- High Court highlights distinction between ITeS and Software Services – IteSproviders not comparable software developers
- In Transfer Pricing documentation/ audits, it has often been observed that taxpayers/ Tax Authorities alike have mistakenly benchmarked IT/ ITES with the wrong set of comparables perhaps largely due to the similar sounding nomenclature for the two categories of services. In a recent decision, Bombay High Court has highlighted that ITES providers cannot be used as comparables for benchmarking software services keeping in view the functional differences between ITES and software services.
- ITES – back office services
- ITeS or IT enabled services are back office services such as BPO, Call Centre, accounting, payroll processing, book keeping, record keeping etc which deploy online or IT medium for rendering of services. Usually highly skilled workforce is not required for rendering such kind of services and the workforce comprises of graduates/ post graduates who acquire skills on the job.
- IT services – software development services
- Software services on the other hand are specialized services requiring training in computer sciences/ information technology. These services involve functions such as coding, testing, de-bugging, system integration etc which are the gamut of services usually involved in the preparation and testing of software products. These services are often outsourced by software product owners to realize cost effectiveness. IT services may also be offered independent of software products such as website design, IT networking etc.
- Bombay High Court Ruling [TIBCO Software]
- In a recent case before the Bombay High Court [TIBCO Software (India) Pvt Ltd], the question was whether Companies [ providing IT enabled services i.e. Infrastructure Management Services, E learning and Digital Consulting) could be relied upon for benchmarking software services. In light of the Tax Tribunal’s orders for prior years, the Court held these activities could not be compared to software design and development services rendered by the assessee. Further, the Court ruled that since the appeal filed by Revenue revolved only around the inclusion/ exclusion of comparables, there was only a question of fact and no substantial question of law arose.
- Key Takeaways
- Taxpayers are advised to analyse comparables closely before finally accepting/ rejecting them for purpose of Transfer pricing benchmarking. IT and ITeS, though similar sounding terms require in-depth review and analysis for purpose of comparability analysis. This often necessitates deep diving into the company’s profile [evidenced from publicly available documents such as annual report and website] and understanding the extent of ITeS or IT activity being undertaken by the Company.
- The information contained in this newsletter is solely intended to provide general guidance on matters of interest. Nothing herein constitutes professional or legal advice, nor does any information herein constitute a comprehensive or complete statement of the issues discussed. It is recommended that you seek a professional advice to confirm your understanding on the issues dealt above.
High Court highlights distinction between ITeS and Software Services – IteSproviders not comparable software developers