M/S. EIT SERVICES INDIA PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, SPECIAL RANGE - 2, BANGALORE

Several grounds are raised with regard to Transfer Pricing Adjustment, both with regard to software development segment and I.T.enabled services. The learned AR, during the course of hearing, submitted that as regards I.T.enabled services, revised order u/s 92CA of the I.T.Act has been passed accepting the international transactions to be at Arm’s Length. As regards software development segment is concerned, the learned AR confined his submission to the exclusion of four comparable companies and inclusion of 2 IT(TP)A No.2498/Bang/2019. M/s.EIT Services India Private Limited. three comparable companies, which were urged in the grounds of appeal. The learned AR also pressed ground No.6.a. with regard to the grant of working capital adjustment. The assessee has also filed an additional ground contending that the transfer pricing adjustment should be restricted to the value of international transactions only.

Brief facts of the case are as follow: The assessee is a company engaged in the business of rendering software development services, software maintenance and technical call centre services primarily to its Associate Enterprises (AEs). The assessee had undertaken several international transactions with its AEs. As regards the software development segment, the final list of comparable considered by the TPO are as follows:-

Kals Information Systems Limited 2. E-Zest Solutions Limited 3. CG-VAK Software & Exports Limited 4. Tata Elxsi Limited (Seg.) 5. Rheal Software Private Limited 6. Mindtree Limited 7. Larsen & Toubro Infotech Limited 8. R S Software (India) Limited 9. Infobeans Technologies Limited 10. Persistent Systems Limited 11. Nihilent Technologies Limited 12. Aspire Systems (India) Private Limited 13. Inteq Software Private Limited 14. Infosys Limited 15. Thirdware Solutions Limited 16. Cybage Software Private Limited 3 IT(TP)A No.2498/Bang/2019. M/s.EIT Services India Private Limited.

Draft assessment order was passed on receipt of the TPO’s order passed u/s 92CA of the I.T.Act. Against the draft assessment order, the assessee filed objections before the DRP. The DRP confirmed the comparable list considered by the TPO except for Thirdware Solutions Limited. Instead of Thirdware Solutions Limited, the DRP included Sasken Communication Technologies Limited. Subsequent to the DRP’s order, final assessment order was passed.

The assessee being aggrieved, has filed this appeal before the Tribunal. The limited prayer of the assessee, insofar as the software development services is that the assessee wants exclusion of four comparables selected by the TPO and affirmed by the DRP and inclusion of three comparables. The details of the companies sought to be excluded are (i) Larsen & Toubro Infotech Limited, (ii) Infobeans Technologies Limited, (iii) Persistent Systems Limited, and (iv) Infosys Limited. The details of the companies sought to be included by the assessee in the comparable list are (i) I2T2 India Limited, (ii) Evoke Technologies Limited, and (iii) Melstar Information Technologies Limited.

We have heard rival submissions and perused the material on record. Before us the Ld A.R placed his reliance on the order dated 28.2.2020 passed by the coordinate bench in the case of M/s. Yahoo Software Development India Pvt.

We notice that the coordinate bench in the case of Yahoo Software Development India Pvt. Ltd. (supra) has excluded following 3 companies holding them as not good comparable companies. (A) Persistent Systems Ltd:-

This argument has been addressed by the DRP in its order as follows:- “4.4.9 We note that the approach of the TPO in treatment of related party transaction into two sets, are for revenue transactions and other for expense transaction is logical and correct. We also note that the RPT filter was adopted by the TPO was with the above conditions and has adopted consistently. Hence, we do not find any infirmity the approach. Hence, we reject the assessee's plea. We hold that onsite expenses do not adversely affect comparability and hence, such plea is rejected.” 35.Further, the assessee had also raised plea with regard to onsite revenue filter by pointing out that onsite revenue is substantial and therefore this company should not be regarded as a comparable company with a company which does not have any onsite revenue. In this regard, the ld. counsel for the assessee placed reliance on the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. v. DCIT, ITA No.1054/Bang/2011 for AY 2007-08 dated 23.11.2012 wherein this Tribunal took the following view:- “64. The next objection of the Assessee is that when the most appropriate method selected for determining ALP is the TNMM there is no reason as to why one should look at price difference in offshore software development and onsite software development. It is no doubt true that in TNMM it is only the margins in an uncontrolled transaction that is tested with reference to the controlled transaction but it is not possible to ignore the fact that pricing will have an effect on the margins obtained in a transaction. The argument that if pricing structure were to be considered as criteria, then it will have to be seen as to what is the pricing structure of all the comparable for various projects cannot be accepted because the TPO has not chosen any other

The next objection of the Assessee is with regard to Assets employed. The companies, which predominantly generate revenues from onsite activity, do not have significant assets as most of the work is carried on the site of customer outside India. The argument that the TPO has himself observed that software service providers do not require much assets cannot be basis to accept the Assessee’s plea. Those observations are made by the TPO in the context of application of turnover filter and have been quoted out of context by the Assessee.

The next argument of the Assessee is that TPO has held that margins are lower in onsite software services and that margin is not a criteria to select or reject a comparable under Rule I0B(2) of the I.T. Rules. We are of the view that this argument again ignores the fact that the approach of the TPO has been to highlight the fact that there can be no functional comparability, if the assets employed and risks assumed are taken into consideration. It is in that context the TPO has referred to the margins.

The companies who generate more than 75% of the export revenues from onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since, the entire operations of the tax payer are taking place offshore i.e. in India; it is but natural that it should be compared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model. As already stated the Assessee has limited its analysis only to functions but not to the assets, risks as well as prevailing market conditions in which both the buyer and seller of services located. Hence, the companies in which more than 75% of their export revenues come from onsite operations are to be excluded from the comparability study as they are not functioning in similar economic circumstances to that of the tax payer. Hence, it is held that this filter is appropriately applied by the TPO.

Admittedly the onsite revenue in the case of the following comparable companies identified by the Assessee was more than 75% of its export revenues viz., a) Visu International Ltd. b) Maars Software International Ltd. c) Akshay Software Technologies Ltd. d) VJIL Consulting Ltd. e) Synfosys Business Solutions Ltd. The above companies were therefore rightly not considered as comparable by the TPO. We hold accordingly.”

It is seen that the TPO in coming to the conclusion that the onsite revenue filter is not applicable has placed reliance on the decision of the ITAT Mumbai Bench in 7 IT(TP)A No.2498/Bang/2019. M/s.EIT Services India Private Limited. the case of Capegemini as quoted in para 16 in para 14 of the TPO’s order, but that decision does not deal with a case of onsite revenue filter and the decision was rendered on the facts of its own case.

On the issue of RPT filter, we notice that the TPO in para 16 has accepted that the RPT filter should be @ 25%. In the case of Persistent Systems Ltd., the RPT is at 31.32% as extracted in the earlier part of this order and therefore this company should be excluded by application of RPT filter. In view of the above, we do not wish to go into other grounds on which this company is sought to be excluded viz., that it is a product company and there is no segmental data between product and services segment, presence of onsite activity and the impact of extra-ordinary event of acquisition during the relevant previous year. Therefore, this company is directed to be excluded from the list of comparable company. (B) LARSEN & TOUBRO INFOTECH LTD:- 38. As far as L&T Infotech Ltd. is concerned, the ld. counsel for the assessee brought to our notice the decision of ITAT Delhi Bench in the case of Saxo India Pvt. Ltd. v. ACIT, for AY 2011-12, order dated 5.2.2016, wherein the Tribunal took note of the fact that this company was also trading in software and owned insignificant intangible assets. The company was excluded from the list of comparable companies with reference to SWD services provider such as the assessee. The ld. Counsel pointed out that though this decision was rendered with reference to AY 2011-12, the same reasoning would apply to AY 2015-16 also and in this regard, he drew our attention to page 696 of assessee’s PB, which gives the details of the revenue generated by this company without any segmental break-up. Our attention was also drawn to page 682 of PB which shows that there is substantial onsite revenue activity as well as cost incurred on onsite software development. We notice from page 676 of assessee’s PB that this company as part of its operating profit in Schedule-O of profit & loss account contains expenditure for ‘cost of bought out items for resale’ and this is a significant part of the operating expenditure. When we see the revenue in Schedule M of the profit & loss account, there is no break-up of the revenue with regard to software services and software product. In our opinion, this distinction is enough to exclude this company from the list of comparable companies as held by the Hon’ble Delhi ITAT in the case of Saxo India Pvt. Ltd. (supra) which decision was also confirmed by the Hon’ble Delhi High Court (C) INFOSYS LTD.

The next company which the assessee seeks to exclude is Infosys Ltd. As far as this company is concerned, it is seen that the following are the functional dissimilarities brought to our notice:- “Functionally dissimilar - owns intellectual properties, incurs significant R&D costs & onsite activity. - Engaged in diversified business activities. - Involved in development of software products in addition to software services. - Owns intellectual property rights. - Incurs significant research and development costs.

We notice that M/s. Infobeans Technologies Ltd. have been directed to be excluded by the coordinate bench in the case of Metric Stream Infotech (India) Pvt. Ltd. with the following observations: “14.3. Infobeans Technologies Ltd., Ld.AR submitted that this comparable was selected by authorities below as it passes all filters, based upon response received from this company under section 133 (6) of the act. He submitted that this observation is contrary to the facts and figures appearing in annual report. Referring to page 1015 Ld.ARsubmitted that this company is operating at CMMI Level 3 and-is a software service company specialising in business application development for web and mobile. In the company overview this company has been stated to be primarily engaged in providing custom developed services to offshore clients and it provides software engineering services primarily in custom application development, content management systems, enterprise mobility, Big Data analytics. Ld.AR thus submitted that this company is functionally not at all similar with a captive service provider like assessee that this providing Ltd services to its associated enterprises. 14.3.1.0n the contrary Ld. CIT DR, referring observations of DRP in para 3.6.1 submitted that the activities of company fall under the gamut of software development has categorised by company itself and that the information obtained under section 133 (6) is sufficient enough to come to such conclusions. However he submitted that this comparable also may be sent back to learnt AO/TPO for verification.

Following the above said decisions rendered by co- ordinate benches, we direct exclusion of Persistent Systems Ltd., Larsen & Toubro Infotech Ltd. and Infosys Ltd. & Infobeans Technologies Ltd. from the final list of comparables.

With regard to the prayer of the assessee to include 3 comparable companies, we notice that the coordinate bench in the case of Goldman Sachs Services Pvt. Ltd. (IT(TP)A No.2355/Bang/2019 dated 15.6.2020) has restored all the 3 companies to the file of the A.O./TPO for examining the claim of assessee with the following directions. 10. The learned Authorized Representative argued for inclusion of three comparables (i) I2T2 India Limited, (ii)Evoke Technologies Limited and (iii)Melstar Information Technologies Limited and made submissions on comparables and substantiated with chart and Paper Book. (i) I2T2 India Limited – The LdAr submitted that the comparable company margin is 3.67%.The comparable has to be included as the RPT details are available in the Annual Report and referred to page no 2385 of the Paper Book. We are of the opinion that the Assessing Officer could have called for the information under Section 133(6) of the Act to confirm the details in the proceedings. Accordingly, we restore this comparable to the file of the TPO/A.O. for examination and verification of facts. (ii) Evoke Technologies Limited – has margin of 0.53%. The LdAr submitted that the company is functionally comparable and passes all the TPO’s filters. The branch is a sub-set of an entity and the results of the branch are 10 IT(TP)A No.2498/Bang/2019. M/s.EIT Services India Private Limited. included in theaudited financial statements of the entity and qualify export revenue, as the company is in the business of software development services and implement services. The LdAr has supported his arguments with the Paper Book at page no 2452 and Profit and Loss Account. Whereas the DRP has commented that unaudited accounts cannot be relied. The learned Authorized Representative relied on the decision of Nokia Seimens Networks India (P) Ltd. Vs. ACIT 70 taxmann.com 236 (Del), with observations at page 5 as under :

The learned Authorised Representative relied on the decision of CIT Vs. Goldman Sachs (2016) 69 Taxmann.com 19 and Star International Limited Vs. DCIT (2019) 112 Taxman.com 258. In the case of CIT Vs. Goldman Sachs IndiaSecurities (P) Limited (Supra) in paras 4(a) and 4(b) the observations are read as under :

The assessee has submitted that theclaim of working capital adjustment was rejected by TPO and Ld DRP. He submitted that the Tribunal is consistently holding that the working capital adjustment is permissible and in many cases; the TPO has also allowed the same. Accordingly, he submitted that the assessee may be granted working capital adjustment.

We find merit in the submissions made by Ld A.R. Accordingly, we restore this issue to the file of AO/TPO with the direction to grant working capital adjustment.

In the additional ground, the assessee is contending that the transfer pricing adjustment should be restricted to the value of international transactions only. There is merit in the said contention as the whole purpose of transfer pricing exercise is to determine the Arms length price of international transactions. Accordingly we direct the AO/TPO to restrict the transfer pricing adjustment to the value of international transactions only.

All other grounds have not been pressed by Ld A.R and accordingly, all of them are dismissed as Not Pressed.

In the result, the appeal filed by the assessee is treated as partly allowed.