AGILENT TECHNOLOGIES (INTERNATIONAL) PVT. LTD.,GURGAON vs. ACIT, GURGAON

Facts of the case, in brief, are that the assessee, Agilent Technologies (International) Private Limited is a 100% subsidiary of Agilent Technologies

Accordingly, the assessee has selected 16 comparables with an average profit margin @ 13.06% on cost. Hence, the margin earned by the taxpayer @ 13.24% on operating cost was treated as at arm’s length. However, the TPO, during the course of TP assessment proceedings, did not accept the method adopted by the assessee. After accepting certain filters applied by the assessee and applying certain further filters, the TPO retained some of the comparables selected by the assessee and added certain new comparables and proposed an upward adjustment of Rs.3,87,45,115/- under the Software Development Segment and

Accordingly, in the final order passed by TPO, he computed the ALP of the international transaction in respect of the Software Development Segment at Rs.2,56,47,695/- by retaining the following revised list of 18 comparables whose average OP/OC was at Rs.21.85%:- S.No. Name of the Company OP/OC (%) 1. Avani Cimcon 21.65 2. Bodhtree Consulting Limited 19.14 3. e-zest Solution Limited 28.95 4. Flextronics (Ancient Technologies Limited) 8.07 5. Igate Global Solution Limited 13.9 6. Infosys 40.41 7. LGS Global Limited 41.94 8. Kals Information System Limited (Seg) 26.64 9. Mindtree Limited (Segment) 15.51 10. President System Limited 27.23 11. Quintegra International Limited (Seg) 21.74 12. R System International Limited (Seg) 15.3 13. R.S. Software 6.46 14. Sasken Communications Technologies 13.44 Limited (Seg) 15. Tata Elxsi 18.97 16. Thirdware Solutions Limited 18.01 17. Wipro Limited (Seg) 28.38 4

Grounds of appeal No. 1 to 15 relate to TP addition relating to ITES and IT addition. The ld. Counsel for the assessee submitted that the adjustment in question in the appeal before the Tribunal is regarding IT and ITES segments wherein the following additions have been made post the directions of the DRP:-

So far as Eclerx Services Limited is concerned, the ld. Counsel for the assessee submitted that this company should be excluded from the list of comparables on account of non-comparable services since it is engaged in operations, management and audit and reconciliation services. It has engaged high skilled set of employees which is evident from pages 191-192 of the paper book. Further, it has earned super normal profit since its profit range is 66.50%. Referring to the decision of the Tribunal in assessee’s own case for AY 2011-12 and 2012-13, he submitted that Eclerx Services Limited was excluded by the Tribunal vide ITA Nos.477 & 6420/Del/2016 from the list of comparables.

He submitted that Eclerx Services is not comparable to the assessee which is a captive service provider which by itself performs merely back office support functions. He submitted that the ITAT had sought to include this comparable on the basis of the decision of the coordinate Bench of the Tribunal in the case of Rampgreen Solutions Pvt. Ltd. Vs. CIT, ITA No.6286/Del/2012. However, the decision of the Tribunal in the case of Rampgreen Solutions Pvt. Ltd. has been set aside by the Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt.

The ld. Counsel for the assessee accordingly submitted that Eclerx is not comparable to the assessee as it follows a different business model, i.e., the outsourcing model. The two models are very different and have a significant impact on the FAR of the companies and hence, companies following an outsourcing model cannot be compared with the assessee which performs its functions through its own employees. He accordingly submitted that Eclerx should be excluded from the list of comparables.

So far as Genesys International Corporation Limited is concerned, the ld. Counsel for the assessee submitted that this company also is not a valid comparable as it is engaged in rendering geographical information services which

So far as Infosys BPO is concerned, the ld. Counsel for the assessee submitted that Infosys BPO Limited is a giant company with huge turnover. The revenue of Infosys is 5 times that of the assessee company. Further, the assessee company has a brand value which has a significant role on its profits. The ld.

Referring to the decision of the Tribunal in Assessee’s own case vide ITA No.1084/Del/2016 for AY 2007-08 order dated 18.11.2019, copy of which is placed at pages 1-55 of the case law compilation, he submitted that the coordinate Bench of the Tribunal, following the decision of the Hon’ble Delhi High Court in case of Avaya India Pvt. Ltd. has excluded this company from the list of comparables. Relying on various decisions, filed in the case law compilation, he submitted that Infosys BPO Limited should be excluded from the list of comparables.

So far as Wipro Limited (BPO Segment) is concerned, the ld. Counsel for the assessee submitted that this company is also not a valid comparable due to incomparable scale of operations and presence of huge intangibles and brand value of Wipro. He submitted that the turnover of Wipro for the impugned assessment year is Rs.1,058 Crores where as that of the assessee company is only Rs.169.41 crores. Further, the Tribunal, in Assessee’s own case for AY 2007-08, following the decision of the Hon’ble Delhi High Court in H & S Software Development and Knowledge Manager Centre Pvt. Ltd. has excluded this company from the list of comparables. Referring to various other decisions filed in the case law compilation, he submitted that this company should be excluded from the list of comparables.

So far as Acropetal Technologies Limited is concerned, the ld. Counsel for the assessee submitted that for the year under assessment, the income from Engineering Design Services is INR 21.80 crores out of total income of INR 60.31 crores which can be verified from page 21 of the annual report of the said company. Thus, the income from engineering design services is 36.13% of the total income. Thus, it is amply clear that the income from ITeS services is less than 75% of total revenues and consequently this company does not satisfy the filter of ITeS services revenue being more than 75% of total revenues, applied by the TPO himself. Relying on the decision of the coordinate Bench of the Tribunal in the case of IHG IT Services (India) Pvt. Ltd. and various other decisions filed in

So far as Accentia Technologies Limited is concerned, he submitted that this company is also not comparable as an extraordinary event happened during the subject assessment year. The company was merged with two other companies which can be verified from the annual accounts of the said company placed at paper book Volume-I. Referring to the order of the Tribunal in Assessee’s own case for AY 2007-08, vide ITA No.1084/Del/2016 order dated 18.11.2019 he submitted that the Tribunal has held that Accentia is not a suitable comparable on the ground of amalgamation of subsidiaries resulting into growth of revenue by 100683% and on ground of functional dissimilarity. The ld. Counsel for the assessee, referring to the following table, drew the attention of the bench to the effect of extraordinary event on the profitability of the company:- Accentia FY 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 Technologies Limited Particulars Amount Amount (INR) Amount (INR) Amount (INR) (INR) - (Refer page Refer page 51 of FY 07-08 annual Refer page 69 of 51 of FY 06- report) FY 09-10 annual 07 annual report report) Revenue 285.000.00 287,231.664.00 509,346,944.00 801,440,931.00 100683.04% 77.33% 57.35% Profit/Loss 43,164,681.00 66,771,702.00 152,336,854.00 252,670,608.00 as per financials 54.69% 128.15% 65.86%

He submitted that the Tribunal in the first round of litigation had remanded the matter back to the file of TPO to verify facts whether the merger has an effect on the comparability of this company.

So far as exclusion of HCL Comnet is concerned, he submitted that this company was already remanded back by the Tribunal before the TPO/AO for verifying the RPT/ sales computation of the company. Therefore, he has no objection if this comparable is restored to the file of the AO/TPO for verification of the RPT filter.

So far as Coral Hub is concerned, he submitted that Coral Hub should be excluded from the list of comparables as it follows outsourcing model of business whereas the assessee is a captive service provider which by itself performs its back office support functions. The two models are very different and have a significant impact on the FAR of the companies and, hence, companies following an outsourcing model cannot be compared with the assessee which itself performs its functions. Referring to the following decisions, he submitted that Coral Hub should be excluded from the list of comparables:- i) Mercer Consulting India Pvt. Ltd. (101/2015) - Punjab and Haryana High Court; ii) New River Software Services Pvt. Ltd. v. Pr. CIT Income Tax(l), New Delhi (ITA Nos. 924/ 2016) - Delhi High Court; iii) Rampgreen Solutions Limited (ITA No. 102/2015); 18

The ld. Counsel for the assessee, accordingly, submitted that if the aforementioned comparables are excluded from the list of comparables, the assessee would be at arm’s length as the margin of the assessee is 9.68% while the average of the margin of the comparables is 14.28% and it will be within (+)/(-) 5%.

So far as Software Development Segment is concerned, the ld. Counsel for the assessee requested for exclusion of the following comparables:-

So far as Infosys Technologies Limited is concerned, the ld. Counsel for the assessee submitted that Infosys is not comparable as it is a huge company with very high turnover having diversified software services and products and having substantial intangibles, etc. It is a product development company which incurs R&D and marketing expenditure. It is a super normal profit making company. Referring to the decision of the Tribunal in assessee’s own case for AY 2007-08 vide ITA No. 1084/Del/2016 and ITA No. 477/Del/2016 for AY 2011-12, he submitted that Infosys Technologies Ltd., was excluded from the list of comparables by following the decision of the jurisdictional High Court in the case of Agnity India Technologies Pvt Ltd. Further, coordinate Bench of the Tribunal in the case of Alcatel Lucent India Limited vide ITA No. 6856/Del/2015) has excluded Infosys Technologies Ltd., from the list of comparables on account of high turnover and the decision has been upheld by the Hon’ble jurisdictional High Court. He accordingly submitted that Infosys Technologies Ltd., should be excluded from the list of comparables. He also relied on the following decisions:- 1) Pentair Water India Pvt. Ltd. v. CIT (ITA No. 18/2015) - Mumbai High Court 2) Alcatel Lucent India Limited (ITA No. 6856/Del/2015) has been upheld by the Hon’ble Delhi High Court vide its order dated 18.07.2017 in ITA 515/2017

So far as Wipro Limited is concerned, he submitted that Wipro Ltd. is engaged in the business of IT services and trading of IT products to its clients and there is no breakup of revenue between IT Service and Products. Further, the company has also undergone an amalgamation which has resulted in an exceptional performance of the company during the year. He submitted that grounds like unreliable segmental information and super normal profits were also brought to the notice of the lower authorities. However, the same were not considered. Referring to the decision of the Tribunal in assessee’s own case for AY 2007-08 vide ITA No.1084/Del/2016, order dated 18.11.2019 copy of which is placed in the paper book, he submitted that this company was excluded from the list of comparables on the ground that Wipro is a product company having sold goods under IT segment of Rs.6,313 crores and being a giant company cannot be a suitable comparable vis-a-vis the taxpayer with a captive SDS provider. Referring to the following decisions, he submitted that Wipro Limited has been excluded from the list of comparables. He accordingly submitted that Wipro Ltd., should be excluded from the list of comparables:-

So far as Kals Info Systems Limited (seg) is concerned, the ld. Counsel for the assessee submitted that Kals is a functionally different company mainly engaged in Software Development, training, consulting, and Equipment development. Referring to the following decisions, he submitted that Kals Info Systems Ltd. (Seg) has been excluded from the list of comparables:-

He further submitted that Kals Info Systems Ltd., has shown inventory of INR 85 lacs which can be verified from page 13 of the annual report). He 22

So far as Persistent Systems Limited is concerned, he submitted that Persistent is a functionally different company, engaged in Software Development and software products with no segment at financials available. The Annual report of the above company which is placed in the paper book provides that the company’s revenue comprises of sale of products and services . The company also maintains the segmental accounts on consolidated basis only which can be verified from page 83 of the annual report. Further, the major revenue is from outsourced product development. Referring to the decision of the Tribunal in assessee’s own case for AY 2007-08 vide ITA No. 1084/DeI/2016, order dated 18.11.2019 he submitted that this company was rejected from the final list of comparables on account of Persistent being a product company with no separate segmental accounts, has undergone merger during the year under assessment and having revenue from the outsources product development; having R&D expenditure and having revenue from licence of products and is also earning royalty from the sale of products.

The ld. Counsel for the assessee further submitted that for the same AY, Persistent has been held to be incomparable to the Software Development Services companies due to an extraordinary event, i.e. a merger w.e.f. AY 2007-08 in the case of AVL India Software (P.) Ltd. v. DCIT vide ITA 6454/Del/2012 & 279/Del/2013. He also referred to the decision of the Tribunal in Alcatel Lucent India Limited vide ITA No. 6856/Del/2015 which has been upheld by the Hon’ble Delhi High Court vide its order dated 18.07.2017 in ITA 515/2017.

So far as Avani Cimcon Technologies Limited is concerned, the ld. Counsel for the assessee submitted that Avani is not a comparable as the information is unreliable and there is non-availability of information in public domain. Further, there are super natural profits of the company in the respective year. Referring to the decision of the Tribunal in assessee’s own case in the first round, he submitted that the Tribunal had remanded the matter back to the file of the TPO to verify the facts whether the company is a product company or not Referring to the decision of the coordinate Bench of the Tribunal in the case of Aircom International (India) Pvt. Ltd. Vide ITA No.6402/Del/2012,he submitted that the Tribunal has excluded this comparable by observing as under:-

So far as LGS Global Limited is concerned, the ld. Counsel for the assessee submitted that LGS Global Limited is not comparable as the company is engaged in rendering diversified services like product evaluation design and development, business process outsourcing (“BPO”) and other activities which are different from that of the assessee which is a captive services provider rendering software services. The business description of the LGS is available at page 26 of the Annual Report of the company placed in the paper book. Further, the company does not have separate segmental accounts and operates under one segment only which is

He accordingly submitted that LGS Global Limited should be excluded from the list of comparables.

So far as Quintegra Solutions Limited (“Quintegra”) is concerned, the ld. Counsel for the assessee submitted that Quintegra is engaged in rendering

So far as Softsol India Limited is concerned, the ld. Counsel for the assessee only requested to consider the correct margin. He submitted that the TPO while giving effect to the DRP directions has computed the margin of Softsol India Limited at 25.59% as against the correct margin of 15%. He submitted that for computation of margin, the assessee has relied upon the Safe Harbor Rules notified by CBDT, which specifies the operating and non-operating items while

The ld. DR, on the other hand, heavily relied on the orders of the AO/TPO/DRP.

We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. First of all, we take up the grounds challenging the inclusion of the comparables on account of ITeS.

So far as the exclusion of Coral Hub Limited is concerned, we are of the considered opinion that Coral Hub is not comparable as it follows an outsourcing model of business while the assessee is a captive service provider which by itself performs its back office support functions. The two models in our opinion are very different and have a significant impact on the FAR of the companies and hence, companies following an outsourcing model cannot be compared with the assessee which itself performs its functions. (Page 189 of the PB I)

We find the issue of outsourcing has been dealt with by the Hon’ble Punjab & Haryana High Court in the case of Mercer Consulting India Pvt. Ltd. (101/2015) wherein it was held that: “ The next question is whether Coral Hub Limited ought to be included in the list of comparables. The ground on which the assessee contends that Coral Hub Limited ought to be excluded from the list of comparables is also well founded. Coral Hub Limited outsources a significant portion of 28

We find the issue of comparability of Coral Hub to captive back-office service providers is also covered in the favour of the appellant for the same AY by the decision dated 25.05.2017 of the High Court in IT A Nos. 924/2016 in the case of New River Software Services Pvt. Ltd. v. Pr. CIT Income Tax(l), New Delhi] wherein it has been held as under: "As far as exclusion of Coral Hub Ltd. (earlier known as Vishal Information Technology Ltd.). the 1TAT has, in the impugned order, given the following reasons therefor: "8.3. Coral Hub (Vishal Information Technologies Ltd.): The annual report of this company is contained at page 476 to 525 of the PB. However, the actual operations carried out by assessee have not been specified. The

We find, for the same AY, the Hon’ble High Court in the case of Rampgreen Solutions Limited (ITA No. 102/2015) rejected the comparable on having different business model as the company outsource its work. The relevant extract is as under:- "38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal’s expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that the outsourcing was common in ITeS industry and the same would not have a bearing on the profitability. Plainly, a business model where services are rendered by employing own employees and using one’s own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity.

So far as exclusion of Eclerx Services Limited is concerned, this in our opinion has also to be excluded. In our opinion Eclerx is not comparable to the appellant which is a captive service provider which by itself performs merely back office support functions. We find, the Tribunal in first round included this comparable on the basis of the decision of the coordinate Bench of the Tribunal in the case of Rampgreen Solutions Pvt. Ltd. Vs. ACIT (ITA No.6286/Del/2012). 31

We find, the Hon’ble High Court of Punjab and Haryana in the case of Mercer Consulting (India) Pvt. Ltd. (ITA No. 101/HC/Pun & Har/2015), held as under:- “25. The TPO relied upon a CBDT circular dated 26.09.2000 which furnishes a list of products or services that may be considered as Information Technology Enabled Products/Sendees (ITES) for the purpose

We find the Mumbai Bench of the Tribunal in the case of John Deere India Pvt. Ltd. (ITA No.2236/PN/2012) which was upheld by the Mumbai HC (ITA No. 63/Mum/2017), has observed as under:- “We are of the considered view that the assessee company is functionally different from Coral Hub Limited. Both the companies have different operating models, thus there cannot be any comparison between two entities having different business spheres and distinct mode of operation. Accordingly, we direct the TPO/AO to exclude the company from the list of comparable entities. ”

Further, we find merit in the argument of the ld. Counsel for the assessee that Eclerx is not comparable to the appellant as it follows a different business model, i.e., the outsourcing model. The two Models are very different and have a significant impact on the FAR of the companies and hence, companies following an outsourcing model cannot be compared with the appellant which performs its functions through its own employees, the details of which are as under:- 33

We further find that the issue of comparability of Eclerx to captive back-office service providers is covered in assessee’s own case for AY 2011-12 & 2012-13 by the decision dated 17.02.2018 of the co-ordinate Bench of the Tribunal vide ITA Nos. 477 & 6420Del/2016 wherein, it has been held as follows: “ 34. We have heard the rival contentions and also perused the relevant findings given in the impugned order on the inclusion of E-cierx. On perusal of the financial statement as pointed out by the learned counsel, we find that E-clerx out of total expenses of Rs.66.01 crores has spent Rs.43.71 crore for outsourcing its contract for services, whereas in the case of the assessee, the entire expenditure has beendone through its own human resources. The major operation of this company seems to be based on outsourcing model and in an outsourcing model the assets deployed in the form of human resources, infrastructure and other intangibles differs from an entity which operates from its own human resources. In the case of the assessee, the entire back of its support have been provided by the assessee, and therefore, following the judicial precedents in the case of B.C. Management Services (supra), we hold that E-clerx should not be included for the comparability and analysis and accordingly same is directed to be excluded.”

We find the issue of comparability of Eclerx to captive back-office service providers is also covered in favour of the assessee in the decision of the coordinate Bench of the Tribunal vide ITA Nos. 5829/De//2015, 6134/Del/2015 and 6572/Del/2016 in the case BC Management Services (P.) Ltd. v. DCIT Circle

We also note that in relation to the point of outsourcing, the Punjab & Haryana High Court in the case of Mercer Consulting (India) Pvt. Ltd. (ITA No.101/2015) has stated that an outsourcing company has a different business model and cannot be compared to a company undertaking normal business activity. The relevant observations of the Hon’ble High Court are as under:- “37. The next question is whether Coral Hub Limited ought to be included in the list of comparables. The ground on which the assesse contends that Coral Hub Limited ought to be excluded from the list of comparables is also well founded. Coral Hub Limited outsources a significant portion of its work. The finding is that the outsourcing charges constitute 90% of the total operating costs. It is admitted by the department that the assessee on the other hand conducts its activities itself without outsourcing any part of it. There can be no comparison between an enterprise that conducts its business activities itself with one that outsources its activities although the activities pertain to the same field. The entire administrative set up of such enterprises would be different. An entity that outsources most of its work is not required to maintain a large establishment. For instance, it would be necessary for such an enterprise to have large premises and a large number of employees. Even the material it uses and the equipment that it installs from minor items such as stationery and telephones to electrical fittings and even machinery are bound to be far less than the material and equipment that an enterprise which conducts its activities itself would of necessity be required to maintain. 38. This in turn would also have consequences upon the legal requirements to be fulfilled by the two enterprises. There are several enactments that bring within its ambit, establishments or undertakings that employ a certain number of persons. There are enactments that also bring within their ambit enterprises that use power. This in turn would require an enterprise carrying on its own activities to maintain staff along with attendan t facilities to ensure compliance with such legislation. The financial difference between such enterprises is bound to be enormous. ……. 40. The Tribunal’s decision not to consider this case is, therefore, correct.”

Further Eclerx is also not comparable to the assessee since the appellant is a captive service provider while Eclerx is a full risk bearing entity. In view of the above discussion, we hold that E-clerx is not a valid comparable. We, therefore, direct the AO/TPO to exclude the same.

So far as exclusion of Genesys International Corporation Limited is concerned, we find Genesys is engaged in rendering geographical information services which require high skill set (page 192-195 of the paperbook I). The Company is engaged in rendering Geographical Information services including Photogrammetry, Remote Sensing, Cartography, Data Conversion, related Computer based Services and other related services during the year under assessment (page 23 of Annual Report for FY 2007-08)

We find for the same AY, the Mumbai Bench of the ITAT in the case of John Deere India Pvt. Ltd. (ITA No. 2236/PN/2012) which was upheld by the Mumbai HC (ITA No. 63/Mum/2017), has observed as under:- “10. With respect to Genesys International, the Tribunal noted that the same Company was engaged in providing geo-spatial services. The activities of the assessee were therefore, at variance from that of Genesys. It was on this count that the Tribunal held that the said Company was functionally different from the assessee. No question of law therefore, arises. ” 50. We find, for the same AY, the co-ordinate Bench of the Tribunal in the case of IHG IT Services (India) Pvt. Ltd. (ITA No.6381/Del/2012), has observed as under:-

Similarly, the co-ordinate Bench of the Tribunal in the case of Cengage Learning India Pvt. Ltd. (ITA No. 6484/Del/2012), while excluding Genesis has observed as under:- “(iv) Genesis International Corp. Ltd. This company has been selected by Ld.TPO in the final list of comparables. Ld. Counsel submits that it is functionally different with that of assessee as it is mainly engaged in the area of Geographical Information Systems services company provides services in the field of Cadastral Mapping, Navigation Maps, 3-D Mapping, Photogrammetry/remote sensing services, power, etc. In our view these services are highly skilled and knowledge- based services which cannot be compared with a back-office support service as that of assessee. Respectfully following the same we direct this company to be excluded from the list of comparables. ”

We further find during the subject year, is an extraordinary event has taken place i.e. the company has acquired 100% stake in Ladya Systech Limited. As a result, there has been a substantial increase in the revenue of the company, the details of which are as under:-

So far as exclusion of Infosys BPO Limited is concerned, we find it is an undisputed fact that Infosys BPO is a giant company with huge turnover. (page 196 of the paper book I). It is mentioned that the revenue of Infosys BPO Limited is 5 times of Agilent. Further, the company has a brand value which has a significant role on its profits. From the details, we find the amount of revenue, expenditure on brand building along with the asset base is as under:-

We find the co-ordinate Bench of the Tribunal in Assessee’s own case for AY 2007-08 (ITA No. 1084/Del/2016) has observed as under:- “23. Undisputedly, there is no change in the business model of the taxpayer. Moreover, when we examine scale of business of Infosys BPO vis-a-vis the taxpayer, it is a giant company with huge turnover and having significant intangibles because as per annual report, relevant page 1239 of the paper book, Infosys BPO is having a turnover of Rs.649 crores whereas turnover of the taxpayer is Rs. 142 crores. Moreover, Infosys BPO has brand expenditure of Rs. 56 lakhs as against nil expenditure of the taxpayer. 24. Moreover, ratio laid down by Hon’ble Delhi High Court in case of Avaya India Pvt. Ltd. (supra) is applicable to the facts and circumstances of the case that scale of operation of comparable vis-a-vis tested party is a factor requires to be kept in mind. So, keeping in view the size and scale of Infosys BPO vis-a-vis the taxpayer, it is not a suitable comparable. ………………………………………. 26. In view of the facts and circumstances of the case discussed above and following the decision rendered by the coordinate Bench of the Tribunal in taxpayer’s own case for AY 2014-15 (supra) and decisions supra rendered by Hon’ble Delhi High Court, we are of the considered view that Infosys BPO is not a suitable comparable vis-a-vis the taxpayer, hence ordered to be excluded”

In relation to the point of asset base, we find that Hon’ble Delhi High Court in the case of Avuya India Pvt. Ltd. (ITA No. 532/2019) after considering the

So far as brand is concerned, we find the co-ordinate Bench of the Tribunal in assessee’s own case for AY 2014-15 (ITA No. 4191/Del/2018) has removed the comparable by observing as under:- “17. We have carefully considered the rival contention and perused the orders of the lower authorities wherein the reasons given for inclusion of the above comparable company for the purpose of benchmarking of the arm ’s-length price of the international transaction of the ITeS segment of the assessee. The assessee has also placed before us the annual report of lnfosys BPO Ltd for 2013 - 14. On looking at the annual report itself it is clear that the company has an imprint of Infosys brand all over it. In the companies overview at page number 4 of the annual accounts as mentioned that this company is the business process outsourcing subsidiary of Infosys and is engaged as outsourcing service provider. In the management discussion and analysis placed at page number 14 of the annual report, it is stated that Infosys BPO provides business process management services to organizations that outsource their business processes and Infosys BPO is majority owned and controlled subsidiary of Infosys Ltd. Rich industry experience held the company to understand the evolving needs of the clients better and provided them with the ability to offer appropriate solution across different industry verticals and horizontals , quickly. Further in paragraph number 1 it is stated that the company is committed to 41

We find Infosys BPO has been rejected by the co-ordinate Bench of the Tribunal in the same AY, in the case of IHG IT Services (India) Pvt. Ltd. (ITA No. 6381/Del/2012)„ wherein it has been held as under:- “We take note that the aforesaid extra ordinary event of amalgamation during the year has helped Infosys BPO in acquiring domains skill sets in the finance, administration space as well as enhanced its global presence with centers at Thailand and Poland. In view of the said extra ordinary event brought to our notice, we exclude Infosys BPO from the list of comparables. ”

We further find the co-ordinate Bench of the Tribunal in the case of IHG IT Services (India) Pvt. Ltd. (ITA No. 397/Del/2017) has observed as under:- “We have considered the submissions of both the parties and have perused the record of the case. In assessment year 2008-09, this comparable was excluded as an extraordinary event took place that year. Infosys BPO Limited acquired skill sets in the finance, administration space as well as enhanced its global presence with centers at Thailand and Poland. In course of hearing, Id. counsel for the assessee filed the news item in the Economic Times, wherein, as regards the acquisition of Australia-based Portland Group for AUD 37 mn, it is pointed out that the deal would essentially enable Infosys BPO to have a reach into the Australian market and will enhance their sourcing and procurement capabilities. It is further stated that Infosys' focus on value-added services and this will add to it. Further, it was stated that Portland Group has over 100 employees with a reported revenue of approximately A$31.3 million for the fiscal year ended June 30, 2011. Further, Portland Group has over 100 procurement specialists with domain expertise and some 40-odd clients. Thus, the deal certainly helped Infosys BPO to intensity its services offerings and took sourcing and procurement functions to a higher level. Thus, it cannot be said that though the deal was struck in January, 2012 but could not impact the profitability of assessee particularly when the Portland Group had substantial presence over area and had specialized skills. Therefore, this event definitely affected the profitability of Infosys BPO which increased substantially. Further, Id. counsel has also demonstrated various aspects, noted earlier, which clearly distinguished Infosys BPO from assessee and, therefore, we direct this comparable to be excluded from the list of comparables. ”

The various other decisions relied on by ld. Counsel for the assessee also support his case for exclusion of Infosys BPO Limited from the list of comparables. We therefore direct the AO/TPO to exclude Infosys BPO Ltd. from the list of comparables.

So far as exclusion of Wipro Limited (BPO segment) is concerned, we are of the considered opinion that Wipro BPO is not comparable to the appellant due to incomparable scale of operations and presence of huge intangibles and the brand value of Wipro. We find the turnover of the company is very high vis-a-vis the appellant. The company has a turnover which is more than 6 times of the appellant which can be verified from the details filed in the paper book.

We find the co-ordinate Bench of the Tribunal in Assessee’s own case for AY 2007-08 (1TA No. 1084/Del/2016) has observed as under:- “22. Similarly, Hon’ble Delhi High Court in H & S Software Development and Knowledge Manager Centre Pvt. Ltd. (supra) has confirmed the exclusion of Wipro by the Tribunal on ground of significant brand presence for profits at large corporate size. So, in view of the facts and circumstances of the case and following the law laid down by Hon’ble Delhi High Court in the cases supra, we are of the considered view that Wipro is not a suitable comparable vis-a-vis taxpayer, hence ordered to be excluded.”

In relation to the point of asset base, we have already reproduced the findings of Hon’ble Delhi High Court in the case of Avuyu India Pvt. Ltd. (ITA No. 532/2019) wherein the impact of assets has been given due consideration for excluding a comparable.

We find the Hon’ble Delhi High Court in the case of New River Software Services Pvt. Ltd. (ITA No. 924/2016) has observed as under:- “Wipro BPO is more or less on the same footing as Infosys BPO as far as the size and scale are concerned. Consequently the Court finds no legal infirmity in the impugned order of the ITAT, which has, apart from excluding the above comparables, remanded the matter to the TPO on the question of working capital adjustment. ”

In view of the above discussion and considering our findings while excluding Infosys BPO whose facts are more or less similar to that of Wipro BPO, we hold that Wipro BPO is not a valid comparable. We, therefore, direct the AO/TPO to exclude Wipro BPO from the list of comparables.

In so far as exclusion of Acropetal Technologies Ltd., is concerned, we find for the year under assessment, the income from Engineering Design Services of Acropetal Technologies is INR 21.80 crores out of total income of INR 60.31 crores (page 21 of annual report) which is 36.13%. Therefore, it is amply clear that the income from ITeS services is less than 75% of total revenues and consequently this company does not satisfy the filter of ITeS services revenue being more than 75% of total revenues, applied by the TPO himself. We, therefore, are of the opinion that this company is not a valid comparable. 45

We find the co-ordinate Bench of the Tribunal in the case of IHG IT Services (India) Pvt. Ltd. (ITA No. 6381/Del/2012), has observed as under:-

In view of the above discussion and in view of various other decisions relied on by ld. Counsel for the assessee, we are of the considered opinion that Acropetal Technologies is not a valid comparable. We, therefore, direct the AO/TPO to exclude this company from the list of comparables.

Now, coming to exclusion of Accentia Technologies Limited is concerned, we find Accentia is not comparable as an extraordinary event has taken place during the subject assessment year. The company was merged with two other companies (page 187 of the paperbook I). We find the co-ordinate Bench of the Tribunal in Assessee’s own case in AY 2007-08 (ITA No. 1084/Del/2016) has held as under:- “33. So, in view of the facts and circumstances of the case and following the decision (supra) rendered by the coordinate Bench of the Tribunal, we are of the considered view that Accentia is not a suitable comparable on ground of amalgamation of subsidiaries resulting into growth of revenue by 100683% and on ground of functional dissimilarity, hence ordered to be excluded.” 71. The relevant details regarding the effect of extraordinary event on the profitability of the company is reproduced as under:-

We find, the Tribunal in the first round has remanded the matter back to the file of the TPO to verify the facts whether the merger has any effect on the comparability of this company. Since it is seen that due to amalgamation of subsidiaries there is growth of revenue by 100683% and there is financial dissimilarities, we hold that Accentia Technologies Ltd., is not a valid comparable. We, therefore, direct the AO/TPO to exclude this company from the list of comparables.

So far as exclusion of HCL Comnet is concerned, we find the subject comparable has already been remanded back by the Tribunal before the TPO/AO for verifying the RPT/ sales computation of the company. We, therefore, deem it proper to restore the issue to the file of the AO/TPO for verifying the RPT/sales

The AO/TPO shall recompute the ALP in ITeS segment on the basis of exclusion of these comparables.

Now, we are taking up the exclusion of comparables in the IT Segment. So far as the exclusion of Infosys Technologies Limited is concerned, we are of the opinion that Infosys is not comparable as it is a huge company with very high turnover. It also has a brand associated with it which impacts the profitability of the company. Further, it is a product development company which incurs R&D and marketing expenditure.

We find, the Tribunal in Assessee’s own case for AY 2007-08 (ITA No. 1084/Del/2016), has rejected Infosys Technologies Ltd. From the list of comparables by observing as under:- “40. So, by following the ratio laid down by the Hon’ble High Court in Agnity India Technologies Pvt Ltd. (supra) and order passed by the coordinate Bench of the Tribunal in taxpayer’s own case for AY 2011-12 (supra), we are of the considered view that Infosys Technologies having turnover of Rs.13,149 crores with asset base of Rs.2150 crores having brand expenditure of Rs. 69 lakhs as against turnover of Rs. 32 crores of taxpayer with nil brand expenditure and asset base of Rs.29 crores; and that Infosys Technologies has also incurred Rs.49 crores on the R&D expenditure and its revenue from the software product has increased to 67.6% whereas segmental financials are not available, so Infosys is not a suitable comparable. So, in these circumstances, we are of the considered view that Infosys Technologies is not a suitable comparable vis-a-vis taxpayer, hence ordered to be excluded. ”

We find the Tribunal in Appellant’s own case for AY 2011-12 (ITA No. 477 /Del/2016), has rejected this comparable from the list of comparables by observing as under:- “7.4 If we apply the aforesaid comparative criteria as laid down by Jurisdictional High Court, we find that the same would be applicable on the facts of the present case also and therefore, respectfully following the judgment of the Hon'ble Delhi High Court (supra), we hold that Infosys Technologies Limited cannot be compared with the assessee-companv, which is operating at minimal risk and is a contract software development service provider. Accordingly, we direct the TPO to exclude Infosys Technologies Limited from the comparable list. ”

We also find the comparability of Infosys Technologies Limited to captive ITeS providers is covered in the favour of the assessee on the ground of huge size and scale by the decision of the jurisdictional High Court in the case of Agnity India Technologies Pvt. Ltd. v. CIT (ITA No. 1204/2011).

We find the Hon’ble Delhi High Court vide ITA No.515/2017 upheld the decision of the Tribunal excluding Infosys Ltd. from the list of comprables in the case of Alcatel Lucent India Ltd. where the Tribunal vide ITA No.6856/Del/2015 has held as under:- “We find that Infosys has been rejected as a comparable by the ITAT in the case of assessee’s predecessor company Alcatel — Lucent Technologies India P. Ltd. for AY 2003-04 and 2004-05 in ITA No. 2297/Del/2008 and 2298/Del/2008. The Hon ’ble Delhi High Court in the case of M/s Agnity India Technologies P. Ltd. (ITA No. 1204/2011) has held that companies with high turnover have to be rejected. Respectfully following the ratio, we direct the TPO to exclude this company from the final list of comparables.’’

We find the decision in Agnity India Technologies (P) Ltd. has been relied upon by the co-ordinate Bench of the Tribunal in the case of UT Starcom Inc. 49

We find the facts in the relevant AY are similar which was demonstrated by the ld. Counsel for the assessee as under:-

We find, the ground of incomparable scale and size has been upheld by the Hon’ble Delhi High Court in the case of Sanvih Info Group Pvt. Ltd., vide ITA No. 420/Del/2019 wherein it has been held as follows: “8. It appears that the comparable discussed in Agnity India Technologies Pvt. Ltd. (supra) which was sought to be excluded was an Infosys Group Company which undoubtedly was ‘a giant corporation ’. On the other hand, in Chrys Capital Investment Advisors India (P.) Ltd. the three comparables included were Brescon Corporate Advisors Limited, Keynote Corporate Services Limited and Khandwala Securities Limited and the rejected comparables were IDFC Investment Advisors Ltd., Sumedha Fiscal Services Limited and Future Capital Holdings Limited. Clearly therefore none of the comparables involved was a ‘giant corporation ’ like Infosys. Consequently, this Court is not persuaded that the ITAT erred in the present case in excluding Infosys BPO Limited relying on the decision of this Court in Agnity India Technologies Pvt. Ltd. (supra) ”

In view of the above discussions, we hold that Infosys Technologies Ltd., should be excluded from the list of comparables. We hold and direct accordingly.

Now, coming to exclusion of Wipro Limited we find Wipro is engaged in the business of IT services and trading of IT products to its clients and there is no breakup of revenue between IT Service and Products. Further, the company has also undergone an amalgamation which has resulted in an exceptional performance of the company during the year. We find, Wipro is a product company having sold goods under IT segment of Rs.6,313 crores and being a giant company cannot be a suitable comparable vis-a-vis the taxpayer who is a captive SDS provider. We find merit in the argument of ld. Counsel for the assessee that Wipro Limited is not comparable to the appellant due to

We find the Tribunal in the case of AVL India Software (P.) Ltd. v. DCIT (ITA 6454/Del/2012 & 279/Del/2013) has observed as under:- “41. We find that in the case of Toluna India Pvt. Ltd. (supra), the Tribunal has excluded this comparable from the list of comparables by observing as under: “41. After considering the rival submissions and perusing the relevant material on record, we have absolutely no doubt in our mind that this company cannot be considered as comparable to the assessee inasmuch as it is a giant company in terms of parameters discussed above while dealing with the case of Infosys Ltd. The Hon 'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) has upheld the exclusion of this company also from the list of comparables on the basis of certain parameters, which are fully applicable to the instant assessee as well. It is, therefore, directed to exclude this company from the list of comparables. The assessee succeeds. 42. Keeping in view the functional profile of Toluna India Pvt. Ltd. (supra) vis-a-vis the assessee, respectfully following the decision of coordinate Bench, this comparable is directed to be excluded from the list of comparables. ”

We find the coordinate Bench of the Tribunal in the case of Toluna India (P.) Ltd. v. ACIT, Circle 12 (I), New Delhi vide ITA 5645/Del/2011, has observed as under:- “41. After considering the rival submissions and perusing the relevant material on record, we have absolutely no doubt in our mind that this company cannot be considered as comparable to the assessee inasmuch as it is a giant company in terms of parameters discussed above while dealing with the case of Infosys Ltd. The Hon’ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) has upheld the exclusion of this company also from the list of comparables on the basis of certain parameters, which are fully applicable to the instant assessee as well. It is, therefore, directed to exclude this company from the list of comparables. The assessee succeeds. ” 87. We further find the turnover of the company is very high vis-a-vis the assessee. The company has a turnover which is 345 time of the appellant the details of which are as under:-

We find, the Hon'ble Supreme Court has dismissed the special leave petition file by the Revenue against the decision of Hon’ble High Court in the case of Oracle (OFSS) BPO Services Pvt. Ltd.. The Hon’ble High Court vide ITA No. 124/2018 has observed as under:- “As to the exclusion of M/s Wipro Limited, here too, the Court is of the opinion that the brand value of an entity has a significant role in its ability to garner profits and negotiate contracts. Thus, while considering the comparables, the likelihood of profits derived or attributable to the brand having regard to the consistency of the quality of services that an entity is 53

In view of our above discussion, we hold that Wipro cannot be compared with that of the assessee company. We, therefore, direct the AO/TPO to exclude Wipro from the list of comparables.

So far as Kals Info Systems Limited (seg) is concerned, we find Kals is a functionally different company mainly engaged in Software Development, training, consulting, and Equipment development. We find the co-ordinate Bench of the Tribunal in the case of Aircom International (India) Pvt. Ltd. vide ITA No.6402/Del/2012 has observed as under:- “The TPO’s inclusion of this company in the list of comparables is that the software products and training constitute only 4.24% of its revenue. This inference has been drawn on the basis of the information supplied by this company stating: ‘‘the use of readymade object laboratories is only to the tune of about (3.4 to 6.96) % in the year 2007-08 to 2008-09 ”. We fail to comprehend as to how the above line conveys that the software products' revenue stands at 4.24%. What has been written is that the company’s use of the readymade object laboratories is only to the tune of maximum 4.24%. By no imagination this can be construed as revenues from software products. When we peruse the Annual report of this company, which is available in the paper book, it can be seen that there is no such mention of software products revenue limited to 4.24%. On the contrary; it has been mentioned in the Notes to the financial statement that: "the company is engaged in development of software and software products since its inception. ” The company consisting of STP1 unit is engaged in software products and development of software and is also undertaking training activity of software professionals on online projects. Not only the revenues of the segment considered by the TPO also include the revenue from software products, but also from training imparted on commercial basis we hold that Kals Information Systems Ltd. (Seg.) should be expunged from the set of comparables. ”

We find the company has shown inventory of INR 85 lacs (page 13 of the annual report). The company is also engaged in trading function as a pure software services provider will not have inventory in its books of accounts. The company also states that it is engaged in production and supply of software product (page 19 of annual report). Even the segmental accounts do not provide the bifurcation of software services and products separately. We, therefore, are of the opinion that this company should not be included in the final comparable list. We find, the co- ordinate Bench of the Tribunal in case of UT Starcom Inc. (India Branch) vide ITA No.5848/Del./2011, has directed exclusion of Kals Info System Ltd. by observing as under:- “17. ….KALS has undisputedly drawn its income from software product and is engaged in executing end to end project through the entire value chain of software development life cycle and this issue has been determined by the coordinate Bench in the order (supra). 18. Moreover, when KALS has not prepared segment-wise data to prove its customized software development services and sale of proprietary products, it is difficult to fathom as to what extent the overall profit of this company have been impacted by the revenue from software products. So, we are of the considered view that KALS is also not a valid comparable, hence ordered to be excluded from the final list of comparables.”

We find the above decision of the Tribunal has been upheld by the Hon’ble High Court vide ITA No.767/2017 order dated 25.9.2017.

We find the above comparable has also been excluded in the case of AVL India Software (P.) Ltd. v. DCIT (ITA 6454/De//2012 & 279/Del/2013) which is

In view of the above discussion, we hold that Kals Info System Ltd., cannot be considered as a comparable. We, therefore, direct the AO/TPO to exclude the company from the list of final comparables.

So far as Persistent Systems Ltd., is concerned, we find this company is a functionally different company, engaged in Software Development and software products with no segment at financials available. The extract of the Annual report for the subject assessment year provides that the company’s revenue comprises of sale of products and services (internal page 71 of annual report). The company also maintains the segmental accounts on consolidated basis only (internal page 83

We further find the Tribunal in assessee’s own case for AY 2007-08 (ITA No. 1084/DeI/2016), has rejected this comparable from the list of final comparables by observing as under:-

We find, for the same AY, Persistent has been held to be incomparable to the Software Development Services companies due to an extraordinary event, i.e. a merger w.e.f. AY 2007-08 as held in the case of AVL India Software (P.) Ltd. v. DCIT (ITA 6454/Del/2012 & 279/Del/2013). The relevant extract of the judgement is reproduced below:

We find the co-ordinate Bench of the Tribunal in case of Alcatel Lucent India Limited vide ITA No. 6856/Del/2015 which has been upheld by the Hon’ble Delhi High Court vide its order dated 18.07.2017 in ITA 515/2017 has observed as under:- “The Ld. AR referred to the profit and loss account of the company and submitted that it shows that the company had revenue streams from software services and products. He further pointed out that the revenues and expenses have been shown in a consolidated manner and no segmented disclosure has been made. He further pointed out to the relevant pages in the annual report, wherein it has been stated that this company has acquired ownership of intangibles of around 50 crores. The Ld. AR submitted that since the company is engaged both in rendering software development services as well as sale of software products, in absence of segmental details, this company could not be selected as a comparable. The Ld. AR also submitted that this company has made significant acquisitions during the year thereby failing TPO’s peculiar economic circumstances filter. The Ld. AR submitted that this company has been rejected on the ground that it earns income from software froducts and services and that no segmental data is available in the following cases - Saxo India Private Limited (ITA 58

In view of the above discussion, we hold that Persistent System Ltd. is not a good comparable. We, therefore, direct the AO/TPO to exclude this comparable from the list of final comparable.

So far as exclusion of Avani Cimcon Technologies Limited is concerned, we find Avani is not a comparable as the information is unreliable and there is non-availability of information in public domain. Further, there are super normal profits of the company in the respective year. We find the Tribunal in the first round has remanded the matter back to the file of the TPO to verify the facts whether the company is a product company or not. We find the co-ordinate Bench of the Tribunal in the case of Aircom International (India) Pvt. Ltd. (ITA No.6402/Del/2012) has observed as under:-

We find the Bangalore Bench of the Tribunal in the case of ABB Global Industries & Services Limited (ITA No. 1612/Bang/2012) directed to exclude this 59

The various other decisions relied on by the ld. Counsel for the assessee also support his case for the proposition to exclude Avani Cimcon Technologies on account of functional dissimilarities and insufficient segmental details. We, therefore, direct the AO/TPO to exclude this company from the list of final comparables.

So far as exclusion of LGS Global Limited (“LGS”) is concerned, we are of the considered opinion that LGS is not comparable as the company is engaged in rendering diversified services like product evaluation design and development, business process outsourcing (“BPO”) and other activities which are different from the appellant which is a captive services provider rendering software services. The business description of the LGS is given on internal page 26 of the Annual Report of the company.. Further, the company does not have separate segmental accounts and operates under one segment only. (page 26 of the Annual Report of the company)

We further find the company has intangible in the nature of goodwill amounting to INR 3.67 crores. However, the Appellant does not have any goodwill nor it has any other intangible. (page 57 of the Annual Report of the company)

We find the issue of comparability of LGS to captive service provider is covered in the favour of the appellant for the same AY by the co-ordinate Bench of the Tribunal vide ITA Nos. 5848/Del/2012 in the case of Cash Edge India Pvt. Ltd. v. ITO Ward 3(2), New Delhi wherein it has been held as follows: “18 ……similarly, Assessing Officer will only take segmental results relating to services only for comparing the companies M/s Kals Information Systems, Avani Cincon, LGS Global Ltd. and Bothtree Consulting Systems as the consolidated results of these companies cannot be compared with the assessee, as assessee is admittedly into service providing activities. It is further directed that if segmental results of the above companies relating to similar services as being provided by assessee are not available, then these companies will have to be excluded as comparables as held in various judicial pronouncements relied upon by Ld. A.R.. ”

We find the decision of the co-ordinate Bench of the Tribunal in the case of Saxo India Private Limited (ITA No.6148/Del/2015) has been upheld by the Hon’ble Delhi High Court vide ITA No. 682/2016. The relevant extract of the Hon’ble High Court reads as under:- “10. On a comparison with the data available and made available, undoubtedly, the object of the statute is to “pull in transactions which otherwise escaped the radar of tax assessment under one head or the other. The transfer pricing methodology - shorn of its details is an attempt by each nation to locate the incidents of income which would be subjected to levy within its jurisdiction where international transactions are involved. This exercise does not compare with other income assessments where the methodology adopted in their domestic jurisdiction will differ ”. The 62

In view of the above discussion, we direct the AO/TPO to exclude LGS Global Ltd. from the list of comparables.

So far as Quintegra Solutions Limited (“Quintegra”) is concerned, we find this company is engaged in rendering diversified services like product engineering, development of proprietary software products, and infrastructure managements services which are different from the assessee which is a captive services provider rendering software services. The business description of the Quintegra is given on page 15 of the Annual Report of the company. Further, the company does not have separate segmental accounts for rendering software services. (page 17 of the Annual Report of the company)

We find during FY 06-07 (page 10 of annual report) and 07-08 ( page 8 of the annual report) the company has made acquisitions due to which the revenue of the company has increased substantially. The relevant extract of the same is as under:- 63

We find the Bangalore Bench of the Tribunal in the case of AMD India Pvt. Ltd., vide ITA No.437/Bang/2013 has observed as under:- “18.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer. Com Pvt. Ltd. (ITA No.227/Bang/2010 dt. 9.11.2012) has held that if a company possesses or owns intangibles or IPRs then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted from the list of comparables, as in the case on hand. 18.5 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.6 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer. Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. ”

We find the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Limited vide ITA No. 1303/Bang/2012, has observed as under:- “18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on land who is a software service provider.”

In view of the above discussions, we hold that Quintegra Solutions Ltd. should be excluded from the list of comparables. We hold and direct accordingly.

So far as arguments for corrected margin computation of Softsol India Limited is concerned, we find it is the submission of the ld. Counsel for the assessee that the TPO while giving effect to the DRP directions has erred in computation of the margin of Softsol India Limited. The correct margin of the comparables is 15% as given in submission filed before the Ld. DRP (page 144 of the PB I). However, the TPO has computed the margin as 25.59%. For computation of margin, the Appellant has relied upon the Safe Harbor Rules notified by CBDT which specifies the operating and non-operating items while computing the margin. We therefore remit this issue to the file of the AO/TPO for computing the correct margin after giving the opportunity of being heard to the assessee. We hold and direct accordingly. The AO/TPO shall recompute the ALP

So far as ground of appeal No.16 is concerned, the same relates to the disallowance of expenses on non-deduction of tax.

Facts of the case, in brief, are that a TDS survey was conducted on 17th February, 2010 and order dated 25th March, 2010 was passed u/s 201 of the Act by the ITO, TDS. Following the order of the ITO, TDS, the AO held that the assessee failed to deduct TDS on expenses of Rs.7,07,962/- debited to P&L Account, the details of which are as under:- Freight charges – Sec.194C – INR 104,599 Expense on hotel accommodation – Sec.194I – INR 603,363

The AO, accordingly, disallowed the above expenses under the provisions of section 40(a)(ia) of the IT Act for which the assessee is in appeal before the Tribunal.

The ld. Counsel for the assessee submitted that the AO has grossly erred both on facts and in law in proposing to disallow freight charges and hotel expenses under section 40(a)(ia) of the Act without appreciating the fact that the assessee was not required to deduct tax on the payment of such expenses. So far as expenses on freight - Rs. 104,599 is concerned, he submitted that during the subject year, the assessee incurred expenses of Rs. 104,599 on account of freight 66

So far as expenses on hotel accommodation of Rs. 603,363 is concerned, he submitted that during the subject year, the assessee incurred expenses of Rs. 603,363 on account of expenses on hotel rooms hired by its employees payable to Park Residency and Lamba’s House. As per explanation to section 194I of the Act, the term “rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement for use of specified assets. The assessee has not entered into any agreement (other than generally agreed rate for the bookings from the assessee) with Lamba’s House and Park Residency for them to provide specified rooms to the employees of the assessee for any specified

The ld. Counsel for the assessee referred to the circulars issued by the Central Board of Direct Taxes (‘CBDT’): i) Circular No. 715 dated August 8, 1995 and 13 Circular no. 5/2002 dated July 30, 2002 and submitted that the provisions of section 194C and 194I of the Act would not apply and hence no disallowance is warranted u/s 40(a)(ia).

Without prejudice to the above, he submitted that even if the amount of Rs.7,07,962/- is not allowed as deduction while computing the business income, the same needs to be taken into account for computation of profits of the business eligible for deduction u/s 10A of the IT Act. Referring to the following decisions, he submitted that deduction u/s 10A of the Act shall be computed on the assessed income after considering all the allowances/disallowances made by the AO during the assessment proceedings:

The ld. DR, on the other hand, heavily relied on the orders of the AO/TPO/DRP.

We have considered the rival arguments made by both the sides perused the orders of the authorities below and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, on the basis of the TDS Survey, conducted on 17th February, 2010 and order passed by the ITO, TDS on 25th March, 2010, made addition of Rs.7,07,962/- on account of Freight charges (Rs. 1,04,599/-) and expense on hotel accommodation (Rs.6,03,363/-) by invoking the provisions of section 40(a)(ia) of the Act. Without going into the merit of the addition, we find the alternate argument of the ld. Counsel for the assessee acceptable according to which once the assessee is entitled to deduction u/s 10A of the IT Act, then, such higher assessed income on account of disallowance made by the AO is eligible for deduction u/s 10A. Since the assessee is entitled to deduction u/s 10A of the Act, therefore, the assessee is entitled to deduction u/s 10A of the Act on such enhanced assessed income due to disallowance of the expenditure on account of freight charges and expenses on

In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on 05.05.2022.