-compliance with revenue and export turnover filters, which the appellant claimed was factually incorrect. The High Court found that the Tribunal did not consider the appellant's objection regarding the onsite revenue filter, leading to an unsustainable decision. The matter was remanded to the Tribunal to reconsider Akshay's inclusion.

3. Exclusion of Tata Elxsi Limited and Sasken Communication Technologies Limited as Comparables:

The appellant's challenge to the inclusion of Tata Elxsi Limited and Sasken Communication Technologies Limited was not adjudicated by the Tribunal. The appellant argued that Tata Elxsi was functionally dissimilar due to its involvement in R&D activities and development of software tools. Similarly, Sasken was argued to own significant intangibles and had undergone extraordinary operations due to acquisitions. The High Court acknowledged that the Tribunal did not address these contentions and decided in favor of the appellant, remanding the issue for consideration.

Conclusion:

The High Court set aside the Tribunal's decision regarding the inclusion of Avani Cincom Technologies Ltd., Ishir Infotech Ltd., Tata Elxsi Limited, and Sasken Communication Technologies Limited as comparables and the exclusion of Akshay Software Technologies Limited. The matters were remanded back to the Tribunal for fresh consideration of the appellant's objections regarding these entities for determining the ALP adjustment. The appeal was disposed of with the direction to reconsider these issues comprehensively.

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