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2020 (3) TMI 548 - HC - Income TaxTP Adjustment - comparable selection - functional dissimilarity - HELD THAT - Persistent systems Ltd. comparable is functionally dissimilar and in the absence of segmental details of revenue generated from its services of product development and product design services has been rightly excluded by the ITAT. Wipro Technology Services comparable excluded has a turnover which is 24 times that of the assessee and has also the benefit of the brand name of Wipro and the assured revenue from its agreement with Citi Technology Services.Thus, the comparable has been rightly excluded. Zylog System Ltd. exclusion of the comparable on the ground that the intangible assets owned by it are significant as compared to the assessee and it has also restructured its business is completely justified both in facts and in law. Accentia Technologies Ltd. comparable amalgamation has resulted in a higher OP by TC is an aberration and thus, the tribunal has rightly excluded the said comparable. Fortune Infotech has unique web based software and provided niche services to its customers and thus, was dissimilar to the assessee and has been right excluded as a comparable. Infosys brand definitely results in higher profits and hence the ITAT has rightly excluded the same from the list of comparables. TCS E Serve International Ltd. dissimilarity to the assessee and thus, the exclusion of the above comparable cannot be faulted in any manner. TCS E Serve Ltd. comparable is functionally dissimilar and thus, has to be excluded. Benchmarking analysis by aggregating the IT and ITES segment of the Appellant - ITAT setting aside the matter for carrying out the benchmarking analysis by selecting the comparable companies involved in provision of both ITES and IT services - HELD THAT - Keeping in view the fact that the Transfer Pricing Officer had in the preceding years accepted that the assessee was engaged in IT Services (i.e. including software development and ITES) as is evident from the assessment order and considering the fact that due to paucity of time, the assessee could not produce evidence before the ITAT. ITAT is directed to examine the issue whether the assessee is engaged in the activity of software development after considering the additional evidence placed before this Court namely Annexures A-6 to A-13 and any other evidence which may be produced after hearing both the parties and allowing sufficient opportunity to the revenue to verify the same.
Issues Involved:
1. Exclusion of Persistent Systems Limited as a comparable. 2. Exclusion of Wipro Technology Services Limited as a comparable. 3. Exclusion of Zylog Systems Limited as a comparable. 4. Exclusion of Accentia Technologies Limited as a comparable. 5. Exclusion of Fortune Infotech Ltd as a comparable. 6. Exclusion of Infosys BPO Ltd as a comparable. 7. Exclusion of TCS E-Service International Ltd as a comparable. 8. Exclusion of TCS E Service Ltd as a comparable. 9. Rejection of segmental information pertaining to IT and ITES. 10. Aggregation of IT and ITES segments for benchmarking analysis. 11. Insufficient time for the appellant to present evidence. Detailed Analysis: 1. Exclusion of Persistent Systems Limited: The Transfer Pricing Officer (TPO) included Persistent Systems Ltd. with a margin of 29.02%, asserting it was engaged in software development services. The assessee argued that Persistent Systems was functionally different, providing outsourced product development services and developing products like Paxpro and ChemLMS. The Income Tax Appellate Tribunal (ITAT) found that Persistent Systems was engaged in product development and design services, unlike the assessee's contract software development services. The absence of segmental details led to its exclusion, following the principle from the Telecordia Technologies India case. 2. Exclusion of Wipro Technology Services Limited: The TPO included Wipro Technology Services with a margin of 73.35%, which was upheld by the Dispute Resolution Panel (DRP). The assessee argued that Wipro had significant related party transactions governed by a Master Service Agreement with Citi Technology Services Ltd. and benefited from the Wipro brand. The ITAT excluded Wipro Technology Services, noting its high turnover (24 times that of the assessee) and brand value, which made it incomparable. 3. Exclusion of Zylog Systems Limited: The TPO included Zylog Systems Ltd. with a margin of 25.07%, considering it functionally similar to the assessee. The assessee argued that Zylog derived income from software services and products, had diversified operations, and underwent business restructuring, making it functionally different. The ITAT excluded Zylog Systems due to its significant intangible assets, business restructuring, and functional dissimilarity. 4. Exclusion of Accentia Technologies Limited: The TPO included Accentia Technologies Ltd., considering it functionally similar to the assessee's ITES segment. The assessee argued that Accentia provided high-end services like knowledge process outsourcing and legal process outsourcing, developed software products, and underwent an amalgamation affecting profitability. The ITAT excluded Accentia Technologies due to its business restructuring and amalgamation, which led to extraordinary circumstances. 5. Exclusion of Fortune Infotech Ltd: The TPO included Fortune Infotech Ltd. with a margin of 22.80%. The assessee contended that Fortune Infotech was engaged in web application development, mobile applications, web designing, and SEO, making it functionally different. The ITAT excluded Fortune Infotech, noting its unique web-based software and niche services, which were dissimilar to the assessee's ITES services. 6. Exclusion of Infosys BPO Ltd: The TPO included Infosys BPO Ltd. with a margin of 31.44%. The assessee argued that Infosys BPO had high turnover, significant brand value, and provided high-end integrated services. The ITAT excluded Infosys BPO, noting its functional dissimilarity and the significant impact of the Infosys brand on profitability. 7. Exclusion of TCS E-Service International Ltd: The TPO included TCS E-Service International Ltd. with a margin of 54.02%. The assessee contended that TCS E-Service provided both BPO and technical services like software testing, making it functionally dissimilar. The ITAT excluded TCS E-Service due to its involvement in high-end technology services, lack of segmental data, significant intangible assets, and brand value. 8. Exclusion of TCS E Service Ltd: The TPO included TCS E Service Ltd. with a margin of 63.42%. The assessee argued that TCS E Service was functionally dissimilar, providing both BPO and technical services like software testing and developing software. The ITAT excluded TCS E Service, noting its functional dissimilarity, significant intangible assets, and brand value. 9. Rejection of Segmental Information Pertaining to IT and ITES: For A.Y. 2013-14, the TPO characterized the appellant as an ITES service provider only, rejecting its claim of providing IT services, which had been accepted in preceding years. The ITAT directed the appellant to submit additional evidence demonstrating its engagement in IT services, but the appellant was given insufficient time to present the evidence. 10. Aggregation of IT and ITES Segments for Benchmarking Analysis: The ITAT set aside the matter for benchmarking analysis by aggregating the IT and ITES segments, despite the appellant's claim of having distinct segments for IT and ITES. 11. Insufficient Time for the Appellant to Present Evidence: The ITAT provided the appellant with only one working day to submit additional evidence, which was insufficient. The High Court set aside the ITAT's order and directed it to re-examine the issue, allowing sufficient time for the appellant to present evidence. Conclusion: The High Court upheld the ITAT's exclusion of the comparables for A.Y. 2010-11 and 2011-12, finding no perversity in the ITAT's findings. For A.Y. 2013-14, the High Court directed the ITAT to re-examine the issue of the appellant's engagement in software development, allowing sufficient time for the appellant to present additional evidence. The appeals were disposed of accordingly.
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