PR. COMMISSIONER OF INCOME TAX, GURGAON vs. M/S COMVERSE NETWORK SYSTEMS INDIA PVT LTD.

The present appeal is directed against the order of the Income Tax Appellate Tribunal (‘ITAT’), I-2 Bench, New Delhi dated 31.05.2017 for the assessment year 2010-11. The Revenue has raised the following question of law:- “Whether in the facts and circumstances of the case and in law, the Hon’ble ITAT was correct in excluding M/s e-Infochips Bangalore Ltd, M/s In-finite Data Systems Pvt Ltd, M/s Engineers India Ltd, M/s IBI Chematur Ltd, M/s Riets Ltd (Consultancy Service Segment) and M/s TCE Consulting Engineers Ltd used as a comparable for determining the ALP in the case of the assessee company, since the TPO has made detailed findings by analyzing functionality, turnover and profile of various comparables considered in his order. Further the ITAT was not justified to consider issues pertaining to earlier years, since each year is a separate assessment year and should be considered independently. The comparables had been selected by the TPO by applying suitable and relevant parameters.”

The Respondent assessee M/s Comverse Network Systems India POOJA SHARMA 2020.03.13 16:22 integrity of this document

For assessment year 2010-11, the Respondent assessee filed its return of income on 13.10.2010, declaring an income of Rs.1,43,77,210. The case of the assessee was selected for scrutiny and statutory notices under section 142(1) and 143(2) of the Income Tax Act, 1961 (‘Act’) along with detailed questionnaire was issued upon assessee. In response to these notices representative of assessee attended assessment proceedings from time to time and submitted information as called for by assessing officer. A reference under section 92C(A)(1) of the Act was made to Transfer Pricing Officer (‘TPO’) New Delhi, for determining arms length price in respect of international transaction entered into by the assessee during financial year 2009-10 to assessment year under consideration.

Before Ld. TPO the assessee filed its documentation under Rule 10D of the Income Tax Rules and other details as asked for. Ld. TPO observed that assessee had entered into following international transactions with its associated enterprises (‘AE’):

On the basis of functional profile of the taxpayer under Software Development, Provision of professional (Customization, configuration etc.) Services and Provision of maintenance (trouble shooting) Services segment, these three international transactions were benchmarked using a single set of comparables which are from the Software Industry. TNMM was considered as the ‘MAM’ & OP/OC was the PLI. The OP/OC of the taxpayer was calculated at 10%, 9% & 7% respectively for these 3 segments against average OP/OC of the 18 comparables at 9.13%. Thus, the transactions were stated to be at arm’s length. Some services were also availed from the AE and for this segment OPM of the taxpayer was calculated at 26.89% against average OPM of the comparables at 5.58%. The taxpayer had also provided some Sales and Post Sales Support Services to its AE and for this segment OP/OC of the taxpayer was calculated at 7% against average OP/OC of the comparables at 6.58%. POOJA SHARMA 2020.03.13 16:22 integrity of this document

The TPO, however, vide its order dated 27.01.2014 determined an adjustment of Rs.5,78,66,602 as under: a. Software Development Services Rs.3,45,49,016/- b. Technical Support Service Segment Rs.2,33,17,586 Total (a + b) Rs.5,78,66,602/-

The said adjustment was incorporated by the Assessing Officer (‘AO’) in the draft assessment order. Against the draft assessment order, the assessee filed its objections before the Dispute Resolution Panel (‘DRP’). The DRP vide its direction dated 18.12.2014 confirmed the adjustment as made by the TPO/AO.

After taking into account the adjustment to ALP, as directed by the DRP, the AO passed the Final Assessment order under section 144C read with section 143(3) of the Act on 24.02.2015. 9. Aggrieved by such final assessment order dated 24.02.2015, the assessee preferred an appeal before the Hon’ble ITAT. The Hon’ble ITAT accepted the submissions of the assessee that the comparables chosen by the TPO were functionally dissimilar and were liable to be rejected vide its order dated 31.05.2017. 10. Being aggrieved by the impugned order dated 31.05.2017 of the Hon’ble ITAT, the Revenue has preferred the present appeal for consideration.

Only one question has been proposed by the Revenue which encompass all the comparables rejected by the Tribunal by analyzing the functionality, turnover and profile of the various comparables now being impugned before us. We propose to deal with the same sequentially as under: SOFTWARE DEVELOPMENT SEGMENT E-Infochips Bangalore Limited

The TPO had adopted E-Infochips whilst stating that the said comparable is primarily engaged in software development services and does not POOJA SHARMA 2020.03.13 16:22 integrity of this document

The counsel for the revenue relies upon the order passed by the TPO and argued that the ITAT failed to appreciate the findings and observations given by the TPO. The ITAT has noted that in the directors report the comparable company has been characterized as to be engaged in development of software as per specific requirement of clients revenue from software development services includes revenue from IT enabled services also. The ITAT has also noted that no where functional profile indicates that there has been an inclusion of IT enabled services into software development division and both the companies are having different functional profile. Said finding of fact that the comparable is functionally dissimilar has not been shown to be perverse by the Revenue and thus, the comparable has rightly been excluded by the ITAT. Infinite Data Systems Private Limited

The TPO has selected this comparable whilst stating that the said company is primarily an IT service provider and hence comparable to the profile of the assessee. The said finding was upheld by the DRP. Before the ITAT, the assessee submitted that Infinite Data Systems was functionally dissimilar to the assessee since the said company was deriving its income from technical support and infrastructure management services. Additionally, it was submitted by the assessee that Infinite Data Systems had only one customer i.e., Fujitsu Services Limited. The ITAT while excluding the said comparable has observed as under:

The counsel for the revenue relies upon the order passed by the TPO and argued that the ITAT failed to appreciate the findings and observations given by the TPO. But the finding of fact recorded by the ITAT have not been shown to be perverse and cogent reasons have been given showing the dissimilarity of the comparable to the assessee and thus, the exclusion of the above comparable cannot be faulted with. SALES AND POST SALES SUPPORT SEGMENT Engineers India Limited

The TPO selected the said comparable as being functionally comparable to the profile of the assessee. The said finding was confirmed by the DRP. Before the ITAT, the assessee contended that Engineers India Limited (‘EIL’) was functionally dissimilar to the profile of the assessee owing to the fact that the said company provided complete range of project services ranging from conceptualization, planning, designing, engineering and construction activities to meet specific requirements of its clients in various fields like petroleum POOJA SHARMA 2020.03.13 16:22 integrity of this document

The said finding of fact that the comparable is functionally dissimilar has not been shown to be perverse by the Revenue and thus, the ITAT has rightly concluded that the said comparable has to be excluded. IBI Chamatur Engineering and Consultancy Ltd.

The said comparable was chosen by the TPO as being functionally comparable to the profile of the assessee which was confirmed by the DRP. Before the ITAT, it was submitted by the assessee that IBI Chematur was not functionally similar owing to the fact that it provided planning and engineering services for the chemical manufacturing industry. It was further submitted by the assessee that the said company provided a wide range of services, detailed engineering, intelligent 3D plant modelling, 2D conversion services, smart plant instrumentation inspection services, project planning and management supervision services. The ITAT while directing exclusion of IBI Chematur as not being functionally comparable to the profile of the assessee has held as POOJA SHARMA 2020.03.13 16:22 integrity of this document

The finding recorded by the ITAT have not been shown to be perverse and cogent reasons have been given showing the dissimilarity of the comparable to the assessee and thus, the exclusion of the above comparable cannot be faulted with. RITES Limited

The TPO selected this comparable while stating that only the consultancy services segment has been considered which was similar to the technical services provided by the assessee. The said finding was confirmed by the DRP. Before the ITAT, it was submitted by the assessee that the said comparable was engaged in providing concept to commissioning consultancy, design, engineering and turnkey solutions in the field of transportation, infrastructure and related technologies of the highest professional standards and hence the same ought to be rejected. Additionally, it was submitted by the assessee that the said company had been recognized as a think tank for development of national policies, priorities and strategies in the field of transportation and infrastructure sector. The ITAT while directing its exclusion has observed as under: “We have perused the submissions advanced by both the sides in the light of records placed before us. We find that only POOJA SHARMA 2020.03.13 16:22 integrity of this document

The said finding of fact that the comparable is functionally dissimilar has not been shown to be perverse by the Revenue and thus, the comparable rightly been excluded by the ITAT. TCE Consulting Engineers Ltd.

The TPO has selected this comparable while stating that the said company is engaged in various project engineering services which are in the nature of technical services and hence comparable to the profile of the assessee. The said finding was confirmed by the DRP. Before the ITAT, it was submitted by the assessee that the said company ought to be rejected owing to the fact that it was engaged in engineering consultancy services in the nature of design engineering, procurement assistances and inspection and expediting, construction and supervision and commissioning support. It was further POOJA SHARMA 2020.03.13 16:22 integrity of this document

The counsel for the revenue relies upon the order passed by the TPO and argued that the ITAT failed to appreciate the findings and observations given by the TPO. The finding recorded by the ITAT have not been shown to be perverse and cogent reasons have been given showing the dissimilarity of the comparable to the assessee and thus, the exclusion of the above comparable cannot be faulted with in any manner.

The above findings of fact by the ITAT regarding exclusion of the comparables are thus upheld and the same do not merit any interference. The questions of law are answered against the revenue and in favour of the assessee. Similar views have been taken by this Hon’ble Court in the case of PCIT v Equant Solutions India Pvt. Ltd. (ITA No. 419/2016), the Bombay 2020.03.13 16:22 integrity of this document

The appeal stands disposed of in the above terms.

Since the main case has been decided, the pending Miscellaneous Application, if any, also stands disposed of.