M/S ENSTAGE SOFTWARE PVT LTD ,BANGALORE vs. INCOME TAX OFFICER WARD-2(1)(4), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE

BEFORE SHRI A.K GARODIA, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER

IT(TP)A No.583/Bang/2017 Assessment Year : 2012-13

M/s Enstage Software Pvt. The Income-tax Officer, Ltd., Ward-2(1)(4), No.25, 1st Floor, East Wing, Bengaluru. Shankaranarayana Bldg. 1, Vs. M.G Road, Bengaluru.

PAN – AAACE 9963 B APPELLANT RESPONDENT

Assessee by : Shri Narendra Jain, C.A Revenue by : Shri Muzaffar Hussain, CIT (DR)

Date of Hearing : 10-09-2020 Date of Pronouncement : 25-09-2020

ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against final assessment order dated 18/01/2017, passed under section 143(3) r.w.s 144C(13) of the Act by Ld.ITO Ward-2(1)(4), for assessment year 2012-13 on following grounds of appeal:

“GENERAL GROUND I. The learned Income Tax officer, Ward 2(1)(4), Bengaluru (hereinafter referred to as "AU" for brevity), learned Deputy Commissioner of Income Tax (Transfer Pricing)I(2)(1), Bengaluru (hereinafter referred to as "TPO" for brevity) and Honorable

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Dispute Resolution Panel-I (hereinafter referred to as Honorable DPP) ("AU "TPU" and "DRP" collectively referred as "lower authorities" for brevity) have erred in passing the orders/directions in the manner passed by them. The orders being bad in law are liable to be quashed. 2. The learned AO has erred in making a reference to TPO for determining arm's length price without demonstrating as to why it was necessary and expedient to do so. The DRP has erred in confirming the action of the Assessing officer. 3. The lower authorities have erred in: a. Making transfer pricing adjustment of Rs. 1,65,61,543/-; b. Passing the orders without demonstrating that the Appellant had motive of tax evasion and not appreciating that no addition can be made under Chapter X as Transfer pricing adjustment under Chapter X is not included in the definition of 'income' uls 2(24) or under Chapter IV of the IT Act, 1961. The orders passed by the lower authorities are therefore bad in law and liable to be quashed. GROUNDS RELATING TO COMPUTATION OF ALP 4. The lower income tax authorities have erred in: a. Rejecting comparables selected by the Appellant and Conducting a fresh transfer pricing analysis despite absence of any defects in the transfer pricing analysis submitted by the Appellant; b. Adopting inappropriate filters like 25% RPT filter, one sided turnover filter, etc. in the process of selecting comparables; c. Adopting companies as comparables even though they are not comparable in respect of functions performed, risks assumed, assets utilized, size, turnover, despite having unusual business circumstances or high margins, etc. The lower income tax authorities have erred in adopting following companies as comparables: i. Genesys International Corpn. Ltd. ii. Infosys Ltd. iii. Larsen & Turbo Infotech Ltd. iv. Persistent Systems Ltd. d. Not making proper adjustment for enterprise level and transactional level differences between the Appellant and the comparable companies; e. Not properly computing the working capital adjustment; and f. Not recognizing that the Appellant was insulated from risks, as against comparables, which assume these risks and therefore have to be credited with a risk premium on this account; 5. Assuming without admitting that the adjustment is to be made, the lower income tax authorities erred in law in not allowing he benefit of +1- 5% the variation as per the proviso to Section 92C(2) of the Act. GROUND RELATING TO CORPORATE TAX

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“ADDITIONAL GROUNDS OF APPEAL 9. The lower authorities have erred in rejecting the segmental results prepared by the Appellant on unjustifiable grounds and allocating costs between the Associated Enterprise and Non- Associated Enterprise segment on the basis of revenue, which is not appropriate in the fact and circumstances of the case. The Appellant submits that each of the above grounds/ sub-grounds are independent and without prejudice to one another. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law. The Appellant prays accordingly.”

Brief facts of the case are as under: 2. Assessee is a private limited company and filed its return of income for year under consideration declaring total income at ‘nil’. The case was selected for scrutiny and notices under section 143(2) and 142(1) of the Act was issued, in response to which, representative of assessee appeared before Ld.AO and submitted details as called for.

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On perusal of information furnished by assessee, Ld.AO observed that assessee had international transaction with its associated enterprise exceeding Rs.15 crores, and accordingly, case was referred to Transfer Pricing officer. On receipt of reference under section 92CA, Ld.TPO called for economic details of international transaction in Form 3CEB. Ld.TPO noted that, assessee was carrying out software development and support services for its AE being, enStage Inc, USA. 3. It was noted that, assessee is a provider of software development and support services for card payment authentication and processing, solutions, and focused on global growth market in prepaid, online and mobile payments. Ld.TPO noted that, assessee undertook analysis selecting cost plus method as most appropriate method. Ld.TPO noted that, assessee selected 11 comparables with average margin of 19.04%. Assessee computed its margin to be at 19.23%, and since it was within +/-5% of arms length margin of comparables, the price charged by assessee in software development service segment was considered to be at arms length. 4. Ld.TPO rejected comparables selected by assessee. It is also been noted that Ld.TPO noted that assessee incurred profit of 15.79% from its associated enterprise, whereas, it had net loss of 43% from its non-AE transaction. Ld.TPO called upon assessee to furnish basis of allocation of costs. Ld.TPO noted that, assessee has not reported segment wise revenue in profit and loss account and the segmentation is

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given only in Transfer Pricing study for benchmarking. Ld.TPO, therefore rejected segmental information provided by assessee subsequently. He also noted that assessee did not substantiate cost allocation basis to the segments being AE non-AE and domestic segment. Ld.TPO thus reworked segmental cost, based on ratio of income to total turnover between associated enterprise and non-associated enterprise as under: Particulars AE Non AE Total Operating 17,29,208,263 17,195,991 146,404,254 Revenue Operating 125,508,877 16,703,649 142,212,526 Expenditure Operating Profit 3,699,386 492,342 4,191,728 OP/OC 2.95% 2.95% OP/OR 2.86% 2.86% 5. Ld.TPO thus computed margin of AE at 2.95%, thereby allocating 88.25% cost to AE segment and non-AE segment. Ld.TPO was thus of the view that, comparables identified by assessee and approach adopted were not appropriate. Ld.TPO thus undertook fresh economic analysis and rejected certain comparable companies identified by assessee based on various filters. Ld.TPO computed average net margin of comparable companies at 16.49% on operating cost as against gross margin of 19.23% under CPM computed by assessee in TP documentation report. 10 new comparables identified by Ld.TPO were as under: SN Name of the taxpayer OP/OC 1 Datamatics Global Services Ltd. 14.57%

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2 Genesys International Corpn. Ltd. 30.09% 3 C R A Tech no Analytics Ltd. 17.24% 4 Infosys Ltd. 43.10% 5 Larsen & Toubro Infotech Ltd. 25.47% 6 Mindtree Ltd. 15.01% 7 Persistent Systems Ltd. 27.47% 8 R S Software (India) Ltd. 12.15% 9 Sasken Communication 26.18% Technologies Ltd. Spry Resources India Pvt. Ltd. 10 Average 22.63%

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facts. Nothing contrary had been brought to our notice by Ld.CIT.DR. 15. Based on above, we admit following additional ground of appeal: “ADDITIONAL GROUNDS OF APPEAL 9. The lower authorities have erred in rejecting the segmental results prepared by the Appellant on unjustifiable grounds and allocating costs between the Associated Enterprise and Non- Associated Enterprise segment on the basis of revenue, which is not appropriate in the fact and circumstances of the case. The Appellant submits that each of the above grounds/ sub-grounds are independent and without prejudice to one another. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law. The Appellant prays accordingly.”

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case of CGI Information Systems and management consultants Pvt.Ltd vs ACIT reported in (2018) 94 taxmann.com 97 for assessment year 2012-13. It is also submitted that, functional profile of assessee is same as that of assessee in CGI Information Systems and Management Consultants Private Ltd., in as much, as the said company was also involved in providing software development services to its AE. It has been submitted that Ld.TPO therein chose similar comparables out of which 7 comparables chosen by Ld.TPO in present case are same. It has been submitted that, observations of coordinate bench of Tribunal in case of CGI (supra) would be applicable to the present case of assessee. 17.3 Ld.CIT.DR submitted that, DRP rejected similar submissions of assessee. He placed reliance on orders passed by authorities below. 17.4 We have perused submissions advanced by both sides in light of records placed before us. 17.5 We have also referred to decision relied upon by Ld.AR in case of CGI Information’s (supra), wherein 4 comparables which are being sought for exclusion by assessee before us, was dealt with. We also note that, functional profile of assessee before us and assessee in case of (CGI Information (supra) is identical in as much as the company was involved in providing software development services to its AE. It is also noted that the comparables chosen by Ld. TPO in case of CGI Information (supra) are same as in present case for the same year under consideration.

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17.6 We note that this Tribunal, while considering 4 comparables, which assessee is seeking to exclude, observed and held as under: 28. The learned counsel for the Assessee submitted before us that the comparability of the 3 companies out of the aforesaid 4 companies which the Assessee seeks to exclude from the list of comparable companies chosen by the TPO viz., Infosys Ltd., Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd., were considered by the ITAT Delhi Bench in the case of Agilis Information Technologies India (P.) Ltd. v. Asstt. CIT [2018] 89 taxmann.com 440 (Delhi - Trib.) for the same AY 2012-13. In this regard it was submitted that the functional profile of the Assessee is same as that of the Assessee in the case of Agilis Information Technologies India (P.) Ltd. (supra), is identical inasmuch as the said company was also involved in providing SWD services to its AE and the TPO had chosen 16 comparable companies out of which 6 companies chosen by the TPO in the case of the Assessee for the purpose of comparability were the same. His submission was that .the decision rendered by the Tribunal in the case of Agilis Information Technologies India (P.) Ltd. (supra) would be equally applicable to the Assessee in the present case also. The learned DR. submitted that the DRP in its directions has merely accepted with the reasoning of the IPO and therefore the issue of exclusion of these companies should be directed to be examined afresh by the DRP. 29. We have considered the rival submissions. In the case of Agilis Information Technologies India (P.) Ltd. (supra), this Tribunal considered the comparability of the 3 companies which the Assessee seeks to exclude from the final list of comparable companies chosen by the TPO. The functional profile of me Assessee and that of the Assessee in the case of Agilis Information Technologies India (P.) Ltd. (supra), is identical inasmuch as the said company was also involved in providing SWD services to its AE and the TPO had chosen some comparable companies which were also chosen by the TPO in the case of the Assessee for the purpose of comparability. In the aforesaid decision the Tribunal held on the comparability of the 3 companies which the Assessee seeks to exclude as follows: (a) Infosys Ltd., was excluded from the list of comparable companies by following the decision of the Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies (P.) Ltd. [2013] 36 taxmann.com 289/219 Taxman 26 (Delhi). The discussion is contained in paragraphs 4.5 to 4.7 of the Tribunal's order. The Tribunal accepted that Infosys Ltd. is a giant risk taking company and engaged in development and sale of software products and also owns

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intangible assets and therefore not comparable with a software development service provider such as the Assessee in that case. (b) Larsent & Tourbro Infotech Ltd., was excluded from the list of comparable companies by relying on the decision of the Delhi Bench of ITAT in the case of Saxo India (P.) Ltd. v. Asstt. CIT [2016] 67 taxmann.com 155 (Delhi - Trib.). The discussion is contained in paragraphs 4.8 to 4.10 of the Tribunal's order. The Tribunal held that L & T Infotech Ltd., was a software product company and segmental Information on SWD services was not available. The Tribunal also noticed that the appeal filed by the revenue against the tribunal's order was dismissed by the Hon'ble Delhi High Court in ITA No.682/2016. ( c) Persistent Systems Ltd., was excluded from the list of comparable companies on the ground that this company was a software product company and segmental Information on SWD services was not available. The Tribunal in coming to the above conclusion referred to the decision rendered by ITAT Delhi Bench in the case of Cash Edge India (P.) Ltd. v. ITO ITA No.64/Del/2015 order dated 23.9.2015 and the decision of Hon'ble Delhi High Court in the case of Saxo India Pvt. Ltd. (supra). The findings in this regard are contained in Paragraphs 4.14 to 4.16 of its order. 30. Respectfully following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins. In this regard we are also of the view that the plea of the learned DR for a remand of the issue to the DRP on the ground that the DRP has not given any reasons in its directions cannot be accepted. The DRP bas endorsed the view of the TPO in its directions and therefore the reasons given by the TPO should be regarded as the conclusions of the DRP. 31. The learned DR. next submitted that Genesys International Corporation Ltd., should be excluded from the list of comparable companies. The comparability of this company with the Assessee has been discussed by the TPO in page-11 of his order. The Assessee objected to inclusion of this company in the list of comparable companies for the reason that this company is functionally different and owns intangible assets which are peculiar only when the Assessee owns software products. The objections of the Assessee are contained in its letter dated 22.12.2015 addressed to the TPO and in annexure-B to the said letter. The relevant portion of the objection is at pages 711-713 of the Assessee's paper book. According to the Assessee this company is engaged in providing Geographical Information

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Services comprising of Photogrammetry, Remote Sensing, Cartography, Data Conversion, state of the art terrestrial and 3D geocontent including location based and other computer based related services. Pagc-38 of the Annual report 2012 containing the above description was brought to the notice of the TPO, Attention of the TPO was invited to the directors report to the shareholders at page ii of the annual report 2012, wherein the Directors have informed the shareholders that the company continued in its journey, to be innovators and leaders in the fields of location based services related geoplatforms and advanced survey techniques. There is no segmental reporting because it is stated in the annual report that this company is only in one segment viz., GIS based services and therefore there is no requirement of segmental reporting. It was also submitted that this company owns substantial intangibles equivalent to 10.42% of its total turnover. 32. The TPO however has regarded this company as a comparable company by observing that this company develops software for mapping and geospatial services and operates a few development centres in India. The company is predominantly into software development services. The intangibles in the possession of the company are only the GIS database which is only depreciation. It does not add significant value to the company. 33. The objections as put forth before the TPO were reiterated before the DRP. The DRP in paragraphs 6.2.2 & 6.2.3 of its directions dealt with this issue as follows: "6.2.2 The functions of the Assessee company have been examined in detail. A financial product on which the settlement system of bank runs is a real time system. It is very complex. Any bug or problem in it can crash the entire banking system of several nations. The Assessee's claim of providing only basic software services is rejected. 6.2.3 The Panel holds that the software for financial product is much more complex than a geospatial software. Therefore, the panel holds that the Genesys is a valid comparable." 34. The learned counsel for the Assessee submitted that the DRP has completely proceeded on wrong facts which does not either emanate from the order of the TPO or the submissions of the Assessee. He reiterated submissions made before the TPO and DRP. The learned OR relied on the order of the DRP/TPO. 35. We have given a careful consideration to the rival submissions. It is clear from the material brought to the notice of the TPO by the Assessee that this: company renders mapping and geospatial services. In rendering such services it develops software. But that does not mean that this company is in the business of software development. The business profile of this company as per the annual report does not show that this company is into software development service. The only line of

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business that this company carries on is rendering GIS based services and this is clear from the annual report which specifies that since the company carries on only one line of business viz., GIS based services there is no need to give any segmental results. In the circumstances, we are of the view that there is no basis for the TPO to conclude that this company is predominantly into software-development services. The presence of intangible assets is indicative of the fact that this company is not in software development services business. The TPO has overlooked this aspect and proceeded on the basis that the presence of intangible assets would not be significant. Rule 10B(2) of the Income Tax Rules, 1962 (Rules) specifically provides that for the purposes of sub-rule (1) of Rule 10B, the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; In the given facts and circumstances, we are of the view that Genesys International Corporation Ltd., cannot be considered as a comparable company and the said company should be excluded from the final list of comparable companies. We hold accordingly. 17.7 Nothing contrary has been pointed by revenue in present facts to deviate from the above view taken in respect of the comparables. Respectfully following above decision of Tribunal, we direct exclusion of 4 comparables alleged herein by assessee from finalist. Accordingly this ground raised by assessee stands allowed partly. 18. Additional ground raised by assessee is in respect of international transaction and therefore we would adjudicate this ground 1st before proceeding further. In additional ground, assessee challenges cost allocation by Ld. TPO to determine margin of assessee at 2.95%. It has been submitted by Ld.AR that, as per statement of work entered into by assessee with its associated enterprise, assessee

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would be charging cost +15% of services provided. The cost includes direct cost specifically identified for the work as well as indirect cost allocated to the work. It is also submitted that, assessee was maintaining separate records for this work and other segments, and hence captured specific cost for each segment and pricing for AE company at 15% on the cost so incurred. 18.1 Ld.AR submitted that, assessee is also into establishing domestic business of undertaking card payment authentication and software operations and support services to 3rd parties. He submitted that Ld.TPO erred in computing profit level indicator based on overall statement of profit and loss account of assessee. It is also submitted that, operating profit by operating cost of assessee from software development and support services comes to 15.79%, which is as per the Master Service Agreement, read with statement of work. Ld.AR referred to page 175-176 of paper book, wherein issue has been addressed in great detail. Referring to page 195 of paper book Ld.AR submitted that, each cost has been allocated by assessee under specific head, which has not been considered by Ld.AO/TPO/DRP. He thus objected for reworking of Cost allocation carried out by Ld. TPO. 18.2 On the contrary Ld. CIT DR submitted that, issue may be sent back to authority is below for verification in accordance with submissions/evidences filed by assessee. 18.3 We have perused submissions advanced by both sides in light of records placed before us. At page 4 of order

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passed by Ld.TPO under 92CA, we note that, assessee filed revised statement of cost allocation, however, the same was not considered by Ld.TPO/DRP, for the reason that, basis of such allocation was not submitted/explained by assessee. In the interest of Justice we deem it appropriate to remand the issue to DRP for verifying the same. Assessee is directed to file all necessary documents to substantiate the basis of such allocation in ascertaining margin of assesse in respect of international transaction undertaken by assessee with its associated enterprise. DRP shall then pass a reasoned order by granting proper opportunity of being heard to assessee in accordance with law. Accordingly, additional ground no.9 raised by assessee stands allowed for statistical purposes. 19. Ground No.6 is in respect of disallowance of employee contribution to PF belatedly paid amounting to Rs.11,25,151/-. 19.1 Ld. A.R. submitted that, authorities below did not consider various decision of Hon’ble Supreme Court and jurisdictional High Court on this issue. He submitted that, DRP relied on CBDT Circular No. 22 of 2015 dated 17/12/2015 wherein it is noted that, decision of (Hon’ble Supreme Court) in case of CIT vs Alomg Extrusion Ltd; reported in 85 Taxmann 416 is not applicable to payments covered under section 36 (1) (va) of the Act. 19.2 Ld.CIT.DR placed reliance on orders passed by authorities below.

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19.3 We have perused submissions advanced by both sides in light of records placed before us. In our opinion this issue now stands settled in favour of assessee by decision of Hon’ble Karnataka High Court in case of CIT vs Sabari Enterprises reported in (2008) 298 ITR 141, wherein Hon’ble Court held that, in view of statutory provisions of section 2(24)(x), section 36(1)(va) and section 43B(b), contributions made by assessee to PF and ESI are allowable deductions, even though made beyond stipulated period, as contemplated under mandatory provisions of section 36(1)(va), read with section 2(24)(x), provided such contributions are paid by assessee on or before due date for furnishing return of income as per section 139(1). 19.4 This ratio has been upheld by Hon’ble Supreme Court in CIT vs Alom Extrusion Ltd reported in (2009) 298 ITR 141. We therefore remand this issue to Ld.AO to verify whether, employee contributions were made by assessee before due date of furnishing of return, as per section 139 (1) of the Act. In the event assessee satisfies this condition, no addition could be made in the hands of assessee. Accordingly this ground raised by assessee stands allowed for statistical purposes. 20. Ground No. 7 raised by assessee is in respect of not allowing set off and brought forward losses and unabsorbed depreciation. 21. Ld.A.R. submitted that, rectification application filed by assessee is pending before Ld. AO and therefore, we do not wish to express our view.

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Bangalore, Dated, the 25th Sept., 2020. /Vms/ Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file

By order

Assistant Registrar, Income-Tax Appellate Tribunal. Bangalore.

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Date Initial On Dragon 1. Draft dictated on Sr.PS -09-2020 2. Draft placed before Sr.PS author -09-2020 3. Draft proposed & placed JM/AM before the second member -09-2020 4. Draft discussed/approved JM/AM by Second Member. -09-2020 5. Approved Draft comes to Sr.PS/PS the Sr.PS/PS -09-2020 6. Kept for pronouncement Sr.PS on -09-2020 7. Date of uploading the Sr.PS order on Website -- 8. If not uploaded, furnish Sr.PS the reason -09-2020 9. File sent to the Bench Sr.PS Clerk 10. Date on which file goes to the AR 11. Date on which file goes to the Head Clerk. 12. Date of dispatch of Order. No 13. Draft dictation sheets are Sr.PS attached