ITAT Excludes Infosys as Comparable in Software Development Segment

ITAT Excludes Infosys as Comparable in Software Development Segment

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has upheld the exclusion of Infosys as a comparable in the software development services segment.

The bench of Saktijit Dey (Vice President) and Dr. B.R.R. Kumar (Accountant Member) noted that the departmental authorities themselves had excluded Infosys for AYs 2014–15, 2015–16, and 2016–17.

The respondent/assessee is a resident corporate entity primarily engaged in the field of software programming and application development. Its core business involves offering support services to other affiliated group entities. In essence, the assessee specialises in providing software development support, programming, and application assistance, particularly in the areas of switching integration and PBX systems. It specifically deals with technologies related to IVR (Interactive Voice Response), call centres, AIC (Automated Call Distribution), and CMS (Content Management Systems). Additionally, the assessee offers services related to software development and information technology-enabled services (ITES).

The assessee engaged in various international transactions with its overseas associates and enterprises, resulting in revenue generation. To ensure the arm's length nature of these transactions, the assessee employed the transactional net margin method (TNMM) for benchmarking purposes. Given that the average margin of the comparables chosen fell within the acceptable tolerance range, the pricing for the transactions with affiliated entities was asserted to be at arm's length.

However, the Transfer Pricing Officer (TPO) did not accept the assessee's benchmarking methodology and proceeded to undertake an independent analysis. During this assessment, the TPO rejected some of the comparables initially selected by the assessee, introducing new comparables, including Infosys Ltd. Based on the TPO's recommendations, the Assessing Officer issued an assessment order that incorporated the transfer pricing adjustment suggested by the TPO.

Subsequently, the assessee challenged this addition before the first appellate authority.

The first appellate authority requested the assessing officer to review the submissions made by the assessee and provide a detailed report. After a thorough examination of all the facts and evidence presented, the Commissioner (Appeals) ultimately determined that Infosys Ltd. should not be regarded as a comparable entity. This decision was based on the precedent set in the assessee's own case for the assessment year 2007–08, where the Tribunal had excluded Infosys Ltd. from the list of comparables.

The Tribunal observed that the assessee had requested the exclusion of Infosys Ltd. from the list of comparables due to several factors. These factors included Infosys Ltd.'s high turnover, its involvement in diverse business segments encompassing software development and the sale of products, its substantial intangible assets, brand value, as well as significant expenses related to intangibles and research and development (R&D).

The Tribunal, taking into account the previous decisions made by coordinate Benches in the assessee's own cases for assessment years 2007–08 and 2008–09, as well as the additional fact that the tax authorities themselves had excluded Infosys Ltd. as a comparable entity in assessment years 2014–15, 2015–16, and 2016–17 within the assessee's case, determined that it was not appropriate to intervene in the first appellate authority's decision regarding the comparability of Infosys Ltd.