Symantec Software & Services India Pvt. Ltd. Vs DCIT (ITAT Chennai)
Summary: The Income Tax Appellate Tribunal, Chennai, partly allowed the appeal of Symantec Software & Services India Pvt. Ltd. against the final assessment order dated 27 September 2018 for Assessment Year 2014–15. The dispute concerned transfer pricing adjustments in software development services (SWD) and information technology-enabled services (ITeS) rendered to its foreign associated enterprise. The assessee had adopted the Transactional Net Margin Method (TNMM) and operating profit to operating cost (OP/OC) as the profit level indicator. Although the Transfer Pricing Officer accepted the segmentation and methodology, he rejected the assessee’s comparable-company analysis and determined higher arm’s length margins.
The TPO initially computed an arm’s length margin of 25.03% for the SWD segment and 19.10% for the ITeS segment, proposing adjustments of ₹14,40,19,430 and ₹5,25,43,650 respectively. Following the Dispute Resolution Panel’s directions, the final adjustments stood at ₹14,64,33,899 for SWD and ₹5,08,60,621 for ITeS. The assessee challenged the selection of several comparables, sought inclusion of companies rejected by the authorities, and disputed the denial of working capital and risk adjustments.
In the SWD segment, the Tribunal directed exclusion of Infosys Ltd., Persistent Systems Ltd., Thirdware Solutions Ltd. and Larsen & Toubro Infotech Ltd. Following the decision in EMC Software and Services India Pvt. Ltd. v. JCIT, it found these companies unsuitable for comparison with the assessee’s software development services because of functional differences, ownership of valuable intangibles, software product activities and the absence of appropriate segmental information. The Tribunal considered earlier coordinate-bench decisions for the same assessment year and found no distinguishing facts warranting a different conclusion.
The assessee also sought exclusion of SQS India BFSI Ltd. on the ground that its related-party transactions represented 33.168% of operating revenue, exceeding the 25% filter. Although this objection had not been raised before the TPO or DRP, the Tribunal rejected the Revenue’s preliminary objection to its admission. Relying on the approach adopted in Citrix R&D India Pvt. Ltd. v. DCIT, it held that the comparable-company objection could be considered at the appellate stage. However, instead of ordering outright exclusion, it restored the matter to the TPO/AO for fresh examination after giving the assessee an opportunity of being heard.
Regarding inclusion of SWD comparables, the Tribunal directed inclusion of CAT Technologies Ltd., Lucid Software Ltd. and Akshay Software Technologies Ltd. It held that CAT Technologies and Lucid Software could not be rejected merely as persistent loss-making companies when they had earned profits during one of the relevant preceding years. The Tribunal relied on CIT v. Goldman Sachs (India) Securities Pvt. Ltd. for the persistent-loss principle. For Akshay Software Technologies, it observed that 98.55% of revenue came from software development services, while only 1.19% related to ERP product sales. The DRP’s reliance on substantial foreign branch expenditure, without applying a corresponding filter consistently, was considered insufficient to reject the company.
For the ITeS segment, the Tribunal directed exclusion of Infosys BPO Ltd., Crossdomain Solutions Pvt. Ltd. and Microland Ltd., following Infor (India) Pvt. Ltd. v. DCIT. The reasons included differences in business scale and brand value, knowledge-process outsourcing activities, and research and development functions accompanied by abnormal growth. Conversely, it directed inclusion of Allsec Technologies Ltd. and Informed Technologies India Ltd. The Tribunal rejected the inconsistent application of a higher export turnover filter against Allsec Technologies and accepted Informed Technologies as functionally comparable based on its business process outsourcing activities and segment reporting.
On working capital adjustment, the Tribunal distinguished Mobis India Ltd. v. DCIT and followed the approach in Citrix R&D India Pvt. Ltd. v. DCIT. It restored the question of granting working capital adjustment to the TPO for reconsideration. The Tribunal directed the TPO/AO to recompute the arm’s length price in accordance with its findings after providing an opportunity of hearing. The appeal was partly allowed, with several comparable-company issues decided in the assessee’s favour and certain matters remanded for fresh consideration. The order did not determine a final revised transfer pricing adjustment.
Cases Discussed
- EMC Software and Services India Pvt. Ltd. v. JCIT — IT(TP)A No. 3375/Bang/2018, 18 December 2019
- Microsoft Research Lab India Pvt. Ltd. v. DCIT — IT(TP)A No. 3131/Bang/2018, 5 February 2020
- Citrix R&D India Pvt. Ltd. v. DCIT — IT(TP)A No. 3134/Bang/2014 (as cited in the order)
- Infor (India) Pvt. Ltd. v. DCIT — [2019] 109 taxmann.com 435
- CIT v. Goldman Sachs (India) Securities Pvt. Ltd. — ITA No. 2222 of 2013; (2016) 290 CTR 236 (Bom.)
- Verizon Data Services India Pvt. Ltd. — IT(TP)A No. 56/Chny/2018
- DCIT v. Quark Systems Pvt. Ltd. — 38 SOT 307 (Chandigarh Special Bench)
- Mobis India Ltd. v. DCIT — 38 taxmann.com 231
- LG Soft India Pvt. Ltd. v. DCIT — IT(TP)A No. 3122/Bang/2018, 28 May 2019
- CIT v. Agnity India Technologies Pvt. Ltd. — [2013] 36 taxmann.com 289 (Delhi)
- CGI Information Systems & Management Consultants Pvt. Ltd. v. ACIT — [2018] 94 taxmann.com 97
- Agilis Information Technologies India Pvt. Ltd. v. ACIT — [2018] 89 taxmann.com 440
- Saxo India Pvt. Ltd. v. ACIT — [2016] 67 taxmann.com 155
- Cash Edge India Pvt. Ltd. v. ITO — ITA No. 64/Del/2015
- 3DPLM Software Solutions Ltd. — IT(TP)A No. 1303/Bang/2012
- Yazaki India Pvt. Ltd. v. DCIT — ITA No. 621/Pune/2014
- Ocwen Financial Solutions Pvt. Ltd. — 108 taxmann.com 306
- Mercedes-Benz Research & Development India Pvt. Ltd. — 95 taxmann.com 134
