ITO, NEW DELHI vs. M/S. NAGARRO SOFTWARE PVT. LTD., NEW DELHI

The above cross appeals by the assessee and Revenue are preferred against the order of the ld. CIT(A) – 44, New Delhi dated 15.12.2014 pertaining to A.Y 2009-10. Since both these appeals were heard together, we are disposing them off by this common order for the sake of convenience and brevity.

The substantial grievance of the assessee is that the Assessing Officer/TPO erred in determining the total income of the assessee at Rs. 3,94,73,751/- as against the returned income of Rs. 24,61,650/-, thereby making an upward adjustment of Rs. 3,70,12,100/-.

The entire dispute revolves around the inclusion and exclusion of certain comparables while determining the Arm’s Length Price [ALP] in respect of international transactions with AE.

Briefly stated, the facts of the case are that the appellant company was incorporated as an Indian Company under the Indian Companies Act, 1956. The flagship company is Nagarro Inc., USA. The holding company is into the business of requirement analysis, quarterly project reviews, conflict resolution, marketing, sales and other support services operations on a vertically integrated basis. To augment its work process, it has the India subsidiary Nagarro Software Pvt Ltd., the appellant.

The appellant company is a software solution developer for its holding company Nagarro Inc and the German Associated in the areas of product co-development, health care and finance. It has a wholly dedicated unit for the purpose. In short, the appellant is a captive service provider.

The appellant is in the business of customised software development on contractual basis and the specifications of the same are provided by Nagarro Inc. USA and Nagarro GmbH, Germany. The domain and vertical of software development work relates to the development of software including coding, provides technical support in terms of research and development on technology, best practices, code reviews and software architecture. Besides this, managerial development work in the areas of project plans, project tracking and execution, inter team co-ordination and systemization of deliverables are also undertaken by the appellant.

The Operating Profit computed by the appellant company is as under:

Margin computation of comparable companies used by the appellant is as under:

Since the margin of the appellant company at 21.37% is higher than the mean margin of comparable companies at 4.25%, the transaction was taken at arm’s length.

During the course of TP assessment proceedings, the TPO rejected the companies where the turnover was less than Rs. 5 crores and directed the assessee to use current year data with same F.Y. and selected companies where the ratio of service income to total income was at least 75% and where income from exports is at least 75% of total income.

Based on the filters, the TPO examined the comparables used by the assessee as under:

However, after receiving the order of the first appellate authority, the TPO gave appeal effect and final list of comparables after giving effect to ld. CIT(A)’s directions were taken as under:

And ALP was computed as under:

Before us, the ld. counsel for the assessee argued for exclusion of the following four comparables, namely,

We will now address to the inclusion/exclusion of these four comparables.

Before the TPO, the appellant strongly contended that this company should not be taken as a comparable. The main contention of the assessee is that this company is engaged in the business of medical transcription, training, software development and consulting services. Its earning is from various activities and at the same time, no segmental information is available. The ld. CIT(A) confirmed the inclusion of this company by holding that the majority of income is from software development activities and its income from training and medical transcription is minimal.

Before us, the ld. counsel for the assessee reiterated what has been stated before the lower authorities.

We have given thoughtful consideration to the orders of the authorities below and have perused the Annual Report of this company which is placed at pages 432 to 492 of the paper book.

The operational income of this company is Rs. 9.35 crores, which includes income from training, software development and consulting services and medical transaction receipts. In its audited report under the head “Accounting Policies and Notes Forming Part of the Account” it has been specifically mentioned that segmental report is not available.

In our considered opinion, services rendered such as job placement portal and BPO services cannot be compared with the business profile of the assessee. We also find that this company has also launched a job portal in the current F.Y. namely, Logtalent.com and further proposes to launch 3-4 more portals in next F.Y. There is a significant abnormal growth in profit of 65.40%.

For these very reasons, the co-ordinate bench in the case of United Health Group Information Services [P] Ltd in & 825/DEL/2014 had excluded this company from the final set of comparables. The relevant findings of the co-ordinate bench read as under:

Considering the business profile of this company in light of decision of the co-ordinate bench [supra] we direct the Assessing Officer/TPO to exclude this company from the final set of comparables.

Before the TPO, the assessee strongly objected for inclusion of this company because of significant difference between OP/TC normal and OP/TC without forex gain/loss.

The TPO dismissed this contention of the assessee as he has excluded the forex gain from the calculation of OP. Another reason given by the TPO for inclusion of this company is that this company predominantly is a software service company providing outsourced product development service and further, the revenues are only 5%.

Before us, the ld. counsel for the assessee vehemently stated that in so far as forex gain is concerned, Safe Harbour Notification dated 18.09.2013 has been held to have prospective effect as held by the Hon'ble High Court of Delhi in the case of Fiserv India Pvt Ltd order dated 06.01.2016. The ld. counsel for the assessee further pointed out that income of this company comprises of sale of software services and products and no segmental accounts are available.

The ld. DR strongly supported the orders of the TPO.

We have given thoughtful consideration to the orders of the authorities below. In so far as whether forex exchange fluctuation is to be considered as operating expenses/income on the basis of Safe Harbour Rules is concerned, we find that the Hon'ble High Court of Delhi in the case of Fiserv India Ltd [supra] has categorically held that the said Notification is prospective and, therefore, the same cannot be considered for A.Y under consideration.

A perusal of the Annual Report of this company reveals that it is true that under the head Income “Sale of Software Services and Products” has been mentioned and bifurcation of software services and products given in Schedule 11 is only in respect of overseas sales and domestic sales. Further, in Schedule 14 under the head “Operating and other expenses” there are software support charges, commission on sales to other than sole selling agents, advertisements, sponsorship fees and other expenses. This shows that this company is paying commission and also incurring expenditure on advertisement and sponsorship.

In our considered opinion, for want of segmental reporting, this company cannot be considered as a good comparable. For similar reasons, this company was excluded by the co-ordinate bench in the case of United Health Group Information Services [P] Ltd [supra]. For the dissimilarity in the functions and for want of segmental accounts, we direct this company to be excluded from the final set of comparables.

The TPO included this company for the reason that out of total sales of Rs. 27,385 crores, Rs. 1919 crores is from BPO and Rs. 2,225/- crores is from IT infrastructure services. Hence, these turnover figures contribute only 15% of the total revenue. The TPO further observed that sale of equipment and software license constitutes only 3.76% and inventory is only 0.13%. The assessee had strongly objected for inclusion of this company stating that enterprise solutions, such as, enterprise resource management, supply chain, management customer relationship management, IT infrastructure services business processing outsourcing, ITES, engineering and industrial services are non-comparable services with that of the business profile of the assessee company. The ld. counsel for the assessee further pointed out that there is sale of equipment and software licence and further, there are significant R & D activities.

The ld. DR supported the findings of the TPO.

We have given thoughtful consideration to the orders of the authorities below and have perused the Annual Report of this company which is placed at pages 746 to 939 of the paper book. The diversified business activities of this company have also been mentioned above.

For these very reasons, the coordinate bench in the case of United Health Group Information Services [P] Ltd [supra] has excluded this company from the final set of comparables. Considering the business profile of the assessee vis a vis that of TCS, we are of the considered view that TCS cannot be taken in the final set of comparables. We, accordingly, direct for exclusion of the same.

Before the TPO, the ld. counsel for the assessee strongly objected to the inclusion of this company on the ground that this company derives revenue from various sources, such as, licence, software services, export from SEZ unit, revenue from subscription etc. Objections of this assessee were dismissed by the TPO holding that this company provides software development services akin to that of the profile of the assessee. Another reason given by the TPO is that sale of licence is only Rs. 2.32 crores out of total sale of Rs. 77.03 crores thereby treating this company as predominantly software services provider. The inclusion of this company was upheld by the ld. CIT(A).

Before us, the ld. counsel for the assessee reiterated what has been stated before the lower authorities and the ld. DR strongly supported the findings of the TPO.

We have given thoughtful consideration to the orders of the authorities below and have carefully perused the Annual Report of this company which is placed at pages 940 – 996 of the paper book. Total sales as per P & L Account is Rs. 77 crores and its bifurcation shows revenue from sale of licence , software services, export from SEZ unit export from STPL Unit, and revenue from subscription. But no segmental accounts are available. Considering the business profile of this company vis a vis that of the appellant company, and for want of segmental reporting, we direct the Assessing Officer/TPO to exclude this company from the final set of comparables.

The assessee has also pointed out some margin computation errors in the case of Goldstone Technologies Limited and Sasken Technology Limited. The assessee has furnished the corrected operating margins of these comparables which is placed at pages 194- 195 of the paper book.

We are of the considered view that the TPO should examine the correct margins of these companies as furnished by the assessee and if found correct, may decide the issue afresh as to whether these companies are to be included or excluded from the final set of comparables. With these directions, we restore the inclusion/exclusion of Goldstone Technologies Ltd and Sasken Technologies Ltd to the file of the TPO.

In the case of CG VAK Software & Exports Ltd, the TPO excluded this company by stating that this company does not qualify employee cost filter as employee cost is 7.22% which is less than 25% of the total cost. However, as per the Annual Report of this company, we find that its employee cost is around 75.42%. The computation of employee cost is also made available at page 214 of the paper book. We, accordingly, direct the TPO to re-examine the employee cost of this company and if found that the employee cost of this company is 75.42%, then the same should be included in the final set of comparables.

In so far as SIP Technology is concerned, the reasons given by the TPO is that the sales of this company is Rs. 1.25 crores which is less than Rs. 5 crores and fails the filter of sales of more than Rs. 5 crores and the employee cost is 19.63%.

In so far as the turnover is concerned, we find that the appellant company’s turnover is only Rs. 35 crores. Therefore, we do not find any reason why filter of more than Rs. 5 crores has been applied by the TPO. In our considered opinion, when there is no functional dissimilarity, then this company should not have been excluded by the TPO. Further, we find that the employee cost of this company worked out to 38.28%. We, accordingly, direct the TPO to re-examine the employee cost only and if found to be at 38.25%, there should not be any reason for exclusion of this company from the final set of comparables.

With the above directions, the appeal of the assessee is allowed in part for statistical purposes.

The only grievance of the revenue is that the ld. CIT(A) erred in excluding M/s Bodhtree Consulting Ltd and Infosys Ltd from the final set of comparables adopted by the TPO.

Before the TPO, the assessee has strongly objected for inclusion of this company on the ground that this company has shown abnormal profit during the F.Y. under consideration in comparison to profit shown in earlier years and subsequent years. The TPO rejected the contention of the assessee.

Before the ld. CIT(A), the same objection was raised and after considering the facts and submissions the ld. CIT(A) held as under:

Before us, the ld. DR could not controvert to the findings of the ld. CIT(A) though referred to the decision of the coordinate bench in the 106 Taxmann.com 14. However, the said decision of the coordinate bench pertains to A.Ys 2003-04 and 2004-05 and the abnormal profit is seen in F.Y. 2008-09. Considering the abnormality in the profit for the year under consideration, we decline to interfere with the findings of the ld. CIT(A).

In so far as exclusion of Infosys Ltd is concerned, the assessee has raised an objection on the turnover of this company and placed strong reliance on the decision of the Hon'ble High Court of Delhi in the case of Agnity India Technologies Pvt. Ltd 36 Taxmann.com 289 wherein it has been held that Infosys Ltd is not a proper comparable. The contentions of the assessee were dismissed by the TPO which were once again raised before the ld. CIT(A) and the ld. CIT(A) while excluding this company held as under:

Before us, the ld. DR placed strong reliance on the decision of the coordinate bench in 106 TAxmann.com 14 and prayed for inclusion of this company.

Per contra, the ld. counsel for the assessee reiterated what has been stated before the lower authorities.

We have carefully perused the orders of the authorities below.

In the result, the appeal of the assessee in is partly allowed for statistical purposes whereas the appeal of the Revenue in is dismissed.