THE PR. COMMISSIONER OF INCOME TAX -6 vs. DEPUTY COMMISSIONER OF INCOME TAX

SANJEEV NARULA, J. (Oral) 1. This common order shall dispose of the afore-noted appeals preferred by both the Assessee as well as the Revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) challenging the orders passed by the Income Tax Appellate Tribunal (hereinafter referred to as ‘ITAT’) with respect to Assessment Years 2011-12 and 2012-13. For the sake of convenience, the appeals pertaining to each assessment year are being dealt with separately.

ITA 247/2019 & ITA 357/2019 2. The appeals of the Revenue and the Assessee are numbered as ITA No. 357/2019 and ITA No. 247/2019 respectively. These cross-appeals impugn

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the common order dated 14.09.2018 passed by the learned ITAT, New Delhi in respect of AY 2011-12, in ITA No. 1479/Del/2016, filed by the Assessee and ITA No. 691/Del/2016 filed by the Revenue (hereinafter referred to as the ‘Impugned Order’). The aforesaid ITAs assailed the order dated 16.01.2016 of the Ld. Assessing Officer (hereinafter referred to as ‘AO’).

3.1. That Microsoft India (R&D) Pvt. Ltd. (hereinafter referred to as the ‘Assessee’) is a private limited company which was set up in India in May 1998 and is a subsidiary of Microsoft Ireland Research Ltd. (99.99% shareholding); the ultimate parent company being Microsoft Corporation, USA. The Assessee is engaged, inter alia, in rendering software development services and information technology enabled services.

3.2. The Assessee filed its return of income on 29.11.2011, declaring an income of Rs. 2,01,64,26,819/- and same was processed under Section 143(1) of the Act. The case of the Assessee was selected for scrutiny assessment and notice under Section 143(2) was issued.

3.3. The Assessee filed Audit Report in Form No. 3CEB declaring six international transactions. Its case was selected for scrutiny and the AO referred the matter to the Transfer Pricing Officer (hereinafter referred to as the ‘TPO’) for determination of Arm’s Length Price (‘ALP’) of the international transactions. The TPO proposed transfer pricing adjustment of Rs. 2,40,89,61,667/- (being Rs. 2,01,21,96,582/-

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towards Software development services and Rs. 39,67,65,085/- towards provision of IT enabled services).

3.4. Pursuant to the aforesaid reference, draft order under Section 144C was framed by the AO. Aggrieved with the same, the Assessee filed its objections before the Dispute Resolution Panel (hereinafter referred to as the ‘DRP’) which were disposed of vide order dated 08.12.2015 with certain directions. Accordingly, pursuant to the order of the DRP, final assessment order under Section 143(3)/144C was framed by the AO on 16.01.2016, determining the total taxable income at Rs. 4,37,47,44,593/-.

3.5 The Assessee preferred an appeal against the assessment order vide ITA No. 1479/DEL/2016 before the learned ITAT. The Revenue also preferred an appeal against the same order vide ITA No. 691/DEL/2016. The afore-noted appeals were disposed of vide the Impugned order dated 14.09.2018.

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accepted by the TPO, the Assessee would be precluded from challenging the inclusion in further appellate proceedings. He points out that the Assessee is not questioning the filters applied by the TPO and adds that the filter applied by the TPO was in fact more stringent than the one applied by the Assessee. He submits that since the Comparables met the said filter test and were included in the list, the Tribunal has completely erred in excluding them.

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comparables as it is also a product company which is apparent from the Annual report of this company. 42. The ld. DR raised a preliminary objection to the effect that once a company has been considered by the assessee as comparable in its TP documentation and the same has been accepted by the TPO, the same cannot be challenged in the further appellate proceedings. He relied on the impugned order to contend that this company was rightly offered by the assessee in the list of comparables and, hence, the same should not be excluded. 43. We are disinclined to sustain the preliminary objection taken by the ld. DR that the assessee should be estopped from taking a stand contrary to the one which was taken at the stage of the TP study or during the course of proceedings before the TPO. It goes without saying that the object of assessment is to determine the income in respect of hich an assessee is rightly chargeable to tax. As an income not originally offered for taxation, if otherwise chargeable, is required to be included in the total income, in the same breath, any income wrongly included in the total income, which is otherwise not chargeable, should be excluded. There can be no estoppel against the provisions of the Act. Extending this proposition further in the context of the transfer pricing, it transpires that if an assessee fails to report an otherwise comparable company, then the TPO is obliged to include the same in the list of comparables, and in the same manner, if the assessee wrongly reported an incomparable company as comparable in its TP study and then later on realizes and claims that it should be excluded, there should be nothing to prohibit it from claiming so, provided the company so originally reported as comparable is, in fact, not comparable. Simply because a company was wrongly ,chosen by the assessee as comparable, cannot tie its hands from contending before the Tribunal that such a company was wrongly considered as comparable which is, in fact, not. There is no qualitative difference between a situation where an assessee claims that a wrong company inadvertently included for the purpose of comparison should be excluded and the situation in which the Revenue does not accept a particular company chosen by the assessee as comparable. The underlying object of the entire exercise is to determine the arm’s length price of an international transaction. Simply because a company was wrongly considered by the assessee as comparable, cannot, act as a deterrent from challenging before the Tribunal the fact that this company is, in fact, not comparable. The Special Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB)1 has held that a company which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tribunal, if the assessee proves that the same was wrongly included. Similar view has been upheld by the Hon’ble Delhi High Court in Xchanging Technology Services India Pvt Ltd [TS-446-HC-20l 6(DEL)-TP}. The Hon’ble Bombay High Court in Tata Power Solar Systems Ltd [TS-1007- HC-2016(BOM)-TP} and the Hon’ble Punjab & Haryana High Court in CIT Vs. Mercer Consulting (India) P. Ltd. (2017) 390 ITR 615 (P&H) have

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also approved similar view. In view of the foregoing discussion, we do not find any substance in the preliminary objection taken by the ld. DR. 44. Coming to the comparability or otherwise of this company, we find from its Profit & Loss Account that its income from’ Sale of software services and products’ stands at Rs.6, 101.27 millions. Product revenue is 7.2% of the total revenue. Thus, it is established that this company is engaged in rendering software development services as well as sale of software products. Even though the percentage of software products in the total revenue is less, yet, the same ceases to be comparable as there is no precise information about the contribution made by the income from sale of software to the total income of the company. In the absence of any segmental information provided by the company in respect of software services, we cannot approve the inclusion of this company in the list of comparables. The same is directed to be excluded. (iv) Wipro Technology Services Ltd. 45. The TPO proposed to include this company in the list of comparables despite the assessee’s objection that it has more related party transactions. After going through the Annual report of this company, it is noticed that it was earlier Citi Technologies Ltd. On 21.1.2009, Wipro Ltd. signed a master agreement with Citi Group Inc., for delivery of technology Infrastructure Services and application development and maintenance services for a period of six years, which also includes the year under consideration. This shows that income from software development support and maintenance services was earned by Wipro Technology Services Ltd., from Citi Group Inc., by means of master service agreement entered into between Wipro Ltd., its parent company and Citi Group Inc., a third person. 46. Rule 10B(l)(e)(ii) provides that it is the net profit margin realized from a comparable uncontrolled transaction, which is considered for the purposes of benchmarking. The epitome of ‘comparable uncontrolled transaction’ is that the companies or transactions, in order to fall within the ambit of sub- clause (ii) of rule 10B(l)(e), should be both comparable as well as uncontrolled. ‘Uncontrolled transaction’ has been defined in Rule 10A(a) to mean: ‘a transaction between enterprises. other than associated enterprises, whether resident or non-resident.’ This shows that in order to be called as an uncontrolled transaction, it is essential that the same should, be between the enterprises other than the associated enterprises. Section 92B(2) provides that: ‘A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise’. On going through the prescription of sub-section (2) of section 92B, it is clearly borne out that a transaction with a non-AE shall be deemed to be a transaction entered into between two AEs if there exists a prior agreement in relation to the relevant

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transaction between the third person and the AE or the terms of the relevant transaction are determined in substance between the third person and the AE. When we consider section 92B(2) in combination with Rule IOA(a), it follows that the transaction between non-AEs shall be construed as a transaction between two AEs, if there exists a prior agreement in relation to the relevant transaction between third person and the AE. If such an agreement exists, the third person is also considered as an AE and the transaction with such third person becomes international transaction within the meaning of section 92B. Once there is a transaction between two associated enterprises, it ceases to be an ‘uncontrolled transaction’ and, thereby, goes out of reckoning under Rule 10B(1)(e)(ii). 47. Coming back to the facts of this company, we find that Wipro Technology Services Ltd. earned a revenue from Master services agreement with Citigroup Inc. for the delivery of technology infrastructure services. This agreement was, in fact, executed between the assessee’s AE, Wipro Ltd., and Citigroup Inc., a third person. This unfolds that the transaction of earning revenue from software development support and maintenance services by Wipro Technology Services Ltd., is an international transaction because of the application of section 92B(2) i.e., there exists a prior agreement in relation to such transaction between Citigroup Inc. (third person) and Wipro Ltd. (associated enterprise). In the light of this structure of transaction, it ceases to be uncontrolled transaction and, hence, Wipro Technology Services Ltd., disqualifies to become a comparable uncontrolled transaction for the purposes of inclusion in the final list of comparables under Rule 10B(1)(e)(ii). We, therefore, direct removal of this company from the list of comparables. Similar view has been taken by the Delhi Bench of the Tribunal in the case of Saxo India (P) Ltd. (2016) 67 taxmann.com 155 (Delhi-Trib.). This order of the Tribunal stands affirmed by the Hon’ble Delhi High Court vide its judgment dated 28.09.2016 in ITA no.682/2016, C.M. APPL.35744-35746/2016 by holding that no substantial question of law arises from the Tribunal order.” [Emphasis Supplied] 7. We notice that insofar as Infosys Technology Limited and Persistent Systems Limited are concerned, the learned ITAT observed that while the profit of the aforesaid three comparables is derived from both software development services as well as software products, however there is no precise information about the contribution made from the income derived from the sale of software to the total income of the companies. Thus, in the absence of segmental information provided by the companies in respect of the software services, the aforesaid companies have been excluded from the list of the comparables. We do not find any perversity in the approach

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adopted by the learned ITAT which would call for our inference. The third comparable viz Wipro Technology Services Limited has been held to be disqualified under Rule 10B(1)(e)(ii), to become a comparable for uncontrolled transaction for the purposes of inclusion in the final list of comparables. The rationale for exclusion has been upheld by this court in Principal Commissioner of Income Tax-7 v. Open Solutions Software Services Pvt. Ltd.1

1 (2020) 315 CTR (Del) 497

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erstwhile Citi Technology Services Ltd. The main ground for exclusion of this comparable is that its entire revenue is on account of related party transactions and it fails the criteria of RPT filter. The critical question is whether the pre-arrangement between the Citi group and Wipro Limited would make the subsequent rendition of services by this company to the Citi Group fall within the meaning of “deemed international transaction” as defined under section 92B(2) of the Act. At this juncture, it would be apposite to reproduce Section 92B (2) of the Act: “Section 92B(2): A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be an international transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not.” [Emphasis Supplied] 30. A perusal of the aforenoted provision shows that the transaction between an unrelated party and an enterprise would be deemed to be an international transaction if there was any prior agreement between the parties on the basis of which the transaction is being undertaken. There was indeed a prior agreement between Citi Group and the erstwhile Citi Technology Services for rendition of software services. After acquiring Citi Technology Services (now Wipro Technology Services) by Wipro Ltd, since the comparable company continues to deliver services to Citi Group, this entire transaction would be considered as a related party transaction. The pre-arrangement between Citi group and Wipro Ltd. is a deemed international transaction as per Section 92B (2). Therefore, we are of the considered view that this comparable has been rightly deleted since it is no longer an uncontrolled transaction and cannot serve as a comparable in the benchmarking mechanism for the present assessee, since the RPT filter of this company failed to meet the filter criteria of 25% of RPT, as applied by TPO. The Tribunal in a similarly situated case, deleted Wipro Technology Services Ltd, since it had ceased to be an uncontrolled transaction under Section 92B (2) of the Act. The same order of deletion has been upheld by this Court in PCIT vs. Saxo India Pvt. Ltd., ITA 682/16vide order dated 28.09.2016.Theassessee therein was engaged in the business of design and development of customized software applications. The relevant paragraphs of the Tribunal’s order reads as under: “16.5. Adverting to the facts of the instant case, we find that Wipro Technology Services Ltd. earned a revenue from Master services agreement with Citigroup Inc. for the delivery of technology infrastructure services. This agreement was, in fact, executed between the assessee’s AE, Wipro Ltd., and Citigroup Inc., a third person. This unfolds that the transaction of earning revenue from software development support and maintenance services by Wipro Technology Services Ltd., is an international transaction because of the application of section 92B(2) i.e., there exists a prior agreement

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in relation to such transaction between Citigroup Inc. (third person) and Wipro Ltd. (associated enterprise). In the light of this structure of transaction, it ceases to be uncontrolled transaction and, hence, Wipro Technology Services Ltd., disqualifies to become a comparable uncontrolled transaction for the purposes of inclusion in the final list of comparables under Rule 10B(1)(e)(ii). We, therefore, direct removal of this company from the list of comparables.” [Emphasis Supplied] 31. We also note that the aforesaid comparable has been deleted in the case of the sister company of the assessee herein. The sister company of the assessee also operates in the same business segment as the assessee. The order of deletion has been upheld by this Court in CashEdge India (supra) for the same AY 2010-11. Since, the Courts have consistently upheld the deletion of the said comparable on account of failing the Related Party Filter, we do not see any reason to interfere with the Tribunal’s order of deletion of Wipro Technology Services Ltd. 32. This brings us to the third and fourth comparable, Persistent Systems Ltd. and Thirdware Solutions Ltd., which were deleted on the ground of being functionally dissimilar to the assessee and on account of absence of segmental information with regard to their earnings and sales in the field of software development. The reasoning given by the Tribunal for rejecting the aforenoted two comparables is as follows: “(iii) Persistent Systems Ltd.: - XXXX 9. We have heard the rival submissions, perused relevant findings given in the impugned order as well as the material referred to before us. From a perusal of the annual report of PSL it is seen that this company deals with various products and it has been stated that it has realised more than 3000 products in the last five years and it is leader in the world of outsource software product development. The break-up of income under the head “software services and products” both exports and domestic, it is seen that there is no segmental information as to how much is the revenue from software services and how much is from the products. This is evident from a detailed report given at page 46 of the paper book. In absence of such segmental information it is very difficult to come to a conclusion as to whether the margin of this company also includes the sale of products. Moreover, as pointed out by ld. Counsel, commission paid to agents on sales is also indicative of the fact that there are sale of products. Thus, we find it very difficult to include such a comparable into the basket of comparables for bench marking the assessee’s margin and, accordingly, we direct the TPO to exclude this comparable from the list of comparable companies. (iv) Thirdware Solutions Ltd.: - XXXXX

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From the above it is not clear as to what constitutes the sale of exports, whether it is product or software development services. Revenue from subscription and sale of licence also indicate that there is income from products also which would indicate different business model and consequently the profit margin. Without any proper segmental information regarding revenues from software development and software products, it would be very difficult to accept that the proper comparability analysis can be carried out with the assessee which is purely providing software development services. Apart from above it is noticed that in the case of Fiserve, this comparable company has been excluded precisely on the same ground and the said order of the Tribunal stands affirmed by the Hon’ble High Court also. Accordingly, we direct the TPO to exclude the said comparable from the list of comparables.” [Emphasis Supplied] 33. Both the aforenoted comparables have been excluded on the ground that apart from rendering software services, the companies are engaged in sale of software products and the segmental data of product and services is not available. Firstly, this is a finding of fact and secondly, in the grounds urged in the present appeal, the Revenue has not disputed this factual position. In the note of arguments filed by the appellant also, there is no challenge to this factual position. We would like to add that the respondent had brought to our notice that this Court in CashEdge (supra) for the very same AY 2010-11 and in identical business vertical i.e. captive software development services had upheld the exclusion of Persistent Systems Ltd. With respect to Thirdware Solutions and Sales Limited, we find that the ITAT has undertaken a detailed factual analysis and has given cogent reasons for the exclusion of the comparables in question. The ITAT has noted that there is no segmental data to work out the separate margin from software services. Further, this comparable was also rejected in the case of assessee’s sister concern, Fiserv India Ltd on the ground of non-availability of segmental data. The said decision was affirmed by this court vide order dated 06.01.2016 in Pr. Commissioner of Income Tax-3 versus Fiserv India Pvt. Limited, ITA N0. 17/2016. The absence segmental data is a factual finding that is not in serious challenge before us. Thus, the Court is not persuaded to find any infirmity in the view taken by ITAT viz the third and fourth comparables. 34. In view of the above, it emerges that none of the comparables have been excluded on the ground of high turnover alone. The test of functional similarity applied by the Tribunal is in consonance with the legal position discussed hereinabove. Therefore, we do not find merit in the contentions urged by the Revenue on this ground. Equally meritless is the contention of the Revenue regarding the bar to challenge the comparables after the acceptance of the filters. The filters are applied to narrow down the search to find the comparables that are closest to the assessee. The use of filters has to be necessarily validated from the annual reports. Since the TPO would have to do this exercise on the basis of the actual data in the report of the comparables, he would surely have the freedom to adopt or reject the

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comparables. We cannot hold that merely because a comparable clears the filters, its inclusion in the list of comparables is immune to challenge by the assessee.”

“(a) Whether impugned order is perverse and bad in law to the extent it upholds substantial variations to determination of arm’s length price in transfer pricing study in the face of clear, unambiguous and express finding by Transfer Pricing Officer that “It is emphasized that Transfer Pricing study was not rejected at all”? (b) Whether conclusion in impugned order classifying software development services rendered by Appellant as “High end” in nature for purposes of Chapter X of the Act is (a) contrary to facts and law as also material on record, (b) perverse as it does not consider all relevant material on record, selectively considers statements recorded by Respondent in the course of Advance Pricing Agreement proceedings and (c) unlawful and unsustainable in law as same arises from gross misinterpretation of facts, law and agreement between parties? (c) Whether impugned order, to the extent it finally upholds rejection of several companies as being not comparable to Appellant for determination of arm’s length price of international transaction, is bad in law, unjust and unsustainable as interalia such conclusion arises from total misinterpretation of facts and law including impact and relevance of patents registration by and in the name of Overseas Associated enterprise, as also relevance and impact of research & development activities of such companies? (d) Whether to the extent impugned order ignores intervening decision of jurisdictional High Court on identical issues involving head under which income is taxable i.e., Income from house property or Income from other sources, and routinely restores the issue to file of Assessing officer on the pretext of following coordinate bench order in earlier year, is unlawful, unsustainable and not in accordance with law as per section 254 of the Act?

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(e) Whether restoration of issues relating to treatment of foreign exchange fluctuations realized or unrealized, disallowance of deduction claim under section 10A of Act and adjustment in opening written down value of computers is unjustified and unlawful in the facts and circumstances of case?”

2 396 ITR 194 (Del.)

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assessee in support of its claim. It is well settled law that remand is not a power to be exercised in a routine manner and should be used sparingly, as an exception only when the facts warranted such course of action. In our opinion, when the requisite materials and the intervening decision of the jurisdictional high court was available for deciding the issue urged by the Assessee, the Tribunal ought to have arrived at a conclusion rather than remanding the matter back to the Assessing Officer.

ITA 652/2019 and ITA 710/2019

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710/2019) assail the order dated 21.01.2019 passed by the learned ITAT in ITA No. 507/DEL/2017 for AY 2012-13. This, in turn had arisen from an assessment order of the AO dated 24.11.2016. The learned ITAT, in its adjudication, followed its own order dated 14.09.2018 for AY 2011-12. (being the aforenoted impugned order), which has been examined and considered in the preceding paragraphs, at length. The questions of law and the contentions urged by the Revenue are identical to those raised in respect of AY 2011-12. Accordingly, for the reasons discussed above, we are not inclined to entertain the present appeal, as no question of law, much less a substantial question of law, arises for our consideration.

“(a) Whether Tribunal erred in not independently adjudicating on disputed characterization of ‘Appellant tested party’ for AY 2012-13 and routinely adopting the incorrect and disputed characterization determined in relation to AY 2011-12 as ‘high end software development service provider’ based on non-appreciation of true and complete facts? (b) Without Prejudice to above, whether impugned order erred in not adjudicating on all comparable companies sought to be included by Appellant in either way of characterization of its services? (c) Whether on the facts and in the circumstances of the case, impugned order is justified in routinely remanding the issue involving head under which composite rental income is taxable i.e., ‘income form house property’ or income from other sources’ to Assessing Officer and not finally deciding the dispute by following guidelines laid down in decision of this Hon’ble Court?”

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corporate tax grounds for AY 2012-13, as urged by the Assessee in its appeal.

SANJEEV NARULA, J

MANMOHAN, J JANUARY 4, 2021 nd

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