DCIT, NEW DELHI vs. M/S UNITED HEALTH GROUP INFORMATION SERVICES PVT. LTD, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : I-2 : NEW DELHI (Through Virtual Court Hearing) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA No.473/Del/2016 Assessment Year: 2011-12 Optum Global Solutions (India) Vs DCIT, Private Limited Circle-27(1), (Formerly known as United Health CR Building, Group Information Services Pvt. New Delhi. Ltd.), 11th Floor, Tower A, DLF Towers Jasola, Jasola District Centre, New Delhi. PAN: AADCA6769Q ITA No.193/Del/2016 Assessment Year: 2011-12 DCIT, Vs Optum Global Solutions (India) Circle-27(1), Private Limited CR Building, (Formerly known as United Health New Delhi Group Information Services Pvt. Ltd.), 11th Floor, Tower A, DLF Towers Jasola, Jasola District Centre, New Delhi. PAN: AADCA6769Q (Appellant) (Respondent) Assessee by : Shri Nageshwar Rao & Shri S. Chakraborty, Advocates Revenue by : Shri Anupam Kant Garg, CIT, DR Date of Hearing : 16.06.2020 Date of Pronouncement : 25.08.2020

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ORDER PER R.K. PANDA, AM: These are cross appeals – the first one is filed by the assessee and is directed against the order dated 24.11.2015 passed by the AO u/s 143(3) r.w. section 144C of the IT Act, 1961, for assessment year 2011-12. ITA No.193/Del/2016 filed by the Revenue is directed against the order dated 15th October, 2015 passed by the ld. DRP u/s 144C5) of the IT Act, 1961 for the A.Y. 2011-12. For the sake of convenience, these were heard together and are being disposed of by this common order.

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claimed any deduction u/s 10A. However, the balance amount of interest income of Rs.72,12,856/- pertained to interest earned by the assessee on FDRs placed with banks for temporary period. These funds have been generated from the assessee’s businesss of export of information technology and ITES. In view of the commercial prudence the excess cash so generated was temporarily parked in the bank, Since this income was derived in the course of the business activity related to export of computer software, things, etc., to the foreign customers, the assessee has considered this as business income while computing the taxable income of the assessee and deduction u/s 10A has been claimed thereon.

2.1. So far as the miscellaneous income of Rs. 44,74,029/- is concerned, it was submitted that the same consists of excess provision written back of Rs.66,361/-, notice pay recovery from employees of Rs.42,87,900/- and other income (Hypo tax refund received from employees of Rs.1,19,768/- and amount recovered against loss of key Rs.1000/-).

2.2 So far as the excess provision written back of Rs.66,361/- is concerned, it was submitted that the same pertained to provision for expenses charged to P&L Account which has been subsequently reversed since it was excessive and, accordingly booked as miscellaneous income. The provision for write back pertains to legal and professional fee incurred by the assesseee in relation to running of its business. Therefore, the same needs to be included while computing the profits and gains of business and is, therefore, eligible for deduction u/s 10A.

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The order of the DRP for A.Y. 2009-10 was also brought to the notice of the AO according to which, the DRP has decided the issue in favour of the assessee and has directed the AO to allow deduction u/s 10A on such income. Similarly, in A.Y. 2010-11, the AO himself has allowed such deduction u/s 10A of excess provision written back. So far as the notice pay recovery from employees of Rs.42,87,900/- is concerned, it was submitted that the same pertains to sum received from employees who do not serve their notice period and instead pay an amount to the assesseee in compensation for non-serving their notice period. Therefore, such amount has arisen in the normal course of business of the assessee and is eligible for deduction u/s 10A of the Act. So far as other income of Rs.1,19,768/- is concerned, it was submitted that the same largely represents refund of Hypo tax which was paid by the assessee on behalf of its employees initially on account of their deployment outside India. Since this receipt is directly connected with the business of the assessee, therefore, the same has been considered for deduction u/s 10A. Relying on various decisions, it was submitted that the assesseee is entitled to deduction u/s 10A on the interest income as well as miscellaneous income.

2.3 However, the AO was not satisfied with the arguments advanced by the assessee. Holding that principles of res judicata do not apply to income-tax proceedings and relying on various decisions, the AO held that the assesseee is not entitled to deduction u/s 10A on the interest income of Rs.72,12,856/- and miscellaneous income of Rs.44,07,668/-. The ld. DRP upheld the action of the AO 4

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observing that when the interest income of Rs.72,12,856/- has arisen from the funds arisen from the business operations which was parked in short-term FDs with banks, such interest income does not arise from the business operations eligible for deduction u/s 10A. As there is absence of nexus that is essential for such earnings, the AO was justified in rejecting the claim of deduction u/s 10A.

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case of Riviera Home Furnishing, has allowed the deduction u/s 10A on interest earned on fixed deposits. Similarly, following the decision in the case of Birla Soft (India) Ltd. vs. DCIT, 44 SOT 664 (Del), the Tribunal has allowed the deduction u/s 10A of the Act on excess provision written back. Referring to the decision of the Hon’ble Delhi High Court in the case of Riviera Home Furnishing vs. Addl. CIT (2017) 9 ITR-OL 401 (Del), he submitted that the Hon’ble High Court in the said decision has held that when the fixed deposits were under the lien to the bank for facilitating letter of credit and the bank guarantee facilities, such interest on fixed deposits were profits of business and eligible for exemption. He submitted that the Hon’ble Delhi High Court in the case of Riviera Home Furnishing has considered the decision of Hon’ble Supreme Court in the case of Motorola India Electronics, Sterling Foods Ltd., Pandian Chemicals, Tuticorin Alkalies Chemicals, etc. Referring to the decision of the Hon’ble Karnataka High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd., he submitted that the Hon’ble High Court in the said decision has held that interest on bank deposits and soft loan arose in the ordinary course of business and, therefore, are entitled to exemption u/s 10A of the Act. Relying on various decisions placed in the case law compilation, the ld. Counsel for the assessee submitted that the assesseee is entitled to deduction u/s 10A on the interest income and miscellaneous income. He submitted that the Ld. DRP, in assessee’s own case for A.Y. 2009-10 has directed the AO to allow the claim of deduction u/s 10A on excess provision written back. Similarly, for A.Y. 2010-11, the AO himself has allowed deduction u/s 10A of 6

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excess provision written back in the draft assessment order. He accordingly submitted that the issue stands covered in favour of the assessee by a series of decisions and, therefore, the ground raised by the assessee should be allowed.

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that the above income do not have a direct nexus with the business income of the assessee. While doing so, he further noted that the interest income has been held as ‘income from other sources’ by the DRP in assessee’s own case for A.Y. 2009- 10 and 2010-11. So far as the miscellaneous income is concerned, although the same was allowed by the DRP in assessee’s own case for A.Y. 2009-10 and the AO himself has allowed the claim of deduction u/s 10A of such income for A.Y.2010-11, the AO held that principle of res judicata does not apply to income- tax proceedings. We find, the DRP upheld the action of the AO. We find, identical issue had come up before the Tribunal in assessee’s own case in the immediately two preceding assessment years. We find, the Tribunal in assessee’s own case for A.Y. 2009-10, vide ITA No.825/Del/2014 filed by the assessee and ITA No.419/Del/2014 filed by the Revenue, order dated 9th February, 2018, has decided an identical issue in favour of the assesseee by observing as under:

“66. The AO in the draft order, available at pages 140 to 147, denied the deduction of Rs.125,71,932/- and Rs.22,85,957/- claimed u/s 10A of the Act being the interest on FDR and misc. income respectively on the ground that the same is not related to exports. Ld. DRP also upheld the findings of the AO by observing that the interest income cannot be termed as profit derived from an undertaking and has also not followed the decision rendered by the coordinate Bench in AY 2008-09 on identical issue. 67. Undisputedly, identical issue has come up before the Tribunal in taxpayer's own case for AY 2010-11 and has been decided in favour of the taxpayer by relying upon the decision rendered by the Hon'ble Delhi High Court in Riviera Home Furnishing vs. Additional CIT- 65 taxmann.com 287 (Delhi). Operative part of the finding returned by Hon'ble Delhi High Court in Riviera Home Furnishing (supra) is reproduced for ready perusal as under :- "9. The question as to what can constitute as profits and gains derived by a 100% EOU from the export of articles and computer software came for

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consideration before the Karnataka High Court in CIT v. Motorola India Electronics (P.) Ltd. [2014] 46 taxmann.com 167/225 Taxman 11 (Mag.). The said appeal before the Karnataka High Court was by the Revenue challenging an order passed by the ITAT which held that the interest payable on FDRs was part of the profits of the business of the undertaking and therefore includible in the income eligible for deduction Sections 10A and 10B of the Act. There the Assessee had earned interest on the deposits lying in the EEFC account as well as interest earned on inter-corporate loans given to sister concerns out of the funds of the undertaking. There was a restriction on the Assessee in that case from making pre- payment of its external commercial borrowings ('ECB'). It could repay only to the extent of 10% of the outstanding loan in a year. This made the Assessee temporarily park the balance funds as deposits or with various sister concerns as inter corporate deposits until the date of repayment. The Assessee contended that the interest derived from the business of the industrial undertaking was eligible for exemption within the meaning of Section 10B and applied the formula under Section 10B(4) of the Act for determining the profits from exports. The Assessee's contention that the expression "profits of the business of the undertaking" in Section 10B(4) was wider than the expression "profits and gains derived by" the Assessee from a 100% EOU occurring in Section 10B(1) was accepted by the ITAT. The ITAT noticed that unlike Section 80HHC, where there was an express exclusion of the interest earned from the 'profits of business of undertaking', there was no similar provision as far as Sections 10A and 10B were concerned. 10. In Motorola India Electronics (P.) Ltd. (supra) reference was made to the decision of the Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539 which dealt with Section 80HH and Liberty India v. CIT [2009] 317 ITR 218/183 Taxman 349 (SC), which interpreted Section 801B of the Act. Reference was also made to the decision of CIT v. Sterling Foods [1999] 237 ITR 579/104 Taxman 204 (SC), which interpreted Section 80HH and the decision of the Madras High Court in CIT v. Menon Impex (P.) Ltd. [2003] 259 ITR 403/128 Taxman 11 which interpreted Section 10A of the Act. The Karnataka High Court in Motorola India Electronics (P.) Ltd. (supra), after noticing the above decisions, held that "it is clear that, what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking". Specific to the question of interest earned by the EOU on the FDRs placed by it and interest earned from the loans given to sister concerns, it was held that although it did not partake the character of profit and gains from the sale of an ITA No.419/Del/2014 article "it is income which is derived from the consideration realized by export of articles." 11. The decision of the Karnataka High Court in Motorola India Electronics (P.) Ltd. (supra) was followed by this Court in its decision in CIT v. Hritnik Exports (P.) Ltd. (decision dated 13th November 2014 in ITA Nos. 219 and 239 of 2014). This Court also referred to its earlier decision dated 1st

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September 2014 in ITA No. 438 of 2014 (CIT v. XLNC Fashions). While declining to frame a question of law in the Revenue's appeal, this Court inHritnik Exports (P.) Ltd. (supra) quoted with approval the observations of the Special Bench of the ITAT in Maral Overseas Ltd. v. Addl. CIT [2012] 136 ITD 177/20 taxmann.com 346 (Indore) on the interpretation of Section 10B(4) of the Act as under: '79. Thus, sub-section (4) of section 10B stipulated that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, not- withstanding the fact that sub-section (1) of section 10B refers the profits and gains as are derived by a 100% EOU, yet the manner of determining such eligible profits has been statutorily defined in sub-section (4) of section 10B of the Act. As per the formula stated above, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Sub-section (4) does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking. Thus, once an income forms part of the business of the eligible undertaking, there is no further mandate in the provisions of section 10B to exclude the same from the eligible profits. The mode of determining the eligible deduction u/s 10B is similar to the provisions of section 80HHC inasmuch as both the sections mandates determination of eligible profits as per the formula contained therein. The only difference is that section 80HHC contains a further mandate in terms of Explanation (baa) for exclusion of certain income from the "profits of the business" which is, however, conspicuous by its absence in section 10B. On the basis of the aforesaid distinction, sub-section (4) of section 10A/10B of the Act is a complete code providing the mechanism for computing the "profits of the business" eligible for deduction u/s 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act. As per the computation made by the Assessing Officer himself, there is no dispute that both these incomes have been treated by the Assessing Officer as business income. The CBDT Circular No. 564 dated 5th July, 1990 reported in 184 ITR (St.) 137 explained the scope and ambit of section 80HHC and the mode of determination of profits derived by an assessee from the export of goods. I.T.A.T., Special Bench in the case of International Research Park Laboratories v. ACIT, 212 ITR (AT) 1, after following the aforesaid Circular, held that straight jacket formula given in sub-section (3) has to be followed to determine the eligible deduction. The Hon'ble Supreme Court in the case ofP.R. Prabhakar; 284 ITR 584 had approved the principle laid down in the Special Bench decision in International Research Park Laboratories v.ACIT (supra). In the assessee's own case the I.T.A.T. in the preceding years, after considering the decision in the case of Liberty India held that provisions

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of section 10B are different from the provisions of section 80IA wherein no formula has been laid down for computing the eligible business profit.' 12. Recently, in a decision dated 6th October 2015 in ITA NO. 392 of 2015 (Principal CIT v. Universal Precision Screws), this Court had occasion to again consider whether interest earned on fixed deposits kept by an Assessee which was eligible under Section 10B of the Act, as a condition for utilization of letter of credit and bank guarantee limits, would qualify for deduction. That question was decided in favour of the Assessee and against the Revenue. The Court held as under: '9. On the question of interest on the FDRs, the ITAT has referred to Section 10B(4) which states that for the purposes of Section 10B(1), the profits derived from export of articles or things or computer software "shall be the amount which bears to the profits of the business of the undertaking", the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.' As noted by this Court in CIT v. Hritnik Exports Pvt. Ltd. (decision dated 13th November, 2014 in ITA No. 219 & 239 of 2014), Section 10B(4) mandates the application of the formula for determining the profits derived from exports for the purposes of Section 10B(1). In other words, the formula would read thus: Profits derived from export = Profits of the business of the undertaking 9A. In terms of the above formula, the question that would arise is whether the interest on the FDRs could form part of the 'profits of the business of the undertaking'. The attention of the Court has been drawn to the decision of the Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (2014) 46 Taxmann.com 167 (Kar.) which held that there was a direct nexus between the interest received from the FDRs created by a similarly placed Assessee from the amounts borrowed by it. The High Court approved the order of the ITAT in that case which held that the entire profits of the business of the undertaking should be taken into consideration while computing the eligible deduction under Section 10B of the Act by ITA 392/2015 applying the mandatory formula. 10. In the present case, the Assessee has stated that the interest on FDRs was received on "margin kept in the bank for utilization of letter of credit and bank guarantee limits". In those circumstances, the decision of the ITAT that such interest bears the requisite characteristic of business income and has nexus to the business activities of the Assessee cannot be faulted. In other words, interest earned on the FDRs would form part of the "profits of the business of the undertaking" for the purposes of computation of the profits derived from export by applying formula under Section 10B(4) of the Act.'

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which has availed of the benefit under Section 10B will not be allowed to further claim relief under Section 80IA or 80IB read with Section 80A(4). The intention does not appear to be to deny relief under Section 10B(1) read with Section 10B(4) or to whittle down the ambit of those provisions as is sought to be suggested by Mr. Manchanda. Also, he is not right in contending that the decisions of the High Courts referred to above have not noticed the decision of the Supreme Court in Liberty India. The Karnataka High Court in Motorola India Electronics (P.) Ltd. (supra) makes a reference to the said decision. That decision of the Karnataka High Court has been cited with approval by this Court in Hritnik Exports (P.) Ltd. (supra) and Universal Precision Screws (supra). In Hritnik Exports (P.) Ltd. (supra) the Court quoted with approval the observations of the Special Bench of the ITAT in Maral Overseas Ltd. (supra) that "Section 10A/10B of the Act is a complete code providing the mechanism for computing the 'profits of the business' eligible for deduction u/s 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act." 16. This then brings us to the questions framed for consideration in the present case and the decision of the ITAT in not accepting the Assessee's plea in regard to 'customer claims' 'freight subsidy' and 'interest on fixed deposit receipts' even while accepted the Assessee's case as regards 'deemed export drawback'. 17. The contention of the Assessee as regards customer claims was that it had received the claim of Rs. 28,27,224 from a customer for cancelling the export order. Later on the cancelled order was completed and goods were exported to another customer. The sum received as claim from the customer was nonseverable from the income of the business of the undertaking. The Court fails to appreciate as to how the ITAT could have held that this transaction did not arise from the business of the export of goods. Even as regards freight subsidy, the Assessee's contention was that it had received the subsidy in respect of the business carried on and the said subsidy was part of the profit of the business of the undertaking. If the ITAT was prepared to consider the deemed export draw back as eligible for deduction then there was no justification for excluding the freight subsidy. Even as regards the interest on FDR, the Court has been shown a note of the balance sheet of the Assessee [which was placed before the AO] which clearly states that "fixed deposit receipts (including accrued interest) valuing Rs. 15,05,875 are under lien with Bank of India for facilitating the letter of credit and bank guarantee facilities." In terms of the ratio of the decisions of this Court both in Hritnik Exports (P.) Ltd. (supra) and Universal Precision Screws (supra), the interest earned on such FDR ought to qualify for deduction under Section 10B of the Act."

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ITA No.193/Del/2016 (by the Revenue).

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UHG, a Minnesota Corporation incorporated in January, 1977, is a diversified health and well-being company that serves approximately 70 million Americans. During 2010, UHG managed approximately $125 billion in aggregate annual healthcare spending on behalf of the constituencies and consumers and provided access to more than 5,300 hospitals and over 730,000 physicians and healthcare providers. He observed that the assessee during the impugned assessment year has entered into the following international transactions:-

Nature of International Transaction Method Amount (In Rs.) Provision of IT enabled services TNMM 1,42,90,67,283 Provision of data analytics services TNMM 25,94,01,927 Provision of IT Services TNMM 2,92,41,22,694 Provision of CRS Services TNMM 7,54,76,206 Purchase of assets CUP 39,15,755 Reimbursement of expatriate’s salaries - 80,55,176 Reimbursement of expenses received by UHG - 4,01,04,636 India Advance against expenses - 2,55,05,713 Grant of RSU/SAR - 65,47,776

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“S. No Company Name Working capital adjusted OP/OC (%) 1 Akshay Software Technologies Ltd. 1.46 E-Infochips Ltd. 13.34 2 3 Evoke Technologies Pvt Ltd 8.21 4 E-Zest Solutions Ltd. 34.12 5 Infosys Ltd. 42.38 6 Larsen & Toubro Infotech Ltd. 18.22 7 LGS Global Limited 12.13 Persistent Systems & Solutions Ltd. [Merged] 22.65 8 9 Persistent Systems Ltd. 15.75 R S Software (India) Ltd. 16.19 10 11 Sasken Communication Technologies Ltd. 24.67 Wipro Technology Services Ltd. [Merged] 52.43 12 13 Celstream Technologies Pvt. Ltd. 13.34 14 Acropetal Technologies Ltd(Seg) 32.63 15 Mindtree Ltd.(Seg) 9.53 Sankhya Infotech Limited(Seg) 20.13 16 17 Tata Elxsi Ltd.(Seg) 7.62 18 Thirdware Sol(Seg) 17.48 Average 20.13

12.1 The TPO accordingly computed arm’s length price of the international transaction related to Software Development as under:-

Total cost : Rs.258,94,46,766 Arm’s length price at a margin of 20.13% : Rs.311,07,02,399 Price received : Rs.292,41,22,694 Proposed adjustment u/s 92CA : Rs. 18,65,79,705”

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proposed adjustment of Rs.17,32,53,365/- in the ITES, the details of which are as under:- S. No Company Name Adjusted OP/OC (%) i. Accentia Technologies Ltd. 27.73 ii. e4e Healthcare Business Services Pvt Ltd 7.76 iii. Eclerx Services L t d . 55.07 iv. ICRA Techno Analytics Limited 23.87 v. Infosys B P O Ltd. 17.88 vi. Jindal Intellicom Ltd. 10.88 vii. Microgenetic Systems Ltd. -2.42 viii. TCS E-Serve Ltd. 68.94 ix. Acropetal Technologies Ltd(Seg) 9.19 Average 24.32

13.1 The TPO accordingly computed the ALP of the international transaction related to ITES segment as under:- Total cost : Rs.1,53,00,87,391 Arm’s length price at a margin of 24.32% : Rs.1,90,22,04,644 Price received : Rs.1,72,89,51,279 Proposed adjustment u/s 92CA : Rs.17,32,53,365”

13.2 Thus, the TPO proposed an upward adjustment of Rs.35,98,33,070/- in both the segments.

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v) Sasken Communication Technologies Ltd., vi) Wipro Technology Services Ltd. vii) Acropetal Technologies Ltd. B- ITES Segment i) eClerx Services ii) Infosys BPO Ltd. iii) TCS e-Serve Ltd.

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Further, this company is engaged in sale of software products and has super normal profits. Referring to the decision in the case of Cadence Design Systems (I) Pvt. Ltd., vide ITA No.6315/Del/2015 for A.Y. 2011-12 and Alcatel Lucent India Ltd., vide ITA No.6856/Del/2015 for A.Y. 2011-12, he submitted that this company was excluded on account of functional dissimilarity.

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significant IP rights. Further, the Tribunal in the case of Agilis Information Technology (P) Ltd., vide ITA No.1063/Del/2016 for A.Y. 2011-12 has rejected this company on account of functional dissimilarity. Similar view has been taken by the Tribunal in the case of Alcatel Lucent India Ltd., vide ITA No.6856/Del/2015 for A.Y. 2011-12.

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services and infrastructure support services. No information is available regarding the nature of business in the annual report. Referring to the decision of the Tribunal in the case of Global Logic India Ltd., vide ITA No.1690/Del/2016 for A.Y. 2011-12 and in the case of Cadence Design System (I) P. Ltd. (supra), he submitted that this company was excluded from the list of comparables for the above reasons.

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case for A.Y. 2008-09 and 2009-10 has directed to exclude this company from the list of comparables. Referring to the decision of the Tribunal in the case of H & S Software Development & Knowledge Management Centre (P) Ltd., vide ITA No.2200/Del/2014 and 204/Del/2016 for A.Y. 2009-10 and 2011-12 and in the case of Cadence Design System (P) Ltd. (supra), he submitted that this company was excluded from the list of comparables on account of functional dissimilarity.

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export turnover filter as applied by the AO and there is insufficient segmental information. Further, the ITAT in assessee’s own case has rejected this company as a comparable on account of being functionally non-comparable.

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segment stands decided in favour of the assessee by the decision of the Tribunal which has been upheld by the Hon’ble High Court.

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comparables from the software segment is justified and, therefore, does not call for any interference.

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“INFOSYS TECHNOLOGIES LIMITED (INFOSYS) 13. The taxpayer sought exclusion of Infosys on grounds inter alia that it is functionally dissimilar and incurring significant R&D expenses having significant intangibles and a giant company having fully risk bearing profile and relied upon the decision rendered by the coordinate Bench of the Tribunal in taxpayer's ITA No.419/Del/2014 own case in ITA No.6312/Del/2012 for AY 2008-09 order dated 28.08.2014. 14. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the AO/DRP. 15. Perusal of page 1045 of annual reports compendium Vol.IV goes to prove that Infosys is providing end to end solutions inter alia include business and technology consulting, custom application development, infrastructure maintenance services, maintenance and production support, package enabled consulting and implementation including enterprise solutions, product engineering solutions and product lifecycle management, systems integration, valuation solutions and Software as a Service (SaaS) related solutions. Infosys has developed Finacle universal banking solution empowering 114 banks across 62 countries helping them serve 25,000 branches 244 million customers 297 million accounts and 2 lakhs million users. Finacle has also emerged as one of the most scale-able core banking solution in the world by achieving an unparallel performance benchmark of 104 million effective transactions per hour. 16. Furthermore, Infosys is incurring 1.3% of the total revenue on R&D and is having significant intangibles duly detailed at page 1138 of the annual report compendium. Perusal of the director's ITA No.419/Del/2014 report, available at page 1016 of the annual report compendium, also shows that Infosys is a giant company having gross profit of Rs.9119 crores. 17. On the other hand, the ld. Taxpayer is providing services on cost plus basis having minimum risk and having no intangibles. Infosys has been ordered to be excluded as a comparable by Hon'ble Delhi High Court in case of Agnity India Technologies Pvt. Ltd. - (2013) 219 taxman 26 (Del.) being a giant company having huge intangibles and incurring substantive amount on R&D and is a full-fledged risk taking company. More so, Infosys was ordered to be excluded in taxpayer's own case for AY 2008-09 (supra). In these circumstances, Infosys is not a suitable comparable vis-à-vis the taxpayer for benchmarking the international transactions, hence we order to exclude it.

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“PERSISTENT SYSTEMS LTD. (PERSISTENT) 18. The taxpayer sought exclusion of Persistent on the grounds inter alia that it is outsourcing its services; that it is also engaged in development of products with no segmental data available; and that it is expending around 1% of its total income of Rs.56.1 million on R&D activities. Undisputedly, Persistent has not been contested by the taxpayer before ld. TPO as well as ld. DRP. In the given ITA No.419/Del/2014 circumstances, we are of the considered view that if something new is to be examined let it be examined by the ld. TPO first as the taxpayer has preferred not to contest Persistent before the ld. TPO as well as DRP. So, this issue is set aside to the ld. TPO to examine afresh after providing an opportunity of being heard to the taxpayer.”

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ITA Nos.473 & 193/Del/2016

ITA Nos.473 & 193/Del/2016

Acropetal Technologies Ltd. (Segmental): 25. Assessee objected this company to be in the list of comparables mainly on the ground that this company employees cost is less than 25% of the total cost and also that this company is engaged in significant R &D activities and incurring significant advertisement, marketing and promotion expenses as a percentage of sale. Learned TPO observed that there appears to be merely a difference in classification of expenses in the annual report for FY 2010-11, and if we look at figures for the FY 2011-12 in the annual report, the expenses on salary and wages are correctly classified, and, as such, this is a good comparable as it has also engaged in offshore model of work as that of the assessee. 26. Ld. DRP held that this company is in software development, passed the employee cost filter, there is no evidence of increase in margin profit on account of creation of incubation business unit, as per website the company started as engineering design services and expanded its foray of services to add software service capabilities and as per page 53 of annual report, segment wise breakup of the revenue is also available. For these reasons, ld. DRP recorded that it is a good comparable. 27. Ld. AR brought to our notice that the salaries and consultancy charges including bonus incurred by Acropetal was Rs.13.51 crores whereas the technical sub contract expense was Rs.55.77 crores which accounts for only 13.74% and accordingly it does not pass through the filter proposed by the ld. TPO. 28. Ld. DR justified the orders of the authorities below basing on the observations of the ld. TPO and considered by the learned DRP to the effect that it is only a matter of difference in classification of expense and the financials of subsequent years ratify the same 29. Per contra, ld. AR submitted that when the matter relates to the FY 2010- 11 and the annual report is available in the public domain, the audited reports of this year are to be considered but not the financials of the next year. 30. On a perusal of page No.45 & 46 of the annual report of Acropetal, we find that the submission of the ld. AR is justified. We, therefore, direct the ld. AO to verify the employee cost percentage to the total cost and if it does not pass the filter, to exclude the same. E-Infochips Limited: 31. Assessee resisted the inclusion of this company in the list of comparables mainly contending that the company’s revenue from software development services is less than 75% of its operating revenue and also that it is engaged

ITA Nos.473 & 193/Del/2016

into diversified activities as could be seen from the annual report of this company. Earning of super normal profits was also contended before the ld. TPO. However, ld. TPO observed that the assessee is also engaged in Semantics, under two heads of income i.e. income from software development and income from IT services which put together amounts to 86% of the total income, as such the assessee cannot insist on considering the income only from software development. He further observed that the other activities are of very small volume and integrally connected with the function of providing software services. 32. Ld. DRP observed that the revenue from software services of this company is as high as 85% of total receipts and there was no earning from sale of software products. Only a small component of earning is from hardware. Following Chrys Capital case (supra) he held that when the companies are otherwise comparables, earning of super normal profit is not a ground to reject the company. 33. It is the argument of the ld. AR that the ld TPO vide paragraph No.16(i) of order selected one of the filters as “companies who have export sales less than 75% of the sales from the software development are excluded”, but E-Infochip Ltd. has got the ratio of service revenue to total operating revenue at 73.38% only. He further submitted that the significant accounting policy of this company vide item No.5 at page 43 of its annual report shows that the company is engaged in the software development and IT enable services and products which are considered the only reportable segment and, for want of segmental data relating to software development this company is not even comparable. Reliance is placed on the decision in Mumbai Tribunal in Ness Technologies (supra). 34. Ld. DR submitted that as could be seen from the scheduled income at page no.144 of the annual report paper book revenue from software development, hardware maintenance and information technology consultancy are part of the information technology services and it accounts for 86% of the revenue. He further submitted that even the assessee is having income from software development and ITES services. He submitted that for all practical purposes this company has only one segment that is software development and the revenue from this is about 86%, satisfying the filter. 35. We have gone through the annual report of this company for FY 2010-11 and found that the revenue from software development was 19, 21, 09, 661/-, revenue from hardware maintenance was Rs. 3,92,48,562/-and revenue from information technology consultancy was Rs. 2,90,26,028/-. Ld. DR asks as to club all these items of revenue under the head revenue from information technology services. We find it difficult to accept this plea of the Ld. DR and to hold that the information technology consultancy service also falls under the head software development so as to bundle it under that head.

ITA Nos.473 & 193/Del/2016

ITA Nos.473 & 193/Del/2016

E-Zest Solutions Ltd. 39. Assessee objected the inclusion of this company in the set of comparables mainly on the ground that this company is engaged into diversified range of software activities and its annual report shows that this company is an SEI- CMMi level III and ISO 9001:2008 certified product engineering and software development company, having special expertise in emerging technologies such as cloud, SAAS, business intelligence and mobility, and predicate it has been serving clients in more than eight industries across the globe with over 2000 software professionals on-board. The product engineering services/outsourced product development services of this company include the product design and development, product feature enhancement, product platform migration, software product testing, product maintenance and support, product release and license management, SAAS/SOA services, web 2.0 services etc ; enterprise application development services include customer relationship management, enterprise resource planning, business intelligence, knowledge management, enterprise application integration, consulting etc; ID services include global onsite/ offshore software development, custom software development/bespoke software development, independent software testing, RIA/Ajax application development etc and technology expertise of this company includes the technology competency centers in relation to Microsoft competency Centre, Sun Java competency Centre, open source competency Centre, Cloud computing practice, mobility practice and BI practice. 40. Ld. TPO observed that an independent enterprise that has to survive on its own will make efforts to have different customers, i.e., unlike the assessee which actually faces a single customer risk. He further observed that the assessee has not recognized with this risk in its risk metrics. He, therefore, using his company as a comparable. 41. Ld. DRP considered all the submissions of the assessee in detail but held that this company is engaged in software development service, as such is a valid comparable to the taxpayer. 42. It is the submission of the Ld. AR that page No. 39 of the annual report of this company under the heading, shows an entry relating to increase/(decrease) in stock. Further, at page No. 42 of the annual report white schedule 7 inventory is there is an entry work in process. Under the significant accounting policies of identity “I” at page No. 48 of the annual report, it is mentioned that “valuation of inventories: inventories are accounted for at cost, automatically realizable value, whichever is less.” Ld. AR submitted that the inventory is not a feature to be seen in software development industry. Basing on the sea submitted that the business model of the assessee is quite different from that of the e-zest and solutions Ltd.

ITA Nos.473 & 193/Del/2016

ITA Nos.473 & 193/Del/2016

Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co- ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the coordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. / TPO is accordingly directed." Considering these facts and the decision of the Tribunal, we direct the Ld. TPO to exclude the E-Zest Solutions Limited from the list of the comparables. 45. It is clear from the above that the e-Zest solutions Ltd is a rendering product development services and high-end technical services which come under the category of capable services and on the ground is not comparable with a company which is into software development services. Though the Ld. DR stated that in the entire annual report there is no mention as to the sale of any product and entire income is from service, there is no explanation forthcoming before us justifying the entries at page No. 39,42 and 48 of the annual report on the aspect of inventories.

ITA Nos.473 & 193/Del/2016

ITA Nos.473 & 193/Del/2016

Pvt. Ltd Vs. ACIT (ITA No. 6148/del/2015) whereby Tribunal directed to exclude the aforesaid company on account of unavailability of segmental data with respect to software development segment, as under:- “15.2 Considering the rival submissions, we find from page 58 of the TPO’s order that he has recognized sale of software products to the tune of Rs. 37 crore and odd. Though the break-up of revenue from software services products is available, but, the break-up of operating costs and revenues from these two segments have not been given. It is further observed that the TPO has taken entity level figures for the purposes of making comparison. Since such entity level figures contain revenue from both software services and software products, as against the assessee only providing software services, we are disinclined to treat this company as comparable. The assessee’s contention is accepted on this issue.” The Ld. AR also relied upon the decision of Delhi Bench of the Tribunal in the case of Motorola Solutions India Private Limited Vs. ACIT (ITA 5637/Del/2011), wherein, the company was rejected on account of significant intangibles in the form of ‘Sasken Branded products’ and exceptional year of operation, the relevant extract of which is reproduced as under: “We have considered the rival submissions and have perused the record of the case. The TPO has completely ignored the extraordinary business circumstances pointed out by assessee for which necessary adjustment was required to be made in accordance with Rule 10B(3) of Income Tax Rules. However, since this adjustment was not possible, therefore, this company should not have been included in the list of comparables. Further, we find that the company owns IPR and has branded products which also distinguishes it from the assessee and, therefore, keeping in view the decision of Hon’ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra), we direct the Id. TPO to exclude this comparable from the list of comparables.” 4.11. The Ld. DR relied upon the order of the TPO and the DRP. 4.12. We have heard both the parties and perused the records. The findings and reasoning given in Tribunal’s orders in case of Saxo India Pvt. Ltd Vs. ACIT (ITA No. 6148/del/2015) and Motorola Solutions India Private Limited Vs. ACIT (ITA 5637/Del/2011) are applicable to assessee’s case. This company is having extra-ordinary business circumstances during the year as well as there is no segmental bifurcation as relates to software services and software product available. Therefore, this company should be excluded from the comparables. Thus, we direct the TPO to exclude this comparable.”

ITA Nos.473 & 193/Del/2016

“E-CLERX SERVICES (E-CLERX) 47. The taxpayer sought to exclude E-Clerx for benchmarking its international transaction on the grounds inter alia that it is functionally dis-similar; that it has only one segment and has ordered to be excluded in taxpayer's own case for AY 2008-09 and also relied upon Ameriprise India Pvt. Ltd. vs. ACIT in ITA No.2010/Del/2014 for AY 2009-10, Capital IQ Information Systems vs. ACIT in ITA No.124/Hyd/2014 for AY 2009-10 and Macquarie Global Services Pvt. Ltd. vs. DCIT in ITA No.6803/Del/2013 for AY 2009-10. 48. A perusal of pages 715 & 716 of the annual report compendium shows that E-Clerx is Knowledge Process Outsourcing (KPO) providing data analytics and data process solutions to global enterprise clients, providing end to end support through trade lifecycle including trade confirmation, settlements, transaction, maintenance, risk analytic and reporting over the last year and also providing unique blend of services, process reengineering and automation. Furthermore, perusal of page 763 of annual report compendium shows that it is having no segmental details rather company operates under single primary segment i.e. data analytics and process outsourcing services. Ld. DR for the ITA No.419/Del/2014 Revenue contended that the taxpayer is also a KPO providing KPO services under data analytics.

ITA Nos.473 & 193/Del/2016

ITA Nos.473 & 193/Del/2016

2010-11, while directing the TPO to exclude this company from the list of comparables has observed as under:-

“24. TCS E Serve. Limited TPO included this comparable, which has a margin of 63.42%. The Id DRP has also held that the far profile of the company is similar. Before us, Id. AR submitted that the company is dissimilar functionally. In addition to BPO services, it is also engaged in technical services such as software testing, verification and validation. It has also developed software such as transport management software. It does not have segmental reporting too. It was further submitted that the company owns substantial intangible assets in form of software licenses and it makes a payment for Tata Brand and therefore it gets the benefit use brand value of Tata. Ld. DR relied on the orders of lower authorities and submitted that all the above reasons for selection of this comparable has been considered by the TPO. We have also considered the rival contention for exclusion of TCS e- service Ltd. It is mainly involved in transaction processing and technology services. It carries on business of providing technology service such as software testing, verification and validation. It is also developed a software such as transport management software therefore functionally this company is dissimilar to the assessee company, it also owns huge intangible and use of Tata Brand, which has definitely benefited this comparable, it is directed to be excluded.”

“19. Regarding Infosys BPO Limited, in the TP study report furnished before us at page No. 104 assessee has also included Infosys BPO Ltd as comparable holding that company provides business platforms customer service outsourcing etc. This shows that according to the assessee also this company is functionally comparable. However before ld. TPO appellant submitted that this company is functionally different. It was further submitted 42

ITA Nos.473 & 193/Del/2016

that it is a very high turnover company. Further this company has high brand value and the super normal profit .The Learned TPO rejected the contention of the assessee. On objection before Learned DRP the contention raised by the assessee were rejected. Before us assessee contended that this comparable is engaged in significantly large scale of operation and it has also undergone acquisitions during the year therefore it is exceptional year of operation. It was further, submitted that it has a very high brand value and intangibles and he referred to the goodwill of the comparable and for this reason he submitted that this comparable should he 'excluded’. Appellant also ' relied on several decisions of the ‘coordinate bench for exclusion of this company. We have carefully considered the rival contentions. We also perused annual accounts of comparable company submitted before us at page No.207 onwards of the paper book. This company is subsidiary of Infosys technologies Ltd and it is ranked amongst top 10 3rd party BPO companies in India. During the year this company has acquired for a total consideration, of Rs. 173 crores and a contingent consideration of Rs. 67 crores , membership interest in purchase agreement to acquire all the outstanding membership interest of Macchims system LLC. Accordingly this is a new addition of the subsidiaries of the comparable. Further on perusal of the balance sheet of the company which is placed at page No, 207 of the paper book we find that it is not a consolidated annual accounts but standalone annual accounts of comparable. Therefore in the financial results of the Infosys BPO Ltd there is no impact of the amalgamation or acquisition of shares of the other companies. A separate statement as required under section 212 of the Companies Act has been annexed with the annual accounts. Though assessee has contested in this year about the exclusion of the above company as comparable however we have perused decision of coordinate bench in ITA No. 6312/del/2012 for assessment year 2008-2009 dated 28/08/2014 in assessee’s own case. On perusal of above decision we have come to know that at page No. 3 of such decision where ITES segment is considered at serial No.8 Infosys BPO Ltd was considered as a comparable for that/year. It is noticed that assessee has not contested that Infosys BPO should be excluded for assessment year 2008- 2009 therefore for the current year we reject the argument of the assessee that it is functionally dissimilar in absence of any contrary material brought to our notice. Furthermore merely because company has higher profits, it cannot be excluded as comparable when its functions are similar to the functions of the appellant. In view of the past history of the assessee discussed in the order of the coordinate bench in assessee’s own case for assessment year 2008- 2009 and further as profitability figures have been taken by the Ld. TPO from the standalone balance sheet of the company we reject the contention of the assessee for exclusion of this comparable on these two counts. However as the asssessee has raised the issue of that this company has a huge brand value, however it was not demonstrated that whether such brand value has any impact on the pricing of the company or how it impacts the profitability of the company, therefore in the interest of justice we set aside this comparable to the file of Id TPO for fresh adjudication.”

ITA Nos.473 & 193/Del/2016

“58. Undisputedly, the Revenue has not treated foreign exchange gain/loss as non-operating item while operating arm's length price ITA No.419/Del/2014 of international transaction of the taxpayer in AYs 2008-09 and 2010-11.

ITA Nos.473 & 193/Del/2016

ITA Nos.473 & 193/Del/2016

under: "4.8. The ld. AR relied on Rule 10T(j) to contend that loss arising on account of foreign currency fluctuations cannot be included in the operating expense. We are not persuaded to give any mileage to the ld. AR on this count for the simple reason that Rule 10T is a part of Safe harbor rules notified on 18.09.2013 which are not applicable to the assessment year under consideration." 61. So, we are of the considered view that foreign exchange gain/loss cannot be treated as non-operating items while calculating the margin of the taxpayer as well as comparables. So, we direct to treat the foreign exchange gain/loss as non-operating margin as non-operating items while benchmarking the ITA No.419/Del/2014 international transactions. Consequently, ground no.4 is determined in favour of the taxpayer.”

The decision was pronounced in the open court on 25.08.2020. Sd/- Sd/- (AMIT SHUKLA) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 25th August, 2020. dk

ITA Nos.473 & 193/Del/2016