M/S. FISERV INDIA PVT. LTD.,NEW DELHI vs. ACIT, NEW DELHI

Briefly stated facts of the case are that the assessee company is incorporated in India under the Companies Act, 1956 on 31/05/2002 as a wholly-owned subsidiary of “Results International System INC”, USA, which in turn is 100% subsidiary of “Fiserv Inc, USA”. The company is engaged in the business of providing software development and maintenance services mainly to its Associated Enterprises (AEs) through its two units located in Software Technology Park Scheme (STPI) at Noida and Pune. For the year under consideration, the assessee filed its return of income on 30/11/2011, declaring total income of ₹ 1,90,27,743/- after claiming deduction under section 10A of the Income-tax Act, 1961 (in short ‘the Act’). The return filed by the assessee was selected for scrutiny assessment. The Assessing Officer issued statutory notices, which were duly complied. During the scrutiny proceedings, the Assessing Officer observed International Transactions carried out by the assessee with its Associated Enterprises. The learned AO referred the matter of determination of the arm’s-length price of the said International Transactions to the learned Transfer Pricing Officer (TPO). 2.1 The learned TPO observed that as per the service agreement between the assessee and its Associated Enterprises, it has been compensated on cost +15%. The International transactions carried out by the assessee are reproduced as under: Sl. No. Name of transaction Method selected Arm’s length price as per taxpayer (i) Software Development TNMM Rs.2,790,704,920 Services (ii) Reimbursement of N.A. Rs.62,696,974 expenses 2.2 The assessee has used Transactional Net Margin Method (TNMM) for determining arm’s-length price of the International Transaction and Operation Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The assessee selected a set of 13 Comparable companies with average margin of 13.66% using multiple year data. The assessee worked out its own margin at 16.01%. According to the assessee, the PLI of the assessee being higher than the average PLI of the comparable companies, the International Transaction carried out by the assessee was at arm’s-length. The learned TPO, however, approved three companies out of the 13 companies selected by the assessee and rejected the balance on the ground that same failed various filters applied for short listing comparable companies. The learned TPO carried out his own search of the comparable companies and added 16 more companies to the set of the comparable companies. The average PLI of the 19 companies was worked out to 22.68% and after applying the margin over the operational cost, the learned TPO in his order dated 16/01/2015 proposed an adjustment of ₹ 20,29,99,837/- to the value of the International Transaction. The Assessing Officer issued draft assessment order on 27/02/2015, after incorporating transfer pricing adjustment of ₹ 20,29,99,837/- and other addition for disallowance of credit card expenses. Aggrieved with the additions proposed by the Assessing Officer, the assessee filed objections before the Learned DRP. 2.3 The learned DRP after considering objection of the assessee issued following directions:

Before us, both the parties have appeared through videoconferencing. The assessee filed paper-books and other documents electronically. Before us, the learned Counsel of the assessee submitted that assessee is interested only in challenging the ground No. 8 of the appeal wherein 8 companies included by the learned TPO in the set of the comparables are sought to be excluded. He further submitted that even if the companies, namely, E-Info chips Ltd., E-Zest Solutions Ltd., Infosys Ltd. and Wipro Technology Services Ltd. are excluded from the final set of the comparable, the average PLI of the comparables companies will be in the range of PLI of the assessee and no transfer pricing adjustment might be required.

We have heard both the parties on the issue of inclusion/exclusion of the eight comparables. Before we proceed to adjudicate inclusion/exclusion of companies from the set of the comparables, it is most relevant to summarize the Functions, Assets and Risk (FAR) analysis of the assessee i.e. profit of the assessee, which the assessee has reported in its transfer pricing study filed before the learned TPO. Profile of the Assessee: 5.(i) In schedule-G to the profit and loss account on page 12 of the paper-book (Volume-I) revenue of Rs.271,60,67,008/- has been shown from “software services”.

In view of the above details provided about the assessee in the transfer pricing study, we can characterize the assessee as engaged in providing “software development and IT enabled services” or say engaged in providing “software services”.

In background of the profile of the assesse, now we proceed to adjudicate inclusion/exclusion of the companies as under:

The Ld. Counsel objected inclusion of the company on two grounds. Firstly, absence of segment profitability and secondly, the company failed to meet the filter of service revenue more than 75%. The Learned Counsel referred to page 155 of APB: volume-I (page 41 of Annual Report of the company) and submitted that the company in addition to development and maintenance of the computer software, was engaged in software development consulting and in manufacturing of ‘EVM’ and ‘VDB’ electronic board (hardware division). He also referred to other pages of the annual report to emphasise that the company was engaged in purchase and sale of the hardware. Further, he referred that the learned TPO has applied filter of service income more than 75% for selection of the comparable companies, but the instant company has shown revenue from software development amounting to ₹ 19,21,09,661/- out of the total revenue of ₹ 26,03,84,251/-, which constitute 73.77% and thus, the company fails the filter applied by the learned TPO. The Learned Counsel submitted that the learned DRP has combined revenue from the other services to hold that the company satisfy the filter of service income more than 75%. In view of the above arguments, the Learned Counsel sought to exclude this company from final set of comparables. 8.1 The Learned DR, on the other hand, relied on the order of the lower authorities and submitted that the company is primarily in software development which is evident from various pages of the annual report of the company. He referred to page 36 of the annual report (page 150 of the paper-book Volume-1) indicating information about the primary segment, which manifest that the company is primarily engaged in software development and IT enabled services. On the issue of hardware division, he submitted that revenue from the hardware division is less than 15% and therefore the assessee satisfy the filter of service income applied by the learned TPO. 8.2 We have heard rival submission of the parties. On perusal of the order of the learned DRP we find that learned DRP has upheld the filter of the rejection of the companies with service income less than 75%. The Ld DRP has observed that this filter has been upheld in the case of the assessee by the Tribunal in assessment year 2010-11 in order dated 26/06/2015. 8.3 Further, the learned DRP has reproduced a table of income from software services and computer hardware and according to which, revenue from software services constitute 85% of the total receipt of Rs.26,03,84,251/- (i.e. Rs.22,11,35,689 + 3,92,48,562). For ready reference, said table is reproduced as under: 01/04/2010 to 31/03/2011 Details of principal products and services. Unless otherwise 1. 2. specified, all monetary values are in INR ITC number of product N.A. N.A. Description of product SOFTWARE SERVICES Computer Hardware` of services Unit of measurement of N.A. N.A. principal product or services Turnover of principal 22,11,35,689 3,92,48,562 product or services 8.4 The objection of the Learned Counsel is that Learned DRP considered software services other than the software development for arriving at figure of 85%, whereas the assessee is engaged in providing purely software development services. The learned TPO has extracted schedule of the income having detail of revenue in the order. For ready reference said table is reproduced as under: 01/04/2010 to 01/04/2009 to 31/03/2011 31/03/2010 Operating revenue net (abstract) Operating revenue gross(abstract) Revenue service gross (abstract) Revenue information technology services (abstract) Revenue software development 19,21,09,661 10,54,19,554 Revenue hardware maintenance 3,92,48,562 2,32,44,559 Revenue information technology 2,90,26,023 42,60,344

The Ld. TPO included the company into set of comparables on the ground that the company is primarily engaged in software development services. He referred to information pursuant to the schedule VI of the Companies Act, 1956 and observed that information related to stock was not applicable in the case of the assessee. Before the learned DRP the assessee objected inclusion of the company on the ground of functional dissimilarity, dealing in software product conceptualization, research and development and development of the software products. The learned DRP referred to the annual report of the company to highlight that software product development included product design and development and product maintenance and support etc. The learned DRP observed from the annual report that generic name of the principal product of the company was computer software development. 9.1 Before us the Learned Counsel of the assessee reiterated the submissions made before the learned DRP and submitted that company is an SEI-CMMi Level -3 & ISO 9001-2008 certified product engineering and software development company. He submitted that company conceptualize its software as per the requirement of clients or its own as against the assessee who is purely engaged in software development on the instruction of its Associated Enterprises and no function of ‘conceptualization’ are being carried out by the assessee. The Learned Counsel also referred to profit and loss account of the company and submitted that there is increase in the stock of ₹ 1,26,03,745/- during the year, which indicate that company was dealing in stock and no separate segment of trading is available in annual accounts of the company and therefore the company need to be excluded on this ground also. 9.2 The learned DR, on the other hand, relied on the authorities below. He referred to functional analysis of the assessee available on page 54 of the paper-book and submitted that assessee is engaged in project planning, which include development and maintenance of the project plan for the client. He also emphasized the “analysis” phase of the function of the assessee, under which documents are sent to the client for approval. He submitted that even the acceptance test is done under approval from the client and the associated enterprises. According to him, in view of the functions carried out by the assessee, the contention of the Learned Counsel that software development is not conceptualized by the assessee, is not correct. 9.3 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. As far as issue of functional dissimilarity on the ground of conceptualization of the software is concerned, we do not agree with the argument of the learned Counsel of the assessee. On page 55 of the paper book, the assessee has provided detail of various phases of the activities under the functions of the software development as under: “Fiserv India renders software development and maintenance services to Associated Enterprises on project basis. The projects entail requirement study, analysis and design of the system, coding and testing of the product.

Before the learned TPO, the assessee objected inclusion of this company on the ground that the company was engaged in developing products, income from sale of the software products, sales being brand driven, and high scale of operations/turnover. The Learned TPO rejected all these arguments of the assessee. According to him, the company is primarily Software Development company, sale of products being miniscule (4.98%), no impact of the brand of the profitability, and no impact of the turnover on the profitability. According to him business model using software development sector in India, the operational size is not having any impact on the profit margin as for providing software development services, “teams of software employees” are formed, which remain same in all the companies and only difference is that in case of the giant companies the teams will be more than the taxpayer, for rendering the Software Development services. The learned DRP upheld the finding of the Learned TPO.

Before the learned TPO, the assessee sought to exclude this company mainly on the ground that company is not functionally comparable as it was engaged in software development as well as product sales during the relevant year. The learned TPO however rejected this contention of the assessee on the ground that 93.56% of the revenue of the company came from export of the software development only. He also rejected the contention of the assessee of presence of the intangibles, holding that ownership of the few proprietary software products and intangibles are not affecting the function of the company. He also rejected the contention of the assessee of acquisition of the transfer agency business and intangible as according to him those are not affecting the function of the company. The argument of the high turnover of the company was also rejected by the Learned TPO. The learned DRP upheld the finding of the learned TPO. 11.1 Before us, the learned Counsel of the assessee referred to profit and loss account of the assessee reproduced by the learned TPO on page 36 of his order and submitted that revenue has been shown from software development services and products and no separate segment for the software development services is available. He also referred to page 528 of the paper-book volume- 2 which provides the related party schedule and under which nature of that first transaction is sale of the service/products. He referred to page 520 of the paper-book-2 and submitted that segmental information is available in respect of the industries and not on the services. He referred to page 470 of the paper-book volume 2 and submitted that the company is engaged in development and strengthening of the brand and thus it should be excluded on this ground also. 11.2 The learned DR, on the other hand, relied on the order of the lower authorities and submitted that argument of strengthening of the brand does not stand on its legs as the AE of the assessee i.e. Fiser USA is having very big brand value and therefore it also fetches higher margins for rendering services to its clients. 11.3 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. On perusal of the profit and loss account of the company reproduced by the learned TPO on page 36 of his order, it is evident that the revenue of Rs.2331,81,22,096/- has been shown from software development services and products and there is no separate segment of the software development services available in the annual report of the company. In such a huge turnover, the composition of revenue from the software development services and from sale of the software products is not separately available in the annual report. In such circumstances, the company cannot be termed as functionally similar at entity level with the assessee, who was engaged in providing software services to its associated enterprises. In view of the functional dissimilarity, we direct the Learned AO/TPO to exclude this company from the final set of the comparables.

The assessee objected inclusion of the company into set of the comparables on the ground of company engaged in development of the new product for which it undertakes research and development activity, unlike the assessee who is a captive service provider. The learned TPO and the learned DRP rejected the contention of the assessee and held that the whole of the revenue of the company is from export of the software development services.

The learned TPO held the company as functionally similar and rejected the objection of the assessee of the different business model, intangible and intellectual property etc. Before the learned DRP, the assessee sought exclusion of the company on the ground of functional difference, significantly high turnover and significant related party transactions (> 10%). The learned DRP observed that Tribunal in the case of the assessee for assessment year 2010-11 has excluded the company on the ground of high turnover. But the Learned DRP referred to the decision of the Hon’ble Delhi High Court in the case of Chrys Capital Investment Advisors (India) Ltd (supra) and Rampgreen Solutions Pvt. Ltd (supra) and held that high profit only cannot be a ground for exclusion of the company as a comparable. The learned DRP observed that revenue from licensing royalty was merely 5% and this company is primarily a software service company providing development services as per the requirement of its clients and, therefore, it was functionally comparable to the assessee. 13.1 Before us, the Learned Counsel of the assessee submitted that the company has been rejected by the Hon’ble Delhi High Court and the Tribunal in the case of the assessee for assessment year 2010-11. The learned Counsel further referred to page 553 of the paper book and submitted that the company was focused on software product development. He also referred to page 571 of the paper book and submitted that company has incurred research and development expenditure during the year. He also referred to pay 656 of the paper book to demonstrate that the company has earned revenue from sale of the software services and the products. In view of the arguments, he submitted to exclude this company from the set of the comparables. 13.2 The learned DR on the other hand relied on the order of the lower authorities. 13.3 We have heard rival submission of the parties and perused the relevant material on record. We find that in assessment year 2010-11, the company was rejected by the Tribunal on the ground of high turnover, but in view of the decision of the Hon’ble Delhi High Court cited by the Learned DRP in their order, we agree with the finding of the learned DRP that high turnover cannot be a ground for rejection of the company as comparable if it is otherwise functionally similar to the taxpayer. Further, Hon’ble Delhi High Court in the assessment year 2010-11 rejected the company mainly on the ground that published data was not available in the case of the company. But in the year under consideration there are no such circumstances and the assessee has filed annual report on page 541 to 732 of the paper- book. On perusal of page 656 of the paper-book, we find that revenue from sale of software services and product has been shown that ₹ 6,101.27 million. There is no separate bifurcation of the revenue from the software services and therefore in absence of segmental data of software services, the company cannot be included as a comparable at entity level. Accordingly, on the ground of the functional dissimilarity of the entity level, we direct the Learned AO/TPO to exclude the company from the final set of the comparables.

The assessee objected inclusion of this comparable on the ground of the extraordinary event and lack of information of software development segment. The learned TPO referred to annual report of the company and held that company was engaged in activities of providing software related support services, primarily information technology software solutions/maintenance and technology infrastructure support services, which are similar to the services rendered by the assessee to its Associated Enterprises. The learned TPO did not give his finding on the objection of the assessee that transaction of rendering services by the company to the Citi Group falls under the deemed international transaction as per section 92B(2) of the Act. The learned DRP held the company as functionally similar to the assessee and rejected the contention of huge turnover and supernormal profit, but gave no finding on the objection of the assessee related to deemed international transaction u/s 92B(2) of the Act. 14.1 Before us, the learned Counsel of the assessee has challenged inclusion of the company on the ground of the no segmental result for the software development services as well as on the ground of the controlled/tainted transactions. He referred to page 954 of the paper book volume 3 and submitted that company is engaged in providing software related support services, primarily information technology software solutions/maintenance and technology infrastructure support services to Citigroup entities, which has been considered as one segment and there are no separate reportable segment as required under the accounting standard 17 on ‘segment reporting’. On the issue of the controlled/tainted transaction, the Learned Counsel referred to page 945 of the paper-book volume 3 and submitted that this company was incorporated as “Citi Technology Services Ltd.” a subsidiary of the Citigroup Banking Corporation and under a share purchase agreement on 21/01/2009, all the shares of the company were purchased by the Wipro Ltd, which is the holding company of the Wipro technology services. He submitted that in following decision of the Tribunal, the company has been rejected as a comparable in view of the transaction of the company with the Citigroup held as tainted transaction: i. Pr. CIT Vs. Cashedge India Pvt. Ltd., ITA 279/2016, page 3 para 6 ii. Element K India Pvt. Ltd. Vs. ITO (AY 2011-12) pages 13 to 16 –para 3 iii. NaviSite India Pvt. Ltd. Vs. ITO (AY 2011-12) ITA No. 1054/Del/2016, paged 12 to 15- para 12 to 13.5 iv. Aircom International (India) Pvt. Ltd. Vs. DCIT (AY 2011-12) ITA No.222/Del./2016- pages 7 to12 para 11 to 16 v. Microsoft India (R&D) Pvt. Ltd. Vs. DCIT (AY 2011-12) ITA No. 691/Del./2016 pages 47 to 51 – para 45 to 47 vi. ST- Ericcson India Pvt. Ltd. Vs. ACIT (AY 2011-12) ITA No. 6247/Del./2015- pages 28 to 30 para 46 to 47 vii. Bechtel India Pvt. Ltd. vs. DCIT (AY 2011-12 ) ITA No. 6779/Del./2015, pages 43 to 45 para 63 to 65 14.2 The learned DR, on the other hand, relied on the order of the lower authorities. 14.3 We have heard rival submission and perused the relevant material on record. As far as the function of the company is concerned, in our opinion the assessee has also rendered similar services of the software development and maintenance including information technology related services to its Associated Enterprises and, therefore, it is functionally similar to the company. But as far as the transaction of the company with Citigroup company held as tainted/controlled transactions and exclusion of the company on this ground, in the case of ‘Element K India Private Limited (supra), the Tribunal has given the detailed finding to reject the company on the ground of transactions covered under "3. Wipro Technology Solutions Ltd: This Comparable has been included by Ld.TPO. Ld. Counsel objected for inclusion of this company in the list of comparables by arguing that apart from this company being functionally different and availability of insufficient segmental information, there were also significant related party transactions. Ld.TPO did not accept assessee's contention of related party transactions and proceeded to include it in the final set of comparables. On the contrary, Ld. DR submitted that there is no related party transaction during the year under consideration. We have heard the rival submissions of both sides in the light of records placed before us. Ld. Counsel submitted that Wipro Technology Services Limited (formerly Citi Technology Services Limited) ('the Company') was incorporated on 15 September, 2004. The entire share capital of the Company was held by Citicorp Banking Corporation, a company incorporated under laws of Delaware, USA, upto 20 January, 2009. It was submitted that Wipro Limited (Wipro) executed agreement with Citigroup Inc. for acquiring all of Citigroup interest in the Element K India Pvt. Ltd. Company w.e.f. 21 January 2009. On 21 January 2009, Wipro signed master service agreement (MSA) with Citigroup Inc. for delivery of technology infrastructure services, application development and maintenance services After acquisition by Wipro, name of Company was changed to Wipro Technology Services Limited ('WTS' or 'the Company') on 16 March 2009."

Before the learned TPO, the assessee objected inclusion of the company on the ground of company engaged in software development as well as sale of the product and no separate segment available for software development. The assessee also sought rejection on the ground that DRP in financial year 2009- 10 has rejected this company as comparable. However, the Learned TPO held this company to be functionally comparable, in view of the decision of the Delhi Tribunal in the case of Interra Information Technologies India P. Ltd Versus DCIT (2012) 27 taxmann.com 1 wherein it is held that while adjudicating transfer pricing cases, there is no binding legal precedence. Before the Learned DRP the assessee sought exclusion of this company on the ground of the functional difference and significant intangibles. However the Learned DRP accepted the company as valid comparable in view of the functional similarity. 15. Before us, the Learned Counsel of the assessee submitted that the company is engaged in provision of the various business activities and no segmental result for software development services is available. He referred to Annual Report of the company for Financial Year 2010-11. He referred to page 1022 and 1051 of the paper book Volume 3 and submitted that the company earns it revenue from software development services and products. He also referred to page 1061 of the paper book and submitted that company derives its revenue primarily from software development services, consultancy services, projects and e-governance projects. He further submitted that company does not meet the 75% software development services to revenue filter adopted by the learned TPO. He referred to page 1024 of the paper book and submitted that contribution of the revenue from software development is only 21.6%. He sought to exclude this company on these grounds. 15.1 The learned DR, on the other hand, relied on the order of the lower authorities. 15.2 We have heard rival submission of the parties and perused the relevant material on record. On perusal of the profit and loss account of the company which is available on page 1051 of the paper-book, we find that the Revenue of ₹ 899,11,06,874/- has been shown from Software Development services and the products and no separate revenue or segmental result for software development services have been reported in the annual report. In absence of any separate segmental result of software development services available in public domain, we reject the company as comparable on functional dissimilarity at entity level. Accordingly, we direct the Ld. AO/TPO to exclude this company from the set of the final comparables.

The ground No. 8, 9 and 10 of the appeal related to the inclusion/exclusion of comparables are accordingly allowed partly for the statistical purposes.

No other grounds have been argued or pressed before us by the learned Counsel of the assessee, accordingly remaining grounds are dismissed as infructuous. 18. In the result, the appeal filed by the assessee is allowed partly for statistical purposes. Order pronounced in the open court on 31st August, 2020.