Facts of the Case

The appellant, Alcatel Lucent India Limited, filed appeals under Section 260A of the Income Tax Act, 1961, challenging a common order dated 16.08.2021 passed by the Income Tax Appellate Tribunal for Assessment Year 2007-08.

The appeals arose from transfer pricing adjustments made in the cases of Alcatel Lucent Technologies India Pvt. Ltd. (ALTIPL) and Alcatel Development India Pvt. Ltd. (ADIPL), both of which subsequently merged with the appellant. These entities were engaged in providing captive software development services to their associated enterprises.

The assessees adopted the Transactional Net Margin Method (TNMM) with Operating Profit to Cost as the Profit Level Indicator. The Transfer Pricing Officer rejected the transfer pricing studies, selected certain comparables, and proposed substantial upward adjustments in the software development segment. The Dispute Resolution Panel largely upheld the adjustments, leading to final assessment orders dated 31.10.2011, which were affirmed by the Tribunal.

Issues Involved

  1. Whether the Tribunal erred in not excluding Avani Cincom Technologies Ltd. and Ishir Infotech Ltd. as comparables.
  2. Whether the Tribunal erred in excluding Akshay Software Technologies Ltd. as a comparable.
  3. Whether the Tribunal failed to adjudicate objections relating to inclusion of Tata Elxsi Ltd. and Sasken Communication Technologies Ltd. as comparables.

Petitioner’s Arguments

The appellant contended that Avani Cincom Technologies Ltd. was functionally dissimilar as it was engaged in development and licensing of software products such as DXchange and CARMA, and no segmental data was available separating product revenue from software services. It was further argued that Ishir Infotech Ltd. followed a business model involving significant outsourcing and subcontracting, rendering it incomparable to a captive software service provider.

The appellant also submitted that Akshay Software Technologies Ltd. satisfied all filters applied by the TPO and was wrongly excluded merely on the basis of the onsite revenue filter. Additionally, it was argued that the Tribunal failed to adjudicate objections regarding Tata Elxsi Ltd. and Sasken Communication Technologies Ltd., despite detailed submissions being placed on record.

Respondent’s Arguments

The Revenue supported the Tribunal’s order and argued that the comparables selected satisfied the filters applied by the TPO. It was contended that reliance on responses obtained under Section 133(6) was valid and that the TNMM permitted a broader degree of functional similarity. The Revenue also defended the application of the onsite revenue filter and inclusion of entities having diversified activities.

Court Order / Findings

The Delhi High Court examined the functional profiles, business models, and judicial precedents governing transfer pricing comparability and held as follows:

Avani Cincom Technologies Ltd. could not be treated as a valid comparable, as it was engaged in development and licensing of software products and lacked segmental data, and prior Tribunal decisions had consistently excluded it.

Ishir Infotech Ltd. followed a substantially outsourcing-based business model, which materially affected its cost structure and profitability, making it functionally incomparable.

The Tribunal failed to properly consider the appellant’s challenge to exclusion of Akshay Software Technologies Ltd., rendering its finding unsustainable.

The Tribunal admittedly did not adjudicate objections relating to Tata Elxsi Ltd. and Sasken Communication Technologies Ltd., which constituted a clear error.

All three substantial questions of law were accordingly answered in favour of the appellant and against the Revenue.

Important Clarification

The Court clarified that selection of comparables under transfer pricing provisions requires strict examination of functional similarity, asset base, risk profile, and business model. Entities engaged in product development, owning intangibles, or operating through outsourcing-driven models cannot be mechanically compared with captive software development service providers.

Final Outcome

The appeals were allowed. The Delhi High Court set aside the Tribunal’s order to the extent it upheld inclusion of Avani Cincom Technologies Ltd., Ishir Infotech Ltd., Tata Elxsi Ltd., and Sasken Communication Technologies Ltd. and exclusion of Akshay Software Technologies Ltd. The matters were remanded to the Tribunal for fresh adjudication on inclusion and exclusion of these comparables, with all contentions of the parties kept open.

link to download the order- https://www.mytaxexpert.co.in/uploads/1770112611_ALCATELLUCENTINDIALIMITEDVsDEPUTYCOMMISSIONEROFINCOMETAXANR..pdf  

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