M/S. MOTOROLA SOLUTIONS INDIA PVT. LTD.,GURGAON vs. DCIT, GURGAON

PER SUCHITRA KAMBLE, JUDICIAL MEMBER This appeal is filed by the assessee against the order of the DCIT- Circle-II, Gurgaon, dated 08/11/2012 u/s 143(3) read with Section 144C of the Income Tax Act, 1961 for Assessment Year 2008-09. 2. Grounds of appeal are as under:-

record any reasons in the draft assessment order based on which he reached the conclusion that it was “expedient and necessary” to refer the matter to the Ld. Transfer Pricing Officer (“TPO”) for computation of the arm’s length price, as is required under section 92CA(1) of the Income Tax Act, 1961 (“Act”). 4. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO and Ld. DRP erred in enhancing the income of the appellant by Rs. 2,17,04,89,288 as the compensation for its Advertisement Marketing and Promotion (‘AMP’) Services by holding that the appellant incurs ‘excessive’ AMP expenses in relation to its distribution activities thereby qualifying as ‘services’ as per the arm’s length principle envisaged under the Act, and in doing so have grossly erred in: 4.1 disregarding that the AMP expenses incurred by the appellant represent purely domestic transaction(s) undertaken towards third parties, not covered under the purview of Section 92 of the Act and that the analysis of “domestic” transactions undertaken with third parties, in respect of which no TP reference has been made by the Ld. AO to the Ld. TPO. is bevond the powers vested with the TPO under Section 92CA of the Act; 4.2. incorrectly applying the "bright line’- concept to the appellant's manufacturing segment/ operations; 4.3. ignoring the fact that once the appellant’s international transactions are accepted to be at arm’s length after application of Transactional Net Margin Method ("TNMM") as the most appropriate method, challenging/' analysing individual elements of costs (like the AMP expenses) is inconsistent with the tenets of the application of TNMM; 4.4. completely disregarding the business and pricing model of the appellant in relation to its distribution activities which compensates the appellant for the alleged ‘excess’ AMP expenses, if any; 4.4.1 ignoring the fact that the AMP expenses incurred by the appellant were in respect of its own business requirements considerations/ purposes and that all and any benefit resulting from -nich expenditure are to its own account (in the form of increased sales and market share i and benefit, if anv. to the overseas AKs. was purely incidental: 4.5. in incorrectly computing the AMP expenses sales 4.6. incorrectly holding the .AMP expenses incurred bv the appellant to be "excessive” on the basis of a "bright line limit” arrived at bv considering inappropriate comparables- which do not operate on the same level on the business value chain as the appellant and are not comparable to the level of advertisement and marketing activities undertaken and costs incurred by the appellant: 4.6.1 in rejecting the comparables provided as a result of fresh search carried out by the appellant to identify such companies which

are comparable to it in terms of the value chain and position of the Brand / brand profile; in rejecting comparable companies, viz., Spice Mobiles Ltd.. 4.6.2 Bharti Teletech Ltd and General Sales Ltd. from the comparable set used to determine the "bright line limit” in the appellant’s case based on erroneous/ inappropriate reasoning; 4.7. erroneously holding that the appellant has rendered services to the AEs by incurring ‘excessive’ AMP expenses and by holding that a mark-up has tobe earned by the appellant in respect of the "alleged excessive" AMP expenses; 4.8. in applying a mark-up of 15% on the "alleged excessive” AMP expenses, for determining the compensation/ service fee towards "alleged AMP service" by the appellant to its AHs:

4.9 That the Ld. AO and Ld. TPO, on the facts and circumstances of the case and in law have erred in not following the binding direction issued by the Ld. DRP regarding the inclusion of M/s Spice Mobility Ltd., M/s General Sales Ltd as comparables of the appellant for the purpose of computing the arm’s length price of the alleged international transaction of "excessive” AMP expenses. 5. That on the facts and the circumstances of the case and in law, the Ld TPO/ Ld AO and Ld DRP erred in enhancing the income of the appellant by Rs. 1,01,18.80,848 while recomputing the arm’s length price of the international transactions pertaining to its contract software development (‘CSD’) services and in doing so have grossly erred in: disregarding the ALP as determined by the appellant in the TP 5.1 documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules') as well as fresh search; and in particular modifying/ rejecting the filters applied by the appellant; 5.2 rejecting the TP documentation maintained by the Appellant under section 92D of the Act and Rule 10D of the Rules and disregarding the ALP as determined by the Appellant in the TP documentation; disregarding multiple year/ prior years’ data as used by the appellant in the TP documentation and holding that current year (i.e. FY 2007-08) data for comparable companies should be used despite the fact that the same was not necessarily available to the appellant at the time of preparing its TP documentation; 5.4 ignoring the fact that the appellant is entitled to tax holiday under section 10A /10B of the Act on part of its profits from CSD services and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions;

5.5 collecting information of the companies by exercising power granted to him under section 133(6) of the Act that was not available to the appellant in the public domain and relying on selective information for comparability purposes (and to the extent of completely ignoring reliable data available in public domain/ annual reports in numerous cases); 5.5.1 and in doing so violating the fundamental principles of natural justice by relying on the information sourced under section 133(6); and also by 5.5.2 not sharing with the appellant, in case of a number of comparables, the information/ reply received by the TPO/ AO u/s 133(6) during the assessment proceedings. 5.6 rejecting comparability analysis in the TP documentation/ appellant’s fresh search and in conducting a fresh comparability analysis based on application of the following additional/ revised filters in determining the ALP for the CSD segment; 5.6.1 exclusion of companies whose data for FY 2007-08 was not available; exclusion of companies with related party transactions (‘RPT’) 5.6.2 greater than 25% of their sales; 5.6.3 exclusion of companies with export sales that are less than 25% of their total revenue; exclusion of companies with diminishing revenues/ persistent 5.6.4 losses for last three years upto and including FY 2007-08; 5.6.5 exclusion of companies having different financial year ending (i.e. not March 31, 2008); 5.6.6 adopting employee cost to revenues greater than 25% of their total revenues as a search criteria for short listing and evaluating comparables for software development services; 5.6.7 exclusion of companies with onsite revenues greater than 75% of their export revenues for selecting comparables for contract software development services; and rejecting, in particular, the following filters applied by the appellant in its TP documentation/ fresh search: 5.6.8 companies having other operating income (ie income other than manufacturing and trading income) to sales greater than 50% were accepted; Companies with net worth less than zero were rejected; 5.6.9 5.6.10 companies having research & development costs to sales less than 3% were accepted; and 5.6.11 Companies having advertising, marketing and distribution costs to sales less than 3% were accepted. 5.7 ignoring the fact that the appellant receives payments for

services within stipulated period of time and hence enjoys a favourable working capital position. Accordingly, a working capital adjustment vis-a-vis the comparables is essential in the instant case for the CSD services segment; including high-profit making companies in the final 5.8 comparables' set for benchmarking a low risk captive unit such as the appellant (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the single- minded intention of making an addition to the returned income of the Appellant; 5.9 including certain companies that are not comparable to the appellant in terms of functions performed, assets employed and risks assumed; 5.10 resorting to arbitrary rejection of low-profit/ loss making companies based on erroneous, and inconsistent reasons; 5.11 excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the appellant in terms of functions performed, assets employed and risks assumed: 5.12 exclusion of certain cost such as provision for doubtful debts from the total cost and inclusion of foreign exchange loss or gain in computation of mark-up of certain comparable companies; and 5.13 ignoring the business/ commercial reality that since the appellant for its CSD services segment is remunerated on an arm’s length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a benchmarking analysis, the appellant undertakes minimal business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the appellant on account of this fact; and committing a number of factual errors in accept-reject of 5.14 comparables and/ or in the computation of the operating profit margins of the comparables; 5.15 That on the facts and circumstances of the case and in law, the Ld. TPO and Ld. AO erred in not following the binding directions issued by the Ld. DRP in respect of re-computing the margins for M/s Softsol Limited and in respect of re computing the margins by keeping out the forex component out of the PLI for both the appellant as well as the comparables 6 That on the facts and the circumstances of the case and in law-, the Ld AO/TPO and the Ld DRP erred in enhancing the income from administrative and marketing support services business segment of the appellant by Rs 16,62,27,059 on account of an arm’s length adjustment and in doing so grossly erred in:

6.1. rejecting comparability analysis in the TP documentation/ appellant’s fresh search and in conducting a fresh comparability analysis based on application of the following additional/revised filters in determining the ALP for the administrative and marketing support services segment; 6.1.1 companies having other operating income (ie income other than manufacturing and trading income) to sales greater than 75% were accepted 6.1.2 exclusion of companies having different financial year ending (ie not March 31, 2008); 6.1.3 exclusion of companies with related party transactions greater than 25% of their sales; and rejecting, in particular, the following filters applied by the appellant in its TP documentation/ fresh search: 6.1.4 companies having other operating income (ie income other than manufacturing and trading income) to sales greater than 50% were accepted;

6.1.5 Companies with net worth less than zero were rejected; and 6.1.6 companies having research & development costs to sales less than 3% were accepted; 6.1.7 Companies having advertising, marketing and distribution costs to sales less than 3% were accepted.

6.2. ignoring the fact that the appellant receives payments for services within stipulated period of time and hence enjoys a favourable working capital position. Accordingly, a working capital adjustment vis-a-vis the comparables is essential for the administrative and marketing support services segment; 6.3. including high-profit making companies in the final comparables' set for benchmarking a low risk captive unit such as the appellant (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the single- minded intention of making an addition to the returned income of the Appellant; 6.4. including certain companies that are not comparable to the appellant in terms of functions performed, assets employed and risks assumed; 6.5. resorting to arbitrary rejection of low-profit/ loss making companies based on erroneous and inconsistent reasons; excluding certain companies on arbitrary/ frivolous grounds 6.6.

even though they are comparable to the appellant in terms of functions performed, assets employed and risks assumed; 6.7. exclusion of certain cost such as provision for doubtful debts from the total cost and inclusion of foreign exchange loss or gain in computation of mark-up of certain comparable companies; and 6.8. ignoring the business/ commercial reality that since the appellant for its administrative and marketing support services segment is remunerated on an arm's length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a benchmarking analysis, the appellant undertakes minimal business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the appellant on account of this fact; and 6.9. committing a number of factual errors in accept-reject of comparables and/ or in the computation of the operating profit margins of the comparables; 7 That on the facts and circumstances of the case and in law, the Ld. AO / TPO and the Id DRP erred in determining the ALP of the appellant’s international transactions pertaining to payment towards services availed fees/reimbursements to its Associated Enterprises (AEs) as NIL against the sum of Rs. 91,21,40,262/- incurred by the appellant and in doing so have grossly erred: 7.1. by not issuing a show cause notice to the appellant before disallowing the payment towards services availed and reimbursement paid and not giving reasonable opportunity to the appellant of refuting/ rebutting the basis on which adjustment was made in the TP order, thus violating the cardinal principle of natural justice; 7.2. in holding that neither the appellant has received any service and/ or benefit in lieu of the payment made by it for services availed and reimbursement of expenses nor was there was any need for such services/ payments; thereby challenging the commercial wisdom of the appellant in making such payments while passing the order in contrast with the recent judicial pronouncements in this regard; 7.3. by holding that the appellant has not furnished documentary evidence to demonstrate the benefits received from the AEs ignoring the fact that no opportunity of being heard was provided to the appellant on this issue during the assessment proceedings: 7.4. in holding that reimbursement of expenses paid b\ the appellant to its AEs on cost to cost basis are also in the nature of intra group service charges paid to its AEs: 7.5. in asserting that the appellant has not identified payment for each and every service and holding that identification of separate payment for each service is necessary to determine the arm’s length nature; 7.6. in holding that the benchmarking done by the appellant in

respect of international transaction relating to payment towards service fees/reimbursements is not in accordance with the law and in doing so have grossly erred in (i) disregarding the ALP, as determined by the appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Rules; (ii) not appreciating that payment towards service fees/reimbursements is closely linked to the primary business segments/ functions of the appellant and erred in analysing the transaction separately for the determination of arm’s length price; (iii) rejecting the Transactional Net Margin Method f'TNMM”) adopted by the appellant, as the most appropriate method for benchmarking the said transactions; 7.7. in holding that the appellant has not furnished any evidence as to cost benefit analysis with regard to cost of services and benefits received from AEs vis-a-vis independent parties and that no independent verification was conducted by the appellant to substantiate the costs incurred by the AE. 7.8. in applying CUP method merely based on presumptions and without furnishing details of price charged in any comparable uncontrolled transaction which is in contravention of the provisions of Rule 10B of the Income Tax Rules, 1962. 8 . That on the facts and circumstances of the case and in law. the Ld AO/TPO and the Ld DRP erred in denying the benefit of (+/-) 5 percent range mentioned in proviso to section 92C(2) of the Act while computing the ALP 9. That on the facts and circumstances of the case and in law, the Ld AO/TPO and the Ld DRP erred in disregarding judicial pronouncements in India in undertaking the adjustment while computing the ALP 10. That on the facts and circumstances of the case and in law, the Ld. AO and Ld. DRP erred in disallowing the provision for liquidated damages amounting to Rs, 4,32,06,463/-. 10.1 The Ld. AO and Ld. DRP erred both on facts and in law in holding that the claim for liquidated damages is a liability of future and not liability of present and thus does not represent liability for AY 2008-09. 11. That the Ld. AO and the Ld. DRP in complete disregard to the facts and legal position erred in disallowing the Computer Software expenses of Rs. 2,63,02,168/- (Rs. 1,05,20,867/- net of depreciation) on the ground that these are capital in nature. 12. The Ld. AO grossly erred in disallowing the claim of the appellant under sections 10A and 10B to the tune of Rs. 5,59,22,700/- and 4,56,88,686/-, respectively 12.1. The Ld. AO has erred in holding that the above deduction u/s 10A/10B claimed on account of suo-moto Transfer Pricing adjustments made by the appellant in return of income are not allowable

6.1.5 are not pressed by the Ld. AR. Therefore, Ground Nos. 1 to 3, 5.1 to 5.5, 6.1.1, 6.1.2, 6.1.4 and 6.1.5 are dismissed.

with assessees who were distributors and the subsequent decisions of Maruti Suzuki and Whirlpool (supra) dealt with manufacturers and the two categories of assessee's stand on a different footing. The licensed manufacturers who operate as risk bearing entities cannot be examined under the so-called AMP framework as their investments in manufacturing and marketing are fully reflected in their profit margins and there cannot be a segregation of returns on manufacturing and returns on marketing as both go hand in hand and are inextricably linked. When goods are manufactured and marketed by the same Indian entity, it would be illogical for the Revenue to contend that such an entity should be treated in the same manner as an Indian distributor which distributes goods imported from a foreign manufacturer under a brand owned by an AE on the ground that by incurring “excessive” AMP expenditure, the brand-owner AE stands to gain at the expense of the Indian entity. A licensed manufacturer makes and sells products in its licensed territory under license of intellectual property (IP), in the form of technology and brand owned by the licensor. It would typically import some raw materials and spare parts from the licensor (or other foreign group companies) and also pay royalty to the licensor of IP for the exploitation of technology and brand. The licensed manufacturer retains a fair share of the entrepreneurial profits, commensurate with the contributions made towards developing of the non-routine marketing intangibles in India for itself and also makes arm’s length compensation to the licensor for exploiting the IP. A licensed manufacturer thus incurs AMP expenses to benefit itself in the capacity of the economic owner of the brand and not the legal owner or licensor of the brand. Intensity of functions performed by the licensed manufacturer around AMP has a relevance on other related international transactions entered into by the licensee with the overseas licensor e.g. payments made to the licensor under the license agreement. Particularly if the payment of royalty and import of raw materials is independently tested for arm’s length, there is no additional benefit flowing to the licensor by way of AMP expense. Such AMP expenses cannot be an item for being subject to a separate

adjustment on a standalone basis. Motorola is a globally well-known name in consumer goods industry and the strength of the brand enhances the sale of consumer goods by it in India, while competing with other domestic and global brands operating in the Indian market. It is the assessee, who is actually benefitted by being able to exploit the license for the use of brands granted by the licensor. Had the taxpayer sold these goods under an unknown brand name, products could not have stood in competition against other reputed brands in the market. The primary benefit is of the assessee who is selling the goods in India and the benefit obtained by the licensor is only incidental. After the decisions of Maruti Suzuki, Whirlpool and Bausch & Lomb (supra), there is no room for any confusion regarding the treatment of AMP expenditure as a separate international transaction. The Hon’ble Delhi High Court in these decisions has categorically held that for an international transaction to exist within the meaning of Section 92B, the Revenue has to show that there existed an agreement or understanding or arrangement, that the Indian entity would incur AMP expenditure for or on behalf of the AE which owns the brand. In the absence of such “action in concert", no international transaction can be said to exist. If the existence of international transaction cannot be established with any degree of certainty, the question of determining the ALP of the same would not arise. The Ld. AR relied upon the recent decision of Casio India Company Pvt. Ltd. vs. DCIT I.T.A. No.1764/DEL/2015 wherein the Tribunal deleted the entire AMP adjustment made by the TPO by holding that there was no separate international transaction of AMP since the Revenue failed, to bring on record any material or any kind of arrangement existing between the AE and Assessee. The Ld. AR further submitted that if an assessee exercises long-term distribution and long-term licensing manufacturing rights, it is implicit that any investment in AMP whether high or low is towards its own sales. The return on investment is expected to be reaped over a period of time as Motorola as an exclusive distributor/licensed manufacturer in India is alone entitled to benefit from this investment. It is clearly mandated in international guidance of OECD-TP guidelines and

the UN-TP Manual that if no written term exists, the contractual relationships of the parties must be deduced from their conduct and the generally applicable principles governing relationship between independent enterprises. Further, even if the parties prematurely terminate the arrangement, the question of compensating the taxpayer for any loss is suffered due to excess AMP spend would arise only at the time of such premature termination and not during the pendency of the distributorship arrangement Thus, in case of a routine distributor, disallowance/adjustment on account of AMP spend on the mere assumption that the supplier may terminate the agreement in the future is not sustainable. A taxpayer cannot be penalized on the presumption of a future event (which may not even occur) while ignoring the present facts and circumstances. If during the course of transfer of the legal rights in the brand, the license enjoyed by the distributor is not terminated or impaired in any way, by the new legal owner of the brand, then the distributor should not ideally be entitled to a compensation for such transfer. Also, in such circumstances, the price payable by the buyer of the brand to the seller might be on the lower side, in case a significant value stands associated with the economic ownership thereof in the hands of the distributor. On the other hand, if during the course of transfer of the legal rights in the brand, the license enjoyed by the distributor is terminated or impaired in any way, then the distributor might seek compensation from the legal owner of the brand, depending upon the terms of the contract, level of investment put in by the distributor under the assumption of long-term rights in the license, practice/ custom followed in the relevant country, etc. This is the key aspect of “exit charge”, which tax administrations across the worldwide for in the context of business restructuring transactions, on which the OECD and Australian Tax Office have brought out detailed guidelines. Any such consideration would arise only when one would need to cross the bridge, namely that if at any future stage, the rights of the licensee were impaired; and not at any time before that. The Ld. AR submitted that empirical and scholarly studies have shown that within a sector or

industry there is huge variation of AMP expenditure among competitors. Various competitors place differing levels of importance on advertising and brand promotion depending upon their understanding and belief regarding the impact of advertising on sales. Empirical studies have shown that there is no positive correlation between advertising and increase in sales and no specific return on investment (ROI) can be inferred in respect of expenditure incurred on advertisement. To support this proposition reference is made to a scholarly article authored by Justin M. Rao of Microsoft and Randall A. Lewis of Google titled "The Unfavorable Economics of Measuring the Returns to Advertising" published in the Quarterly Journal of Economics (2015) 1941-1973, Oxford University Press which contains a rigorous analysis of correlation between advertising spend and increase in sales. The conclusion drawn in this article is that it is not possible to quantify the extra sales that can be generated based on incremental AMP spend. It also contains empirical data showing wide variation of AMP spend among competitors in the same sector or industry. Based on the above, it is submitted that it is not possible to determine the impact of increased intensity of advertising function on profit margin because the impact of advertising on sales cannot be determined and quantified. In the absence of a quantifiable measurement, it is not possible to make a “reasonably accurate” adjustment to the profit margins of the comparable companies as mandated under law. In view of the above, it was submitted that it would be erroneous to treat AMP as a separate international transaction and any attempt to benchmark such an imaginary transaction in any manner (whether as bundled transaction or on a stand-alone basis) would be an exercise in futility. The Ld. AR relied upon the decision in case of M/s. Moet Hennessy India Private Ltd. Vs. ACIT (ITA No.85/Del/2015) in which ALP adjustment on account of AMP expenditure was deleted because no material was brought on record by the Revenue apart from applying the Bright Line Test and by taking the view that the taxpayer had incurred huge AMP/ Sales expenses to the tune of 18.14%. No cogent material was there to treat the incurring of AMP expenses as international transaction

more particularly when basis for treating the AMP expenses as international transactions i.e. BLT was not sustainable method. Further, BLT as a method was disregarded in the case of Nikon India Pvt. Ltd. vs. DCIT (ITA No.6870/Del/2018). The Hon’ble Delhi High Court in Sony Ericsson (supra) has also laid down the permissibility and desirability of “set-off” between ALP of various international transactions. The Hon’ble High Court held that in cases where AMP is treated as a separate international transaction on a stand-alone basis, any adjustment made on this account by determining the ALP has to be necessarily set-off against any extra profit that is earned by the assessee which is over and above the mean profit margin of the comparables. The Ld. AR relied upon the following decisions of the Tribunal where existence of an international transaction of AMP expenditure has been negated: � Yakult Danone India P Ltd. v. DCIT: ITA No. 996/Del/2016 (Delhi- Trib.) � PepsiCo India Holdings (P.) Ltd. v. ACIT: [2018] 100 taxmann.com 159 (Delhi – Trib.) � L.G. Electronics India Pvt. Ltd. v. ACIT: ITA No. 6253/2012 (Delhi- Trib.) � BMW India Private Ltd. v DCIT ITA No. 1514/2016 (Delhi-Trib.) � M/s L’Oreal India Pvt. Ltd v. ACIT: ITA No. 1417/2017 (Mum- Trib.) � Nippon Paint India (P) Ltd v ACIT: [2017] 79 taxmann.com 8 (Chennai-Trib.) � Widex India (P)Ltd v ACIT: [2017] 78 taxman.com 348 (Chandigarh- Trib.) � MSD Pharmaceuticals(P) Ltd v ACIT: 2017] 88taxmann.com 54 (Del- Trib) � Philips India Ltd v ACIT: [2G18] 90 taxmann.com 357 (Kolkata- Trib.) � CIT v Johnson & Johnson Ltd: [2017] 80 taxmann.com 269 (Bombay HC) � ACIT v Colgate Palmolive (India) Ltd: ITA No. 6073/Mum/2014

(Mum-Trib.)

The Ld. AR also submitted that the assessee has not paid any royalty to its foreign AE who owns the "Motorola" brand and other marketing intangibles for the use of the brand and other intangibles. Thus, the TPO should have accounted for an appropriate brand royalty rate and technical know-how royalty rate based on benchmarking study while computing the value of the AMP transactions. The Ld. AR pointed out that this contention was accepted by the Tribunal in assessee's own case for AY 2007- O8 (ITA no. 5637/Del/2011). The Ld. AR submitted that the pricing model of the assessee with its AEs suitably compensates the Assessee for the alleged ‘excess’ AMP expenses. This fact was submitted before the TPO vide submission dated 05 August 2011 to TPO. Pursuant to the Group’s Global Transfer Pricing policy, during FY 2007-08, the Assessee received credit notes of Rs. 3,465,141,270 as a cost credit/ purchase price adjustment from its AEs. The Assessee has supporting evidence for credit notes of Rs. 3,465,141,270 in the form of credit notes / vouchers/ copies of the Foreign Inward Remittance Certificates. An application under Rule 18 read with Rule 29 of the ITAT Rules has been filed requesting admission of additional evidence which comprised of sample credit notes and Foreign inward remittance certificates. Again, attention is drawn to the order of the Tribunal for AY 2007-08 in assessee’s own case (ITA no. 5637/Del/2011) wherein this contention was accepted by the Tribunal. Further, the contention of the assessee in respect of credit notes was recorded by the TPO in the order and was not controverted (or commented upon) either by him or the DRP.

benefits of its AE; & thus the TPO rightly held AMP expenditure as international transactions. The Ld. DR further submitted that the assessee who is in the business of distribution of goods manufactured by its foreign controlling parent and did not own any trademark or brand, had performed significant functions like brand development, market development, marketing customer support, technical and administrative support on behalf of its AEs in India bearing cost, investing huge sum and using its skilled manpower and time. These facts clearly prove that the assessee had developed marketing intangible for brand owned and goods manufactured by its foreign AEs by bearing significant cost and risk. Accordingly, the assessee was entitled to get reimbursement of the cost incurred by it and was entitled to retain intangible income in India. As no independent person would undertake such activities without being compensated for this kind of effort. The Assessing Officer/TPO further observed that since the assessee developed marketing intangible and is in the process of making the intangible more valuable by incurring huge AMP cost, bearing risk and using its both tangible and human assets intangibles (skilled and trained manpower), ownership of the marketing intangible lies with the assessee. However the AEs are deriving huge benefit from this intangible developed by the assessee by way of enhanced sale of their products in India which led to increased profitability of parent company and the assessee was left with only small and limited returns. The TPO/AO held that the assessee though asserted that the assessee company is already getting reimbursement for any excess marketing (if any) in its AE segments to sustain a consistent arm’s length profit margin, but the assessee did not able to show any evidence of receiving such support in AMP segment. Thus, the assessee cannot be allowed to claim any other reimbursement received in any other segment against the AMP support. Therefore, the Ld. DR submitted that the TPO has rightly made addition of Rs. 217.05 crores on account of Advertisement, Marketing and Promotion (AMP).

noted this fact in paras 18.3 and 18.4 of its order and thereafter directed the TPO to consider the impact of this factor on the determination of transfer pricing adjustment towards AMP expenses in the light of decision of the Special Bench in the case of LG Electronics (supra). It is observed that albeit a specific direction was given by the Tribunal for considering the impact of non-payment of royalty on the question of determining the transfer pricing adjustment of AMP expenses, the TPO did not examine such issue. Under these circumstances, we are left with no option but to send matter back to the AO/TPO for considering the effect of non-payment of royalty on the transfer pricing adjustment in the light of the decision rendered by the Special Bench in the case of LG Electronics (supra). 12. To sum up, we set aside the impugned order on the transfer pricing addition on account of AMP expenses and send the matter back to the TPO/AO for determining its ALP afresh in the light of our above discussion. Needless to say, the assessee will be allowed an opportunity of hearing in such fresh proceedings.” As per the contentions of the Ld. AR, the assessee has not paid any royalty to its foreign AE who owns the "Motorola" brand and other marketing intangibles for the use of the brand and other intangibles. Thus, the TPO should have accounted for an appropriate brand royalty rate and technical know-how royalty rate based on benchmarking study while computing the value of the AMP transactions. The Ld. AR pointed out that this contention was accepted by the Tribunal in assessee's own case for AY 2007- O8 (ITA no. 5637/Del/2011). Further the Ld. AR submitted that the pricing model of the assessee with its AEs suitably compensates the Assessee for the alleged ‘excess’ AMP expenses. This fact was submitted before the TPO vide submission dated 05 August 2011 to TPO. Pursuant to the Group’s Global Transfer Pricing policy, during FY 2007-08, the Assessee received credit notes of Rs. 3,465,141,270 as a cost credit/ purchase price adjustment from its AEs. The Ld. AR further submitted that the Assessee has supporting evidence

for credit notes of Rs. 3,465,141,270 in the form of credit notes / vouchers/ copies of the Foreign Inward Remittance Certificates. An application under Rule 18 read with Rule 29 of the ITAT Rules has been filed requesting admission of additional evidence which comprised of sample credit notes and Foreign inward remittance certificates. Again, attention is drawn to the order of the Tribunal for AY 2007-08 in assessee’s own case (ITA no. 5637/Del/2011) wherein this contention was accepted by the Tribunal. Further, the contention of the assessee in respect of credit notes was recorded by the TPO in the order and was not controverted (or commented upon) either by him or the DRP. As per the Ld. DR’s contentions, admittedly, the assessee incurred the cost of AMP for the benefits of its AE; & thus the TPO rightly held AMP expenditure as international transactions. The assessee who is in the business of distribution of goods manufactured by its foreign controlling parent and did not own any trademark or brand, had performed significant functions like brand development, market development, marketing customer support, technical and administrative support on behalf of its AEs in India bearing cost, investing huge sum and using its skilled manpower and time. These facts clearly prove that the assessee had developed marketing intangible for brand owned and goods manufactured by its foreign AEs by bearing significant cost and risk. Accordingly, the assessee was entitled to get reimbursement of the cost incurred by it and was entitled to retain intangible income in India. All these contentions of both the Ld. AR and Ld. DR has not been taken into account by the TPO/AO which needs to be verified by the Revenue. Therefore, it will be appropriate to remand back this entire issue to the file of the TPO/AO for adjudication on merit as well as in light of the decisions of the Hon’ble High Court and the Special Bench in case of L G Electronics (supra). Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 4 is partly allowed for statistical purpose.

101.18 crores in respect of Software Development Services segment (SDS), the Ld. AR submitted that the assessee company performs activities relating to software development/coding, related to quality control and documentation, testing, implementation and maintenance. The work carried out by the assessee company is in accordance with the guidelines provided by the AEs. As per the functional analysis documented in the Transfer Pricing (TP) documentation, the assessee company is characterized as a captive software development service provider, which assumes less than normal risks associated with carrying out such business. Benchmarking of SDS in the TP documentation:

Nature of Most Value of International international appropriate Transactions Software Development services OP/TC TNMM 6,35,07,41,416

The Ld. AR submitted that there is no change in the functions undertaken by the assessee company, application of filters and benchmarking analysis undertaken by the assessee company from the previous year. The assessee identified 16 comparable companies with the mean OP/TC margin of 11.66% against the margin of the assessee company at 8.22%. (5.10% before voluntary adjustment). Thus, the international transactions with respect to "SDS” segment were considered to be at arm’s length. The Ld. AR submitted that the TPO rejected the TP study prepared by the assessee company stating that the quantitative filters are not correct, selection/rejection of comparables based on qualitative filter of “functionally different” is not objective and uniform, data for the current year is not used, non-application of filters such as onsite revenue, employee cost and export sales. The TPO rejected the multiple year data adopted by the assessee in his TP study. Based on the additional/modified filters the TPO conducted a fresh comparability analysis to identify comparable companies. There has been no change in the approach adopted by the TPO with respect to the application of filters

from the previous year. In conduct of the fresh comparability analysis, the TPO used information received vide exercise of its powers u/s 133(6) from companies which was otherwise not available in the public domain. Based on the fresh comparability analysis carried out by the TPO, he identified 19 comparable companies (introduced 16 new comparables and accepted 3 comparable i.e. Bodhtree consulting Ltd, LGS Global Ltd and Mindtree Ltd (seg) selected by the assessee) with the mean margin to be at 26.20% (without allowing working capital adjustment) and proposed a transfer pricing addition of INR 127,47,23,744. Pursuant to the objections filed by the assessee before the DRP, the DRP directed the TPO to exclude Celestial Biolabs from the list of the comparable companies and to re- compute the margin of Softsol India Limited (after excluding rental income and rental expenses). Thus, the revised mean margin came to be 21.85% and transfer pricing addition was re-computed at Rs. 1,01,18,80,848.

10.1 As regards to companies having onsite revenue more than 75% of the export revenues were excluded, the Ld. AR submitted that the issue is decided in favour of the Revenue in A.Y. 2007-08. The Ld. DR relied upon the order of the TPO and the directions of the DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

10.2 We have heard both the parties and perused all the relevant material available on record. The assessee did not dispute the profit margin in case of on-site work which is normally low as compared to offshore work. In the present year also the TPO demonstrated with facts and figures that there is considerable difference between the average rate per hour in the case of offshore projects vis-à-vis on site projects. The TPO was right in applying the on-site revenue’s filter considering the

companies generating more than 75% of their export revenue’s from on- site operation. Therefore, this filter was rightly applied.

10.3 As regards to filter relating to employee cost more than 25% of sales and companies falling less than this threshold have been excluded, the said issue is held in favour of the assessee in assessee’s own case for A.Y. 2007-08 wherein it has been held that the employee cost/sales of the assessee is 65% and hence a range of 50% to 80% should be applied instead of the threshold limit of 25% as applied by the TPO. In A.Y. 2008- 09, the employee cost ratio of the assessee for the SDS segment is 45% and hence a range of 30% to 60% should be applied instead of 25% threshold filter as applied by the TPO as per the submissions of the Ld. AR. The Ld. DR relied upon the order of the TPO and the directions of the DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

10.4 We have heard both the parties and perused all the relevant material available on record. The situation remains same in this Assessment Year as well, therefore, this filter is wrongly applied by the Revenue. Hence we direct the TPO/AO to apply a range of 30% to 60% as it will be most appropriate ratio for the SDS segment.

10.5 As regards to filter applied that of companies with diminishing revenue/companies consistently incurring losses were rejected, the said issue is held in favour of revenue in assessee’s own case for Assessment Year 2007-08. The Ld. DR relied upon the order of the TPO and the directions of the DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

10.6 We have heard both the parties and perused all the relevant material available on record. The companies having diminishing revenue

or consistent losses are definitely cannot be compared with the assessee company. Thus, this filter was rightly rejected.

10.7 As regards to related party transactions (both income and expenditure) being more than 25% of sales were excluded as against the threshold of 10% chosen by the assessee. The Tribunal held this issue in favour of the assessee in assessee’s own case for A.Y. 2007-08 wherein it has been held that the threshold limit of 15% ought to be applied instead of 25% applied by the TPO. The Ld. DR relied upon the order of the TPO and the directions of the DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

10.8 We have heard both the parties and perused all the relevant material available on record. The facts remain similar in the present assessment year, therefore, we direct the TPO to take into consideration only those comparables where related party transactions are to the extent of 15% because it is not the case of revenue that by applying the threshold limit of 15%, it will not get sufficient number of comparables.

10.9 As regards to appropriate filters applied by the assessee in TP documentation but was rejected by the TPO/AO, firstly the Ld. AR submitted that filter relating to Research and Development Sales which is less than/equivalent to 3% (<=3%) were accepted by the assessee. The Ld. AR submitted that the Tribunal partly held in favour of the assessee in assessee’s own case for A.Y. 2007-08. The Ld. DR relied upon the order of the TPO and the directions of the DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

10.10 We have heard both the parties and perused all the relevant material available on record. The Tribunal in A.Y. 2007-08 held as under:

“81.1 We have considered the submissions of both the parties and have perused the record of the case. We are in agreement with ld. TPO’s observations that for creating intellectual property rights, R&D is required but the converse is not true i.e. each company spending on R&D automatically is not towards creating an IPR. We are also in agreement with the observation of ld. TPO that R&D activity in a software development company is to improve the processes in delivering the software development services and not for creating an intangible. But at the same time the submissions of ld. Counsel for the assessee that profitability of companies having intangible is more cannot be lost sight off. If a company is having brand then it is definitely in a better position to command higher profits. Ld. Counsel in his submissions has pointed out that companies having patent had incurred substantial sums on R&D to develop its own products. Thus, both sides have their logical view point. Under such circumstances, the balance has to be drawn keeping in view the primary object of transfer pricing study. The object of selection of comparables is to find out companies which are performing similar functions as assessee with almost similar asset base and similar risks. These comparables are to be considered for finding out the arm’s length price. If by applying a particular filter many, otherwise comparables, gets excluded then such a filter should be applied after making necessary adjustments for material factors. Thus, if a comparable has developed its own intellectual property right resulting into development of a patented product by incurring huge expenditure on R&D then even if it is performing software development functions, it has to be excluded. However, if a company is incurring huge expenditure on R&D only for improving the processes in delivering the software development services then the said comparable cannot be rejected merely because it is incurring R&D expenditure more than 3% of its total sales revenue because sufficient number of comparables are to be found for determining ALP. An objective decision has to be taken in each case. Ld. TPO has clearly demonstrated that by applying this filter even functionally similar companies gets excluded. This will result in limiting

the number of comparables to a very small number. Thus, this will entirely frustrate the object of determination of the arm’s length price. The contention of assessee that companies incurring expenditure greater than 3% on R&D were necessarily creating IP products is devoid of any merit. Therefore, this filter is to applied subject to proper analysis as observed earlier. In the result this ground is partly allowed in terms of aforementioned observations.” Therefore, in the present assessment year also the facts remains identical, hence this filter can be applied subject to proper analysis mentioned in order of the Tribunal in A.Y. 2007-08.

10.11 As regards to advertisement, marketing and distribution cost less than/equivalent to (<=) 3% were accepted the Tribunal partly held in favour of the assessee in assessee’s own case for A.Y. 2007-08 and held that application of this filter will have to be seen on a case by case basis. The Ld. DR relied upon the order of the TPO and the directions of the DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

10.12 We have heard both the parties and perused all the relevant material available on record. The factual aspect is identical with that of A.Y. 2007-08 in the present assessment year. Therefore, in similar like application of this filter will have to be seen case by case basis in this year. Hence this filter can be applied subject to proper analysis mentioned in order of the Tribunal in A.Y. 2007-08 (para 81.1).

had himself offered to provide the working capital adjustment in show cause notice, however, the same was not provided in the final order. The Ld. AR relied upon the decision in case of Nokia India Private limited (ITA 551/Del/2011) wherein in was held that: “When there is no material change in fact, situation or law in the current year then working capital adjustment cannot be denied if allowed in previous assessment year. The Ld. AR relied upon the decision of the Hon’ble Jurisdictional High Court in the case CIT vs. Dalmia Promoters Developers (P) Ltd. 281 ITR 346]. The said judgment was followed by the Delhi ITAT in Nokia India (P.) Ltd. v. DCIT IT A 4559 of 2011 (A.Y. 2007-08) and Nokia India (P.) Ltd. v. DCIT IT A No. 2445 of 2010 (A.Y. 2003-04). The Delhi High Court dismissed the appeal filed by the department against the case for A.Y.2007-08 in PCIT v. Nokia India (P.) Ltd. ITA 955 of 2018. The Ld. AR also relied upon the following decisions: • PCIT v. M/s. Citrix R & D India Pvt. Ltd. (Para 4-6) ITA 533 of 016 (Karnataka HC). The SLP against this decision was dismissed by the Supreme Court in SLP (Civil) Diary No. 6045/ 2019; • Brocade Communication IT(TP)A No. 71/Bang/2014. Appeal against this decision was dismissed by Karnataka High Court in PCIT v. M/s Brocade Communications Pvt. Ltd. ITA 309/2017; • Indigra Exports (P.) Ltd. v. DCIT [2016] 176 TTJ 384 (Bangalore - Trib.). • Appeal against this decision was dismissed by Karnataka High Court in Indigra Exports (P.) Ltd. v. DCIT [2018] 407 ITR 396 (Karnataka); • Marubeni-ltochu Steel India (P.) Ltd. v. DCIT [2016] 177 TTJ 539 (Delhi - Trib.) - • DCIT v. Imsofer Manufacturing India (P.) Ltd. ITA 5155 & 5158 (Delhi) of 2015; • Federal Mogul Automotive Products (India) Ltd. v. DCIT ITA No. 5881 (Delhi) of 2012; • M/s. MetricStream Infotech (India) Pvt. Ltd. v, ACIT IT(TP)A No. 493 of 2016

• CIT Vs. Dalmia Promoters Developers (P) Ltd. 281 ITR 346 • Qualcomm India Pvt. Ltd. Vs. ACIT (ITA No. 5239/Del/2010) • Mentor Graphics (Noida) Pvt. Ltd. ITA 196/D/2006 • Philips Software Centre (P) Ltd ITA No. 218 (BNG)/08

15.1 Kals Information Systems Ltd. (Seg.) :- The Tribunal in assessee’s own case rejected the comparable on account of different asset base in A.Y. 2007-08. Assets base of the company in this year also is only Rs. 40.26 lakhs which is very miniscule as compared to assessee which is Rs. 288.2 crores. This is a product based company as well. As per the Annual Report, Kals is engaged in the business of software services and software products. It further shows that there is “consumption of software inventory” as an expenditure which implies that the company is into trading of software. Thus, the Ld. AR submitted that this is functionally different company. The Ld. AR relied upon the Hon’ble Delhi High Court decision in case of Toluna India Pvt. Ltd. ITA No. 393/2016 and 394/2016

as well as the decision of the Tribunal in case of Mentor Graphics (India) Pvt. Ltd. vs. DCIT for A.Y. 2008-09 and 2009-10 (ITA No. 410/Del/2013 and ITA No. 1484/Del/2014).

15.2 The Ld. DR relied upon the order of the TPO and DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

15.3 We have heard both the parties and perused all the relevant material available on record. This is a product based company as well. As per the Annual Report, Kals is engaged in the business of software services and software products. It is pertinent to note that this company is functionally different company. Besides that assets base of the company in this year is Rs. 40.26 lakhs which is very miniscule as compared to assessee company which is Rs. 288.2 crores. Therefore, the TPO is directed to exclude this company from the list of comparables.

15.4 Infosys Ltd.:- The Tribunal in assessee’s own case rejected the comparable in A.Y. 2007-08. In this year also Infosys has a diversified business profile and owns various software products. The Company possesses brand value which tends to influence the pricing policy of the company and thereby directly impacting the margins earned by the company. Without prejudice to the above, if at all Infosys Technologies Ltd. is to be considered as a comparable it is necessary to eliminate the brand profits (calculated at Rs. 3,134 Crores by Infosys) in determining the profitability of the company for transfer pricing purposes. In doing so, the margin would be 11.43%. This company has tangible assets which is many times of that of the assessee. The risk levels for Infosys are quite high as against minimal for the assessee. The company has incurred significant expenditure on research and development activities. The company’s expenditure on advertisement and marketing is 4.66% on sales, i.e. which exceeds 3% of sales filter applied by the assessee. Thus, the Ld. AR submitted that this is functionally different company. The Ld.

AR relied upon the Hon’ble Delhi High Court decision in case of Toluna India Pvt. Ltd. ITA No. 393/2016 and 394/2016 as well as the decision of the Tribunal in case of Mentor Graphics (India) Pvt. Ltd. vs. DCIT for A.Y. 2008-09 and 2009-10 (ITA No. 410/Del/2013 and ITA No. 1484/Del/2014).

15.5 The Ld. DR relied upon the order of the TPO and DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

15.6 We have heard both the parties and perused all the relevant material available on record. Infosys has a diversified business profile and owns various software products. The Company possesses brand value which tends to influence the pricing policy of the company and thereby directly impacting the margins earned by the company. This company has tangible assets which is many times of that of the assessee. The risk levels for Infosys are quite high as against minimal for the assessee. The company has incurred significant expenditure on research and development activities. The company’s expenditure on advertisement and marketing is 4.66% on sales, i.e. which exceeds 3% of sales filter applied by the assessee. Therefore, this company cannot be held as comparable to the assessee company. Therefore, the TPO is directed to exclude this company from the list of comparables.

15.7 E-Zest Solutions Ltd.:- The Tribunal in case of Verifone India Technology Pvt. Ltd. for A.Y. 2008-09 (ITA No. 1/Bang/2014 & 73/Bang/2014), this company is engaged in rendering product development services and high end technical services which falls under the category of KPO services and hence, not comparable. Further in point no. 2 of the auditors’ report, it has been mentioned that there is no inventory with the company, however, in point no. 4 it has been mentioned that there are adequate international control for purchase of inventory. Also, inventory is appearing in Balance Sheet and Profit and

Loss account of company. Thus, there is contradiction in the information provided in the financial statements. The Ld. AR relied upon the decision in case of DCIT vs. Verifone India Technology Pvt. Ltd. (supra) as well as Mentor Graphics (India) Pvt. Ltd. vs. DCIT for A.Y. 2008-09 and 2009-10 (ITA No. 410/Del/2013 and ITA No. 1484/Del/2014).

15.8 The Ld. DR relied upon the order of the TPO and DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

15.9 We have heard both the parties and perused all the relevant material available on record. This company is engaged in rendering product development services and high end technical services which falls under the category of KPO services and hence, not comparable. Besides this, there is contradiction in the information provided in the financial statements. Thus, this company does not satisfy the criteria to be held as comparable. Therefore, we direct the TPO to exclude this company form the list of comparables.

15.10 Wipro Ltd. (Seg):- The Tribunal in assessee’s own case rejected the comparable in A.Y. 2007-08 as functionally different, following the ruling of Agnity India. This year also Wipro has undertaken R&D activities for development of IP and products. Further, company owns substantial patents, trademarks and rights in the form of intangible assets to the tune of Rs. 175 crore. Independent study done by Forrester Research where companies viz. Infosys, Tata Consultancy Services and Wipro Technologies have been identified as the top three companies reporting superlative performance with high revenue growth and sky rocketing profitability. The annual report of the company for AY 2007-08 provides the abridged financial data which does not provide the detailed financial information. Wipro has a diversified business profile and owns various software products. Thus, it is functionally different comparable than the assessee company. Wipro has substantial intangible assets in

form of goodwill which is valued by the company at Rs.42209 crore. During the year under consideration there was merger of Wipro Infrastructure Engineering Limited, Wipro Healthcare IT Limited, Quantech Global Services Limited with Wipro Limited. The Ld. AR relied upon the Hon’ble Delhi High Court decision in case of Toluna India Pvt. Ltd. ITA No. 393/2016 and 394/2016, Ciena India Pvt. Ltd. vs. DCIT (ITA No. 3324/Del/2013 for A.Y. 2008-09) as well as the decision of the Tribunal in case of Mentor Graphics (India) Pvt. Ltd. vs. DCIT for A.Y. 2008-09 and 2009-10 (ITA No. 410/Del/2013 and ITA No. 1484/Del/2014).

15.11 The Ld. DR relied upon the order of the TPO and DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

15.12 We have heard both the parties and perused all the relevant material available on record. Wipro has undertaken R&D activities for development of IP and products. Further, company owns substantial patents, trademarks and rights in the form of intangible assets to the tune of Rs. 175 crore. Independent study done by Forrester Research where companies viz. Infosys, Tata Consultancy Services and Wipro Technologies have been identified as the top three companies reporting superlative performance with high revenue growth and sky rocketing profitability. The annual report of the company for AY 2007-08 provides the abridged financial data which does not provide the detailed financial information. Wipro has a diversified business profile and owns various software products. Thus, it is functionally different comparable than the assessee company. Wipro has substantial intangible assets in form of goodwill which is valued by the company at Rs.42209 crore. During the year under consideration there was merger of Wipro Infrastructure Engineering Limited, Wipro Healthcare IT Limited, Quantech Global Services Limited with Wipro Limited. Thus, this comparable company is not only functionally different but also in the present assessment year it had

merger which is an extra ordinary event. Therefore, we direct the TPO to exclude this comparable from the list of comparables.

15.13 Tata Elxsi Ltd. (seg):- The Tribunal in assessee’s own case rejected the comparable in A.Y. 2007-08 as functionally different. This year also the company is in the business of “Hardware design”. It is notable that the company employs a wide variety of personnel such as hardware engineers, styling and mechanical designers, graphic designers, animators and special effects artists. Thus is ample testimony to the fact that the company is not engaged in pure software development activity unlike the assessee. R&D activities undertaken by the Tata Elxsi resulted in the creation of the Intellectual properties (I). Further, the company’s R&D expenses of 3.39% on sales fails the R&D filter of 3% applied by the assessee in the TP documentation. Net fixed assets to sales ratio in case of Tata Elxsi is 246% (approx.). The Ld. AR relied upon the Hon’ble Delhi High Court decision in case of Toluna India Pvt. Ltd. ITA No. 393/2016 and 394/2016 as well as the decision of the Tribunal in case of Mentor Graphics (India) Pvt. Ltd. vs. DCIT for A.Y. 2008-09 and 2009-10 (ITA No. 410/Del/2013 and ITA No. 1484/Del/2014).

15.14 The Ld. DR relied upon the order of the TPO and DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

15.15 We have heard both the parties and perused all the relevant material available on record. The company is in the business of “Hardware design” and employs a wide variety of personnel such as hardware engineers, styling and mechanical designers, graphic designers, animators and special effects artists. Thus the company is not engaged in pure software development activity unlike the assessee. Besides that R&D activities undertaken by the Tata Elxsi resulted in the creation of the Intellectual properties (I). Further, the company’s R&D expenses of 3.39% on sales fails the R&D filter of 3% applied by the assessee in the TP

documentation. Net fixed assets to sales ratio in case of Tata Elxsi is 246% (approx.). Thus, this comparable company is not only functionally different but also it also fails the filters applied by the TPO. Therefore, we direct the TPO to exclude this comparable from the list of comparables.

15.16 Sasken Communication Technologies Ltd.(seg):- The Tribunal in assessee’s own case rejected the comparable in A.Y. 2007-08 on account of development and ownership of IPR. This year also Sasken had applied and acquired patents. As per the Annual Report for AY 2008-09, the company has filed for 41 patent applications out of which 19 has been granted (4 have been granted during current year). The Ld. AR submitted that this comparable be rejected as it has ownership of IPR which is not the activity of the assessee company.

15.17 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

15.18 We have heard both the parties and perused all the relevant material available on record. The Tribunal in assessee’s own case rejected the comparable in A.Y. 2007-08 on account of development and ownership of IPR. This year also Sasken had applied and acquired patents. As per the Annual Report for AY 2008-09, the company has filed for 41 patent applications out of which 19 has been granted (4 have been granted during current year). This fact is not denied by the Ld. DR. Thus, the Sasken has a different profile which cannot be compared with the assessee company. Therefore, we direct the TPO to exclude this comparable from the list of the comparables.

15.19 Avani Cincom Technologies:- The Tribunal in assessee’s own case rejected the comparable in A.Y. 2007-08 as functionally different. This year also the company is engaged in the business of software product development and owns products like Dxchange Travel Solutions,

Insurance Solutions, Customer appreciation and relationship management application and content management system. The Ld. AR submitted that the assessee has not been provided with the information obtained by TPO using section 133(6) of the Act. The Ld. AR further submitted that the complete annual report is not available in public domain. The Ld. AR relied upon the decision in case of DCIT vs. Verifone India Technology Pvt. Ltd. (supra) as well as Mentor Graphics (India) Pvt. Ltd. vs. DCIT for A.Y. 2008-09 and 2009-10 (ITA No. 410/Del/2013 and ITA No. 1484/Del/2014).

15.20 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

15.21 We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that this company is engaged in the business of software product development and owns products. Besides this, the complete annual report is not available in public domain. The Tribunal in Mentor Graphics (India) Pvt. Ltd. vs. DCIT for A.Y. 2008-09 has also excluded this comparable. Thus, it will be appropriate to exclude this comparable in the present assessee’s case as well. Therefore, we direct the TPO to exclude this comparable from the list of final comparables.

15.22 Persistent Systems Ltd.: This comparable is rejected by the DRP in assessee’s own case for A.Y. 2007-08 which is confirmed by the Tribunal. The company has been rejected because there was restructuring in the business of Persistent Systems, in light of the same this company should be rejected. It’s a product company. The company derives its income from the sale of software services as well as products. Further, in numerous decisions cited this company has been rejected on the ground that it is software product company which is different from software development service company. The Ld. AR relied upon the decision of the

Hon’ble High Court in case of Cash Edge India Pvt. Ltd. (ITA 279/2016 order dated 04.05.2016 as well as Mentor Graphics (India) Pvt. Ltd. Vs. DCIT for AY 2008-09 and AY 2009-10 (ITA No. 410/DEL/2013 and 1484/Del/2014).

15.23 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

15.24 We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that this is product based company and the assessee company do not deal into business of product. Therefore, we direct the TPO to exclude this comparable from the final list of comparables.

15.25 LGS Global Ltd.:- This comparable company has abnormal increase in revenue from the previous year i.e. 200%. The Ld. AR submitted that TPO has used diminishing filter to reject companies with diminishing return and on other side selected this company as comparable with such a huge increase in revenue. The Company is engaged in multifarious activities including an end to end service provider and offers variety of services. It is involved in product evaluation, design & development etc. of the products. Further, it also renders BPO services in the field of Human Resources, Life Sciences, Legal Services, Supply Chain Management, Sales and Customer Support etc. Further, the financial statements lacks in providing the segmental results as well. The Ld. AR relied upon the decision in case of M/s Nokia Siemens Networks India vs. ACIT (ITA No. 333/Del/2013 for A.Y. 2008-09), Navisite India Pvt. Ltd. (ITA No. 5329/Del/2012) and Sapient Corpn. (P.) Ltd. Vs. DCIT (ITA No. 5263/Del/2010).

15.26 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue

authorities be taken as the submissions of the revenue before us.

15.27 We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that this comparable company is engaged in various kinds of activities and does not have segmental results in its financials. Besides that the TPO has not considered that this company has abnormal increase in revenue. Therefore, we direct to the TPO to exclude this comparable company form the final list of comparables.

15.28 Bodhtree Consulting Ltd.:- As per the decision of the Tribunal in case of Aircom International (India) Pvt. Ltd. (AY 2008-09 ITA No. 6402/Del/2012), the company is engaged in providing open and end to end web solutions, software consultancy, design and development of solutions. Also, the Tribunal has noted the faulty revenue recognition approach of the company which makes it non-comparable to the assessee. Further, as recognized by the Tribunal in Dialogic Networks (India) Pvt. Ltd. (AY 2008-09 ITA No. 7280/Mum/2012), company is engaged in providing Data Management and Data warehousing services which are classified as ITES and also, during the year the company has undergone restructuring activity by hiving off its e-paper business. Thus, it is functionally non comparable. The Ld. AR also relied upon the decision of the Tribunal in case of Mentor Graphics (India) Pvt. Ltd. Vs. DCIT (supra).

15.29 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

15.30 We have heard both the parties and perused the relevant material available on record. It is pertinent to note that this comparable company is functionally different as the said company is engaged in providing open and end to end web solutions and various other activities which are totally different from the assessee company’s profile. Thus, we

direct the TPO to exclude this comparable from the final list of the comparables.

15.31 Softsol India Ltd.:- As per the website, the company provides high- end services and is engaged in diversified operations including development of products. There is error in computing the margin of this company. The correct margin of Softsol after excluding rental income comes to be 15% (as directed by the DRP) instead of 25.59% as computed by the TPO in the revised order. The ratio of related party transactions to sales is more than 15%. The Ld. AR relied upon the decision in case of DCIT vs. Verifone India Technology Pvt. Ltd. (AY 2008-09 ITA No. 1/Bang/2014 & 73/Bang/2014).

15.32 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

15.33 We have heard both the parties and perused all the relevant material available on record. This company is a product development company. Its margin were incorrectly computed by the TPO. The TPO has also not taken into account that the ratio of related party transactions to sales is more than 15% which cannot be applied in the present assessee company’s case. Therefore, we direct the TPO to exclude this comparable from final list of comparables.

15.34 Quintegra Solutions Ltd.:- This comparable is rejected by the Tribunal in assessee’s own case for AY 2003-04 as well as recently decided on 27.04.2018 wherein it has been held that the company is functionally not comparable to assessee. This year the company acquired PA Corporation Inc. a US based IT company hence the results may be impacted by the said acquisition. The company owns intangibles in form of copyrights and software which is being used by the company for rendering of services unlike assessee. The company is engaged in

Research and Development activities as well. The Ld. AR relied upon the decision of the Tribunal in case of Aircom International (India) Pvt. Ltd. Vs. DCIT for AY 2008-09 (ITA No. 6402/Del/2012).

15.35 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

15.36 We have heard both the parties and perused the material available on record. There is acquisition during the year which is an extra ordinary event and has a financial impact. Besides that this company is also involved in R&D activities which are different from what the assessee company is doing. Therefore, we direct the TPO to exclude this comparable from final list of comparables.

15.37 Thirdware Solutions Ltd.:- This comparable is functionally different. This company is engaged in diversified business including software products and segmental is not available. The company is engaged in purchase of sale of licenses. The Ld. AR relied upon the decision of the Tribunal in case of Aircom International (India) Pvt. Ltd. Vs. DCIT (supra).

15.38 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

15.39 We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that this comparable company is engaged in software product and have diversified business. Besides this the company does not have segmental details available. Therefore, we direct the TPO to exclude this comparable company from the final list of comparables.

15.40 R Systems International Ltd. (seg): This comparable company

follows different financial year ending i.e. December. Despite this the TPO has obtained data using Section 133(6), the same cannot be relied upon in the absence of audited data as per the Ld. AR.

15.41 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

15.42 We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that this comparable company follows different financial year ending and there is no availability of the audited data. Thus, this company cannot be taken into account as comparable. Therefore, we direct the TPO to exclude this comparable company from the final list of comparables.

15.43 iGate Global Solution Ltd.:- This comparable is functionally different. This company is engaged in diversified business including contract services, IT services and IT enabled services. As recognized by the Tribunal in Dialogic Networks (India) Pvt. Ltd. (supra), the company is engaged in application development, Application management, Business Process Management, IT Governance, Web Technology Solutions, Enterprise Integration, CIS and BPO, Infrastructure Management, Cloud Services. The Company also provides Business Intelligence and Data Warehousing Solutions. Thus, it is functionally different from the assessee company.

15.44 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

15.45 We have heard both the parties and perused all the relevant material available on record. This company is engaged in various activities and functionally different than the assessee company. Therefore, we direct

the TPO to exclude this comparable company from the final list of comparables.

15.46 We further note that since there is only two comparable left in the final list of the comparables selected by the TPO/DRP. Hence, the matter is remanded back to Assessing Officer /TPO to decide afresh by giving new set of comparables (including two comparables which are not challenged by the assessee) which are functionally similar to the Assessee company and the segmental data including other filters of the TPO are met with. Needless to say, the assessee will provide the new set of comparables which will be verified by the TPO and thereafter adjudicate the issues at length.

15.47 Thus, Ground No. 5.8 to 5.11 are partly allowed for statistical purpose.

Correct Amount of addition as Computation of computed by the Ld. addition Particulars Reference TPO/AO

(page 29 of the Appeal Set) Operating cost A 6,042,365,420 6,042,365,420 Arm’s length margin B 21.85% 21.85% Arm’s Length Price C=A*B+A 7,362,622,264 7,362,622,264

D 6,350,741,416 Price charged by the Assessee

Price charged by the Assessee D 6,538,865,723 (After making voluntary adjustment of INR 188,124,307 in the return of income)

Amount of adjustment E=C-D 1,011,880,848 823,756,541

Nature of Most Value of International international appropriate Transactions Marketing TNMM OP/TC 568,540,150 Support services

The Ld. AR further submitted that there has been no change in the functions undertaken by MSIPL, application of filters and benchmarking analysis undertaken by MSIPL from the previous year. The Assessee identified 4 comparable companies with the mean OP/TC margin of 4 18% against the margin of MSIPL at 3.53%. (4.04% after considering foreign exchange gain as operating) Thus, the international transactions with respect to "MSS" segment were considered to be at arm’s length. The TPO

rejected the TP study prepared by MSIPL stating that the quantitative filters are not correct, selection/rejection of comparables based on qualitative filter of “functionally different” is not objective and uniform, data for the current year is not used and RPT filter was not applied. The TPO rejected ail the 4 comparables selected by the Assessee and based on the fresh comparability analysis, identified 10 new comparable companies with a mean margin of 21.76% (without allowing working capital adjustment) and proposed a transfer pricing addition of Rs. 16,62,27,059.

28.1 Rites Ltd. (seg):- This comparable is rejected by the Tribunal in assessee’s own case in A.Y. 2007-08 as functionally different. This year also the company has same functional profile and provides comprehensive engineering, consultancy and project management services in the transport infrastructure sector. The company provides services like Pre- Project planning, Project support activities, Project preparation activities of detailed engineering, Project implementation / management covering, Commissioning, operation, maintenance of rolling stock & workshop management, Training etc. The consultancy fees received by company also includes supplies. Apart from that, the company is in ‘Construction management/supervision contracts’, leasing services, receives mobilization fees. There is no separate segmental information and all the receipts have been classified under the primary segment of ‘Consultancy services’. The company has a turnover of 353.14Cr and is not comparable to the assessee. The company is Government of India enterprise, thus, cannot be compared with the assessee. The Ld. AR relied upon the decision of the Tribunal in case of Rolls Royce India Pvt. Ltd. vs. DCIT (ITA

No. 1310/DEL/2015) and Yum Restaurants India Pvt. Ltd. vs. ITO for A.Y. 2008-09 (ITA No. 6168/Del/2012) as well as M/s Shell India Markets Pvt. Ltd. vs. ACIT for A.Y. 2008-09 (ITA No. 193/Mum/2013).

28.2 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

28.3 We have heard both the parties and perused all the relevant material available on record. The company is Government of India enterprise and has a turnover of 353.14Cr. There is no separate segmental information and all the receipts have been classified under the primary segment of ‘Consultancy services’. Thus, this company cannot be taken as comparable as it is functionally different. Besides this, there is no separate segmental information available. Therefore, we direct the TPO to exclude this comparable from the final list of comparables.

28.4 IDC (India) Ltd.:- The Tribunal assessee’s own case in A.Y. 2007-08 remanded back this comparable company to the file of the TPO. The TPO accepted the contention of the assessee and vide order dated 21.01.2016 rejected the said comparable as functionally different to that of the assessee company. This year also the company has same functional profile and is engaged in providing consulting services in Asia/Pacific region. It provides the most rigorous and exhaustive primary research. It also provides services like, CMO advisory research, Investment research services, IT advisory tools, etc. As per the revenue recognition schedule in Annual report of company, its operational income is classified as income from sale of service and product. The company is a research company, primarily dealing in research and survey services and products. Thus, not only the nature of services rendered by this company is different, but, it is also engaged in selling products, which is absent in the case of the assessee. Further, segmental is not available. The Ld. AR relied upon the

decision of the Brown Forman Worldwide LLC India vs. DDIT for A.Y. 2007-08 and 2008-09 (ITA No. 433 & 6139/Del/2012.

28.5 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

28.6 We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the company is a research company, primarily dealing in research and survey services and products which are totally different from the assessee company. Therefore, we direct the TPO to exclude this comparable from the final list of comparables.

28.7 Technicom-Chemie (India) Ltd.:- This comparable is rejected by the Tribunal in assessee’s own case in A.Y. 2007-08 as functionally different. The company has earned income from commission, consultancy and services. This year also the company has the same functional profile. The Ld. AR relied upon the decision of the Brown Forman Worldwide LLC India vs. DDIT for A.Y. 2007-08 and 2008-09 (ITA No. 433 & 6139/Del/2012).

28.8 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

28.9 We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the company has earned income from commission, consultancy and services. Thus, the company cannot be compared with the assessee company. Therefore, we direct the TPO to exclude this comparable from the final list of comparables.

28.10 Apitco Ltd.:- The company operates in the diversified activities which includes Asset Reconstruction and Management Services, Project Related Services, Micro Enterprise Development, Infrastructure Planning and Development, research studies & Tourism, Skill Development, Environment. The Ld. AR relied upon the decisions of the Tribunal in case of Alcatel Lucent India Ltd. vs. ITO for A.Y. 2008-09 (ITA No. 2154/Del/2014), Corning SAS-India Branch Office vs. DDIT for A.Y. 2008- 09 (ITA No. 5713/Del/2012), Fujitsu India Pvt. Ltd. vs. DCIT for A.Y. 2008-09 (ITA No. 6280/Del/2012) and Ciena India Pvt. Ltd. vs. DCIT for A.Y. 2008-09 (ITA No. 3324/Del/2013).

28.11 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

28.12 We have heard both the parties and perused all the relevant material available on record. The company operates in the diversified activities which includes Asset Reconstruction and Management Services, Project Related Services, Micro Enterprise Development, Infrastructure Planning and Development, research studies & Tourism, Skill Development, Environment. Further as held in the case of Fujitsu India Pvt. Ltd. (supra) for the same assessment year, the Tribunal held that “this company has also earned revenue from Research studies and tourism amounting to Rs.1.26 crore. From a close look at the activities carried on by this company, it becomes clear that except for 'Research studies', which partly resembles with the assessee's Marketing research activity, there is no match between all the other activities carried out by this company and what the assessee is doing. There is no segmental information available on this business segment and the company has computed profit on a consolidated basis. In view of the patent mismatching functions performed by this company on a holistic basis vis-à-vis the assessee, we cannot deem this company as comparable on entity level. This company is, therefore, ordered to be excluded from the list of comparables.” Thus, it will not be

proper to include this comparable. Therefore, we direct the TPO to exclude this comparable from the final list of comparables.

28.13 WAPCOS Ltd. (seg):- The company is engaged in the provision of consultancy services in all facets of Water Resources, Power and Infrastructure Sectors. The Services/ Projects undertaken by the company include Irrigation, Drainage and Water Management, Ground Water Exploration, Development of Wells and Minor Irrigation, Dryland Farming, Dam and Reservoir Engineering etc. The major source of income for the company is from consultancy income and contract income. Further, this company is Public Sector Company wholly owned by the Govt. of India and such companies cannot be compared with the assessee. In fact the DRP in A.Y. 2007-08 has excluded one of the comparables Vapi Waste and Affluent Management Company on the ground that it is a non-profit company. The Ld. AR relied upon the decisions in case of Actis Advisors Pvt. Ltd. (Del. HC) (ITA No. 952/2015) as well as Corning SAS-India Branch Office vs. DDIT for A.Y. 2008-09 (ITA No. 5713/Del/2012), Fujitsu India Pvt. Ltd. vs. DCIT for A.Y. 2008-09 (ITA No. 6280/Del/2012) and Ciena India Pvt. Ltd. vs. DCIT for A.Y. 2008-09 (ITA No. 3324/Del/2013).

28.14 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

28.15 We have heard both the parties and perused all the relevant material available on record. The company is majorly engaged into consultancy services. The major source of income for the company is from consultancy income and contract income. Further, this company is Public Sector Company wholly owned by the Govt. of India and such companies cannot be compared with the assessee company. Therefore, we direct the TPO to exclude this company from the list of final comparables.

28.16 Choksi Laboratories Ltd.:- The company is a commercial testing house engaged in testing of various products, offers services in the field of pollution control as allied activity and produces effluent treatment plants. Further, from the fixed assets schedule of the company, it is evident that major assets are instruments. Thus, the company is providing testing services with the help of these instruments. The Ld. AR relied upon the decisions in case of Brown Forman Worldwide LLC India vs. DDIT for A.Y. 2007-08 and 2008-09 (ITA No. 433 & 6139/Del/2012), Corning SAS-India Branch Office vs. DDIT for A.Y. 2008-09 (ITA No. 5713/Del/2012) and Ciena India Pvt. Ltd. vs. DCIT for A.Y. 2008-09 (ITA No. 3324/Del/2013).

28.17 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

28.18 We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the company is a commercial testing house engaged in testing of various products, offers services in the field of pollution control as allied activity and produces effluent treatment plants which are altogether different functions from the assessee company. Further, from the fixed assets schedule of the company, it is evident that major assets are instruments. Thus, the company cannot be taken as comparable. We direct the TPO to exclude this comparable from the final list of the comparables.

28.19 Vapi Waste & Effluent Mgmt. Co. Ltd.:- The company deals in the infrastructure sector and is engaged in undertaking high end technical services and project implementation on varied nature of infrastructure projects. The company’s revenue streams include effluent treatment, common solid waste treatment and management. The majority of the revenue earned by company is from its members in form of charges for deposition. Therefore, the price of this company cannot be treated as an independent and uncontrolled price. This comparable is rejected by the

DRP in assessee’s own case for Assessment Year 2007-08 as the company is non profit making company. The Ld. AR relied upon the decision of the Hon’ble Delhi High Court in case of Actis Advisors Pvt. Ltd. (ITA No. 952/2015) and M/s Intercontinental Hotels Group [India] Pvt. Ltd. vs. DCIT for A.Y. 2009-10 (ITA No. 5809/Del/2014).

28.20 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

28.21 We have heard both the parties and perused all the relevant material available on record. From the perusal of records it can be seen that the company deals in the infrastructure sector and is engaged in undertaking high end technical services and project implementation on varied nature of infrastructure projects. The company’s revenue streams include effluent treatment, common solid waste treatment and management. Thus, it is functionally different than the assessee company. Therefore, we direct the TPO to exclude this company from the final list of comparables.

28.22 Indus Technical and Financial Consultants Ltd.:- As per the website of the company, the company is engaged in providing high-end technical services in the areas of environment & pollution control, technology management, financial services, administrative & legal services, project selection & project implementation services, energy & power services, etc. and manufacturing of TMT Bars. Its commission expense constitutes Approx 30% of its sales. Furthermore, this company has a very small asset base of just 44.58 lakhs and its turnover is 1.13 crores.

28.23 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

28.24 We have heard both the parties and perused all the relevant material available on record. This company is engaged in providing high- end technical services in the areas of environment & pollution control, technology management, financial services, administrative & legal services, project selection & project implementation services, energy & power services, etc. and manufacturing of TMT Bars. Thus, this company is functionally different from the assessee company. Besides that commission expenses and approximately 30% of its sales which impacted the large portion of the revenue. Therefore, this company cannot be taken as comparable. We direct the TPO to exclude this comparable from the list of final comparables.

28.25 Best Mulyankayan Consultants Ltd.:- This comparable company is functionally different. This company is engaged in providing premier valuation consulting, real estate advisory and chartered engineering certification company in India. There is incorrect margin computation. The TPO included other income of Rs. 7.86 lacs as operating and excluded bank charges of Rs. 0.13 lacs and computed the margins at 12.85% instead of 4.97%. The company did not have any employees during the year under consideration. The Ld. AR relied upon the decision of the Tribunal in case of Fujitsu India Pvt. Ltd. Vs. DCIT (ITA No. 6280/Del/2012 for AY 2008-09)

28.26 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us.

28.27 We have heard both the parties and perused all the relevant material available on record. From the perusal of the annual report of the company it can be seen that this company is engaged in providing premier valuation consulting, real estate advisory and chartered engineering certification company in India which is totally different from the assessee

company. In fact, there is incorrect margin computation and the TPO included other income of Rs. 7.86 lacs as operating and excluded bank charges of Rs. 0.13 lacs and computed the margins at 12.85% instead of 4.97%. Besides this, the company did not have any employees during the year under consideration. Therefore, it will be appropriate to exclude this comparable. We direct the TPO to exclude this comparable from the final list of comparables.

28.28. We further note that since there is only one comparable left in the final list of the comparables selected by the TPO/DRP. Hence, the matter is remanded back to Assessing Officer /TPO to decide afresh by giving new set of comparables (including the one which is not challenged by the assessee) which are functionally similar to the Assessee company and the segmental data including other filters of the TPO are met with. Needless to say, the assessee will provide the new set of comparables which will be verified by the TPO and thereafter adjudicate the issues at length.

28.28 Ground No. 6.3, 6.4, 6.5 and 6.6 are partly allowed for statistical purpose.

reimbursements paid (Rs. 290,000,000/-) in the nature of “Intra Group services”, during FY 2007-08, the Assessee received services amounting to Rs. 62.21 crores from its AEs in the nature of training, IT infrastructure and support, etc and majority of such amounts have been charged to the Assessee based on actual cost incurred by such overseas group companies (allocable to India). Further, in some cases, the AEs have charged a mark-up of 5% on their costs for these services. Also, reimbursement of expenses of INR 29 crores payable by the Assessee to its AEs represents actual costs incurred by the AEs, which were supported by third party bills/ back-ups. Detailed inter-company agreement was provided by the assessee. These corporate charges/ reimbursements have been allocated to the various business/ TP segments and have been benchmarked along with relevant segments. The TPO made an addition of INR 91.21 crores as no details/ justification for these payments to AEs were made by the Assessee. The TPO held that in absence of the information, it appears that the AEs have imposed upon the Assessee certain costs pertaining to themselves and without passing on either any services or any benefits out of above. Therefore, by application of CUP, the arm’s length price of this transaction is determined to be Nil. The DRP upheld the decision of TPO.

corporate reimbursements recharges Total amount in 622,140,262 290,000,000 the current year Software 368,386,758 33,582,060 Development segment (A) Administrative 207,918,476 827,435 and Marketing Support Services segment (B) Total (A) +(B) 576,305,234 34,409,495 Balance amount 45,835,028 255,590,505 to be considered

The above expenses allocated to the SDS and MSS segments have been recovered by the Assessee from the AE with mark up of 8.22% and 3.53% respectively amounting to a total of Rs. 65 crores approximately out of a total expense of Rs. 90 crores. In the case of Ciena India (P.) Ltd. v. ITO ITA 1453 (Delhi) of 2014, it was held that no addition is warranted in respect of international transaction, the cost of which is recovered from the AE under a cost-plus approach. The Ld. AR submitted that this is because reduction of such cost leads to a reduction in income. The TPO has not challenged the applicability of TNMM for both segments. The Ld. AR further submitted that the TPO has disregarded an important fact i.e. under the Global TP Policy, the Assessee is assured adequate profit margins in India by value of adjustment/ credit notes in distribution segment. Part of this cost has been benchmarked under TNMM (distribution and manufacturing segments). The Ld. AR submitted that the issue involved is that MSIPL has availed certain support services from its AEs including MINC. The Assessing Officer, year on year, holds that such services do not add any

benefit to MSIPL and therefore effectively no services have been rendered by MINC to MSIPL. However, in the case of MINC, the Assessing Officer of MINC held that these services are technical services in which technology is made available and are taxed as Fees for Technical Services ("FTS”) under the Double Taxation Avoidance Agreement (“DTAA”) and Income Tax Act, 1961. Thus, the Ld. AR submitted that there is a clear dichotomy that on one side, in case of MINC, the Indian tax department alleged that services rendered are highly technical in nature and on the other hand, in the case of Assessee, the Indian tax department alleged that the same services do not add any value to the recipient. The Ld. AR pointed out that the DRP has not controverted the fact that the services were received. The DRP has merely stated that the evidence and arguments are not persuasive without providing any speaking reasons. The Ld. AR also pointed out that the DRP has not recorded a finding that the services received are not in the nature of shareholder services. Hence, once it has been established that the services have been received and are not in the nature of shareholder services, then the services are admittedly under the criteria of chargeable intra group services. An application under rule 18 read with Rule 29 of the ITAT Rules has been filed requesting additional evidence comprising of invoices, evidence on receipt of third party charges on communication network and other relevant third party expenses that form a part of these recovery of expenses from the Assessee etc. The DRP as well as the TPO have not provided any comparable companies or data for arriving at the arm’s length price to be nil. This is in violation of the Rules that prescribe as to how each method is to be applied. The Ld. AR further submitted that a part of the expenses claimed to be valued as "nil’’ are in the nature of cost reimbursements. The TPO has not controverted this fact. It has been accepted that the cost to cost transactions amounting to INR 290,000,000 are without any mark-up. The Ld. AR submitted that these are third party expenses that have been recharged on a cost to cost basis. No adverse finding has been recorded by the TPO/DRP on

this. Hence, in this scenario, it cannot be arm’s length behaviour that the any independent company would incur expenses through unrelated enterprises and would not charge these expenses back to the beneficiary entity.

The agreements of the Assessee with customer contain clauses that • in case of delays / defaults in execution of the projects, damages would be levied. The Assessee has been claiming the provision for

damages as deductible at the time of provision. As per the DRP, the provision is to be allowed on the basis of actual details.

• During the year, a provision on Rs. 4 32 Crores was made towards liquidated damages on projects executed for BSNL. This amount has been deducted by BSNL from payments to the Assessee and is no longer recoverable.

Accounting treatment is also the same. •

The Ld. AR further submitted that provision is made when delays happen or there is non-compliance with the terms of the contracts. Provision is made on management estimates. Estimates are on the basis of contractual terms, past experience and actual deductions made by the respective customers. The parties deduct damages from the payments to the Assessee. When the Assessee is sure that no further negotiation with the customers can be made on the damages, the amount is shown as utilized in the provision account. Any amount of provision which remains unutilized is reversed subsequently and is offered to tax as income.

authorities be taken as the submissions of the revenue before us.

proceedings was brought to the Hon’ble Court’s notice. Under these facts, it was held that the damages had not crystallized particularly because there was no stipulation in contract and assessee had denied its liability. In the present, case, however, as noticed earlier, the provision had been made on the basis of specific terms of contract in regard to liquidated damages. Therefore, this decision is of no assistance to the revenue. 170.1 The next decision relied upon by ld. DR is in the case of Navjivan Rollar Flour & Pulse Mills Ltd. (supra). In this case, the assessee company was engaged in the business of manufacturing of dal, besan, suji etc. On 23/07/1986, the assessee had entered into a contract with a foreign company for the import of yellow gram. Under the contract letter of credit were to be opened latest by 14/08/1986. The assessee, failed to open letter of credit. Protracted litigation ensued. The foreign party claimed damages for breach of the contract. The assessee disputed the payment of damages. There was no stipulation in the contract notes regarding the damages to be paid by the party breaching the terms of the contract. The Arbitrator on 25th May, 1987 awarded certain damages under the arbitration agreement. The assessee challenged the legality of the arbitration award and preferred appeal before the Board of appeal constituted by the Grain and Free Trade Association, which gave decision against the assessee on 20/03/1989. For the A.Y. 1988-89 the assessee claimed deduction on account of damages and certain amount on account of expenditure for legal fees. The AO allowed the assessee’s claim, however, the Commissioner initiated proceedings u/s 263 and set aside the assessment with the direction to the AO to redo the assessment fresh. The AO, accordingly, made the addition which was deleted by CIT(A) on the ground that the liability on account of damages on breach of contract accrued on 28th May, 1987 when the award of arbitration was passed. The Tribunal upheld the revenue’s contention, inter-alia, observing as under: …………………………………………………………………………………. 170.2 Thus, in this case also the provision was not made on the basis

of some contractual obligations but on account of Arbitrator’s Award which had not become final. 171. From the analysis of the two decisions relied upon by ld. DR, it is evident that both are not applicable to the facts of the case. 172. On the other hand, we find that the case laws relied upon by ld. Counsel for the assessee clearly support the assessee’s case particularly because terms and conditions of agreement with customers contained delayed delivery clause whereunder specified penalty was to be paid by assessee for delay in delivery. We find that Hyderabad ITAT Spl. Bench in the case of KCP Ltd. (supra) in para 8, inter-alia, observed as under:- ……………………………………………………………………. 173. Similar view has been taken in other cases also. In the case of F.F.E. Minerals (P.) Ltd. (supra), while allowing the provision for liquidated damages, inter-alia, observed in para 13 that the decision of Hon’ble Kerala High Court in N. Sundereswarn (supra) is not relevant in deciding the issue. 174. We further notice that Pune ITAT in Thermax Bebcock & Wilcox Ltd. (supra) para 24.5 to para 25, has observed as under: “33. …………………. Applying the same analogy to the present case, we find that the assessee has imported a liability on itself to pay liquidated damages for the delay in completing the work within the specified time, and as such, the estimated expenditure which would be incurred towards liquidated damages would be deductible from the receipts of the year. This certain act or event of not completing the work within stipulated time has imported a definite and absolute liability on the assessee and merely because of the fact that liability would be discharged at a future dated and, there is difficulty in estimating the correct amount thereof would not convert this definite and absolute liability into conditional one as has been held by the Hon’ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC), Metal Box Company India Ltd. v. Their Workment [1969] 73 ITR 53 (SC) and Bharat Earth Movers v. CIT [2000] 245 ITR

428 (SC). ……………………. …………In the present case, the works have been executed after the expiry of the stipulated period. The stipulation as to the payment of liquidated damages towards delay in executing the contract work is related to the contract work, revenue thereof has been accounted for in the year under consideration. Although exact quantification of the claim of liquidated damages may be made at a future dated, the assessee payer was, in obligation to pay liquidated damages for the delay in work did accrue on the date when the delay was first occurred and continued upto the date of completion of the work, and thus, in computing the profit and gains derived by the taxpayer from such contract works in the present year, the assessee tax payer is entitled to deduct from the profits from the aforesaid contract works a provision, for the cost of the anticipated liquidated damages in so far as the same is related to the period of delay falling within the year under consideration.” 174.1 It has also allowed the assessee’s claim of liquidated damages following the decision of Hon’ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 and Bharat Earth Movers (supra). 175. In view of above discussion, this ground is allowed for statistical purposes.” Thus, in present year as well the facts are identical. In the contracts entered into by the Assessee, the clause on liquidated damages clearly fixes amount of liquidated damages in delay and therefore liability of the Assessee to pay accrues immediately upon delay and such liability is fully ascertainable. Thus, provisions made in that respect is allowable. Ground No. 10 is allowed.

to the file of Assessing Officer to decide it in light of guidelines laid down by Special Bench of Delhi Tribunal in Amway India Enterprises.

hearing by following principles of natural justice. Ground No. 11 is partly allowed for statistical purpose.

Hyderabad Unit Banqalore - II Unit Total Particulars (10B Unit) (10A Unit)

10A/10B as per C A 7,63,41,509 8,61,19,914 16,24,61,423 Certificate Suo-Moto ALP adjustment 4,56,88,686 10,16,11,387 5,59,22,700 made in Income Tax Revised claim u/s 12,20,30,195 14,20,42,614 26,40,72,809 10A/10B made before the AO

The Ld. AR submitted that the assessee claimed deduction u/s 10A/10B of INR 16.25 crores on the basis of the CA certificate. However, in the return of income, the Assessee had also made suo-moto adjustment of Rs.18.81 Crores on account of ALP for the software segment being lower than TP margin required as per law. Out of the said adjustment of INR 18.81 Crores, INR 10.16 Crores pertain to the 10A/10B units allocate in proportion to the turnover. The powers of the Assessing Officer envisaged in the circular should include the power to give higher deduction than the amount as per the CA certificate. What section 10A states is that a CA certificate to this effect should be produced. However, it does not say that the Assessing Officer cannot allow any higher deduction than what is permissible as per law and which is rightfully due to the Assessee. Section 292B of the Income Tax Act provides that if the assesse has made substantial compliance with the law then technical defects if any cannot render the assessee’s compliance as defective and such technical omission should be ignored. The Ld. AR further submitted that the issue of allowability of Section 10A/10B claim on suo moto Transfer Pricing

adjustments has been decided in favour of the assessee in the following cases: i) ACIT v. GS Engineering & Construction India (P) Ltd. [2018] 93 taxmann.com 154 (Del. Tri.) ii) Apoorva Systems (P.) Ltd. v. DCIT (IT Appeal No. 1051(Pune) of 2015) iii) Agilisys IT Services India (P) Ltd. v. ITO [2015] 69 SOT (Mum. Tri. Affirmed in PCIT v. Agilisys IT Services India (P) Ltd. [2018] 96 taxmann.com 374 (Bom. HC) iv) Austin Medical Solutions Pvt. Ltd. vs. ITO (TS-348-ITAT-2015, Bang. Tri.) v) iGate Global Solutions Ltd. (ITA No. 453/2008 Karn. HC 2014) vi) iGate Global Solutions Ltd. v ACIT (24 SOT 3, 2008, Bang. Tri.) The Ld. AR further submitted that delay in filing CA certificate is a mere procedural delay and the claim of the assessee (if otherwise allowable) may not be denied on this ground. The Ld. AR relied upon the following decisions: i) ITO v Lepide Software Pvt. Ltd. (ITA No. 5455/Del/2012) 2013 (Del.Tri) ii) CIT vs. Mantec Consultants (P) Ltd. (178 Taxman 429) (Del. HC) iii) CIT vs. American Data Solutions India (P.) Ltd. [2014] 223 Taxman 143 (Kar.) iv) ITO vs. Com Lab India [2015] 41 ITR (T) 641 (Hyd. Tri.) v) Cloud Softech India (P) Ltd. v. ITO (IT Appeal No. 483(HYD) of 2013) vi) Worley Parsons India (P.) Ltd. vs. DCIT (IT Appeal No. 273 (HYD) of 2016)

Assessee had also made suo-moto adjustment of Rs.18.81 Crores on account of ALP for the software segment being lower than TP margin required as per law. Out of the said adjustment of Rs. 18.81 Crores, Rs. 10.16 Crores pertain to the 10A/10B units allocate in proportion to the turnover which is now reflected in the revised CA certificate. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for verifying whether the claim of the assessee is proper or not and adjudicate the same on merit after considering the revised CA certificate. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 12 is partly allowed for statistical purpose. Sd/- 45. In result, appeal of the assessee is partly allowed for statistical purpose. Order pronounced in the open court on 31/10/2019.

Sd/- Sd/- [N.K.BILLAIYA] [SUCHITRA KAMBLE] ACCOUNTANT MEMBER JUDICIAL MEMBER

Delhi; Dated: 31/10/2019. Shekhar, Sr. P.S Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi

Date of dictation 19/08/2019 Date on which the typed draft is placed before the 19/08/2019 dictating Member

Date on which the typed draft is placed before the Other Member

Date on which the approved draft comes to the Sr.PS/PS

Date on which the fair order is placed before the Dictating Member for pronouncement

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Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order

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