Case Law Details
TPG Software Pvt Ltd Vs DCIT (Delhi High Court)
Delhi High Court held that order is liable to be set aside and matter remanded to ITAT since ITAT failed to provide appropriate reasoning with regard to functionality of comparable while undertaking transfer pricing adjustment.
Facts- During scrutiny assessment, TPO passed an order u/s. 92CA(3) of the Act proposing a transfer pricing adjustment of ₹6,84,70,678/- in respect of international transactions, which related to provision of software development services provided by the Assessee to its overseas associated enterprises as well as interest on the outstanding receivables.
The Assessee filed its objections before the Dispute Resolution Panel [DRP], including objections relating to the selection of comparables – exclusion of comparables selected by the Assessee and inclusion of other comparables by the TPO.
DRP accepted that two of the comparables, namely Cigniti Technologies Limited and Wipro Limited, were required to be excluded; however, the remaining entities, were found to be comparable on the FAR analysis. Insofar as the comparables entities proposed by the Assessee, which were rejected by the learned TPO are concerned, the learned DRP accepted that two of the entities [Sagarsoft (India) Limited and Maveric Systems Limited] are required to be included.
Conclusion- Held that ITAT, although articulated the Assessee’s contentions but did not provide any reasons for rejecting the objection. The learned ITAT did not reject the Assessee’s contention that no analysis was conducted for including the said entity; however, rejected the Assesee’s contention on an erroneous premise that the said entity was featured in the list of comparables selected by the Assessee as well as by the TPO and the DRP. Similarly, the learned ITAT did not provide any reasons for its conclusions in respect of other entities as well. Illustratively, in the case of Cybercom Datamatics Information Solutions Ltd., it is the Assessee’s case that the said entity is not comparable as it is functionally dissimilar to the Assessee. The Assessee had referred to the annual report and contended that Cybercom Datamatics Information Solutions Ltd. acts as consultants and advisors on information / internet systems and surveyors of information services. It also carries on the business of development, testing, implementation, migration of homegrown and other applications, marketing and manufacturing of information technology products and services, software and hardware systems to enterprise and embedded technologies in telecom and other industries. The Assessee emphasized that it, on the other hand, is a captive software development company and therefore cannot be considered as comparable to Cybercom Datamatcis Information Solutions Ltd. The learned ITAT recorded the said submission as well as the counter submissions advanced on behalf of the Revenue. However, there is no discussion as to why Cybercom Datamatcis Information Solutions Ltd. Was accepted to be functionally comparable to Assessee.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. The Assessee has filed the present appeal impugning an order dated 11.09.2023 passed by the learned Income Tax Appellate Tribunal [ITAT] in ITA No.6468/Del/2018 in respect of assessment year [AY] 2014-15. The Assessee had preferred the said appeal impugning the assessment order dated 29.08.2018 passed by the Assessing Officer [AO] under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 [Act].
2. The Assessee had filed its return of income for AY 2014-15 declaring an income of ₹4,24,39,400/-. The said return was picked up for scrutiny. Since the return included income from international transactions, a reference was made to the Transfer Pricing Officer [TPO].
3. The learned TPO passed an order under Section 92CA(3) of the Act proposing a transfer pricing adjustment of ₹6,84,70,678/- in respect of international transactions, which related to provision of software development services provided by the Assessee to its overseas associated enterprises as well as interest on the outstanding receivables.
4. The Assessee furnished its transfer pricing study report and selected eight comparable entities which, according to the Assessee, were comparable on the basis of Function, Assets and Risk [FAR] profile. The Assessee had used Transactional Net Margin Method [TNMM] as the most appropriate method and adopted Operating Profit / Total Operating Costs as the Profit Level Indicator [PLI]. The TPO accepted selection of TNMM as the most appropriate method.
5. The learned TPO accepted some of the entities selected by the Assessee as comparables but rejected the others for various reasons. The learned TPO rejected the five entities selected by the Assessee as comparables and included nine others as comparable entities. The final list of entities, as set out in the order passed by the learned TPO, are reproduced below:
| S. No. | Company Name | OP/OC (%) |
| 1 | Akshay Software Technologies Ltd. | 0.13 |
| 2 | Alcatel-Lucent India Ltd. | 10.01 |
| 3 | C G-V AK Software & Exports Ltd. | 8.94 |
| 4 | Cigniti Technologies Ltd. | 27.39 |
| 5 | Comviva Technologies Ltd. | 18.95 |
| 6 | Evoke Technologies Pvt Ltd. | 4.79 |
| 7 | Cybercom Datamatics Information Solutions Ltd. | 87.03 |
| 8 | Mindtree Ltd. | 21.29 |
| 9 | Persistent Systems Ltd. | 37.2 |
| 10 | R S Software (India) Ltd. | 24.45 |
| 11 | Tata Elxsi Ltd. | 14.55 |
| 12 | Tata Tedmologies Ltd | 33.05 |
| 13 | Thirdware Solution Ltd. | 50.58 |
| 14 | Wipro Ltd. | 26.85 |
| Average | 26.09 |
6. The Arm’s Length Price [ALP] was determined by the learned TPO, on the average PLI of 26.09. The transfer pricing adjustment as computed by the learned TPO’s on the aforesaid basis, as set out in its order, is reproduced below:
| Operating Revenues Received (A) | 43,53,50,928 |
| Total Operating Cost (B) | 39,99,79,711 |
| Arm’s Length Profit (C=26.09% OF B) | 10,43,54,707 |
| Arm’s Length Price (D= B+C) | 50,43,34,418 |
| Adjustment/Difference (E= D-A) | 6,89,83,490 |
| Price Received by Assessee in international transaction (F) | 42,66,58,271 |
| Proportion of AEs revenue to Total Revenue (G=F/A) | 98.00% |
| Adjustment (H+ E*G) | 6,76,06,095 |
7. Additionally, the learned TPO also proposed an upward adjustment of ₹8,64,583/- on account of interest on outstanding receivables and accordingly directed enhancement of the Assessee’s income for the relevant AY by an amount of ₹6,84,70,678/-.
8. The Assessee filed its objections before the Dispute Resolution Panel [DRP], including objections relating to the selection of comparables – exclusion of comparables selected by the Assessee and inclusion of other comparables by the TPO.
9. The tabular statement, as set out by the learned DRP, regarding its view of the Assessee’s objections to comparables selected by the learned TPO and exclusion of comparables selected by the Assessee is reproduced below:
“S .No. |
Comparables |
As per TPO |
Assessee’s contentions |
DRP’s Directions |
1. |
Cigniti Technologies Limited |
It passes all filters applied by this office. Hence, it is a good comparable |
Engaged inindependent testing services and has built dedicated TestingCentres of Excellence (TcoE) for Security Mobile, BFSI andRetail During the year under review, Cigniti built accelerators and pre built test suites for SAP and OracleThe acquisition of Gallop Solutions Inc had a significant impact on the revenue of the company. Revenue during the year increased to INR 5,552.12 lacs as against INR2,356.75 lacs million, during FY 2013-14.Cigniti has INR 54.86 crores worth of intangible fixed assets in the nature of brands, trademarks goodwill, patents and copyrights. |
As per annual accounts, It is the third largestindependent testing software services company. · The intangible are54.86 Cr out of total fixed assets of 91.77 Cr and computers areonly 15.84 Cr The FAR is different. The is functionality not similar. It should be excluded. |
2 |
Cybercom Datamatics Information Solutions Ltd |
The Company provides business aligned next generation solutions to a wide range of industry verticalsthat help enterprises across the world overcome their business challenges and achieve operational efficiencies. These solutions leverage innovations intechnology, of business process, and domain expertise to provide clients a competitive edge. It is considered as a comparable to the assessee. |
Act as consultants and advisors on information /internet systems and surveryors ofinformation services. Carry on the busienss of development, testing, implementation migration of home grown and otherapplications, marketingand manufacturing of information technology prodcuts and services
|
The company is a joint venture company of Cybercom Group AB andDatamatics Global Services Limited w.e.f. 01.06.2006 and subsequently became a subsidiary of DGSL w.e.f. 28.03.2007. Hence, theobjection of the assessee regarding JV is not material.The company reports revenues from only ‘sale of services’. The company is
|
3 |
MindtreeLimited |
Mindtree Limited (Mindtree’ or the Company) is an international information Technology consulting and implementation Company that delivers business solutions through global software development. It operates in two units. Product engineering services and IT services. The Company isstructured into five verticals – Manufacturing, BFSI, Hitech, Travel & Transportation and Others. The Company offers services in the arears of agile, analytics and informationmanagement, application development andmaintenance, business process management, business technology consulting, cloud, digital business’s, independent testing, infrastructure management services, mobility, product engineering and SAP services. This Company is
|
Engaged in business of software development and selling of products and have business in five verticals manufacturing, BFSI, Hitech, travel & transportation andothersHas incurred
|
During this financial year the revenue recognition haschanged. As per the annual accounts the revenue recognition is primarily from software services – Revenue from software development ontime-and-material basis is recognized as the related services are rendered.Revenue from fixed price contracts is recognized using the proportionate completion method, which is determined by relating the actual project cost of work performed to date to the estimated total project cost for each contract. Functionally the company is similar. The change in segment reporting does not change theprimary function. The intangibles are Rs.17.10 Cr. (which includes softwares of Rs.15.50 Cr. and intectual property is only Rs.1.50 Cr.) as against the operating revenue of Rs.3081.00 Cr. FAR is similar. In TNMM broad functional similarity is to be seen. It should be rtained. |
4 |
Persistent Systems Ltd |
Persistent Systems Ltd. is an OPD speciality company, offering the customers the benefits of offshore delivery. The company designs, develops and maintains software systems and solutions, creates new applications and enhances thefunctionality of the customers’ existing software products. This company isengaged in software services and is functionally comparable. |
Engaged in software product development and development of end-to- end solutionsUndertakes R&DOwns intangiblesInvest significantly in IPHas acquired
|
The Company is into software development. The assessee too is into this field. The P&L account shows it has only one stream of revenue i.e. sale of software services. It means it is not into product development. There is no stock in trade in the P&L account. As per the Balance sheet it has total intangible assets of Rs.70 Crores(which includes contractual rights b/f of 54 Cr.) against total assets of Rs.280 Cr. which is not very significant. Thus the FAR is similar to that of the assessee. It should be retained. |
5 |
Tata Elxsi Ltd |
Tata Elxsi provides system integration and software development. The company provides hard core technology and strength in design.The company offers end-to end solution across the product lifecycle.Company’s operations are classified into two business segments, i.e. Software Development & Services and Systems Integration& Support. This
|
· Activities undertaken as part of software development & services segment are not comparable with the Assessee’s functionHolds inventory incurred AMP expenses & consultant fee expenses (Difference in business model)Engaged in R&DMuch larger scale of operations (Sales – INR 682.7
|
The company’s business is divided in 2 segments–software development & services; andSystems integration & Support. The functions of the company aresimilar to that of the assessee. The assessee has also aggregated 3different functions. In TNMM broad functional similarity is to be seen. This is a functionally comparable entity. It should be retained. |
6 |
Tata Technologies Limited |
Tata Technologies Limited is company in the Tata Group that provides services in engineering and design, product lifestyle management, manufacturing, product development, and IT service management to automotive and |
· Significant related party transaction i.e. 87.68% (Refer page no. 395 of paperbook)Engaged in providing diversified business operations which include IT Consultancy, SAP implementation and maintenance, providing networking solutions, CAD/CAM engineering |
As per annual accounts the company is engaged in providing difference services including IT Consultancy,SAP implementation and maintenance, providing networkingreporting. The company owns intangible assets in the form of software licenses of Rs.106.09 Cr (net block as on 31.03.2014 of
|
7 |
ThirdwareSolutionsLimited |
Thirdware Solutions Ltd is engaged in implementation andconsulting services
|
Carries out diverse set of activities, which arem not similar services provided by the Assessee.Segmental information not availableEntire operating income derived from trading of products Owns intangibles Super normal profits during FY 2013-14, i.e. 50.58% |
Company is engaged in two business segments, namely, Information Technology and Information Technology enabled services providing other professional technical and business services,purchase of IT hardware and software including software as a
|
8 |
Wipro Limited |
Wipro Limited is a leading global information technology,m consulting and business process services company. It harnesses the power of cognitive computing, hyper- automation, robotics, cloud, analytics and emerging technologies to help our clients adapt to the digital world and make them successful. This company is engaged in software services and is functionally comparable. |
Renders ITservices including BPO services.· Engaged in selling /trading of IT products Incurred huge expenses on account of sub-contracting /technical fees/third party application (Difference in business model)Segmental info not available Much largerm scale of operations (Turnover- 38,797 Cr vs Assessee INR 43.5Cr) Owns significant intangibles (INR 35.35Cr) · Has registered patents · Presence of brand and significant AMP expenses. |
It is engaged in providing IT Services and IT products but no segmental data is available. The company is also engaged in significant R&D activities Further, two subsidiaries,Wipro Technology Service Limited and Wipro Energy IT Services Limited amalgamated with Wipro Limited, and one unit of the company demerged from the company. The company has significant intangible assets, and exceptionally high turnover, earning supernormalprofits (31.26%) FAR of the company isdifferent. Besides extra- ordinary events and brand ownership make the company not comparable. It should be excluded.” |
10. Insofar as the comparables selected by the learned TPO are concerned, the DRP accepted that two of the comparables, namely Cigniti Technologies Limited and Wipro Limited, were required to be excluded; however, the remaining entities, were found to be comparable on the FAR analysis. Insofar as the comparables entities proposed by the Assessee, which were rejected by the learned TPO are concerned, the learned DRP accepted that two of the entities [Sagarsoft (India) Limited and Maveric Systems Limited] are required to be included.
11. In addition, the learned DRP also issued further directions. Based on the same the learned AO passed the final assessment order dated 29.08.2018.
12. The Assessee preferred an appeal before the learned ITAT objecting to the inclusion of following five entities as comparables:
(i) Cybercom Datamatcis Information Solutions Ltd.
(ii) Mindtree Ltd.
(iii) Persistent Systems Ltd.
(iv) Tata Elxsi Ltd.
(v) Comviva Technologies Ltd.
13. The Assessee’s contention, as to why each of the said entities was required to be excluded as a comparable entity was duly noted by the learned ITAT in the impugned order. It is the Assessee’s case, that the FAR profile of the said entities was not comparable to that of the Assessee’s.
14. Insofar as Comviva Technologies Ltd. is concerned, the Assessee pointed out that no analysis was conducted either by the learned TPO or by the learned DRP for including the said entity. The learned ITAT, although articulated the Assessee’s contentions but did not provide any reasons for rejecting the objection. The learned ITAT did not reject the Assessee’s contention that no analysis was conducted for including the said entity; however, rejected the Assesee’s contention on an erroneous premise that the said entity was featured in the list of comparables selected by the Assessee as well as by the TPO and the DRP.
15. Similarly, the learned ITAT did not provide any reasons for its conclusions in respect of other entities as well. Illustratively, in the case of Cybercom Datamatics Information Solutions Ltd., it is the Assessee’s case that the said entity is not comparable as it is functionally dissimilar to the Assessee. The Assessee had referred to the annual report and contended that Cybercom Datamatics Information Solutions Ltd. acts as consultants and advisors on information / internet systems and surveyors of information services. It also carries on the business of development, testing, implementation, migration of homegrown and other applications, marketing and manufacturing of information technology products and services, software and hardware systems to enterprise and embedded technologies in telecom and other industries. The Assessee emphasized that it, on the other hand, is a captive software development company and therefore cannot be considered as comparable to Cybercom Datamatcis Information Solutions Ltd. The learned ITAT recorded the said submission as well as the counter submissions advanced on behalf of the Revenue. However, there is no discussion as to why Cybercom Datamatcis Information Solutions Ltd. Was accepted to be functionally comparable to Assessee.
16. Similarly, there is no discussion as to why the Assessee’s contentions regarding other entities have been rejected.
17. In view of the above, we consider it apposite to set aside the impugned order and remand the matter to the learned ITAT to consider the Assesee’s appeal afresh and pass a reasoned order.
18. The petition is disposed of. Pending application is also disposed of.
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