AGILENT TECHNOLOGIES INDIA PVT. LTD.,NEW DELHI vs. DCIT, CIRCLE- 1(2), NEW DELHI

3 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. of Agilent India’s revenue. He noted that assessee-company had entered into the following international and domestic transactions during the year:-

Amount in S. No. International Transaction INR 1 Purchase of finished goods 2541277609 Receipt of commission income 879003115 2 3 Re-export of goods 128765627 4 Provision of labour services 5045871 5 Provision of IT and BCC Services 75772502 6 Provision of software development 60254625 services 7 81328313 Provision of marketing support services Provision of group marketing 119342383 8 services 9 Purchase of fixed assets 32162849 Sale of fixed assets 1284515 10 Cost reimbursement paid/payable 9822382 11 Receipt of labour services 4614686 12 13 171880992 Cost reimbursement received/ receivable 2.3 He noted that for the software development services, assessee-company has applied Transactional Net Margin Method [“TNMM”] as the most appropriate method. The Operating Profit to Total Cost [“OP/TC”] ratio has been taken as the Profit Level Indicator [PLI] for the TNMM analysis. He noted that the PLI of the assessee-company has been arrived at 12.28% on cost. However, the average PLI of 4 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. the comparables has been arrived at 8.92% as per the analysis in the T.P document. After applying various filters for exclusion of certain comparables such as unavailable data for the F.Y. 2012-13, company software development services income is less than Rs.2 crore, the company’s gross revenue from services is less than 75% of the total operating revenues, companies who have export sales less than 75% of the sales from software development services, companies having more than 25% RPT, companies having persistent losses, companies whose employee cost is lower than 25% of the total cost, companies having different financial years, companies that are functionally different from that of the tax payer and companies that are having peculiar economic circumstances, the TPO retained certain comparables and rejected certain comparables taken by the assessee- company in the T.P. study report and proposed the following 14 comparables whose average profit is 17.97% and accordingly proposed an upward adjustment of Rs.30,60,859/-. After considering the various submissions made by the assessee, the TPO selected the final set of 5 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. comparables as per Pages 40 and 41 of the T.P. order, the details of which, are as under :

S.No. Company Name OP/OC 1. Acropetal Technologies Ltd. (seg) 11.58% 2. Akshay Software Technologies Ltd., 7.16% 3. Cigniti Tech 8.64% 4. E-Zest Solutions 9.79% 5. Infosys Limited 37.67% 6. Larsen & Toubro Infotech Ltd. (Seg.) 39.35% 7. Mindtree Ltd., 23.01% 8. Persistent Systems Ltd., 15.41% 9. R S Software (India) Ltd., 17.73% 10. Sasken Communication Technologies Ltd., 11.82% 11. Spry Resources Pvt. Ltd., 9.86% 12. Tata Elxsi 8.94% 13. Thirdware Solution Ltd., (Overseas Segment) 33.47% 14. ICRA Techno Analytics Ltd., 17.10% Average 17.97% 2.4. Since the assessee-company has not demonstrated that there is a difference in the levels of working capital employed by it vis-à-vis from the comparables, the A.O./TPO did not allow working capital adjustment. Similarly, the TPO did not allow adjustment on account of outstanding receivables overdue from Associated Enterprises. Accordingly, the TPO proposed an adjustment of Rs.30,60,859/- being the ALP of the international transactions in respect of provision of software services

6 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. entered into by the assessee with it’s A.Es and an amount of Rs.3,30,567/- on account of outstanding receivables overdue from it’s A.Es. The A.O. in the draft assessment order made the above addition.

2.5 The assessee approached the DRP who vide order dated 13.09.2017 issued certain directions to re-compute the ALP. Accordingly, the TPO recomputed the ALP of the international transactions by making an upward adjustment of Rs.22,99,123/- to the income of the assessee. The A.O. accordingly passed the final assessment order making the above addition to the total income of the assessee.

3. Aggrieved with such order of the A.O./TPO/DRP the assessee is in appeal before the Tribunal by raising the following grounds :

1. “The Ld. AO erred in proposing to assess the income of the Appellant at INR 37,00,82,560 as against the returned income of INR 36,77,83,430 by making an addition of INR 22,99,123 by 7 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. holding that the Appellant’s international transaction does not satisfy the arm's length principle envisaged under the Act; 2. The order passed by the Ld. AO/ Learned Transfer Pricing Officer (“Ld. TPO”) in pursuance of the directions issued by the Hon’ble Dispute Resolution Panel (“Hon’ble DRP”) enhancing the income of the Appellant by INR 22,99,123 is bad in law; 3. The Ld. AO/ Ld. TPO erred in enhancing the income of the Appellant by INR 21,58,680 by holding that the international transactions of the Appellant pertaining to provision of software development services (“IT”) from its Associated Enterprises (“AEs”) does not satisfy the arm’s length principle envisaged under the Act and in doing so, have grossly erred in: 3.1. disregarding multiple year/ prior years’ data as used by the Appellant in the Transfer Pricing (“TP”) documentation and holding that 8 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. current year [i.e. Financial Year (“FY”) 2012- 13] data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; 3.2. rejecting comparablility analysis in the TP documentation and in conducting a fresh comparability analysis based on application of the additional/revised filters in determining the Arm’s Length Price; 3.3. disregarding the arm’s length price (“ALP”) as determined by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (“the Rules”); 3.4. Committing factual/ computational errors while calculating the operating margins of the companies selected as comparable in the TP order; 9 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. 3.5. erroneously including certain functionally dissimilar companies that are full-fledged risk taking entrepreneurs and high profit making companies for benchmarking a low risk captive service provider like the Appellant (in the software service segment) and excluding certain comparable companies on arbitrary/ frivolous grounds.

4. The Ld. AO/ Ld. TPO erroneously imputed an interest of INR 1,40,443 for the receivables outstanding beyond 30 days and while doing so, has grossly erred in: 4.1. recharacterising the overdue receivables amount as deemed loan and that it constitutes as an international transaction separate from the main transaction: 4.2. not appreciating that in relation to the overdue receivables, the conduct of the Appellant with its AEs and non AEs was exactly the same;

10 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. 4.3. arm’s length price determination for outstanding receivables is subsumed within the arm’s length price determination of the principal international transaction itself; 4.4. computing the amount of interest by applying an arbitrary credit period for determining overdue status; 4.5. determining an interest rate of LIBOR plus 400 basis points without giving regard to various factors responsible for determination of interest rate. 4.6. Disregarding judicial pronouncements in India in undertaking the TP adjustment; and

5. The Ld. AO has grossly erred in proposing to initiate penalty proceedings under section 271(1 )(c) of the Act.

The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of appeal either before or during the course

11 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. of the proceedings before the Hon’ble Income Tax Appellate Tribunal in the interest of the natural justice. The aforesaid grounds are mutually exclusive and without prejudice to each other.”

4.1. Learned Counsel for the Assessee drew the attention of the Bench to the final set of comparables taken by the TPO at Pages 40 and 41 of the order where he has taken 14 comparables, the details of which are already reproduced in Para 2.1 above.

4.2. So far as Infosys Limited is concerned, Learned Counsel for the Assessee drew the attention of the Bench to 12 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. the submissions made before the DRP, copy of which is placed at Page-17 of the PB where the following objections were raised.

 Functionally different : Engaged in diversified activities including consulting, application design, development, re-engineering and maintenance system integration and implementation and business process management etc.  Scale of operations : Turnover during the year is 25,385 crores which is 773 times more than that of the Assessee.  Brand Profits and significant intangible assets: Company focus on immense brand building and profits derived by Infosys are predominantly due to its premium branding.  Product development: Company owns products and leverages on its premium banking solutions – Finocle.

13 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi.  Significant AMP expenses: Incurs AMP expenses which are 4.8% of the total revenue.  Significant R&D expenses: High R&D activities for developing new functionalities and patenting innovative technologies. (2.1%).  Reliance placed on Agnity Indio Technologies Pvt. Ltd (ITA No.1204/2011) wherein the High Court rejected Infosys on various factors which includes turnover, capital, advertisement, soles promotion, brand building and expenditure on R&D.

4.3. The Learned Counsel for the Assessee further drew the attention of the Bench to the revenue of Infosys Limited at Rs.36,765 crores which is 6027 times that of the assessee whose total revenue is Rs.6.10 crores. He submitted that the assessee-company does not incur any Research & Development [“R & D”] expenses for software development services. However, Infosys Limited has incurred R & D expenses of Rs.907 crores during the F.Y. 2012-13. Referring to the order of the Tribunal in assessee’s own case for the A.Y. 2010-11, he submitted that under 14 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. identical circumstances the Tribunal has excluded Infosys Limited from the list of comparables.

i. Unitrax ® - for Banking & Financial services

Unitrax ® is a SaaS-based transfer agency record keeping platform, enabling fund and insurance manufacturers to manage the administration of their wealth management products including mutual funds, fixed income, structured notes, annuities, and insurance investment products. The product is delivered through a graphical user interface providing

15 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. integration with web-based B1 reporting and sales analytics features and functions. Unitrnx®’s Web services-based architecture makes it very easy to connect to in-house applications and can be leveraged to bring the utmost value to your end investors and advisors by providing readily used information via the web portal, investor and advisor trax.

(Source:https://www.lntinfotech.com/en- us/AboutUs/Pages/Overview.aspx)

(ii) ACCURUS1 - Underwriting Workbench Solution- for Insurance :

AccuRUSI™ provides a unified working environment for commercial insurance underwriting that improves underwriting rigor, productivity and process control, it facilitates integration with multiple internal and external systems to facilitate workflow automation all through the underwriting lifecycle. Leveraging and harmonizing advanced technologies such as workflow management, collaboration, rules engine and business

16 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. analytics, AccuRUSI™ helps commercial insurers achieve strategic and operational underwriting goals.”

5.1. He submitted that the income from software development services and products cannot be identified separately in case of L & T. Further there is presence of intangible assets to the tune of Rs.130 crores in the form of software and business rights. However, there is no such intangible assets in the case of the assessee-company. He submitted that the Tribunal in assessee’s own case for the A.Y. 2010-11 has excluded this company from the list of comparables. He submitted that the issue in the case of Infosys Limited will be equally applicable for the L & T also.

17 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. the attention of the Bench to the following objections filed before the DRP which has been brushed aside by them.

 “Functionally not comparable

Mindtree Limited ('Mindtree' or 'the Company') is an international Information Technology consulting and implementation company that delivers business solutions through global software development. The Company is structured into two business units - Information Technology (IT) Services and Product Engineering ('PE') Services. IT Services offer consulting and implementation and post production support for customers in manufacturing, financial services, travel and leisure and other industries, in the areas of e-business, data warehousing and business intelligence, supply chain management, ERP and maintenance and re-engineering of legacy mainframe applications. PE Services provides full life cycle product engineering, professional services and sustained engineering services. It also enables faster product realization by leveraging the expertise in the 18 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. areas of hardware design, embedded software, middleware and testing and through Mindtree's own IP building blocks in the areas of Bluetooth, VOIP, 1VP6, iSCSI and others in datacom, telecom, wireless, storage, industrial automation, avionics, consumer products and computing.”

6.1. The Learned Counsel for the Assessee further submitted that this company is engaged in Research and Development activities by building in-house Research Labs. Therefore, on account of being functionally different segment, high turnover and on account of engagement in R & D activities, Mindtree Limited should be excluded from the list of comparables. Referring to the decision of Bangalore Bench of the Tribunal in the case of M/s. Sunquest Information Systems (India) P. Ltd., vs., DCIT vide ITA.No.1604/Bang/2014 and the decision in the case of Lam Research (India) P. Ltd., vs., DCIT vide ITA.No.1437/ Bang/2014 and various other decisions, he submitted that this company should be excluded from the list of comparables.

19 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. 7. So far as Thirdware Solution Ltd., (Overseas Segment) is concerned, the Learned Counsel for the Assessee submitted that the income of this company is derived from software development, subscription contracts and sale of user license. Referring to page-73 of Annual Report, the Learned Counsel for the Assessee drew the attention of the Bench to the following :

“Revenue from Software development and implementation on time and material contracts is recognised and are billable to clients as per the terms of specific contracts. On fixed – price contracts revenue is recognised and billable based on milestones achieved and after receiving the sign-off certificates from the customers for the specific milestones specified in the contracts. Revenue from Subscription contract is recognised on acceptance of renewal of the contract and is accrued over the period of the contract. Revenue from sale of user licenses for software applications

20 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. is recognised on e-delivery of Software Licence Key lo end user.”

7.1. He submitted that it is evident that this company generates income from not only software development services, but also sale of license and subscription of contracts. However, the assessee-company is a captive service provider engaged in rendering only software development services. Referring to the decision of Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. vs., DCIT vide ITA.No.1303/Bang./2012 wherein it has been held that this company has been excluded from the list of comparables on the ground that the company is engaged in product development and earns revenue from sale of licenses and subscription and no separate segmental data has been provided for software development services and product development services. He submitted that this company should be excluded from the list of comparables.

21 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. Counsel for the Assessee submitted that the Tribunal in assessee’s own case in ITA.No.1291/Del./2015 order dated 27.11.2020 for the A.Y. 2010-11 has deleted the adjustment on account of outstanding receivables overdue from A.Es. The Hon’ble Delhi High Court in the case of Kusum Healthcare Private Limited vs., ACIT reported in [2015] 62 taxmann.com 79 (Del.) has upheld the decision of the Tribunal in deleting the notional interest adjustment on delayed A.E receivables. He accordingly submitted that this being a covered matter in favour of the assessee, the ground raised by the assessee on this issue should be allowed.

10.1. So far as inclusion of Infosys Limited is concerned, we find merit in the submissions of the Learned Counsel for the Assessee that this company is functionally different being engaged in diversified activities including consulting,

23 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. application, design, development, re-engineering and maintenance system communication and implementation of business process management etc. It has revenue of Rs.36,765/- crores which is 6027 times higher than that of the assessee and Infosys Limited has incurred huge R & D expenses of Rs.907 crores during the F.Y. 2012-13. However, the assessee-company has not incurred any R & D Expenses and the total revenue of the assessee is only Rs.6.10 crores. Further the assessee-company is engaged in providing routine software services only to it’s A.Es.

10.2 We find an identical issue had come-up before the Tribunal in assessee’s own case for the A.Y. 2010-11. We find the Tribunal vide ITA.No.1291/Del./2015 order dated 27.11.2020, while excluding Infosys Technologies Ltd., from the list of comparables has observed as under :

“10. With respect to the Infosys technologies it is the claim of the assessee that the turnover of the above company is such a huge turnover that it is not comparable with the assessee company is software

24 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. development division. For this proposition we look at page number 165 of the paper book wherein the software development division revenue of the assessee is only Rs. 16.80 crores whereas the turnover of the comparable company i.e. Infosys technologies Ltd compared by the learned transfer pricing officer is Rs.21.140 crores. It is also submitted before us that the asset base of the assessee company is merely Rs.42.7 crores whereas the asset base of Infosys technologies Ltd is Rs.4188 crores. The assessee has not incurred any expenditure on brand whereas the comparable company has incurred an expenditure of Rs.57 crores. The learned departmental representative could not controvert the above dissimilarity between the asset base, turnover of the company, the brand utilised by the comparable. Thus, In view of such a huge turnover of the comparable company, relying on the decision of the honourable Bombay High Court in case of CIT versus Pentair water private limited and of honourable Delhi High Court in case of CIT versus Agnity India

25 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. technologies Ltd in ITA number 1204/2011 dated 10 July 2013 the above comparable is directed to be excluded.”

10.3. Respectfully following the decision of the Tribunal in assessee’s own case for the A.Y. 2010-11 (supra), we hold that Infosys Technologies cannot be considered as comparable with that of the assessee-company. We, therefore, direct the A.O./TPO to exclude this company from the list of comparables.

“BRANDING

The ‘L & T’ Brand has grown steadily across the globe, riding on increasing visibility of the 26 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. Company in new geographics and now industry sectors. The Company’s efforts to contribute value to its global clients and making them more successful, more cost effective and more agile have also strengthened the ‘L & T’ Infotech Brand. This has been apparent as existing clients have made referrals to their peers concerning your Company’s skill sets.

The overall brand recall and brand experience amongst our stakeholders is being continuously monitored, reviewed and enhanced. Your Company’s clients also hold us as a ‘trusted business partner’ rather than a mere supplier of commoditized IT services and cost arbitrage.

Your Company has recently adopted following 3 - pronged value proposition to elevate its engagements with clients to the next level and thereby infusing new energy in the Company Brand ; internally and externally ; 27 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi.

2. Engage the Future : A point of view around technologies that will disrupt traditional business and personal behavior, Articulation of IT Services based on such a point of view has resonated with clients, analysts and advisors alike. This market posture has assisted in elevating us beyond the pack of our Industry peers.

28 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. involved not only in IT but also in business official decisions beyond IT.”

11.1. Further the Annual Report of L & T shows that it is engaged in providing onsite services to its customer. It’s onsite expenses constitute 41.37% of the total sales. We find, the Bangalore Bench of the Tribunal in the case of M/s. Trilogy E- Business Software India Private Limited vs., The DCIT vide ITA.No.1054/Bang/2011 has held that in case of companies whose revenues are majorly from onshore services are functionally dissimilar to companies performing offshore services. The relevant observations of the Tribunal read as under :

"67. The companies who generate more than 75% of the export revenues front onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions

29 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since the entire operations of the tax payer are taking place offshore i.e., in India; it is but natural that it should be compared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model.”

11.2. Similarly, the Bangalore Bench of the Tribunal in the case of M/s. Arowana Consulting Ltd., vs., ITO vide I.T. (TP) A.No.21/Bang/.2014 has held that a Company which earns its revenue predominantly from rendering development services onsite should be compared only with Companies which also have revenue of software development onsite. We further find from note to accounts that no segmental details available for onsite and offshore operations of L & T. Accordingly, in our opinion the said company cannot be taken as comparable. We, therefore, direct the A.O./TPO to exclude

30 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. Larsen & Toubro Infotech Ltd., (Seg.) and Infosys Limited from the list of comparables.

31 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. 13. So far as Thirdware Solution Ltd., (Overseas Segment) is concerned, we find merit in the arguments of the Learned Counsel for the Assessee that this company is functionally different since it provides Software Application, Implementation and Support Services which is dissimilar from that of the assessee-company.

14.1 The grounds raised by the assessee on the issue of inclusion/exclusion of comparables are accordingly allowed.

“12. With respect to the adjustment on account of the overdue receivable from the associated enterprises, the learned dispute resolution panel in objection number 7.5 has held that TPO’s objection in not allowing working capital adjustment does not hold good and directed the learned transfer pricing officer to give working capital adjustment using the OECD methodology applying SBI prime lending rate as the interest rate. When working capital adjustment is granted to the assessee there is no requirement once again of making any adjustment on account of the overdue receivable from associated enterprises as the sundry debtors outstanding of the assessee includes outstanding receivable from associated enterprise. In view of this, we direct the learned transfer pricing officer

33 ITA.No.418/Del./2018 Agilent Technologies India Private Limited, New Delhi. to delete the adjustment on account of outstanding receivable from associated enterprise.”

Order pronounced in the open court on 30.03.2022.