VERIZON DATA SERVICES INDIA PRIVATE LIMITED,CHENNAI vs. DCIT CORPORATE CIRCLE 3(2), CHENNAI

आदेश / O R D E R

Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2014- 15 arises out of final assessment order dated 13-08-2018 passed by Ld. Deputy Commissioner of Income Tax, Corporate Range-3, Chennai (AO) u/s 143(3) r.w.s. 92CA / 144C(13) of the Act pursuant to the directions of Ld. Dispute Resolution Panel-2, Bengaluru (DRP) u/s 144C(5) of the Act dated 30-07-2018. The assessee carried out

- 2 - IT(TP)A No.56/Chny/2018 certain international transactions with its Associated Enterprises (AE) which were subjected to determination of Arm’s Length Price (ALP) before Ld. Transfer Pricing Officer-3, Chennai (TPO) vide order dated 31-10-2017. Incorporating the proposed adjustments, draft assessment order was passed by Ld. AO on 16-11-2017 which was subjected to assessee’s further objections before Ld. DRP. The assessee filed rectification before Ld. TPO which was rectified vide order dated 19-01-2018. Subsequent to final assessment order dated 13-08-2018, the assessee filed rectification u/s 154 which was disposed-off on 18-09-2018. Aggrieved, by confirmation of certain Corporate Tax Adjustments as well as Transfer Pricing (TP) adjustments in the final assessment order, the assessee is in further appeal before us. The grounds raised by the assessee read as under: 1. The lower authorities erred on facts and in law, in enhancing the returned income of the Appellant. 2. The lower authorities erred in finalizing an order of assessment which suffers from legal defects such as being passed in violation of principles of natural justice and the provisions of the Act and is devoid of merits and are contrary to facts on record and applicable law, and has been completed without adequate inquiries and as such is liable to be quashed. I. Corporate Tax Disallowance of payments to GTE-Overseas: 3. The lower authorities erred in law and on facts in law in disallowing the payments made to GTE-Overseas without considering the fact that the issue of whether the said payments are liable to withholding provisions under the Act is already pending before the Authority for Advanced Rulings for disposal. 4. The order of the lower authorities, in the facts and circumstances of the case and in law, is rendered erroneous due to the order of the jurisdictional Income Tax Appellate Tribunal in Appellant's own case for AY 2011-12, in relation to the payments made by the Appellant to GTE-overseas. 5. Without prejudice, the lower authorities, in facts and circumstances of the case and in law, erred in disallowing the payments by the Appellant to GTE-Overseas in computing the Appellant's taxable income. 6. The lower authorities, in facts and circumstances of the case and in law, erred in holding that the payments made by the Appellant to GTE-Overseas are liable to withholding tax provisions under section 195 of the Act.

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- 4 - IT(TP)A No.56/Chny/2018 17. The lower authorities have erred in law and on the facts by rejecting such companies that are comparable to the Appellant, in the final set of comparable companies considered for determination of the Arms' length price of services rendered under its ITeS segment. Economic adjustment: 18. The lower authorities erred, both on facts and in law, in not allowing the economic adjustments, namely working capital and risk adjustment, claimed by the Appellant in computing its ALP. 2.1 Ground No. 1 and 11 is general in nature. No arguments have been made in support of ground Nos. 2 & 18. Ground Nos.9 & 10 has not been pressed before us. It has been submitted that ground nos. 3 to 8 relating to disallowance u/s 40(a)(i) may be remitted back as per order in earlier years. The Ld. AR advanced arguments on ground numbers 12 & 13 to submit the forex gains are to be treated as operating item since forex losses have been treated as operating losses. The Ld. AR placed on record a chart to support exclusion / inclusion of comparable entities and made arguments on ground nos. 14 to 17. 2.2 The Ld. CIT-DR, on the other hand, submitted that forex gains could not be considered as operating in nature. The Ld. CIT-DR vehemently contested the arguments of Ld. AR with respect to comparable entities. In support of arguments, the assessment order of one comparable entity i.e., M/s Thirdware Solutions Ltd. has been placed on record. The written submissions have also been filed by both the sides which have duly been considered while adjudicating the appeal. The rival arguments, as considered relevant, have appropriately been dealt with at appropriate places. The case was put up for clarification also which was duly responded to by both the sides. Having heard rival submissions, our adjudication would be as under.

- 5 - IT(TP)A No.56/Chny/2018 3. The assessee being resident corporate assessee is wholly owned subsidiary of Verizone Singapore Pte. Ltd. The assessee is stated to be 100% export-oriented unit (EOU) and stated to be engaged in development and maintenance of software services for telecommunication operations and engaged in providing business support solutions for the Verizone group. It also provides non-IT services like global support services, voice and non-voice-based helpdesk services and supervisory support services. Thus, the assessee renders services mainly in two segments i.e., IT services and ITeS services. The IT services involves software development and maintenance of IT applications. The ITeS segment involves voice and non-voice-based services. For the same, the assessee has entered into Software development Services Agreement and non- information Technology services agreement with Verizone Data Services LLC, USA. The same is effective from 01.04.2012. Thus, the assessee is characterized as a captive software service provider assuming less than normal risks relating to business and operations and significant business and entrepreneurial risks are borne by its AE. Proceedings before lower authorities 4.1 The assessee entered into various international transactions with its Associate Enterprises (AE) and benchmarked the same under two main segments as stated above using Transactional Net Margin Method (TNMM). The revenue in IT segment was Rs.974.42 Crores whereas the revenue in ITeS segment was Rs.64.20 Crores. The assessee compared net-cost-plus markup (NCP) for benchmarking these transactions and submitted that its margins, in both the

- 6 - IT(TP)A No.56/Chny/2018 segments, were at Arm’s Length. The same could be tabulated as under: - Description Comparables Assessee +/-3% IT Segment 12.16% 16.12% 19.49% ITeS Segment 10.34% 14.12% 17.44% 4.2 The Ld. TPO questioned the assessee’s margin on the ground that foreign exchange gains of Rs.33.98 Crores were considered as operating revenue, though the same, in the opinion of Ld. TPO, would be non-operating in nature. 4.3 The assessee submitted that forex gains as well as losses form part of routine business operations of export of services and inextricably linked to routine transactions of export of services and therefore, the same are to be considered as operating in nature. Simply because the same have been shown as other incomes would not materially alter this position. This policy is stated to be consistently followed by the assessee in earlier years. The assessee submitted that similar treatment was affected for computing margins of comparable entities. 4.4 However, Ld. TPO held that the assessee was operating on a cost-plus model. As per as per inter-company agreement, costs inter- alia includes forex losses but do not include forex gains as negative costs. If the gains are reduced from costs, it calls for an adjustment since the same has given unintended benefits to the assessee in terms of more margins on reduced cost base. The assessee failed to account for as to how the forex gains have been adjusted while raining invoices every month. Therefore, the gains could not be considered as operating revenue. Further, the gains were in no way connected to the

- 7 - IT(TP)A No.56/Chny/2018 compensation for the services rendered to the AE but it was only an appreciation post realization of receivable. The costs would form part of the operating cost as per the definition of ‘operating cost’ as per the agreement. Accordingly, assessee’s Net Cost Plus margins under IT segment was re-computed as 10.69% whereas under ITeS segment, the same were re-computed as 10.5%. 4.5 Proceeding further, the selection of comparable entities under both the segment was held to be not acceptable. Applying certain filters and after meeting assessee’s objection with respect to exclusion / inclusion of comparable entities, Ld. TPO finalized three entities under IT segment which were having mean PLI of 25.21%. These entities include CG-VAK Software and Exports Ltd. (9.27%), RS Software (India) Ltd. (24.11%) and Thirdware Solutions Ltd. (42.24%). Applying the same, Ld. TPO proposed adjustment of Rs.128.58 Crores under IT segment. 4.6 Similar adjustment was made under ITeS Segment and 6 entities were selected having PLI of 18.38% which led to another adjustment of Rs.469.62 Lacs under this segment. 4.7 In other words, Ld. TPO proposed aggregate adjustments of Rs.133.28 Crores in its order under both the segments. The findings with respect to each of the entities have been rendered in the order. The aggregate adjustments have been revised by Ld. TPO to Rs.123.62 Crores in rectification order dated 19.01.2018. The same was due to revision in margin of M/s CG-VAK Software & Exports Ltd. 4.8 The Ld. DRP, relying upon the definition of operating expenses as defined in safe Harbor Rules 10TA(j)(iv) held that operating expenses would not include loss arising on account of foreign

- 8 - IT(TP)A No.56/Chny/2018 currency fluctuations. The Rules excludes loss / gain arising on forex fluctuation while computing operating expenses and operating income. Therefore, such gains would not form part of operational income because these items had nothing to do with the export income of the assessee. Accordingly, the action of Ld. TPO was upheld. The assessee’s plea to use three year’s data as well, as exclusion / inclusion of comparable entities was also not accepted. 4.9 Pursuant to the directions of Ld. DRP, final assessment order was passed by Ld. AO on 13.08.2018 incorporating TP adjustment as proposed by Ld. TPO for Rs.123.62 Crores. Aggrieved, the assessee is in further appeal before us. Having heard rival submissions and after going through relevant material on record including case laws as cited during the course of hearing, our findings and adjudication would be as under. Our findings and Adjudication 5. So far as the treatment of forex Gains is concerned, it is undisputed fact that forex losses have been considered as operational losses. In our considered opinion, such gains / losses form part of routine business operations of export of services and inextricably linked to routine transactions of export of services. Therefore, the consequential losses as well as gains are to be given the same treatment. The Ld. TPO has treated forex losses as operating costs but has held that forex gains would be non-operating in nature. The Ld. DRP, considering safe harbor rules, held that forex losses as well as gains would stand excluded while computing operating income. However, the forex losses have still been considered as operating cost and no directions have been given by Ld. DRP in this regard. The

- 9 - IT(TP)A No.56/Chny/2018 same could not be held to be justified since both items, being of similar nature, are to be given same treatment. In earlier years also, similar treatment has been given by the assessee and the same has been accepted by revenue. Similar treatment has been given while computing margins of comparable entities. Another fact is that as per inter-company agreement, costs include forex losses. Therefore, there is no logic in giving separate treatment to forex gains arising out of same set of transactions. Under these circumstances, we would hold that forex gains are to be treated as part of operating income only. The corresponding grounds raised by the assessee stand allowed to that extent. 6. Comparable Entities under IT segment In this segment, the assessee seeks exclusion of comparable entity viz. M/s Thirdware Solutions Ltd. The assessee also seeks inclusion of M/s Akshay Software Technologies Ltd. 7. M/s Thirdware Solutions Ltd. 7.1 This entity was introduced by Ld. TPO during fresh search. The Ld. TPO rejected assessee’s contention that this was a product company and had intangible assets. The assessee relied upon downloaded financials from the MCA Website. The Ld. TPO held that in the footnotes forming part of financials, the revenue from export of software services was stated to be Rs.20192.37 Lacs for this year and Rs.414.07 Lacs from software services from domestic segment. The intangibles were nothing but the software. Therefore, this comparable was retained by Ld. TPO. The Ld. DRP upheld the inclusion of the same. Aggrieved, the assessee is in further appeal before us.

- 10 - IT(TP)A No.56/Chny/2018 7.2 The Ld. AR seeks exclusion of this entity on functional differences. It has been submitted that the assessee is captive software service provider having two segments viz. IT and ITeS. On the other hand, this entity is a software product company. This entity is engaged in product development and has diversified functional profile and also engaged in sale of software licenses and has made investment in R&D. It has also been submitted that this entity has revenue from subscription and training and segmental data is not available. Further, this entity has intangible assets and it faces peculiar economic circumstances since it has liquidated Singapore entity during November, 2013 due to insolvency of business activities. The liquidation has led to slowdown of goodwill in Thirdware business. To support the same, our attention has been drawn to Published Annual Report of this entity. Reliance has been placed on the various decisions including the decision of Bangalore Tribunal in Yahoo Software Development India Pvt. Ltd. (115 Taxmann.com 60) and the decision of Hyderabad Tribunal in Kony IT Services Pvt. Ltd. (113 Taxmann.com 214). The copies of the orders have been placed on record. The Ld. CIT-DR, on the other hand, placed on record, assessment details of this entity in support of the submission that this entity was primarily into software services sector. It has earned software services revenue. The perusal of Tax Audit Report of this entity would also support the fact that this entity was engaged in service sector. Thus, this entity was engaged in software development, implementation and support services which are similar to services being rendered by the assessee. The Ld. CT-DR sought distinction in the case law of Kony

- 11 - IT(TP)A No.56/Chny/2018 Services Pvt. Ltd. (supra) and submitted that the observations made therein run contrary to audited financial statements of this entity. The Ld. CIT-DR also averred that necessary segmental results are also available for this entity. The Ld. AR controverted the arguments of Ld. CIT-DR and submitted that the aforesaid data as furnished by Ld. CIT-DR was not available in public domain. The Audited final statements as obtained from official MCA website ought to take precedent over the date furnished by Ld. CIT-DR. 7.3 Having considered rival submissions, the bench finds substance in the arguments of both the sides. The assessee seeks exclusion of this entity on functional difference whereas Ld. CIT-DR submits that this entity is having similar functional profile. To support the same the assessee relies on published Annual Statements whereas Ld. CIT-DR has brought on record the assessment details and other financial statements of this entity. To ensure fair adjudication of this entity and to bring correct facts on record, the bench deems it fit to remit the issue of exclusion / inclusion of this comparable entity to the file of Ld. AO / TPO with a direction to the assessee to substantiate its case. All the issues are kept open. The Ld. AO / TPO shall re-adjudicate this issue after affording reasonable opportunity of hearing to the assessee. The corresponding grounds raised by the assessee stand allowed for statistical purposes. 8. Akshay Software Technologies Ltd. 8.1 The Ld. TPO excluded this entity on the ground that this entity was functionally dissimilar as it was engaged in product development.

- 12 - IT(TP)A No.56/Chny/2018 The Ld. DRP confirmed the same against which the assessee is in further appeal before us. 8.2 The Ld. AR has submitted that the inference of Ld. TPO is erroneous since the extract made from annual report of this entity are not with respect to the assessee but with respect to assessee’s wholly owned subsidiary vis. Akshay Software International Inc. The Ld. AR submitted that this entity is functionally similar since it is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and overseas. The revenue from software services is more than 75% of total revenues which is one of the filter applied by Ld. TPO. The Ld. AR submitted that this entity has been accepted by Bangalore Tribunal in the decision of Mercedes-Benz Research & Development India (P.) Ltd. (95 Taxmann.Com 134) as well as Kolkata Tribunal in the decision of Labvantage Solution Pvt. Ltd. (ITA No.1051/Kol/2015 & ors. dated 19.10.2016) The Ld. CIT-DR opposed inclusion of the same on the ground that it was a low-profile company carrying out functionally different activities and its turnover could not be compared with assessee’s turnover. 8.3 We find that the observation made by Ld. TPO, as rightly pointed out by Ld. AR, are erroneous. The observations have been made in the Annual Report not with respect to the assessee but with respect to another entity. This entity meets filters applied by Ld. TPO while carrying out comparable analysis. In the cited decision of Bangalore Tribunal in Mercedes-Benz Research & Development India (P.) Ltd. (supra), this entity has been accepted to be a comparable entity. Therefore, we direct Ld. TPO to accept this entity as comparable

- 13 - IT(TP)A No.56/Chny/2018 entity. The corresponding grounds raised by the assessee stand allowed. 9. Comparable entities under ITeS Segment In this segment, the assessee seeks exclusion of comparable entities viz. M/s Infosys BPO Ltd. & M/s BNR Udyog Limited. The assessee also seeks inclusion of M/s Informed Technologies India Ltd. & M/s Ace BPO Services Pvt. Ltd. 10. M/s Infosys BPO Ltd. 10.1 The assessee sought exclusion of this entity on argument of economies of scale and high turnover. However, the same was rejected by Ld. TPO and confirmed by Ld. DRP against which the assessee is in further appeal before us. 10.2 . The Ld. AR sought exclusion of this entity on the ground of functional dissimilarity. It was submitted that this entity was engaged in diversified activities and provide business process management services. Further, this entity has different business model and has high turnover. This entity incurs brand building expenditure and own intangibles and has a different business model. Therefore, this entity should be excluded as per the decision of Bangalore Tribunal in Ocwen Financial Solutions P. Ltd. (108 Taxmann.com 306) as well as held in various other decisions. The Ld. CIT-DR submitted that this entity is functionally similar. 10.3 We find that the cited decision of Bangalore Tribunal is for ITeS segment and for same AY 2014-15. The bench observed that this entity provides services to both horizontal and vertical focus areas. Under both these areas, this entity offers a gamut of different and diversified services which cannot be compared with routine back office

- 14 - IT(TP)A No.56/Chny/2018 services provided by the assessee. This entity was also providing business process management services which are different from routine back office services. Further, this entity enjoyed significant brand value and own intangible assets which makes it distinguishable. Therefore, we accept the argument of Ld. AR and direct Ld. TPO to exclude this entity. 11. M/s BNR Udyog Ltd. (segment) 11.1 The Ld. TPO accepted this entity on the ground that this entity rendered services other than KPO activities which would fall under ITeS. The Ld. DRP confirmed the same against which the assessee is in further appeal before us. 11.2 The Ld. AR submitted that this entity is not comparable since it is engaged in medical transcription services which are KPO services. It has outsourced its services and trades in intangible goods and assumes significant risk. This entity is stated to be excluded by Tribunal in various decisions including the decision of Delhi Tribunal in Teradata India Pvt. Ltd. (82 Taxmann.com 30) 11.3 We are of the opinion that an entity engaged in providing medical transcription services would fall under KPO services which could not be compared with an entity like assessee who is a routine software service provider. Further, the assessee is a low risk entity. On the same reasoning, this entity has been excluded in the cited decision of Delhi Tribunal. Considering the same, we direct Ld. TPO to exclude this entity. 12. M/s Informed Technologies India Ltd.

- 15 - IT(TP)A No.56/Chny/2018 12.1 This entity has been excluded by Ld. TPO on the ground of functional differences. The Ld. DRP confirmed the same against which the assessee is in further appeal before us. 12.2 The Ld. AR submitted that this entity operates as ITeS segment which is evident from disclosures made in the Annual Report. Reliance has been placed on the decision of Bangalore Tribunal in Ocwen Financial Solutions P. Ltd. (108 Taxmann.com 306) to support the arguments. The Ld. CIT-DR submitted that this entity was functionally different. 12.3 We find that this entity has been held to be a comparable entity under ITeS segment by Bangalore Tribunal in Ocwen Financial Solutions P. Ltd. (supra). As per Directors’ Report (Page No.1210 of paper book), this entity is operating as IT enabled Service provider and is a leading content provider to the securities and financial research industry. Its entire revenue is out of revenue information technology services (Page 1299 of the paper book). These functions are similar to assessee’s functions. Therefore, we direct for inclusion of this entity. 13. M/s Ace BPO services Ltd. 13.1 The Ld. TPO excluded this entity on the ground that current year data was not available. The Ld. DRP confirmed the same against which the assessee is in further appeal before us. 13.2 The Ld. AR submitted that Annual Report of this entity is very much available and the same was furnished before Ld. DRP. It has further been submitted that this entity is functionally comparable and satisfies all the filters. Therefore, this entity should be included.

- 16 - IT(TP)A No.56/Chny/2018 13.3 Considering the arguments of Ld. AR, we direct Ld. AO / TPO to consider inclusion of this entity after perusal of financial statements. The assessee is directed to provide the requisite details and data. 14. Disallowance u/s 40(a)(i) for want of TDS u/s 195 14.1 The assessee made certain contractual payment to another entity i.e., GTE-Overseas Corporation (GTC-OC) under Personnel Secondment Agreement dated 01.04.2008 which were claimed to be mere reimbursement in nature. Accordingly, no Tax was deducted at source (TDS) on the same which led Ld. AO to make disallowance u/s 40(a)(i). 14.2 It transpired that the assessee had sought ruling from Authority for Advance Ruling (AAR) for this transaction. The AAR ruled that the payment would be ‘Fees for inclusive services’ liable for TDS of 20%. The ruling was confirmed by Hon’ble High Court of Madras and this issue was before Hon’ble Supreme Court. Considering the same, Ld. DRP confirmed this disallowance. Aggrieved, the assessee is in further appeal before us. 14.3 The Ld. AR has submitted that this issue has been restored back by Tribunal in ITA No.998/Chny/2017 for AY 2011-12 order dated 06.03.2018 as under: - 9.2 As the issue, whether the payment to GTE-OC in respect of employee deputed to the assessee was reimbursement or not and as to whether the said employee had provided any technical services or was providing managerial services are issues in dispute. Though, the assessee has submitted that it has deducted TDS u/s 192 of the Act. The dispute would also centre on, whether the TDS liable to be made u/s 195 of the Act. These issues are now pending before the Hon’ble Supreme Court on account of SLP filed both by the assessee and the AAR against the Writ Petition order of the Hon’ble jurisdictional High Court of Madras. This being so, the issues in regard to this payment made to GTE-OC are restored to the file of the AO for re-adjudication after awaiting final decision in respect of the AAR in the case of the assessee on the issue. Consequently,, Ground Nos.6.1 & 6.2 are partly allowed for statistical purposes.

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Similar directions have been given by Tribunal in ITA No.3411/Chny/2016 order dated 03.03.2020 for AY 2012-13. The Ld. CIT-DR pleaded for confirmation of impugned disallowance. 14.4 Having considered earlier direction of Tribunal as aforesaid and to enable revenue take consistent stand in the matter, this issue stand restored back to the file of Ld. AO on similar lines. The corresponding grounds stands allowed for statistical purposes. Conclusion 15. The appeal stand partly allowed in terms of our above order. Order pronounced on 29th November, 2023

Sd/- Sd/- (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा23 /VICE PRESIDENT लेखा सद; /ACCOUNTANT MEMBER चे(ई/ Chennai; िदनांक/ Dated : 29-11-2023 EDN आदेशकीXितिलिपअ8ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant2. ��यथ�/Respondent 3. आयकरआयु�त/CIT 4. �वभागीय��त�न�ध/DR 5. गाड�फाईल/GF