M/S.EVOLVING SYSTEMS NETWORK INDIA PVT. LTD.,,BANGALORE vs. INCOME-TAX OFFICER, WARD-2(1)(2), BANGALORE

The Assessee is a company engaged in the business of providing contract Software Development Services (SWD Services) and providing Information Technology Enabled Services (ITES) to its holding company Evolving Systems USA as a captive service provider. The transaction of rendering software development services to holding company was a IT(TP)A No.216/B/17 2 transaction with an Associated Enterprise (AE) and was therefore an international transaction. As per the provisions of Sec.92 of the Act, income from international transaction has to be computed having regard to Arm’s Length Price (ALP). It is not in dispute between the Assessee and the revenue that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee’s profit with that of comparable companies was Operating Profit/Total Cost (OP/TC). The OP/TC of the Assessee was 17%. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the AO, selected a final set of 10 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment was as follows:

Based on the above average arithmetic mean of profit margin of the comparable companies, the TPO computed the ALP of the international

The difference between the price charged by the Assessee and the ALP determined by the TPO viz., Rs.1,40,06,512/- was added to the total income by the AO in his drat assessment order as addition on account of shortfall being adjustment u/s.92CA of the Act.

The Assessee filed objections to the draft assessment order by the AO before the Disputes Resolution Panel (DRP). The DRP in its directions held that ICRA Techno Analytics Ltd. and Datamatics Global Services Ltd. are not comparable with the Assessee and were liable to be excluded from the list of comparable companies as they agreed with the Assessee that these two companies are not functionally comparable to the Assessee, (ii) So also the DRP held that the following four companies are liable to be excluded from list of comparable companies viz., Geneys International Corporation Limited, Infosys Ltd., Sasken Communication Technologies Ltd., and Spry Resources India Private Limited. (iii) the IT(TP)A No.216/B/17 4 DRP however felt that if 6 companies are excluded the set of comparables would not be broad and therefore decided to retain all the 10 comparables chosen by the TPO. (iii) The DRP however directed TPO to recompute the margins of the Assessee and the comparables after treating foreign exchange fluctuations as operating income or loss as the case may be.

Pursuant to the directions of the DRP, the AO passed the final assessment order wherein the TP adjustment as suggested by the TPO was incorporated by the AO. Aggrieved by the addition made in the fair order of assessment, the Assessee has raised several grounds of appeal challenging the addition on several counts. However at the time of hearing the learned counsel restricted his arguments to exclusion of 4 comparables out of the 10 comparable companies viz., (a) Genesys International Corpn.Ltd., (b) Infosys Ltd., (c ) Larsen and Toubro Infotech Ltd., and ( d) Persistent Systems Ltd.

The learned counsel for the Assessee submitted before us that the comparability of the 3 companies out of the aforesaid 4 companies which the Assessee seeks to exclude from the list of comparable companies chosen by the TPO viz., Infosys Ltd., Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd., were considered by the ITAT Delhi Bench in the case of Agilis Information Technologies India (P) Ltd. Vs. ACIT (2018) 89 taxmann.com 440 (Delhi-Trib.) for the same AY 2012-13. In this regard it was submitted that the functional profile of the Assessee is same as that of the Assessee in the case of Agilis Information Technologies India (P) Ltd., is identical in as much as the said company was also involved in providing SWD services to its AE and the TPO had chosen 16 comparable companies out of which 6 companies chosen by the TPO in the case of the Assessee for the purpose of comparability were the same. His submission was that the decision rendered by the Tribunal in the case of Agilis Information Technologies India (P) Ltd., (supra) would be equally

We have considered the rival submissions. In the case of Agilis Information Technologies India (P) Ltd., (supra), this Tribunal considered the comparability of the 3 companies which the Assessee seeks to exclude from the final list of comparable companies chosen by the TPO. The functional profile of the Assessee and that of the Assessee in the case of Agilis Technologies India (P) Ltd., is identical in as much as the said company was also involved in providing SWD services to its AE and the TPO had chosen some comparable companies which were also chosen by the TPO in the case of the Assessee for the purpose of comparability. In the aforesaid decision the Tribunal held on the comparability of the 3 companies which the Assessee seeks to exclude as follows: (a) Infosys Ltd., was excluded from the list of comparable companies by following the decisioin of the Hon’ble Delhi High Court in the case of CIT Vs. Agnity India Technologies (2013) 36 taxmann.com 289 (Delhi). The discussion is contained in paragraphs 4.5 to 4.7 of the Tribunal’s order. The Tribunal accepted that Infosys Ltd. is a giant risk taking company and engaged in development and sale of software products and also owns intangible assets and therefore not comparable with a software development service provider such as the Assessee in that case.

Respectfully following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins.

The learned AR next submitted that Genesys International Corporation Ltd., should be excluded from the list of comparable companies. According to the Assessee this company is engaged in IT(TP)A No.216/B/17 7 providing Geographical Information Services comprising of Photogrammetry, Remote Sensing, Cartography, Data Conversion, state of the art terrestrial and 3D geocontent including location based and other computer based related services. Page-38 of the Annual report 2012 containing the above description was brought to the notice of the TPO. Attention of the TPO was invited to the directors report to the shareholders at page ii of the annual report 2012, wherein the Directors have informed the shareholders that the company continued in its journey to be innovators and leaders in the fields of location based services related geo platforms and advanced survey techniques. There is no segmental reporting because it is stated in the annual report that this company is only in one segment viz., GIS based services and therefore there is no requirement of segmental reporting. It was also submitted that this company owns substantial intangibles equivalent to 10.42% of its total turnover.

The TPO however has regarded this company as a comparable company by observing that this company develops software for mapping and geospatial services and operates a few development centres in India. The company is predominantly into software development services. The intangibles in the possession f the company are only the GIS database which is only depreciation. It does not add significant value to the company.

The DRP upheld the action of the TPO. The learned counsel for the Assessee submitted that the DRP has completely proceeded on wrong facts which does not either emanate from the order of the TPO or the submissions of the Assessee. He reiterated submissions made before the TPO and DRP. The learned DR relied on the order of the DRP/TPO.

We have given a careful consideration to the rival submissions. It is clear from the material brought to the notice of the TPO by the Assessee that this company renders mapping and geospatial services. In rendering such services it develops software. But that does not mean that this company is in the business of software development. The business profile of this company as per the annual report does not show that this company is into software development service. The only line of business that this company carries on is rendering GIS based services and this is clear from the annual report which specifies that since the company carries on only one line of business viz., GIS based services there is no need to give any segmental results. In the circumstances, we are of the view that there is no basis for the TPO to conclude that this company is predominantly into software development services. The presence of intangible assets is indicative of the fact that this company is not in software development services business. The TPO has overlooked this aspect and proceeded on the basis that the presence of intangible assets would not be significant. Rule 10B(2) of the Income Tax Rules, 1962 (Rules) specifically provides that for the purposes of sub-rule (1) of Rule 10B, the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;

In the given facts and circumstances, we are of the view that Genesys International Corporation Ltd., cannot be considered as a IT(TP)A No.216/B/17 9 comparable company and the said company should be excluded from the final list of comparable companies. We hold accordingly.

The TPO is directed to exclude from the list of comparable companies, the 4 companies mentioned above and compute the average arithmetic mean of the remaining comparable companies and allow the +/- 5% in accordance with law.

The other grounds of appeal were not pressed. In the result, appeal by the Assessee is partly allowed.

In the result, the appeal by the assessee is partly allowed.