M/S SONUS NETWORKS INDIA PRIVATE LIMITED ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-6(1)(2), BANGALORE

This appeal filed by the assessee is directed against the assessment order dated 26.12.2018 passed by the A.O. for assessment year 2009-10 u/s 143(3) r.w.s. 254 r.w.s. 144C(13) of the Income-tax Act,1961 ['the Act' for short], in pursuance of directions given by Ld. Dispute Resolution Panel (DRP).

The assessee is engaged in the business of software development and support services to its parent company M/s. Sonus, USA. The assessee is a wholly owned subsidiary of Sonus Network Inc., USA.

The issue under consideration relates to transfer pricing addition made by the TPO in respect of provision of software services and confirmed by Ld. DRP.

The international transactions entered by the assessee with its associated enterprises, inter-alia, included provision of software development services to its AE. The total receipts of the assessee declared by it for the year under consideration was Rs.31.59 crores. The assessee adopted transactional net marginal method (TNMM) as most appropriate method and Operating revenue by Operating cost as Profit Level Indicator. The assessee declared net margin of 11.81%. The assessee selected 13 companies as comparables and contended that the provision of software development services was at arm’s length.

The TPO rejected the transfer pricing study conducted by the assessee and finally selected following companies as comparable companies: Sl. Company Name Unadjusted No. Margins FY 2008-09 1. Kals Information Systems Ltd. 13.89% 2. Akshay Software Technologies Ltd. 8.11% 3. Bodhtree Consulting Ltd. 62.27%

The Ld. A.R. submitted that the assessee is pressing only part of ground No.9 and he does not press all other remaining grounds also. The assessee has sent a e-mail confirming the above said position. In ground No.9, the assessee has sought exclusion of 8 comparable companies. The Ld. A.R. submitted that the assessee is accepting the comparable companies named M/s Mindtree Ltd. & M/s. Zylog Systems Ltd. Accordingly, he is pressing for exclusion of only 6 companies mentioned below: a. Bodhtree Ltd. b. Infosys Ltd. c. Larsen & Toubro Infotech Ltd. d. Persistent Systems Ltd. e. Sasken Communication Technologies Ltd. f. Tata Elxsi Ltd. The Ld. A.R. submitted that all these companies have been examined by the coordinate benches in the cases of M/s. Schneider Electric IT Business India Pvt. Ltd. Vs. JCIT (2019) 106 taxmann.com 70 (Bangalore) and they have been held to be not a IT(TP)A No.396/Bang/2019 M/s. Sonus Networks India Pvt. Ltd., Bangalore

The Ld. D.R. on the contrary supported the order passed by Ld. DRP.

We heard the rival contentions and perused the record. In the case of M/s. Schneider Electric IT Business India Pvt. Ltd. (supra), the above said 6 companies have been discussed by the Tribunal in paragraph 10 to 12 of its orders and has held that these are not good comparables. For the sake of convenience, we extract below the said paragraphs: “10. As far as the appeal of the Assessee is concerned, the first aspect is with regard to exclusion of some of the comparable companies chosen by the TPO and retained by the DRP as comparable companies. The learned counsel for the Assessee submitted before us that the comparability of the following 5 comparable companies out of the 13 companies that remain after the order of the DRP viz., (i) Kals Information Systems Ltd., (ii) Bodhtree Consulting Ltd., (iii) Tata Elxsi Ltd., (iv) Persistent Systems Ltd. and (v) Infosys Ltd. was considered by the Tribunal in the case of Infinera India (P.) Ltd. v. ITO [2016] 72 taxmann.com 68 (Bang-Tribunal). The said decision was also in relation to AY 2009-10. In the aforesaid decision the issue raised was against including the aforesaid five companies as comparable companies. The plea of the Assessee was that the aforesaid five companies are not functionally comparable with the Assessee who was engaged in the business of providing SWD services to AE. It is also not in dispute before us that the functional profile of the Assessee in this appeal and the Assessee in the decision rendered in the case of Infinera India (P.) Ltd. (supra) are identical. In the case of Infinera India (P.) Ltd. (supra) this Tribunal held that the aforesaid 5 companies are not functionally comparable with a company rendering SWD services. The learned DR could not point out any difference in facts. Hence, we hold these 5

We notice that the coordinate bench has followed the decision rendered by another coordinate bench in the case of M/s. Infinera India Pvt. Ltd. (supra), wherein following discussions have been made in respect of four of the above said comparable companies, viz., (i) M/s Bodhtree Consulting Ltd, (ii) Tata Elxsi Ltd., (iii) Persistent Systems Ltd. and (iv) Infosys Ltd. “(2) M/s Bodhtree Consulting Ltd., For exclusion of this company also, reliance has been placed on the same Tribunal order rendered in the case of Cisco Systems (Ind.)(P.) Ltd. (supra) and in particular, our attention was drawn to para-26.1 available on page no.98 to 99 of Case Law Compendium. In this case, it is noted by the Tribunal that this company is in the business of software product and was engaged in providing open and end to end web solutions software consultancy and design and development of software using latest technology and therefore, the same cannot be considered as a comparable in the case of companies rendering software development services, as in the present case. Therefore, by respectfully following this Tribunal order, we hold that this company is also excluded from the list of final comparables. (3) M/s Tata Elxsi Ltd., For exclusion of this company also, reliance has been placed on the same Tribunal order rendered in the case of Cisco Systems (India)(P.) Ltd. (supra) and our attention was drawn to para 26.4

Since ld. DR of the revenue could not point out any difference in facts, respectfully following these Tribunal orders, we direct the AO/TPO to exclude this company also from the list of final comparables. (4) Persistent Systems Ltd., For exclusion of this company, reliance has been placed on the Tribunal order rendered in the case of Unisys India (P.) Ltd. IT(TP) Appeal No.67(Bang) of 2015, copy available on pages 210 to 246 of case law compendium and in particular, our attention

Following the said decision, we direct that Persistent Systems Ltd., be excluded from the final list of comparable companies chosen by the TPO'. The ld. DR of the revenue supported the orders of the authorities below; 16. We have considered the rival submissions. We find that in this case, the Tribunal has followed another Tribunal order rendered in the case of Yodlee Infotech Ltd. v. ITO [IT(TP) Appeal No. 108 (Bang) of 2014]. The relevant portion of that Tribunal order is re- produced above and as per the same, this company i.e. M/s Persistent Systems Ltd., was in product designing services and into software product development. Since the present assessee company is only providing software development services to the AE, this company cannot be considered as a comparable in the present case. Since the ld. DR of the revenue could not point out any difference in facts, by respectfully following this Tribunal order, we direct the AO/TPO for exclusion of this company from the final list of comparable. 16.1 M/s Infosys Technologies Ltd., For exclusion of this company, reliance has been placed on the judgment of the Hon'ble Delhi High Court rendered in the case of CIT v. Aginity India Technologies (P.) Ltd. [2013] 36 taxmann.com 289/219 Taxman 26 (Delhi) and in particular, our attention was drawn to para-6 of the judgment as available inpage-386 of the case law compendium and the same is reproduced hereunder:— "6. 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 hat Infosys Technologies Ltd., should be exclude from the list of comparables for the reason latter was 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

Following above said the decision rendered by the Tribunal in the case of M/s. Schneider Electric IT Business India Pvt. Ltd (supra) and M/s. Infinera India Pvt. Ltd. (supra), we direct exclusion of (i) M/s Bodhtree Consulting Ltd, (ii) Tata Elxsi Ltd., (iii) Persistent Systems Ltd. and (iv) Infosys Ltd.

The co-ordinate bench has excluded M/s Sasken Communication Technologies Ltd and M/s Larsen & Toubro Infotech Ltd by following the decision rendered by another co- ordinate bench in the case of M/s VMware Software India (P) Ltd (supra). In the above said case, both these companies were excluded with the following discussions:-

Ld. DR relied on the order of TPO and submitted that TPO considered the companies software services segment details only. We have considered the rival submissions and have perused the record of the case.

Ld. 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 10E3(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 t7iat 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 TPO to exclude this comparable from the list of comparables.If we follow the coordinate bench decision in the case of Motorola Solution (India) P. Ltd, Sasken Communication Technologies Ltd needs to be excluded. However, as mentioned by us

Accordingly we direct the AO to exclude Accel Transmatic Ltd (seg), Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-Zest Solutions Ltd, Flextronics Software Systems Ltd (seg), Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid software Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd (seg), Tata Elxsi Ltd (seg), Third- ware Solutions Ltd (seg) and Wipro Ltd (seg) from the list of comparables considered by him."

The learned Authorised Representative of the assessee has submitted that the correct RPT of this company is 16.61 which is more than 15% filter. Therefore this company is required to be excluded from the set of comparables. The learned Departmental Representative has submitted that this fact is to be verified by the TPO as to whether the RPT of this company is more than 15%.

Having considered the rival submissions as well as the relevant material on record, we note that the assessee has raised objection that the RPT of this company is 16.61% and therefore it exceeds the tolerance range of 15% of the RPT. The learned Authorised Representative has pointed that the details of related party has been given by this company in the Annual Report and the correct computation comes to 16.61%. In view of the above facts and circumstances of the case, when we have considered the tolerance range of related party at 15%, this issue requires to be examined and verified by the TPO. Accordingly, this issue is set aside to the record of TPO for limited purpose of verifying the correct RPT of this company

Accordingly following the decision rendered by the Tribunal in the case of M/s. Schneider Electric IT Business India Pvt. Ltd (supra) and M/s VMware Software India (P) Ltd (supra), we direct exclusion of M/s Sasken Communication Technologies Ltd and M/s Larsen & Toubro Infotech Ltd.

In the result, the appeal of the assessee is treated as allowed.