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Income Tax Appellate Tribunal, DELHI BENCH : I-2 : NEW DELHI
Before: SHRI R.K. PANDA & MS SUCHITRA KAMBLE
ORDER PER R.K. PANDA, AM: filed by the assessee is directed against the order dated 29th October, 2015 passed u/s 143(3) r.w. section 144C of the IT Act, 1961 relating to the assessment year 2011-12. Revenue is directed against the order dated 23rd September, 2015 of the DRP-II, New Delhi, relating to the assessment year 2011-12.
For the sake of convenience, these were heard together and are being disposed of by this common order.
Facts of the case, in brief, are that the assessee is a company and is engaged in the business of manufacturing of software development and support services. It filed its return of income on 30.11.2011 declaring an income of Rs.18,99,480/-. Since the assessee had entered into the international transactions with its AEs, the Assessing Officer referred the matter to the Transfer Pricing Officer for determination of the arm’s length price u/s 92CA(1) of the IT Act, 1961. The TPO, vide order dated 15th January, 2015, determined the ALP with respect to the international transaction carried out by the assessee and directed the Assessing Officer to add a sum of Rs.1,44,37,862/- to the taxable income of the assessee. The Assessing Officer, accordingly made an addition of Rs.1,44,37,862/- being the difference in the ALP determined by the TPO. The assessee filed objections before the DRP and the DRP directed the Assessing Officer/TPO to recompute the margins of the comparable companies and accordingly re-work the ALP of the assessee. On the basis of the direction of the DRP and the order fo the TPO, the Assessing Officer finally made an addition of Rs.93,60,271/- being the adjustment on account of ALP of the international transaction with the AEs.
The Assessing Officer further noted that the assessee has claimed deduction u/s 10A for an amount of Rs.78,73,197/-. She noted that the assessee has taken the building and plant & machinery on lease from Netlink Software group which was already in existence being used by the affiliated company. Therefore, it is clear that it is the case of reconstruction of already existing business. She noted that the assessee has not submitted any proof regarding non-use of the assets being taken on lease by the assessee company from its affiliated company. Therefore, the contention of the assessee that the plant & machinery were not previously used was not accepted by him. Since the assessee has violated the provisions of section 10A of the IT Act, the Assessing Officer, following her order for the preceding assessment years in the case of the assessee, disallowed the claim of deduction u/s 10A and, accordingly made addition to the total income. The Assessing Officer accordingly determined the income of the assessee at Rs.1,91,32,948/-.
Aggrieved with such order of the A.O./TPO/DRP, the assessee is in appeal before the Tribunal raising the following grounds:- “
Based on the facts and circumstances of the case, the Netlink Software Pvt. Ltd. (the Appellant) craves leave to prefer an appeal against the order passed by Income Tax Officer, Ward 18 (1), New Delhi (Learned AO/Ld. AO) in pursuance of the directions issued by Dispute Resolution Panel (DRP), New Delhi dated 23.09.2015 under section 253 of the Income Tax Act, 1961 (the Act) on the following grounds, which are without prejudice to each other:
1. That on the facts and in the circumstances of the case and in law, the Hon’ble DRP and consequently the Ld. AO on erroneous and insufficient grounds, has erred both on facts and in law in assessing the total income at Rs.1,91,32,948 as against income of Rs.18,99,480 thus confirming an addition of Rs 1,72,33,468 to the income of the Appellant.
2. That on the facts and in the circumstances of the case and in law the Learned Transfer Pricing Officer (Ld. TPO) erred and the Ld.AO under directions issued by the hon'ble DRP, grossly erred in confirming an addition of Rs.93.60,271 to the income of the Appellant based on the provisions of Chapter X of the Act.
3. That on the facts and in the circumstances of the case and in law the Ld. AO under directions issued by the hon’ble DRP, on erroneous and insufficient grounds grossly erred in making an addition of Rs 78,73,197 to the income of the Appellant on account of not allowing of deduction under Section 10A of the Act.
4. That on the facts and in the circumstances of the case and in law, the Hon'ble DRP and consequently the Ld. AO, have erred in appreciating that the application of the most appropriate method resulted in a notional income of the Appellant and cannot be brought to tax in the absence of a specific provision in this regard being there under section 2(24), Section 4 and Section 92 of the Act.
5. That the Ld. TPO erred and the Hon’ble DRP further erred in confirming the addition of Rs.93,60,271 made by the Ld. TPO/AO thereby modifying the economic analysis undertaken by the Appellant for the determination of the Arms-Length Price of the international transactions entered into by the Appellant, and in conducting a further search without pointing out any valid defects in the transfer Pricing documentation maintained by the Appellant. 6. That the Hon'ble DRP, on erroneous and insufficient grounds, grossly erred in confirming the transfer pricing adjustment made by the Ld. IPO/AO and thereby upholding the adoption of the new quantitative filters for the purpose of identification of comparable companies and modification/rejection of certain quantitative filters adopted by the Appellant. 7. That the Hon’ble DRP, on erroneous and insufficient grounds, grossly erred in confirming the Transfer pricing adjustment made by the Ld. TPO/AO in substituting the comparability analysis conducted by the Appellant for its software development services with a fresh comparability analysis based on presumptions, conjectures and surmises. 8. That the Hon’ble DRP. on erroneous and insufficient grounds, grossly erred in confirming the Transfer pricing adjustment made by the Ld. TPO/AO and thereby affirming the approach of employing/modifying erroneous filters having inherent upward bias and designed ex-facie to select only high margin comparable companies.
9. While confirming the Transfer pricing adjustment done by the Ld. AO/TPO, the Hon'ble DRP, on erroneous and insufficient grounds, grossly erred by not correctly interpreting the functional profile of the companies selected which by no stretch of imagination could be considered to be comparable to the Assessee.
10. While confirming the transfer pricing adjustment done by the Ld. AO/TPO, the Hon'ble DRP, on erroneous and insufficient grounds, grossly erred in rejecting two out of the six companies selected by the Appellant as final comparables and further upholding the selection of three new companies as alleged comparables and disregarding the fact that the same were not at all functionally comparable and failed to fulfill the filters as adopted by Ld. TPO/AO and specific objections raised by the Appellant in this regard . 11. While confirming the transfer pricing adjustment done by the Ld. AO/1 PO, the Hon'ble DRP, on erroneous and insufficient grounds, grossly erred in upholding the benchmarking exercise conducted for the relevant international transactions by- • rejecting the use of multiple-year data of comparables (i.e. data pertaining to the assessment years 2009-10 and 2011-12); and • determining the arm’s length margins / prices using only the data of comparables pertaining to the relevant assessment year (i.e. 2011-12) which was not available to the Appellant at the time of complying with the TP documentation requirements. • in not granting relief as is available to the Appellant under the proviso to Section 92C (2) of the Income Tax Act, 1961. 12. That the Hon’ble DRP, on erroneous and insufficient grounds, grossly erred in confirming has grossly erred in confirming with the Ld. AO on denial of the deduction u/s 10A of the Act amounting to Rs. 78,73,197 as allowable and claimed by the Appellant thereby affirming the same as a reconstruction of an already existing business and the unit has been formed by transfer to a new business of plant and machinery previously used. 13. While confirming the disallowance of deduction u/s 10A of the Act done by the Ld. AO. the Hon’ble DRP, on erroneous and insufficient grounds, grossly erred in upholding that the new unit being formed was a case of reconstruction of an already existing business, without appreciating that the unit was new, being set up during the year ended 31st March, 2007 and was not formed by the splitting up or the reconstruction of a business already in existence. 14. While confirming the disallowance of deduction u/s 10A of the Act done by the Ld. AO, the Hon’ble DRP, grossly erred in upholding the denial of the deduction u/s 10 A of the Act thereby disregarding the settled legal dictum that -‘lease” does not tantamount to “transfer” and therefore, the leased plant and machinery being “previously used” or "new"
15. While confirming the disallowance of deduction u/s 10A of the Act done by the Ld. AO the Hon'ble DRP grossly erred in upholding the denial of the deduction u/s 10 A of the Act thereby considering as an “indirect holding” of the leased plant and machinery without appreciating the fact that both the entities had a separate shareholding .
16. The additions as proposed by the Ld. TPO/AO without any basis or material and is based on conjectures, surmises and hypothesis.
17. That on facts and in law, the Ld. AO erred in proposing to initiate penalty proceedings under section 271(1) (c) of the Income Tax Act, 1961.
18. The Ld. AO has erred in levying interest under section 234B and 234C of the Act amounting to Rs 2,734,457 and 50,235 respectively. The Appellant requires leave to add, alter, modify or delete such other objections before or during the course of hearing before the Hon’ble Dispute Resolution Panel ('DRP’), so as to enable the panel to decide on the objections raised by the Appellant, as per law.”
Being aggrieved with the order of the DRP, the Revenue is in appeal raising the following grounds:- “
1. Whether on the facts and circumstances of the case the Dispute Resolution Panel (DRP) was right in not appreciating the functional analysis of two comparables carried out by the TPO based on the TP study, submissions made by the assessee and information available in public domain?
2. Whether the DRP was justified in rejecting two high magin comparables contested by the taxpayer and allowing to retain other low margin comparables in the final set of the TPO unopposed by the taxpayer, which were discharging similar nature of functions referred to as software development services thereby ignoring the decision of the Hon’ble Supreme Court in the case of Mumbai International Airport with regard to the “Doctrine of Election” and the “Doctrine of Approbation and Reprobation”, wherein it has been laid down that a litigant cannot change and choose its stand to suit its convenience?
3. Whether the DRP was justified in laying down stringent standards of comparability and attempting to identify exact replica of the taxpayer for comparability analysis, whereas the Indian laws and the international jurisprudence recognize the reality that there cannot be an exact comparable in 6 a given situation without any differences without appreciating that such stringency will defeat the purpose of flexibility provided in comparability analysis for determination of ALP? 4. Whether in the facts and circumstances of the case and in law the DRP was right in rejecting E-Zest Solutions Ltd. as a comparable by ignoring the fact that it is developing software for clients and not selling products? 5. Whether in the facts and circumstances of the case and in law the DRP was right in rejecting Wipro Ltd. as a comparable by disregarding the fact that it is a predominantly software development services company? 6. That the order of the DRP is erroneous and is not tenable on facts and in law.
7. That the appellant craves leave to add, alter, amend or forgo any ground(s) of appeal either before or at the time of hearing of the appeal.”
Coming to the assessee’s grounds, Ground of appeal No.4 was not pressed by the ld. counsel for the assessee at the time of hearing for which the ld. DR has no objection. Accordingly, the same is dismissed as not pressed. Grounds No.1 and 16 by the assessee being general in nature are dismissed. Ground of appeal No.17 being premature at this juncture is dismissed. Ground of appeal No.18 being mandatory and consequential in nature is also dismissed.
8. So far as grounds of appeal No.3,12, 13, 14 and 15 are concerned, these grounds relate to the denial of deduction u/s 10A of the IT Act. The ld. counsel for the assessee, referring to the decision of the Tribunal in the assessee’s own case for assessment year 2009-10, vide order dated 3rd July, 2017, copy of which is placed at page 508 to 512 of the paper book, drew the attention of the Bench to para 13 of the order and submitted that the issue has been restored to the file of the CIT(A) for deciding the issue afresh. Referring to the decision of the Tribunal in assessee’s own case for assessment year 2010-11 vide ITA No.5935/Del/2014, order dated 23rd October, 2017, copy of which is placed at pages 514 to 519 of the paper book, he submitted that here also the Tribunal has restored the issue to the file of the CIT(A) for deciding the issue afresh after ascertaining the actual nature of transaction in view of section 10A in the light of the lease deed executed by the assessee for taking the plant & machinery on lease. He accordingly submitted that he has no objection if the issue is restored to the file of the Assessing Officer for deciding the issue afresh in the light of the decision of the Tribunal for earlier years. The ld. DR has no objection if the matter is restored to the file of the Assessing Officer.
9. We have considered the rival arguments made by both the sides and perused the record. We find the Tribunal in assessee’s own case, vide order dated 23rd October, 2017, for assessment year 2010-11, has restored the issue to the file of the CIT(A) with a direction to decide the issue afresh. The relevant observation of the Tribunal from para 5 onwards reads as under:-
“5. 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. 6. Undisputedly, assessment year 2010-11 is the second year of working of the assessee company having been incorporated on 26.03.2007 engaged in the business of information technology software. Ld. AR for the assessee 8 company contended that identical issue has come up before the Tribunal for AY 2009-10 and has since been decided in favour of the assessee by remitting the case back to the ld. CIT (A).
7. When it is not in dispute that new STPI undertaking cannot be treated as reconstruction of business already in existence, leasing out of a portion of its assets to the assessee, the assessee cannot be said to have defeated the provisions stipulated u/s 10A which creates a bar of deduction on the undertakings formed by a reconstruction or by splitting out of an existing business. So, ld. CIT (A), on the basis of material placed before him, has rightly came to the conclusion that new undertaking of the assessee has comprehensively explained that there is no transfer to a new business or machinery or plant previously used for any purpose and that STPI approval was accorded on 23.04.2008 and the assessee has taken plant and machinery on lease. All these facts have been duly considered by ld. CIT (A) who has relied upon the decision rendered by the coordinate Mumbai Bench of the Tribunal wherein the word "reconstruction" has been explained.
However, ld. CIT (A) has nowhere referred to the lease deed vide which assessee company claimed to have took plant and machinery on lease nor any such lease deed has been relied upon by the assessee company during assessment proceedings by way of filing comprehensive submissions. So, we are of the considered view that aforesaid findings given in the preceding paras are subject to the production of the lease deed and following the decision rendered by the coordinate Bench of the Tribunal in assessee's own case for AY 2009-10, this issue is remitted back to the ld. CIT (A) to examine the claim of the assessee in view of the lease agreement stated to have been entered into between NSGPL and assessee. So, this case is remitted back to ld. CIT (A) to decide afresh after ascertaining the actual nature of transaction in view of section 10A (ii) & (iii) of the Act in the light of lease deed set up by the assessee for taking plant and machinery on lease. Consequently, appeal of the Revenue is allowed for statistical purposes.”
Further, the Tribunal, in assessee’s own case for assessment year 2009-10 has also restored the issue to the file of the CIT(A) for adjudication of the issue afresh. Since, in this year, the matter came directly from the order of the Assessing Officer after the direction of the DRP, therefore, considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the Assessing Officer with a direction to decide the issue afresh in the light of the direction of the Tribunal in the immediately preceding two assessment years. The grounds raised by the assessee on the issue of allowance u/s 10A are accordingly allowed for statistical purposes.
The remaining grounds by the assessee and the grounds raised by the Revenue are related to the TP adjustment. As already mentioned, as against the total addition of Rs.1,44,37,862/- proposed by the TPO, the Assessing Officer made addition of Rs.93,60,271/- after reworking the ALP on the basis of the direction given by the DRP.
The facts of the case, in brief, are that the TPO, during the course of TP assessment proceedings noted that the assessee has undertaken the following international transaction with its AE:-
No. Nature of transaction Method Value of transaction 1. Provision of software development TNMM 10,54,41,903/- services
The results as submitted by the tax payer in the segment of contract software development services, are as under:- Nature of transaction Sales Operating Cost Operating OP/OC (%) (OC) Profit (OP) Provision of software 10,54,41,905 9,35,09,959 1,19,31,946 12.76% development services
He observed that The arms length price of the international transactions representing Software Development Services provided to the associated enterprises (AE) is determined by applying transactional net margin method (TNMM). The 10 operating profit to total cost (OP/TC) ratio is taken as the profit level indicator (PLI) in the TNMM analysis. The PLI of the company is arrived at 12.76%on cost whereas the average PLI of the comparables is arrived at 12.67% as per the analysis in the TP document. It is seen that the PLIs of the comparable companies have been worked out by adopting weighted averages for the current year and the immediately preceding two years. The TPO noted that the assessee has considered eight comparables in the software development service segment in its TP study report wherein he has considered weighted average and the arithmetic mean was computed at 12.67%. He, therefore, issued a show cause notice to the assessee. Since the TPO was not satisfied with the various comparables taken by the assessee, he rejected certain comparables taken by the assessee and also added certain new comparables and finally selected the following nine comparables for determining the ALP of the international transactions which are as under:
No. Company Name OP / TC 22.06% 1 Acropetal Technologies Ltd. 2 Akshay Software Technologies Ltd. 0.86% 3 e-lnfochips 56.44% 4 E-Zest Solutions 39.98% 5 Persistent Systems & Solutions Ltd. 21.51% R S Software (India) Ltd. 16.20% 6 7 Sasken Communication Technologies Ltd. 31.97% Tata Elxsi Ltd. 10.35% 8 9 Wipro Technology Services Ltd. 54.42% 28.20% Average
The TPO accordingly directed the Assessing Officer to make addition of Rs.1,44,37,862/- the computation of which is as under:-
Operating Cost 9,35,09,959 OP/OC % 28.20% Arm’s Length Price (ALP) 11,98,79,767 Price shown in the international transactions 10,54,41,905 Shortfall being adjustment u/s 92CA 1,44,37,862
The assessee approached the DRP who directed the A.O./TPO to exclude E-Zest Solutions Ltd., Wipro Technology Services Ltd. from the list of comparables. However, they upheld the order of the TPO for retaining the remaining comparables.
Aggrieved with such order of the A.O./TPO/DRP, the Revenue as well as the assessee are in appeal before the Tribunal.
The ld. counsel for the assessee, referring to page 502 of the paper book, drew the attention of the Bench to the service agreement dated 15th March, 2008 between Netlink Software Group America Inc., and Netlink Software Pvt. Ltd. and drew the attention of the Bench to clause 2 and 3 of the Agreement which are as under:- “2. The Michigan Corporation Company will secure contracts from clients in the USA and Europe and assign to the Indian Company the actual performance of preparing the Software development & BPO services, the said contracts on an exclusive basis. 3. Since the Indian Company will be executing under the contract on an exclusive basis or acting as a BPO & Software Development center for it, the Michigan Corporation will pay the Indian Company on a Cost Plus basis as mutually agreed from time to time. The cost is defined as per annexure -1.” 12
So far as the inclusion of certain comparables are concerned, the ld. counsel drew the attention of the Bench to the page 7 of the TPO’s order and submitted that R. Systems International Ltd., was excluded by the TPO on the ground that the company has financial year ending December, 2010 which is different from the assessee’s financial year ending March, 2011 and, therefore, it cannot be considered as a comparable. He submitted that the company is free to adopt different statutory year and cannot be rendered incomparable simply on this ground. The audited accounts of R. Systems International Ltd. for the year ending 31st December, 2010 and the data for the quarter ending 31.03.2010 and 31.03.2011 (both audited) are available in public domain. Referring to the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT vs. Mercer Consulting (I) Pvt. Ltd., reported in 390 ITR 615, he submitted that the Hon'ble High Court in the said decision has held that a company following different financial year can be adopted as comparable if data for relevant period is available. Relying on various other decisions, he submitted that under identical circumstances the various Benches of the Tribunal have held that if it is possible to determine the value of the transaction during the corresponding period, purpose of comparability would be solved. He accordingly submitted that when the quarterly results for financial year ending 2010-11 are available in public domain, the same can be brought down to the financial year 2010-11and this company should be considered as comparable.
The ld. DR, on the other hand, strongly supported the order of the A.O./TPO/DRP.
After hearing both the sides, we find R. Systems International Ltd. was excluded by the TPO on the ground that this company is having different financial year ending. It is the case of the ld. counsel for the assessee that the audited accounts of R. Systems International Ltd. for the year ended 31st December, 2010 and the data for the quarter ended 31.03.2010 and 31.03.2011 (both audited) are available in the public domain and if considered the margins of R. Systems for F.Y. 2010-11 will be 2.84%. Considering the totality of the facts of the case and considering the fact that audited accounts of R. Systems International Ltd. for the year ended 31st December, 2010 and the data for the quarter ended 31.03.2010 and 31.03.2011 (both audited) are available in public domain, therefore, we deem it proper to restore the issue to the file of the TPO/A.O. for including this company as a comparable by taking its margin at 2.84% as stated by the ld. counsel for the assessee (subject to verification).
So far as Think Soft Global Services is concerned, we find this company was rejected by the TPO mentioning low end functions as compared to the assessee. The submissions of the assessee that this company is broadly similar to the assessee and TNMM rejection brought functional inability and the company meets all filters applied by the assessee as well as the TPO were rejected by the TPO. We find the DRP held that the company is into software validation and verification services which are different from software development services and hence not comparable. It is the submission of the ld. counsel that TNMM is tolerant to some functional differences as it requires only broad function and product/service comparability in comparison to other traditional transactional method. Referring to the decision of the Mumbai Special Bench of the Tribunal in the case of Maersk Global Centres (India) (P) Ltd. vs. ACIT, 147 ITD 83, the ld. counsel drew the attention of the Bench to para 62 of the order which reads as under:-
“62. At the time of hearing before us, Shri Porus Kaka has relied on the guidelines given by the OECD in section B-3.1 (para 2.68 to 2.75) in respect of the comparability standard to be applied to the Transactional Net Margin Method. However, as rightly pointed out by the ld. D.R., these guidelines are issued by the OECD as a caution to overcome the number of weaknesses of the TNMM, as clearly mentioned in para 2.64. In any case, we will deal with these guidelines, given by the OECD, subsequently at an appropriate stage. Suffice it to say at this stage that the net profit indicators such as operating profit to operating cost or total cost or total sales are less affected by transactional differences and the same being more tolerant to some functional differences between controlled and uncontrolled transactions, broad functionality can be taken into consideration for selecting the potential comparables in case of TNMM. If such broad functionality is taken into consideration in the present context, we are of the view that the potential comparables at ITES sector level can be selected at first stage in the comparability analysis as the functions performed by IT enabled service providers are broadly similar and there is a common thread running through them as rendering of these services involve extensive use of information technology.”
Referring to the decision of the Pune Bench of the Tribunal in the case of TIBCO Software India (P) Ltd. vs. DCIT, the ld. counsel for the assessee drew the attention of the Bench to para 33 of the order and submitted that the Tribunal in the said decision has held that verification and validation are broadly part and parcel of the process of software development. It was accordingly held that the action of the lower authorities in excluding the said concern from the final set of comparables is not correct. He submitted that this decision of the Pune Bench of the tribunal has been followed by the Pune Bench again in the case of Starent Networks (India) (P) Ltd., reported in 90 taxmann.com 367 (Pune-Trib). He accordingly submitted that Think Soft Global Services cannot be excluded from the list of comparables.
The ld. DR, on the other hand, heavily relied on the order of the A.O./TPO/DRP.
After hearing both the sides, we find Think Soft Global Services was excluded from the list of comparables by the A.O./TPO on the ground that this company is functionally not comparable and its functions are low end as compared to the functions of the assessee. Further, this company is only providing a part of the software development services while the functions of the assessee are high in functional hierarchy even higher than a full fledged software developer. Further, the operation of the company predominantly related to software validation and verification services which are different from software development services and, hence, not comparable. We find the Pune Bench of the Tribunal in the case of TIBCO Software India (P) Ltd. (supra) at para 33 of the order has held as under:-
“33. We have carefully considered the rival submissions. We have also perused the orders of TPO as well as the DRP in this context. Although, the order of the TPO is quite sketchy on this point, but the DRP has discussed the matter in a slight detail. One of the observations of the DRP is that the "primary activity of the appellant is to carry out part of the process of software development for its parent company and therefore, the finding of the TPO that 16
Thinksoft Global Service Limited, is a functionally different company, appears to be correct". In our considered opinion, the aforesaid finding of the DRP goes to show, in the context of the fact situation of assessee's activities and that of Thinksfot Global Services Limited, that both are engaged in carrying out activities which are parts of the process of software development activities. It is quite justifiable to comprehend that the activity of verification of software and validation of software are activities which are part and parcel of the process of software development. In fact, before the DRP, assessee referred to the Wikipedia meaning of the expression 'Verification' and 'Validation' in the context of software. The expression 'Verification' was explained to be referring to the process of evaluating the software to determine whether the products of a given development phase specified the conditions imposed at the start of that phase. Similarly, the expression 'Validation' was explained to be the process of evaluating software during or at the end of the development process to determine whether it satisfies specified requirements. In our considered opinion, where it is admitted that the activity being performed by the assessee is also a part of process of software} development for its associated enterprise, then the captioned activities being undertaken by Thinksoft Global Services Limited, which ostensibly also are a part of the whole process of software development, would definitely be considered as comparable. The argument being set up by the lower authorities that the 'Verification' and 'Validation' are steps to test the efficiency of the software, but not a part of software development, in our view is a hairsplitting argument, which is not justified in the context of the present comparability analysis. Ostensibly, 'Verification' and 'Validation' are broadly speaking, a part and parcel of the process of software development. Therefore, on this aspect, we are unable to uphold the action of lower authorities in excluding the said concern from the final set of comparables. We direct, accordingly.”
We find, following this decision, the Pune Bench of the Tribunal in the case of Starent Networks (India) (P) Ltd. vs. ACIT has also held that ThinkSoft Global Services Ltd. needs to be included in the final set of comparables being functionally comparable. Respectfully following the decisions cited (supra), we hold that the DRP was not justified in excluding Thinksoft Global Services from the list of comparables. We accordingly direct the A.O./TPO to include Thinksoft Global Services Ltd., as a comparable.
So far as exclusion of Acropetal Technologies Ltd., is concerned, this company was included by the TPO on the ground that it meets the filters and is functionally comparable in view of the functional profile of the assessee. The arena of operations or the business sector would not impact inclusion as the primacy of functional comparability is not subject to area of operation in the chosen ALP methodology. The submission of the assessee that as per its annual report the company has different segments such as engineering, design, information technology services and healthcare and, therefore, needs to be excluded from the list of final comparables both on account of functional dissimilarity and non-qualification of filters adopted by the TPO was rejected by the lower authorities. It is the submission of the ld. counsel that this company fails the TPO’s own filter i.e., employee cost/total cost of more than 25% whereas the annual cost to total cost is only 13%. It is his submission that the ld. DRP, without going into the details mentioned that the company meets the filters and is functionally comparable. Relying on various decisions, the ld. counsel for the assessee submitted that this company should be excluded from the list of comparables since the assessee is not in software product whereas Acropetal Technologies Ltd. is into software product. Referring to the decision of the Chennai Bench in the case of Symantec Software & Services India (P) Ltd. vs. DCIT, the ld. counsel drew the attention of the Bench to para 6 of the order which reads as under:-
“6. We heard the rival submissions, perused the material on record and judicial decisions. We found that the Acropetal Technologies Limited is functionally non-comparable to the assessee company as it is engaged in development of computer software. Whereas, the assessee is in the software development and technical support services and the Ld. AR relied on the decision of (i) ACIT Vs Intoto Software India Private Limited, ITTA No. 233 of 2014, (ii) AT & T Global Services India Private Limited Vs. ITO, (iii) Telcorida Technologies India P. Ltd Vs. ACIT, ITA No 7821/Mum/2011, (iv) Ness Technologies (India) Pvt. Ltd., Vs. ACIT, ITA No. 7016/Mum/2012 and we find in Mindcrest (India) Pvt. Ltd., Vs. DCIT, ITA No.7289/Mum/2012, this comparable has been dealt at Para 7.1 which read as under: " 7.1. Let us now consider the company's used as comparables by the TPO to see whether they can be accepted or not: 1. M/s. Acropetal Technologies (Seg.) A perusal of the Annual report of this company shows that it is engaged in the development of Computer Software. The company has also shown inventories as work-in-progress in its balance sheet and there is also increase/decrease in inventories in its profit and loss account and under the head employees related onsite development charges, there are onsite development expenses amounting to Rs. 31.45 crores. Considering these facts, it can be safely concluded that this company has totally different business model. It is also seen that this company does not pass the test of 75% export turnover which is used as a filter by the TPO himself. This company was also rejected by the Tribunal in ITA No. 7016/M/2012 wherein the Tribunal has held that the ratio of onsite to total employee related expenses of this company comes to 86.2%k, thus failing the onsite filter. The Tribunal, Bangalore Bench in ITA No. 1316/Bang/2010 in the case of Symphony Marketing Solutions India Pvt. Ltd. has observed that the functions performed by the Engineering Design Services segment of this company cannot be considered as comparable to the ITES/BPO functions performed by the assessee. Considering all these facts in totality, we direct for the exclusion of this company from the final list of comparables.” Considering the Mumbai Tribunal decision and facts submitted, we direct the TPO to exclude the company from the list of comparables.”
27.1 Referring to the decision of the Delhi Bench of the Tribunal in the case of Cadence Design Systems (I) (P) Ltd. vs. ACIT reported in 93 taxmann.com 227, he drew the attention of the Bench to para 27 which reads as under:-
“27. Ld. AR brought to our notice that the salaries and consultancy charges including bonus incurred by Acropetal was Rs.13.51 crores whereas the technical sub contract expense was Rs.55.77 crores which accounts for only 13.74% and accordingly it does not pass through the filter proposed by the ld. TPO.”
Referring to the decision of the Bangalore Bench of the Tribunal in the case of ACIT vs. Marvell India (P) Ltd., 84 taxmann.com 212, the ld. counsel drew the attention of the Bench to para 14.3.1 of the order which reads as under:- “14.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial pronouncement cited. We find that as per the segmental reporting at page 53 of the Annual report of this company, the income from Information Technology Services is Rs. 81.40 crores out of total income o Rs. 141.65 crores. Therefore, it is amply clear that the income from Information Technology Services is less than 75% of total revenues and consequently this company does not satisfy the filter of information technology services revenue being more than 75% of total revenues, applied by the TPO himself. We find that on similar facts for the year under consideration i.e. Assessment Year 2011-12, a co-ordinate bench in the case of GT Nexus Software (P.) Ltd. (supra) has upheld the DRP's exclusion of this company from the list of comparables on account of it failing to satisfy the filter of 75% revenues to be from software technology services revenue. In the said order the co-ordinate bench has also held this company to be functionally not comparable to a provider of pure software development services to its AE's. Following the decision of the co-ordinate bench in the case of GT Nexus Software (P) Ltd. (supra), we direct the TPO/AO to exclude this company, M/s. Acropetal Technologies Ltd. from the list of comparables.”
28.1. He accordingly submitted that this company should be excluded from the list of comparables.
The ld. DR, on the other hand, while supporting the order of the A.O./TPO/DRP submitted that he has no objection if the same is restored to the file of the A.O./TPO for verification of the employee cost and functional profile of the assessee and decide the issue afresh.
After hearing both the sides, we find the Assessing Officer included Acropetal Technologies Ltd. as a comparable on the ground that it meets all the filters and is functionally comparable. It is the submission of the ld. counsel for the assessee that this company fails the employee filter cost adopted by the TPO himself which is more than 25% whereas the employee cost to total cost of Acropetal Technologies is only 13%. It is also his submission that the DRP, without going into the details, has mentioned that this company meets the filters and is functionally comparable. Since it is the submission of the ld counsel that this company is not in software product and its employee cost to total cost is only 13% which is much less than 25% filter adopted by the TPO himself, therefore, considering the totality of the facts of the case, we deem it proper to restore the issue to the file of the A.O./TPO for verification of the same and decide the issue afresh as per fact and law. Needless to say, the assessee be given due opportunity of being heard.
So far as E-Infochips is concerned, the TPO selected this company as a comparable on the ground that it meets all the filters and is functionally comparable in view of the functional profile of the assessee. The submission of the assessee that its services comprises of conceptualization, architecture and design sustenance and support development, production and quality testing was rejected by the lower authorities. It is the submission of the ld. counsel that this company was added by the TPO without any search process and is functionally dissimilar.
Further, it fails the TPO’s own filter which is export income of more than 75% whereas the export income in the instant case is only 59%. Relying on various decisions, he submitted that this company fails the TPO’s own filter and functional profile is not verified and should be excluded from the list of comparables. Referring to the decision of the Bangalore Bench of Tribunal in the case of Metric Stream Infotech (India) (P) Ltd. vs. ACIT, 99 taxmann.com 184, he drew the attention of the Bench to para 9 of the order which reads as under:- “9. As far as E-Infochips Ltd. is concerned, this Tribunal in the case of M/s. Electronic Imaging India Pvt. Ltd. (supra) vide para 9 of its order had held that this company was a software development and ITeS providing company and software development product company. The Tribunal held that no segmental data of this company was available and therefore it is difficult to compute the operating margin from software development services and therefore this company should be excluded from the list of comparable companies.”
He accordingly submitted that this company be excluded from the list of comparables.
The ld. DR, on the other hand, submitted that this issue should be restored to the file of A.O./TPO for verification of the export income filter and the functional profile.
We have considered the rival arguments made by both the sides and perused the record. We find this company was added by the TPO/A.O./DRP on the ground that this company meets the filters and is functionally comparable in view of the functional profile of the assessee. It is the submission of the ld. counsel for the assessee that this company fails the TPO’s own filter i.e., export income of 75% since the export income of this comparable E-Infochips is only 59%. Further, it is also functionally not comparable. Considering the totality of the facts and in the interest of justice, we deem it proper to restore this issue to the file of the A.O./TPO/DRP to find out the export income filter as adopted by the TPO and if this company does not meet the export income filter as adopted by the TPO himself, then to exclude the same from the list of comparables. Needless to say, the assessee be given due opportunity of being heard while deciding the issue.
So far as the Revenue’s appeal is concerned, we find the DRP while excluding E-Zest Solutions Ltd., from the list of comparables has given a finding that this company is in divergent segment in view of the product development undertaken by the comparable which is clear from the profile provided by the assessee in its submissions. Accordingly, they have held that this company to be excluded from the list of comparables. We do not find any infirmity in the order of the DRP excluding this company from the list of comparables. We find, the Hon'ble Bombay High Court in the case of PCIT vs. Barclays Technology Centre India (P) Ltd., 409 ITR 138, at para 4 of the order, has observed as under:- “4 The impugned order of the Tribunal has examined services rendered and consideration received by each of these companies with the services rendered and consideration received by the respondent assessee. On facts it comes to the conclusion that all the aforesaid four companies cannot be said to be comparable for the purposes of determining ALP of the Appellant’s services to its AE’s as under: (i) EZest Solutions Ltd. (a) On facts the Tribunal placed reliance upon the order of its coordinate bench in the case of M/s. Symphony Services (Pune) Private Ltd., Pune 23
rendered on 30.4.2014 for Assessment Year 200809 itself. It was found that M/s. EZest Solutions Ltd. is rendering Knowledge Process Outsourcing (KPO) services. Therefore, not comparable to software development service being rendered by the Assessee therein as being rendered also by Respondent Assessee herein. (b) No distinguishing features in this case to that of M/s. Symphony Services (Pune) Pvt. Ltd. (Supra) are pointed out either before the Tribunal or before us. The Revenue has also not shown to us any challenge to the order of the Tribunal in M/s. Symphony Services Pvt. Ltd. (Supra) before this Court. ( c) It follows that the exclusion of M/s. EZest Solutions Ltd by the Tribunal is a finding of fact which cannot be disturbed in the absence of any perversity being shown.”
We find the Pune Bench of the Tribunal in the case of Symphony Services Pune (P) Ltd. vs. ITO, 65 SOT 30, at para 23 of the order has observed as under:-
“23. We have carefully considered the rival submissions. In this context, we find that before the TPO relied upon the information available on the website of the said concern and submitted that the said concern was engaged in ebusiness consultancy services, consisting of web strategy services, ITES services, and in technology consultancy services including portal development services, etc.. It is sought to be explained that such kind of services are ITES services which are understood as KPO services. It was also pointed out that the said concern has not provided any segmental data in its Annual Report. Before us, it is sought to be contended that the KPO services are not comparable to the software development services being rendered by the assessee and therefore concerns which render KPO services cannot be considered as functionally comparable to the concerns who render software development services. For the said proposition, reliance has been placed on the decision of the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) which has indeed been rendered in the context of the same comparable, which is the subject-matter of consideration before us, i.e. E-Zest Solutions Limited.
Since the order of the DRP is in consonance with the various decisions cited (supra), therefore, we do not find any infirmity in the order of the DRP excluding E-Zest Solutions Ltd. from the list of comparables.
So far as Wipro Technology Services Ltd., is concerned, here also we find the ld. DRP excluded this company from the list of comparables on the ground that it is functionally different from that of the assessee company. We find the Delhi Bench of the Tribunal in the case of Navisite India (P) Ltd. vs. ITO, 101 taxman.com 290, at para 12 of the order has excluded this company from the list of comparables by observing as under:- “12. Wipro Technology Services Ltd.: Vide Ground No. 5.9, assessee is objecting for inclusion of this comparable. Ld.AR submitted that this company is functionally different and segmental information is not available. It has also been urged by Ld.AR that there are significant related party transactions undertaken by this company. Ld.TPO did not accept assessee’s contention of related party transactions and proceeded to include it in the final set of comparables. 12.1. On the contrary, Ld.DR submitted that there is no related party transaction during the year under consideration. 13. We have heard rival submissions of both sides in light of records placed before us. 13.1. Ld.AR submitted that 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. 13.2. It was submitted that Wipro Limited (Wipro) executed 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 master service agreement (MSA) with Citigroup Inc. for delivery of technology infrastructure services, application development and maintenance services After acquisition by Wipro, name of Company was changed to Wipro Technology Services Limited (‘WTS’ or ‘the Company’) on 16 March 2009.” 13.3. It is observed from the above 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 which executed agreement with Citi Group Inc., for acquiring Citi
Technology Services Ltd., now called Wipro Technology Services Ltd. On 21.1.2009, Wipro Ltd. signed master agreement with Citi Group Inc., for delivery of Technology Infrastructure Services and application development and maintenance services for the period of six years, which also includes 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. 13.4. It is observed that issues raised by Ld.CIT,DR in respect of comparability of this comparable has been dealt with by coordinate bench of Delhi Tribunal in Saxo India Pvt.Ltd vs. ACIT (supra) as under: “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 subclause (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 necessary that the same should be between enterprises, other than 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 sub-section (2) of section 92B, it is clearly borne out that a transaction with 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 third person and the AE, or the terms of relevant transaction are determined in substance between the third person and AE. When we consider section 92B(2) in combination with Rule 10A(a), it follows that transaction between non-AEs shall be construed as a transaction between two AEs, if there exists a prior agreement in relation to relevant transaction between third person and AE. If such an agreement exists, third person is also considered as an AE, and 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). Adverting to the facts of the instant case, we find that Wipro Technology
Services Ltd. earned 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 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.” 13.5. Respectfully following the same, we direct exclusion of this company from final list of comparables.”
Respectfully following the decision cited (supra), we do not find any infirmity in the order of the DRP directing the A.O./TPO to exclude WIPRO Technology Services Ltd. from the list of comparables. Accordingly, the order of the DRP on this issue is upheld.