AGILENT TECHNOLOGIES (INTERNATIONAL) PVT. LTD.,GURGAON vs. ACIT, GURGAON

Date of Hearing : 30.09.2019 Date of Order : 18.11.2019

O R D E R

PER KULDIP SINGH, JUDICIAL MEMBER

2. The Appellant, M/s. Agilent Technologies (International)

Pvt. Ltd. (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 28.01.2016 passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Act qua the assessment year 2007-08 on the grounds inter alia that :-

“On the facts and circumstances of the case and in law, the learned Assessing Officer CAO') has erred in passing the assessment order under section 254/143(3) read with section 144C of the Income-tax Act, 1961 ('file Act') after considering the adjustments made by the learned Transfer Pricing Officer ('learned TPO') in his order passed under section 254 read with 92CA(3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel (‘DRP') Each of the ground is referred to separately, which may kindly be considered independent of each other That, on the facts and circumstances of the case and in law 1. The learned TPO / AO / DRP have erred m making an addition of INR 180,674,599 to the total income of the Appellant in respect of International transactions pertaining to provision of software development services and provision of IT-enabled services by the Appellant to its associated enterprises ('AEs') (hereinafter referred to as 'impugned transactions').

2. The learned TPO / A.O / DRP have erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income- tax Rules, 1962 ('the Rules'), and modifying the same for the determination of the Arm's Length Price ('ALP') of the impugned transactions to hold that the International transactions are not at arm's length.

3. The learned TPO I AO f DRP have erred In a. Not accepting the use of multiple year data, as adopted by the Appellant In its Transfer Pricing ('TP') documentation and b. Determining the arm’s length margins / prices using data pertaining only to financial Year (‘FY') 2006-07 which was not available to the appellant at the time of complying with the Indian TP documentation requirements

4 The learned TPO / AO / DRP have erred III rejecting certain comparable companies selected by tile Appellant by applying inappropriate comparability criteria such as a turnover less than INR < crore, b Diminishing revenue, c Different accounting year. d. Employee cost greater than 25 percent; and e. Onsite revenues greater than 75 percent.

5 The learned TPO / AO / DRP have erred in law by exercising powers under section 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes.

6. The learned TPO / AO / DRP have erred in selecting certain companies (which arc earning super normal profits) as comparable to the Appellant.

7 The learned TPO / AO / DRP have erred in erroneously rejecting the comparable companies selected by the Appellant and adding certain companies to the final set of comparable companies on an ad-hoc basis, thereby resorting to cherry picking of comparables to determine ALP.

8. The learned TPO / AO / DRP have erred in treatment of operating and non-operating items while computing the margins of the Appellant and comparable companies, and passed an order which also suffers from several computational errors in computation of margins.

9. The learned TPO / AO / DRP have erred in not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies

10. The learned TPO / AO have erred in not passing an assessment order in conformity with the directions of the Hon'ble DRP in respect of certain items (viz. treatment of fringe benefit tax and computational errors while computing operating margins of the Appellant and comparable companies), thus acting in contravention of provisions of section 144C(10) of the Act.

11 The learned AO has grossly erred In initiating penalty proceedings under section 271 (1)(c) of the Act

Pvt. Ltd., the taxpayer is a wholly owned subsidiary of Agilent Technologies International Europe, BV and is into the business of providing Software Development (IT) Services and Information Technologies Enabled Services (ITES) to its overseas company.

As per report in Form 3CEB, the taxpayer provided Software Development (IT) services and ITES to its Associated Enterprises (AE) and thereby entered into international transactions as under:-

Name of transaction Value of international transaction Purchase of fixed assets 4,222,962 Purchases for repairs and maintenance 1,885,599 Provision of IT Enabled services 1,452,567,224 Provision of software R & D services 321,600,317 Reimbursement of expat salaries paid 32,542,090

Ld. TPO finally selected 26 comparables for software segment with average margin after working capital adjustment of 32.68% with OP/OC and 25 comparables qua ITES segment to benchmark the international transactions with average margin after working capital adjustment of 32.02% with OP/OC and computed the Arm’s Length Price (ALP) of international transactions entered into by the taxpayer with its AE as under :-

“9.1 Software Development services :- Arm’s Length Price :

Operating Cost 279,485,304 Arms Length Margin 32.68% of the Operating Cost Arms Length Price (ALP) @ 132.68% 370,821,101 of operating cost

Price received vis-à-vis the Arms Length Price The price charged by the taxpayer to its Associated Enterprises is compared to the Arms Length Price as under :-

Arms Length Price (ALP) @ 132.68% 370,821,101 of operating cost Price charged in the international 321,644,804 transactions Shortfall being adjustment u/s 92CA 49,176,297

9.2 IT Enabled services segment :

Operating Cost 1,293,732,265 Arms Length Margin 30.05% of the Operating Cost Arms Length Price (ALP) 1,682,498,810

Price received vis-à-vis the Arms Length Price : The price charged by the taxpayer to its Associated Enterprises is compared to the Arm’s Length Price as under :-

Arms Length Price as computed above 1,682,498,810 Price shown in the international 1,453,039,699 transactions Shortfall being adjustment u/s 92CA 229,459,111 10. In view of the same, following adjustments can be made :- A. Software Development Segment Rs. 49,176,297 B. ITES Rs.229,459,111 Total : Rs.278,635,408”

ITES SEGMENT

No. Company Name Adjusted OP to Total Cost % 1 Accentia Technologies Ltd (Seg) 27.87% 2 Aditya Blrla Mincas Worldwide Ltd (Earlier 12.75% Transworks Information Services Ltd

3 Allsec Technologies Ltd 27.44% 4 Appollo Healthstreet Ltd (-)9.99% 5 Cosmic Global Ltd 13.1% 6 Datamatics Financial Services Ltd 10.34% 7 Flextroncs Software Systems Ltd. (Seg) 7.8% 8 Genesys International Corporation Ltd 10.28% 9 HCL Com net Systems & Services Ltd (Seg.) 45.83% 10 I C R A Techno Analytics Ltd (Seg.) 13.15% 11 Informed Technologies India Ltd 35.33% 12 Infosys B P O Ltd 30.38% 13 Iservices India Pvt Ltd 50.35% 14 Maple Esolutions Ltd 31.99% 15 R Systems International Ltd (Seg.) 20.04% 16 Spanco Ltd (seg.) 21.39% 17 Triton Corp Ltd 29.37% 18 Wipro Ltd (Seg.) 31.51% Arithmetical Mean 22.72%

Operating Cost 1,29,37,32,265/- Arms Length Price 22.72% of the Operating Cost Arms Length Price (ALP) @ 122.72% of 1,58,76,68,236/- operating cost Price received vis-à-vis the Arms Length Price : Arms Length Price (ALP) @ 122.72% of 1,58,76,68,236/- operating cost Price charged in the international transactions 1,45,30,39,699/- Shortfall being adjustment u/s 92CA 13,46,28,537/-

WIPRO LIMITED (BPO SEGMENT) (WIPRO) 12. Ld. AR for the taxpayer sought exclusion of Wipro from the final set of comparables on the grounds inter alia that it is a product company; that it has significant intangibles; that Wipro has acquired substantial business and brand of North West Switchgear Ltd.; that Wipro is a giant company with huge turnover and relied upon the decisions in cases of Avaya India Pvt. Ltd. ITA 532/2019, American Express (India) Pvt. Ltd. Oracle (OFSS) BPO Services Pvt. Ltd. ITA 124/2018, H&S Software Development and Knowledge Management Centre Pvt. Ltd., New River Software Services Pvt. Ltd. ITA 924/2016, Pentair Water India Pvt. Ltd. vs. CIT ITA 18/2015 & Everest Business Advisory India (P) Ltd. ITA No.41/Del/2013 & 1191/Del/2013.

Furthermore, when we examine TPO’s order at page 92, external page 139 of the appeal set, it has come on record that Wipro has acquired 9 companies detailed as under :-

(i) mPower Software Services Inc. and subsidiaries (100% stake acquired in December 2005) - Customer Related Intangibles – Rs.513.13 million (ii) BVPENTE Beteiligungsverwaltung GmbH and subsidiaries (100% stake acquired in December, 2005) - Customer Related intangibles - Rs. 117.40 million (iii) cMango lnc. and Subsidiaries (100% stake acquired in April, 2006) - Customer Related Intangibles - Rs, 117.40 million (iv) RetailBox BV and Subsidiaries (100% stake acquired in June, 2006) – Customer Related Intangibles - Rs. 297.72 million (v) North-west Switchgear Ltd (100% stake acquired in May, 2006) - Marketing Related Intangibles - Rs. 1097.91 million (vi) Saraware Oy (100% stake acquired in June; 2006) - Customer Related Intangibles - Rs, 254.72 million (vii) Quantech Global Services (100% stake acquired in July, 2006) - Customer Related Intangibles - Rs, 45,92 million (viii) Hydrauto Group (100% stake acquired in November, 2006) - Customer Related Intangibles - Rs. 73.57 million (ix) 3D Networks (100% stake acquired in November, 2006) - Customer Related Intangibles - Rs. 136.24 million

Furthermore, financial statement, available at page 1475 of the paper book, shows that Wipro has goodwill of Rs.8.6 crores. It is also proved from page 991 of the paper book that Wipro has huge turnover of Rs.940 crores as against Rs.142 crores of the taxpayer, thus a giant company with huge brand value.

“27. There is merit in the contention of the Assessee that the scale of operations of the comparables with the tested entity is a factor that requires to be kept in view. TCS E-Serve has a turnover of Rs.1359 crores and has no segmental revenue whereas the Assessee’s entire segmental revenue is a mere24 crores. As observed by this Court in its decision dated5thAugust 2016 in ITA 417/2016(PCIT v. Actis Global Services Private Limited)“Size and Scale of TCS‟s operation makes it an inapposite comparable vis-à-vis the Petitioner.” As already pointed out earlier there is a closer comparison of TCS E-Serve Limited with Infosys BPO Limited with each of them employing 13,342 and 17,934 employees respectively and making Rs.37 crores and Rs.19 crores as contribution towards brand equity. When Rule 10(B)(2) is applied i.e. the FAR analysis, namely, functions performed, assets owned and risks assumed is deployed then brand and high economic upscale would fall within the domain of “assets” and this also would make both these companies as unsuitable comparables.”

Hon’ble Delhi High Court in the case of Pr. CIT vs. Oracle 21.

(OFSS) BPO Services Pvt. Ltd. in ITA 124/2018 order dated 05.02.2018 confirmed the exclusion of Wipro by the Tribunal on ground of brand value which have significant role in its ability to garner profits and to negotiate contracts by returning following findings :-

“There is no error of law per se in this approach. As to the exclusion of M/s Wipro Limited, here too, the Court is of the opinion that the brand value of an entity has a significant role in its ability to garner profits and negotiate contracts. Thus, while considering the comparables, the likelihood of profits derived or attributable to the brand having regard to the consistency of the quality of services that an entity is able to offer would be relevant; although functionally, the two entities may be similar in terms of the services or products they offer, brand does play its own role in price or cost determination. If this singular aspect is kept in mind, the ITAT’s approach cannot be faulted with.”

MAPLE ESOLUTIONS LTD. (MAPLE)

23. The taxpayer sought exclusion of Maple from the final set of comparables for benchmarking the international transactions on ground of merger and acquisitions which has affected its profit leading to abnormal results with growth of 64% in sales over the previous year. The taxpayer has made analysis of revenue and profit of Maple for AY 2006-07, 2007-08 & 2008-09 in tabulated form as under :-

Maple FY 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 Esolutions Ltd. Particulars Amount Amount (INR) Amount (INR) Amount (INR) (INR) Refer Page 1308 of PB Refer internal Refer internal page 63 of FY page 63 of FY 07-08 annual 08-09 annual report report Revenue 74,312,955.54 122,132,832.77 336,459,841.54 38,599,505.82 64.35% 175.49% -88.53% Refer Page 1308 of PB Refer internal Refer internal page 63 of FY page 63 of FY 07-08 annual 08-09 annual report report Profit / 17,510,010.00 30,145,087.00 51,1566,745.00 (20,176,862.00) Loss as per financials 72.16% 69.70% -139.44% Ld. AR for the taxpayer relied upon the decisions in the cases of Caliberated Healthcare Systems India Pvt. Ltd. in M/s. Everest Business Advisory India (P) Ltd. in ITA No.41/Del/2013, CRM Services India (P) Ltd. in ITA No.4796/Del/2010, Oracle (OFSS) BPO Service Pvt. Ltd. in ITA No.1111/Kol/2011, Capital IQ Information Systems India Pvt. Ltd. in ITA No.1961/Hyd./2011 & AOL Online India Pvt. Ltd. in ITA No.1036/Bang./2011.

24. On the other hand, ld. DR for the Revenue contended that simple acquisition is not enough to exclude any company from the list of comparables.

25. The contention raised by the ld. DR for the Revenue is not sustainable because in case of Maple, acquisition has certainly affected the profit margin as its growth during the year under assessment is abnormal to the tune of 64% in sales over the previous year. Maple has been ordered to be excluded by the coordinate Bench of the Tribunal in the case of Cabliberated Healthcare Systems India Pvt. Ltd. (supra) as a comparable in similar set of facts and circumstances on grounds of acquisition by returning following findings :-

“9. We have heard both the sides and perused the relevant material on record. Both these companies are inter-related entities. During the year under consideration, there was acquisition of 100% shares of Maple Esolutions Ltd. by Triton Corp. Ltd. and thus, Maple Esolutions Ltd. became a wholly owned subsidiary of Triton Corp. Ltd. w.e.f 01.01.2007. It can be seen that this merger/acquisition has taken place during the year under consideration, thereby shattering their comparability.

……. 11. We find that there is a direct order by the Delhi Benches of the Tribunal in which these two companies have been excluded because of financial irregularities committed by their directors. In the absence of any contrary order brought on record by the ld. DR permitting the inclusion of companies under cloud, in the list of comparables, respectfully following the precedent we direct the exclusion of these two companies from the list of comparables.”

26. Maple has been ordered to be excluded in many other cases decided by the Tribunal on the ground that its financial results are not credible as its Directors have been indicted in frauds. So, in view of the matter, we find that Maple is not a suitable comparable vis-à-vis taxpayer, hence ordered to be excluded.

TRITON CORP. LTD. (TRITON)

27. The taxpayer sought to exclude Triton again on ground of acquisition and on the ground that its financials are not credible as its Directors were indicted for fraud; that it is a product company and segmental financials are not available and relied upon the (supra). Ld. AR for the taxpayer in support of his arguments brought on record that financial results of Triton for FYs 2006-07, 2007-08 & 2008-09 in tabulated form which are extracted as under:-

Triton FY 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 Corp Ltd. Particulars Amount (INR) Amount (INR) Amount (INR) Amount (INR) Refer Page 1344 of PB Refer page 22 of annual report Revenue 317,529,518.00 533,671,726.00 1,431,655,866.00 327,661,569.00 68.07% 168.27% -77.11% Refer Page 1344 of PB Refer page 22 of annual report Profit / 46,361,173.00 122,204,738.00 236,804,944.00 (328,318,273.00) Loss as per financials 163.59% 93.78% -238.65%

28. Ld. DR for the Revenue, on the other hand, contested the exclusion of Triton on the basis of same argument in case of Maple and relied upon the orders passed by the ld. TPO/DRP.

29.1 Moreover, in Cabliberated Healthcare Systems India Pvt. Ltd. (supra), Triton has been ordered to be excluded as a comparable because of financial irregularities committed by their Directors as its financials were not credible. So, in view of the matter, we are of the considered view that Triton is also not a suitable comparable, hence ordered to be excluded from the final set of comparables.

INFOSYS BPO LTD. (INFOSYS BPO)

30. The taxpayer sought to exclude Infosys BPO on the grounds inter alia that it is a giant company with huge turnover and significant intangibles; that Infosys BPO has a brand expenditure of Rs.56 lakhs vis-à-vis nil in case of the taxpayer; that Infosys BPO has a brand value of Rs.31,617 crores and relied upon the decision rendered by the coordinate Bench of the Tribunal in case

Flextronics Technologies (India) Pvt. Ltd. in ITA of No.1559/Bang/2012, Avaya India Pvt. Ltd. in Evalueserve SEZ (Gurgaon) Pvt. Ltd. in ITA 241/2018 and Oracle (OFSS) BPO Services Pvt. Ltd. It has also been ordered to be excluded in taxpayer’s own case in ITA No.4191/Del/2018 for AY 2014-15 order dated 06.05.2019.

32. Coordinate Bench of the Tribunal in taxpayer’s own case for AY 2014-15 (supra) ordered to excluded Infosys BPO as a comparable for benchmarking the international transaction for ITES segment by returning following findings :-

“17. We have carefully considered the rival contention and perused the orders of the lower authorities wherein the reasons given for inclusion of the above comparable company for the purpose of benchmarking of the arm’s-length price of the international transaction of the ITeS segment of the assessee. The assessee has also placed before us the annual report of Infosys BPO Ltd for 2013 – 14. On looking at the annual report itself it is clear that the company has an imprint of Infosys brand all over it. In the companies overview at page number 4 of the annual accounts as mentioned that this company is the business process outsourcing subsidiary of Infosys and is engaged as outsourcing service provider. In the management discussion and analysis placed at page number 14 of the annual report, it is stated that Infosys BPO provides business process management services to organizations that outsource their business processes and Infosys BPO is majority owned and controlled subsidiary of Infosys Ltd. Rich industry experience held the company to understand the evolving needs of the clients better and provided them with the ability to offer appropriate solution across different industry verticals and horizontals , quickly. Further in paragraph number 1 it is stated that the company is committed to providing best- in - class services to both horizontal and vertical focus areas. The horizontal solutions comprises of sourcing and procurement, customer services, finance and accounting, legal process outsourcing, sales and fulfillment, analytics, business platform, business transformation services, human resources outsourcing, technology solution optimization. While vertical solution included financial services and insurance, manufacturing, energy utilities, communication and services, retail, consumer packaged goods, logistics and life sciences. On looking at the horizontal services, which comparable company provides it is apparent that on this ground itself the same is not comparable with the assessee company. On looking at page number 64 of the annual accounts, it is apparent that comparable company has contributed INR 50,000,000 towards brand building and advertisement expenditure. Admittedly the company does not have any goodwill which can impact the profitability of the price of the business of it services because the goodwill is recorded on amalgamation in the nature of purchase only. This is mentioned at page number 51 in para number 1.5 of the annual report and corroborated by page number 58 of the fixed assets schedule in paragraph number 2.6 of the report. Based on the above analysis, it is apparent that Infosys BPO Ltd has a huge brand backing of the Infosys group behind it which can definitely impact the revenue as well as the profitability of the comparable company, therefore in absence of any such assets available to the assessee company, Infosys BPO Ltd is required to be excluded from the comparability analysis of ITeS segment. Accordingly we direct the learned TPO/AO to exclude the above comparable and then compute the arm’s-length price of the ITeS segment of the assessee.”

33. Undisputedly, there is no change in the business model of the taxpayer. Moreover, when we examine scale of business of Infosys BPO vis-à-vis the taxpayer, it is a giant company with huge turnover and having significant intangibles because as per annual report, relevant page 1239 of the paper book, Infosys BPO is having a turnover of Rs.649 crores whereas turnover of the taxpayer is Rs.142 crores. Moreover, Infosys BPO has brand expenditure of Rs.56 lakhs as against nil expenditure of the taxpayer.

“…….In the other two cases of M/s. Infosys BPO and Wipro BPO Ltd., the ITAT again in the opinion of this Court, quite correctly held that the corporate entities had a significant brand presence for profits and large corporate size, which could not be compared to the assessee’s transactions.”

HCL COMNET SYSTEMS & SERVICES LTD. (HCL COMNET)

ACCENTIA TECHNOLOGIES LTD. (ACCENTIA)

29. Ld. DR for the Revenue, on the other hand, relied upon the orders passed by the ld. TPO/DRP.

The revised revenue and profit increase post removing sale of investment are 100683% and 5148%.

Coordinate Bench of the Tribunal in AOL Online India Pvt. 31.

Ltd. in has also examined the suitability of Accentia as a comparable vis-à-vis routine ITES provider and ordered to be excluded on ground for extra ordinary events i.e. amalgamation of subsidiary resulting in growth of revenue of 100683% and on functional non-comparability as Accentia is into the activity of medical transcription, billing & coding and software development and implementation and on the ground that business promotion expenses constitute 28.34% of the total operating revenue earned by the company.

“(i) Accentia Technologies Ltd. (Seg) : The assessee is objecting to the aforesaid company being treated as a comparable on the ground that during the year Geosoft Technologies (Trivandrum) Ltd. and Indian Technologies (India) Pvt. Ltd. amalgamated with Accentia during the year resulting in abnormal rise in profits. The Delhi Bench of the Tribunal in Cienna India (P) Ltd. vs DCIT 57 taxmann.com 329 ( Delhi- Trib) as well as the Mumbai Bench in Petro Araldite (P) Ltd Vs. DCIT 144 ITD 625 (Mumbai-Trib) have held that a company cannot be considered as comparable because of financial results become distorted due to mergers, demergers etc. Similar view has also been taken by the Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd vs ACIT in ITA No. 5654/Del/2011. As there were amalgamations in Accentia Technologies Ltd. during the financial year in question, this fact makes it incomparable with the assessee company. In view of the aforesaid, we direct to exclude Accentia Technologies Ltd. (Seg) from the list of comparables.”

SOFTWARE DEVELOPMENT SERVCIES (SDS) (IT SEGMENT)

No. Company Name OP to total Cost% 1 Avani Cimcon Technologies Ltd. 50.29% 2 Datamatics Ltd. 1.38% 3 E-Zest Solutions Ltd. 35.63% 4 Flextroncs Software Systems Ltd. 25.31% (Seg) 5 Geometric Ltd (Seg) 10.71% 6 Helios & Matheson Information 36.63% Technology Ltd 7 Igate Global Solutions Ltd 7.49% 8 Infosys Technologies Ltd 40.30% 9 Ishir Infotech Ltd 30.12% 10 KALS Informations Systems Ltd 30.55% 11 LGS Global Ltd (Lanco Global 15.75% Solutions Ltd) 12 Lucid Software Ltd 19.37% 13 Mediasoft Solutions Ltd 3.66% 14 Megasoft Ltd 60.23% 15 Mindtree Ltd. 16.90% 16 Persistent Systems Ltd. 24.18% 17 Quintegra Solutions Ltd. 12.56% 18 R S Software (India) Ltd. 13.47% 19 R Systems International Ltd. 15.07% (Seg.) 20 Sasken Communication Techno 22.16% Ltd. (Seg.)

21 SIP Technologies & Exports Ltd. 13.90% 22 Tata Elxsi ltd (Seg.) 26.51% 23 Thirdware Solutions Ltd. 25.12% 24 Wipro Ltd. (Seg.) 33.48% Average 23.78% After working capital adjustment 31.56% OP/OC%

Operating Cost 27,94,85,304/- Arms Length Price 31.56% of the Operating Cost Arms Length Price (ALP) @ 131.56% of 36,76,90,866/- operating cost Price received vis-à-vis the Arms Length Price : Arms Length Price (ALP) @ 131.56% of 36,76,90,866/- operating cost Price charged in the international transactions 32,16,44,804 Shortfall being adjustment u/s 92CA 4,60,46,062/-

Tata Elxsi Ltd (Seg.), (vi) Megasoft Ltd., (vii) Hellos & Matheson Information Technology Ltd., (viii) Thirdware Solutions Ltd., (ix) Avani Cincom Technologies Ltd., (x)

Sasken Communication Technologies Ltd. (Seg.), (xi) Flextronics Software Systems Ltd. (Seg), and (xii)Ishir Infotech Ltd.. We would decide the suitability of each of the aforesaid comparables one by one.

INFOSYS TECHNOLOGIES LTD. (INFOSYS TECHNOLOGIES) 37. The taxpayer challenged the inclusion of Infosys Technologies as a comparable vis-à-vis the taxpayer to benchmark the international transactions on the grounds inter alia that it is functionally dissimilar being a product company; that it is a giant company with huge turnover and brand expenditure and further contended that this comparable was excluded by the Tribunal in taxpayer’s own case in for AY 2011-12 order dated 13.02.2018.

37.1 Perusal of the annual report, relevant pages 1815 and 1862 of paper book-III, shows that Infosys Technologies has its banking product, namely, Finacle Suite and its overview also claims that the company has software products. Furthermore, its expenditure on R&D are Rs.48 crores during the year under assessment as against no expenditure on R&D by the taxpayer.

37.2 Furthermore, when we examine the scale of business with brand expenses of Infosys Technologies vis-à-vis the taxpayer, both are incomparable as is evident from the table extracted below

Particulars Agilent International Infosys Ltd. FY 2006-07/AY 2007-08 FY 2006-07/AY 2007-08 Turnover INR 32 crores @ pg 51 of PB INR 13,149 crores @ pg 1 1854 of PB III Brand INR 0 lakhs @ pg 302 of PB I INR 69 lakhs @ pg 1859 of expenditure PB III Asset base INR 29 crores @ pg 298 of INR 2,150 crores @ pg 1856 PB I of PB III

“5. The tribunal has observed that the assessee was not comparable with Infosys Technologies Ltd., as Infosys Technologies Ltd. was a large and bigger company in the area of development of software and, therefore, the profits earned cannot be a bench marked or equated with the respondent, to determine the results declared by the respondent-assessee. In paragraph 3.3 the tribunal has referred to the difference between the respondent-assessee and Infosys Technologies Ltd. For the sake of convenience, we are reproducing the same:-

Basic Particular Infosys Technologies Ltd. Agnity India Risk Profile Operate as full-fledged Operate at risk taking entrepreneurs minimal risks as the 100% services are provided to AEs Nature of Diversified-consulting, Contract Services application design, Software development, re- Development engineering and Services. maintenance system integration, package evaluation and implementation and business process management, etc. (refer page 117 of the paper book) Revenue Rs.9, 028 Crores Rs.16.09 Crores Ownership of Develops/owns branded/ proprietary products like proprietary Finacle, Infosys Actice products Desk, Infosys iProwe, Infosys mConnect, Also, the company derives substantial portion of its proprietary products (including its flagship banking product suite “Finacle”) Onsite Vs. As much as half of the The appellant Offshore software development provides only services rendered by offshore Infosys are onsite (i.e., services (i.e., services performed at the remotely from customer’s location India) overseas). And offshore (50.20%) (Refer page 117 of the paper book) than half of its service, income from onsite services. Expenditure on Rs.61 Crores Rs. Nil (as the Advertising/Sales 100% services promotion and are provide to brand building AEs) Expenditure on Rs. 102 crores Rs. Nil Research & Development Other 100% offshore (from India)

6. Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent- assessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted.”

WIPRO LIMITED (WIPRO) 41. The taxpayer sought exclusion of Wipro for benchmarking its international transactions qua SDS segment on the grounds inter alia that Wipro is a product company; that its segmental accounts are not prepared on consolidated basis; that Wipro has an inventory amounting to Rs.2,404 millions which shows that it is engaged in trading function apart from rendering services; that Wipro is a giant company as its size and scale vis-à-vis the taxpayer make all the difference and relied upon the decision of Toluna India Pvt. Ltd. in H&S Software Development, Knowledge Management Centre Pvt. Ltd. in ITA 912/2017 and Alcatel Lucent India Ltd. in ITA 515/2017.

Furthermore, when we examine size and scale of Wipro vis-à-vis the taxpayer it has come on record that Wipro is having turnover of Rs.9,616 crores as against Rs.32 crores of the taxpayer. Similarly, Wipro has asset base of Rs.2,626 crores as against Rs.29 crores of the taxpayer. Hon’ble Delhi High Court vide order dated 29.07.2016 in ITA 393/2016 in Toluna India Pvt. Ltd. confirmed the findings returned by the coordinate Bench of the Tribunal that the giant company in terms of size and scale cannot be a good comparable vis-à-vis routine SDS provider.

Similarly, Hon’ble Delhi High Court in case of H&S 43.

Ltd. (supra) also confirmed the findings returned by the coordinate Bench of the Tribunal excluding Wipro, by returning following findings :-

“……In the other two cases of M/s. Infosys BPO and Wipro BPO Ltd., the ITAT again, in the opinion of this Court, quite correctly held that the corporate entities had a significant brand presence for profits and large corporate size, which could not be compared to the assessee’s transactions.”

KALS INFO SYSTEMS LTD. (KALS)

PERSISTENT SYSTEMS LTD. (PERSISTENT) 49. The taxpayer sought to exclude Persistent from the final set of comparables for benchmarking its international transactions qua SDS segment on the grounds inter alia that Persistent is functionally dissimilar being engaged in software products with non-availability of segmental financials; that the asset base of Persistent is 5 times more than the taxpayer i.e. asset base of Rs.161 crores as against Rs.29 crores of the taxpayer and relied upon the decisions of Lime Labs (I) Pvt. Ltd. in AVL India Software (P.) Ltd. (supra), Saxo India Pvt. Ltd. in ITA No.6148/Del/2015 and affirmed by Hon’ble Delhi High Court in ITA 682/2016.

Pvt. Ltd. which shows that during the year under assessment, Persistent also performed additional functions for rendering services to the customers having different functional profile.

“37. We find that in the case of Toluna India Pvt. Ltd (supra), the Tribunal has excluded this comparable from the list of comparables by observing as under: "33. After considering the rival submissions and perusing the relevant material on record, we hold that this company also cannot be considered as comparable because of merger of another company into it, which fact is evident from page 196, of @ the paper book. It can be seen that a subsidiary company was merged into this company pursuant to judgment of Hon'ble Bombay High Court w.e.f. 1.4.06. Because of the merger of subsidiary into this company, we hold that the financial position of this company cannot be construed as normal capable of a good comparison. Following the Mumbai Bench decision in Petro Araldite (P) Ltd. (supra), we direct the exclusion of this company from the list of comparables. The assessee succeeds.”

TATA ELXSI LIMITED (SDS SEGMENT) (TATA ELXSI)

"5.5 ………..ITAT while excluding Tata Elxsi Ltd. are in Para 5.04 and 5.04.1. The same are being reproduced as under for a ready reference:- "5.04 Tata Elxsi Limited ('Tata Elxsi") - The Ld. AR has submitted that this company has been included by the TPO on the ground that it is functionally similar to the assessee company. The Ld. AR has also submitted that this company has software segment and that this segment does not contain any revenue by way of sale of products and, therefore, the company was not functionally comparable. The Ld. AR has submitted that Tata Elxsi Ltd. has two segments viz. Systems Integration& Support and Software Development & Services. 5.04.1 It is seen that this company was excluded as a comparable on the ground that it was engaged in the development of specialized/niche products in the following rulings: JDA Software India (P) Ltd. Vs. ITO ([2016J 66 taxmann.com 327) (AY 2006-07), Yodlee Infotech P. Ltd. Vs. ITO [TS-63-ITAT-2013 (Bang)-TPJ (AY 2006-07), HCL EAI Services Ltd. Vs. DCIT [TS-133- ITAT-2013(Bang)- TP], Goldman Sachs Services Private Limited [TS-435-ITAT- 2015(BangJ-TPJ (AY 2006-07), Novell Software Development (India) P. Ltd. [TS-257- ITAT-2016 (Bang) (AY 2007-08), Telecordia Technologies India P. Ltd. [TS-325-ITAT- 2012(Mum)J (AY 2007-08), Virtusa (India) Pvt. Ltd. Vs. DCIT [TS- 253-ITAT-2013(HYD)-TPJ (AY 2007-08). In Virtusa

(India) Pvt. Ltd. Vs. DCIT [TS-253- ITAT-20J3(HYD)- TPJ the Hyderabad Bench of the ITAT in followed the decision of the Mumbai Bench rendered in the case of Telcordia Technologies India P. Ltd. in ITA No. 7821/Mum/2011, wherein the Mumbai Bench had held that, "From the facts and material on record and submissions made by the Ld. AR, it is seen that Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the Ld. AR that the nature of the product developed and services provided by this company are different from the assessee as have been narrated above. Even the segmental details for Revenue sales have not been provided by the TPO so as to consider it as comparable party for comparing the profit ratio from product and services. Thus, on these fact, we are unable to treat this company fit for comparability analysis for determining the arm’s length price for the assessee, hence, should be excluded from the list of comparable parties." Following the aforesaid decisions, this company cannot be considered as comparable with the assessee and we direct exclusion of the aforesaid company from the final list of comparable while determining ALP.”

“39.2. After considering the rival submissions and perusing the material on record, we find from page No. 206 of the paper book, which is Annexure to the Director's report of this company, that the nature of its activity is quite distinct from that of the assessee. It can be seen that this company is into development of hardware and software for embedded products such as multi-media and some other electronics, etc. Apart from that, this company is also engaged in making some programmes developing technology intellectual property. As the nature of activity carried out by the assessee in question is nowhere close to that of Tala Elxsi Ltd., we hold that this company cannot be included in the list of comparables. Accordingly, this company is directed to be excluded. The assessee succeeds.”

MEGASOFT LIMITED (MEGASOFT) 61. The taxpayer sought exclusion of Megasoft from the final set of comparables to benchmark international transactions qua SDS segment on the grounds inter alia that Megasoft is a software product service company and its segmental financials are not available; that asset base of Megasoft is 5.3 times larger than the taxpayer; that there was an amalgamation from August 2006 onwards with Visual Soft Technologies Ltd. taking over assets, liabilities, rights and obligations of Visual Soft Technologies Ltd. and relied upon the decisions in Avaya India Pvt. Ltd. in ITA 532/2019, Toluna India Pvt. Ltd. in and AOL Online India Pvt. Ltd. in ITA No.1036/Bang/2011.

It is also come on record that Megasoft delivers value to customers and stakeholders through innovative technologies used for its own product development and for co-creating value for other product companies through its two divisions.

Furthermore, when we examine page 1975 of the paper book, it is proved on record that revenue of Megasoft from software product was 49% during the year under assessment and it also earns revenue from the sale of software licence, as is evident form page 1988 of the paper book. Moreover, segmental financials showing break-up between software product and software business at standalone level is not available.

"31.2. Having heard the rival submissions and perused the relevant material on record, we find from the Director's report of this company, a copy of which is available on page 193 of the paper book, that the financial results for the year include the business performance of Visual Soft Technologies Ltd. w.e.f 1st October, 2006 consequent to the amalgamation. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. vs. DCIT [(2013) 154 TTJ (Mum) 176} has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers etc. Since the financial results of Megasojt Ltd. have the impact of the merger of Visual Software Technologies Ltd., w.e.f. 1st October, 2006, obviously, this company cannot be considered as comparable. Accordingly, this company is directed to be excluded. The assessee succeeds."

Similarly, coordinate Bench of the Tribunal in AOL Online 65.

India Pvt. Ltd. (supra) also ordered to exclude Megasoft as comparable vis-à-vis routine SDS provider by returning following findings :-

4.2. Assessee is objecting to the balance of the comparables and objections on each of the comparables are as under:

Megasoft Ltd. .......................

1. Functionally Not Comparable - company has two segments - BLUEALLY and XIUS-BCGI Under the XIUS- BCGI company carried out product development. Software development is carried out under BLUEAPPLY division.

2. The product segment has employee cost of 27.65% whereas software services segment has employee cost of 50%. Similarly profit margin on cost in product segment is 117.95% and in case of software services segment is 23.11 %. Hence both the segments are substantially different. …………………..It was admitted that these objections were considered in the Co-ordinate Bench decision in the case of Broadcom India Research Private Limited in IT(IP)A No.1180/Bang/2011. Further, in the case of NXP Semiconductors India P. Ltd. Vs. ACIT in IT(IP)A No.1174/Bang/2011 also examined the above comparables. Similarly in the case of Capgemini India P. Ltd., Vs. ACIT [46 SOT 195} (Mum) has also examined these comparables. In all these decision of the Co-ordinate Benches, the objections as stated in the above column were examined in detail and the above said companies were held to be not comparable to the functionality of the said assessee's company. Since the facts are similar and assessee's business is also similar and TPO has selected the same comparables, we are of the opinion that the said comparables listed above cannot be considered as suitable for inclusion in the list for TP analysis. AO/TPO is directed to exclude the above comparables."

ISHIR INFOTECH LTD. (ISHIR)

However, it is brought to our notice that ld. TPO while computing employee cost included professional fee as employee cost, which is not includible as contended by the ld. AR for the taxpayer.

“21. As for as comparable companies listed at Sl.No.11 & 14 of the final list of comparable companies chosen by the TPO viz., M/s. Ishir Infotech Ltd. and Lucid Software Ltd., is concerned, this Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. Vs. DCIT IT (IP) No.10861Bang12011 for AY 07-08 held that the companies should be excluded for the reasons as held in the following paras: "22. The learned counsel for the assessee submitted that these two companies are also to be excluded from the list of comparables on the basis of the finding of this Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. dt 22.2.2013, wherein at pages 17 and 22 of its order the distinctions as to why these companies should be excluded are brought out. He submitted that the facts of the case before us are similar and, therefore, the said decision is applicable to the assessee 's case also.

"Ishir Infotech Ltd . ......................... Fails employee cost filter - only 3.96% of the operating revenue of the company (schedule 15 on page 13 of the Annual Report and page 7 of the Annual Report for operating revenue) - Ishir is engaged in trading of services ..................... It was admitted that these objections were considered in the Co-ordinate Bench decision in the case of Broadcom India Research Private Limited in IT(TP)A

No.1180/Bang/2011. Further, in the case of NXP Semiconductors India P. Ltd., Vs. ACIT in IT(TP)A No.1174/Bang/2011 also examined the above comparables. Similarly in the case of Capgemini India P. Ltd., Vs. ACIT [46 SOT 195J (Mum) has also examined these comparables. In all these decision of the Co-ordinate Benches, the objections as stated in the above column were examined in detail and the above said companies were held to be not comparable to the functionality of the said assessee's company. Since the facts are similar and assessee's business is also similar and TPO has selected the same comparables, we are of the opinion that the said comparables listed above cannot be considered as suitable for inclusion in the list for TP analysis. AO/TPO is directed to exclude the above comparables."

HELIOS & MATHESON INFORMATION TECHNOLOGIES LTD. (HELIOS & MATHESON)

“The company is engaged in training development and maintenance of computer software, the production of sale of such software cannot be expressed in any generic unit, hence, it is not possible to give the quantitative details of sales and certain information as required under part ii of schedule vi to the companies act, 1956.”

“23.2 …………….further be noticed that the TPO has taken the figures of this company which represent 'Income from software sales and services'. Obviously, the assessee is not engaged in software sales. In view of our above discussion while dealing with the comparability of Flextronics Software Systems Limited, we are satisfied that this company cannot be considered as comparable and is, hence, directed to be excluded from the list of comparables. The assessee succeeds.”

4.2. Assessee is objecting to the balance of the com parables and objections on each of the comparables are as under:

Helios & Matheson Information Technology Ltd. .......................

1. Functionally Not Comparable - is earning revenue from software sales and services.

THIRDWARE SOLUTIONS LTD. (THIRDWARE) 77. Though the taxpayer has challenged the Thirdware as comparable, but during the course of arguments, the ld. AR for the taxpayer submitted that he does not press exclusion of Thirdware from the final set of comparables, hence it is ordered to be retained.

AVANI CIMCON TECHNOLOGIES LTD. (AVANI) 78. The taxpayer sought exclusion of Avani from the SDS segment on the grounds of functional dissimilarity being engaged into software products and the segmental results are not available in the public domain. The taxpayer relied upon the information qua Avani from website wherein it is stated that Avani has developed its very first version of product called ‘DXchange’ in the year 2006 and relied upon the decisions in ST Microelectronics Pvt. Ltd. in Aircom International (India)

Pvt. Ltd. in and Saxo India (P.) Ltd. (supra).

SASKEN COMMUNICATION TECHNOLOGIES LTD. (SOFTWARE SERVICE SEGMENT) (SASKEN) 81. The taxpayer sought exclusion of Sasken as a comparable to benchmark the international transactions qua SDS segment on the grounds inter alia that Sasken has acquired Botnia Hightech and its subsidiaries based in Finland in March, 2007; that during the year under assessment, Sasken has completed three other mergers, viz., Sasken Network System Ltd. and Integrated Softech Solutions Ltd. along with Botnia Hightech; that there has been increase of revenue of 55% by organic and inorganic growth led by acquisition; that Sasken has intangibles of Rs.5.72 crores during the year under assessment and it is also engaged in creation of intellectual property; that Sasken has incurred huge R&D expenditure to the tune of Rs.22.23 crores as against nil of taxpayer and that asset base of Sasken is Rs.95 crores as against Rs.29 crores of the taxpayer and relied upon the decisions in Toluna India Pvt. Ltd. (supra), Tata McGraw Hill Education Pvt. Ltd. in an Saxo India Pvt. Ltd. (supra).

83.1 Furthermore, perusal of Schedule 3 forming part of the balance sheet qua fixed assets, available at page 2425 of the paper book, shows that Sasken has intangible assets amounting to Rs.5.72 crores as against nil of the taxpayer. Sasken has also incurred R&D expenditure to the tune of Rs.22.23 crores as per profit & loss account, available at page 2423 of the paper book, as against nil R&D expenditure of the taxpayer.

83.2 Furthermore, as per Schedule 3 forming part of the balance sheet, available at page 2425 of the paper book, it is proved on record that Sasken is having asset base of Rs.95 crores which is 3.2 times as against Rs.29 crores of the taxpayer. All these facts make Sasken not a suitable comparable vis-à-vis the taxpayer for benchmarking the international transactions qua SDS segment.

Coordinate Bench of the Tribunal in Toluna India Pvt. Ltd. 84.

(supra) directed exclusion of Sasken on grounds of acquisition as a comparable vis-à-vis SDS segment. Similarly, coordinate Bench of the Tribunal in Tata McGraw Hill Education Pvt. Ltd. (supra) also excluded Sasken on ground of merger of Sasken Network Systems Ltd. and Integrated Softech Solutions Ltd. on the ground that its financial results makes incomparable vis-à-vis routine SDS segment.

FLEXTRONIC SOFTWARE SYSTEMS LTD. (FLEXTRONIC)

Perusal of the profit & loss account, available at page 1568 of the paper book, shows that Flextronic has amortized product development cost of Rs.5.15 crores during the year under assessment.

87.1 Furthermore, perusal of Scheduled D forming part of the balance sheet shows that it has asset base of Rs.125.84 crores as against Rs.29 crores of the taxpayer. Flextronic has also incurred R&D expenditure as per Annexure to the Director’s Report, available at page 1561 of the paper book, to the tune of 4.6% of the total turnover as against nil R&D expenditure of the taxpayer. So, all these facts make Flextronic not a suitable comparable vis-à-vis the taxpayer which is a routine SDS provider as a risk bearing entity. Moreover, a product company cannot be compared for benchmarking the international transactions vis-à-vis routine SDS provider.

(supra) excluded Flextronic as a comparable vis-à-vis routine SDS provider on the ground that this company is having a product revenue of Rs.92.1 crores whereas the taxpayer is not selling any product by returning following findings :-

"21.2. After considering the rival submissions and perusing the relevant material on record, we find this company to be not comparable to that of the assessee. The reason for our this decision is that the TPO has taken segmental data of 'Product and service segment' of this company which has Product revenue of Rs.92.1 crore. In contrast to it, the instant assessee is not selling any software products, but, is doing the job assigned to it on cost plus basis. The contention of the ld. DR that since the majority of the revenue from 'Product and services segment' was from the services segment and, hence, this company should be considered as comparable, is bereft of any force. When figures of Products and services are combined, it cannot be ascertained as to how much contribution was made by the product division or the service division to the overall revenue of the Product and services segment. As the assessee is admittedly not engaged in selling its software products, such a company cannot be considered as comparable. It can be seen from the annual report of this company, a copy of which is available on page 88 of the paper book, that it consolidated its existing product portfolio and took steps to expand into further technologies by increasing the momentum in key initiatives in WIMAX, IMS, SIP & ISSIESS domains. This company has its own products such as ASN, WIMAX, Gateway Product with ASN Light. It is further relevant to note that the year ending of this company is not coinciding with that of the assessee and it is not known as to how the TPO has adopted the relevant figures for comparison. In view of the foregoing discussion, we hold this company to be not comparable and direct its exclusion from the list of comparables. The assessee succeeds. "