CIT vs. Ut Starcom Inc. (India Branch) (Delhi High Court)

The following two questions have been urged by the Revenue for consideration:

“(i) Whether the Tribunal erred in law in directing exclusion of Infosys Technologies Ltd and Kals Information Systems Ltd in respect of Software Development Segment and exclusion of Vishal Information Technology Ltd (now Coral Hub Limited) in respect of IT Enabled Services Segment though all the aforesaid companies were functionally similar under Transaction Net Margin Method?

(ii) Whether the Tribunal erred in law in laying down stringent standards of comparability analysis as applicable to traditional methods such as Comparable Uncontrolled Price (CUP) Method for selecting comparables under Transactional Net Margin Method (TNMM)?”

3. Having heard learned counsel for the Revenue, the Court is of the view that the ITAT has given cogent reasons for excluding the aforementioned comparables applying TNMM and its order suffers from no legal infirmity giving rise to any substantial question of law.

Extracts of the order of the Tribunal

(i) When we examine the profile of the assessee company vis-à-vis Infosys Technologies Limited in the light of the judgment in CIT vs. Agnity India Technologies Pvt. Ltd. (supra), there is no comparability for benchmarking the international transactions for the reasons inter alia that Infosys Technologies Limited is a giant risk taking company whereas, on the other hand, the assessee is a captive unit of its parent company and prone to minimum/ limited risk; that the Infosys Technologies Limited is having huge significant intangibles and having huge assets leading to the exorbitant turnover; that it is not in dispute that functional profile of assessee company and CIT vs. Agnity India Technologies Pvt. Ltd. is similar; that moreover, in the SDS segment, numerous companies are available for comparability. So, in the given circumstances, we are of the considered view that Infosys Technologies Limited is not a valid comparable in this case, hence ordered to be excluded.

KALS INFORMATION SYSTEMS LIMITED (KALS)

(ii) Assessee sought exclusion of KALS on ground of functional dis-similarity as it is engaged in executing end to end project through the entire value chain of Software Development Life Cycle (SDLC) right from design to delivery, testing and training as has been incorporated by ld. DRP at page 9 of its order. The ld. AR for the assessee contended that so far as functions performed by the assessee company are concerned it only confines to cutting and testing in India whereas intangibles are created in the US and relied upon Global Logic India Limited vs. DCIT (order dated June 6, 2015) (order available at page pages 313 to 321 of the compendium of case laws), NetHawk Networks India Pvt. Ltd. (order dated November 6, 2013) (order available at page pages 322 to 328 of the compendium of case laws) and LG Soft India Private Limited (order dated March 22, 2013) (order available at page pages 369 to 375 of the compendium of case laws).

(iii) Comparability of KALS with Global Logic India Pvt. Limited has been examined by the coordinate Bench, a similarly placed company which is also into the software development as in the case of assessee company, and held to be not a comparable company. When we peruse TP study available at page 47 of the paper book-1, it is not in dispute that the assessee company is only into cutting and testing of software development in India whereas the core design is made in US and intangibles are created in US. Whereas, on the other hand, KALS has undisputedly drawn its income from software product and is engaged in executing end to end project through the entire value chain of software development life cycle and this issue has been determined by the coordinate Bench in the order (supra).

(iv) Moreover, when KALS has not prepared segment-wise data to prove its customized software development services and sale of proprietary products, it is difficult to fathom as to what extent the overall profit of this company have been impacted by the revenue from software products. So, we are of the considered view that KALS is also not a valid comparable, hence ordered to be excluded from the final list of comparables.