2023 (9) TMI 972 - AT - Income Tax

Deduction u/s. 10A - Computation of deduction - HELD THAT - Allow deduction u/s. 10A after reducing the expenses incurred by the assessee in foreign currency for deliver of software and telecommunication charges both from the export turnover as well as the total turnover. TP Adjustment - comparable selection - HELD THAT- As relying on Sterling Commerce Solutions India (P.) Ltd. case 2019 (6) TMI 1705 - ITAT BANGALORE we direct the AO/TPO to exclude the above six companies viz., iGate Global Solutions Ltd. (seg.), Infosys Ltd., Mindtree Consulting Ltd., Persistent Systems Ltd., Sasken Communications Ltd. (seg.) and Flextronics Software Systems Ltd. whose turnover is exceeding Rs. 200 crores from the comparables and also for the reason that these companies are functionally different from the assessee which is a captive service provider rendering software development services. Aztec Software Ltd., Geometric Software Ltd. and Megasoft Ltd. which are sought to be excluded by the assessee on the ground that these fail the RPT filter - The issue regarding adoption of rate of RPT filter was considered by the Hon ble High Court of Karnataka in PCIT v. Yodlee Infotech P. Ltd. 2018 (6) TMI 1783 - KARNATAKA HIGH COURT The AO/TPO is directed to follow the above judgment for applying the RPT filter rate. Tata Elxsi has to be excluded from the list of comparable chosen by the TPO on functional dissimilarity with the assessee company. Bodhtree Consulting is engaged in Web Service Integration including data cleansing services, data management services, e-paper solutions and completely different from assessee engaged in software development services for manufacturing and hospitality sectors. Accel Transmatics is engaged in various business models whereas the assessee is into software development services and KALS Info Systems Ltd. is into developing software products and not comparable with the assessee. Exclude Avani Cincom Technologies Ltd. from the list of comparables as functionally dissimilar. Celestial Biolabs Ltd.was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable. Helios Matheson Information Technology Ltd. is not comparable with the assessee and directed to be excluded from the comparable companies. Ishir Infotech Pvt. Ltd - we remit this issue to the AO/TPO to re-examine the issue whether professional charges paid to outside consultants are also included in the employee compensation and decide the issue as per law if it satisfies 25% employee cost filter. Megasoft Ltd. - TPO has computed the PLI of this company at 60.23%, whereas the assessee s claim is at 23.11%. Respectfully following the above decision of the Tribunal, we remit this issue to the AO/TPO to verify the aspect of correct computation of operating margin of this company in the light of the decision of the coordinate Bench in the case of Trilogy E-Business Software India (P.)Ltd 2013 (1) TMI 672 - ITAT BANGALORE . Thirdware Solutions Ltd company deals in both products and services and manages products and applications for other product companies, whereas the assessee is into only software development services. Also, following the decision of the Tribunal in the case of Softbrands India (P.) Ltd. 2016 (8) TMI 1426 - ITAT BANGALORE we direct to exclude Thirdware Solutions Ltd. from the comparable companies. Accel Transmatic Ltd. - This company is directed to be excluded from the comparables list for the AY 2006-07 in assessee s own case hereinabove. For the same reasons, since in the impugned AY there is no change in functional profile of the comparable company, accordingly we direct exclusion of this company as a comparable. KALS Info Systems Ltd company is into development of software and software products and training of software professionals on online projects. Further the employee cost is @ 16.38% which fails the threshold limit of 25% fixed by the TPO. It also holds inventories. Hence it is not comparable with assessee company which is engaged in software development services. Lucid Software Ltd is not comparable with the assessee and excluded from the comparables list due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services. Avani Cimcon Technologies Ltd. excluded from the comparables list on functional dissimilarity. Bodhtree Consulting Ltd is functionally dissimilar to the assessee which is engaged in software development services and exclude this company from the comparables list. Celestial Biolabs Ltd. company s functional profile is different from the assessee and it fails employee cost filter of 25% applied by the TPO, therefore we direct exclusion of this company. E-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand as company is engaged in eBusiness Consulting Services consisting of web strategy services, IT design services including product development consulting services which are high end ITES / KPO services and functionally different from the assessee s profile. Infosys Ltd. company has significant intangibles and huge revenue from software products and not comparable with the assessee, therefore Infosys Ltd. is excluded from the list of comparables. KALS Information Systems Ltd. (Seg) company has been held to be functionally different for AYs 2006-07 2007-08 hereinabove. LGS Global Ltd revenue's contention that segmental data was available, cannot be accepted. The mere availability of proportion of the turnover allocable for software product sales per se cannot lead to an assumption that segmental data for relevant facts was available to determine the profitability of the concerned comparable. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration as in the absence of segmental details/information a company cannot be taken into account for comparability analysis. Quintegra Solutions Ltd be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. Wipro Ltd (Seg) is functionally different from the Appellant since it owns significant intangibles, IPRs, patents etc. and renders product development services. Segment bifurcation of revenue from sale of products and software services not available.

Summary

Issues Involved:

1. Deduction under Section 10A of the Income-tax Act, 1961.
2. Exclusion of certain companies from the comparables for Transfer Pricing purposes.
3. Application of Related Party Transactions (RPT) filter.
4. Functional dissimilarity of comparable companies.
5. Error in margin computation of a comparable company.

Summary:

1. Deduction under Section 10A of the Income-tax Act, 1961:
The first common ground for AYs 2006-07 and 2008-09 was that the AO erred in not following the ITAT's direction to allow full deduction claimed u/s. 10A of the Act. The Tribunal had directed the AO to compute the deduction by considering expenses from both export turnover and total turnover. The AO failed to follow this direction. The Tribunal reiterated its earlier direction and ordered the AO to allow the deduction u/s. 10A in full for both AYs 2006-07 and 2008-09.

2. Exclusion of Certain Companies from the Comparables for Transfer Pricing Purposes:
Ground Nos. 2 to 14 for AY 2006-07 and Ground Nos. 2 to 15 for AY 2008-09 raised by the assessee were regarding the exclusion of certain companies from the comparables list. The Tribunal found that several companies, including iGate Global Solutions Ltd., Infosys Ltd., Mindtree Consulting Ltd., Persistent Systems Ltd., Sasken Communications Ltd., and Flextronics Software Systems Ltd., were not comparable due to their high turnover and functional dissimilarity. The Tribunal directed the AO/TPO to exclude these companies from the comparables list.

3. Application of Related Party Transactions (RPT) Filter:
The Tribunal addressed the issue of applying the RPT filter rate for companies like Aztec Software Ltd., Geometric Software Ltd., and Megasoft Ltd. The AO/TPO was directed to follow the judgment in PCIT v. Yodlee Infotech P. Ltd. for applying the RPT filter rate.

4. Functional Dissimilarity of Comparable Companies:
Several companies were found to be functionally dissimilar to the assessee, including Tata Elxsi Ltd., Bodhtree Consulting Ltd., Accel Transmatics Ltd., KALS Info Systems Ltd., Avani Cimcon Technologies Ltd., Celestial Biolabs Ltd., E-Zest Solutions Ltd., and others. The Tribunal directed the exclusion of these companies from the comparables list based on their different functional profiles.

5. Error in Margin Computation of a Comparable Company:
The Tribunal noted an error in the margin computation of Megasoft Ltd. The TPO had computed the PLI at 60.23%, whereas the correct margin was claimed to be 23.11%. The issue was remitted to the AO/TPO to verify the correct computation of the operating margin.

Conclusion:
The appeals for AYs 2006-07, 2007-08, and 2008-09 were partly allowed for statistical purposes. The Tribunal directed the AO/TPO to exclude certain companies from the comparables list, follow the earlier direction regarding the deduction u/s. 10A, and re-examine the issue of margin computation for Megasoft Ltd. The common order was pronounced on July 19, 2023.