VARIAN MEDICAL SYSTEMS (INDIA) SOFTWARE P. LTD,MUMBAI vs. ASST CIT 11(3)(1), MUMBAI

O R D E R PER PAWAN SINGH, JM : 1. This appeal by assessee is directed against the assessment order dated 27-01-2016 passed u/s 143(3) r.w.s. 144C(13), passed in pursuance of direction of DRP dated 24-12-2015 for assessment year 2011-12. The assessee has raised the following grounds of appeal:-

“Based on the facts and circumstances of the case, and in law, Varian Medical Systems India Software Private Limited (hereinafter referred to as 'the Appellant') respectfully craves leave to prefer an appeal against the order passed by die Asst. Commissioner of Income Tax — 11 (3)(1), Mumbai ("learned AO") dated 27 January 2016, received on 29 January 2016, under Section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 ('the Act') on the following grounds: 1. On the facts and in the circumstances of die case and in law, the learned Transfer Pricing Officer ("learned TPO) and consequently the learned AO 2 ITA 1709/Mum/2016 Varian Medical System(India) Ltd on the directions of die Hon'ble Dispute Resolution Panel ("DRP") has erred in computing the arm's length price of international transaction and confirming the adjustment of Rs. 2,05,78,185 to the appellant's total income based on the provisions of Chapter X of the Act and therefore, to die extent of additions/disallowances made by die learned AO, die order of die learned AO is bad in law and needs to be annulled.

2. No motive to avoid tax avoid tax as it is a STPl Unit 2.1 On facts and in die circumstances of die case and in law, the appellant is a STPI unit registered widi die Software Technology Parks of India claiming tax holiday under section 10A of die Act, hence diere is no motive to avoid tax. 2.2 On facts and in the circumstances of die case and in law, appellant has no motive to avoid tax as it is an STPI Unit entided to Income-tax holiday under section IDA of die Act and therefore transfer pricing provisions under Chapter X of the Act ought not to be invoked.

3. Cherry picking of companies by the learned TPO and inappropriate rejection of the search process adopted by the Appellant 3.1 On die facts and in the circumstances of the case and in law, the learned TPO as well as the Hon'ble DRP erred in rejection of metiiodical and scientific search process undertaken by die appellant. 3.2 On facts and in the circumstances of the case and in law, the Hon'ble DRP erred in upholding / confirming the action of the learned TPO in cherry picking of companies without providing any cogent reason or without sharing the search process or accept-reject matrix of the comparable companies selected by him.

4. Violation of provisions of Rule 10B(2) and 10B(3) and arbitrary rejection of comparable! selected by the Appellant 4.1 On the facts and in the ckcumstances of the case and in law, the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the TPO in adding new comparables which differ in functions undertaken, assets employed and risk assumed as compared to appellant in contravention of the provisions of Rule 10B(2) & (3) of the Rules; and 3 ITA 1709/Mum/2016 Varian Medical System(India) Ltd 4.2 On facts and in the ckcumstances of the case and in law, the learned TPO as well as the Hon'ble DRP erred in rejecting CG-VAK Software & Exports Ltd. stating that the company with fluctuating margins should be excluded.

5. Inappropriate rejection of the jitters applied by the Appellant 5.1 On the facts and in the ckcumstances of the case and in law, the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the TPO in rejecting all of the appellant's quantitative filters, to select comparable companies; 5.2 On facts and in the ckcumstances of the case and in law, the learned TPO as well as the Hon'ble DRP erred in not considering the turnover filter for the upper limit which has been duly considered by the appellant while selecting its comparables.

6. Working Capital adjustment 6.1 On the facts and in the ckcumstances of the case and in law, the learned TPO as well as the Hon'ble DRP erred in denying the working capital adjustment with regard to the provision of reasonable credit period to the appellant's associated enterprises. The above grounds of appeal

are mutually exclusive & without prejudice to each other.”

2. Brief facts of the case are that the assessee company is engaged in the business of software development and services. The assessee filed its return of income for assessment year 2011-12 on 27-09-2011 declaring total income at Rs.1,08,180/-. The assessee also claimed deduction u/s 10A of Rs.1,56,66,131/- from Software Technology Park of India (STPI) unit. The assessee, while filing return of income, furnished report u/s 3CEB. In the report u/s 3CEB, the assessee reported international transaction about software development and support

4 ITA 1709/Mum/2016 Varian Medical System(India) Ltd services to its associated enterprises (AE). Consequent upon reporting international transaction, the assessing officer made reference to transfer pricing officer (TPO), for computation of arm’s length price (ALP). The TPO, while considering the ALP determined by assessee with regard to the international transaction with its two associate enterprises (AEs), noted that the assessee provided software development and support services fee, Varian Medical Service System International AG, and Varian Medical System Inc. USA of Rs.10.49 crores each. The assessee benchmarked its transaction by selecting transaction net margin method (TNMM) as most appropriate method.

The assessee treated itself as tested party. The assessee claimed its profit level indicator (PLI) at 10.52%. The assessee selected seven comparables, where arithmetic mean of seven comparables was 10.97%. Accordingly, the assessee claimed that its transaction of software services with its AE was at arm’s length. The TPO rejected 4 comparables of assessee and included his own 16 comparables and on the basis of following twenty final set of comparables, worked out the arithmetic mean of 20 comparables at 23.64%:-

Sl.No Company OP / OC Comment 1 Acropetal Technologies Limited 36.69% Also selected (Segment) by the assessee

5 ITA 1709/Mum/2016 Varian Medical System(India) Ltd 2 Akshay Software Technologies Ltd 0.16% -do- 3 Celstream Technologies Pvt Ltd 12.26% Proposed by TPO 4 Evoke Technologies Pvt Ltd 8.11% -do- 5 E-infochips Limited 56.44% -do- 6 E-Zest Solutions Limited 34.83% -do- 7 iGate Global Solutions Ltd 23.71% -do- 8 Infosys Ltd 43.53% -do- 9 Kireeti Soft Technologies Ltd 3.43% -do- 10 Larsen & Toubro Infotech Ltd 18.40% -do- 11 Mindtree Limited (Segment) 10.74% -do- 12 Persistent Systems & Solutions Ltd 22.12% -do- (Merged) 13 Persistent Systems Ltd 23.08% Also selected by assessee 14 R S Software (India) Ltd 16.20% -do- 15 Sankhya Infotech Limited 26.20% -do- 16 Sasken Communication Technologies 24.36% -do- Ltd 17 Tata Elxsi Ltd (Segment) 13.00% -do- 18 Thirdware Solutions 16.19% -do- 19 Wipro Technologies Limited 54.42% -do- 20 Zylog Systems Ltd 28.74% -do- 23.64% Arithmetic Mean

Operating Revenue as per (A) Rs.21,03,30,611 Operating cost of the tested party Rs.19,03,06,531 The Arm’s length Margin 23.64% of Cost The Arm’s length Price (B) Rs.23,52,94,995

6 ITA 1709/Mum/2016 Varian Medical System(India) Ltd The Arm’s length Adjustment (C)= (B)- Rs.2,13,96,384 (A) 5% of the sale value of the international Rs.1,04,95,997 transactions 4. Accordingly the TPO suggested adjustment of Rs.2.13 crores with regards to both the transaction reported by assessee with its AE. The TPO vide its order dated 31.03.2015 rectified his order and suggested adjustment was revised to Rs. 2,49,64,384/- in place of Rs. 2,13,96,384/-. On receipt of report of TPO, the AO passed the draft assessment order. The draft assessment order was served upon the assessee on 12-03-2015. The assessee exercised its option for filing objection before Dispute Resolution Panel (DRP). The DRP, vide its direction dated 14-12-2015 directed to exclude e-Zest Solution and Sankya Infotech Ltd from the list of comparables and with regard to correctness of PLI (OP/OC) of comparables directed to take correct PLI of comparable. Accordingly, as per the direction of DRP the computation of arms lengths price adjustment was worked out at Rs. 2,05,78,185/- in the final assessment order dated 27.01.2016 passed under section 143(3) rws 144C(13). Aggrieved by the additions / adjustments on ALP with regard to the transaction with its AE, the assessee filed this appeal before us.

7 ITA 1709/Mum/2016 Varian Medical System(India) Ltd 5. We have heard the submission of Ld.AR of the assessee and the Ld.

DR for the revenue. The Ld.AR of the assessee submits that he has a very limited submission with regard to the exclusion of six comparables and inclusion of one comparable for final set of comparables. The Ld. AR for assessee submits that Infosys Ltd , Wipro Technology Services Ltd, e-Infochips Ltd, Zylog Systems Ltd, Sasken Communication Technologies Ltd and Persistent Systems Limited are not comparable with the assessee and should be excluded / rejected from the final set of comparables. Similarly, CG Vak Software & Exports Ltd excluded by TPO which is comparable with the assessee should be excluded / included in final set of comparables.

8 ITA 1709/Mum/2016 Varian Medical System(India) Ltd No.3728/Mum/2017 and in Cadence Design System (I) Ltd in ITA No.6315/Del/2014. For Exclusion of Infosys Ltd: 7. The Ld.AR submits that this company is engaged in diversified services and owns high brand value. It owns or develops proprietory product like Pinnacle. It incurred extensive expenditure on R&D and operates from 15 developed centres, having high turnover. This company is full-fledged risk operating company. On the other hand, the assessee is merely a capital software service provider. The Ld.AR submits that this company’s comparable was rejected as a good comparable in the following cases:-  Cincom Systems India Pvt Ltd vs ACIT Cir. 3(1)  Alcatel Lucent India Ltd vs DCIT – ITA No. 6856/Del/2015  Pr CIT vs Alcatel Lucent India Ltd ITA 515/2017 HC order  Aithent Technologies Pvt Ltd ITA No.1286/Del/2016 & ITA No.1020/Del/2017  Zynga Game Network India Pvt Ltd IT(TP)A No.360/Bang/2016  Ness Technologies (India) Private Ltd ITA No.696/Mkum/2016 For exclusion of Wipro Technology Services Ltd 8. The Ld.AR submits that Wipro Technology Services Ltd is engaged in rendering infrastructure services, application development and maintenance services of Citi group. Wipro Technology Services Ltd entered into an agreement with Citi group Inc. for acquiring of Citi

9 ITA 1709/Mum/2016 Varian Medical System(India) Ltd group interest in Citi Technology Services Ltd. This company has signed most service agreement with Citi group Inc. for delivery of technology, infrastructure services and application development and maintenance of service for a period of six years. This company is managing to earn more than the industry average and has a very difficult risk profile and, therefore, is not comparable with the assessee which is capital service provider. This comparable was excluded by Tribunal in following cases:-  Saxo India Private Ltd vs ACIT –  Pr.CIT Delhi vs Saxo India Private Ltd – ITA No.682/2016 C.M. Appl.3574-35746/2016 Delhi High Court,  Aithent Technologies Pvt. Ltd – ITA No.1286/Del/2017,  Mobileum (India) Pvt Ltd (Formerly known as Roamware India Pvt Ltd- IT(TP)A 945 & 2047Mum/2016,  Aithent Technologies Pvt. Ltd ITA No.1286/Del/2017 & ITA No.1020/Del/2017,  Mobileum (India) Pvt Ltd (Formerly known as Roamware India Pvt Ltd- IT(TP)A 945 & 2047Mum/2016,  St.Ericcson India Pvt Ltd vs ACIT,Cir.24(2) ITA 6247/Del/12015,  Aircom International India Pvt. Ltd vs Dy.CIT ITA No.222/Del/2015,  Ness Technologies (India) Private Ltd ITA No.696/Mum/2016 For exclusion of e-Inforchips Ltd

10 ITA 1709/Mum/2016 Varian Medical System(India) Ltd 9. The Ld.AR for assessee submits that this company is engaged in manufacturing of electronic voting machine (EVM) and VPDB Electronics boards. Its income comprised of sales of goods, royalty, etc. and the segment data is not available. Thus, this company fails the comparable factor. Further, this company is managing to earn more than the industry average and is not comparable. This comparable was rejected by Delhi High Court and various Benches of Tribunal in the following cases with the comparability of capital service provider:-  Saxo India Private Limited vs ACIT ITANo.6148/Del/2015  Pr. CIT Delhi vs Saxo India Private Limited ITA 682/2016, C.M. APPL. 35744-35746/2016 High Court Delhi,  Alcatel Lucent India Ltd vs DCIT ITANo. 6856/Del/2015  Pr CIT vs Alcatel Lucent India Ltd ITA 515/2017 HIGH COURT OF DELHI  Mobileum (India) Pvt Ltd (Formerly known as Roamware India Pvt Ltd) IT(TP)A No.945& 2047 / Mum / 2016  St.Ericcson India Pvt Ltd vs ACIT,Cir.24(2) ITA 6247/Del/12015  Electronic Imaging India Pvt. Ltd vs DCIT –  Zynga Game Network India Pvt Ltd vs ACIT (IT(TP)A No.360/Bang/2015  Ness Technologies (India) Private Ltd ITA No.696/Mum/2016 For exclusion of Zylog Systems Ltd 10. The Ld.AR of the assessee submits that Zylog Systems Ltd is engaged in providing range of various services such as mobile computing, health care info tech, enterprises computing application development, enterprises computing, enterprise intelligence services. Segmental data

11 ITA 1709/Mum/2016 Varian Medical System(India) Ltd is not provided in the annual report of company. The shareholders of this company have filed a case against system of the company for making files, misleading and distorting disclosure. SEBI has debarred its Chairman & CEO as it found that they made false misleading and distorted disclosers. Accordingly, this comparable is not comparable with the assessee. This comparable was rejected by Delhi High Court and Delhi Tribunal in following cases:-  Alcatel Lucent India Ltd vs DCIT ITANo. 6856/Del/2015  Pr CIT vs Alcatel Lucent India Ltd ITA 515/2017 HIGH COURT OF DELHI  Aircom International India Pvt Ltd vs DCIT For exclusion of Sasken Communication Technologies Ltd 11. The Ld.AR submits that this company is engaged in advertising business and provides telecommunications software services and solution to network equipment manufacturers, mobile terminal, hardware design, IC design services and IT infrastructure. This comparable owned IPs. Turnover of this company is Rs. 349 Crore, which more than 19 times of assessee’s turnover which is only Rs. 20 Crore. It has high turnover comparable to assessee. This comparable was rejected by Tribunal and Delhi High Court in the following cases:-  Alcatel Lucent India Ltd vs DCIT ITANo. 6856/Del/2015  Pr CIT vs Alcatel Lucent India Ltd ITA 515/2017 HIGH COURT OF DELHI  Aithent Technologies Pvt. Ltd – ITA No.1286/Del/2017 12 ITA 1709/Mum/2016 Varian Medical System(India) Ltd  ST.Ericcson India Pvt Ltd vs ACIT,Cir.24(2) ITA 6247/Del/12015  Electronic Imaging India Pvt. Ltd vs DCIT – For exclusion of Persistent Systems Ltd 12. The Ld.AR of the assessee submits that this comparable company has huge intangibles. It has made investment in intellectual property rights and providing software product. No segmental date is available in the annual report and having huge turnover. In support of his submission, the Ld.AR relied upon the following decisions:-  Saxo India Private Limited vs ACIT ITANo.6148/Del/2015  Pr.CIT Delhi vs Saxo India Private Ltd – ITA No.682/2016  C.M. Appl.3574-35746/2016 Delhi High Court  Alcatel Lucent India Ltd vs DCIT ITANo. 6856/Del/2015  Pr CIT vs Alcatel Lucent India Ltd ITA 515/2017 HIGH COURT OF DELHI  Aithent Technologies Pvt. Ltd – ITA No.1286/Del/2017  St.Ericcson India Pvt Ltd vs ACIT,Cir.24(2) ITA 6247/Del/12015  Aircom International India Pvt Ltd vs Dy CIT ITA No.222/Del/2016 13. On the other hand, the Ld. DR for the revenue submits that the TPO as well as the Ld.DRP, while considering the exclusion / inclusion of each and every comparable has given proper reasoning. Thus, he strongly relied upon the order of AO and DRP.

13 ITA 1709/Mum/2016 Varian Medical System(India) Ltd unit and claim of holiday period prescribed under section 10A. No submission was made by ld. AR for the assessee, thus, this ground of appeal was treated as not pressed and dismissed.

15. Ground NO. 3 to 6 relates to transfer pricing adjustment. The TPO while making benchmarking of ALP accepted that the assessee company is a captive service provider providing offshore software development and related support services. As we have noted above, the Ld. AR of the assessee confined his submission to the exclusion of six comparables and inclusion of single comparable. Therefore, we shall confine our finding only on the exclusion and inclusion of different comparables only.

14 ITA 1709/Mum/2016 Varian Medical System(India) Ltd that the coordinate bench of Kolkata Tribunal in Nomura Structured Finance Services Pvt Ltd in ITA 284/Kol/2016 while considering the comparability of this comparable pass the following order:

“11.2. CG -VAK Software and Exports Limited. The Ground No. 16 raised by the assessee is with regard to the comparable chosen by the assessee but rejected by the ld TPO in respect of CG-VAL Software and Exports Limited. The ld. TPO rejected this comparable stating that it is engaged into medical transcriptions which is different from the assessee and hence not functionally comparable. The ld. AR argued that the company is engaged in the business of software services and also into medical transcription and that for the purpose of comparability, the assessee had only used the date for software segment of the said company. He referred to the relevant pages in the annual report of the said company in support of his contentions and pleaded that the same be included in the list of comparables while computing the arm's length margin. We find that in Asst Year 2010-11 in assessee's own case, the ld TPO had accepted the said company as functionally comparable but had finally rejected on the ground that it was incurring persistent losses during the said time*. It was also pleaded at that time that if the forex gain is treated as part of operating revenue, then the said company's operating margin would be 5.29% for financial year 2008-09 which argument was rejected by the ld DRP in Asst Year 2010-11. We find that this tribunal had gone deep into the computation mechanism of the operating margins of the said company in Asst Year 2010-11 and had held as under:- 31. We have considered the rival contentions. From a perusal of the order of the TPO it is clear that the claim of the Assessee that this company's operating profit to operating cost of the software development services segment for AY 2009-10, if expenses are allocated on the basis of revenues, is 5.29%. This chart is extracted by the TPO in page-50 of his order ( and also in paragraph 27 of this order) and even the TPO does not dispute this plea of the Assessee. The TPO has however proceeded on the basis that foreign exchange gain should not 15 ITA 1709/Mum/2016 Varian Medical System(India) Ltd be regarded as part of the operating profit. Such approach of the TPO has not been accepted by the DRP in its order while dealing with the comparable company Kuliza Technologies Pvt. Ltd. Therefore it appears that the plea of the Assessee that the basis assumption of the TPO and DRP on the comparability of this company that it is a consistent loss making company is erroneous and therefore their orders are set aside. However, the question still remains as to whether the allocation of expenses and the attribution of the foreign exchange gain to the software development services segment of the comparable company CG-VAK software and Exports Ltd., has not been considered by the TPO or DRP. Further it has also to be seen as to what were the reasons for the losses in the case of this comparable company. If all these factors are considered and due adjustment can be given to the operating margins of this company, than the same should be considered as comparable company and added to the list of comparables for determining Arithmetic mean of profits of comparable companies. The TPO is directed to consider the comparability of this company afresh in the light of the aforesaid observations and also taking note of decision rendered on this aspect by Tribunals and Hon'ble High Courts if any.

Both the parties before us fairly agreed that let similar direction be given for the year under consideration also. Accordingly, the Ground No. 16 raised by the assessee is remanded to the file of ld TPO with similar directions that were given for Asst Year 2010-11 by this tribunal. Accordingly, the Ground No. 16 raised by the assessee is allowed for statistical purposes.” (* under line by us)

14. Considering the decision of tribunal that this comparable is not consistent loss making as it had made profit in the relevant assessment year, hence, we direct the TPO/AO to include this comparable in the final set of comparable.

16 ITA 1709/Mum/2016 Varian Medical System(India) Ltd 15. Infosys Ltd. This comparable company was accepted as a comparable by TPO. As we have noted of the learned AR of the assessee submit that this comparable could not be regarded as a good comparable because it has substantial R&D intangible patents, tremendous brand value attached to image. It is a great company and high turnover which is around 1200 times of sales of assessee. The TPO rejected the contention of assessee by taking with it turnover is a favourite tool used by assessee for rejection of comparable, which is not tenable as high turnover may not impact the profitability of company. Similarly DRP also took the view that turnover does not have an impact on the margin of the company. Further, creation of brand value is not on account of marketing expenses but because of superior service provided by the company and it does not impact profitability. We have noted that the coordinate bench of Mumbai tribunal in Ness technologies (India) Private limited IT No. 696 /Mumbai /2016, while comparing the captive service provider with the Infosys Ltd held as under;

“9.2 ---------- we have carefully considered the rival submissions. A pertinent point raised by the assessee is to the effect that on the basis of level of respective turnovers, the said concern is incomparable. It has been pointed out that the turnover of the assessee is to the tune of Rs.359,61,45,000/-, whereas M/s. Infosys Limited has a turnover of about Rs.25,385.00 crores for the year

17 ITA 1709/Mum/2016 Varian Medical System(India) Ltd under consideration. In this context, it was put to the parties in the course of hearing as to whether any turnover filter was applied either by the assessee in its Transfer Pricing Study or by the Transfer Pricing Officer in the course of the transfer pricing proceedings. In response, it has been stated before us that no turnover filter was used either by the assessee in its Transfer Pricing Study or by the Transfer Pricing Officer while selecting the comparables for the purpose of benchmarking the international transaction of software development services. Therefore, in this background, it would be inappropriate at this stage to device a new filter and reject/accept a concern as comparable because it would not be feasible to see as to whether the other concerns which were a part of the accept-reject matrix qualify such new filter or not?. We may hasten to add here that we are not proposing to say that the turnover filter is not a relevant filter. The only point we are trying to make is that it would be inappropriate to apply a particular filter with respect to a particular concern without applying it across the entire spectrum of the concerns which have been considered as comparable. Therefore, on this aspect of the matter, we do not deal any further.

9.3 So, however, the other pleas of the assessee to support exclusion of the said concern from the final set of comparables are quite justified. Notably, the said concern is also engaged in the production of software products such as 'Finacle', 'Flypp' and 'Infosys iSmart as is evident from the copy of the Annual Report of such concern, which has been placed in the Paper Book at pages 483 to 500. In fact, we find that the Transfer Pricing Officer has himself accepted the fact that the said concern is engaged in software products. Apart therefrom, it is quite well understood that Infosys has a brand image which is quite incomparable to the assessee before us, which is wholly acting as a captive service provider for its associated enterprises. In this view of the matter, it is quite evident that the said concern cannot be compared to an assessee who is undertaking pure software development services as a captive service provider.

9.4 At the time of hearing, Ld. Representative for the assessee had also pointed out that the said concern was excluded by the DRP itself in the case

18 ITA 1709/Mum/2016 Varian Medical System(India) Ltd of the assessee for the earlier assessment year of 2010-11 on account of its functional profile being different, against which the Department has not preferred any appeal to the Tribunal. It is therefore, contended that in the absence of any change in facts, the DRP ought to have rejected the said concern in this year too.

9.5 In our considered opinion, qualitatively speaking, the activities undertaken by M/s.E-Infochips Limited are not comparable to the pure software development services undertaken by the assessee as a captive service provider to its associated enterprises. Factually, it is also emerging that there is no segmental break-up available with respect to the production and sale of software products undertaken by the said concern, which is an aspect incomparable to the activities of the assessee. For the said reasons, we do not find any justification for inclusion of the said concern and the same is hereby directed to be excluded from the final set of comparables. Thus, on this aspect also assessee succeeds.”

DRP while confirming the action of TPO also took the same view. DRP

19 ITA 1709/Mum/2016 Varian Medical System(India) Ltd further took the view that acquisition of Citigroup by Wipro is irrelevant to the functional comparability analyses. Before us the learned AR submitted the similar submission for exclusion of all these four as made for exclusion of Infosys Ltd. We have noted that coordinate bench of Delhi tribunal in Saxo India private limited versus ACIT in while examining the comparability of captive service provider with Wipro technology services Ltd, e Infochips Ltd, Sasken Communication Technology Ltd and Persistent system Ltd., passed the following order;

“(i) E-Infochips Limited:

10.1 The Transfer Pricing Officer included this company in the list of comparables. On being called upon to explain as to why it should not be considered as a comparable, the assessee contended that there was functional dissimilarity inasmuch as this company was engaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenues of this company from Products was only 15% of total revenue and hence the same qualified to be eligible for comparison. The DRP did not allow any relief.

10.2 After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at Rs. 3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee

20 ITA 1709/Mum/2016 Varian Medical System(India) Ltd is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that from the common pool of income from both the streams of software products and software services, one cannot deduce the revenue from software services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from software development services, we order to exclude this company from the list of comparables. xxxxxxxx xxxxxxxx

(v) Persistent Systems Ltd. 14.1 The assessee objected to the inclusion of this company in the tally of comparables by arguing that it was functionally different and there was insufficient segmental information. The TPO negatived this contention and included the same in the final set of comparables. 14.2 After considering the rival submissions and perusing the relevant material on record, we find from Profit & Loss Account of this company, a copy of which is placed at page 1534 of the paper book, that its income from 'Sale of software services and Products' is amounting to Rs.6101.27 millions. The TPO has himself observed that this company does have some products, but, product revenue is only 7.2% and, hence, this company is predominantly a software service provider. This discussion is contained in para 21.67 of the TPO's order. Even Schedule-11 to the Profit & Loss Account also shows 'Sale of software services and Products.' This shows that this company is engaged in both rendering software development services as well as sale of software products. Albeit the percentage of software products in the total revenue is less, as has been noted by the TPO, yet, we are inclined to take it as non-comparable because there is no precise information about the contribution made by such small sale of software products to the total profit of the company. As no segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, we, therefore, order for the exclusion of this company from the list of comparables (vi) Sasken Communications Technologies Ltd. 15.1 The TPO included this company in the set of comparables despite the assessee's objection that it was functionally different and also had Product portfolio.

21 ITA 1709/Mum/2016 Varian Medical System(India) Ltd 15.2 After considering the rival submissions, we find from page 58 of the TPO's order that he has recognized sale of software products to the tune of Rs.37 crore and odd. Though the break-up of revenue from software services and software products is available, but, the break-up of operating costs and net operating revenues from these two segments have not been given. It is further observed that the TPO has taken entity level figures for the purposes of making comparison. Since such entity level figures contain revenue from both software services and software products, as against the assessee only providing software services, we are disinclined to treat this company as comparable. The assessee's contention is accepted on this issue “(vii) Wipro Technology Services Ltd. 16.1 The assessee objected to the inclusion of this company in the list of comparables by arguing that apart from this company being functionally different and the availability of insufficient segmental information, there were also significant related party transactions. The TPO did not accept the assessee's contention of the related party transactions and proceeded to include it in the final set of comparables. 16.2 We have heard the rival submissions. Page 57 of the TPO's order is reproduction of the assessee's contention about the related party transactions as under :— "Wipro Technology Services Limited (formerly Citi Technology Services Limited) ('the Company') was incorporated on 15 September, 2004. The entire share capital of the Company was held by Citicorp Banking Corporation, a company incorporated under laws of Delaware, USA, upto 20 January, 2009. Wipro Limited (Wipro) executed an agreement with Citigroup Inc. for acquiring all of Citigroup interest in the Company w.e.f. 21 January 2009. On 21 January 2009, Wipro signed a master service agreement (MSA) with Citigroup Inc. for the delivery of technology infrastructure services and application development and maintenance services for the period of six years. The MSA provides for the delivery of at least $500 million in service revenues over the period of the contract. After the acquisition by Wipro, the name of the Company was changed to Wipro Technology Services Limited ('WTS' or 'the Company') on 16 March 2009." 16.3 It is observed from the above contention reproduced in the TPO's order that Wipro Technology Services Ltd., which was earlier Citi Technology Services Ltd., was held by Citi Corp. Banking Corporation, USA upto 20th January, 2009. Wipro Ltd., parent company of the assessee, executed an agreement with Citi Group Inc., for acquiring Citi Technology Services Ltd., now called Wipro Technology Services Ltd. On 21.1.2009, Wipro Ltd. signed a master agreement with Citi Group Inc., for 22 ITA 1709/Mum/2016 Varian Medical System(India) Ltd the delivery of technology Infrastructure Services and application development and maintenance services for the period of six years, which also includes the year under consideration. This shows that income from software development support and maintenance services was earned by Wipro Technology Services Ltd., from Citi Group Inc., by means of master service agreement entered into between Wipro Ltd., its parent company and Citi Group Inc., a third person. 16.4 We have noticed above from the language of Rule 10B(1)(e)(ii) that it is the net profit margin realized from a comparable uncontrolled transaction, which is considered for the purposes of benchmarking. The epitome of 'comparable uncontrolled transaction' is that the companies or transactions in order to fall within the ambit of sub-clause (ii) of rule 10B(1)(e), should be both comparable as well as uncontrolled. 'Uncontrolled transaction' has been defined in Rule 10A(a) to mean: 'a transaction between enterprises other than associated enterprises, whether resident or non-resident.' This shows that in order to be called as an uncontrolled transaction, it is sine qua non that the same should be between the enterprises other than the associated enterprises. Section 92B(2) provides that: 'A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise'. On going through the prescription of sub-section (2) of section 92B, it is clearly borne out that a transaction with a non-AE shall be deemed to be a transaction entered into between two AEs if there exists a prior agreement in relation to the relevant transaction between the third person and the AE or the terms of the relevant transaction are determined in substance between the third person and the AE. When we consider section 92B(2) in combination with Rule 10A(a), it follows that the transaction between non-AEs shall be construed as a transaction between two AEs, if there exists a prior agreement in relation to the relevant transaction between third person and the AE. If such an agreement exists, the third person is also considered as an AE and the transaction with such third person becomes international transaction within the meaning of section 92B. Once there is a transaction between two associated enterprises, it ceases to be an 'uncontrolled transaction' and, thereby, goes out of reckoning under Rule 10B(1)(e)(ii). 16.5 Adverting to the facts of the instant case, we find that Wipro Technology Services Ltd. earned a revenue from Master services agreement with Citigroup Inc. for the delivery of technology infrastructure services. This agreement was, in fact, executed between the assessee's AE, Wipro Ltd., and Citigroup Inc., a third 23 ITA 1709/Mum/2016 Varian Medical System(India) Ltd person. This unfolds that the transaction of earning revenue from software development support and maintenance services by Wipro Technology Services Ltd., is an international transaction because of the application of section 92B(2) i.e., there exists a prior agreement in relation to such transaction between Citigroup Inc. (third person) and Wipro Ltd. (associated enterprise). In the light of this structure of transaction, it ceases to be uncontrolled transaction and, hence, Wipro Technology Services Ltd., disqualifies to become a comparable uncontrolled transaction for the purposes of inclusion in the final list of comparables under Rule 10B(1)(e)(ii). We, therefore, direct removal of this company from the list of comparables.”

Before DRP the assessee contended that SEBI has barred its Chairman and CEO as SEBI in its investigation found its promoters for making false and distorted disclosers. It was also contended that this company is 24 ITA 1709/Mum/2016 Varian Medical System(India) Ltd engaged in various product and having 42 times turnover compared with the assessee. The ld. DRP has not given any specific finding while affirming the action of TPO. The coordinate bench of Delhi Tribunal in Alcatel Lucent India Ltd (supra) while discussing the comparability of Zylog System Ltd held that this company is engaged in R&D activities, has a license fee and developed in house intangible. Thus, cannot be compared with captive service provider. Thus, we direct the AO/TPO to exclude these four comparable.

Order pronounced in the open court on 21.04.2020.