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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’, NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI O.P. KANT
Date of hearing 23.07.2020 Date of pronouncement 31.08.2020 ORDER PER O.P. KANT, AM:
This appeal by the assessee is directed against final assessment order dated 30/10/2015 passed by the Assistant Commissioner of Income-tax, Circle-9, New Delhi [in short ‘the Ld. Assessing Officer’ (AO)], pursuant to the direction dated 31/08/2015 of the learned Dispute resolution panel-I, New Delhi [in short ‘the Ld. DRP’]. The grounds raised by the assessee are reproduced as under:
1. That the AO erred in assessing the total income of the Appellant at Rs.22,20,27,590/- as against income of Rs.1,90,27,743/- returned by the Appellant after making transfer pricing addition of Rs.20,29,99,837/- in respect of international transaction of software development services rendered by the Appellant to its parent company, viz., Fiserv Global Services Inc., USA.
2. That the TPO and the DRP erred in proposing an adjustment to the arm’s length price computed by the Appellant without appreciating that since the Appellant was eligible to claim deduction under Section 10A of the Act in respect of income from the international transaction entered into between the Appellant and its AE, there was no motive to shift profits outside India by manipulating the prices charged in international transactions, which is a pre-requisite to make any adjustment under the provisions of Chapter X of the Act.
3. That the AO erred in making a reference to the TPO without recording reasons on the basis which the AO considered it "necessary or expedient" to refer the international transaction entered into by the Appellant with its associated enterprise ("AE").
4. That on facts and in circumstances of the case and in law, the AO and DRP erred in partly confirming the action of the TPO in making an addition to the income of the Appellant without appreciating that the Appellant had computed arm's length price in respect of international transaction entered into by the Appellant with its Associated Enterprise ("AE") using the most appropriate method (i.e. the transactional net margin method), maintained all the information and documentation required under section 92D of the Act, used information/data available in the database (Prowess database and Capitaline database) at the time of filing the income tax return on a bonafide belief that the data in the database is reliable and correct and furnish the Transfer Pricing Study ("TP Study”).
That the AO and DRP erred in confirming the action of the TPO impliedly rejecting the Transfer Pricing Study of the Appellant and in conducting a fresh benchmarking analysis on the basis of conjectures and surmises.
6. That on facts and circumstances of the case and in law, the AO and DRP erred in confirming the action of the TPO in applying the following filters:
A. Use of only current year (i.e. FY 2010-11) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for the FY 2010- 11 was not available in the public domain, B. Rejecting companies with turnover below Rs.5 crores without applying an upper filter of Rs. 500 crores
C. Rejecting companies whose revenues from services is less than 75% of the total operating revenues without appreciating that the said filter has no effect on comparability analysis, D. Rejecting companies with export sales of less than 75% of total sales, E. Rejecting companies with persistent losses in the last three years, F. Rejecting companies where revenue from related party transactions exceeds 25% of the total revenue without appreciating that companies with any related party transactions should have been excluded or else companies with revenue from RPT of more than 10-15% to sales should have been excluded, G. Rejecting companies with employee cost less than 25% of total operating cost, without appreciating that such a filter is not decisive for tracing out service companies since there is no compulsion on companies to necessarily keep personnel on their rolls H. Rejecting companies with different financial year without assigning any cogent reasons for applying the said filter, 7. That the AO and DRP erred in confirming the action of the TPO in rejecting the comparable companies selected by the Appellant without providing any cogent and/or sufficient reasoning.
8. That the AO and DRP erred in confirming the action of the TPO in selecting the following companies which were not functionally comparable to the Appellant for the purposes of benchmarking the international transaction entered into by the Appellant:
a) E-Infochips Ltd. b) E-Zest Solutions Ltd. c) Infosys Ltd. d) Larsen & Toubro Infotech Ltd. e) Persistent Systems Ltd. f) Persistent Systems & Solutions Ltd. g) Sasken Communication Technologies Ltd. h) Wipro Technology Services Ltd. i) Zylog Systems Ltd.
9. That the AO and DRP erred in confirming the action of the TPO in selecting E-Infochips Bangalore Ltd. as a comparable for benchmarking the international transaction entered into by the Appellant with its AE without appreciating that the said company had fluctuating margins over the years.
10. That the AO and DRP erred in confirming the action of the TPO in selecting Wipro Technology Services Ltd. (WTS] without appreciating that the entire income of WTS was derived from rendering services to the Citigroup under a fixed contract executed in lieu of acquisition of WTS by Wipro Ltd. from the Citigroup and, therefore, failed the RPT filter and extraordinary event filter applied by the TPO.
11. That the DRP erred in confirming the action of the TPO in treating foreign exchange gain/loss and hedging costs/premium as a non- operating income/expense.
12. That the AO and DRP erred in confirming the action of the TPO in not allowing risk adjustment claimed by Appellant in terms of Rule 10B(l)(e) read with Rule 10B(3) of the Income tax Rules, 1962.
13. That the DRP erred in law in confirming the action of the AO/TPO in mechanically initiating penalty proceeding under Section 271(l)(c) of the Act by holding that penalty under Section 271(l)(c) is consequential in nature.
14. The AO erred on facts and circumstances of the case and in law in charging interest under Section 234B and 234D of the Act and computing interest under Section 234B in violation of the provisions of the Act.
The above grounds are in alternative and without prejudice to each other, and the Appellant craves leave to add, amend, alter or vary from the above grounds of the appeal before or at the time of hearing.
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:
“1. To check the employee cost of M/s. LGS Global Ltd. and to include in the final list of comparables companies if it passes the employee cost filter. 2. To compute the margin computation as per Safe Harbour Rules and provide the copy of computation of profit margin of both taxpayer and the comparables alongwith the order.”
2.4 The learned TPO given effect to the direction of the Learned DRP, wherein he maintained the transfer pricing adjustment as proposed in the draft assessment order. Pursuant to the direction of the learned DRP, the Assessing Officer passed the impugned final assessment order. Aggrieved with the order of the Assessing Officer, the assessee is in appeal before the Tribunal raising the grounds as reproduced above.
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”.
(ii) In notes to financial statements (Schedule -M) on page 15 of the paper-book (Volume -I), the background clause reads that the company was incorporated to provide software development services, conversion, data entry and implementation of the software.
(iii) On page 23 of the paper-book (volume-I), clause 8 of notice to the financial statements (schedule-M), segment reporting has been provided as under:
“Segment Reporting The company provides software development services, conversion, data entry and implementation of Software and IT enables services. The disclosures as required under accounting standard 17 on segment reporting has not been provided as the company deals in one bueinss segment and in one geographic area.”
Thus, the assessee provides software development services and IT enabled services also. (iv) The profile of the assessee has been reported in the transfer pricing study (Page 33 of the paper-book Voulme-1), which reads that the assessee has been established to render software development and maintenance services, data analytics/global analysis to Fiserv global services INC and the assessee is a property and casualties insurance (P &C) expert for (a) outsourcing for Information Systems (b) management of new or replacement systems and (c) project development and management.
(v) The assessee has provided various steps of the functions carried for providing services to the AEs on page 54 of the paper-book Volume 1, which is part of the transfer pricing study. The functions performed by the assessee include project plan, analysis, design, build and testing, staffing and recruitment, personal management and administration etc.
(vi) On page 55 of the paper-book (volume-1), it has again been reiterated that the assessee renders software development and maintenance services to associated enterprises on project basis.
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:
E-Infochips Ltd.
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
counseltancy Revenue information technology 26,03,84,251 13,29,250 services Revenue services gross 26,03,84,251 13,29,250 Operating revenue gross 26,03,84,251 13,29,250 Operating revenue net 26,03,84,251 13,29,250 8.5 On perusal of the chart, it is evident that revenue from hardware maintenance is of ₹ 3,92,48,562/- and balance is from software development and other IT enabled services. The function of the assessee under comparison are also software development and IT enabled services and this contention of the Learned Counsel that assessee is engaged only in providing software development services is not correct. In the profit and loss account of the assessee revenue is shown from the software services and thus we do not find any error in the finding of the learned DRP that service revenue of the company is more 85% of the total revenue and it satisfies the filter of service income more than 75%, therefore the profit results of the company are eligible for comparison with the software services of the assessee. However, details of margin on hardware sales is not available and if the margin on hardware is too high as compared to software services, the company may not be suitable for comparison. Due to lack of sufficient information in respect of the company available in the public domain, in the interest of substantial justice, we feel appropriate to restore the issue of comparison to the Ld AO/TPO with the direction to the TPO to obtain such information in the form of relevant schedules of the Profit & Loss Account of the said entity as well as the segmental details of the hardware division, if any, directly from the said entity and then decide the issue of comparability. We, therefore, set aside the finding of learned TPO for including the company into set of comparables as well as the direction given by the DRP on this issue and restore the matter to the file of the Assessing Officer/TPO for deciding the same afresh in the light of the observations already made by us, after giving the assessee a proper and sufficient opportunity of being heard.
E-Zest Solutions Limited.
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.
Fiserv India employees are technically qualified professionals in their respective area of operations. Each project entails the following phases:
Project Plan
The Project Manager (Fiserv India) is responsible for developing and maintaining the Project Plan. The Project Plan is updated and re- released as and when deemed necessary.
Analysis
The Project Manager (Fiserv India) is responsible for the initial development and ongoing maintenance of the System Requirement Specifications for each phase of delivery.
The System Requirement Specification is agreed to and signed off by the client and AE prior to the commencement of the design of the design phase.
The System Requirement Specification is updated from time to time as deemed necessary by the project manager (Fiserv India). The document is re- released and sent to the client for approval.
Design
The process of system design is the responsibility of the Project manager (Fiserv India). Appropriately skilled resources are allocated to the design tasks. As there is also an element of analysis in each phase, continued access to client user representatives is necessary during the system design phase. Build & Test]
Build & Test
The Developers assigned to the project are responsible for the construction of software components according to the design specification and the requirements. Software development is done according to the relevant development standards.]
The Test Manager (Fiserv India) is responsible for developing Test Specifications for the system. Acceptance Test Signoff Signoff of the acceptance testing will be by the Project Manager (Fiserv India) from the client and AE. Release An initial release of the system is done to the client for the purpose of the User Acceptance testing. Any issue reported during this phase is handled either by the Requirements change process or by the problem tracking process. Subsequent releases is done to incorporate defect fixed and approved requirement changes.”
9.4 In view of the above, phases of the cycle of the software development carried out by the assessee, it is evident that the assessee is also engaged in conceptualization of the software for the clients of the associated enterprises, and thus contention of the learned Counsel of functional dissimilarity on this ground rejected. However, regarding the trading of the stock by the assessee, there is apparently contradictory information in the annual report of the company. According to page 225 of the paper-book volume 1, the quantitative details in respect of opening stock, purchase, sales and closing stock is not applicable as the company is engaged in providing computer software development related services only, whereas in the profit and loss account available on page 2 to 13 of the paper book, there is increase in the stock of ₹ 1,26,03,745/-. Thus, although the company is functionally similar to the assessee but in view of the figure of increase in the stock gives rise to the possibility of trading segment. As complete information is not available in public domain, in our opinion, the Learned TPO can collect the relevant information from the company using the authority under section 133(6) of the Act and if he finds that trading segment exist and no separate results are available for the software development segment, then he shall exclude the company from the set of the comparables. Accordingly, we restore the issue of the comparability of the company to the file of the Learned AO/TPO for deciding afresh after providing adequate opportunity of being heard to the assessee.
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.
10.1 Before us, the Learned Counsel of the assessee submitted to exclude the company on the ground of segment result for the software services not available, different functional profile and different scale of the operations. The learned Counsel submitted that the company has been rejected by the Hon’ble Delhi High Court in the assessee’s own case for assessment year 2009-10 and 2010-11. According to him, not being substantial change in the functioning of the assessee as well as the company in the year under consideration as compared to assessment year 2010-11, the company need to be rejected following the decision of the Hon’ble Delhi High Court in the case of assessee itself. 10.2 The learned DR, on the other hand, relied on the order of the lower authorities. 10.3 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The Tribunal in ITA No.6737/Del./2014 for assessment year 2010-11 on the issue of the comparability of M/s. Infosys Ltd has observed as under: “11.4 We have considered rival submissions, perused the material on the record. In the case of Agnity Technologies, a coordinate Bench has held as under:- "It is argued that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the latter is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited Currency risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded"
11.5 The aforesaid order was upheld by the Hon'ble Delhi High Court after taking note of the chart as given below:
Risk Profile Operate as full-fledged risk taking Operate at minimal entrepreneurs risks as the 100 percent services are provided to AEs Nature of services Contract software Diversified-consulting, application development services design, development, reengineering and maintenance system integration, package evaluation and implementation and business process management, etc. (refer page 117 of the Paper Book) Turnover 20,264 crores 209.83 crores Ownership Develops/owns proprietary products branded/prop like Finacle, Infosys Actice Desk, rietary Infosys iProwe, Infosys mConnect. products Also the company derives substantial portion of its proprietary products (including its flagship banking product suite ‘Finacle’) Onsite vs. Offishore The appellant provides As much as half of the software only offshore services development services rendered by (i.e. remotely from Infosys are onsite (i.e. services India) performed at the customer's location overseas). And offshore (50.20 per cent) Refer p. 117 of the Paper Book) than half of its service, income from onsite services. Expenditure on Rs. 80 crores Rs. Nil (as the 1-percent advertising/sal es services are provided to promotion and brand AEs) building
Expenditure on Rs. 236 crores Rs. Nil Research and Development Other 100 per cent offshore (from India)
11.6 On the basis of the above chart, the Hon'ble High Court affirmed the conclusion that a captive unit of a comparable company which assumed only a limited risk, cannot be compared with a giant company in the area of development of software who assumes all types of risks leading to higher profits. The facts of the appellant are akin and therefore, do not warrant any different conclusion. The appellant is also captive service provider to its AE and as such, M/s. Infosys Ltd. is not a valid comparable with the appellant.”
10.4 The Hon’ble Delhi High Court in & CM No.30032/2016 in case of assessee, on the issue of the comparability of M/s. Infosys has observed as under: “Learned counsel appearing on the advance notice urges that the assessee is engaged in the business of software development. He supports the conclusions of the ITAT with respect to the exclusion of two comparables in question and highlights that M/s Infosys Ltd. is engaged not merely in software development both offsite and onsite and that it receives the substantial revenues on account of onsite software financial development – the activity which the assessee does not carry out. It is also submitted that besides this, the other distinguishing factor vis-a-vis that M/s Infosys Ltd. is that concern also owns brand intangibles- an advantage which the assessee does not possess. Lastly, the assessee is captive as opposed to status of M/s Infosys Ltd. With respect to M/s Persistent Technologies, it is pointed out that in a previous order in ITA No. 279/2016 dated 04.05.2016 (Principle Commissioner of Income Tax vs. M/s Cashedge India Pvt. Ltd) held that having regard to the rules i.e. Rule 10 B to 10 E of Income Tax Rules, the data of M/s Persistent Systems Ltd- could not have been included. Here, it is urged that the assessee is also a member of the Cashedge India group and is engaged in same and identical business. The AY also coincides with that of assessee i.e. AY 2010-2011. For these reasons, we are of the opinion that no substantial question of law arises on the first issue urged.”
10.5 We find that the Tribunal has rejected the company mainly on the ground of giant company vis-à-vis the assessee being a captive service provide. Since this ground of the rejection is valid in the year under consideration also, respectfully following the decision of the Tribunal (supra) and decision of Hon’ble Delhi High court (supra), we direct the Learned AO/TPO to exclude this company from the final set of the comparables.
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.
Persistent Systems & Solutions Ltd.
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.
12.1 Before us, the learned Counsel of the assessee referred to page 763 and 764 of the paper-book and submitted that revenue recognition provided method of recognition from licensing of the product, royalty on sale of product, revenue from maintenance contract. According to the learned Counsel, the company is engaged in development of the software products in view of the revenue recognition provided in the notes to the account, and therefore it need to be excluded from the set of the comparables.
12.2 The learned DR, on the other hand, relied on the order of the lower authorities.
12.3 We have heard rival arguments of the parties and perused the relevant material on record. We find that schedule of income to the profit and loss account is available on page 786 of the paper-book, which is reproduced as under:
01/04/2010 01/04/2009 to to 31/03/2011 31/03/2010 Operating revenue, net [abstract) Operating revenue, gross (abstract)
Revenue services, gross [abstract) Revenue information technology services [abstract] Revenue software development 18,94,90,457 6,67,28,828 Revenue information technology services 18,94,90,457 6,67,28,828 Revenue services, gross 18,94,90,457 6,67,28,828 Operating revenue, gross 18,94,90,457 6,67,28,828 Operating revenue, net 18,94,90,457 6.67,28.828 Other income [abstract] Receipt income investments [abstract] Receipt income current investments [abstract) Receipts dividend current investments [abstract] Receipt dividend current mutual funds 4,18,608 2,29,840 Receipts dividend current investments 4,18,608 2,'29,840 Receipt income current investments 4,18,608 2,29,840 Receipt income investments 4,18,608 2,29,840 Other income 4,18,608 2,29,840 12.4 On perusal of the above, it is evident that revenue has been shown from the software services only and no revenue has been shown from sale of the products or from royalty etc. Merely mention of the method of the recognition of the revenue in the notes to the account, cannot indicate revenue has been earned from sale of the products or from the royalty. No other information has been pointed out by the learned Counsel to support his contention that the company is engaged in sale of the products. No such information in respect of sale of products or income from royalty is available in the public domain, therefore in the interest of the justice, we feel it appropriate to restore this matter to the Learned AO/TPO with the direction to gather information using authority under section 133(6) of the Act and if he finds presence of substantial income from sale of the products or royalty and income from software development services cannot be segmented, then the company shall be excluded from the set of the comparable. The assessee shall be afforded adequate opportunity of being heard.
Persistent Systems Ltd.
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."
It is observed from the above that, Wipro Technology Services Ltd., which was earlier Citi Technology Services Ltd., was held by Citi Corp. Banking Corporation, USA upto 20th January, 2009. Wipro Ltd., parent company of which executed agreement with Citi Group Inc., for acquiring Citi Technology Services Ltd., now called Wipro Technology Services Ltd. On 21.1.2009, Wipro Ltd. signed master agreement with Citi Group Inc., for the delivery of technology Infrastructure Services and application development and maintenance services for the 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. It is observed that the issues raised by Ld. CIT DR in respect of comparability of this comparable has been dealt with by coordinate bench of Delhi Tribunal in Saxo India Pvt.Ltd vs. ACIT (supra) as under: "We have noticed above from the language of Rule 10B(1)(e)(ii) that it is the net profit margin realized from a comparable uncontrolled transaction, which is considered for the purposes of benchmarking. The Element K India Pvt. Ltd.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(1)(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 necessary that the same should be between enterprises, other than 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 sub-section (2) of section 92B, it is clearly borne out that a transaction with 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 transaction between third person and the AE, or the terms of relevant transaction are determined in substance between the third person and AE. When we consider section 92B(2) in combination with Rule 10A(a), it follows that transaction between non- AEs shall be construed as a transaction between two AEs, if there exists a prior agreement in relation to relevant transaction between third person and AE. If such an agreement exists, third person is also considered as an AE, and 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).
Adverting to the facts of the instant case, we find that Wipro Technology Services Ltd. earned 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., Element K India Pvt. 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." Respectfully following the same we also direct removal of this company from the list of comparables.”
14.4 The Hon’ble Delhi High Court in the case of PCIT Vs Cashedge India Private limited (supra) has held as under:
“6. As far as the first company, i.e., Persistent Systems Ltd. is concerned, the material on record - as found by the ITAT - shows that this company was involved in software development, software products and marketing. Furthermore and perhaps more importantly published segmental data was not available. In these circumstances, having regard to the specificity of the Transfer Pricing Rules under Rule 10 (b) to 10 (e) of the Income Tax Rules, the data of the said firm, i.e., Persistent Systems Ltd. could not have been included. Likewise as far as the Wipro Technology Services goes, it was part of the Citi Group and was during the financial year in question acquired on 21.01.2009 by the Wipro Ltd. as a subsidiary. As a part of the arrangement, the existing contracts pertaining to the work of the Citi Group continued to be with the newly created entity, i.e., Wipro Technology Services. Equally importantly, is that there was no published segmented data as far as software development or its finances were concerned with respect to Wipro Technology Services. In these circumstances, the findings of the ITAT are purely factual and cannot be gone into as no substantial question of law arises for consideration.” 14.5 Respectfully, following the finding of the Tribunal (supra) and the Hon’ble High Court (supra), the company is directed to be excluded from the set of the final comparables.
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.