APTEAN INDIA PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BANGALORE

ORDER

PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the final assessment order dated 25/03/2022 passed by NFAC, Delhi for A.Y. 2017-18 on following grounds of appeal: “The grounds mentioned herein by the Appellant are without prejudice to one another General Ground 1. On the facts and in the circumstances of the case and in law, final assessment order passed by National Faceless Page 2 IT(TP)A No. 422/Bang/2022 Assessment Centre ('NFAC') under section 143(3) r.w.s 144C(13) r.w.s 144B of the Act, in pursuance to the order of the Deputy Commissioner of Income Tax,1(1)(1) ('the learned Transfer Pricing Officer' or the learned TPO' or 'TPO'), and the directions of the Dispute Resolution Panel-1, Bangalore (`Hon'ble DRP' or 'DRP'), to the extent prejudicial to the Appellant, is bad in law and is liable to be quashed

3. On the facts and circumstances of the case and in law, the NFAC/ DRP/TPO erred in rejecting the Transfer Pricing ('TP') documentation maintained by the Appellant, in good faith, as required under section 92D of the Income-tax Act, 1961 ('the Act') read with rule 10D of the Income-tax Rules, 1962 ('the Rules') on the ground that the appellant did not apply appropriate filters and accordingly contended, that the data used in computing arm's length price (ALP') is not reliable or correct.

4. On the facts and circumstances of the case and in law, the NFAC/ DRP/TPO erred in rejecting comparability analysis carried out by the appellant in TP documentation and conducting a fresh comparability analysis for the SWD services segment based on the application of additional filters in determining the ALP.

5. On the facts and circumstances of the case and in law, the NFAC/ DRP/TPO erred in excluding the companies which are functionally comparable to the SWD service segment of the Appellant and which formed part of the TP documentation maintained by the Appellant.

6. On the facts and circumstances of the case and in law, the NFAC/ DRP/TPO erred in rejecting the additional companies proposed by the Appellant which are functionally comparable to the Service segment of the Appellant.

7. On the facts and circumstances of the case and in law, the NFAC/ DRP/TPO erred in computing the operating margins of the following comparable companies by inconsistently considering certain line items as operating/non-operating in nature and disregarding the submissions filed by the Appellant with the correct computation of the operating margins along with the supporting documents:  Celstream Technologies Private Limited Page 3 IT(TP)A No. 422/Bang/2022  Rheal Software Limited  Harbinger Systems Private Limited  CG-VAK Software & Exports Limited  Great Software Laboratory Private Limited  Mind tree Limited  Larsen and Toubro Infotech Limited  R Systems International Limited  Nihilent Limited  Aptus Software Labs Limited  Infobeans Technologies Limited  OFS Technologies Limited  Cygnet Infotech Private Limited  Infosys Limited  Threesixty Logica Testing Services Private. Limited  Cybage software Private Limited  Consilient Technologies Private Limited 8. On the facts and circumstances of the case and in law, the NFAC/ DRP/TPO erred in including the following comparables that are not functionally comparable to the Appellant and which ought to have been excluded from the in the final list of comparables:  Mind tree Limited  Larsen and Toubro Infotech Limited  Nihilent Limited  Aptus Software Labs Limited  Infobeans Technologies Limited  Persistent Systems Limited  OFS Technologies Limited  Cygnet Infotech Private Limited  Infosys Limited  Threesixty Logica Testing Services Private Limited  Cybage software Private Limited  Consilient Technologies Private Limited 9. On the facts and circumstances of the case and in law. the NFAC/ DRP/TPO erred in excluding functionally comparable companies:  Isummation Technologies Private Limited  Yudiz solutions Private Limited  E-zest solutions Private Limited  Evoke Technologies Private Limited  Indianic Infotech Limited  Intelligrape software Private Limited  Blive web solutions Private Limited Page 4 IT(TP)A No. 422/Bang/2022 10. On the facts and circumstances of the case and in law, the NFAC/ DRP/TPO erred in ignoring the limited risk nature of the Service segment of the Appellant and thereafter selecting high profit-making entrepreneurial companies as comparables. In doing so, the NFAC/DRP/TPO has erred in not providing an appropriate adjustment towards the risk differential, even when the full-fledged entrepreneurial companies have been selected by the learned TPO as comparables.

11. On the facts and in the circumstances of the case and in law, the NFAC erred in considering and determining the TP adjustment at INR 129,944,007 whereas the TP adjustment determined by the learned TPO in the order giving effect dated 25 March 2022 [DIN No.: ITBA/COM/F/17/2021-22/1041529377(1)] post providing effect to the learned Panel's directions is determined at INR 107,403,656. Grounds relating to other than transfer pricing matters: Grounds relating to disallowance of reimbursement of expenses made to related enterprises under section 40(a)(i) of the Act: 12. On the facts and in the circumstances of the case and in law, the NFAC pursuant to the directions of the learned panel, has erred in disallowing reimbursement of expenses for payroll processing and leased-line services, amounting to INR 3,04,28,634, paid by the Appellant to its related enterprises by alleging non-deduction of taxes at source under section 195 of the Act without considering the fact that this amount represents sums which are not liable to deduction of tax at source in India.

13. The NFAC/ DRP erred in holding that reimbursements to related enterprises are third-party payments made by the Appellant routed through group concerns and being a third-party payment, the income component is embedded in the same.

14. Without prejudice to the above, the NFAC/DRP erred in alleging non-deduction of tax at source under section 195 of the Act without appreciating that the payments towards leased line charges and payroll processing charges are not subject to tax in India as Royalty or Fees for Technical Services/Fees for Included Services under the Act as well as the DTAA between India and USA and India and Canada. Ground relating to initiation of penalty proceedings under section 270A of the Act: 15. On the facts and in the circumstances of the case and in law, the notice issued by the NFAC under section 274 Page 5 IT(TP)A No. 422/Bang/2022 read with section 270A of the Act in respect of Assessment Year (`AY') 2017-18 is bad in law and contrary to the facts and circumstances of the case and liable to be quashed.

16. On the facts and in the circumstances of the case and in law, the NFAC erred in concluding that the Appellant has under-reported its income without appreciating that the contentions are bona fide and are well supported by relevant income-tax provisions/ details/ documents/ judicial pronouncements. Ground relating to levy of interest under section 234B and 234C of the Act: 17. On the facts and in the circumstances of the case and in law, the NFAC erred in levying interest of INR 4,04,92,740 under section 234B and additional interest of INR 734,680 under section 234C of the Act. Ground relating to short grant of Advance Tax: 18. On the facts and in the circumstances of the case and in law, the NFAC has erred in not allowing credit of advance tax paid by the Appellant to the extent of INR 1,15,00,000. Ground relating to non-grant of Tax Deducted at Source (TDS'): 19. On the facts and in the circumstances of the case and in law, the NFAC has erred in not granting the credit of TDS amounting to INR 5,05,690 as claimed in the return of income without appreciating the fact that the said credit is reflecting in Form 26AS. The Appellant craves leave to add to and / or to alter, amend, rescind, modify, the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal.”

2. Rheal Software Ltd. 2.66 3. Isummation Technologies Ltd. 2.74 4. Sagarsoft (India) Ltd. 3.22 5. Yudiz Solutions Pvt. Ltd. 4.08 6. E-Zest Solutions Ltd. 8.48 Happiest Minds Technologies Pvt. 7. 11.82 Ltd.

Weighted Sl. Name of the Company average No. (in %) 1. Rheal Software Pvt. Ltd. -1.85 Kals Information Systems Ltd. 3.62 2. Infomile Technologies Ltd. 10.43 3.

4. It is submitted that an application for admission of additional ground has been filed on 12/10/2022 wherein following legal issues has been raised. “Ground No. 20: The Ld. AO/TPO while applying the turnover filter to reject companies having turnover less Page 10 IT(TP)A No. 422/Bang/2022 than INR I crore, erred in not applying an appropriate upper limit to reject companies having high turnover when compared to the Appellant and thereby, erred in accepting companies without considering the turnover and size of the Appellant and comparable companies.” 4.1 It is submitted that the omission in raising the said ground in the memorandum of appeal is for bonafide reason and not with any intention to protract the litigation. The Ld.AR submitted that this Tribunal has been consistently applying the upper turnover filter limit, for selecting comparables, and it is a fit case for to apply upper turnover filter. 4.2 The Ld.AR thus prayed for the additional ground to be admitted. 4.3 On the contrary, the Ld.DR though objected to the prayer of the Ld.AR could not controvert the submission in support of the additional ground raised

. 4.4 Considering the submissions and respectfully following the decisions of Hon’ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional ground raised by the assessee. Accordingly the application for admission of additional ground stands admitted.

5. Ground no. 20 r.w.s. Ground no. 8 – It is submitted that following comparables deserves to be excluded due to failure of upper turnover filter of 200 crores. The Ld.AR submitted that the turnover of assessee under Software Development segment is approximately Rs. 108 crores and the comparables sought for exclusion are more than Rs. 200 crores that cannot be held comparable with the assessee.

Page 11 IT(TP)A No. 422/Bang/2022 a. Larsen & Toubro Infotech Ltd. b. R Systems International Ltd. c. Mindtree Ltd. d. Tata Elxsi Ltd. e. Nihilent Ltd. f. Persistent Systems Ltd. g. Infosys Ltd. h. Cybage Software Pvt Ltd. 5.1 She placed reliance on the decision of Coordinate Bench of this Tribunal in case of Autodesk India (P) Ltd. V. DCIT reported in (2018) 96 taxmann.com 263 (Bang Trib) and ACI Worldwide Solutions Pvt. Ltd. v. ACIT (order dated 13.05.2022 passed in IT(TP)A No. 106/Bang/2022). 5.2 The Ld.AR submitted that, amongst the above comparables, L&T Infotech Ltd., Persistent Systems Ltd., Tata Elxi Ltd., Nihilent Technologies Ltd., Cybage Software to high turnover. He relied on the order passed by this Tribunal in assessee’s own case for assessment year 2015-16 wherein these comparables were excluded on the non-satisfaction of turnover filter. 5.3 The Ld.DR on the contrary relied on the order passed by the authorities below. 5.4 We have perused the submissions advanced by both the sides in light of record placed before me. We note that the assessee has a turnover under software development service segment at Rs.1,59,43,94,173/-. It is also noted that the Ld.TPO has excluded from the list of comparable companies, chosen by the assessee in the TP study, whose turnover was less than Rs.1 crore. The contention of the assessee is that, as the Ld. TPO excluded Page 12 IT(TP)A No. 422/Bang/2022 companies with a low turnover, he failed to apply the same yardstick to exclude companies with a high turnover. From the submissions of the assessee, we note that the comparables sought for exclusion on turnover filter is more than Rs.200 crores as follows: 1) Larsen & Toubro Infotech Limited – Rs.6,183 Cr. 2) Persistent Systems Limited - Rs.1,732 Cr. 3) T a ta E l x s i L i m i te d - R s .1 ,2 0 1 C r . 4) I n f o s y s L i m i t e d - R s . 5 9 , 2 5 7 C r . 5) Cybage Software Private Ltd. - Rs.759 Cr. 5.5 It is also an admitted position that coordinate bench of this Tribunal in assessee’s own case in IT(TP)A No.2482/Bang/2019 dated 22.2.2022 excluded comparables with high turnover and have been consistently following the turnover range of Rs.1 to 200 Crores and Rs.200 to Rs.2000 crores, so on and so forth. The Coordinate Bench of this Tribunal in assessee’s own case cited (supra) has dealt with the applicability of turnover filter by observing as under: “11. As far as comparability of companies listed as (a) to (g) in Grd.No.4 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than Rs.200 Crores and the Assessee’s turnover is only Rs.1,21,34,35,876/-. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs.1 Crore. The contention of the Assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The DRP primarily relied on the decision rendered by the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on Page 13 IT(TP)A No. 422/Bang/2022 FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The DRP therefore held that a company which is otherwise functionally comparable cannot be excluded only on the basis of high turnover. The Assessee has raised Grd.No.4 before the Tribunal challenging the aforesaid view of the DRP.

7. Ground no. 7 – Assessee seeks the correction in the margins of the comparables computed by the Ld.AO/TPO. We direct the Ld.AO/TPO to compute the margins in accordance with law in respect of the comparables that would be sustained on giving effect to the present order.

8. Ground nos. 12-14 are in respect of disallowance u/s. 40(a)(i) of the Act. 8.1 The Ld.AR submitted that during the year under consideration, the assessee had made payment of Rs.44,50,732/- to Aptean Canada Corporation and Rs. 2,59,77,902/- to Aptean Inc. towards reimbursement of payroll and communication expenses (leased line charges) incurred by the said entities on behalf of the assessee. The details of the payments are as under: - Leased line charges: these charges are paid to CenturyLink Communications, LLC and some other foreign vendors for Page 17 IT(TP)A No. 422/Bang/2022 providing leased line circuit services in the form of 1000 Mbps Private IQ port, 200 Mbps CenturyLink loop and international monitoring services, etc. - Payroll processing charges: these charges are paid to ADP International Services B.V., which provides certain payroll processing services in the form of processing the fixed and variable employee data changes submitted by the assessee and providing a payroll report, which is accessed by the assessee through the login provided by the said company. 8.2 It is submitted that third party service providers raise an invoice on the AEs, who in turn raise a debit note on the assessee for the same. It is submitted that the payments made by the assessee are in the nature of cost-to-cost reimbursement, without any income element embedded in the same. The inter company agreement entered into between the assessee and its AE is produced at pages 666-668 of the paperbook and the sample invoices and debit notes are produced at pages 401-440 with a reconciliation at page 663 of the paperbook. In view thereof, the payments made are not liable for tax deduction at source under Section 195 of the Act. Reliance in this regard is placed on the following: - DIT v. A.P. MollerMaersk A S (reported in (2017) 392 ITR 186 (SC) at paragraphs 10 and 11); - CIT v. Tejaji Farasram Kharawalla Ltd. (reported in (1968) 67 ITR 95 (SC)); - CIT v. Industrial Engineering Projects (P.) Ltd. (reported in (1993) 202 ITR 1014 (Delhi)); - CIT v. Dunlop Rubber Co. Ltd. (reported in (1983) 142 ITR 493 (Cal.)); and Page 18 IT(TP)A No. 422/Bang/2022 - CIT v. Siemens Aktiongesellschaft (reported in (2009) 310 ITR 320). 8.3 In any event, it is submitted that the payments are not in the nature of royalty/fees for technical services (“FTS”) under the relevant Double Taxation Avoidance Agreements (“DTAA”) and the Act, and therefore, the provisions of Section 195 have no application. 8.4 It is submitted that the payments were made towards standard leased line charges and payroll processing, and do not fall within the definition of royalty/FTS. 8.5 It is submitted that the payments were not made towards use of or right to use any copyright, secret formula or process or for information concerning industrial, commercial or scientific experience, or for use of or right to use any industrial, commercial or scientific equipment, and therefore, the payments do not fall within the ambit of ‘royalty’ under the India-Canada/USA DTAA. Reliance in this regard is placed on the following decisions: - Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT [2021] 125 taxmann.com 42; and - J&P Coats Ltd. v. CIT (Order dated 29.11.2021 passed by this Hon’ble Tribunal in ITA No. 11/Bang/2014). 8.6 Also, the assessee does not have any control or physical possession over the infrastructure used for receiving the leased line services. Furthermore, no process, (technical) know how and/ or technology is being made available to the assessee at any stage during the provision of such leased line services. 8.7 Further, it is submitted that under the DTAA, in order for a payment to be in the nature of fees for technical services, the services ought to ‘make available’ technical knowledge, Page 19 IT(TP)A No. 422/Bang/2022 experience, skill, know-how or processes, or consists of the development and transfer of a technical plan or technical design. Technology will be considered ‘make available’ when the person acquiring the service is enabled to apply the technology without depending on the provider. Reliance in this regard is placed on the decision of the Hon’ble High Court of Karnataka in the case of CIT v. De Beers India Minerals (P.) Ltd. (reported in [2012] 21 taxmann.com 214 (Karnataka). In the present case, the mandatory precondition of ‘make available’ is not satisfied, and therefore the payments are not in the nature of fees for technical service. Therefore, disallowance under Section 40(a)(i) of the Act is not warranted. 8.8 The Ld.DR submitted that the issue may be remanded to the Ld.AO for verification based on the above submissions by the assessee. We have perused the submissions advanced by both sides in the light of records placed before us. 8.9 Admittedly the Ld.TPO/AO did not invoke the provisions of section 9(1) (vi)/(vii). It is the DRP who considered the payments made by assessee to be in the nature of royalty. In any event, the payment made towards payroll processing and leased line charges have been considered by Coordinate Bench of this Tribunal in case of J&P Coats Ltd. v. CIT (supra). 8.10 In any case following decisions of this Tribunal has held the payment made towards leaseline charges and payroll processing charges cannot be considered in the nature of royalty/FTS.  Hon'ble High Court of Delhi in the case of CIT Vs. Expeditors International (India) Pvt.Ltd., of 2011, by Judgment dated 16/12/2011 it has been held that amount Page 20 IT(TP)A No. 422/Bang/2022 paid to its parent company on account of ....., communication uplink charges and other reimbursement of expenses incurred by parent company will not be chargeable to tax and no TDS obligation arises for the same.  Decision of Hon’ble Supreme Court in case of Bharat Sanchar Nigam Ltd.& Ors. v UOI reported in (2006) 3 SCC 1  Decision of Hon’ble Bombay High Court in case of DIT(IT) vs. WNS Global Services (UK) Ltd reported in (2013) 32 taxmann.com 54;  Decision of Hon’ble Delhi High Court Asia Satellite Telecommunication Co. Ltd. vs. DIT reported in 197 Taxmann 263,  Decision of Hon’ble Bangalore Tribunal in assessee’s own case in ITO v M/s. Madura Coats (P) Ltd. In & 1712/Bang /2005 for assessment years 2005-06 & 2006-07 by order dated 28.09.2006;  Decision of Hon’ble Delhi Tribunal in case of Convergys Customer Management Group Inc v ADIT reported in (2013) 58 SOT 69;  Decision of Hon’ble Mumbai Tribunal in case of WNS North America Inc. v. ADIT reported in (2012) 152 TTJ 145;  Decision of Hon’ble Mumbai Tribunal in case of Wipro Ltd. v ITO reported in 133 Taxman 149; 8.11 In order to examine the element of FTS in respect of payments made towards payroll processing, reliance was placed on Explanation 2 to clause (vii), under the Act, wherein FTS is defined to mean any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". Thus the payments ought to make available the technical knowledge, experience, skill, knowhow or process, or consists of development or transfer of a technical plan. Unless there is a “make available” established, the payment made in lieu of services rendered cannot be considered to be FTS/royalty.

Page 21 IT(TP)A No. 422/Bang/2022 We rely on the decision of Hon’ble Karnataka High Court in case of CIT v. De Beers India Minerals (P.) Ltd.(supra). 8.12 We therefore direct the Ld.AO to verify the payments made by the assessee based on the above principles laid down by Hon’ble Karnataka High Court as well as various decisions of Coordinate Bench of this Tribunal. Due regards must be given to ratio laid down by Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT (supra). Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly these grounds raised by assessee stands allowed for statistical purposes. In the result, the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 20th January, 2023.