ITAT Bangalore Clarifies Transfer Pricing Filters for Software Development Service Providers

Background of the Dispute

EIT Services India Pvt. Ltd. Vs ACIT came up before the Bangalore Bench of the ITAT in IT(TP)A No.2498/Bang/2019 concerning Assessment Year 2015-16. The appeal arose from a final assessment framed under Section 143(3) read with Section 144C(13) of the Income Tax Act 1961, following directions issued by the Dispute Resolution Panel (DRP).

The assessee, a captive unit, was engaged in:

  • Software development services
  • Software maintenance
  • Technical call centre / IT-enabled services

All of these were primarily rendered to its Associated Enterprises (AEs). Various international transactions were benchmarked under transfer pricing (TP) provisions.

During the appeal:

  • For the IT-enabled services segment, the assessee pointed out that a revised order under Section 92CA had already accepted that the international transactions were at Arm’s Length Price (ALP). Hence, no further dispute on that segment survived.
  • The controversy before the Tribunal, therefore, narrowed down to the software development services segment.

In this segment, the assessee restricted its challenge to:

  1. Exclusion of 4 comparables retained by the TPO/DRP
  2. Inclusion of 3 rejected comparables
  3. Grant of working capital adjustment
  4. An additional legal ground that any TP adjustment must be confined only to the value of international transactions with AEs, and not to the entire segment turnover.

Software Development Segment – Initial Comparable Set

For the software development services segment, the Transfer Pricing Officer (TPO) had finally selected the following 16 comparables:

  1. Kals Information Systems Limited
  2. E-Zest Solutions Limited
  3. CG-VAK Software & Exports Limited
  4. Tata Elxsi Limited (Seg.)
  5. Rheal Software Private Limited
  6. Mindtree Limited
  7. Larsen & Toubro Infotech Limited
  8. R S Software (India) Limited
  9. Infobeans Technologies Limited
  10. Persistent Systems Limited
  11. Nihilent Technologies Limited
  12. Aspire Systems (India) Private Limited
  13. Inteq Software Private Limited
  14. Infosys Limited
  15. Thirdware Solutions Limited
  16. Cybage Software Private Limited

On objections being filed, the DRP broadly endorsed the TPO’s selection, with a single modification:

  • Thirdware Solutions Limited was removed, and
  • Sasken Communication Technologies Limited was added in its place.

The final assessment order repeated this revised list, giving rise to the present appeal.

The assessee’s limited grievance in the software development segment before the Tribunal was:

  • To exclude:

    • Larsen & Toubro Infotech Limited
    • Infobeans Technologies Limited
    • Persistent Systems Limited
    • Infosys Limited

  • To include:

    • I2T2 India Limited
    • Evoke Technologies Limited
    • Melstar Information Technologies Limited

Reliance on Coordinate Bench Precedents

During the hearing, the assessee’s Authorised Representative heavily relied on earlier Bangalore ITAT rulings for the same assessment year 2015-16 and closely similar facts:

  • Yahoo Software Development India Pvt. Ltd. (IT(TP)A No.2365/Bang/2018, order dated 28.02.2020) – dealing with Persistent Systems Ltd., Larsen & Toubro Infotech Ltd. and Infosys Ltd.
  • Metric Stream Infotech (India) Pvt. Ltd. (ITA No.2347/Bang/2019, order dated 24.04.2020) – dealing with Infobeans Technologies Ltd.

The Tribunal evaluated those precedents and applied them to the facts of EIT Services India Pvt. Ltd.

Exclusion of Persistent Systems Ltd.

RPT Filter Breach

The coordinate bench in Yahoo Software Development India Pvt. Ltd. had already examined Persistent Systems Ltd. and found that it failed the Related Party Transactions (RPT) filter of 25% applied by the TPO himself.

In that earlier case, the assessee had demonstrated, based on the annual report, that:

  • Total related party transactions (including sale of services, commission received, purchase of software, technical professional cost, commission paid, travel expenses etc.) aggregated to an amount which, when compared with total sales, resulted in RPT of 31.32%.

The TPO had consistently applied a 25% RPT threshold, citing Section 92A(2)(a) as guidance (26% shareholding threshold for Associated Enterprises). The ITAT, in the earlier decision, had upheld the reasonableness of this 25% RPT filter.