DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 3(1)(1), BENGALURU, BENGALURU vs. RIBBON COMMUNICATION PRIVATE LIMITED (FORMERLY KNOWN AS SONUS NETWORKS INDIA PVT LTD), BENGALURU

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ITTPA 520/BANG/2024Status: DisposedITAT Bangalore28 June 2024AY 2013-1410 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal upheld the CIT(A)'s decision to exclude Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. The Tribunal noted that the assessee's turnover in the software development segment was Rs. 112 crores, while these comparables had turnovers of Rs. 3613 crores and Rs. 996 crores respectively. Furthermore, the Tribunal found that these companies were functionally dissimilar due to owning intangibles, brands, and selling products for which segmental information was unavailable. The Tribunal relied on previous decisions of coordinate benches that excluded such comparables based on audit reports, not solely on turnover. Therefore, Revenue's grounds (i) and (v) were dismissed. Regarding grounds (vi) and (vii), the Tribunal found that the CIT(A) had remanded these comparables (Sankhya Infotech Ltd., Cigniti Technologies Ltd., and Kals Information Systems Ltd.) to the AO for verification against the adopted filters. The TPO was directed to conduct necessary verification. The Tribunal found no infirmity in this approach and upheld the CIT(A)'s view, thus partly allowing Revenue's grounds (vi) and (vii) for statistical purposes. The Tribunal also noted that the assessee's cross-objection became academic as the CIT(A)'s order did not materially change the position, and thus dismissed the assessee's cross-objection. The operative direction was that the appeal filed by the revenue stands partly allowed, and the cross-objection filed by the assessee stands dismissed.

What were the facts?

The assessee, M/s. Ribbon Communication Pvt. Ltd., is a wholly owned subsidiary of Ribbon US, engaged in software development services. For Assessment Year 2013-14, an international transaction with its Associated Enterprise (AE), Ribbon US, was referred to the Transfer Pricing Officer (TPO). The assessee reported an OP/OR margin of 12.43% based on 11 comparables. The TPO, however, shortlisted 7 comparables with an average margin of 20.90%, proposing an adjustment of Rs. 4,53,73,690/-. The assessee appealed to the CIT(A), who rejected Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. from the TPO's list and directed the inclusion of Sankhya Infotech Ltd., Akshay Software Technologies Ltd., Cigniti Technologies Ltd., and KALS Information Systems Ltd. Both the assessee and the revenue have filed appeals before the ITAT.

What were the issues?

1. Whether the CIT(A) erred in excluding Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. based on a turnover filter exceeding 200 Crores, without demonstrating how this factor falls within Rule 10B(2) of the Income Tax Rules, 1962, and whether the Tribunal has previously held turnover as an irrelevant criterion for comparability (Revenue's Grounds i, ii, v)? 2. Whether the CIT(A) erred in seeking exact comparability under TNMM and whether the objection to the selection of comparables is legally sustainable (Revenue's Ground iii)? 3. Whether the CIT(A) erred in ignoring the parameters prescribed under Rule 10B, which are exhaustive, and if so, whether it is legally permissible to bypass them (Revenue's Ground iv)? 4. Whether the CIT(A) erred in holding that Persistent Systems Ltd. cannot be taken as a comparable due to lack of segmental details, and whether the assessee's grounds regarding unavailability of segmental information, presence of intangibles, and brand for Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. were not adjudicated (Revenue's Ground v, Assessee's Grounds 1, 2)? 5. Whether the CIT(A) was right in directing the TPO to consider Sankhya Infotech Ltd. even when it was not part of the TPO's search matrix, and whether the CIT(A) was right in directing the inclusion of Cigniti Technologies Ltd. and Kals Information Systems Ltd. while ignoring the principles of res judicata and estoppel (Revenue's Grounds vi, vii)? Assessee's contentions include that Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. should have been rejected on grounds of unavailability of segmental information, presence of intangibles, and brand. The assessee also argued for the inclusion of Acropetal Technologies Ltd. and Sasken Communication Technologies Ltd., and that KALS Information Systems Ltd. and Cigniti Technologies Ltd. are functionally comparable and pass all filters. The assessee further contended that Sankhya Infotech Limited is functionally comparable and was part of the TPO's search matrix. The assessee also raised issues regarding the application of employee cost filter, service income filter, sales turnover filter, financial year ending, RPT filter, and reliance on information procured under section 133(6). The assessee also argued for an adjustment on account of risk level.

Which sections of the Income-tax Act were involved?

Section 92CA,Section 133(6)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE

Before: SMT. BEENA PILLAI & SHRI LAXMI PRASAD SAHU

For Appellant: Shri K.R. Vasudevan, Advocate &, Ms. Rashmi .R, Advocate
For Respondent: Shri Senthil Kumar .N, CIT-DR

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE

BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

IT(TP)A No. 520/Bang/2024 Assessment Year : 2013-14 M/s. Ribbon Communication Pvt. Ltd. (Formerly known as Sonus The Deputy Network India Pvt. Ltd.), Commissioner of 2nd Floor, Delta Block Income Tax, Embassy Tech Square, Circle – 3(1)(1), Kadubeesanahalli Village, Bangalore. Outer Ring Road, Vs. Varthur Hobli, Bangalore – 560 103. PAN: AALCS5706P APPELLANT RESPONDENT & C.O. No. 9/Bang/2024 (in IT(TP)A No. 520/Bang/2024) By Assessee Assessee by : Shri K.R. Vasudevan, Advocate & Ms. Rashmi .R, Advocate Revenue by : Shri Senthil Kumar .N, CIT-DR

Date of Hearing : 04-06-2024 Date of Pronouncement : 28-06-2024 ORDER

Page 2 of 10 IT(TP)A No. 520/Bang/2024 & C.O. No. 9/Bang/2024 PER BEENA PILLAI, JUDICIAL MEMBER Present cross appeals filed by assessee as well as revenue arises out of order dated 28.12.2023 passed by Ld.CIT(A), Bengaluru-12 for A.Y. 2013-14 on following grounds of appeal: Grounds of appeal raised by revenue: “i. Whether the Hon'ble CIT(A) erred in law as well as on facts in excluding comparable Larsen & Toubro Infotech Ltd having high turnover more than 200 Crores without showing how these factors fall within the scope of factors specified in rule 10B(2) of the Income Tax Rules, 1962? ii. Whether the Hon'ble CIT(A) erred in law as well as on facts in not considering the decisions of its own bench in various cases where the Tribunal has held that turnover is not a relevant criterion for deciding the comparability of a company? iii. Whether the Hon'ble CIT(A) erred in law as well as on facts in seeking exact comparability under TNMM and whether the objection to the selection of comparable is legally sustainable? iv. Whether the Hon'ble CIT(A) erred in law as well as on facts in ignoring the parameters of analysis prescribed under Rule 10B, which are exhaustive and if so, whether it is legally permissible to bypass the same partially or by implication? v. Whether the Hon'ble CIT(A) erred in law as well as on facts in holding that M/s. Persistent System Ltd. Cannot be taken as comparable as no segmental details are available? vi. Whether the Hon'ble CIT(A) was right in directing the TPO to Sankhya Infotech Ltd even when it was not a part of TPO's search matrix? vii. Whether the Hon'ble CIT(A) was right in directing the TPO to include comparables Cigniti technologies Ltd. & Kals Information Systems Ltd by ignoring that the principle of res judicata and principle of estoppel is not applicable to Income Tax Proceedings.”

Page 3 of 10 IT(TP)A No. 520/Bang/2024 & C.O. No. 9/Bang/2024 Grounds of appeal raised by assessee in cross objection: “1. The Hon'ble Commissioner of Income Tax (Appeals) [CIT(A)] while rejecting Larsen and Toubro Infotech Ltd. on high turnover/ scale of operations has erred in not adjudicating on the following grounds:  Unavailability of segmental information  Presence of significant intangibles  Presence of brand 2. The Hon'ble CIT(A) while rejecting Persistent Systems Ltd. on grounds of lack of segmental details has grossly erred in not adjudicating on the following grounds:  Huge scale of operations/High turnover  Functionally dissimilar  Presence of significant intangibles  Occurrence of extra-ordinary event 3. The Hon'ble CIT(A) has erred in not adjudicating on the following companies even though they are functionally comparable to the Respondent:  Acropetal Technologies Ltd. (IT segment)  Sasken Communication Technologies Ltd. 4. While the Hon'ble CIT(A) has rightfully included KALS Information Systems Ltd and Cigniti Technologies Ltd., it has erred on not mentioning that the said companies are functionally comparable to the Respondent and passes all relevant filters. 5. While Sankhya Infotech Limited is rightfully included by the Hon'ble CIT(A) as it is functionally comparable and forms a part of search matrix of the Learned TPO, however it has erred in not mentioning that the company passed all the relevant filters applied by the learned TPO. 6. The Hon'ble CIT(A) has grossly erred in rejecting Spry Resources India Pvt. Ltd. that ought to have been included as a comparable company. 7. The Hon'ble CIT(A) has grossly erred in rejecting Helios & Matheson Information Technology Ltd. that ought to have been included as a comparable company. 8. The Hon'ble CIT(A) has grossly erred in rejecting CTIL Limited by inappropriately applying the employee cost filter.

Page 4 of 10 IT(TP)A No. 520/Bang/2024 & C.O. No. 9/Bang/2024

9.

The Hon'ble CIT(A) has erred in not applying threshold limit for service income filter as 25% instead of 75% for accepting / rejecting comparable companies. 10. The Hon'ble CIT(A) has erred in inconsistently applying the upper limit on sales turnover filter for accepting / rejecting comparable companies. 11. The Hon'ble CIT(A) has grossly erred in calculation of the employee cost filter which has led to rejection of functionally comparable companies. 12. The Hon'ble CIT(A) has erred in rejecting comparable companies by applying different financial year ending without appreciating the fact that relevant data can deduced for the concerned financial year from the corresponding financials. 13. The Hon'ble CIT(A) has erred in not adjudicating on the appropriate calculation of the RPT filter which has led to rejection of functional comparable companies. 14. The Hon'ble CIT(A) has erred in not adjudicating and allowing the learned TPO to place reliance on the information procured under section 133(6) of the Income Tax Act, 1961 (the Act) that are not publicly available. 15. The Ld. DRP has erred in disregarding the fact that there is a difference in the risk level assumed by the Respondent and the comparable companies and thereby no allowing an adjustment on account of risk level. The respondent craves leave to add, alter, amend and/or delete any of the ground mentioned above.” 2. Brief facts of the case are as under: 2.1 Assessee was incorporated on April 21,2004 under the Indian Companies Act, 1956. It is a wholly owned subsidiary of Ribbon US. Ribbon India is engaged in the business of software development services and has entered into a Master Software Development Agreement with Ribbon US. As per the agreement,

Page 5 of 10 IT(TP)A No. 520/Bang/2024 & C.O. No. 9/Bang/2024 Ribbon India renders software development services to Ribbon US.

2.2 As there was international transaction, reference was made to the transfer pricing officer for determining the arms length price. On receipt of the reference, the Ld.TPO called for economic details of the international transactions entered into by assessee with its AE.

2.3 The Ld.TPO observed that, the assessee provided software development service to its AE in US for an amount of Rs.1,12,37,36,197/-. The Ld.TPO observed that, the assessee selected 11 comparables and had determined its margin by using OP/OR at 12.43%. Unsatisfied with the TP analysis carried out by the assessee, the Ld.TPO shortlisted set of 7 comparables with an average margin of 20.90% as under: Unadjusted Net Margin Sl. Name of the company on cost No. (FY 2012- 13) C G –V A K Software & Exports 1 20.54% Ltd 2 I C R A Techno Analytics Ltd 17.10% 3 Larsen & Toubro Infotech Ltd 26.06% 4 Mindtree Ltd (Seg) 18.19% 5 Persistent Systems Ltd (Seg) 28.72% 6 R S Software (India) Ltd 17.41% 7 Tech Mahindra Ltd (Seg) 18.72% Average 20.90%

2.4 The Ld.TPO adopted following filters for selecting the above comparables.

Page 6 of 10 IT(TP)A No. 520/Bang/2024 & C.O. No. 9/Bang/2024  Use of Current Year Data  Companies having different financial year ending or data of the company which does not fall within the 12-month period i.e., April 2012 to March 2013, were rejected  Companies whose income was less than Rs. 1 crore were excluded  Companies whose Software Development service income is less than 75% of its total operating revenues were excluded  Companies who have more than 25% RPT of sales were excluded  Companies who have export service income less than 75% of sales were excluded  Companies with employee cost less than 25% of turnover were excluded Particulars Amount (INR) Arm’s length margin 20.90% Less: Working capital adjustment 2.09% Adjusted arithmetic mean PLI (A) 18.80% Operating cost (B) 98,40,60,893/- ALP [118.80% of B] 1,16,91,09,887/- Price received 1,12,37,36,197/- Shortfall being adjustment u/s 92CA 4,53,73,690/- The Ld.TPO thus worked out the proposed adjustment being the shortfall at Rs. 4,53,73,690/-.

2.5 On receipt of the transfer pricing order, the Ld.AO passed the draft assessment order and the assessee informed the authorities of preferring the appeal before the Ld.CIT(A). Accordingly, on 19.06.2017, the order u/s. 143(3) r.w.s. 144C was passed by the Ld.AO.

2.6 Against the assessment order, the assessee preferred appeal before the Ld.CIT(A). 2.7 The Ld.CIT(A) after considering the submissions of the assessee rejected two companies being Larsen & Toubro and Persistent Systems from the final list.

Page 7 of 10 IT(TP)A No. 520/Bang/2024 & C.O. No. 9/Bang/2024

2.8 The Ld.CIT(A) also directed inclusion of four companies which are as under:  Sankhya Infotech Ltd.  Akshay Software Technologies Ltd.  Cigniti Technologies Ltd.  KALS Information Systems Ltd.

2.9 Aggrieved by the order of Ld.CIT(A), the revenue is in appeal before this Tribunal.

3.

The assessee has filed cross objection which is in support of the order passed by the Ld.CIT(A).

4.

The Ld.DR submitted that ground no. (ii) & (iv) are general in nature and therefore do not require adjudication. Accordingly, Ground nos. (ii) and (iv) stands dismissed. The Ld.DR also submitted that ground no. (i) and (v) are raised in excluding Larsen & Toubro Infotech and Persistent Systems Ltd. for failing turnover filter of 200 crores.

5.

In respect of ground no. (vi) and (vii), the revenue is challenging the direction of Ld.CIT(A) to include Sankhya Infotech Ltd., Cigniti Technologies Ltd. and Kals Information Systems Ltd.

6.

Ground no. (i) and (v) – At the outset, it is submitted that the turnover of assessee under SWD segment is only 112 crores whereas the comparables sought for inclusion by the revenue

Page 8 of 10 IT(TP)A No. 520/Bang/2024 & C.O. No. 9/Bang/2024 being Larsen & Toubro Infotech Ltd. has a turnover of 3613 crores and Persistent systems Ltd. has a turnover of 996 crores.

6.1 It is also submitted that these comparables are functionally not similar to that of assessee as it owns intangibles, brand and also provides sale of products for which segmental information is not available. The Ld.AR has submitted that these comparables have been excluded in various decisions of Coordinate Bench of this Tribunal which are as under:  NXP India Pvt.Ltd reported in (2019) 116 taxmann.com 421  Metric Steam Infotech (India) (P.) Ltd. v. Dy. CIT in IT(TP)A No.1418 & 2735 /Bang/2017, by order dated 27-2-2019  Applied Materials India Pvt. Ltd. v. DCIT by order dated 13.05.2020 in IT(TP) A No. 2687/Bang/2017  EMC Software and Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019 passed in IT(TP)A No. 3375/Bang/2018 for AY 2014-15,  EPAM Systems India (P.) Ltd. v. ACIT [2018] 100 taxmann.com 335.

6.2 Nothing has been brought on record by the Ld.DR which is contrary to the above view wherein this Tribunal has excluded these comparables based on audit reports and not merely on the turnover filter. We therefore do not find any infirmity in the view taken by the Ld.CIT(A) and the same is upheld. Accordingly, ground no. (i) and (v) stands dismissed.

7.

Ground nos. (vi) and (vii) – These grounds are raised challenging inclusion of the three comparables i.e. Sankhya Infotech Ltd., Cigniti Technologies Ltd. and Kals Information Systems Ltd.

Page 9 of 10 IT(TP)A No. 520/Bang/2024 & C.O. No. 9/Bang/2024

7.1 On perusal of the impugned order, we note that these three comparables have been remanded to the Ld.AO for verification in respect of the filters adopted. The Ld.CIT(A) directed the Ld.TPO to consider these comparables only if they satisfy the filters adopted by the Ld.TPO. The Ld.TPO is directed to carry out necessary verification regarding the comparables sought for inclusion based on the filters adopted. We do not find any infirmity in this view adopted by Ld.CIT(A) and the same is upheld. Accordingly, ground no. (vi) and (vii) raised by revenue stands partly allowed for statistical purposes.

8.

In respect of the cross objection filed, it is submitted that as the view taken by Ld.CIT(A) does not have any material change, the cross objection raised by assessee thus becomes academic at this stage. Accordingly, the appeal filed by revenue stands partly allowed. The cross objection filed by the assessee stands dismissed. Order pronounced in the open court on 28th June, 2024.

Sd/- Sd/- (LAXMI PRASAD SAHU) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 28th June, 2024. /MS /

Page 10 of 10 IT(TP)A No. 520/Bang/2024 & C.O. No. 9/Bang/2024 Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file 6. CIT(A) By order

Assistant Registrar, ITAT, Bangalore

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