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Facts
The appeals relate to assessment years 2007-08 and 2008-09, concerning transfer pricing adjustments made by the AO/TPO and upheld by the DRP. The assessee is challenging the validity and methodology used in determining the arm's length price.
Held
The Tribunal decided to exclude several comparable companies put forth by the revenue, finding them functionally dissimilar to the assessee's business model as a captive service provider. The appeal has been partly allowed.
Key Issues
The primary issues revolve around the exclusion of certain comparable companies in the transfer pricing analysis, the methodology used for benchmarking, and the validity of adjustments made by the tax authorities.
Sections Cited
143(2), 142(1), 92CA(3), 92D, 10D, 133(6), 10B(1)(e)(iii), 271(1)(c), 234B, 234D, 115JB, 14A, 92C(2)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SMT. BEENA PILLAI & SHRI GIRISH AGRAWAL
Per: Smt. Beena Pillai, J.M.: The Present appeals filed by the assessee arises out of final assessment order dated 21/09/2011 and 27/09/2012 passed by Ld.ACIT-Circle-3(1), Mumbai, for assessment years 2007-08 and 2008-09 respectively, on following grounds of appeal:
Assessment year 2007-08 “1. On the facts and in the circumstances of the case, the Hon'ble Dispute Resolution Panel ('DRP") erred on facts and in law in confirming the action of the learned Transfer Pricing Officer ('TPO') and the learned Assessing Officer ('AO') of making an addition to the Appellant's total income of Rs. 9,49,81,245 based on the provisions of Chapter X of the Income-tax Act, 1961 ('the Act').
2. The TPO/AO/DRP approached the entire issue with a prejudiced mindset with an intention of making an adjustment and the same is in clear violation of the principles of natural justice.
3. The Hon'ble DRP erred on facts and in law in confirming the approach adopted by the learned AO/TPO, who disregarded the various submissions made by the Appellant without assigning any cogent reasons therefor and also rejected the benchmarking analysis and comparable companies selected by the Appellant without appreciating the fact that such selection was based on the contemporaneous data and the transfer pricing study report prepared and maintained as per section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules').
4. The Hon'ble DRP erred on facts and in law in upholding the action of the learned TPO of conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with 3 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited fresh benchmarking analysis on his own conjectures and surmises. Thus the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed.
5. The Hon'ble DRP erred on facts and in law in upholding the action of the learned TPO for applying an arbitrarily prepared standard set of comparable companies for Information Technology enabled services ('ITeS') and Information Technology services ('IT') to determine the arm's length nature of the international transactions of the Appellant without taking into consideration the differences in the functions performed, assets employed and risks undertaken between the Appellant and the set of comparables considered by the TPO and without finding any deficiencies in the benchmarking analysis undertaken by the appellant, 6. The Hon'ble DRP erred on facts and in law in confirming the action of the learned TPO of using data obtained using powers available under section 133(6) which was not shared with the Appellant, and which, based on the principle of 'impossibility of performance', the Appellant could not possibly have access to as the same was not available in public domain.” Assessment year 2008-09 “1. On the facts and in the circumstances of the case, the learned Transfer Pricing Officer ("TPO') and the learned Assessing Officer (AO') under the directions of the Hon'ble Dispute Resolution Panel ('DRP") erred on facts and in law in making an addition of Rs.8,24,48,689 to the ITES transaction of the Appellant based on the provisions of Chapter X of the Income-tax Act, 1961 ('the Act').
2. The learned AO/TPO under the directions of the Hon'ble DRP erred on facts and in law in disregarding the various submissions made by the Appellant without assigning any cogent reasons thereof and also rejected the benchmarking analysis and comparable companies selected by the Appellant without appreciating the fact that such selection was based on contemporaneous data and the transfer pricing study report prepared and maintained as per Section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules').
The learned AO/TPO under the directions of the Hon'ble DRP erred on facts and in law in conducting a fresh benchmarking analysis using non 4 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis based on his own conjectures and surmises. Thus the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed.
The learned AO/TPO under the directions of the Hon'ble DRP erred on facts and in law in applying an arbitrarily prepared set of ITES companies to determine the arm's length nature of the international transaction of the Appellant relating to provision of ITES services, without taking into consideration the differences in the functions performed, assets employed and risks undertaken between the Appellant and the set of comparables considered by the TPO and without finding any material deficiencies in the benchmarking analysis undertaken by the Appellant.
The learned AO/TPO under the directions of the Hon'ble DRP erred on facts and in law in using data obtained using powers available under Section 133(6) which was not shared with the Appellant, and which, based on the principle of 'impossibility of performance', the Appellant could not possibly have access to as the same was not available in public domain either at the time of carrying out the benchmarking exercise or during the assessment.
The learned AO/TPO under the directions of the Hon'ble DRP erred on facts and in law in not allowing appropriate adjustments to the comparables as was compulsorily required to be done in accordance with the provisions of Rule 10B(1)(e)(iii) of the Rules, to account for difference between international transactions and the alleged comparable uncontrolled transactions selected by the learned AO/TPO.
The learned AO/TPO under the directions of the Hon'ble DRP erred on facts and in law in arbitrarily rejecting the without prejudice contention of the Appellant of computing the margin of alleged comparable companies based on multiple year financial data.
8. The learned AO/TPO under the directions of the Hon'ble DRP erred on facts and in law in not appreciating the fact that there was no intention whatsoever on the part of the Appellant to shift profits outside India. The Appellant prays that the adjustment in relation to transfer pricing matters made by the learned AO/ TPO and upheld by the Hon'ble DRP in respect of ITES services be deleted.
5 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited Ground II - Depreciation allowance of Rs.8,37.562 on additions made to the block of assets in earlier years' assessments The AO erred in not allowing depreciation on the written down value ("WDV") of assets being items included to block of assets of Computer, Plant and Machinery and Building, consequent to disallowance of revenue expenditure in the assessment orders of assessment years 2004-05, 2005- 06 and 2006-07. The Appellant prays that the AO be directed to grant depreciation allowance amounting to Rs. 8,37,562 on the WDV of the block of assets, as a consequence to and consistent with such assessment orders. Ground III - Levy of interest under Section 234B of Rs.69,54,567 and 234D of Rs.1,42,024 of the Act 1. On the facts and in the circumstances of the case, the learned AO has erred in levying interest under Section 234B of the Act of Rs.69,54,567 and under Section 234D of the Act of Rs. 1,42,024. The Appellant prays that the AO be directed to grant consequential relief in computing interest under Section 234B and Section 234D of the Act in accordance with the law. Ground IV - Penalty Proceedings under Section 271(1)(c) of the Act 1. On the facts and in the circumstances of the case, the learned AO has erred in law in initiating penalty proceedings under Section 271(1)(c) of the Act. The Appellant prays that the penalty proceedings be dropped in the matter. Ground V-Consequential reliefs The Appellant prays that the AO be directed to grant all consequential reliefs arising out of reliefs from this appeal.”
The Ld.AR submitted that the assessee has raised legal issue vide additional grounds for both assessment years under consideration. He referred to application dated 03/01/2022 for AY 6 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited 2007-08 and application dated 16/11/2022 for AY 2008-09.The Ld.AR submitted that the issues raised therein is to challenging validity and legality of the draft assessment order, DRP directions and final assessment order. 2.1 The Ld.AR at the outset submitted that, these issues may be treated as academic and is not pressed by the assessee. 2.2 Considering the submissions of the Ld.AR, additional grounds raised
by the assessee vide application dated 03/01/2022 for assessment year 2007-08 and application dated 16/11/2022 for assessment year 2008-09are treated as academic and not adjudicated at this stage. However, these grounds are left open to be raised in an appropriate circumstances. Accordingly, this application dated 03/01/2022 for admission of additional grounds are dismissed as not pressed. 2.4 The Ld.AR submitted that assessee has preferred application seeking admission of additional ground under Rule 11 on 20/07/2018 that reads as under:
5. On the facts and in the circumstances of the case, and in law, Spanco Telesystems and Solutions Limited, Wipro Limited and Allsec Technologies Limited for the Data processing segment: and Wipro Limited for the Software service segment ought not to be retained in the set of comparable to determine the arm's length price of the international transaction entered into by the Assessee. 2.5 He submitted that, the assessee is seeking exclusion of above comparable under both the segments which was originally considered by assessee in the transfer pricing study report for data processing segment and software development service segment.
7 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited 2.6 The Ld.AR submitted that nothing new on facts needs to be considered in order to verify the compatibility of these comparable for exclusion. It is submitted that the functional profiles of these comparables were furnished before the Ld.TPO and are on record. 2.7 Placing reliance upon decision of Hon’ble Supreme Court in case of NTPC Ltd., vs CIT reported in 229 ITR 383 and Jute Corporation of India vs CIT reported in 53 taxman 85, the Ld.AR submitted that, comparables specified in additional grounds may be admitted for consideration. 2.8 The Ld.CIT DR on the contrary, strongly objected for the admission of the additional ground by submitting that, these are assessee’s own comparable that formed part of transfer pricing study report and therefore, after laps of almost 13 years, assessee should not be allowed to contest these comparable for exclusion. It is submitted that, these comparable have been alleged for exclusions now due to the pendency of the appeal for over more than 7 years before the Tribunal. 2.9 In the rejoinder, the Ld.AR submitted that, Hon’ble Chandigarh Special Bench in case of DCIT to v/s. Quark Systems Pvt. Ltd., reported (2010) 38 SOT 307, held that, a taxpayer is not estopped from pointing out that it had wrongly taken certain comparable when the assessee can show from the record that there is a prima facie case. We have perused the submissions advanced by both sides in the light of the record space before us.
8 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited 2.10 In our considered opinion comparables alleged in additional grounds raised by assessee arises out of the records and was subject matter of consideration before the Ld.TPO. These comparables are nothing but elaboration of transfer pricing ground already raised by the assessee in the main grounds of appeal. Considering inadvertent omission on behalf of assessee in raising these grounds before this Tribunal, respectfully following the decision of Hon’ble Chandigarh Special Bench in case of Quark Systems Private Limited (supra), we admit additional ground raised vide application dated 20/07/2017 before this Tribunal. Accordingly, additional grounds raised by assessee vide application dated 20/07/18 stands allowed.
3. The Ld.AR submitted that facts and circumstances for both the assessment years under consideration are identical. The Ld.AR submitted assessee is seeking exclusion of common comparable under data processing service segment for both the years under consideration. He submitted that, the assessee is alleging one extra comparable for exclusion for assessment year 2008-09. It is submitted that, one additional ground in respect of depreciation allowance denied on addition made to the block of assets is raised by the assessee under corporate tax for assessment year 2008-09. 3.1 Considering the above submissions, both the years are being disposed off, by way of a common order. For the sake of convenience facts pertaining to assessment year 2007-08 has been considered.
9 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited Brief facts of the case are as under: 4. The assessee is a company engaged in the business of information technology enabled services and development and maintenance of global web based services. It filed its return of income for year under consideration on 30/10/2007 declaring total income of Rs.7,33,36,336/-. The case was selected for scrutiny and statutory notice under section 143(2) of the act along with notice under section 142(1) of the act was issued to assessee. In response to the statutory notices, representative of the assessee appeared before the Ld.AO and filed requisite details as called for. 4.1 The Ld.AO from the details furnished observed that, the assessee undertook international transactions with its associated enterprises exceeding the threshold limit. A reference was therefore made to the transfer pricing officer under section 92CA(3) of the act to determine arm’s-length price of the international transactions. 4.2 Upon receipt of the reference, the Ld.TPO called upon assessee to furnish details of international transactions in form 3 CEB. The Ld.TPO, observed that, the assessee is one of the largest financial services group in the world. It was noted that, the group offers investment growth and value style equity products as well as several focused sector portfolios. 4.3 The Ld.TPO observed that, Franklin Templeton Holdings Ltd Mauritius was 100% subsidiary of Templeton Asset Management Ltd Singapore. And that, Franklin Templeton Holdings Ltd Mauritius is the holding company of assessee in India.
10 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited 4.4 The Ld.TPO observed that, assessee is primarily engaged in providing back-office processing services and software development services to the group companies worldwide. The details of international transaction undertaken by the assessee during the year under consideration are as under: Nature of transaction Amount Provision of data processing services 80,30,76,175 Provision of software development services 2,26,83,813 Total 83,21,59,988 4.5 From the transfer pricing study report, the Ld.TPO noted that, assessee used TNMM as the most appropriate method and OP/OC as PLI to compute its margin under both segment as under: Particulars ITES Software Total Operating Income 443,412 392,282 834,694 Other Income 20,930 Total Income 443,412 392,282 856,624 Expenditure 388,260 331,896 720,156 Net reconciliation items 14 Total Expenditure 388,260 331,896 720,170 Net Profit 55,152 60,386 136,773 NCP (%) 14.20 18.19 18.99 Data Processing Service Segment:
4.5.1 The Ld.TPO noted that assessee computed its margin at 14.2%. It was noted that the assessee used following comparable with average margin at 12.51%:
11 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited SI. No. Name of the Company Wtd. Avg. 1 Allsec Technologies Ltd. 27.89 2 Ask Me Info Hubs -1.75 3 B2 K Corp Pvt. Ltd. -18.89 4 B N R Udyog 25.85 5 CMC Ltd. 17.49 6 Cosmic Global Ltd. 17.56 7 Datamatatics Technologies Ltd. 10.62 8 Firstsource Solutions Ltd. 11.05 9 Fortune Infotech Ltd. 15.25 10 Galaxy Commercial Ltd. 20.47 11 HCL Technologies Ltd. 17.28 12 KPIT Cummins Global Business Solu. -18.83 13 M C S Ltd. 13.65 14 Maple Esolutions Ltd. 36.43 15 Mphasis Ltd. 11.63 16 NIIT Smartserve Ltd. -15.05 17 Spanco Telesystems & Solutions Ltd. 18.36 18 Sutherland Global Services Pvt. Ltd. 13.22 19 T S R Darashaw Ltd. 15.38 20 Transwork Information Services Ltd. 12.40 21 Triton Corp. Ltd. 22.11 22 Wipro Ltd. 23.12 Arithmetical Mean 12.51 Based on the above, assessee treated its margin under data processing service segment to be at arm’s-length.
12 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited 4.5.2 Dissatisfied with the comparable selected by the assessee, the Ld.TPO applied certain filters and selected following 25 comparable with average margin of 27.30%: SI. Particulars TP Study TPO/DRP No. Comparables (3 Comparables year average (single year margins) margins) 1 Allsec Technologies Ltd. – Consol 27.89% 27.31% 2 Spanco Ltd (Earlier known as 18.36% 25.81% Spanco Telesystems and Solutions Ltd) Consol Sea 3 Maple Esolutions Ltd. 36.43% 34.05% 4 Aditya Birla Minacs (Formerly 12.40% 11.98% Known as Transworks Information Services Ltd.) 5 Triton Corp. Ltd 22.11% 34.93% 6 Wipro Limited 23.12% 29.70% 7 Apex Knowledge Solutions Pvt Ltd 12.83% 8 Apollo Healthstreet Ltd -13.55% 9 Asit C Mehta Financial Services 24.21% Ltd – (segmental) 10 Bodhtree Consulting Ltd 29.58% 11 Caliber Point Business Solutions 21.26% Ltd 12 Datamatics Financial Services Ltd 5.07% 13 Eclerx Services Ltd 90.43% 14 Flextronics Software Systems Ltd 14.54% 15 Genesys International 13.35% Corporation Ltd 16 HCL Comnet Systems and 44.99% Services Ltd – (Segmental) 17 ICRA Techno Analytics Ltd.- 12.24% (Segmental) 18 Informed Technologies Ltd. 35.56% 19 Infosys BPO Ltd. 28.78% 20 Iservices India Ltd. 50.27% 21 Mold-Tek Technologies Ltd. – 113.49% (segmental) 22 R Systems Internationl Ltd. 20.18% Arithmetic mean 11.80% 27.30% The Ld.TPO thus proposed adjustment, being the difference at Rs.6,42,37,956/-.
13 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited Software Development Service Segment:
4.5.3 The Ld.TPO noted that the assessee computed its margin at 18.19%. Assessee used following 29 comparable with average margin at 8.81%:
SI. No. Name of the company Wtd. Avg. Margin (%) 1 Akshay Software Technologies Ltd. 7.36 2 A S M Technologies Ltd. 7.46 3 Bodhtree Consulting Ltd. 18.12 4 B T TechNet Ltd. -1.55 5 Computech International Ltd. 6.65 6 Essel Software & Services Lyd. -0.95 7 Exensys Software Solutions Ltd. 23.10 8 Goldstone Technologies Ltd. 9.78 9 I C S A (India) Ltd. 31.36 10 Intertec Communication Ltd. 7.18 11 Lanco Global System Ltd. 10.63 12 Maars Software International Ltd. 5.36 13 Melstar Information Technologies Ltd. -1.10 14 Nav Parva Technologies Ltd. 10.20 15 Orient Information Technologies Ltd. -8.58 16 P S I Data System Ltd. 3.01 17 Powersoft Global Solution Ltd. 20.37 18 R. S. Software (India) Ltd. 12.20 19 Ramco system Ltd. -8.85 20 Saksoft Ltd. 30.20 21 S Q L Star International Ltd. -4.69 22 Shree Tulsi Online.Com Ltd. 2.64 23 Synergy Log-In Systems Ltd. -5.43 24 Synetairos Technologies Ltd. 11.61 25 V & K Softech Ltd. 4.16 26 V M F Soft Tech Ltd. 5.51 27 Vama Industries Ltd. 20.23 28 Visesh Infotecnics Ltd. 17.76 29 Visualsoft Technologies Ltd. 21.78 Arithmetic mean 8.81 Based on the above, assessee treated its margin under the software development service segment to be at arm’s-length.
14 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited 4.5.4 Dissatisfied with the comparable selected by the assessee, the Ld.TPO applied certain filters and selected following comparables with average margin of 27.97%:
SI. Particulars TP Study TPO/DRP No. Comparables (3 Comparables year average (single year margins) margins) 1 Bodhtree Consulting Ltd 79.23% 109.79% 2 Accel Transmatic Ltd 21.11% 3 Avani Cimcon Technologies Ltd. 52.59% 4 Celestial Labs Ltd. 58.35% 5 Datamatics Ltd. 7.27% 6 E-Zest Solutions Private Ltd. 36.12% 7 Flextronics Software Systems Ltd. 25.31% 8 Geometric Ltd. 10.71% 9 Helios & Matheson Information 40.35% Technology Ltd. 10 Igate Global Solutions Ltd. 7.49% 11 Infosys Technologies Ltd. 40.30% 12 Ishir Infotech Private Ltd. 30.12% 13 KALS Information systems Ltd. 30.55% 14 Lanco Global Systems Ltd. 15.75% 15 Lucid Software Ltd. 54.85% 16 Mediasoft Solutions Pvt Ltd. 3.66% 17 Megasoft Ltd. 23.11% 18 Mindtree Ltd. 16.90% 19 Persistent Systems Private Ltd. 24.52% 20 Quintegra Solutions Ltd. 12.56% 21 R Systems Internationl Ltd. 15.07% 22 Sasken Communications 22.16% Technologies Ltd. 23 SIP Technologies Exports Ltd. 13.90% 24 Tata Elxsi Ltd. 26.51% 25 Thirdware Solutions Ltd. 25.12% 26 TVS Infotech Ltd. 11.61% 27 Wipro Ltd. 33.65% Arithmetic mean 11.46% 27.96% The Ld.TPO thus proposed adjustment, being the difference at Rs.3,24,12,813/-.
15 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited 5. Upon receipt of the order passed under section 92CA(3), the Ld.AO passed draft assessment order by making further disallowance of Rs.9,02,067/- under section 14A of the act. The Ld.AO also made similar disallowance under section 115JB of the act for the purpose of calculating book profit. Upon the receipt of the draft assessment order, assessee preferred objections before the DRP.
6. Before the DRP assessee sought exclusion of some of the comparables under both the segment. In respect data processing service segment, the DRP accepted the plea of assessee against 13 comparables and directed the same to be excluded from the final list. Thus the comparable is that remained under data processing service segment post DRP direction are as under: Sr. No. Company Name Sales in OP to Total Crores(Rs.) Cost % 1 Aditya Birla Minacs 197.06 11.98% Worldwide Ltd. 2 Allsec Technologies 113.28 27.31% Ltd. 3 Apex Knowledge 6.64 12.83% Solutions Pvt. Ltd. 4 Apollo Healthstreet 47.84 -13.55% Ltd. 5 Asit C Mehta Financial 6.09 24.21% Services Ltd. 6 Bodhtree Consulting 2.94 29.58% Ltd. 7 Caliber Point Business 39.30 21.26% Solutions Ltd. 8 Datamatics Financial 2.92 29.58% Services Ltd. 9 Eclerx Srvices Ltd. 86.21 90.43% 10 Flextronics Software 21.41 14.54% Systems Ltd. 16 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited 11 Genesys International 19.17 13.35% Corporation Ltd. 12 HCL Comnet Systems 260.18 44.99% and Services Ltd. 13 ICRA Techno Analytics 7.23 12.24% Ltd. 14 Informed Technologies 4.08 35.56% India Ltd. 15 Infosys BPO Ltd. 649.56 28.78% 16 Iservices India Ltd. 16.29 50.27% 17 Maple Esolutions Ltd. 12.21 34.05% 18 Mold-tek Technologies 11.40 113.49% Ltd. 19 R Systems 17.34 20.18% International 20 Spanco Ltd. 35.00 25.82% 21 Triton Corp Ltd. 53.37 34.93% 22 Wipro Ltd. 939.78 29.70% Arithmetic Mean 30.32% 6.1 In respect of software development service segment, the comparable selected by the Ld.TPO was upheld. 6.2 Regarding disallowance made under section 14A, the DRP directed the assessee to restrict the disallowance only to the direct and indirect expenses that has approximate connection with the earning of the exempt income by placing reliance on the decision of Hon’ble Bombay High Court in case of Godrej & Boyce Manufacturing Co. Ltd., reported in (2010) 234 CTR 1. 6.3 On receipt of the DRP direction, the Ld.AO passed impugned order by making addition in the hands of the assessee at ₹ 9,55,43,693/-. Aggrieved by the order of the Ld.AO, assessee is on appeal before the Tribunal.
17 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited 7. The Ld.AR are submitted that Ground No.1-10 raised by the assessee is in respect of the transfer adjustment made based on certain comparable that is alleged for exclusion. 7.1 He submitted that assessee seeking exclusion of following comparable under data processing service segment: Maple Esolutions Ltd Asit C Mehta Financial Services Ltd (SEG-IT) Spanco Ltd (SEG-BPO) Mold-tech technologies Ltd (SEG-IT) Eclerx services Ltd I services India Ltd HCL Comnet systems and services Ltd (SEG-ITS) Triton Corp Ltd Comparable alleged for exclusion under Software Service Segment: Celestial Labs Ltd., Lucid Software Ltd., Bodhtree Consulting Ltd., Infosys Technologies Ltd., Wipro Ltd., 7.2 Before we undertake the comparability analysis, it is sine qua non to understand the functions performed, assets owned and risk assumed by the assessee under both the segments. “4 Functional Analysis 4.1 Functions performed 18 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited FTIS undertakes back office transaction processing, data processing, business support services and software development services for overseas FTI Group entities. These services are provided by various units set up by FTIS. Services rendered by various units of FTIS to the overseas FTI Group entities are discussed below: 4.1.1 Data Management and Security Services Global RFP Management Unit: This unit provides online data requested by the Franklin Templeton Institutional, LLC ('FTI LLC') FTI LLC is providing investment advisory services. The Global RFP Management Unit of FTIS provides data analysis, ratio calculation etc. relevant to investment advisory services of FTI LLC on a quarterly or monthly basis as required by FTL LLC. Investment Operation Unit: This unit of FTIS sets up and maintains system and database security of Franklin Templeton Services, LLC ('FTS LLC').”
4.1.7 Testing Services Testing Services (TS) in India had been started as an extension team to St. Petersburg Testing Services in January 2004. The objective of the TS is to be a global unit, which will cater to all testing requirements for software applications within Franklin Templeton Group.
“4.2 Risks assümed 4.2.1 Contract risk Contract risk is faced by a contracting entity in respect of the quality of work and other deliverables, as well as any obligations emanating from the contract. As FTIS does not directly enter into any contract with the customers and it contracts only with the overseas FTI Group entities, it does not bear the contract risk. 4.2.2 Idle time risk Idle time risk is the risk that a business faces of not getting sufficient billable work to occupy the time of staff. We understand that FTIS would 19 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited be insulated from idle time risk, as it would be compensated based on installed capacity. 4.2.3 Attrition risk Attrition risk is the risk faced by an enterprise of losing its trained personnel. Competitive market forces expose an enterprise to this risk particularly in a high-technology domain. The employee turnover (attrition rate) in the industry in which FTIS operates is high. Further, recruiting right. kind of people takes time. The delay in recruitment process leads to loss of revenue due to consequential delay in migration. Such risks are bone by FTIS. 4.2.4 Market risk Market risk arises due to uncertainty in the structure of the market, demand patterns and needs of the customers, costs, pricing etc. FTIS does not face significant market risks as it provides services to overseas FTI Group entities. 4.2.5 Credit risk Credit risk is the risk arising from non-payment of dues by customers. As the customers of FTIS are the overseas FTI Group entities, FTIS does not face any significant credit risk. 4.2.6 Currency risk Currency risk is the risk of any adverse fluctuation in exchange rates, which would eventually have a negative impact on the profitability. FTIS receives service fee from overseas FTI Group entities in foreign exchange but incurs expenses in Indian Rupees. Accordingly it bears normal foreign exchange currency risks. 4.2.7 Risk of disruption of infrastructure Outsourcing business models rely heavily on the internet/telecommunications infrastrücture. Accordingly, FTIS faces the risk of a disruption in the infrastructure. 4.2.8 Database maintenance risk 20 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited Since the processes carried out by FTIS are system driven, i.e., all the transactions have to be processed on computer systems, there is a threat of loss of data. However, the same are mitigated by ensuring planned and periodic back ups. Summary of key business risks faced by FTIS and overseas FTI Groupe tabulated below Type of risk FTIS Overseas FTI Group entities � Contract risk X � Idle time risk X � Attrition risk X � Market risk X � Credit risk X � Currency risk X Risk of disruption of infrastructure � X � Database maintenance risk X 4.3 Assets Employed FTIS deploys necessary assets to perform its functions effectively. The assets maintained by FTIS include computers, office equipment, furniture and fixtures and human capital. FTIS does not own any valuable non- routine intangible assets. A snapshot of assets employed by FTIS as on 31 March 2007 is given below: Particulars INR(‘000) Fixed Assets (incl. Capital WIP) 1,633,781 Investments 180,413 Net Current Assets 27,330 Total 1,841,524 7.3 Based on the above FAR analysis, we undertake the comparability of the alleged comparable by the assessee for exclusion under both segments.
At the outset, the Ld.AR submitted that Maple Esolutions Ltd., Asit C Mehta Financial services Ltd., and Spanco Ltd., was excluded by coordinate of this Tribunal in assessee’s own case for 21 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited assessment 2006-07 in vide order dated 19/10/2022. The Ld.AR referred to the said order placed at page 966 -978 of the paper book. 8.1 The Ld.DR on the contrary relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of the records placed before us. 8.2 It is noted that these comparable have been excluded in assessee’s own case for immediately preceding assessment year. Revenue has not been able to bring out any factual differences between the year under consideration and the preceding assessment year, or any decision contrary to the view taken by the coordinate bench for assessment of 2006-07. Respectfully following the view taken therein, we direct the Ld.AR/TPO to exclude Maple Esolutions Ltd., Asit C Mehta Financial services Ltd., and Spanco Ltd., from the final list. Mold tech Technologies Ltd.
8.3 The Ld.AR submitted that this comparable is functionally different with that of the assessee as it is providing engineering design services for construction of building and employing highly skilled software engineers. Referring to the annual report of this company placed at page 381, 382 and 4.9 of the paper book, the Ld.AR submitted that this company has abnormal group sales in IT division over the previous years.
22 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited 8.4 He submitted that the Ld.TPO rejected this comparable 2006- 07 for identical reason. He has placed before this Tribunal order passed by Ld.TPO for the assessment year 2006-07 in support. The Ld.DR on the contrary, relied on the orders passed by the authorities below. We have perused submissions advanced by both sides in the light of the records placed before us. 8.5 It is noted that this comparable was excluded by coordinate of this Tribunal in case of ACIT vs. Tech Book Electronics Services Pvt. Ltd for assessment year 2008-09 in vide order dated 15/02/2015, placed at page B1–B26 of the paper book. After analyzing the functionality in case of captive service provider similar to the assessee, this Tribunal observed as under: “When undisputedly, the comparable company has two segments one ITES and another Plastic Divisions and ITES division is having 100% exemption and the company has only to pay tax on the profits of its plastic division and thus earning profits @ 106.82% for the financial year 2007-08 it falls in the category of units earning extra ordinary profits. Even otherwise, comparable company is functionally dissimilar to the assessee company because comparable company is dealing in engineering designs and detailing services, web designing services, software testing, in house software development etc. whereas, functionally the assessee company is providing electronic publishing services such as computerized data conversion, we page construction, data entry / key boarding, copy editing and CAD / civil mapping services to its AEs, which are diametrically dissimilar to each other” 8.6 It is noted that assessee is a captive service provider insofar as the services rendered are concerned, whereas Mold Tech Technologies Ltd u/s. dealing in engineering designs and detailing services, web services, software testing etc. Whereas the assessee is limited to provide BPO services to its AE’s. A captive service 23 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited provider therefore cannot be compared with an entrepreneur like the comparable under consideration. We therefore respectfully following the above observations, do not find any reason to consider this company to be functionally similar that of assessee. Revenue has not been able to bring out any factual differences between the year under consideration or any decision contrary to the view taken by the coordinate bench ACIT vs. Tech Book Electronics Services Pvt. Ltd (supra). Accordingly, we direct Mold tech Technologies Ltd., to be excluded from the final list.
Eclarx Services Ltd., 8.7 This comparable was selected by Ld.TPO. The Ld.AR submitted that this comparable is functionally different as it is engaged in high-end services and therefore is not comparable with a captive service provider like that of assessee. He submitted that this comparable basically provides services into knowledge process segments and not a back-office service provider like that of assessee. The Ld.AR referred to the annual reports placed at pages 691 of paper book. He relied on pages 698-699 in support of this submission. 8.8 He placed reliance on observations of coordinate bench of this Tribunal in case of DCIT vs. Morgan Stanley Advantages Pvt.Ltd for assessment year 2007-08 in vide order dated 10/07/2019.
24 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited 8.9 On the contrary Ld.CIT DR placed reliance on orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. 8.10 It is noted that this comparable was excluded by coordinate of this Tribunal in case of DCIT vs. Morgan Stanley Advantages Pvt. Ltd for assessment year 2007-08 in vide order dated 10/07/2019 placed at page C32 –C34 of the paper book. After analyzing the functionality in case of captive service provider like assessee. This Tribunal observed as under: “32. As noted earlier the Id AR for the assessee submitted that the assessee submits that Eclerx Services Ltd. has not considered as a comparable in earlier years. Eclerx Services Ltd. is a Knowledge Process Outsourcing (KPO) Service provider which is not comparable to assessee; assessee is engaged in providing back office support services. In support of his submission, the Id. AR of the assessee relied upon the decision of Delhi High Court in Rampgreen Solution P Ltd Vs CIT (2015) ITR 533 (Delhi). The TPO included this comparable by taking his view that this company is in date process and analytical services. The Id CIT(A) confirmed the action of the TPO by taking his view that this comparable company is into the health care receivable management and therefore renders ITeS services. The Hon'ble Delhi Court in Rampgreen Solution (P) Ltd (supra) held entities rendering voice call center services for customer support and a KPO service provider employ IT-based delivery systems, but characteristics of services, functional aspects, business environment, risks and quality of human resource employed are materially different; and therefore, benchmarking international transactions on basis of comparison of PLI of high-end KPO service providers with PLI of Voice Call Centers, would be unreliable. Further, Mumbai Tribunal in Wills Processing Services (India) Ltd Vs. ACIT (supra) on considering similar contentions excluded this comparable holding as under.
25 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited "(5) We have heard the Ld. Representatives of both the parties, perused the orders of the lower authorities and the records made available before us. We have given a thoughtful consideration to the facts of the case and are of the considered view that though we find ourselves to be in agreement with the contention of the Ld. D.R and have not found favor with the contention of the assessee that as the aforesaid comparable had carried out an acquisition of a U.K based company, therefore simpliciter on the said count, without establishing that such acquisition had rendered the aforesaid comparable functionally different, could not be accepted as a factor for exclusion of the said comparable, but then we are of the considered view that the fact as averred by the Ld. A.R before us that the aforesaid comparable, viz. Eclerx Services Limited was providing high end data analytics and customized process solution and was a leading Indian provider of KPO services, which substantially varies from a low end ITES service provider, while for the assessee was engaged in providing BPO services, viz-processing of insurance claims and insurance premiums and data processing service for which it employed ordinary graduates, therefore the aforesaid comparable, viz. Eclerx Services. Limited was functionally different from the assessee company, and as such could not be selected as a comparable. We find that the DRP had vide its order dated 27.11.2015 passed in the case of assessee for AY 2011-12 had accepted the contention of the assessee and rejected the aforesaid. comparable company, viz. Eclerx Services Limited on the basis that it was engaged in KPO service, and the department by accepting the said order of the 'DRP' for A.Y. 2011-12 by not carrying the matter in further appeal before the Tribunal, had thus allowed it to attain finality. We further find that in the assessee's own case for the immediately succeeding year, i.e A.Y 2009-10, the DRP as well as the Tribunal had held that companies engaged in KPO services cannot be compared to the routine BPO services provided by the assessee. That still further the Tribunal while disposing of the appeal of the assesses for AY 2010-11 had held that as the assessee was a routine BPO service provider, therefore it cannot be compared to high end KPO service providers such as Eclerx Service Limited. We further find that the 'Special bench' of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. (supra), had 26 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited specifically rejected the aforesaid comparable, viz. Eclerx Services Limited, on the basis that companies predominantly engaged in KPO services cannot be considered as a comparable to a company predominantly engaged in BPO activities. We are thus of the considered view that in the backdrop of the view taken by the Tribunal while disposing of the appeals of the assessee for A.Y(s): 2009-10 & 2010-11, therein concluding that the aforesaid comparable, viz. Eclerx Services Limited which was a KPO could not be taken as a comparable as against the assessee company which is providing BPO services, coupled with the fact that in the assesses own case for A.Y 2011-12 the exclusion by the DRP of the aforesaid comparable, viz. Eclerx Services Limited from the list of comparables had been accepted by the department, and last but not the least the 'Special bench' of the Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. (supra) had therein held that the aforesaid comparable, viz. Eclerx Services Limited which is a KPO cannot be compared as against the assessee which is providing BPO services, we thus finding no reason to take a different view and being of the considered view that the aforesaid comparable, viz. Eclerx Services Limited was functionally different from the assessee company, therefore hold that it cannot be accepted as a comparable and hence is directed to be excluded from the list of comparables."
Considering the decision of Delhi High Court in Rampgreen Solution P Ltd (supra) and Tribunal in Wills Processing Services (supra), we direct to exclude Eclercx Services from the comparables.” 8.11 It is noted that assessee is a captive service provider insofar as the services rendered are concerned, whereas Eclarx Services Ltd has been found to be a KPO. A captive service provider cannot be compared with an entrepreneur like the comparable under consideration. We therefore respectfully following the above observations, do not find any reason to consider this company to be functionally similar that of assessee. Revenue has not been able to bring out any factual differences between the year under 27 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited consideration or any decision contrary to the view taken by the coordinate bench DCIT vs. Morgan Stanley Advantages Pvt. Ltd. (supra). Accordingly, we direct Eclarx Services Ltd., to be excluded from the final list.
8.12 This comparable was selected by Ld.TPO. The Ld.AR submitted that this comparable is functionally different as it is engaged in providing web hosting, web designing and domain management services which are not akin to the BPO services rendered by the assessee. The Ld.AR referred to the annual reports placed at page 788 of paper book. The Ld.AR thus submitted that this comparable is therefore not comparable with a captive service provider like that of assessee. He placed reliance on observations of coordinate bench of this Tribunal in case of DCIT vs.Morgan Stanley Advantages Pvt. Ltd for assessment year 2007-18 in vide order dated 10/07/2019. 8.13 On the contrary Ld.CIT DR placed reliance on orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. 8.14 It is noted that this comparable was excluded by coordinate of this Tribunal in case of DCIT vs. Morgan Stanley Advantages Pvt. Ltd for assessment year 2007-08 in vide order 28 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited dated 10/07/2019 placed at page C38 –C43 of the paper book. After analyzing the functionality in case of captive service provider like assesse. This Tribunal observed as under: “37. The Id. AR submitted that this comparable is into divergent high end services like web hosting, email services spam filtering domain names and DNS hosting, web hosting, email services and are mainly in a product services and cannot be compared. The TPO included this comparable by taking view that this comparable company is in software services and product. The Id. CIT(A) confirmed the inclusion holding that TPO conducted bench marking after calling information under section 133(6). The TPO exercise has helped in authenticating and validating the date. We have noted that the Delhi Tribunal in DCIT vs. Everest Business Advisory India (P.) Ltd. (supra) for same Assessment Year excluded this comparable company holding that business profile of I Services shows that it is into high end diversifying services vis a vis the tax payer who is into divergent high end services like web hosting, email services, spam filtering, domain names and DNS hosting, web hosting, email services and directed to exclude from comparing with ITeS enabled services. Therefore, considering the decision of Delhi Tribunal, we direct the exclusion of I I Services. Services.” 8.15 It is noted that assessee is a captive service provider insofar as the services rendered are concerned, whereas Iservices India Ltd is dealing in engineering designs and detailing services, web services, software testing etc. Whereas the assessee function is limited to provide BPO services to its AE’s. A captive service provider cannot be compared with an entrepreneur like the comparable under consideration. We therefore, respectfully following the above observations, do not find any reason to consider this company to be functionally similar that of assessee. Revenue has not been able to bring out any factual differences between the year under consideration or any decision contrary to the view taken by the 29 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited coordinate bench DCIT vs. Morgan Stanley Advantages Pvt. Ltd (supra). Accordingly, we direct Iservices India Ltd., to be excluded from the final list.
8.16 This comparable was selected by Ld.TPO. The Ld.AR submitted that this comparable is functionally different with that of the assessee as it is engaged in providing Telecommunication services and ITEsS. The Ld.AR referring to page272 of the annual report placed in the paper book submitted that, the company has abnormal margin @ 50.27%. The Ld.AR thus submitted that this comparable cannot be compared with a captive service provider like that of assessee. He placed reliance on observations of coordinate bench of this Tribunal in case of ICICI Bank Ltd vs. DCIT for assessment year 2007-18 in vide order dated 09/11/2023 8.17 On the contrary Ld.CIT DR placed reliance on orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. 8.18 It is noted that this comparable was excluded by coordinate of this Tribunal in case of ICICI Bank Ltd vs. DCIT (supra) placed at page C 62 of the paper book. This Tribunal observed as under: “HCL Comnet Systems and Services Ltd.
30 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited The exclusion of this company is contended on the ground that the company has prepared the financial statements for the year ended 30.06 whereas the assessee is financial year ended is 31.03. It is also contended that the company is having large scale operations as compared to the assessee and therefore, the same is to be excluded. In this regard, we noticed that from the perusal of the P&L A/c of the company. The company is having revenue of Rs. 314 crores which is significantly higher than the turnover of the assessee from back office support services. Further, it is noted that the Jurisdictional High Court in the case of CIT Vs. Pentair Water India Pvt. Ltd. (ITA No.18/2015) had rejected the inclusion of the company for the reason that the company is having large turnover. On perusal of the annual accounts of the company (page 887 of PB) we noticed that in ITES Segment, the company is rendering services to data centre management, individual computer managed securities services and tool and process consultant services which in our considered view is functionally not similar to the services rendered by the company which is extracted in the earlier part of this order. For these reasons, we hold that HCL Comnet Systems Services Ltd. is not comparable with the assessee and accordingly should be excluded from the list of comparables.” 8.19 It is noted that assessee is a captive service provider as BPO to its AE’s. Whereas HCL Comnet is dealing rendering services to data management centers, individual computer managed security services and process consulting services. Revenue has not been able to bring out any factual differences between the year under consideration or any decision contrary to the view taken by the coordinate bench ICICI Bank Ltd vs. DCIT (supra).Therefore a captive service provider cannot be compared with an entrepreneur like the comparable under consideration. Respectfully following the above observations, do not find any reason to consider this company to be functionally similar that of assessee.
31 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited Accordingly, we direct HCL Comnet Systems and Services Ltd, to be excluded from the final list.
8.20 This comparable was selected by Ld.TPO. The Ld.AR submitted that this comparable is functionally different with that of the assessee as it is engaged in providing IT and ITeS. The Ld.AR referring to pages 631 of the annual report placed in the paper book submitted that there is no segmental data available in respect of the revenue earned from each segment. 8.21 It is also submitted that during the financial year relevant to assessment year under consideration, this Comparable underwent restructuring and acquired Maple e Solutions Ltd., with effect from 01.01.2007. The Ld.AR thus prayed for exclusion of the comparable. 8.22 On the contrary, Ld.CIT DR placed reliance on orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. 8.23 It is noted that this comparable was excluded by coordinate of this Tribunal in case of DCIT vs. Morgan Stanley Advantages Pvt. Ltd for assessment year 2007-08 in vide order dated 10/07/2019 placed at page C44-C45 of the paper book. This Tribunal observed as under: “46. The contention of ld AR for the assessee is this company was rejected by ld TPO himself in AY 2008-09. Triton Corp is also a part of is 32 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited part and parcel of Rastogi Group which was under serious indictment and its financials were distorted and cannot be relied. However, the Id. DR for the revenue supported the inclusion of this comparable. The Id. TPO included this comparable by taking his view that this company is in the call centre services. The Id CIT(A) upheld the action of Id TPO by taking view that benchmarking was conducted by calling information under section 133(6). We have seen that Mumbai Tribunal in Stream International (P) ltd (supra) held that, a Company under serious indictment in fraud cases is to be excluded from list of comparables on ground of unreliability of data. Thus, following the order of the Tribunal we direct to exclude this company from the comparable.” 8.24 It is noted that segmental details are also not available in respect of ITeS services rendered by this comparable. Similar view has been taken by coordinate bench of this Tribunal in case of ICICI Bank Ltd vs. DCIT (supra). Revenue has not been able to bring out any factual differences between the year under consideration or any decision contrary to the view taken by the coordinate bench in a border for decisions. Respectfully following the view taken therein, we do not find any reason to consider this comparable functionally similar with the assessee. Accordingly, we direct Triton Corp. Ltd, to be excluded from the final list.
Additional Comparable sought for exclusion: Allsec Technologies Ltd., and Wipro Ltd (seg).
8.25 It is submitted that these were assessee’s own comparables. However due to subsequent developments these comparables are sought to be excluded by the assessee. The revenue objected to the 33 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited exclusion of these comparables as these are functionally similar to that of assessee with segmental details identifiable. 8.26 We have considered but I will submissions of the assessee as well as a Ld.DR in respect of the above to comparables. 8.27 It is noted that the revenue generated by Wipro Ltd for the year under consideration from ITeS segment is Rs. 96,543 crores. The relevant annual report is pleased at page 643 on the paper book. In view, this comparable fails turnover filter applied by the Ld.TPO. Accordingly, we are of the view that Wipro Ltd deserves to be excluded.
8.28 In respect of Allsec Technologies Ltd., The Ld.AR did not raise any argument and therefore is not decided with. Accordingly the additional ground raised by the assessee stands partly allowed.
Software Support Services:
Assessee is seeking exclusion of Celestial Labs Ltd., Lucid Software Ltd., Bodhtree Consulting Ltd., Infosys Technologies Ltd., Wipro Ltd. It is submitted that these comparables have been submitted to be functionally not comparable with that of the assessee. 9.1 The Ld.AR submitted that in case of Celistial Labs Ltd., the company is basically a product development company. It is submitted that for the year under consideration, this company has 34 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited developed a de novo drug design tool called “CELSUITE”. It is submitted that this company also owns the IPR of the producys developed by it. In support he placed reliance on pages 393,430 431, 432 815, and 816 of the PB. 9.2 In respect of Lucid software Ltd., the Ld.AR submitted that it is functionally not compatible with the assessee as it is engaged in development of software product. It is submitted that this comparable has incurred expenditure towards the development of products and capitalises these expenses to amortise the same over the lifespan of the product developed. 9.3 In respect of Bodhtree consulting Ltd., The Ld.AR submitted that this company is also into development of software products and no segmental details are available in the annual report. It is submitted that this company has hived of some of its business during the year under consideration having a revenue stream. It is also submitted that this company is exponentially grown by 91.63% as that of the past years and therefore it is a full-fledged entrepreneur. 9.4 The Ld.AR has placed reliance on the decision of coordinate Bench of this Tribunal in case of Dun& Bradstreet Information Services India Pvt. Ltd., vs DCIT in order dated 06/06/2019. He submitted that, the said order is placed at page C 47, wherein all the above comparable were excluded, as not functionally similar to a captive service provider.
35 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited 9.5 On the contrary, Ld.CIT DR placed reliance on orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. 9.6 It is noted that coordinate Bench of this Tribunal in case of Dun& Bradstreet Information Services India Pvt. Ltd., vs DCIT (supra) excluded Lucid software Ltd by following another coordinate bench decision case of Infor Global solutions India Private Limited vs DCIT reported in 102 taxman.com 58,for the same assessment year having similar functional profile of a captive service providers like assessee. The specific observations of this Tribunal in respect of the above comparable in case of In for Global solutions India Private Limited vs DCIT (supra) is as under: “(vi) LUCID SOFTWARE LTD.
This company was selected by the Transfer Pricing Officer and retained by the DRP. Objecting to the selection of this company as comparable, the learned Authorised Representative submitted that the annual report of the company reveals that it has incurred product development expenses which demonstrate that the company is into product development activity and not software development. Thus, he submitted that the company cannot be treated as comparable. In support of this contentions, he relied upon the following decisions:- (i) Tech Mahindra Ltd. (supra); (ii) Telcordia Technologies India (P.) Ltd. (supra); (iii) Sumtotal Systems India (P.) Ltd. (supra); (iv) LSI Technologies India (P.) Ltd. (supra); (v) CAPCO IT Services India (P.) Ltd. (supra); and 36 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited (v) Global Logic India (P.) Ltd. (supra).
The learned Departmental Representative relied upon the order of the DRP and the Transfer Pricing Officer.
We have considered rival submissions and perused materials on record. It is noted by us, in case of Tech Mahindra Ltd. (supra), the Tribunal having found that this company is into software product development has rejected this company as a comparable. The same view has been expressed by the Co-ordinate Bench in case of Telcordia Technologies India (P.) Ltd. (supra) and various other decisions as cited by the learned Authorised Representative. Since the aforesaid decisions pertain to the very same assessment year, respectfully following them, we exclude this company as a comparable.” 9.7 Following the above view this Tribunal in case of Dun& Bradstreet Information Services India Pvt. Ltd., vs DCIT (supra) excluded Lucid Software Ltd 10. In case of celestial labs Ltd., Infosys technologies Ltd., & Wipro Ltd., this Tribunal in case of Dun& Bradstreet Information Services India Pvt. Ltd., vs DCIT (supra) observed as under: “3.4 Celestial Labs Ltd. It has been submitted that this entity is not functionally comparable as it was engaged in development of drug discovery tool and was a research & development company as against the assessee's functions i.e. software development services. Reliance has been placed on the following decisions:- i) Trilogy E-Business Software India P. Ltd. [Bangalore Tribunal [confirmed by Hon'ble Karnataka High Court vide ii) Witness System Software India P. Ltd. (Bangalore Tribunal IT(TP)A No.948/Bang/2011] ⅲ) Transwitch India P. Ltd. (Bangalore Tribunal IT(TP)A No.1366/Bang/2011] 37 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited The decision listed at serial no.1 is for same AY and rendered in case of assessee having similar functional profile. The co-ordinate bench has held that the aforesaid entity was engaged in clinical research and manufacturing of bio products and other products and hence, not functionally comparable. The other decisions also support the case of the assessee for exclusion of this comparable. Respectfully following the consistent view, we direct for exclusion of the same. 3.5 No other arguments/grounds have been urged before us in assessee's appeal. Therefore, the same are kept open and not dealt with. Resultantly, the appeal stands partly allowed to the extent of exclusion of above comparable. 4.1 So far as the revenue's ground no. 2 is concerned, we are of the considered opinion that the benefit of +5% was not allowable as a standard deduction. The provisions of Section 92C(2) only envisages that no TP adjustment would be warranted in case variance was within a range of ±5% and nothing more. It would be only a tolerance range and available only when the prices of international transaction are within the range of 5% of the arithmetic mean of margin of more than one comparable entity. This ground stands allowed. 4.2 In ground No. 1, the revenue is agitating exclusion of two entities i.e. M/s Infosys Technologies Ltd. & M/s Wipro Limited by Ld. CIT(A). The Ld. CIT(A) has excluded the same on the premise that these companies had brand value and incurred heavy marketing and selling expenses and cost of software package for own use and therefore, not comparable. The Ld. Sr. counsel, on the strength of judicial pronouncements justified exclusion of the same. After hearing rival contentions, our adjudication for the same is as follows. 4.3 Infosys Technologies Limited It has been submitted by Ld, Sr. Counsel that this entity is not functionally comparable due to various factors viz. its size, turnover, brand value, scale of operations, diversified activities and owning of intangibles. Reliance has been placed on the following judicial pronouncements in support of exclusion of the same: - 38 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited i) Telcordia Technologies India P. Ltd. [Mumbai Tribunal AY 2007-08] ii) Sumtotal Systems India P. Ltd. [ITA No.1710/Hyd/2011 09/05/2014 AY 07-08] iii) Adaptec India Pvt. Ltd. [ITA No. 1801/Hyd/2009 31/01/2013 AY 2007-08] Upon perusal, we find force in the arguments of Ld. Sr. Counsel. The co- ordinate bench of Mumbai Tribunal in the case of Telcordia Tech. India P. Ltd. [supra], relying upon, Agnity India Tech. Pvt. Ltd. [ITA 3856/Del/2010], held that the said entity was giant enterprise and in the area of development of software and it assumes all risks, leading to higher profits and cannot be compared with the company which is captive unit of its parent company assuming only limited risk. Similar views have been expressed in other decisions. Keeping in view the same, we confirm exclusion of the same. 4.4 Wipro Limited It has been submitted by Ld. Sr. Counsel that this entity is not functionally comparable due to various factors viz. its size, turnover, brand value, scale of operations, diversified activities and owning of intangibles. Reliance has been placed on the following judicial pronouncements in support of exclusion of the same: - i) Telcordia Technologies India P. Ltd. [supra] ii) Sumtotal Systems India P. Ltd. [supra] iii) DE Shaw India Software Pvt. Ltd. [supra] iv) Virtusa India Pvt. Ltd. [ITA No. 1962/Hyd/2011 30/08/2013 AY 2007-08] Similar is the situation for this comparable. In decision listed at serial no.1, the co-ordinate bench has directed for exclusion of this entity on the same reasoning as given for exclusion of Infosys Tech. Ltd. The other decisions also support the submissions. Keeping in view the same, we confirm exclusion of the same.” 10.1 Revenue has not been able to bring out any factual differences between the year under consideration or any decision contrary to 39 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited the view taken by the coordinate bench in a border for decisions. Respectfully following the view taken therein, we do not find any reason to consider Celestial Labs Ltd., Lucid Software Ltd., Bodhtree Consulting Ltd., Infosys Technologies Ltd., Wipro Ltd. functionally similar with the assessee. 10.2 Accordingly Ground number 1-10 stands partly allowed and additional ground vide application dated 20/07/2018 raised by the assessee for assessment year 2007-08 stands allowed. Assessment year 2008-09
The Ld.AR submitted that the functional profile of the assessee for the year under consideration is identical with the assessment year 2007-08 considered herein above. He submitted that the adjustment was proposed by the Ld.AO/TPO only in respect of ITeS segment and assessee is seeking exclusion of following compatibles: i) Maple Esolutions Ltd ii) Asit C Mehta Financial Services Ltd (SEG-IT) iii) Spanco Ltd (SEG-BPO) iv) Mold-tech technologies Ltd (SEG-IT) v) Eclerx services Ltd vi) I services India Ltd vii) HCL Comnet systems and services Ltd (SEG-ITS) viii) Triton Corp Ltd ix) Acropetal Technologies Ltd., 11.1 The Ld.AR submitted that, except for Acropetal Technologies Ltd., all of their compatibles are identical with those alleged for exclusion under ITeS segment for assessment year 2007-08 here in above. He submitted that the arguments of the assessee to seek exclusion of these comparables are under similar circumstances.
40 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited The Ld.AR relied on the decision of coordinate bench of this Tribunal in case of ICICI Bank Ltd vs. DCIT in vide order dated 30/04/2025 for assessment year 2008-09, wherein all the above comparable is considered and held to be not comparable with a captive service provider for assessment year 2008-09. 11.2 The Ld.CIT DR also reiterated identical arguments raised for these comparables. We have perused the submissions advance by both sides in the light of record placed before us. 11.3 Revenue has not been able to bring out any factual differences between the year under consideration or any decision contrary to the view taken by the coordinate bench in a border for decisions. Considering the submissions of the assessee the observations of this Tribunal in the preceding paragraphs for assessment year 2007-08 in respect of Maple Esolutions Ltd Asit C Mehta Financial Services Ltd (SEG-IT), Spanco Ltd (SEG-BPO), Mold-tech technologies Ltd (SEG-IT), Eclerx services Ltd., I services India Ltd., HCL Comnet systems and services Ltd (SEG-ITS)., Triton Corp Ltd., will apply mutatis mutandis for assessment year 2008-09. Acropetal Technologies Ltd., 11.4 The Ld.AR submitted that this company is engaged in the development of computer software and also owns its revenue from export of software services. Either submitted that this company is not at all cup functionally similar with the ITeS segment carried out 41 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited by the assessee it is also submitted that this comparable has substantial intangibles by placing reliance on page 468 of the paper book. The Ld.AR relied on the decision of coordinate bench of this Tribunal in case of ICICI Bank Ltd vs. DCIT (supra) for assessment year 2008-09. 11.5 On the contrary the Ld.CIT DR relied on the orders passed by the authorities. We have perused the submissions advanced by both sides in the light of the records placed before us. 11.6 It is noted that, this Tribunal in case of ICICI Bank Ltd vs. DCIT (supra) observed as under: “6.4. Accropetal Technologies Ltd: The Ld.AR submitted that, this comparable is functionally not similar with that of assessee as it is engaged in the development of engineering designs. It is submitted that this company is engaged in development of software and has incurred huge on sight development expenses during the year under consideration. She submitted that the Ld.TPO considered the engineering design services segment to compare with the ITES segment of the assessee, which is a basic back up of support service rendered by assessee to its AE. It is submitted that, revenue generated under ITES by this comparable is more than 75% of the total operating revenue. She drew our attention to page 118 of the paper book where in segmental details of the comparables are provided. The Ld.AR also placed reliance on the decision of Co-ordinate Bench of this Tribunal in case of Goldman Sachs (1 Securities (P) Ltd. us ACIT reported in (2016) 72 taxmann.com 337 for exclusion of this comparable for identical reasons.” 11.7 Revenue has not been able to bring out any factual differences between the year under consideration or any decision contrary to the view taken by the coordinate bench in a border for decisions. Respectfully following the view taken therein, we do not find any 42 ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited reason to consider Acropetal Technologies Ltd., functionally similar that. 11.8 Accordingly we direct the Ld.AO/TPO to exclude Maple Esolutions Ltd Asit C Mehta Financial Services Ltd (SEG-IT), Spanco Ltd (SEG-BPO), Mold-tech technologies Ltd (SEG-IT), Eclerx services Ltd., I services India Ltd., HCL Comnet systems and services Ltd (SEG-ITS)., Triton Corp Ltd. and Acropetal Technologies Ltd. from the final list. Accordingly ground nos.1-8 raised by the assessee for assessment year under consideration stands allowed.
Ground Number II by the assessee is in respect of this allowance of depreciation on additions made to the block of assets in the earlier years. 12.1 The Ld.AR submitted that the claim of the assessee may be verified by the Ld.AR and considered in accordance with law. The Ld.DR did not object for the claim to be verified. 12.2 Considering the submissions by both sides, this issue is remitted back to the file of the Ld.AO to verify the claim of the assessee in regards to the depreciation claimed and to consider in accordance with law. Accordingly the ground raised by the assessee stands partly allowed for statistical purposes.
Other common ground raised
by assessee for both the years under consideration is in respect of levy of interest under section 43. ITA 6986/Mum/2011 & 7216/Mum/2012; A.Y. 2007-08 & 2008-09 Franklin Templeton International Services (India) Private Limited 234 B,C,D and penalty proceedings initiated under section 271(1)(c) of the act. As these are consequential in nature they do not require to be educated. In the result the appeal filed by the assessee for assessment year 2007-08 and 2008-09 stands partly allowed. Order pronounced in the open court on 13/10/2025 Sd/- Sd/- (GIRISH AGRAWAL) (BEENA PILLAI) Accountant Member Judicial Member Mumbai: Dated: 13/10/2025 Poonam Mirashi, Stenographer Copy of the order forwarded to:
(1)The Appellant (2) The Respondent (3) The CIT (4) The CIT (Appeals) (5) The DR, I.T.A.T.