9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2025 (3) TMI 453 - AT - Income TaxTP Adjustment - comparable selection - HELD THAT - Tata Elxsi Limited owns significant intangible assets which contributes to its revenue. Assessee-company is a simple captive service provider to it s AE whereas Tata Elxsi Limited is a company which provides a software development services to multiple segments and to different verticals of industry. Therefore the said company cannot be comparable to assessee-company. Persistent Systems Limited is engaged in diversified activities whereas the assessee company engaged in providing software development services to it s AE on cost plus mark-up basis as a captive service provider and therefore in our considered view Persistent Systems Limited cannot be compared with the appellant-company. Larsen Toubro Infotech Limited - Once a particular company is a part of comparable selected in it s TP documentation by the appellant-company it cannot be excluded at subsequent stage merely on the basis of some decisions of Tribunal unless the appellant-company makes out a case that such company is functionally dissimilar to that of the appellant-company. Therefore we are of the considered view that there is no merit in the arguments advanced by Assessee for exclusion of Larsen Toubro Infotech Limited from the list of comparables. Infobeans Technologies Limited - No doubt the appellant seeks to exclude Infobean Technologies Limited from the list of comparables on functional dissimilarity but on perusal of functions performed by the appellant company when compared to Infobean Technologies Limited we find that largely the functions performed by both the companies are similar and the dissimilarities are miniscule and insignificant. We find that Infobeans Technologies Limited is engaged in the provision of software development services. Therefore in our considered view once a particular company is a part of comparable selected in it s TP documentation by the appellant-company it cannot be excluded at subsequent stage merely on the basis of some decisions of Tribunal unless the appellant-company makes out a case that such company is functionally dissimilar to that of the appellant-company. Therefore there is no merit in the arguments advanced by Assessee for exclusion of Infobeans Technologies Limited. Infosys Limited is a giant company carries huge brand value which is evident from the report of brand financials where the total value of brand of Infosys Limited was at USD 3414 million. We further note that the company incurred significant amount of expenditure on R and D activities which is more than the 1000% of the turnover of the appellant-company. From the nature of services rendered by Infosys Limited and it s scale of operations in our considered view it cannot be compared with appellant-company which is a capitive service provider to it s AE on cost plus mark-up. Mindtree be excluded on the ground that 46% of revenue is from onsite activity which is over and above the threshold limit of 25% of total revenue. We direct the AO/DRP to exclude Mindtree Limited from the list of comparables on functional dissimilarities. Cybage Software Private Limited - Based on information provided in annual report it cannot be said that the functions performed by Cybage Software Private Limited is altogether different from the appellant-company more particularly when the broader services provided by both the companies are similar to software development services. Therefore in our considered view there is no merit in the arguments advanced by the Learned Counsel for the Assessee for exclusion of Cybage Software Private Limited from the list of comparables. We therefore reject the arguments of the appellant-company Akshay Software Technologies Limited fails onsite revenue filter which is evident from the annual report where it derives revenue from export of software services which is more than 90% of the total revenue than that of the appellant-company. ERP implementation and support involves personnel from professional domain and software domain and therefore when a company involved in providing ERP solutions it cannot be compared with a company which is providing software services to it s AE as captive service provider. DRP observed that there is no segmental information available for comparison of software development services. Therefore we are of the considered view that Akshay Software Technologies is not comparable to appellant-company. Maveric Systems Limited - Once the company is functionally similar to appellant company the same cannot be rejected on the basis of one filter i.e. R and D expenditure above tolerance limit. Therefore we are of the considered view that the DRP/TPO erred in not including Maveric Systems Limited from the list of comparables and thus we direct TPO/AO to include. Harbinger Systems Pvt. is engaged in software development services. Once a particular company is functionally similar to the appellant-company then such company cannot be rejected on the ground of data not available in prowess database/search matrix. Although the learned DRP/TPO has not included Harbinger Systems Pvt. Limited on the ground of data not available in prowess database/search matrix but in our considered view once the company is functionally similar to appellant company the same cannot be rejected on the basis of prowess database/search matrix. Appeal of the assessee is partly allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment involve the determination of the Arm's Length Price (ALP) for international transactions between the appellant company and its Associated Enterprises (AE) under the Transfer Pricing (TP) provisions of the Income Tax Act, 1961. The issues revolve around the inclusion and exclusion of certain comparable companies in determining the ALP, the application of the Transactional Net Margin Method (TNMM), and the treatment of interest on outstanding receivables. 2. ISSUE-WISE DETAILED ANALYSIS Selection of Comparable Companies: - Relevant Legal Framework and Precedents: The selection of comparables is governed by the principles of functional similarity, size, scale of operations, and other relevant factors as per the Income Tax Act, 1961. The Tribunal has previously directed the exclusion of certain companies based on functional dissimilarities in the appellant's own case for earlier years. - Court's Interpretation and Reasoning: The Tribunal evaluated the functional profile, size, and scale of operations of each comparable company against the appellant's business model, which is a captive service provider to its AE on a cost-plus markup basis. - Key Evidence and Findings: The Tribunal considered annual reports, financial data, and previous Tribunal decisions to assess the comparability of each company. - Application of Law to Facts: The Tribunal applied the principles of functional similarity and size to determine the appropriateness of each comparable company. - Treatment of Competing Arguments: The Tribunal weighed the arguments of the appellant and the Revenue, considering previous Tribunal decisions and the functional profile of each company. - Conclusions: The Tribunal directed the exclusion of Tata Elxsi Limited, Persistent Systems Limited, Infosys Limited, and Mindtree Limited due to functional dissimilarities. It upheld the inclusion of Larsen & Toubro Infotech Limited, Infobeans Technologies Limited, and Cybage Software Private Limited, rejecting the appellant's arguments for exclusion. Interest on Outstanding Receivables: - Relevant Legal Framework and Precedents: Interest on outstanding receivables is considered for TP adjustments if it exceeds a reasonable period, as per the Act. - Court's Interpretation and Reasoning: The Tribunal noted that the DRP had deleted the adjustment for notional interest on outstanding receivables, aligning with the appellant's contention. - Key Evidence and Findings: The Tribunal relied on the DRP's directions and the appellant's functional profile to conclude on this issue. - Application of Law to Facts: The Tribunal applied the principles of functional similarity and size to determine the appropriateness of each comparable company. - Treatment of Competing Arguments: The Tribunal weighed the arguments of the appellant and the Revenue, considering previous Tribunal decisions and the functional profile of each company. - Conclusions: The Tribunal upheld the DRP's decision to delete the adjustment for notional interest on outstanding receivables. 3. SIGNIFICANT HOLDINGS - Preserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal stated, "We find that the appellant is a captive service provider to its AE on cost-plus markup basis, whereas, Tata Elxsi Limited is engaged in providing product design and engineering services to different segments of business... Therefore, the said company i.e., Tata Elxsi Limited cannot be comparable to assessee-company." - Core Principles Established: The judgment reinforced the principle that comparables must be functionally similar to the tested party, considering factors such as scale of operations, R&D expenditure, and brand value. - Final Determinations on Each Issue: The Tribunal directed the exclusion of certain companies from the list of comparables and upheld the inclusion of others based on functional similarity. It also upheld the DRP's decision to delete the adjustment for notional interest on outstanding receivables.
|
