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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER :
Since common questions of facts and law have been raised in both the aforesaid appeals, the same are being disposed off by way of composite order to avoid repetition of discussion.
Appellant, M/s. Aithent Technologies Pvt. Ltd. (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 28.01.2016 & 19.12.2016 passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) qua the assessment years 2011-12 & 2012-13 respectively on the grounds inter alia that :-
“AY 2011-12 1. The order of the Learned Assessing Officer is bad in law and on the facts and circumstances of the case.
2. The Ld. Transfer Pricing Officer/ Ld. Assessing Officer has erred on facts and circumstances of the case in determining the arm's length adjustment to the appellant's international transaction from associated enterprises and thereby resulting in the enhancement of returned income of the appellant by Rs.1,57,79,500/-.
3. The Ld. Assessing Officer has completely ignored the facts in the submissions made before him and proceeded to make transfer pricing adjustment on the basis of TPO's order.
4. The Ld. Transfer Pricing Officer has erred in facts and in law to reject, based on his subjective grounds and presumptions, the economic analysis conducted by the appellant for determination of the arm's length price.
5. In relation to quantitative search filters applied in benchmarking analysis, the Ld. TPO has erred in facts and circumstances by: a) Rejecting/modifying the filters applied by the Appellant in its TP study and thereby erroneously holding that the TP Study is defective and unreliable; b) Erroneous understanding of the purpose of Appellant's usage of multiple year data and erroneously stating had objected to using contemporaneous data, whereas the appellant has used only current year in respect of com parables; c) Erroneously rejecting the turnover filter applied by the Appellant and disregarding the contentions raised by Appellant
w.r.t differences in scale of operations between the Appellant and the companies selected by Ld. TPO as comparables; d) Erroneous application of turnover filter applied by Ld. TPO of Rs 5 crores without providing any evidence to support his rationale for applying this filter and not applying any upper cap filter, thereby comparing Appellant having turnover of Rs. 20 crore with giants like Infosys having turnover of thousands of crores; e) Erroneous modification of manufacturing and trading sales to total sales filter of 33% as applied by Appellant to 75% of sales from software development activities without providing any logical reason for such a modification; f) Erroneous computation of related party transactions to sales ratio of comparable companies by including both revenue and expense transactions together in numerator and disregarding the Appellant's contention regarding calculation of expense and revenue side related party transactions separately using appropriate base as denominator; g) Erroneous application of export sales to total sale filter by ignoring Appellant's contentions on reliability of export sales data, effect of outstanding receivables and geographical differences in markets to which exports are being made;
6. In relation to companies selected/rejected as comparables, Ld. TPO has erred in facts and circumstances by:
a) Erroneously all the four comparables mentioned in TP study have been rejected; b) Erroneously rejecting CG Vak Software & Exports Ltd on ground that it fails employee cost filter applied by Ld. TPO and ignored Appellant's contention that the said company clears the employee cost filter applied by Ld. TPO; c) Erroneously rejecting KALS Information Systems Ltd. by stating that segmental information is not reliable and ignored the Appellant's contention regarding selection of company as a whole as a comparable company; d) Erroneously rejecting Virinchi Technologies Ltd. on employee cost filter and by failing to appreciate functional profile of the comparable company; e) Erroneously rejecting Melstar Information Technologies Ltd. on export sales filter and ignored Appellant's contention on reliability of export sales data, effect of outstanding receivables and geographical differences in markets to which exports are being made; f) Erroneously accepting Igate Global Solutions Ltd in final comparable set used by Ld. TPO after accepting Appellant's contentions regarding its exclusion on the basis of dissimilar business activities as mentioned in the Annual Report and also expressly stating in his order that this company should be rejected; g) Erroneously accepting companies (i.e. Infosys Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd and Zylog Sytems Ltd) which are having high turnover and disregarding the Appellant's contentions w.r.t differences in functional profile arising due to differences in scale of operations; h) Erroneously accepting companies (i.e. Infosys Ltd, Sasken Communication Technologies Ltd) having intangibles/ intellectual property/patents in his final comparable set; i) Erroneously accepting companies which are functionally different or having very less revenue from software development activities (i.e. Wi pro Technologies Ltd and Zylog Systems Ltd.) in his final comparable set.
7. The Ld. TPO has erred in considering operating margin of the Appellant as 10.62% and disregarded the correct margin of the Appellant i.e. 12.62% without providing any reason for not considering the correct margin.
8. The Ld. TPO/ Ld. AO has not rejected our TP Study but has in unlawful manner cherry picked companies disregarding their FAR and having high margins and very high turnover, products/intangibles, software support activities in comparable set, which are completely different from the profile of the Appellant company.
9. The Ld. TPO has erred in laws and facts of the case by ignoring the idle capacity adjustment made on account of idle capacity.
The Ld. TPO has erred in laws and facts of the case by ignoring the differences between risk profile of Appellant and companies selected by him as comparables and denying adjustment on account of such differences in Risk differences.
11. The Ld. Transfer Pricing Officer has erred in law by treating Foreign exchange income/ expense and Miscellaneous income as non- operating, while Ld. TPO himself has considered
the miscellaneous income as operating while calculating the operating margins of the comparable companies.
Honourable DRP has completely ignored the entire submission made by the appellant and passed the order in a mechanical manner without considering any of the submission/fact placed before it.”
“AY 2012-13
“1. The assessment order of the Learned Assessing Officer (AO) is bad in law and on the facts and circumstances of the case.
2. The Ld. AO has erred on facts and circumstances of the case in determining the arm's length adjustment to the appellant's international transaction with respect to software development services rendered to associated enterprise and thereby resulting in the enhancement of returned income of the appellant by Rs.1,26,10,260/-.
3. The Ld. Transfer Pricing Officer (TPO) has erred on facts and in law to reject, based on his subjective grounds and presumptions, the economic analysis conducted by the appellant for determination of the arm's length price.
4. The Ld. TPO/ AO/DRP has erred on facts and circumstances of the case in rejecting the appropriate filters as applied by the appellant and further modifying the filters arbitrarily without proper appreciation of the facts, law and commercial reality.
5. In relation to quantitative search filters applied in benchmarking analysis, the Ld. TPO/DRP has erred in facts and circumstances by:
a) Rejecting/modifying the filters applied by the appellant in its TP study and thereby erroneously holding that the TP Study is defective and unreliable; b) Erroneous understanding of the purpose of appellant's usage of multiple year data and erroneously stating having objected to using contemporaneous data, whereas the appellant has used only current year in respect of comparables; c) Erroneously rejecting the turnover filter applied by the appellant and disregarding the contentions raised by appellant w.r.t differences in scale of operations between the appellant and the companies selected by Ld. TPO as comparables; d) Erroneous application of turnover filter applied by Ld. TPO without providing any evidence to support his rationale for not applying any upper cap filter, thereby comparing appellant having turnover of Rs. 19.57 crores with giants having turnover of thousands of crores; e) Erroneous modification of manufacturing and trading sales to total sales filter of 33% as applied by appellant to 25% of total sales without providing any logical reason for such a modification; f) Ld. TPO has erred in facts and circumstances by erroneous application of employee cost to total cost filter by ignoring appellant's contention of taking total sales as the appropriate denominator. g) Erroneous computation of related party transactions to sales ratio of comparable companies by including both revenue and expense transactions together in numerator and disregarding the appellant's contention regarding calculation of expense and revenue side related party transactions separately using appropriate base as denominator; h) Erroneous application of service income from exports to total sale filter of 75% by ignoring appellants contentions on reliability of export sales data, effect of outstanding receivables and geographical differences in markets to which exports are being made;
6. In relation to companies selected/rejected as comparables, Ld. TPO has erred in facts and circumstances by:
a) Erroneously rejecting three out of four comparables of appellant i.e. Bells Softech Limited, Infomile Technologies Limited and Kals Information Systems Ltd. without giving any explanation or working for their rejection even after being directed by Hon'ble DRP to accept these as valid comparables on passing the filters applied by Ld. TPO; b) Erroneously accepting companies (i.e. Infosys Ltd, L& T Infotech Ltd, Persistent Systems Ltd, R S Software(lndia) Ltd, Sasken Communication Technologies Ltd, Tata Elxsi Ltd and Zylog Sytems Ltd) which are having high turnover and disregarding the appellant's contentions w.r.t differences in functional profile arising due to differences in scale of operations; c) Erroneously accepting companies (i.e., Infosys Ltd, Lucid Software Ltd., Persistant Systems Ltd., Sasken Communication Technologies Ltd) having intangibles/ intellectual property/patents in his final comparable set; d) Erroneously accepting companies (Le. Infosys Ltd, Persistant Systems Ltd. and Zylog Systems Ltd.) having peculiar or abnormal business conditions like mergers/acquisition etc. during the year under consideration and for which appropriate adjustments cannot be taken out; e) Erroneously accepting companies which are functionally different or having very less revenue from software development activities (i.e., Infosys Ltd, L& T Infotech, R S Software(India) Ltd., Sasken Communication Technologies Ltd, Spry Resources Pvt. Ltd., Tata Elxsi Ltd., Thirdware Solution Ltd. and Zylog Systems Ltd.) in his final comparable set.
The Ld. AO/TPO/DRP has erred in laws and facts of the case by ignoring the appellant's contention with respect to erroneous computation of transfer pricing adjustment by making the adjustment at entity level instead of the adjustment being made only in respect of international transactions undertaken by the appellant.
8. The Ld. AO/TPO/DRP has erred in laws and facts of the case by ignoring the idle capacity adjustment claimed by the appellant on account of the unutilized capacity during the year.
9. The Ld. AO/TPO/DRP has erred in laws and facts of the case by ignoring appellant's contention as to the requirement of suitable adjustment for difference in risk undertaken by appellant and comparable companies."
Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Aithent Technologies Pvt. Ltd. (ATPL), the taxpayer incorporated in India on November 3, 2000 is engaged into the development of computer software. The taxpayer is a wholly owned subsidiary in USA, namely, Aithen Inc. (AI), a branch office in Canada and sales & marketing offices in Japan. The taxpayer acquired 100% of the equity capital of “Software Services International Incorporated” after obtaining approval from Reserve Bank of India. Thereafter, the name of “Software Services International Incorporated” was changed to Aithent Inc. in the year 2001. During the years under assessment i.e. 2011-12 & 2012-13, the taxpayer entered into international transactions as under :-
AY 2011-12 S.No. International Transaction Amount (in Rs.) 1 Software Development Services 8,71,62,752 AY 2012-13 S.No. International Transaction Amount (in Rs.) 1 Software Development Services by 12,61,36,720 ATPL to AI 2 Software Development Services by AC 48,56,264 to AI
For both AYs 2011-12 & 2012-13, the taxpayer in order to benchmark its international transactions used Transactional Net Margin Method (TNMM) as Operating Profit/Operating Cost (OP/OC) as Profit Level Indicator (PLI) as the Most Appropriate Method (MAM). The taxpayer chosen 4 companies and 6 companies as comparables to benchmark its international transactions with average margin of 6.80% and 4.50% by using multiple year data as against its own margin at 10.62% and 10.13% for AY 2011-12 & 2012-13 respectively.
For AY 2012-13, Transfer Pricing Officer (TPO) rejected all the 4 comparables by applying various filters detailed in para 2.1 of the TP order, selected 6 new comparables with average margin of 32.97% and proposed the adjustment on account of arm’s length as under :-
Operational Cost 78,792,386 Arm’s Length Price at a Margin of 32.97% 104,770,236 Price Received 87,162,752 105% of the Price received 91,520,890 Proposed Adjustment u/s 92CA 17,607,484 The above shortfall of Rs.1,76,07,484/- is being proposed as an adjustment to the price shown by the taxpayer under the IT segment in its books of account. The assessing will accordingly enhance the income of the assessee by Rs.1,76,07,484/-. This shall be treated as the cumulative adjustment u/s 92CA.”
6. For AY 2012-13, the ld. TPO in order to benchmark the international transactions applied various filters detailed in para 2.1 of T.P. order rejected 12 comparables out of 13 comparables chosen by the assessee, introduced 13 new comparables and arrived at the average margin of 18.74% and computed the Arm’s Length Price (ALP) of international transactions as under :-
Operating Cost 18,33,62,071 Arm’s Length Margin (%) 18.74% Arm’s Length Price (ALP) 21,77,24,123 Price Received 20,19,41,697 Shortfall being adjustment u/s 92CA 1,57,82,426 The above shortfall of Rs.1,57,82,426/- is being proposed as an adjustment to the price shown by the taxpayer u/s 92CA.”
7. Assessee carried the matter before the ld. DRP by filing objections who has confirmed proposed adjustments made by the ld. TPO for AY 2011-12 by dismissing the objections. However, for AY 2012-13, ld. DRP directed the ld. TPO to correct as well as comparables by removing computational errors in view of the Safe Harbour Rules notified by CBDT, granted working capital adjustment and thereby average margin of comparables has been reduced to 17.01% as against 18.74% computed by the ld. TPO. Consequently, TP adjustment proposed by TPO as Rs.1,57,82,426/- has been reduced to Rs.1,26,10,260/-. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeals in both the AYs 2011-12 & 2012-13.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
Undisputedly, TNMM with OP/OC as PLI as the MAM applied by the taxpayer has been accepted by the ld. TPO as well as ld. DRP. It is also not in dispute that ld. DRP has not interfered in the final set of comparables chosen by the TPO for both the AYs 2011-12 & 2012-13 to benchmark the international transactions qua software development services.
10. Now, the only challenge made by the taxpayer is selection and rejection of comparables made by the TPO as well as ld. DRP.
We would examine the suitability of comparables rejected as well as selected by the TPO for AYs 2011-12 & 2012-13 separately.
The taxpayer challenged rejection of its comparables by the ld. TPO and thereby sought inclusion of its 4 comparables viz. CG Vak Software & Exports Ltd., Kals Information Systems Ltd., Melstar Information Technologies Ltd. & Virnichi Technologies Ltd. for benchmarking the international transactions and further sought exclusion of 5 comparables viz. Wipro Technologies Services Ltd., Infosys Ltd., I gate Global Solutions Ltd., Persistent Systems Ltd. & Sasken Communication Technologies Ltd. to benchmark the international transactions qua software development services.
11.1 Ld. TPO after applying TNMM with OP/OC as PLI as MAM chosen 6 comparables with average margin of 32.97%, which are as under :-
S.No. Company Name OP/OC 1 I gate Global Solution Ltd. 23.71% 2 Infosys Ltd. 43.53% 3 Persistent Systems Ltd. 23.08% 4 Zylog Systems Ltd. 28.74% 5 Sasken Communication Technologies 24.36% Ltd. 6 Wipro Technologies Ltd. 54.42% Average 32.97% Software & Exports Ltd., Kals Information Systems Ltd., Melstar Information Technologies Ltd. & Virnichi Technologies Ltd. and suitability thereof is being examined as under.
CG VAK Software & Exports Ltd. (CG Vak)
Ld. TPO rejected CG Vak as a comparable on the ground that it fails employee cost filter (6%). Ld. DRP confirmed the rejection of CG Vak by TPO.
However, when we examine the filters applied by the TPO to benchmark the international transactions detailed in para 2.1, there is no such filter such as employee cost filter applied by the TPO.
Even otherwise, when we examine annual report of CG Vak for AY 2011-12 at page 23 of the paper book-2 along with Notes annexed forming part of accounts employee cost is Rs.4,73,01,685/- which is 70.50% of the total operating expenses of Rs.6.7 crores. Functionality of CG Vak vis-à-vis taxpayer has not been disputed by the ld. TPO. In view of the financials of CG Vak, we hereby direct TPO/AO to verify employee cost of CG Vak with reference to next year annual report so as to decide the suitability of CG Vak as a comparable.
KALS INFORMATION SYSTEMS LTD. (KALS)
Ld. TPO rejected Kals as a comparable chosen by the taxpayer on the ground that segmental information is not matching with entity level financials. There is no dispute as to the functional similarity between taxpayer and Kals. Ld. TPO also applied taxpayer’s lower turnover cap and applied lower turnover cap of Rs.5 crores. However, in AY 2012-13, AO accepted lower turnover cap of Rs.1 crore and TPO himself applied lower turnover cap of Rs.1 crore in taxpayer’s own case for AY 2009-10.
Coordinate Bench of the Tribunal in case of M/s. Mercedes Benz Research & Development India Pvt. Ltd. vs. ACIT in IT(TP) A.No.291/Bang/2015 order dated 28.04.2017 examined the issue as to how the turnover filter is applicable for inclusion and exclusion of any company as comparable by returning following findings :-
“4. We have considered the rival submissions. We find that the learned DR is objecting to the application of turnover filter and the learned AR of the assessee is also not insisting on applying of turnover filter. But when the assessee is requesting for exclusion of this company and if it is seen that this company has to be excluded by applying turnover filter, then there is no reason for ignoring the turnover filter merely on this basis that in a given case, there may be other reasons of exclusion. Regarding the objection of learned DR of the revenue that size of turnover in the case of a company rendering Software Development Services does not affect the profit margin and therefore, in such cases, turnover filter should not be applied, we find that on this aspect, we may draw support from the safe Harbour Rules framed u/s 92CB of the I. T, Act. In particular, Rule 10TC states that Software Development Services are eligible International
Transaction for Safe Harbour Rules and as per Rule 10TD (2), rate of 20% is prescribed for those entities where the turnover is below Rs.500 Crores and in cases where turnover exceeds Rs. 500 Crores, the prescribed rate is 22%. It implies that as per these rules, size of turnover has impact on profit margin in cases of companies rendering Software Development Services also. These rules are not applicable in the present case but an inference can be drawn that size of turnover has impact on profit margin In cases of companies rendering Software Development Services also. Therefore, this argument of the learned DR of the revenue is rejected. Moreover, this tribunal is consistently holding that turnover filter is applicable to software development service company also and such filter applied is 1/10th of the turnover of the tested party or 10 times of the turnover of the tested party. In the present case, the turnover of Infosys Ltd. is Rs. 21,140 crores which is many times more than the turnover of the assessee company of Rs.108 crores. Under these facts, in our considered opinion, the turnover filter is applicable and by applying the turnover filter, this company has to be excluded. We direct the AO/TPO accordingly.”
So, following the aforesaid order passed by the coordinate Bench of the Tribunal, we are of the considered view that low turnover cap applied by the TPO in case of taxpayer is required to be restricted to Rs.1 crore instead of Rs.5 crores.
Even by applying the rule of consistency, we are of the considered view that when there is no change in the business model of the taxpayer in AYs 2008-09, 2009-10 & 2012-13 as well as year under assessment for AY 2011-12, rule of consistency has to be followed and TPO is directed to apply the turnover cap of Rs.1 crore as against cap of Rs.5 crores applied by him. So far as, question of segmental information being not matching with entity level functions as has been held by ld. TPO is concerned, as per AS-17 on segment reporting, revenue derives from reportable segmental results are not expected to match with entity-wise results. So, in these circumstances, Kals is ordered to be included in the final set of comparables.
MELSTAR INFORMATION TECHNOLOGIES LTD. (MELSTAR)
Ld. TPO rejected Melstar as a comparable on the ground that it fails export filter. However, it is fairly conceded by ld. ARs for the parties to the appeals that detail of export sales was not available in public domain. So, when detail of export sales is not available Melstar cannot be rejected just like that. So, we direct the ld. TPO to rework the suitability of Melstar as a comparable vis-à-vis taxpayer by supplying the copy of details of export sales of Melstar relied upon by him.
VIRNICHI TECHNOLOGIES LTD. (VIRNICHI)
Ld. TPO rejected Virnichi which is taxpayer’s comparable on the ground that it fails employee cost filter. However, when we examine filters applied by the ld. TPO to benchmark the international transaction, there is no such filter such as employee cost filter applied by the ld. TPO. In these circumstances, ld. TPO as a comparable vis-à-vis the taxpayer.
EXCLUSION OF COMPARABLES SOUGHT FOR BY THE TAXPAYER WIPRO TECHNOLOGIES SERVICES LTD. (WIPRO)
This is TPO’s comparable. The taxpayer sought its exclusion on the ground that it is functionally dissimilar and that it does not qualify for an independent comparable on account of its related party transactions. When we examine the Director’s Report of Wipro for FY 2009-10 it has come on record that Wipro has entered into Master Services Agreement with Citi Group Inc. for a period of 6 years and the terms of the Master Services Agreement with Citi Group was determined by the Wipro Ltd., the holding company of Wipro Technologies Services Ltd.. So, the transactions undertaken by Wipro with Citi Group amount to deemed international transactions u/s 92B(2) of the Act. So, we are of the considered view that due to related party transactions, Wipro is not a suitable independent comparable.
Coordinate Bench of the Tribunal in case of Cadence Design Systems (I) (P.) Ltd. vs. ACIT (2018) 93 taxmann.com 227 (Delhi-Trib.) for AY 2011-12 examined the suitability of Wipro as a comparable vis-à-vis software development services provider and on the basis of Master Service Agreement with Citi Group for delivery of Technical Infrastructure Services Ltd. and application of maintenance services for a period of 6 years. So, in view of the mater, we are of the considered view that Wipro is not a suitable comparable vis-à-vis the taxpayer for benchmarking the international transaction qua software development services.
INFOSYS LTD. (INFOSYS)
The taxpayer sought exclusion of Infosys on the grounds inter alia that Infosys also deals in software products; that it is having huge brand value and having patents; that its R&D expenditure is Rs.527 crores i.e. 2.1% of the revenue; that Infosys has goodwill worth Rs.916 crores and intellectual property rights worth Rs.12 crores. All the aforesaid facts highlighted by the taxpayer finds mention in the annual report, available at pages 432, 438 & 470 of the paper book, and has not been refuted by the ld. DR for the Revenue. From the perusal of annual report at pages 431 & 436 of the paper book, it has come on record that Infosys also deals in software products, namely, “Finnacle". In these circumstances, Infosys, a giant company, cannot be a suitable comparable vis-à-vis taxpayer who is a captive service provider having no expenditure on R&D, having no goodwill and intellectual property rights as well as patents.
Coordinate Bench of the Tribunal in case of Clear 2 Pay India (P.) Ltd. vs.ITO (2018) 95 taxmann.com 284 (Delhi) examined the comparability of Infosys vis-à-vis the routine software development service provider in AYs 2011-12 & 2012-13 and ordered to exclude the same by relying upon the case of CIT vs. Agnity India Technologies (P.) Ltd. (2013) 36 taxmann.com 289 rendered by Hon’ble Delhi High Court. Operative part of the findings returned by the Hon’ble Delhi High Court in the aforesaid judgment excluding Infosys is as under :-
“5. The tribunal has observed that the assessee was not comparable with Infosys Technologies Ltd., as Infosys Technologies Ltd. was a large and bigger company in the area of development of software and, therefore, the profits earned cannot be a bench marked or equated with the respondent, to determine the results declared by the respondent-assessee. In paragraph 3.3 the tribunal has referred to the difference between the respondent-assessee and Infosys Technologies Ltd. For the sake of convenience, we are reproducing the same:
Basic Particular Infosys Technologies Agnity India Ltd. Risk Profile Operate as full- Operate at fledged risk taking minimal risks as entrepreneurs the 100% services are provided to AEs Nature of Services Diversified- Contract consulting, Software application design, Development development, Services. reengineering and maintenance system integration, package evaluation and implementation and business process management, etc. (refer page 117 of the paper book) Revenue Rs.9, 028 Crores Rs.16.09 Crores
Ownership of Develops/owns branded/proprietary proprietary products products like Finacle, Infosys Actice Desk, Infosys iProwe, Infosys mConnect, Also, the company derives substantial portion of its proprietary products (including its flagship banking product suite “Finacle‟) Onsite Vs. Offshore As much as half of The appellant the software provides only development services offshore services rendered by Infosys (i.e., remotely are onsite (i.e., from India) services performed at the customer’s location overseas). And offshore (50.20%)(Refer page 117 of the paper book) than half of its service, income from onsite services. Expenditure on Rs.61 Crores Rs. Nil (as the Advertising/Sales 100% services promotion and are provide to brand building AEs) Expenditure on Rs. 102 crores Rs. Nil Research & Development Other 100% offshore (from India)
Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent assessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted.
7. Learned counsel for the appellant Revenue during the course of hearing, drew our attention to the order passed by the TPO and it is pointed out that based upon the figures and data made available, the TPO had treated a third company as comparable when the wage and sale ratio was between 30% to 60%. By applying this filter, several companies were excluded. This is correct as it is recorded in para 3.1.2 of the order passed by the TPO. TPO, as noted above, however had taken three companies, namely, Satyam Computer Service Ltd., L&T Infotech Ltd. and Infosys Technologies as comparable to work out the mean.
8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The tribunal for valid and good reasons has pointed out that Infosys Technologies Ltd. cannot be taken as a comparable in the present case. This leaves L&T Infotech Ltd. which gives us the figure of 11.11 %, which is less than the figure of 17% margin as declared by the respondent-assessee. This is the finding recorded by the tribunal. The tribunal in the impugned order has also observed that the assessee had furnished details of workables in respect of 23 companies and the mean of the comparables worked out to 10%, as against the margin of 17% shown by the assessee. Details of these companies are mentioned in para 5 of the impugned order.”
So, in view of the matter, we are of the considered view that Infosys is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded.
I GATE GLOBAL SOLUTIONS LTD. (I GATE)
The taxpayer sought exclusion of I Gate on the ground that the ld. TPO has erroneously excluded the same from the final set of comparables despite the fact that findings have been returned against its inclusion. I Gate has presence of intangibles in the shape of goodwill worth of Rs.225.99 crores and it has high turnover of Rs.1184.55 crores which is 59 times of the taxpayer.
When we examine discussion made by the ld. TPO as to the suitability of I Gate as a comparable in the light of the argument addressed by the taxpayer in para 8.2 at page 25 of the TP order, he has ordered to exclude the same as a comparable by returning following findings :-
“Assessee objected on the inclusion of this comparable submitting that this is an ITES company and produced various snap shots from the Annual Report of the company proving that dominatently it is an ITES company. Assessee’s claim is verified from the Annual Report and this company is taken out from the final list of comparables in assessee’s case.”
When ld. TPO himself has verified the claim of the taxpayer as to non-suitability of I Gate as a comparable vis-à-vis the taxpayer and ordered to keep the same out of the final list, it comparables. Even otherwise, when we examine page 229 of the paper book Volume-3 which is fixed assets schedule, it has come on record that I Gate has goodwill worth Rs.225.99 crores.
Similarly, perusal of profit & loss statement, available at pages 300 to 302 of the Paper Book Vol.III, shows that I Gate is having turnover of Rs.1184.55 crores which is 59 times of the taxpayer.
Hon’ble Delhi High Court in Agnity India Technologies Pvt. Ltd. TS-189-HC-2013 (Del.)-TP affirmed the finding returned by the Tribunal that a large and bigger giant company in the area of software development cannot be compared with small companies like I Gate and confirmed the exclusion of same by the Tribunal.
In view of the matter, we are of the considered view that I Gate is not a suitable comparable vis-à-vis taxpayer who is a captive software development service provider having meager turnover vis-à-vis I Gate and having huge intangibles in the form of goodwill of Rs.225.99 crores as against nil of taxpayer, hence ordered to be excluded.
PERSISTENT SYSTEMS LTD. (PERSISTENT)
This is TPO’s comparable The taxpayer sought exclusion of Persistent on the grounds inter alia that Persistent is having huge fixed assets in the form of software and other intangibles Persistent has created several IPs, such as, ChemLMS, ViewMO, etc.; that its revenue is also from licencing of products and royalties; that in February 2011, Persistent has acquired the business of Infospectrum India Pvt. Ltd. and that it is having high turnover of Rs.645.39 crores which is 32 times of the taxpayer.
Perusal of the annual report shows that the aforesaid objections raised by the taxpayer against inclusion of Persistent as a comparable by the ld. TPO are correct having not been controverted by the ld. DR for the Revenue. When Persistent is having huge software and other intangibles and having invested in IPR and has created several IPs and is having revenue from licencing of product and royalties and having huge turnover of Rs.645.39 crores which is 32 times of the taxpayer, it cannot be a suitable comparable vis-à-vis the taxpayer who is a captive software service provider, hence ordered to be excluded.
SASKEN COMMUNICAITON TECHNOLOGIES LTD. (SASKEN
This is again TPO’s comparable. The taxpayer sought its exclusion on the grounds inter alia that it is functionally different; that it is into trademark products/patents; and that its segmental data is not available. Perusal of the annual report at pages 841, 850, 873, 911 & 922 of the paper book shows that it is into trademark products/patents for which segmental data is not available for standalone financials as is evident form page 946 of the paper book Vol.IV.
Suitability of Sasken has been examined by the coordinate Bench of the Tribunal in Clear 2 Pay India (P.) Ltd. (supra) for AYs 2011-12 & 2012-13 and has been ordered to be excluded as a comparable vis-à-vis routine software development service provider by returning following findings :-
“41. The ld.DR challenged exclusion of Sasken by ld. CIT (A) for the reason that the taxpayer has significant intangibles and research and development activities, Ld.DR contended that the Sasken is having no income from sale of licence and drew our attention towards page 324 of the paper book. However, when we examine Director’s report available at page 300 of the annual report of Sasken, the contention raised by ld. DR is not sustainable. Operative part of the Director’s report is extracted as under :- “On the hardware side we will leverage our extensive understanding and knowledge of this OEMs ecosystem and capitalize on the delivery centers in European Union and China regions. This geographical spread enables a cost efficient service mix to service opportunities in RF / Antenna design. The combination of our hardware and software knowledge gives us a competitive edge. Sasken key differentiators : Some of the unique capabilities of Sasken include its abilities to take a leadership position in : • Android Software Platform Services • Full Phone (device) Design Services • Intellectual Property (IP) Led Services • Operator Specific Services”
42. So, on the basis of functional dissimilarity alone, Sasken is not a valid comparable vis-à-vis the taxpayer. Moreover, its segmental financials are not available and it is having significant intangibles and research and development activities. So, ld. CIT (A) has rightly excluded Sasken from the final set of comparables.”
So, in view of the matter, we are of the considered view that Sasken is not a suitable comparable vis-à-vis the taxpayer on ground of functional dissimilarity and being into trademark products/patents having no segmental financials, hence ordered to be excluded as a comparable.
ITA NO.1020/DEL/2017 (AY 2012-13)
INCLUSION OF COMPARABLES SOUGHT FOR BY THE TAXPAYER CG VAK SOFTWARE EXPORT LTD. (CG VAK)
This is taxpayer’s comparable. Ld. TPO rejected CG Vak as a comparable chosen by the taxpayer on the ground that it is having different functional profile, but these findings have been overturned by the ld. DRP and held that CG Vak is functionally similar to the taxpayer. However, ld. DRP rejected this comparable on the ground of incurring persistent overall loss in FYs 2009-10, 2010-11 & 2011-12. However, ld. AR for the taxpayer come up with the argument that CG Vak is not incurring persistent overall losses and referred to profit & loss statement for the year ending 31.03.2012, available at page 901 of the paper book Vol.III, wherein CG Vak is shown to have the profit of Rs.1,39,70,696/- for FY ending 31.03.2012 and Rs.9,64,864/- for the year ending 31.03.2011. So, it has come on record that ld. DRP has lost sight of the actual figure showing profit by CG Vak and proceeded to reject the same on the basis of incorrect facts. So, the AO/TPO is directed to verify the facts and include CG Vak as a valid comparable vis-à-vis the taxpayer.
KALS INFORMATION SYSTEMS LTD. (KALS)
This is taxpayer’s comparable which the ld. TPO has rejected on the basis of different functional profile. When we examine order passed by the ld. DRP at page 22 of the DRP order, Kals has been found to be similar and ordered to include Kals as a valid comparable by returning following findings :-
7 Kals Information Different Functionally similar. Systems Ltd. functional The company if profile. KALS INFORMATION functionally Hence rejected SYSTEMS LTD. is an comparable and (Page No.5 of established Software satisfies all filters the show cause Products & Services proposed by the notice issued organization in TPO. Moreover by the Ld. TPO Bangalore, with a 80.86% of dated successful, revenue is 07.12.2015). international, Pan-Asian derived from experience in Software software export Development & Technology Services. We offer unique range of Software Development, Transition and Migration Solutions to help large end-user organizations meet a variety of challenges. We have got a 15 year successful track record in servicing industries such as Financial Services, Government Telecom, Security, Manufacturing & Distribution. http://www.kalsinfo.com/ If it meets filters approved by DRP, TPO to include as a valid comparable.
Ld. AR for the taxpayer has contended that Kals satisfied all the filters applied by the ld. TPO and provided application of filters in tabulated form as under :-
Data availability of FY 2011- Yes 12 Software Development services Yes (INR Page 1405, PB income > 1 Cr. 2,21,00,000) Vol-V Services Revenue > 75% of Yes (80.86% = 2.21 Page 1405, PB total operating Revenue cr / 2.73 cr) Vol-V Export Sales > 75% Yes (80.86% = 2.21 Page 1405, PB cr / 2.73 cr) Vol-V RPT 0.00% Persistent losses No Page 1399, PB Vol-V Employee cost > 25% of Total Yes (44.18% = INR Page 1405, PB Cost 1.10 cr / 2.50 cr) Vol-V Financial Year ending Mar-12
Aforesaid facts detailed in the table when verified with annual report show that all the filters applied by the ld. TPO stood satisfied. So, in these circumstances, the ld. TPO/AO is directed to include Kals as a valid comparable.
INFOMILE TECHNOLOGIES (INFOMILE)
This is taxpayer’s comparable rejected by the ld. TPO on the ground of functional dissimilarity. However, ld. DRP held Infomile functionally similar to the taxpayer and directed the TPO to include the same as a valid comparable if it meets the filter approved by the ld. DRP. So, we direct ld. TPO to reconsider Infomile as a comparable vis-à-vis the taxpayer by providing an opportunity of being heard to the taxpayer.
BELLS SOFTWARE LTD. (BELLS)
This is taxpayer’s comparable rejected by the ld. TPO on the ground of functional dissimilarity. However, ld. DRP held Bells functionally similar to the taxpayer and directed the TPO to include the same as a valid comparable if it meets the filter approved by the ld. DRP. So, we direct ld. TPO to reconsider Bells as a comparable vis-à-vis the taxpayer by providing an opportunity of being heard to the taxpayer.
EXCLUSION OF COMPARABLES SOUGHT FOR BY THE TAXPAYER INFOSYS LTD. (INFOSYS)
PERSISTENT SYSTEMS LTD. (PERSISTENT)
Since there is no change in the business model of taxpayer since 2011-12 in year under consideration, we order to exclude reasons discussed in detail in the preceding para nos.23 to 25 and para 30 of this order qua AY 2011-12.
LARSEN & TOUBRO INFOTECH LTD. (L&T)
The taxpayer sought exclusion of L&T on the ground that the taxpayer is having high sale turnover of Rs.2959.55 crores which is 140 times of the taxpayer, as is evident form statement of profit & loss account available at page 1419 of the paper book, and as such is liable to be excluded being a giant company in view of the decision rendered by the Hon’ble High Court in case of Agnity India Technologies Ltd. (supra). Moreover, L&T is having huge intangibles of Rs.51.15 crores, as is evident from Notes forming part of accounts, available at page 1427 of the paper book. Even otherwise, L&T is having dissimilar functional profile vis-à-vis the taxpayer as it is providing wide range of services including Data & analytics, Artificial intelligence & cognitive, Cloud & infrastructure services (CIS), Cyber Defense Resiliency services, etc. It also owns products, namely, Unitrax & iCEOn. All these facts have been highlighted by the ld. TPO at page 45 of the TP order.
In view of the fact that L&T is a giant company having huge intangibles and having dissimilar functional profile being into wide range of services and also into products, cannot be a suitable comparable vis-à-vis the taxpayer.
Coordinate Bench of the Tribunal has confirmed the exclusion of L&T by the ld. CIT (A) in case of Clear 2 Pay India (P.) Ltd. (supra) for AY 2011-12 by returning following findings :-
“48. The ld. DR for the Revenue challenged the exclusion of L&T by the ld. CIT (A) on the ground that no income from licence of product has been shown rather 100% income is from the software export. However, when we examine profit & loss account of L&T at page 238 of the paper book-1, L&T has shown this entire income from software development services and products. However, complete segmental financials are not available. Furthermore, the taxpayer is having intangibles of Rs.37,78,99,720/- during the year under assessment as against nil intangibles with the taxpayer. So, in these circumstances, L&T cannot be a valid comparable vis-à-vis the taxpayer which is a routine captive software development service provider and ld. CIT (A) has rightly excluded the same.”
In view of the matter, L&T is not a suitable comparable vis- à-vis the taxpayer, hence ordered to be excluded.
Resultantly, both the appeals filed by the taxpayer are allowed for statistical purposes. Order pronounced in open court on this 21st day of January, 2020.