M/S. MOTHERSON SUMI INFOTECH & DESIGNS LTD.,NEW DELHI vs. DCIT, NEW DELHI

./2015 (Assessment Year : 2010-11) M/s Motherson Sumi Infotech Vs. DCIT & Designs Limited Circle-17(1), Room No. 317-B F-7, B-1, Mohan Cooperative C.R.Building, I.P.Estate Industrial Estate, Mothura Road New Delhi- 110044 New Delhi-110002 (PAN : AACCM3199B) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Ravi Sharma, Sh. Anubhav Rastogi, Adv. REVENUE BY : Shri Surendra Pal, CIT-DR Date of Hearing : 25.08.2020 Date of Order : 31.08.2020

O R D E R PER KULDIP SINGH, JUDICIAL MEMBER The Appellant, M/s. Motherson Sumi Infotech & Designs Limited (MIND) (hereinafter referred to as ‘the Taxpayer’) by filing the present appeal sought to set aside the impugned order dated 14.11.2014 passed by the Assessing Officer (AO) in consonance with the orders passed by the ld. DRP/TPO under section 254/143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2010-11 on the grounds inter alia that :-

“That on the facts and circumstances of the case, and in law; 1. The assessment order passed by the Learned Assessing Officer (‘Ld. AO’) pursuant to the directions of Learned Dispute Resolution Panel (‘Ld. DRP’) is bad in law and void ab-initio.

2. The Ld. AO (following the directions of the Ld. DRP), erred both on facts and in law in confirming the addition of Rs. 3,24,37,885/- to the income of the Appellant proposed by the Transfer Pricing Officer (‘Ld. TPO’) by holding that its international transactions pertaining to provision of software development services do not satisfy the arm’s length principle envisaged under the Income- tax Act, 1961 (’the Act') and in doing so, the Ld. DRP and the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO’s action of: 2.1 not appreciating that none of the conditions set out in section 920(3) of the Act are satisfied in the present case; 2.2 ignoring the fact that the appellant is entitled to tax holiday under section 10B of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; 2.3 disregarding the arm’s length price (‘ALP’), as determined by the Appellant in the Transfer Pricing (‘TP’) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (‘Rules’) as well as fresh search; and in particular modifying/ rejecting the filters applied by the Appellant; 2.4 disregarding multiple year/ prior years’ data as used by the Appellant in the TP documentation and holding that current year [i.e. Financial Year (‘FT) 2009-10] data for comparable companies should be used;

2.5 rejecting comparability analysis undertaken by the Appellant in the TP documentation/ fresh search and conducting a fresh comparability analysis based on application of additional/ revised filters, or disregarding Appellant’s filters in determining the ALP for the international transactions; 2.6 including companies having high margin / volatile operating profit margins in the final comparables’ set for benchmarking a low risk service provider such as the Appellant; 2.7 including certain companies in the final set of comparables that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 2.8 resorting to arbitrary rejection of low-profit/ loss making companies and companies with diminished revenues based on erroneous and inconsistent reasons; 2.9 excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 2.10 by committing a number of factual /computational errors in selection/ rejection of proposed comparables and/ or in the operating profit margins of the comparables; 2.11 ignoring the business/ commercial reality that the Appellant undertakes limited business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact; 2.12 by denying the benefit of a working capital adjustment while computing the ALP and thereby disregarding the law, international guidance and judicial precedents in this regard; 2.13 by making the TP addition to the entire value of transactions entered into by the Appellant in its export segment and not only to the value of international transactions entered into by the Appellant (i.e. proportionate adjustments) and ignoring established jurisprudence in this regard; 2.14 disregarding judicial pronouncements in India in undertaking the TP adjustment; 3. On a without prejudice basis to the other grounds, the Ld. AO / DRP has erred in facts and in law, in ignoring the alternative benchmarking analysis conducted by the Appellant considering Internal Comparable Uncontrolled Price (‘CUP’) method to determine the arm’s length price of the software development services provided by the Appellant; 4. On a without prejudice basis to the other grounds, the Appellant craves to submit alternative benchmarking analysis considering Internal Transactional Net Margin Method (‘TNMM’) to determine the arm’s length price of the software development services provided by the Appellant; 5. The Ld. DRP erred in disregarding the detailed arguments/ submissions put forth by the Appellant during the course of the DRP/ assessment proceedings while passing its direction under section 144C of the Act; 6. The Ld. AO has grossly erred by proposing to compute interest under section 234A, 234B, 234C and 234D of the Act; 7. The Ld. AO has grossly erred in initiating penalty under section 27l(l)(c) of the Act mechanically and without recording any satisfaction for its initiation. The above grounds are without prejudice to each other. The Appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing.”

Customised business solutions are provided in the areas of ERP, Bar-coding solutions, supply chain management (SCM), Business Intelligence, Workflow automation, Device Interface solutions and Network Management. MIND has been catering to manufacturing automotive, banking industries and the government sector.

3. During year under assessment, taxpayer entered into International Transaction with its associated enterprises (AE) reported in Form No. 3 CEB as under :-

S. No. International Transaction Amount (In Rs.) 1. Services rendered 28,25,40,187 2. Services received 14,92,933

8. Undisputedly, TNMM with OP/TC as the Profit Level Indicator (PLI) as Most Appropriated Method (MAM) used by the taxpayer to benchmark its international transaction qua Software Development Services has been accepted by the Ld. TPO / DRP.

Ld. TPO / DRP proposed / confirmed the adjustment of Rs. 3,24,37,885/- after applying TNMM with OP/TC as the most appropriated method chosen 19 comparables with average of 24.40%. Final comparables are as under :-

Sl. No. Name of the Company OP/TC 1. Akshay Software Technologies Ltd. -1.07% 2. CTIL Ltd. 18.11% 3. E-infochips 71.38% 4. Evoke Tech 18.56% 5. E-zest Solutions 18.66% 6. Infinite Data System Private 88.25% Limited 7. Infosys Limited 45.47% 8. Larsen & Toubro Infotech Ltd. 19.06% 9. Mindtree Ltd. (segment) 13.92% 10. Persistent System Limited 29.02% 11. Persistent Systems & Solutions Ltd. 11.37% 12. Quintegra Solutions Ltd. -8.20% 13. R S Software (India) Ltd. 10.18% 14. Sasken Communication 17.54% Technologies Ltd.

15. Sonata Software 35.87% 16. Tata Elxsi (Segment) 20.29% 17. Thinksoft Global Services Ltd. 17.35% 18. Zylog Systems Limited 25.07% 19. LGS Global Limited 12.78% AVERAGE 24.40%

Operational Cost 28,43,98,071 Arm’s Length Price at a Margin of 35,37,91,200 24.40% Price Received 32,13,53,315 Proposed Adjustment u/s 92CA 3,24,37,885 10. Ld. AR for the taxpayer challenging the impugned order passed by Ld. TPO / DRP contended that now the only dispute left to be decided is arbitrary selection of some comparables by TPO / DRP and has sought exclusion of 7 comparables namely E- Infochips Bangalore Ltd. ; E-Zest Solutions Ltd. ; Infinite Data System Private Limited; Infosys Limited; Sasken Communication Technologies Ltd.; Sonata Software Ltd. and Zylog Systems Ltd. We would discuss the suitability of aforesaid comparables vis-à-vis taxpayer, which a routine software development service provider working on cost plus model, one by one.

E-infochips Bangalore Ltd.

E-Zest Solutions Ltd.

Infinite Data System Private Limited (Infinite) on ground of functional dissimilarity and non-availability of segmental financial. Perusal of the Annual report of Infinite Data System Pvt. Ltd. available at page 60 and 64 of the ARC paper book goes to prove that Infinite is primarily a service company engaged in technical consulting, design & development of software, maintenance, systems integration, implementation, testing and infrastructure management services, hence, it is not possible to give the quantitative details of sales and certain information as required under paragraphs 3, 4C and 4D of Part II of Schedule VI to the Companies Act, 1956”. Since its segmental reporting shows that its revenue primarily come from technical support and infrastructure management services but no segmented data is available.

15. Furthermore, it is brought on record by the taxpayer that the profitability of Infinite is increased by 1496% as compared to the preceding year despite the fact that for computation of OP/OC, foreign exchange loss has been excluded from OC. So, we are of the considered view that super-normal profit to the tune of 1496% certainly affects OP/OC but, in this case, even foreign exchange loss has been excluded from the OC by the TPO and as such, it makes the Infinite not a valid comparable vis-à-vis the taxpayer. So, we are of the considered view that because of functional dissimilarity of Infinite vis-à-vis the taxpayer and earning super-normal profit by 1496% as compared to preceding years makes Infinite as invalid comparable. So, we direct the AO/TPO to exclude Infinite from the final set of comparables.

Infosys Limited (Infosys)

“24. The Annual Report of this company is placed at pages 346 to 615 of the paper book. Infosys Technologies Limited has substantial intangible assets and is a giant company with a substantial brand value. Infosys owns products/IPR. The turnover of this company is approximately 700 times than the turnover of the appellant company and has substantial investment in intangibles. Being a giant company, this company has been excluded in the case of Agnity India Technologies Pvt Limited by the Hon'ble High Court of Delhi in ITA No. 1204/2011.”

Sasken Communication Technologies Ltd. 27. Taxpayer sought exclusion of Sasken on ground of functional dissimilarity as well as on ground of extraordinary circumstances.

Sasken delivers end-to-end solutions that enable richer content delivery on next generation networks”. Annual report also shows that Sasken has undertaken business restructuring during the year under assessment by making investment in the subsidiaries and joint ventures.

“21. On hearing the rival contentions, we are of the view that first step which has to be seen is functional comparability. The concerns are providing variety of services and application of service filter of 75% would come in the next rung of comparability. M/s Sasken Communication Technologies Limited was developing mobile enterprise applications and solutions across various mobile platforms including iOS, Android, Blackberry, RIM and Symbiam platform; which are clearly mentioned in the annual report of the said concern. The assessee on the other hand was only providing Software Development Services to its AE. Hence the concern Sasken Communication Technologies Limited is not functionally comparables to the assessee and same needs to be excluded from the final list of comparable. Accordingly, we hold so.”

32. Taxpayer sought to exclude Zylog on ground of functional dissimilarity as well as on ground of business restructuring. Perusal of annual report at page 433 shows that Zylog has income from software development services and products. Annual report at page 412 shows that “Zylog is making a software solution from concept to reality is a complex and arduous process. At ZSL. We continue to offer value to our customers and market place through value added Research & Development, Product Engineering, and end-to- end Product Lifecycle Management (PLM) solutions from conceptualization, prototyping, development, integration with Enterprise applications, Migration, Porting, Performance Turning, Application Upgrade, testing and maintenance”.

“31. Perusal of the annual report available at page 457 goes to prove that Zylog has acquired directly M/s. Matrix Primus Partners Inc. USA, M/s. Algorithm Solutions Private Limited, India and acquired M/s. Brainhunters Inc., Canada, through our WOS Zylog Systems (Canada) Ltd., during the Financial years 2009-10 relevant for year under assessment in case of the tax payer.

Grant of working capital adjustment 35. Ld. TPO / DRP have denied the benefit of working capital adjustment while computing the ALP on the ground that the assessee has not demonstrated that there is a difference in levels of working capital employed by the taxpayers vis-à-vis comparables.

TP study referred to by the taxpayer for benchmarking its International Transaction shows that the complete detail has been provided to grant working capital adjustment. So, in view of the matter, we are of the considered view that the matter is required to be reconsidered by the TPO by providing opportunity of being heard to the assessee. Moreover working capital adjustment has been granted to the taxpayer in the earlier years and since then there is no change in the business model of the assessee. So, this issue is remitted back to the Ld. TPO.