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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAJESH KUMAR
PER SAKTIJITDEY, J.M.
The aforesaid appeal by the assessee is directed against assessment order dated 29th October 2010, passed under section 143(3) r/w 144C of the Income Tax Act, 1961 (for short “the Act”) for the assessment year 2008–09, in pursuance to the directions of the Dispute Resolution Panel–I (DRP), Mumbai.
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Brief facts are, the assessee an Indian Company is a subsidiary of M/s. Beaumont Development Centre Holding Ltd. and part of the Accenture Group. The assessee is basically providing Software Development Services (SDS), Information Technology Enabled Services (ITES) and Consultancy Services (CS) to its group entities worldwide. For the assessment year under dispute, the assessee filed its return of income on 28th September 2008, declaring loss of ` 39,38,42,462, after claiming deduction under section 10A of the Act. Subsequently, the assessee filed a revised return of income on 18th March 2010, claiming additional TDS. The return of income filed by the assessee was selected for scrutiny and in course of assessment proceedings the Assessing Officer noticing that the assessee has entered into international transactions with its overseas Associated Enterprises (AE) made a reference under section 92CA of the Act to the Transfer Pricing Officer for determining the arm's length price of the international transaction. In the course of proceedings before him, the Transfer Pricing Officer after calling for various information and details relating to the international transactions with the AE and examining the transfer pricing analysis done by the assessee found that assessee has earned revenue from providing services to its AE under three different segments viz. Software Development Services, ITES and Consultancy Services. From the transfer pricing study of the
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assessee, he found that the assessee has combined the software development services and ITES together for bench marking purpose. The assessee has selected 38 comparables and using three years’ data has arrived at a mean margin of 17.46%. The Transfer Pricing Officer, however, being of the view that software development services and ITES are to be benchmarked separately called upon the assessee to do so. In response, the assessee submitted a separate benchmarking for software development segment by selecting 23 comparables with arithmetic mean of 14.20% as against the margin shown by the assessee @ 12.74%. Thus, it was claimed that the price charged to the AE towards software development services is within arm’s length. The Transfer Pricing Officer, however, did not accept the claim of the assessee and after rejecting the transfer pricing study report he proceeded to bench mark the arm's length price of the software development service segment independently. In the process, he selected 18 comparables out of which seven were from the list of comparables selected by the assessee and 11 new comparables. The average arithmetic mean of the comparable companies was worked out @ 28.48% which was subsequently revised to 24.97% in a rectification order passed under section 154 of the Act on 17th November 2011. Thus, on the basis of the margin computed of the
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comparable companies an adjustment of `239,02,52,498, was made to the arm's length price.
As regards ITES segment, during the proceedings before the Transfer Pricing Officer the assessee furnished a fresh list of 15 comparables under Transactional Net Margin Method (TNMM) with average margin of 11.06% as against the margin shown by the assessee at 15.26%. Hence, the price charged to the AE was claimed to be at arm's length. The Transfer Pricing Officer after examining the fresh list of comparables submitted by the assessee accepted some of the comparables while rejecting many. Having done so, the Transfer Pricing Officer on analyzing the objections of the assessee in respect of fresh comparables proposed by him rejected assessee’s objection in respect of 11 comparables and included them in the list of comparables selected by him. Thus, the final set of comparables selected by the Transfer Pricing Officer consisted of 18 companies having average arithmetic mean of 31.36% as against assessee’s margin of 15.26%, which resulted in an upward adjustment of the arm's length price amounting to `178,10,59,529. On the basis of the adjustment made by the Transfer Pricing Officer the Assessing Officer framed the draft assessment order making addition of the said amount. Being aggrieved of the draft assessment order, the assessee raised objections before the DRP.
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DRP after considering the objections of the assessee did not find merit in them and mostly upheld the findings of the Transfer Pricing Officer in respect of the comparables. On the basis of directions of the DRP the Assessing Officer passed the impugned assessment order.
Shri P.J. Pardiwalla, The learned Sr. Counsel for the assessee andShri Saurabh Deshpande, learned Departmental Representative were heard. The major dispute between the parties insofar as it relates to transfer pricing adjustment is, with regard to selection / rejection of certain comparables. Herein after we will deal with the acceptability or otherwise of the comparables disputed before us.
ACROPETAL TECHNOLOGIES LTD. (SEGMENT) AND R.S. Software (India) Ltd
Objecting to the selection of Acropetal Technologies Ltd., the learned Sr. Counsel for the assessee submitted that the employee cost of the company works out to 8.2% of the total turnover.Therefore, it fails the employee cost filter of 25% adopted by the Transfer Pricing Officer. Further, he submitted,as per the financials of the company it has incurred expenditure of ` 31,45,91,271 under the head “On–site Development Expenses”. Further, the company has reported expenditure in foreign currency amounting to ` 32,38,72,105. Thus, he submitted, on–site expenditure works out to almost 73% of the total
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expenditure of the company. The learned Sr. Counsel submitted, if on– site development expenditure is to be considered to be in the nature of employee cost, as opined by the DRP, then, it would be logical to assume that similar proportion of revenue would be arising from on– site activities and in which case, the company will not satisfy the on– site revenue filter of 60% applied by the Transfer Pricing Officer. The learned Sr. Counsel submitted, in response to the notice issued under section 133(6) of the Act the company had stated that, though, it has shown nil on–site revenue during the year, however, the reason for doing so is because it was not able to bifurcate its revenue between on–site and off–shore activities. That being the case, the company cannot be treated as comparable. The learned Sr. Counsel submitted, while the Transfer Pricing Officer has rejected R.S. Software (India) Ltd., a comparable offered by the assessee, on the reasoning that it does not satisfy the on–site revenue filter of 60%, however, contrary to his own finding he has selected this company, though, it fails the on–site revenue filter. Referring to the Profit & Loss account of this Company as on 31st March 2008, the learned Sr. Counsel submitted that as against total sales of ` 60.31 crore the total expenditure was ` 45.37 crore. He submitted, out of the total expenditure an amount of ` 36.40 crore relate to employee cost and on–site development expenses. Referring to Schedule–VIII of the profit and loss account,
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the learned Sr. Counsel submitted, out of employee related and on– site development cost of ` 36.40 crore, on–site development expenses amounted to ` 31.45 crore which works out to almost 80% of the employee cost towards on–site development. That being the case, the company cannot be considered as comparable since it is not functionally similar to the assessee. In support of such contention, the learned Authorised Representative relied upon the following decisions:–
i) BP India Services Pvt. Ltd. v/s ACIT, ITA no.6977/ Mum./2012, dated 21.01.2015l; ii) Capgemini India Pvt. Ltd. v/s ITO, ITA no.7099/Mum./2012, dated 10.12.2015; iii) M/s. Zyme Solutions Pvt. Ltd. v/s ACIT, IT(TP)A no.85/Bang./2016, dated 26 .07.2017; i) IBM India Pvt. Ltd. v/s ACIT, ITA no.1543/Bang./2012, dated 20.12.2013; ii) Ness Technologies India Pvt. Ltd., ITA No.7016/Mum./2012, dated 24.09.2014.
As regards R.S. Software (India) Ltd., the learned Sr. Counsel submitted that the Transfer Pricing Officer has rejected this company selected by the assessee on the reasoning that it has substantial on site revenue. He submitted,there is no break–up of on–site and off– shore revenue in the audit report of the company. He submitted,relying upon the foreign currency expenditure of the
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company the Transfer Pricing Officer has assumed that the company must be having similar proportion of on–site revenue as well. Whereas, he submitted, though the same is the fact situation in respect of Acropetal Technologies Ltd., the Transfer Pricing Officer has selected the said company while rejecting assessee’s comparable. He submitted, while selecting comparables by applying a particular filter the Transfer Pricing Officer must be consistent in his approach. He submitted, since, both Acropetal Technologies Ltd. and R.S. Software (India) Ltd. fail the on–site revenue filter adopted by the Transfer Pricing Officer, either both of them should be excluded or included. He submitted, the Transfer Pricing Officer cannot adopt a selective approach while selecting / rejecting comparables.
The learned Departmental Representative, though, agreed that on the basis of on–site revenue filter applied by the Transfer Pricing Officer both Acropetal Technologies Ltd. and R.S. Software (India) Ltd. either have to be accepted or rejected, however he submitted, there are some other functional differences in case of R.S. Software (India) Ltd. Referring to the Profit & Loss account of R.S. Software the learned Departmental Representative submitted that it has paid sub– contracting charges of ` 14.24 crore which is indicative of the fact that the company is outsourcing its work. Therefore, the business model of the company being different, it cannot be treated as a comparable.
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We have considered rival submissions and perused materials on record. As could be seen from Page–18 of the Transfer Pricing Officer’s order, he has applied certain filters for selecting comparables from the data bases. One of the filter applied by the Transfer Pricing Officer is companies whose on–site revenue is more than 60% of the export revenue are to be excluded. On a perusal of the Profit & Loss account of Acropetal Technologies Ltd., it is noticed that out of the total expenditure of ` 36.40 croredebited to the Profit & Loss account for employee related and on–site development expenditure, an amount of ` 31.45 crore is towards on–site development expenditure. In addition, the company has reported expenditure in foreign currency amounting to ` 32,38,72,105. The aforesaid figures clearly indicate that the company has substantial on–site development activities and if the proportionate revenue from on–site development is considered compared to on–site development expenses, it certainly works out to more than 60% of the export revenue. Though, the Transfer Pricing Officer has referred to the company’s reply in response to notice issued under section 133(6) of the Act to state that the company has reported nil on–site revenue, however, the reason for doing so as stated by the company in the said letter is, since, the billing is done from head office for the total work carried out on–site as well as off– shore the contract revenue could not be separately bifurcated for on–
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site work.It is relevant to observe,while rejecting R.S. Software (India) Ltd., the Transfer Pricing Officer noticing that it has incurred substantial foreign currency expenditure has opined that it must have substantial on–site revenue and accordingly held that the company fails the on–site revenue filter adopted by him. Though, the very same reasoning applies to Acropetal Technologies Ltd., the Transfer Pricing Officer adopting a very selective approach has accepted it as a comparable, since, it is proposed by him. In our considered opinion, such selective approach of the Transfer Pricing Officer on identical facts and circumstances cannot be appreciated. Further, it is relevant to observe,the Tribunal, Bangalore Bench, in IBM India Pvt. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, dated 20th December 2013, which is for the very same assessment year i.e., 2008–09, has excluded Acropetal Technologies Ltd. as a comparable, since, it has substantial on–site expenses. In case of Ness Technologies India Pvt. Ltd. v/s ACIT, ITA no.7016/Mum./2012, dated 24th September 2014, this company was excluded on the reasoning that 73% of the total expenditure incurred by the company was in foreign currency under the head “On–site Development Expenses”. It is also relevant to observe that the employee cost of the company at ` 4,94,50,804, works out to 8.2% of the total turnover of ` 60,31,48,486, hence, fails the employee cost filter of less than 25% applied by the Transfer
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Pricing Officer himself. For this reason also, the company was not treated as comparable in many decisions cited before us which are for the very same assessment yea. In view of the aforesaid, we hold that neither Acropetal Technologies Ltd. nor R.S. Software (India) Ltd. can be treated as comparable to the assessee. Therefore, the Assessing Officer is directed to exclude both these companies from the list of comparables.
KALS INFORMATION SYSTEM LTD.
Objecting to the selection of this comparable, the learned Sr. Counsel for the assessee submitted that as per the Annual Report of the company it is engaged in the development of software and software products. The learned Sr. Counsel submitted, as per the information available in the web–site of the Company, it owns proprietary products such as CMSS, eDMS, SHINE ERP, Virtual Ensure etc. The learned Sr. Counsel referring to the Profit & Loss account of this company, as submitted in the paper book, contended that it has shown inventories which indicates that it develops software products. Thus, it was submitted, the company cannot be considered as a comparable. The learned Sr. Counsel submitted, as per segmental information in the Annual Report, though, the company derives income from two segments i.e., application software and training, however, there is no separate segment to account for products sale. Thus, in the
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absence of adequate segmental break–up the company cannot be considered as a comparable. The learned Sr. Counsel submitted, the Transfer Pricing Officer has rejected assessee’s comparable Larsen & Toubro Infotech Ltd. alleging that it is engaged in sale of products. He submitted, the very same reason also applies to this company. In support of his contention, the learned Sr. Counsel relied upon the following decisions:– i) Invensys Development Centre India Pvt. Ltd. v/s ACIT, ITA no.1692/Hyd./2012, dated 12.11.2014; ii) Net Cracker Technology Solutions (India) P. Ltd. v/s CIT, ITA no./86/Hyd./2013, dated 17.06.2015; iii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no1303/Bang./2012, dated 28.09.2013; iv) M/s. NTT DATA India Enterprise Application Services Pvt. Ltd. v/s DCIT, ITA no.1862/Hyd./2012, dated 02.01.2015; v) PTC Software India Pvt. Ltd., ITA no.732 of 2014, dated 26.09.2016; vi) UCB India Pvt. Ltd. v/s ACIT, ITA no.7691/Mum./2012, dated 29.07.2016; vii) Aircom International India Pvt. Ltd. v/s DCIT, ITA no.6402/Del./2012, dated 02.08.2017; viii) Systech Integrators India Pvt. Ltd. v/s ITO, IT(TP)A no.1283/Bang./2012, dated 14.03.2014’; ix) Tavant Technologies India Pvt. Ltd., IT(TP) no.1592/Bang./2012 and ITA no.292/Bang./2014 dated 31.05.2017 x) United Online Software Development India Pvt. Ltd., ITA no.1720/Hyd./2012, dated 22.04.2016; xi) Emptoris Technologies India Pvt. Ltd., ITA no.436/ Pn./2013, dated 29.02.2016;
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xii) App Labs Technologies Pvt. Ltd. v/s DCIT, ITA no.94/Hyd./2013, dated 22.11.2013; xiii) IBM India Pvt. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, 20.10.2013; xiv) M/s. Logica Pvt. Ltd. v/s ACIT, ITA no.1192/Bang./2012, dated 18.07.2012; xv) Barclays Technology Centre India Pvt. Ltd., ITA no.2279/ Pn./2012, dated 28.01.2015; xvi) ABB Global Industries & Services Ltd. v/s ACIT, IT(TP)A no.1612/Bang./2012, 24.08.2017; xvii) PTC Software India Pvt. Ltd. v/s ACIT, ITA no.2546/ Pn./2012, dated 11.09.2017; xviii) CIT (I.T) v/s UT Starcom Inc., ITA no.767/2017, TS–758– HC–2017(DEL)–TP, dated 25.09.2017.
The learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and the DRP.
We have considered rival submissions and perused materials on record. From the audited Annual Account of this company placed in the paper book it is evident that the company is also engaged in the development and sale of products.In fact, the learned DRP has also accepted this fact while dealing with the objections of the assessee. However, the DRP has ultimately held that the sale of products do not constitute a major portion of the company’s revenue. We are unable to understand on what basis the DRP has given such a finding considering the fact that segmental details as regards sale of products
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and services are not available in the Annual Report. That being the case, there can be possibilities of revenue from products sale being included in application software segment. The Transfer Pricing Officer while rejecting the objections of the assessee has simply stated that the company is in the business of application software which is similar to the assessee. It is relevant to note, in a number of decisions of different Benches of the Tribunal for the very same assessment year, this company has been rejected as a comparable to a software service provider on the reasoning that it is also involved in development and sale of product. The ratio laid down in these decisions squarely applies to the facts of the present case.Pertinently, in course of hearing, it was brought to our notice by the learned Sr. Counsel for the assessee that the Transfer Pricing Officer relying upon the information sought by another Transfer Pricing Officer in case of some other assessee has utilised it in the present case. Referring to the copy of the said reply at Page–940 of the paper book the learned Sr. Counsel submitted that the export sales figure mentioned in the said reply does not tally with the export sales figure mentioned in the audited annual account of the assessee for the relevant previous year. On factual verification, we find the aforesaid contention of the learned Sr. Counsel to be correct. Thus, on the basis of such unverified information also, the Transfer
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Pricing Officer was not justified in selecting this company as a comparable.
Therefore, we direct the Assessing Officer to exclude this company from the list of comparables.
THIRDWARE SOLUTIONS LTD.
Objecting to the selection of this company, the learned Sr. Counsel for the assessee submitted that this company cannot be considered as a comparable as it is functionally different from the assessee. He submitted, the company is engaged in providing software services as well as sale of software products. The learned Sr. Counsel submitted, considering the aforesaid fact, the learned Commissioner (Appeals) in assessee’s own case for assessment year 2005–06 excluded this company from being treated as a comparable. He submitted that the aforesaid decision of the learned Commissioner (Appeals) was also accepted by the Department. Further, he submitted, as per the annual report, the company has reported revenues from software services, sale of licenses, export from SEZ and STPI unit and revenues from subscription. He submitted, revenue from software services constitutes only 3.98% of the total revenue considering the fact that as against revenue from software services at ` 7.67 crore, the total revenue of the company is ` 52.28 crore.
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Without prejudice to the aforesaid submissions, the learned Sr. Counsel for the assessee submitted that the complete annual report of the company for financial year 2007–08 is not available and the financial extracts provided by the Transfer Pricing Officer does not include the director’s report, management discussion and analysis and notes to account to evaluate comparability properly. He submitted, the incomplete data available with the Transfer Pricing Officer raises concern on the reliability, fairness and transparency in the process adopted by the Transfer Pricing Officer while obtaining this information. Thus, it was submitted, the information obtained by the Transfer Pricing Officer under section 133(6) of the Act being unreliable should not be acted upon for selecting the comparable. In support of his contentions, the learned Counsel relied upon the following decisions:–
i) M/s. NTT DATA India Enterprise Application Services Pvt. Ltd. v/s DCIT, ITA no.1862/Hyd./2012, dated 02.01.2015; ii) 3DPLM Software Solutions Ltd., ITA no.1303/Bang./2012, dated 28.09.2013; iii) AIRCOM International India P. Ltd. v/s DCIT, ITA no.6402/Del./2012, dated 02.02.2017; iv) M/s. Trilogy E–Business Software India Pvt. Ltd. v/s DCIT, IT(TP)A no.22 abd 115/Bang./2013, dated 08.06.2016; v) DCIT v/s M/s. Cypres Semiconductors Technology Pvt. Ltd., IT(TP)A no.463/Bang./2013, dated 07.02.2017; vi) DCIT v/s IDS Software Solutions India Pvt. Ltd. IT(TP)A no.214/Bang./2014, dated 16.12.2016
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vii) DCIT v/s M/s. Century Link Technologies India Pvt. Ltd., IT(TP)A no.214/Bang./2014, dated 09.06.2017; viii) Trianz Holdings Pvt. Ltd. IT(TP)A no.1568/Bang./2012, dated 21.03.2017; ix) Tavant Technologies India Pvt. Ltd., IT(TP)A no.1592/Bang./2012 and IT(TP)A no.292/Bang./2014, dated 31.05.2017; x) PCM Sierra, IT(TP)A no.882/Bang./2013, dated 26.08.2016; xi) CIT v/s Intoto Software India Pvt. Ltd., ITA no.233/2014, dated 27.03.2017 xii) MWH India Pvt. Ltd. v/s DCIT, ITA no.792/Mum./2013, dated 27.10.2017.
The learned Departmental Representative relied upon the observations of DRP and the Transfer Pricing Officer.
We have considered rival submissions and perused materials on record. The main planks on which the assessee seeks exclusion of this company as a comparable is, it is functionally dissimilar to the assessee being involved in sale of products and further the information obtained by the Transfer Pricing Officer under section 133(6) of the Act is incomplete, hence, unreliable. The Transfer Pricing Officer has repelled the aforesaid contentions of the assessee by observing that whatever information obtained was provided to the assessee. The DRP has also accepted the view of the Transfer Pricing Officer without much deliberation. It is relevant to observe, while examining the comparability of this company in assessee’s own case in assessment
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year 2005–06, the learned Commissioner (Appeals) having found this company to be engaged in sale of software products excluded it from being treated as comparable. The aforesaid decision of the learned Commissioner (Appeals) was upheld by the Tribunal while deciding Revenue’s appeal in ITA no.4100/Mum./2009, dated 10thNovember 2017.It is further relevant to observe, in a catena of decisions relating to the very same assessment year different Benches of the Tribunal have held that this company cannot be treated as comparable as it is involved in sale of products. This fact is clearly coming out from the decisions relied upon by the learned Sr. Counsel. Thus, keeping in view the decision of the Tribunal in assessee’s own case for assessment year 2005–06 and the other decisions of different Benches of the Tribunal in respect of this comparable for the very same assessment year i.e., A.Y. 2008–09, we hold that the company cannot be treated as comparable to the assessee. Accordingly, we direct the Assessing Officer to exclude this company from the list of comparables.
E–ZEST SOLUTIONS LTD.
Objecting to the selection of this company as a comparable learned Sr. Counsel for the assessee submitted that it cannot be a comparable to the assessee due to functional differences. He submitted, as per the information available in the web–site of the
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company it is engaged in product engineering, software development, CRM product development, ERP, web designing, wireless application, e–business solutions, portal development, etc. He submitted, the company does not have segmental result, therefore, it cannot be considered to be functionally similar to the assessee. The learned Sr. Counsel submitted, in the annual report it is stated that the company is focusing on the universal usage of its software program and to strengthen its overseas distribution network. He submitted, in the notes to accounts of the company it has been stated that the company has earned foreign exchange revenue from services rendered and software. He submitted, due to this factor, the company cannot be considered as a comparable. Further, he submitted, the information obtained by the Transfer Pricing Officer under section 133(6) of the Act is not available in public domain. He submitted, due to insufficient information, details of related party transactions are not available to evaluate comparability as per the filter applied by the Transfer Pricing Officer. In support of such contention, the learned Sr. Counsel relied upon the following decisions:–
i) Invensys Development Centre India P. Ltd. v/s ACIT, ITA no.1692/Hyd./2012, dated 12.11.2014; ii) Net Cracker Technology Solutions (I) Pvt. Ltd. v/s ACIT, ITA no.86/Hyd./2013, dated 17.06.2015; iii) UCB India Pvt. Ltd. v/s ACIT, ITA no.7691, dated 29.07.2016;
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iv) 3DPLM Software Solutions Ltd., ITA no1303/Bang./2012, dated 28.09.2013; v) SYMPHONY Services Pune P. Ltd. v/s ITO, ITA no.257/Pn/2013, dated 30.04.2914; vi) DCIT v/s Misys Software Solutions (I) P. Ltd., ITA no.1071/Bang./ 2013, dated 27.09.2017; vii) ITO v/s Ketera Software India Pvt. Ltd., IT(TP)A no.460/Bang./ 2013, dated 22.02.2017; viii) Tesco Hindustan Service Centre Pvt. Ltd. v/s DCIT, IT(TP)A No.1285/Bang./2011, dated 09.12.2016; ix) Tavant Technologies India Pvt. Ltd. v/s DCIT, IT(TP)A no.1592/Bang./2011, dated 31.05.2017;
i) DCIT v/s Amber Point Technology India Pvt. Ltd., ITA no.756,757,761,762/Pn./2014, dated 25.01.2018; ii) John Deere India Pvt. Ltd. v/s ACIT, ITA no.2236/Pn./2012, dated 18.11.2015; iii) Emptoris Technologies India Pvt. Ltd. v/s DCIT, ITA no.436/Pn/ 2013, dated 29.02.2016; iv) Barclays Technology Centre India Pvt. Ltd. v/s ACIT, ITA no.2279/ Pn./2012, dated 28.01.2019; i) CIT v/s PTC Software India P. Ltd., ITA no.732/2014, dated 26.09.2016; ii) Saxo India Pvt. Ltd. ITA no.682/2016, 28.09.2016.
Learned Departmental Representative relied upon the observations of the DRP and the Transfer Pricing Officer.
We have considered rival submissions and perused materials on record in the light of relevant case laws cited before us. As could be
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seen from the finding of the Transfer Pricing Officer in respect of this comparable, he has disposed off the objections of the assessee in a general manner by simply stating that the information obtained under section 133(6) of the Act was made available to the assessee. He has not properly evaluated all the objections of the assessee. The DRP also upheld the finding of the Transfer Pricing Officer by simply observing that the services provided by the company are largely in the nature of software services. Notably, in case of Invensys Development Centre India Pvt. Ltd. v/s ACIT, [2015[ 53 taxmann.com 76, while rejecting this company being treated as a comparable to software development service provider the Tribunal has observed that the company is rendering product development services and high end technical services which come under the category of Knowledge Process Outsourcing (KPO) services. Since, the aforesaid decision of the Co– ordinate Bench is for the very same year, the observations made therein would squarely apply to the present case also. Pertinently, in various other decisions relating to the very same assessment year different benches of the Tribunal have rejected this company as a comparable to software development service provider. Following the consistent view of different Benches of the Tribunal in respect of this company, we exclude this company from the list of comparables insofar as it relates to software services segment.
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At this juncture, it is relevant to observe, in course of hearing the learned Sr. Counsel for the assessee had submitted that in the event of exclusion of Acropetal Technologies Ltd. (ACG), R.S. Software (India) Ltd., Kals Information Systems Ltd., Thirdware Solutions Ltd. and E–Zest Solutions Ltd. from the list of comparables in the software services segment, assessee’s margin of 14.20% would fall within ±5% range of the arithmetic mean of the rest of the comparables. In view of the aforesaid submissions of the learned Sr. Counsel for the assessee we refrain from deliberating on the acceptability or otherwise of the following comparables in the software services segment and issues relating to these comparables are left open for consideration, if warranted, in any other assessment year:–
i) Avani Simcon Technologies Ltd. ii) E–Infochips Ltd. iii) SIP Technologies and Exports Ltd. iv) Wipro Ltd. (SEG) and v) Infosys Technologies Ltd.
The Assessing Officer is directed to determine the arm's length price of the international transaction relating to software development services keeping in view our observations herein above.
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The next dispute is with regard to selection / rejection of comparables in ITES or Business Process Outsourcing (BPO) segment.
Hereinafter we will deal with the specific objections of the assessee with regard to selection / rejection of certain comparables under this segment.
Genesys International Corporation Ltd. and Nucleus Netsoft and GIS India Ltd. (SEG)
Objecting to selection/rejection of these two companies, the learned Sr. Counsel for the assessee submitted that Genesys International Corporation Ltd. is functionally different from the assessee as it is engaged in engineering design services (CAD/CAM) and Geographic Information System (GIS) which are in the nature of KPO services. In this context, he referred to CBDT notification no.S.O. 2810(E) dated 18th September 2013. Therefore, he submitted that Genesys International Corporation Ltd. cannot be treated as a comparable to a routine BPO service provider like the assessee. The learned Sr. Counsel submitted, for the very same reason the Tribunal in assessee’s own case for assessment year 2005–06 has rejected this company as a comparable. He submitted, for the very same reason Nucleus Netsoft and GIS India Ltd. was also rejected as comparable. Therefore, the learned Sr. Counsel submitted, either both are to be
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included as comparable or excluded. The learned Counsel for the assessee also relied upon the following decisions:–
i) TNS India Pvt. Ltd. v/s DCIT, ITA no.1875/Hyd./2012; ii) Hyundai Motors India Engineering P. Ltd. v/s ITO, ITA no. 1850/Hyd. /2012; iii) Tracmail (India) P. Ltd., ITA no.7519/Mum./2012; iv) BP India Service, ITA no.6977/Mum./2012; v) United Health Group, ITA no.6312/Del./2012; vi) BA Continuum India P. Ltd. v/s ACIT, ITA no.1144–1145/ Hyd./2014; vii) Symphony Marketing India Pvt. Ltd., IT(TP)A no.1316/Bang./2012; viii) Monster.com India P. Ltd., ITA no.1762, 1697/Hyd./2011, etc. ix) M/s. Mercer Consulting (I) P. Ltd. v/s CIT;
i) Tata Power Solar System Ltd., ITA no.1120/2014; ii) M/s. Quark Systems India Pvt. Ltd., ITA no.594/2010, iii) M/s. Symantec Software Solutions P. Ltd., ITA no.7623/ Mum./2012; iv) Xander Advisors India P. Ltd., ITA no.5840/Del./2012; v) Dell International Service India P. Ltd., IT(TP)A no.85/ Bang./2014; vi) M/s. Aptean Software India Pvt. Ltd. IT(TP)A no.1285/Bang. /2010 and IT(TP)A no.207/Bang./2014; vii) M/s. Citrix R&D India Pvt. Ltd., IT(TP)A no.1289/Bang./ 2014; viii) M/s. Yodlee Infotech P. Ltd., IT(TP)A no.108/Bang./2014;
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ix) International Specialty Products India Pvt. Ltd, ITA no.218/ Hyd./2014; x) LG Chemical India Pvt. Ltd., ITA No.1819/Del./2015.
The learned Departmental Representative relied upon the observations of the DRP and the Transfer Pricing Officer.
We have considered rival submissions and perused materials on record. As could be seen from the facts on record, both these companies are engaged in KPO services involving CAD/CAM and GIS services. Considering the aforesaid factual aspect, the Tribunal in assessee’s own case for assessment year 2005–06 in ITA no.4100/ Mum./2009 dated 10th November 2017 excluded both these companies from being treated as comparable to the assessee. There being no material difference in facts involved in the impugned assessment year, respectfully following the decision of the Co–ordinate Bench as referred to above, we direct the Assessing Officer to exclude both these companies from the list of comparables.
E–CLERX SERVICES LTD.
Objecting to the selection of this company, the learned Sr. Counsel for the assessee submitted, the company is engaged in providing KPO services in data analytics and data process solutions. Referring to Page–3 of the Annual Report, the learned Sr. Counsel
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submitted that the company is providing services in price analytics, bundling optimization, content operations, sales and marketing support, product data management, revenue management, data analytics, real time capital market, middle and back office support, portfolio risk management services and various critical data management services. The learned Sr. Counsel for the assessee submitted that the company itself in its Annual Report has stated that it provides KPO services. The learned Sr. Counsel submitted that in assessee’s own case for assessment year 2009–10, the Transfer Pricing Officer himself has excluded this company accepting that it provides high end KPO services. The learned Sr. Counsel submitted that there being no difference in facts between the assessment year 2008–09 and 2009–10, the reasoning of the Transfer Pricing Officer in assessment year 2009–10 will equally apply to the impugned assessment year. Further, the learned Sr. Counsel submitted that in a number of decisions, High Courts as well as different Benches of the Tribunal have held that this company being engaged in KPO services is not comparable to routine BPO service provider. In this context, he relied upon the following decisions:–
i) PCIT v/s PTC Software India Pvt. Ltd., ITA no.598/2016 (Bom.); ii) TNS India Pvt. Ltd. v/s DCIT, ITA no.1875/Hyd./2012;
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iii) Rampgreen Solution Pvt. Ltd. v/s CIT, ITA no.102/2015 (Del.); iv) H&S Software Development & Knowledge Management Centre Pvt. Ltd. v/s PCIT, ITA no.912/2017; CM appl. 38877/2017 (Del.); v) Capital IQ Information Systems (I) Pvt. Ltd. v/s ACIT, ITA no.124/ Hyd./2014, ITA no.170/Hyd./2014; vi) Market Tools Research Pvt. Ltd. v/s DCIT, 37 CCH 605, dated 24.10.2013; vii) Tracmail (I) Pvt. Ltd., ITA no.7519/Mum./2012; viii) Maersk Global Services Centres India Pvt. Ltd. v/s ACIT, 36 CCH 130; ix) Lionbridge Technologies Pvt. Ltd. v/s ITO, ITA no.7498/Mum./2012, dated 09.07.2014; x) Symphony Marketing Solutions India Pvt. Ltd., 37 CCH 253; xi) HSBC Electronic Data Processing India Pvt. Ltd., dated 14.10.2014 xii) Stream International Services Pvt. Ltd. v/s ACIT, ITA no.8290/ Mum./2011, dated 10.10.2014; xiii) ExxonMobil Company India Pvt. Ltd. v/s ACIT, ITA no.6708/ Mum./ 2011; xiv) NCS Pearson India Pvt. Ltd. v/s ACIT, ITA no.99/Del./2018; xv) Maersk Global Centre (I) Pvt. Ltd. v/s ACIT, ITA no.2594/ Mum./ 2014 dated 16.01.2015; xvi) PTC Software India P. Ltd., ITA no.336/Pn./2014, dated 31.10.2014; xvii) Ventura India v/s ACIT, ITA no.1788/Pu./2014; xviii) United Health Group Information Services Pvt. Ltd. v/s DCIT, ITA no.825/Del./2014; xix) Agilent Technologies (International) Pvt. Ltd. v/s ITO, ITA no.1620/ Del./2015, ITA no.477 & 6420/Del./2016;
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xx) Samsung Heavy Industries Pvt. Ltd. v/s ACIT, ITA no.402/ Del./2017;”
The learned Departmental Representative relied upon the observations of the DRP and the Transfer Pricing Officer.
We have considered rival submissions and perused materials on record. On a reference to the Annual Report of the company, a copy of which is placed at Page–1190 of the assessee’s paper book, it is noticed that the company itself has stated that it is a KPO company providing data analytics and data solution to some of the largest brand in the world. Though, the Transfer Pricing Officer has made a general observation that the assessee is also involved in high end services, however, he has not specified on what basis he has come to such conclusion. Pertinently, in assessee’s own case for assessment year 2009–10, the Transfer Pricing Officer himself has accepted that E– Clerx Services Ltd. being involved in providing high end KPO services is functionally different from the assessee, hence, cannot be treated as comparable. Since, the learned Departmental Representative was unable to bring to our notice any difference in facts in the impugned assessment year, the conclusion of the Transfer Pricing Officer relating to this comparable in assessment year 2009–10 will equally apply to the impugned assessment year. Moreover, in case of Rampgreen Solutions Pvt. Ltd. v/s CIT, [2015] 377 ITR 533, the Hon'ble Delhi High
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Court has held that E–Clerx Services Ltd. being involved in providing KPO services is not comparable to regular BPO service provider. The Hon'ble Jurisdictional High Court in PCIT v/s PTC Software India Pvt. Ltd., ITA no.598/2016, dated 16th April 2018, have held that E–Clerx Services Ltd. since is providing KPO services is not comparable to BPO service provider. Different Benches of the Tribunal while examining the comparability of this company with a BPO service provider in respect of the very same assessment year have consistently held that the company cannot be treated as comparable as it provides KPO services. In view of the aforesaid, we direct the Assessing Officer to exclude this company.
CROSSDOMAIN SOLUTIONS LTD.
Objecting to the selection of this company, the learned Sr. Counsel for the assessee submitted that as per the information available in the web–site of the company, it is engaged in rendering software development and KPO services relating to software development and maintenance services, software testing services, infrastructure set–up and management, consulting services, architecture, configuration and installation, etc. Thus, it was submitted that the company being functionally different cannot be treated as comparable to the assessee. Further, the learned Sr. Counsel
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submitted that the financials of the company provided by the Transfer Pricing Officer do not contain the director’s report, management discussion and analysis. He submitted, theseinformation are also not available in the public domain. He submitted, in the absence of complete annual report, the assessee cannot verify comparability of this company, hence, it should be rejected. In support of his contention, the learned Sr. Counsel relied upon the following decisions:–
i) PCIT v/s Aptara Technology Pvt. Ltd., ITA no.1209 of 2015, (Bom.); ii) Hyundai Motors India Engineering Pvt. Ltd. v/s ITO, ITA no.1850/ Hyd./2012; iii) Market Tools Research Pvt. Ltd. v/s DCIT, ITA no.1811/Hyd. /2012; iv) Mindcrest India Pvt. Ltd. v/s DCIT, ITA no.7289/Mum./ 2012; v) Symphony Marketing Solutions India Pvt. Ltd. v/s ITO, ITA no.1316/Bang./2012; vi) Aegis Ltd. v/s ACIT, ITA no.1213/Mum./2014; vii) Willis Processing Services India Ltd. v/s DCIT, ITA no.2152/ Mum./2014; viii) Ventura India v/s ACIT, ITA no.1788/Pn./2014;
The learned Departmental Representative relied upon the observations of the DRP and the Transfer Pricing Officer.
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We have considered rival submissions and perused materials on record. A reference to the Profit & Loss account of the company at Page–112 of the paper book along with Schedule–10, reveals that though the company has earned revenue from different activities, however, the segmental details are not available. Further, the information available in the Annual Report as placed at Page–1188 of the paper book reveals that the company is not into normal ITES / BOP services. The Hon'ble Jurisdictional High Court in PCIT v/s Aptara Technology Pvt. Ltd., while considering the acceptability of this company as a comparable in assessment year 2008–09, has held that the company being involved in providing KPO services cannot be considered to be a comparable to BPO service provider. Several decisions of different Benches of the Tribunal, as cited by the learned Counsel for the assessee, have also held this company as not comparable since it is a KPO service provider. Since, these decisions are for the very same assessment year, consistent with the view taken in these decisions, we direct the Assessing Officer to exclude this company.
ALLSEC TECHNOLOGIES LTD.
Objecting to the rejection of this company, the learned Sr. Counsel for the assessee submitted that the only reason for which the Transfer Pricing Officer has rejected this company selected by the
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assessee is that it has closed its business and merged into another company. The learned Sr. Counsel submitted that the aforesaid finding of the Transfer Pricing Officer is factually incorrect since the company has continued its operations even in the subsequent year i.e., financial year 2008–09 relevant to assessment year 2009–10. He submitted,this fact is evident from the Annual Report of the company for the financial year 2008–09. He submitted, the Transfer Pricing Officer himself has accepted this company as a comparable to assessee in assessment year 2009–10. He submitted, though, it is a fact that in the relevant previous year, B2K Corp Ltd. a subsidiary merged with the assessee, however, the scheme of amalgamation has not affected the business operations of the assessee since the said subsidiary was also engaged in the same line of business. He submitted, since the merger of the subsidiary has not impacted the profitability in any manner and both the merged and merging company are functionally similar, the company cannot be rejected. In support of such contention, the learned Sr. Counsel relied upon the following decisions:–
i) Willis Processing Services (I) Pvt. Ltd., ITA no.6877/Mum./ 2012; ii) Evalueserve SEZ (Gurgaon) P. Ltd. v/s ACIT, ITA no.1467/ Del./2017;
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The learned Departmental Representative submitted that this company is simply a call centre, hence, cannot be considered to be a comparable to BPO service provider. Further, he submitted that since in the relevant previous year, there is a merger the company cannot be selected as a comparable.
We have considered rival submissions and perused materials on record. No doubt, this company was selected by the assessee as one of the comparable. However, the Transfer Pricing Officer has rejected this company by stating that it has merged with another entity and closed down its business. The aforesaid factual finding of the Transfer Pricing Officer is grossly erroneous and contrary to facts on record. As could be seen from the annual report of the company for financial year 2008–09, the company has not closed down its business and is still continuing. In fact, the Transfer Pricing Officer himself has considered this company as comparable to assessee in assessment year 2009–10 by accepting assessee’s claim. Therefore, the rejection of the company by the Transfer Pricing Officer is on a totally wrong premise and on factual misconception. Of–course, the DRP while considering the objections raised by the assessee has tried to supplement the reasoning of the Transfer Pricing Officer by stating that in the relevant previous year there is a merger which could have impacted financial result of the company. However,
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except the general observations of the DRP no other factual basis has been provided to indicate impact of the merger on the profitability of the company. Be that as it may, on a perusal of the annual report of the company placed in the paper book it is noticed that though B2K Pvt. Ltd. merged with the assessee during the relevant previous year. From the material on record it is not clear whether the loss incurred was on account of such merger. Thus in absence authentic and reliable data to assess the impact of merger on the profitability of this company, it will not be safe to include this company as a comparable.
ACCENTIA TECHNOLOGIES LTD.
Objecting to the selection of this company, learned Sr. Counsel for the assessee submitted that this company cannot be treated as a comparable since in the relevant previous year, two other companies i.e., Geosoft Technologies (Trivandrum) Ltd. and Iridium Technologies Pvt. Ltd. have merged with this company and thereafter the company had purchased the business of a number of other companies. He submitted that Iridium Technologies Pvt. Ltd. was engaged in software product development for health care industry. He submitted, the merger of this company had an impact on financial results is evident from the fact that revenue of the company has increased substantially during the year. Thus, he submitted, due to the merger there was an
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impact on the profitability of the company. He submitted, though, for the very same reason of merger the Transfer Pricing Officer and DRP have excluded Allsec Technologies Ltd., ignoring the same reasoning Aaccentia technologies ltd. Was selected. He submitted, the Department cannot be allowed to take such inconsistent stand in the matter of selecting / rejecting comparables.
The learned Sr. Counsel for the assessee submitted, if Allsec Technologies Ltd. is rejected on account of merger, this company shouldalso be rejected for the same reason.
The learned Departmental Representative relied upon the observations of the DRP and the TPO.
We have considered rival submissions and perused materials on record. On a perusal of the order passed by the Transfer Pricing Officer, it is noticed that while considering assessee’s objection against selecting this company on account of merger of two entities the Transfer Pricing Officer has rejected such objection and selected the company by stating that the acquired / merged entity are also in the same business and assessee’s operating margin in the earlier year was also high. It is observed that the DRP has also accepted the Transfer Pricing Officer’s view by simply stating that the assessee has not brought on record any fact to indicate that the merger has an impact
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on the financial results of the company. Notably, while rejecting Allsec Technologies Ltd. selected by the assessee, the DRP has observed that the merger of a company in the relevant previous year might have impacted the financial results of the company. The aforesaid finding of the DRP is not on the basis of any material brought on record to indicate that the profitability of the company was impacted by merger of the subsidiary. Thus, it is evident that the Departmental Authorities have adopted inconsistent approach while accepting / rejecting comparables. If a particular comparable selected by assessee cannot be accepted due to merger, for the same reason, the company selected by the Transfer Pricing Officer cannot also be accepted as a comparable. In view of the aforesaid, we direct the Assessing Officer to exclude this company as a comparable.
It is pertinent to mention here, inthe course of haring the learned Sr. Counsel for the assessee had submitted that if Genesys International Corporation Ltd., Nucleus Netsoft and GIS India Ltd. (SEG), E–Clerx Services Ltd., Cross Domain Solutions Ltd., are excluded and Allsec Technologies Ltd. and AaccentiaTechnologies Ltd. are either included or excluded assessee’s margin would fall within +/– 5% of the arithmetic mean of the rest of the comparables selected by the Transfer Pricing Officer. In view of the aforesaid submissions of the learned Sr. Counsel for the assessee, we do not find it necessary to
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venture into the acceptability or otherwise of the following companies:–
i) HCL Comnet Systems and Services Ltd. (Segmental); ii) CG–VAK Software and Exports Ltd. (Segmental); iii) Datamatics Financial Services Ltd.; iv) Wopro Ltd. (Segmental); v) Infosys BPO Ltd.; and vi) ACE Software Exports Ltd.
Comparability issues relating to these comparables are left open for adjudication, if warranted, in any other assessment year. Pertinently, in course of hearing learned senior counsel for the assessee submitted that assessee’s claim of working capital adjustment was not properly considered either by the Transfer Pricing Officer or by the DRP. He submitted, the Transfer Pricing Officer himself has allowed working capital adjustment in Assessment Year 2012–13. In this context he drew our attention to Transfer Pricing Officer’s order for the said assessment year placed at page 1256 of the paper book. Thus, he submitted, Transfer Pricing Officer may be directed to allow working capital adjustment in similar line. Learned Departmental Representative submitted, issue may be restored to Transfer Pricing Officer for considering assessee’s claim. Having considered rival submissions we find that in Assessment Year 2012–13 the Transfer Pricing Officer himself has allowed working capital
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adjustment to the assessee. That being the case, we direct the Assessing Officer/Transfer Pricing Officer to consider assessee’s claim of working capital adjustment while computing the margins of the comparables.
At this juncture, it is necessary to observe, in the course of hearing the learned Departmental Representative had submitted that while examining the suitability and unsuitability of comparables objectivity has to be applied. The learned Departmental Representative submitted that neither the assessee nor the Transfer Pricing Officer can select or reject comparable by adopting a selective approach. He submitted, if by applying certain criteria a company is found to be suitable or unsuitable as a comparable, suchcriteria should be applied to all the companies selected as comparable. He submitted, the assessee cannot be permitted to retain certain companies having low margin even though they are functionally similar to the companies which are sought to be excluded by the assessee. The learned Departmental Representative submitted, in such event the entire issue relating to selection of comparables and determination of arm's length price should be restored back to the Transfer Pricing Officer for conducting a fresh analysis for selecting comparables. In support of such contentions, the learned Departmental Representative relied upon the following decisions:–
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i) All Scripts India Pvt. Ltd. v/s ACIT,, [2013] 37 taxmann.com 19; ii) DCIT v/s Panasonic AVC Networks India Co. Ltd., ITA no.4620/ Del./2011, dated 21.02.2014; iii) ACIT v/s M/s. Gartner India Research and Advisory Services Pvt. Ltd., ITA no.7510/Mum./2010, dated 04.10.2017.
The learned Sr. Counsel for the assessee strongly opposing the aforesaid contentions of the Department submitted that the Transfer Pricing Officer has selected certain comparables which have been challenged by the assessee before the DRP. He submitted, in the impugned assessment year as per the provisions of the Act, the Department had no right of appeal against the order of the DRP. He submitted, only the assessee has right to appeal against the order of the DRP. He submitted, at this stage if the Department is allowed to challenge certain comparable selected by the Transfer Pricing Officer which are not under dispute, it will amount to conferring a right to appeal upon the Department against the order of the DRP, that too, while deciding the appeal filed by the assessee. The learned Sr. Counsel for the assessee submitted, the Transfer Pricing Officer in course of proceedings before him having accepted certain comparables they are not open to challenge by the Revenue. In support of his contention he relied upon the decisions discussed in our finding below.
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We have considered the submissions of the parties. In sum and substance what the learned Departmental Representative wants to do at this stage is to call into question selection of certain comparables by the TPO himself. This, in our view, is impermissible.While dealing with similar argument advanced by the Department in case of ACIT v/s Maersk Global Service Centre (India) Pvt. Ltd., [2011] 133 ITD 543, the Tribuna observed in the following manner:–
“40. Having exhausted the argument that the ld. CIT(A) should have examined the cases cited by the assessee as comparable, the ld. DR then took upon herself the task of distinguishing some of such cases. Referring to the material on record, it was stated that in certain cases, the comparison was not proper. She argued that such cases be excluded from the final list drawn by the ld. CIT(A) for the purposes of determining the ALP. When the learned AR objected to this argument advanced on behalf of the Revenue by stating that the learned Departmental Representative could not improve the order of the TPO, the learned Departmental Representative pressed into service the Special Bench order in the case of Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 307/4 ITR (Trib.) 606 (Chd.) (SB)].
Primarily we need to decide as to whether the learned Departmental Representative, while arguing the appeal, can validly improve the order of the AO/TPO by contending that the assessing authority was wrong in accepting a particular claim of the assessee. In the case of Quark Systems (P.) Ltd.(supra) the assessee by way of additional ground, contended before the Tribunal that a particular case of high profit rate was not comparable with that of the case before the bench on account of positive reasons pointed out and hence the same be excluded. The bench observed in para 30 of the order that due to new implementation of the transfer pricing legislation in India both the tax payers as well as consultants were not fully conversent with this branch of taxation. It was also noted that the case sought to be removed by the assessee had extra ordinary profit and huge turnover besides difference in assets and other characteristics. The bench while holding that the assessee could not be stopped from pointed out that such case was wrongly taken as a
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comparable, remitted the matter to the file of A.O. for de novo examination of the assessee's stand in this regard. Thus it is apparent that the special Bench decision in Quark Systems (P.) Ltd. (supra) restored the matter to the file of the Assessing Officer for fresh examination in the light of the fact that those were the initial years of implementation of transfer pricing provision and the tax payers were not fully conversant with such provisions. This decision is thus not of any help to the Revenue.
We are unable to accept the contention of the ld. DR for excluding certain cases not rejected by the TPO but which in her opinion did not pass the test of comparability. It is evident that Departmental Representative has the duty to defend the order of the Assessing Officer while arguing the appeal filed by the Revenue. He is fully competent and free to support the reasoning of the Assessing Officer from any other angle so as to put forward a strong case of the Revenue. There is a marked distinction between supporting order of the AO/TPO by the Departmental Representative on one hand and finding flaws in the order of the AO/TPO in an attempt to show that the AO/TPO failed to do what was required to be done by him. In our considered opinion if the Departmental Representative is allowed to fill in the gaps left by the AO/TPO it would amount to conferring the jurisdiction of the CIT u/s 263 to the Departmental Representative, which is not permitted by the statute. Let us take another situation. Suppose a particular deduction is permissible on the cumulative satisfaction of three conditions. The AO examines the case and finds the very first condition as lacking. Without examining the fulfillment or otherwise of the other two conditions, he rejects the claim. In that case if such first requirement is subsequently found to be fulfilled in the appellate proceedings, the Departmental Representative can very well point out to the tribunal that the other two conditions were also not fulfilled. By so contending the DR cannot be said to set up a new case. Rather it would amount to supporting the view point of the Assessing Officer on the question of deduction. But in no circumstance the Departmental Representative can be allowed to take a stand contrary to the one taken by the AO/TPO.
The Special Bench of the Tribunal in Mahindra & Mahindra Ltd. v. Dy. CIT [2009] 122 TTJ (Mum.) (SB) 577/ 30 SOT 374 / [2010] 122 ITD 216 (Mum.) has laid down the proposition to the effect that the Departmental Representative has no jurisdiction to go beyond the order passed by the A.O. It has further been observed in this case that the scope of argument of the Departmental Representative should be confined to supporting or
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defending the impugned order and he cannot be permitted to set up an altogether different case.
In the light of the above reasons we are of the considered opinion that the learned Departmental Representative cannot be allowed to argue that certain cases included by the assessee in the list of comparables, were in fact not comparable, when the TPO himself failed to point out as to how such cases were distinguishable. The situation would have been different if the TPO had found a case to be incomparable say on account of functional test. In that case on finding such a case to be functionally similar, the ld. DR could have justifiably shown such case to be distinguishable on some other valid ground. Presently we are dealing with a situation in which the TPO, by not adversely commenting upon the assessee's comparables, impliedly accepted such cases as comparable. Now it is too late in the day for the ld. DR to argue that such cases were not comparable. If the argument on the behalf of the Revenue in this regard is allowed to be made, it will amount to permitting the ld. DR to argue contrary to what has been done by the TPO. Obviously it is not permissible within the framework of the statutory provisions. We, therefore, refuse to permit the ld. DR to argue contrary to what TPO has done.”
While deciding Revenue’s appeal against the aforesaid decision of the Tribunal, the Hon'ble Jurisdictional High Court in ITA no.692 and 693 of 2012, dated 22nd August 2014, observed as under:–
“7. We do not find that the Tribunal has either taken the revenue by surprise or in fact treated the revenue unfairly, leave alone unjustly. It has not allowed the revenue’s representative to travel beyond the order of the Transfer Pricing Officer and the Assessing Officer so as to make out some different case. That was fully justified in the given facts and circumstances. The Tribunal was also not obliged in the peculiar facts of this case to send the matter back to anybody else much less the Transfer Pricing Officer. That is why it considered on its own the correctness of the finding of the learned Commissioner of Income Tax (Appeals). In other words, the findings of the first appellate authority were under challenge and they were being scrutinized by the Tribunal, then it was open for the Tribunal to consider the complaint of the revenue with regard to its findings. The Tribunal performed its
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duty in law when it proceeded to find out whether the learned Commissioner of Income Tax (Appeals) (the First appellate authority) order was perverse or vitiated by any error of law apparent on the face of record. It also considered the complaint as to whether the Commissioner exercised his discretion of his powers as the first appellate authority arbitrarily and capriciously. Having found no basis in all these complaints and dismissing the appeals of the revenue, the Tribunal did not commit any error. To our mind, the order of the Tribunal is not vitiated by any serious legal infirmity nor is it perverse, rather it is unfortunate that a detailed and properly reasoned order of the first appellate authority and the second appellate authority is being challenged and that too on such grounds by the revenue. We would highly appreciate the parties not discrediting the Tribunal or the first appellate authority in this manner. The complaints about unfair treatment or breach of principles of natural justice ought to be backed and supported by some material which would demonstrate serious prejudice and loss. A technical objection of nature will not carry the case of either parties any further. It would mean that a speaking order of the record is disputed or challenged by oral complaints across the bar before this Court. Nothing is going to be achieved by such an approach and in the least by the revenue. In these circumstances and finding that the present appeals are brought by the Revenue on frivolous complaint of breach of principles of natural justice, we are constrained to dismiss them with costs. That is because we are also wasting precious judicial time by hearing such appeals and perusing the record.”
Thus, keeping in view the ratio laid down in the aforesaid decisions, the contention of the learned Departmental Representative for rejecting / excluding the comparables selected by the Transfer Pricing Officer and not disputed by the assessee in the present appeal, and further, restoring the entire issue of selection of comparable for fresh analysis by the Transfer Pricing Officer, in our considered opinion, is unacceptable, hence, we decline to do so. As regards the decisions relied upon by the learned Departmental Representative, on careful perusal of the said decision, we find that in case of All Scripts
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India Pvt. Ltd. (supra), on the concession of the assessee, the Tribunal restored the issue to the Assessing Officer for selection of comparable afresh. Similarly, in case of Panasonic AVC Networks India Co. Ltd. (supra) and M/s. Gartner India Research and Advisory Services Pvt. Ltd. (supra), restoration of the issues to the Assessing Officer / Transfer Pricing Officer was directed by the Tribunal while deciding the appeals filed by the Revenue. That being the case, the decisions relied upon by the learned Departmental Representative are factually distinguishable, hence, would not apply to the assessee’s case. In view of the aforesaid, we decline to entertain the Department’s plea to restore the issue to the Assessing Officer / Transfer Pricing Officer to undertake the process of selecting comparables afresh.
The next transfer pricing adjustment issue arising for consideration relates to the addition of an amount of ` 1,83,27,826 on account of short fall in price charged to the A.E. towards services rendered under the Intellectual Property Services Agreement (IPSA).
Brief facts are, apart from the services rendered by the assessee in the nature of software services and ITES under the Delivery Centre Agreement (DCA),the assessee had entered into a separate agreement with the A.E. viz. IPSA for providing certain other services. While bench marking the arm's length price under the IPSA, the assessee
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treated an amount of ` 90,41,87,522, received from A.E. as ITES and accordingly bench marked it by aggregating with the revenue received from ITES rendered under the DCA.However, an amount of `8,47,34,817, received from the A.E. towards services rendered under the IPSA was segregated by the assessee and a separate bench marking was conducted in the transfer pricing study since the assessee was of the view that the services rendered in respect of such revenue earned from the A.E. is neither in the nature of software services nor ITES. Proceeding on the aforesaid basis, the assessee set out to bench mark the transaction by adopting TNMM as the most appropriate method with operating profit to operating cost as the Profit Level Indicator (PLI). Undertaking a search in the databases assessee selected 28 companies as comparable with average arithmetic mean of 12.31%. Since, the margin shown by the assessee was within ±5% of the average arithmetic mean of the comparables, the price charged to the A.E. was claimed to be at arm’s length. The Transfer Pricing Officer, however, did not accept the claim of the assessee. He was of the view that the services provided by the assessee under the IPSA is in the nature of ITES, hence, has to be benchmarked accordingly. He, therefore, called upon the assessee to show cause why the amount received under the IPSA agreement should not be treated as ITES. Though, the assessee objected to the bench marking proposed by the
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Transfer Pricing Officer, however, Transfer Pricing Officer referring to CBDT notification no.SO–890(E) dated 26th September 2010 held that the services rendered by the assessee under the IPSA is in the nature of ITES. Accordingly, the Assessing Officer applying the arithmetic mean of the comparable selected under the ITES segment at 31.36% worked out the arm's length price of the transaction under the IPSA at ` 10,30,62,643, as against the price charged by the assessee at ` 8,47,34,817. The resultant shortfall of ` 1,83,27,826, was treated as the adjustment made to the arm's length price.
Being aggrieved of such adjustment, the assessee raised objections before the DRP. However, the DRP concurred with the view of the Transfer Pricing Officer.
The learned Sr. Counsel for the assessee submitted, since, a part of the services rendered under the IPSA was neither in the nature of software development or ITES the assessee benchmarked it separately. He submitted, for that reason also the assessee did not claim deduction under section 10A of the Act in respect of the revenue earned from that part of services rendered to the A.E. In this context, the learned Sr. Counsel drew our attention to the benchmarking of the transaction in the transfer pricing study placed in the paper book. Further, drawing our attention to the details of services rendered
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under the IPSA the learned Sr. Counsel submitted, image development – web development is not in the nature of ITES. The learned Sr. Counsel, though, accepted that in the preceding assessment year assessee has not objected to identical benchmarking by the Transfer Pricing Officer, however, he submitted, that by itself will not prevent the assessee from objecting to similar benchmarking made by the Transfer Pricing Officer in the impugned assessment year. Without prejudice to the aforesaid submission, the learned Sr. Counsel submitted, in case this particular transaction is classified as ITES, it should be aggregated with the entire ITES segment for benchmarking purpose and cannot be benchmarked separately as has been done by the Transfer Pricing Officer. The learned Sr. Counsel submitted, in that event, the margin of comparables pertaining to ITES segment should also apply to this transaction for determining the arm's length price.
The learned Departmental Representative relying upon the observations of the Transfer Pricing Officer submitted, after a thorough analysis the Transfer Pricing Officer has come to a valid conclusion that the services rendered under the IPSA is in the nature of ITES. As regards assessee’s contention to aggregate this transaction with the entire transaction under the ITES segment and apply the margin of the comparable selected under ITES segment, the learned Departmental
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Representative submitted that assessee’s claim can be verified by the Transfer Pricing Officer.
We have considered rival submissions and perused materials on record. Undisputedly, the assessee has rendered services to its overseas A.E. under two different agreement viz. DCA and IPSA. While the services rendered under the DCA have been treated to be in the nature of software development and ITES, services rendered under the IPSA has been segregated by the assessee into two categories. As could be seen from the submissions made by the assessee before the Transfer Pricing Officer, the assessee itself admitted that an amount of ` 90,41,87,522, received under the IPSA is in the nature of ITES and can be treated at par with ITES rendered under the DCA and can also be benchmarked considering same comparables. However, an amount of ` 8,47,34,817, received towards services rendered under the IPSA was treated by the assessee not to be in the nature of either software services or ITES. It is the contention of the learned Sr. Counsel before us that image development - web development is not in the nature of ITES and is altogether a separate class of service, hence, cannot be classified as ITES. After carefully considering the submissions made from both sides in the light of facts and materials on record, we are not convinced with the claim of the assessee. As could be seen from CBDT notification no.S0–890E, dated 26th September 2010, it was
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specifically issued for the purpose of section 10A of the Act. On a perusal of the said notification, it is clear that content development or animation and website services are coming within the ambit of I.T. enabled products or services. Thus, keeping in view the aforesaid fact, it has to be concluded that the services rendered under IPSA are to be treated as ITES. As could be seen from the order of the Transfer Pricing Officer,though, he has treated the revenue earned of ` 8.47 crore as ITES, however, he has benchmarked it separately without aggregating it with all services rendered ITES segment. The DRP has also failed to rectify the error committed by the Transfer Pricing Officer by benchmarking it separately. Since, the Transfer Pricing Officer has not benchmarked this particular transaction by aggregating it with other ITES, we are inclined to restore the issue to the Assessing Officer for undertaking the necessary exercise of benchmarking the transaction by aggregating with other ITES and determine the arm's length price by applying the average margin of the comparables selected under the ITES segment, subject to our direction contained in this order with regard to the comparables under ITES segment.
In ground no.15, the assessee has challenged the mode of computation of deduction under section 10A and section 10AA of the Act after reducing / setting–off of losses in some other STP / SEZ unit.
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Brief facts are, the assessee has eight Special Economic Zone (SEZ) units functioning at Mumbai, Hyderabad, Bangalore, Chennai, Pune, Haryana and Chennai SEZ. In the return of income filed, the assessee claimed deduction under section 10A of the Act in respect of three SEZ units independently which have made profit during the year. The Assessing Officer while examining assessee’s claim of deduction under section 10A of the Act, was of the view that assessee’s claim of deduction under section 10A, unit–wise, is not allowable, since, such deduction has to be allowed from the total income of the assessee. Referring to his decision in assessee’s own case for the preceding assessment year, the Assessing Officer observed, after section 10A of the Act was made a deduction provision by virtue of amendment brought into the statute w.e.f. 1st April 2001, the deduction has to be allowed after computation of total income. Thus, the Assessing Officer held that the profit of all eligible units has to be computed first and, thereafter, reducing the loss therefrom the deduction under section 10A of the Act has to be allowed. Accordingly, he restricted assessee’s claim of deduction under section 10A of the Act to ` 568,09,89,967. Being aggrieved of the part disallowance of deduction claimed under section 10A of the Act, the assessee raised objection before the DRP.
The DRP, however, agreed with the computation of the Assessing Officer.
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The learned Sr. Counsel for the assessee submitted that deduction under section 10A of the Act has to be allowed unit–wise from the gross total income and thereafter loss has to be set off. In this context he relied upon the decision of the Hon'ble Supreme Court in CIT v/s Yokogawa India Ltd., [2017] 391 ITR 274 (SC).
The learned Departmental Representative relied upon the observations of the DRP and the Assessing Officer.
We have considered rival submissions and perused materials on record. The dispute between the assessee and the Department is limited to the issue as to whether deduction under section 10A of the Act has to be allowed from the gross total income before setting offof loss or deduction under section 10A of the Act is to be allowed from the total income after reduction of loss. The Assessing Officer has allowed deduction under section 10A of the Act after setting–off of loss on the reasoning that as per the amended provisions of section 10A of the Act deduction has to be computed on the total income. However, in our considered view, the issue now stands settled by the decision of the Hon'ble Supreme Court in Yokogawa India Ltd. (SC) wherein, the Hon'ble Supreme Court has held that even after amendment made to section 10A of the Act by making it a deduction provision instead of exemption provision, there is no material change in the nature of
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deduction claimed by the assessee which has to be allowed from the gross total income before set–off of loss. Therefore, in view of the ratio laid down by the Hon'ble Supreme Court as discussed above, assessee’s claim of deduction under section 10A of the Act unit–wise is allowable. The Assessing Officer is directed to compute the deduction accordingly.
In ground no.16, the assessee has challenged disallowance of deduction under section 10A of the Act in respect of income / profit derived under the intellectual property services agreement. During the assessment proceedings, the Assessing Officer noticed that in the relevant previous year the assessee claimed to have received an amount of ` 90,41,87,522, under the IPSA agreement which is claimed to be in the nature of ITES. Further, he found that the margin earned by the assessee at 15% of the aforesaid amount received the assessee was claimed as deduction under section 10A of the Act. The Assessing Officer referring to the assessment order passed for the preceding assessment year held that the income derived under the IPSA agreement is not in the nature of ITES, hence, assessee is not eligible for deduction 10A of the Act in such income. Accordingly, he disallowed assessee’s claim of deduction under section 10A of the Act with regard to the profit derived from the said activity. Though, the
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assessee objected to this decision of the Assessing Officer before the DRP, however, the DRP also rejected assessee’s claim.
The learned Counsel for the assessee drawing our attention to the order passed by the Transfer Pricing Officer submitted that after examining the nature of service rendered by the assessee under the IPSA agreement, the Transfer Pricing Officer has categorically held that the services rendered by the assessee are in the nature of ITES, hence, he has benchmarked it by aggregating with other ITES income received by the assessee. The learned Sr. Counsel submitted that the CBDT notification dated 26th September 2000, which is also issued for the purpose of section 10A and section 10B of the Act has clarified that content development, web–site services etc. are also included within information technology enabled product or services. That being the case, the income derived by the assessee from such services is eligible for deduction under section 10A of the Act. The learned Sr. Counsel submitted, the Department cannot be permitted to take contrary stand in respect of same nature of income.
The learned Departmental Representative relying upon the observations of the Assessing Officer submitted that the Transfer Pricing Officer has considered the services rendered under the IPSA as akin to ITES for benchmarking purposes. Therefore, it cannot be said
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that the Transfer Pricing Officer has determined the nature of services rendered as ITES. He submitted, the Assessing Officer while verifying assessee’s claim under section 10A of the Act has to independently examine whether conditions of section 10A of the Act are fulfilled or not. Thus, he submitted, assessee’s claim of deduction under section 10A of the Act in respect of income received from IPSA agreement was rightly disallowed by the Departmental Authorities.
We have considered rival submissions and perused materials on record. As could be seen from the facts on record, as per the terms of the IPSA agreement the assessee was required to provide certain services including content development and image development and web development. The Transfer Pricing Officer while examining the nature of services rendered under the IPSA agreement has classified it to be in the nature of ITES. While doing so, he has also referred to CBDT notification no.SO–890(E), dated 26th September 2010. A careful reading of the observations of the Transfer Pricing Officer in Para–15.2 of his order would clearly establish that by referring to the CBDT notification under consideration he has concluded that the income from IPSA agreement either has to be classified under software development or ITES. On further analysis, he has finally concluded that the services rendered are more akin to ITES. Accordingly, the Transfer Pricing Officer has proceeded to benchmark the revenue
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received from IPSA agreement as ITES. Thus, the contention of the Department that the Transfer Pricing Officer has not recorded any conclusive finding with regard to the nature of income from IPSA agreement is contrary to facts on record. In any case of the matter, when the Transfer Pricing Officer has classified the income received under IPSA agreement to be of the nature of ITES and has also benchmarked it as such, the Assessing Officer cannot take a contrary view by stating that it is not in the nature of ITES only for disallowing assessee’s claim of deduction under section 10A of the Act. The Department cannot be permitted to take contrary view with regard to the nature of a particular item of income for its own advantage. Once, the income under the IPSA has been classified to be in the nature of ITES, assessee’s claim of deduction under section 10A of the Act have to be allowed. In view of the above, we direct the Assessing Officer to allow assessees claim of deduction under section 10A of the Act ín respect of income earned from IPSA. However, we make it clear such deduction has to be computed on the amount of ` 90,41,87,522 as claimed in the return of income and as per grounds raised before us.
In ground no.17, assessee has challenged disallowance of ` 4,05,40,683 under section 40(a)(ia) of the Act.
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Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has not deducted tax at source on an amount of ` 4,05,40,683 called upon the assessee to explain why it should not be disallowed under section 40(a)(ia) of the Act. In response, it was submitted that the amount represents the liability which was estimated on an ad–hoc basis. It was submitted, since the amount payable to each party is not determinable at the time of making provision in the books, no credit to the party account has been made in the books. It was submitted, the said provision for expenditure was made based on estimation with reasonable certainty, though, the exact quantification was possible only on receipt of the details / invoices from the payee. It was submitted, the payees are also following mercantile system of accounting under which liability already accrued, though, to be discharged at a future date is a proper charge while working out profit of its business. As regards non– deduction of tax at source, the assessee submitted that obligation to withhold tax arises on the amount payable to an identified payee. It was submitted,unless the payee is identified, the assessee cannot withhold tax. The Assessing Officer, however, was not convinced with the explanation of the assessee and proceeded to disallow the amount of ` 4,05,40,653 under section 40(a)(ia) of the Act. Against such
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disallowance made in the draft assessment order, the assessee raised objections before the DRP.
Before DRP, apart from reiterating the stand taken before the Assessing Officer, the assessee submitted that in the event the amount is disallowed under section 40(a)(ia) of the Act, the business profit will increase to that extent. Hence, assessee should be allowed deduction under section 10A of the Act on such enhanced profit. The DRP after considering the submissions of the assessee did not find any merit in them. The DRP observed, once the liability is not ascertained and merely is a provision, it cannot be allowed as deduction under section 37(1) of the Act. Further, the DRP held that once the assessee debits some expenditure to the Profit & Loss account it is liable to withhold tax on such payment if it comes within the purview of TDS provision. Thus, the DRP held that disallowance made under section 40(a)(ia) of the Act by the Assessing Officer was proper.
The learned Sr. Counsel for the assessee drawing our attention to the tax audit report submitted in the paper book contended that the auditor has certified that except the amount of ` 4,05,40,683, the other inadmissible expenditure has been disallowed under section 40(a)(ia) of the Act. Further, explaining the reason for not deducting tax on the aforesaid amount, it was submitted that liability to deduct
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tax at source would not arise as the names of the parties are not ascertainable. Without prejudice to the aforesaid submissions, the learned Sr. Counsel submitted, in case the amount is disallowed under section 40(a)(ia) of the Act, 10A deduction to that extent has to be allowed as it enhances the business profit of the assessee. In this context, he referred to the certificate dated 30th November 2011, issued by the Chartered Accountant certifying the exact amount of the expenditure relating to STPI / SEZ units a copy of which is at Page– 1489 of the paper book. Further, the learned Sr. Counsel submitted, the assessee has reversed this amount in its books in the subsequent assessment year, therefore, it is revenue neutral. In this context, he referred to the certificate dated 20th April 2018, issued by the Chartered Accountant. Thus, he submitted, no disallowance under section 40(a)(ia) should be made.
The learned Departmental Representative strongly relying upon the observations of the Assessing Officer and the DRP submitted that once the expenditure debited is in the nature of a provision it cannot be allowed under section 37(1) of the Act. Further, he submitted that if the assessee claims the amount to be an ascertained liability and debits it to the Profit & Loss account, the assessee was duty bound to deduct tax at source. The assessee having failed to do so, disallowance under section 40(a)(ia) of the Act was proper.
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We have considered rival submissions and perused materials on record. Though, the Assessing Officer has disallowed the deduction claimed of ` 4,05,40,683 under section 40(a)(ia) of the Act, however, the DRP while agreeing to the view of the Assessing Officer has also held that the deduction claimed being in the nature of unascertained liability is not allowable as deduction. From the submissions made by the assessee before the Assessing Officer, prima–facie, it appears that the assessee itself has admitted that the amount debited to the Profit & Loss account was quantified on the basis of a reasonable estimation pending exact quantification on receipt of details / invoices from the payee. At the same time, when it comes to the issue of withholding tax the assessee has claimed that the payee is not identified. In our considered opinion, the assessee cannot be permitted to take such contradictory stand on the issue of deduction. If the deduction claimed is a provision, it needs to be examined whether it has crystallized during the year.Then only, it can be allowed as deduction under section 37(1) of the Act. Further, the onus is on the assessee to demonstrate that the payee is not identifiable when the payment was debited to the books of account. Thus, these facts require to be verified by the Assessing Officer. Moreover, it is evident, during the proceeding before the DRP the assessee has contended that out of the amount of ` 4,05,40,683, claimed as deduction, an amount of `
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3,05,66,130 pertains to STPI / SEZ unit eligible for deduction under section 10A of the Act. It is the contention of the assessee that once such amount is disallowed under section 40(a)(ia) of the Act, the profit of the eligible unit is enhanced to that extent, hence, is entitled to deduction under section 10A of the Act. Though, we find substantial force in the aforesaid contention of the assessee, however, it is observed that the DRP has not at all considered the aforesaid claim in proper perspective. In our considered opinion, if the expenditure claimed by the assessee pertains to STPI / SEZ unit, on disallowance of such deduction the profit of STPI / SEZ unit will get enhanced, hence, the assessee will be eligible to avail deduction under section 10A of the Act to that extent. We direct the Assessing Officer to examine the aforesaid claim of the assessee having regard to the facts and material brought on record and allow the same after factual verification. Further, the assessee has submitted that the provision made of ` 4,05,45,683, has been reversed on 1st April 2008, in the books of account of the assessee. In this context, a certificate dated 20th April 2018, issued by the Chartered Accountant was submitted before us. Obviously, this is a fresh claim made by the assessee before us. Therefore, in all fairness, this claim of the assessee is also required to be examined by the Assessing Officer. Thus, on overall consideration of facts and material on record, we are inclined to
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restore this issue to the file of the Assessing Officer for fresh adjudication keeping in view our observations herein above and only after due opportunity of being heard to the assessee. In view of our decision in ground no.17, there is no need to adjudicate ground no.18 separately.
Grounds no.19 and 20 are not pressed, hence, dismissed.
Grounds no.21 and 22 being consequential in nature do not require adjudication.
In addition to the aforesaid grounds, the assessee has raised two more additional ground numbered as grounds no.23 and 24, which are reproduced below:–
“23. Without prejudice to Ground No 16, the learned AO/ Hon'ble DRP erred in law and in fact in computing disallowance of deduction claimed under Section 1 OA of the Act on the profits earned from IPSA revenues pertaining to the STPI and SEZ units for which no deduction under section 10A has been claimed by the Appellant on account of losses in such units. 24. Without prejudice to Ground No 16, the learned AO/ Hon'ble DRP erred in law and in fact in computing profits to be disallowed as deduction under Section 1OA of the Act at 15% of the IPSA revenues (i.e. cost + mark-up) instead of 15% of cost.”
Since, the additional grounds can be decided on the basis of facts and material already available on record, we admit these additional grounds for adjudication.However, in view of our decision in respect of
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ground no.16 herein above, these grounds are restored to the Assessing Officer for fresh adjudication, if warranted, after due opportunity of being heard to the assessee.
In the result, assessee’s appeal is partly allowed. Order pronounced in the open Court on 20.07.2018
Sd/- Sd/- RAJESH KUMAR SAKTIJIT DEY ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 20.07.2018
Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary
(Sr. Private Secretary) ITAT, Mumbai