2020 (5) TMI 440 - HC - Income Tax

TP Adjustment - comparable selection - deletion of Infosys Ltd. as a comparable - HELD THAT - Infosys Ltd., it possesses huge tangibles of more than ₹ 1,00,000/- Crores. It is a full-fledged risk bearer with a turnover of more than ₹ 12,000/- Crores. The functions of Infosys Ltd. are highly diversified, and branching out into product conceptualization, core design, research development to marketing and sales of products, etc. No such function is carried out by the assessee. Being a captive service provider, its function is completely confined to software development services for its AE. There are no intangibles owned by the assessee and it incurs no expenditure on research development. We find that these distinguishing factors are highly substantial and cannot be ignored or severed from the comparison. The contractual terms of the transaction will be heavily influenced by this and other factors, such as, the overall economic standing of Infosys Ltd. in the market, thereby affecting the cost of the transaction that it enters into - we are not inclined to interfere with the order of deletion of Infosys Ltd. as a comparable. Wipro Technology Services Ltd - main ground for exclusion of this comparable is that its entire revenue is on account of related party transactions and it fails the criteria of RPT filter - whether the pre-arrangement between the Citi group and Wipro Limited would make the subsequent rendition of services by this company to the Citi Group fall within the meaning of deemed international transaction as defined under section 92B(2)? - HELD THAT - A perusal of the aforenoted provision shows that the transaction between an unrelated party and an enterprise would be deemed to be an international transaction if there was any prior agreement between the parties on the basis of which the transaction is being undertaken. There was indeed a prior agreement between Citi Group and the erstwhile Citi Technology Services for rendition of software services. After acquiring Citi Technology Services (now Wipro Technology Services) by Wipro Ltd, since the comparable company continues to deliver services to Citi Group, this entire transaction would be considered as a related party transaction. The pre-arrangement between Citi group and Wipro Ltd. is a deemed international transaction as per Section 92B (2). Therefore, we are of the considered view that this comparable has been rightly deleted since it is no longer an uncontrolled transaction and cannot serve as a comparable in the benchmarking mechanism for the present assessee, since the RPT filter of this company failed to meet the filter criteria of 25% of RPT, as applied by TPO. The Tribunal in a similarly situated case, deleted Wipro Technology Services Ltd, since it had ceased to be an uncontrolled transaction under Section 92B (2) of the Act. - The same order of deletion has been upheld by this Court in SAXO INDIA PVT. LTD. 2016 (10) TMI 501 - DELHI HIGH COURT Persistent Systems Ltd. and Thirdware Solutions Ltd. , which were deleted on the ground of being functionally dissimilar to the assessee and on account of absence of segmental information with regard to their earnings and sales in the field of software development - HELD THAT - These comparables have been excluded on the ground that apart from rendering software services, the companies are engaged in sale of software products and the segmental data of product and services is not available. Firstly, this is a finding of fact and secondly, in the grounds urged in the present appeal, the Revenue has not disputed this factual position. In the note of arguments filed by the appellant also, there is no challenge to this factual position. We would like to add that the respondent had brought to our notice that this Court in CashEdge 2016 (5) TMI 1348 - DELHI HIGH COURT for the very same AY 2010-11 and in identical business vertical i.e. captive software development services had upheld the exclusion of Persistent Systems Ltd. With respect to Thirdware Solutions and Sales Limited, we find that the ITAT has undertaken a detailed factual analysis and has given cogent reasons for the exclusion of the comparables in question. The ITAT has noted that there is no segmental data to work out the separate margin from software services. Further, this comparable was also rejected in the case of assessee's sister concern, Fiserv India Ltd 2016 (1) TMI 1276 - DELHI HIGH COURT on the ground of non-availability of segmental data. None of the comparables have been excluded on the ground of high turnover alone. The test of functional similarity applied by the Tribunal is in consonance with the legal position discussed hereinabove. No merit in the contentions urged by the Revenue on this ground. Equally meritless is the contention of the Revenue regarding the bar to challenge the comparables after the acceptance of the filters. The filters are applied to narrow down the search to find the comparables that are closest to the assessee. The use of filters has to be necessarily validated from the annual reports. - Decided against revenue.

Summary

Issues Involved:
1. Exclusion of four comparables by the Transfer Pricing Officer (TPO) for benchmarking the international transaction of software services.
2. Whether the Tribunal was correct in deleting the four comparable companies for the purpose of assessment of the arm's length price (ALP).

Detailed Analysis:

1. Exclusion of Four Comparables:
The respondent-assessee, engaged in software development services, benchmarked its international transaction using the Transactional Net Margin Method (TNMM) and selected 14 comparables. The TPO introduced four additional comparables—Infosys Ltd., Wipro Technology Services Ltd., Persistent Systems Ltd., and Thirdware Solutions and Sales Ltd.—and computed an arithmetic mean PLI of 27.86%, resulting in an addition of ?5,49,05,106 to the assessee's taxable income. The ITAT excluded these comparables, leading to the present appeal.

2. Tribunal's Deletion of Comparables:
The Tribunal conducted a FAR (Functions, Assets, and Risks) analysis and excluded the four comparables based on functional dissimilarity and other factors:

- Infosys Ltd.: The Tribunal found Infosys Ltd. functionally different due to its diversified profile, significant brand value, and high entrepreneurial risk, unlike the risk-mitigated captive service provider nature of the assessee.
- Wipro Technology Services Ltd.: This comparable was excluded as it failed the Related Party Transaction (RPT) filter, with its revenue primarily from services rendered to Citi Group under a pre-acquisition understanding.
- Persistent Systems Ltd.: The Tribunal noted the absence of segmental information distinguishing revenue from software services and product sales, making it unsuitable as a comparable.
- Thirdware Solutions and Sales Ltd.: This company was excluded due to functional dissimilarity and lack of segmental data, similar to the exclusion in the case of Finserv India Pvt. Ltd., a group company of the assessee.

Question of Law:
The primary question was whether the Tribunal was correct in deleting the four comparable companies for assessing the ALP.

Submissions on Behalf of the Appellant/Revenue:
The Revenue argued that under TNMM, broad functional similarity suffices for comparability. They contended that high turnover alone should not exclude a comparable unless there is functional dissimilarity. The Revenue also argued that the Tribunal erred in deleting the comparables without considering the TPO and DRP's findings.

Submissions on Behalf of the Respondent/Assessee:
The assessee's counsel argued that the comparables must be functionally similar and operate in a similar business environment. They cited previous judgments supporting the exclusion of comparables based on functional dissimilarity, brand value, and lack of segmental data.

Analysis/Reasoning:
The Court emphasized that comparables must be functionally similar to the assessee, adhering to Rule 10B(2) of the Income Tax Rules. The Court upheld the Tribunal's exclusion of the four comparables based on detailed functional dissimilarity:

- Infosys Ltd.: The Court agreed with the Tribunal's finding of significant functional differences, including diversified operations, substantial intangibles, and high entrepreneurial risk.
- Wipro Technology Services Ltd.: The Court upheld the exclusion due to the entire revenue being from related party transactions, making it a deemed international transaction under Section 92B(2) of the Act.
- Persistent Systems Ltd. and Thirdware Solutions and Sales Ltd.: The Court found the exclusion justified due to the absence of segmental data and functional dissimilarity, consistent with previous decisions involving the assessee's group companies.

Conclusion:
The Court concluded that the Tribunal's exclusion of the four comparables was correct, affirming the need for functional similarity in comparability analysis under TNMM. The appeal was dismissed, with no order as to costs.