NOKIA INDIA PVT. LTD.,GURGAON vs. JCIT, SPECIAL RANGE-6, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I’: NEW DELHI

BEFORE, SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER AND SHRI YOGESH KUMAR U.S., JUDICIAL MEMBER

ITA No.7745/Del/2018 (ASSESSMENT YEAR 2014-15)

Nokia India Private Limited Jt. CIT 18th Floor, Executive Centre, Special Range-6 DLF Vs. New Delhi Cyber City Phase III Building No.5, Tower A Gurgaon-122002 PAN:AAACN 2170R (Appellant) (Respondent)

Assessee by Shri Ankul Goyal and Priyam Bhatnagar, Adv. Respondent by Shri Rajesh Kumar, CIT-DR

Date of Hearing 20/06/2024 Date of Pronouncement 30/08/2024

O R D E R PER S.RIFAUR RAHMAN, AM:

“1. General Grounds of Appeal 1.1. That, the final assessment order framed by the learned Joint Commissioner of Income-tax, Special Range -1, Delhi (hereinafter referred to as "the Ld. AO") pursuant to the directions of the Hon'ble

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Dispute Resolution Panel-1 (hereinafter referred to as "the Hon'ble DRP") under section 143(3) read with section 144C of the Income-tax Act, 1961 ("the Act"), is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab-initio.

1.2 That, in framing the impugned assessment order, the reference made by the Ld. AO under section 92CA(1) of the Act suffers from jurisdictional error, as the Ld. AO had not recorded any reasons nor he had any material whatsoever on the basis of which he could even reach a prima- facie opinion, that it was 'necessary or expedient' to refer the matter to the learned Additional Commissioner of Income Tax, Transfer Pricing Officer - 2(3), New Delhi (hereinafter referred to as "Ld. TPO") for computation of arm's length price ("ALP").

1.3. That on facts and in law, Ld. TPO has erred, by not discharging the statutory onus to establish that the conditions specified in clause (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the ALP determined by the Appellant and proceeded to determine the ALP himself.

1.4. That on the facts of the case and in law, the Ld. AO, has erred in determining the taxable income of the Appellant for the subject assessment year at INR 4,52,34,12,750 as against the taxable income of INR 1,31,81,12,747/-.

a. That on the facts of the case and in law, the Ld. AO has erred in proposing several additions based on mere conjunctures and surmises, ignoring the factual matrix of the Appellant as well as the nature of the transactions undertaken by the Appellant.

b. That the Ld. AO failed to appreciate the submissions made/ contentions raised by the Appellant and further erred in making several observations and inferences in the impugned assessment order which are factually incorrect and legally untenable. Transfer Pricing ("TP") adjustment in relation to international transactions pertaining to sale of mobile phones and accessories ("NMP segment").

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2.1. That on the facts of the case and in law, the Ld. AO/ Ld. TPO") /Hon'ble DRP has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, and conducting alternate comparability analysts for the determination of the ALP of the Appellant’s international transactions pertaining to the NMP segment and holding that the Appellant’s international transactions are not at arm’s length.

2.2 That on the facts of the case and in law, the AO/Ld. TPO/ Hon’ble DRP has erred in rejecting the Appellant’s claim to use multiple year data for computing the arm’s length price and, instead, has adhered to the use of single year updated data to conclude the ALP of the international transactions which was not available with the Appellant at the time of undertaking transfer pricing study required to be maintained under Section 92D of the Act.

2.3 That on the facts of the case and in law, the Ld AO/Ld. TPO/Hon'ble DRP has erred by treating foreign exchange gain and miscellaneous income as non-operating item while computing adjustment for international transactions pertaining to NMP segment.

2.3.1. That on the facts of the case and in law, the Ld. AO/Ld TPO/ Hon'ble DRP grossly erred in law in relying on the provisions of the Section 92CB of the Act read with Rule 10TA of the Rules for excluding foreign exchange gain from the computation of operating revenue;

2.3.2. That on facts of the case and in law, the Ld. AO/Ld. TPO/ Hon'ble DRP completely failed to apply their minds while relying on Safe Harbor Rules ('SHR') since the SHR are applicable to 'eligible assessee' as defined in Rule 10TB of the Rules in relation to 'eligible international transactions' as defined in Rule 10TC and the Appellant, as part of NMP segment, did not qualify as an eligible assessee' and the international transactions pertaining to the NMP segment did not qualify as 'eligible international transactions';

2.3.3 That on facts of the case and in law, the Ld. AO/ Ld. TPO/ Hon'ble DRP completely failed to appreciate that SHR are applicable only if an eligible assessee exercises the option to be governed by such provisions for determination of arm's length price of its eligible international transactions and in absence of such option being exercised by the Appellant, the provisions of SHR will have no effect on determination of arm's length price of the international transactions undertaken by the Appellant;

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2.3.4. That on facts of the case and in law, the Ld. AO/ Ld. TPO/ Hon'ble DRP relied on extraneous considerations for reducing the operating revenue of the Appellant in relation to NMP segment by the amount of foreign exchange gain which were inextricably linked to the international transactions and the manufacturing activity being undertaken by the Appellant and as such should form part of operating revenue,

2.3.5 That on facts of the case and in law, the Ld. AO/ Ld. TPO/ Hon'ble DRP relied on frivolous grounds, presumptions and assumptions and feeble arguments of improving comparability: 2.3.6.That on facts of the case and in law, the Ld. AO/Ld. TPO/ Hon'ble DRP completely failed to apply the correct position of law and relied on extraneous considerations and in the guise of comparability adjustments, completely failed to apply the principles enunciated in Rule 10B (3) of the Rules;

2.3.6 That on facts of the case and in law, the Ld. AO/Ld. TPO/ Hon'ble DRP completely failed to apply the correct position of law and relied on extraneous considerations and in the guise of comparability adjustments, completely failed to apply the principles enunciated in Rule 10B(3) of the Rules.

2.3.7 That on the facts of the case in law, the Ld. AO/Ld. TPO/Hon’ble DRP have grossly erred in treating foreign exchange gain as non-operating in nature, in complete disregard to the well accepted doctrine of stare decisis by disregarding the binding judicial precedent.

2.4. That on the facts of the case and in law, the Ld. AO/ Ld. TPO/ Hon'ble DRP has erred in selection of functionally non-comparable companies and rejection of comparable companies, for the purpose of determination of ALP of the international transactions pertaining to the NMP segment of the Appellant on an adhoc basis, without resorting to any reasonable search methodology, thereby resorting to cheery picking of comparable companies.

2.4.1. The Ld. AO/ Ld. TPO, in particular, erred in rejecting Zenith Computers Limited as comparable to the NMP segment on the ground that the said company has incurred persistent losses without appreciating the fact that the said company had operating profits in one out of three financial years.

2.4.2. The Ld. AO/ Ld. TPO, in particular, erred in selecting Whirlpool of India Limited and Penguin Electronics Limited as comparable companies without appreciating that such companies are not functionally comparable to the NMP segment of the Appellant.

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2.5 That on the fact of the case and in law, the Ld. TPO/Ld. AO/ Hon'ble DRP has erred in not allowing a risk adjustment to the Appellant on account of the fact that the Appellant is a limited risk bearing contract manufacturer for its AE and does not undertake market risk, product liability risk, credit and collection risk, inventory and capacity utilization risk as against comparable companies that are the full-fledged risk bearing entrepreneurs. TP adjustment in relation to international transactions pertaining to provision of Contract Software Development ("CSD") services.

3.1. That on the fact of the case and in law, Ld. AO/ Ld. TPO / Hon'ble DRP has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, and conducting alternate comparability analysis for the determination of the ALP of the Appellant's international transaction pertaining to provision of CSD services and holding that the Appellant's international transactions are not at arm's length.

3.2 That on the facts of the case and in law, Ld. AO/Ld. TPO/Hon'ble DRP have erred by selecting companies which are earning supernormal profits as compared to the Appellant.

3.3 That on the facts of the case and in law, Ld. AO/ Ld. TPO/Hon'ble DRP has erred in rejecting the Appellant's claim to use multiple year data for computing the arm's length price and, instead, has adhered to the use of single year updated data to conclude the ALP of the international transaction which were not available with the Appellant at the time of undertaking transfer pricing study required to be maintained under Section 92D of the Act.

3.4. That on fact of the case and in law, Ld. AO/Ld. TPO/ Hon'ble DRP has erred in application of inappropriate filters based on different financial year end, export service income and employee cost for identifying companies comparable to the Appellant.

3.5. That on the facts of the case and in law, the Ld. AO/ Ld. TPO/ Hon'ble DRP has erred in selection of functionally non-comparable companies and rejection of comparable companies, for the purpose of determination of ALP of the international transaction pertaining to

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provision of CSD services on an adhoc basis, without resorting to any reasonable search methodology. thereby resorting to cherry picking of comparable companies. 3.5.1. The Ld. AO/Ld. TPO, in particular, erred in selecting Infobeans Technologies Limited, Persistent Systems Limited, Larsen and Toubro Infotech Limited. Mindtree Limited, Tata Elxsi Ltd and e- Zest Solutions Limited without appreciating that these companies are not functionally comparable to the Appellant in relation to the international transaction pertaining to provision of CSD services. 3.5.2. The Ld. AO/ Ld. TPO, in particular, erred in rejecting Lucid Software Limited and Cat Technologies Limited as comparable to the Appellant in relation to the international transaction pertaining to provision of CSD services on the ground that the said companies have incurred persistent losses without appreciating that the companies were functionally comparable to the CSD segment of the Appellant and that the said companies had operating profits in one out of three financial years.

3.6 That on the fact of the case and in law, the Ld. TPO/Ld. AO/ Hon'ble DRP has erred in not allowing a risk adjustment to the Appellant on account of the fact that the Appellant is a captive service provider for its associated enterprises and is remunerated on a cost-plus basis irrespective of the outcome of the services provided and hence undertakes no market risk, service liability risk, credit and collection risk as against comparable companies that are the full- fledged risk bearing entrepreneurs.

Levy of interest under section 234A and 234B of the Act.

The above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.

The Appellant prays that appropriate relief be granted based on the above grounds of appeal and the facts and circumstances of the case.”

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“5. That on the facts and circumstances of the case and in law, the Learned Assessing Officer (learned AO') has erred in not determining and granting refund on account of excess dividend distribution tax paid by the Appellant for the subject AY.

5.1 That the learned AO erred in not invoking the provisions of India-Finland Double Taxation Avoidance Agreement ('DTAA') to determine the rate of tax on payment of dividend to the Appellant's shareholder.

5.2 That the learned AO erred in not determining the Dividend Distribution Tax as per the tax rate provided under Article 10 of India Finland DTAA and thereby not granting refund of the excess Dividend Distribution Tax taxes paid by the Appellant as the recipient shareholder was a non-resident governed by the provisions of the said DTAA.

5.3 That the learned AO failed to appreciate that the dividend income, being taxable in the hands of non-resident shareholder, cannot be subjected to a tax rate in excess of the rate prescribed under the India-Finland DTAA in light of the provisions of Section 90(2) r.w. Section 10(34) and hence, erred in subjecting the Appellant to excessive income tax in terms of section 115-0 of the Act.

The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.

The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the Appellant's case.”

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7.2 Invocation of Safe Harbour Rules as envisaged under part DB of the IT Rules

In this context, the attention of the Hon'ble Tribunal is invited to the decision of the co-ordinate bench in the case of Delval Flow Controls (P.) Ltd. v. DCIT, [2021] 128 taxmann.com 260 (Pune Tribunal) (rel. para. 11- 13), wherein the Hon'ble Tribunal in unequivocal terms has held that 'Safe Harbour Rules are optional in nature and the same could be triggered only when such option has been exercised by the Assessee, otherwise, the

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application of such provisions would be ousted. Admittedly, in the present case, the Appellant has not exercised such option and thus, the treatment of gain on foreign exchange fluctuation as non-operating item by the DRP as well as TPO while relying on such Safe Harbour Rules' has no legs to stand on in the eyes of law. Hence, on this count alone, the actions of the DRP and AO deserves to quashed being devoid of any merit.

7.3. The Appellant does not assume or control the foreign exchange risk which is borne by the AE. At the very outset, it is respectfully submitted that the DRP as well as AO failed to appreciate that in terms of the law as laid down by the jurisdictional High Court of Delhi and coordinate benches of the Tribunal, the treatment of foreign exchange fluctuation gain/loss is totally dependent on the fact that whether the same forms an integral part or directly results from the trading activity of the Assessee. However, the DRP and AO in their zeal to make an adjustment thoroughly lost their way by over-emphasizing on the fact that foreign exchange fluctuation risk was borne by the AE of the Appellant. 7.4. In this context, the attention of the Hon'ble Tribunal is drawn to the decision of the Hon'ble High Court of Delhi rendered in the case of Ameriprise India (P.) Ltd. v. ACIT, [2017] 78 taxmann.com 373 (Delhi High Court), wherein the High Court whilst affirming the reasoning of the ITAT categorically held that since the foreign exchange fluctuation loss suffered by the Assessee directly resulted from the trading activity, the same ought to be considered as operating item as opposed to non-operating item. Reliance in this regard is also placed on PCIT v. B.C. Management Services (P.) Ltd., (2018) 403 ITR 45 (Delhi High Court); PCIT v. Rolls Royce India Pvt. Ltd., [Order dated 23.10.2017 in ITA 419/2016 & 747/2016] (Delhi High Court). 7.5. Further, the coordinate bench of the Tribunal in the case of Convergys India Services (P.) Ltd. v. ACIT. [2022] 134 taxmann.com 15 (Delhi Tribunal), while dealing with the identical argument of foreign exchange fluctuation risk being borne by the foreign AE, specifically opined that foreign exchange fluctuation is an integral part of the sale and purchase transactions and in essence, an integral part of the international transaction entered by the Assessee and thus, in that view of the matter, the same would be treated as an operating item while determining arm's length price under chapter X of the Act. In the instant case, the Appellant

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was engaged in import of raw materials and export of finished product to its foreign AE being the trading activity [please see page no. 88 to 93 of the Factual Paperbook), thus, any gain/loss on the foreign exchange fluctuation would partake the same character as that of the international transaction. Therefore, the gain on foreign exchange fluctuation ought to be considered as part of its operating income. 7.6. It is humbly submitted that it is not the case of the TPO or the DRP that the foreign exchange gain operating income. 7.7. It is humbly submitted that it is not the case of the TPO or the DRP that the foreign exchange gain is not integral part of the sale and purchase transactions. The only reason for rejecting forex gain as operating income is hinged on the understanding that the foreign exchange risk is borne by the Foreign AE and thus same cannot be considered as operating income for the Appellant. In view of the above, it is incumbent to understand the effect of foreign exchange gain on the remuneration received by the Appellant. In the instant case, there is no dispute on the fact that the foreign exchange risk is borne by the Foreign AE and that the Appellant gets remunerated on a cost-plus mark-up arrangement. In view of the same, as the foreign exchange risk is being borne by the Foreign AE, in case of any gain or loss arising out of the international transaction, same must be passed on to such Foreign AE. Reliance in this regard is placed on OECD TP Guidelines, 2022 which provides that "A party should always be appropriately compensated for its control functions in relation to risk. Usually, the compensation will derive from the consequences of being allocated risk, and therefore that party will be entitled to receive the upside benefits and to incur the downside costs.

7.8. Thus, in cases where foreign exchange fluctuation results in a gain/loss, same is duly considered while computing the mark-up earned by the Appellant. For example, -

a. In case where there is no foreign exchange fluctuation, Appellant will receive INR 10,163/-(mark- up being 1.63% on cost) against a cost base of INR 10,000/-,

b. In case of a foreign exchange loss assuming the loss to be INR 1000 and other operating cost as INR 9000, the Appellant will again receive INR 10,163/- (mark-up being 1.63% on other cost foreign exchange loss).

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This would ensure that the Appellant is not assuming the foreign exchange risk as the Appellant is recovering the foreign exchange loss along with a mark up. c. Conversely, in case of foreign exchange gain, the same should be considered as part of operating revenue and should form part of the transfer pricing. This is because in case where the AE assumes the loss arising from the foreign exchange loss, the gain, if any should also be assumed by the AE only. Thus, in case of a foreign exchange gain of say INR 63 and cost base being INR 10,000/- the Appellant will receive only INR 10,100/- as the Appellant has already received part of such remuneration being INR 63, in the form of foreign exchange gain. Thus, in case such foreign exchange gain is not considered as an operating income for the purpose of benchmarking. same will result in foreign exchange risk being assumed by the Appellant which is clearly not the case.

7.9. Hence, on this count as well, the actions of the DRP and AO are untenable in the eyes of law, liable to be quashed.

7.10. Before delving into the specific arguments for inclusions and exclusions of comparable, it is humbly submitted that in case where the foreign exchange gain is considered as operating income, the margin earned by the Appellant will be more than the arm's length margin determined by the TPO and thus, the discussion on comparables will become academic. 8. Inclusion of Zenith Computers Limited ("Zenith") as comparable (Concise Grounds of Appeal- Ground no. 2.3)

8.1. At the very outset, it is humbly submitted that the DRP as well as AO/Transfer Pricing Officer ("TPO") grossly erred in excluding Zenith by observing that the same has incurred persistent loss for over a period of three years. In this context, it is relevant to bring to the attention of the Hon'ble Tribunal that Zenith has not incurred losses for three consecutive years, which is substantiated in the table below:

Particulars FY 2013-14 FY 2012-13 FY 2011-12 Profits before Tax (4,29,417) (3,38,43) 20,841

8.2 In relation thereto, the attention of the Hon’ble Tribunal in invited to the decision of the Hon’ble High Court of Bombay in the case of CIT v.

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Goldman Sachs (India) Securities (P.) Ltd. 290 CTR 23 (Bombay High Court) and coordinate bench decision in the case of DCIT v. Marubeni India (P.) Ltd., a company could not be considered as a persistent loss making company if such company has earned profit in any of three preceding AY/s. Copy of the said decision is being enclosed for the sake of ready reference. Reliance in this regard is also placed on Yazaki India (P.) vs. DCIT [2019] 108 taxmann.com 36 (Pune Tribunal): Yokogawa India Ltd. v. DCIT, [2024] 159 taxmann.com 428 (Bangalore Tribunal): ISG Novasoft Technologies Ltd. v. DCIT [2023] 151 taxman.com 255 (Bangalore Tribunal). 8.3 As evidenced in the table above, Zenith Computers Ltd has earned profit in FY 2011-12, the comparable could not be excluded whilst applying the persist loss filter. Thus, on the count alone, order of DRP/AD/IPO deserves to be quashed being against the mandate of law. 8.4 Further, it would be pertinent to highlight that TPO selected Whirpool of India Ltd. Penguin Electronics Ltd. as comparables on the ground that the same are involved in manufacturing and sale electronic consumer goods, on the same logic, Zenith is also liable to be included in the final set of comparables since it is also involved in manufacturing and sale of laptop and desktop computers, in this regard placed reliance on the decision of jurisdictional high court in the case of PIT v. Nokia Sremene Network India (P) Ltd.. [2019] 111 taxmann.com 445 (Delhi High Court), wherein it was that a comparable cannot be excluded only on the grounds of persistent losses or declining revenue in is functionally comparable to the Assessee. Therefore, on this count as well, Zenith is liable to be included in the final set of comparables whilst determining arm's length price under chapter of the Act. Copy of the said decisions is being enclosed for the sake of ready reference. 9. CONTRACT SOFTWARE DEVELOPMENT SEGMENT With regard to Exclusion of Infobeans Technologies Ltd., Persistent Systems Ltd., Larsen and Toubro Infortech Ltd. and Mindtree Ltd. (Concise Grounds of Appeal-Ground No. 3-3.2)

9.1 Ld AR submitted that he relies on the Chart submitted during the course of hearing on 20.06.2024 and further submitted as under:

a. Infobeans Technologies Ltd.: Functionally dissimilar (pg. 14-15 of the AR Compl), No segmental data available: Engaged in high-tech software services (pg. 44 of the AR Compl.)

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Rely on Avaya India Ltd. v. ACIT, (Order dated 24.09.2019 in ITA No. 7290/Del/2018) (Delhi Tribunal) (Rel Para. 7 at page 67-68 of the Case Law Compilation). b. Persistent Systems Lid: Functionally dissimilar (g. 100, 105 and 120 of the AR Comp.), R&D Activities (pg. 131 of the AR Compl.), No segmental data available and Owns significant intangibles (pg. 111 of the AR Compl.) Rely on Avaya India Ltd. v. ACIT, [Order dated 24.09.2019 in ITA No. 7290/Del/2018) (Delhi Tribunal) (Rel. Para. 8 at page 69-70 of the Case Law Compilation). c. Larsen and Toubro Infortech Ltd.:- Functionally dissimilar (pg. 174 of the AR Comp.), No segmental data available; Owns significant intangibles (pg. 194 of the AR Compl.), Significant branding activities (pg. 174 of the AR Comp.) and Extraordinary event (pg. 174 of the AR Comp) Rely on Global Logic India Lid. v. DCIT. (Order dated 01.05.2020 in ITA No. 4749/Del/2018) (Delhi Tribunal) (Rel. Para. 6-6.9 at page 124-127 of the Case Law Compilation). d. Mindtree Ltd.: Functionally dissimilar (g. 294 of the AR Comp.), Non-linear models (pg. 249 of the AR Compl.), Engaged in providing software delivery platforms (page. 249 of the AR Compl.), Owns significant intangibles (pg. 249 and 305 of the AR Compl.); R&D Activities (pg. 248 of the AR Compl.); No segmental data available, High Turnover (pg. 292 of the AR Compl.)

Rely on Avaya India Ltd. v. ACIT,[ Order dated 24.09.2019 in ITA No.7299/Del/2018] (Delhi Tribunal) {Ref. Para. 9 at page 70 -72 of the Case Law Compilation}. 9.2 Inclusion of Lucid Software Ltd. ("Lucid") and Cat Technologies Ltd. ("Cat")

With respect to inclusion of Lucid and Cat, he submitted that TPO/DRP excluded both the comparables on the ground that the same are persistent loss-making company, however, as elaborated above, a company could not be considered as a persistent loss-making company if such company has earned profit in any of three preceding AY/s. In this regard, for inclusion of Lucid, reliance is placed on the submission made before the TPO [please see page no. 584-585 of the factual paper book) and for inclusion of Cat, reliance is placed on objections raised before the DRP (please see page no. 792-793 of the factual paper book], which

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evidences that in one of the three preceding AY/s, both the company earned profit and hence, could not be rejected by applying the filter of persistent loss making company.

9.3 Moreover, the reliance placed by the Revenue Department on the decisions of the Tribunal rendered in the case of TPG Software Pvt. Ltd. v. DCIT, (Order dated 11.09.2023 in ITA No. 6468/Del/2018) (Delhi Tribunal): Steria India Ltd. v. ACIT, [Order dated 28.09.2020 in ITA No. 741/Del/2017) (Delhi Tribunal); Velocity Tech-Sol India Pvt. Ltd. v. ACIT, [Order dated 30.05.2022 in ITA No. 1694/Pun/2018] (Pune Tribunal), is grossly misplaced since all these Assessee/s were performing different high-end functions in the software industry and could not be compared with the Appellant being a captive service provider. The difference being that in the case relied upon by the Revenue Department, the tested parties were engaged in provision of software development services on behalf of its foreign AE's for customers of the foreign AEs, while the Appellant herein is engaged in captive software development services i.e., coding and testing for mobile phone software installed in the mobile phones manufactured and sold by foreign AEs. Further, none of the judgments relied upon by the Revenue Department deal with the previous decisions rendered by the Tribunal and the High Courts and thus, are per incuriam to that extent and cannot be relied upon.

10 ADDITIONAL GROUNDS OF APPEAL REFUND OF EXCESS PAYMENT OF DIVIDEND DISTRIBUTION TAX UNDER SECTION 115- 0 OF THE ACT (CONCISE GROUNDS OF APPEAL-GROUND NO. 5- 5.3) 10.1 By way of additional grounds of appeal, the Appellant seeks refund of the excess dividend distribution tax paid under section 115-0 of the Act while distributing dividends to its shareholders based in Finland. As the said claim has been raised for the first time, it is humbly prayed that the said issue may be remanded back to the file of AO for fresh consideration.

Thus, in view of the above, it is humbly prayed before the Hon'ble Tribunal that the appeal preferred by the Appellant deserves to be allowed.

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summary: Following adjustment are required to be made:

Segment Adjustment in Rs. Sale of Goods 4,89,28,50,000 Software development services 15,4,90,000 Software development services 7,88,78,000

11.2. Further, with regard to Mobile Phone segments, TPO has considered the foreign exchange gain as, not part of operating income. Aggrieved with the order, the assessee has approached the Ld. DRP and the DRP vide its order dated 04th Sep, 2018 has majority upheld the transfer pricing adjustment made by the TPO/AO and in line with the directions of the Hon’ble DRP, the AO has finalized the following additions.

Loss claimed by the Assessee in 758,18,87,253 Return of income TP adjustment 320,53,00,000 Disallowance of protective claim 7700,00,00,000 Assessed income 452,34,12,474 Rounded off 452,34,12,450

Also the Ld. DRP has upheld the order of the TPO and passed a very speaking order that why the foreign exchange/loss should be treated as non operating in nature and also incorporated the remand report submitted by the TPO in its order. 11.3. The issues raised by the assessee with regard to mobile phone segment are mentioned as under- (1) The assessee has argued that foreign exchange gain should be included in the operating income and submitted that as the AE bears the foreign exchange risk, then that gain/ loss on account of foreign exchanges should be passed to the AE only. Further it has been submitted that if the foreign exchange gain/loss is not considered as part of operating income/expense, the same would not be considered for the

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purpose of computing the assured return for the assessee and thus the assessee would bear the risk of such losses. (2) The assessee has claimed that the foreign exchange gain/loss arising from business operations and thus should be treated as operating in nature. Also, the assessee has relied on ICAI guidance note and stated that appropriate adjustment should be made for accounting practice including the adjustment on account of foreign exchange fluctuation to make the accounting treatment consistent and improve comparability. Further the assessee has also relied on some decisions of Hon'ble Tribunal.

Department arguments: 11.4. The assessee company is a contract manufacturer of mobile phone and contract software developer to its AE's. Further in the TP study report, it has been clearly mentioned that the entire exchange risk is borne by the AE only and asseseee's company is fully insulated for the foreign exchange risk i.e. gain or loss related to foreign exchange. For ready reference, the relevant extract of foreign exchange risk in the TPSR for both mobile phone as well as contract software development segment is reproduced below: (i) Mobile phone segment - mentioned in page 92 & 93/of paper book Foreign exchange risk Nokia India invoices to AEs in foreign currency and y makes payments to AEs in foreign currency for purchase of goods from AEs. However, since Nokia India is assured of an arm's length mark up on total, the loss on account of foreign exchange risk is passed on to AE. On the other hand, the AEs, bear this to the extent of payment/remittance made/received from Nokia India in foreign exchange other than their respective functional currencies. Type of risks

Type of risks Nokia India AEs No Yes Business risk/Market risk Product Liability risk No Yes R&D risk No Yes Capacity Utilization risk No Yes No Yes Credit and collection risk A

17 ITA No.7745/Del/2018 Nokia India Pvt. Ltd. vs. JCIT Inventory test No Yes Foreign exchange risk No Yes Manpower risk No Yes Legal and Statutory risk No Yes Technology risk Limited yes

(ii) For contract software development services-mentioned in page 100 & 101/Paper book Foreign exchange risk. Type of risks Nokia India Nokia Corp Business risk/market risk no yes R&D risk no yes Contract risk no no Service Liability no yes Price risk no no Credit and collection risk no no Foreign exchange risk No yes Manpower risk no yes 11.5. From the perusal of the above clauses in the TP study report, it is crystal clear that the assessee is assured of the fixed margins for both i.e. contract manufacturing of mobile phone and contract software development services segments. It is specifically and unambiguously mentioned that the loss/gain on account of foreign exchange risk will be borne by the AE only. The assessee bills/invoices its AE and the entire risk related to fall/gains in the foreign exchange currency is born by the AE. This has been specifically tabulated in the risk profile of assessee company and the AE which makes the bearing of risk on account of foreign exchange fluctuations more clear. This issue with regard to findings in the TP study report was discussed in detail before the Hon'ble Bench also and the assessee counsel also conceded the fact that the foreign exchange risk is borne by the AE only. Also on the specific query by the Hon'ble Bench, the assessee counsel could not explain how and on what account, the company suffers the foreign exchange gain or loss because that is fully borne by the AE only. Thus as the assessee does not have any bearing with regard to foreign exchange risk accordingly the assessee does not have any case that foreign exchange gain and loss should be treated as operating in nature. 11.6. In Transfer Pricing, benchmarking is done on transaction by transaction basis. For benchmarking the price/cost incurred/received by assessee company is compared with comparable companies which undertake the similar transaction independently. The foreign exchange gain/risk is usually undertaken at the end of the year and in a way it is not directly related to the transaction price. Also the foreign exchange

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gain/loss is based on the hedging policy of the foreign companies. For comparing two transactions with regard to foreign exchange risk undertaken by two different companies, there should be the same hedging policy adopted by the two companies. In the case of assessee, first of all, it is not exposed to any foreign exchange risk, secondly it is not demonstrated that even the comparable companies were following same policy of foreign exchange or they are exposed to the same foreign exchange risk. 11.7. DRP's directions and TPO's remand report: This issue of foreign exchange gain/loss, whether it should be treated as operating and non operating, is dealt extensively by the DRP which is discussed from para 2.3 in internal pages 7 to 15 of DRP order. Before the DRP, the assessee company has submitted the fresh computation and the DRP has also asked the remand report from the AO which has been duly incorporated in the order and copy of which was also given to the assessee for asking their comments.

11.8. The assessee has mainly raised the two issues with regard to foreign exchange which are mentioned below: 1. Inconsistent approach followed by the TPO i.e. the TPO has considered foreign exchange gain/loss as operating in respect of comparable companies and it has been considered as non operating as alleged by assessee. The TPO in the remand report mentioned in page 9 to page 15 of the DRP order has dealt with all the objections of the assessee comprehensively and for the sake of brevity, same is not reproduced below: 11.9. The TPO has mentioned that out of 6 comparables, 4 of the comparables do not have any item of gain/loss on account of foreign exchange, in their audited financial account statements. In the case of other 2 comparables i.e. Whirlpool India Ltd. and Blue Star, there were small components of foreign exchange loss/gain. Further from the final list of comparables, Blue Star were omitted and only Whirlpool remained. As far as Whirlpool is concerned, reference is invited to the operative part of the DRP directions. For ready reference is reproduced in 2.3.3.2 page of 15 of DRP.

2.3.3.2 As per TP Documentation the assessee invoices its AE in foreign currency and makes payment in foreign currency for purchase of goods from AEs, but since the assessee is assured of an arm's length mark-up

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on total cost, the loss on account of foreign exchange fluctuation risk which is borne by the AE In this year the assessee had gain from foreign exchange. It has been rightly treated as non-operating gains. Similar treatment should also need to be given in respect of the comparables even though it would impact the margins of the said two comparables only marginally. 12. From the perusal of the above, it is clear that the DRP has given directions, that similar treatment i.e. foreign exchange fluctuation i.e. gain/loss should be treated as non operating in the comparables companies. Thus, it is crystal clear that the DRP has given directions for benchmarking, the assessee transactions with the comparable companies by treating foreign exchange gain/loss as non operating in both the cases and brought parity with regard to comparable criteria. Thus there is no ground for assessee to complain and allege that before the Hon'ble Tribunal i.e. its cases are dealt differently from comparable companies because after the DRP directions, the TPO/AO has taken only the transactions price and not the associated foreign exchange risk gain/loss for comparing. When this fact was brought before the Hon'ble Tribunal, the assessee counsel could not explain the allegations that different comparison criteria was adopted in case of assessee and other with comparable companies or the prejudice caused with regard to comparison of transaction by transactions when the components of foreign exchange gain/loss in both the cases as well in comparable companies are considered non operating in nature. 13. The assessee other grounds i.e. it was treated as operating in the last years was also proved wrong and incorrect as discussed in detail in para 6 by the TPO in the remand report. There was no such mention of treatment of foreign exchange gain/loss in the earlier year and in that year there was no adjustment made in the mobile phone segment and only because of the facts that no adjustment was made no inference can be drawn that the TPO has considered the forex gains/loss as operating in nature. 14. Safe Harbour Rule It is also mentioned that the TPO/DRP also relied on the Safe Harbour Rule i.e. clause J of rule 10TA(iv) wherein it is clearly mentioned that operating expenses does not include loss arisen on foreign exchange fluctuations which clearly proves that forex variations are non operating in nature.

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21 ITA No.7745/Del/2018 Nokia India Pvt. Ltd. vs. JCIT

the loss on account of foreign exchange fluctuation which is unforeseen expenses by the assessee. Therefore, the foreign exchange loss or gain are to be excluded from the operating income. Foreign exchange loss or gain due to reinstatement of balance outstanding at the end of the year cannot be held as operating profit/loss since the same is an account of notional loss to comply with the accounting standards. With regard to the foreign exchange loss incurredin business operations for purchase of materials or for international transaction do not give any extra benefit to the AE who supplies the material, since the AE receives the payment in foreign exchange and the assessee also makes the payment in foreign exchange. The loss was due to exchange difference between the foreign currency and the Indian currency. Therefore, while computing the PLI, operating income for the purpose of PLI, both foreign exchange loss or gain should be excluded from the operating income. The DRP has allowed loss on Forex to exclude from the operating income, relying on the safe Harbour Rules which provide for exclusion of Forex loss from operating expenses. Therefore, we do not find any infirmity in the directions given by the DRP to exclude both foreign exchange loss or gain of the tested party as well as comparables from the operating income. This ground of Revenue is dismissed. 3) Proseed India Ltd. v/s ACIT, ITAT Hyderabad Bench 'B' [2022] (141 Taxmann.com 482) Para No. 14 and 15

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23 ITA No.7745/Del/2018 Nokia India Pvt. Ltd. vs. JCIT

ii) The assessee has also agitated for exclusion of four comparables i.e. Infobeans Technologies Limited, Persistent Systems Limited, Larsen & Toubro Infotech Limited and Mindtree Limited. The assessee's contentions are dealt as under: 20. Assessee's contentions that it is not providing complete software development services For explaining the software development services provided by the assessee's companies to its AE's, reference is invited to functional profile as mentioned in the TP study report, at page no. 94 to 99 of the paper book and for the sake of brevity the same is not reproduced below. From the perusal of the function performed w.r.t software services, it is clearly apparent that the assessee company, provides services with regard to software development right from the inception to the completion stage i.e. from the planning, coding, testing, verification, integration etc. of software services. In other words, it can be said that the assessee company is providing services of complete software development to its AEs and covers the entire spectrum of software development from planning to ultimate testing and integration with the module developed by Nokia. From the functional profile, it is seen that the AEs role is basically confined to furnishing of requirement/conceptualization and the entire process of software development is done at the assessee level only. It is also submitted that this reason of limited role in software development by the assessee company has not been taken before the lower authorities and assessee can't take any new ground at this stage, as has been observed by Hon'ble bench also in the physical hearings. Further the functional profile of the assessee's company is common and almost identically worded in functional profile as mentioned in TPSR of various other companies including the comparable companies. 3. Reliance was also placed, on the decision of Hon'ble Delhi ITAT in the case of Headstrong Services (India) Pvt. Ltd. Vs. DCIT circle 11(1), 68 Taxmann.com 363(2016), wherein the identical issue or limited role in software development v/s the complete software development services provided by comparable is discussed. For ready reference, the relevant extract reproduced below: 13.2 After considering the rival submissions and perusing the relevant material on record, we find that the total sales of this company for the corresponding year ending is Rs. 38.31 crore. Para

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17.2.13 of the Annual Report of this company provides that: 'The company is primarily a services company engaged in technical consulting, design & development of software, maintenance, systems integration, implementation, testing and infrastructure management services'. Next para 17.2.14 dealing with "Segment Reporting" provides that: 'The Company's operations are predominantly related to providing software technical consultancy services to its sole customer Fujitsu Services Ltd.' Narration of the above facts from the Annual report of this company makes it explicit that it is engaged in providing technical consultancy, design and development of software. The Ld. AR's contention that the assessee is not into consultancy services is incorrect as has been noted above from the relevant parts of its Agreement with Headstrong UK Ltd. showing that the assessee is also into software consultancy. Be that as it may, in our considered opinion, software consultancy services cannot be considered as independent of software development services, which necessarily implies applying such consultancy in the software development. Another contention raised by the Id. AR that Infinite Data System is doing all the activities in the development of software including its conceptualization, whereas some of such activities are done by the assessee's AE, in our considered opinion is again inconsequential. We have noticed above that the role of the assessee's AE is largely that of Sales and marketing including the conceptualization of services but the work of software development is done by the assessee alone. Further, if assessee is doing, say, five parts of the overall six or seven parts of the software development, spectrum of software development from planning to ultimate testing and integration with the module developed by Nokia. From the functional profile, it is seen that the AEs role is basically confined to furnishing of requirement/conceptualization and the entire process of software development is done at the assessee level only. 21. Further, if assessee is doing, say, five parts of the overall six or seven parts of the software development, it cannot be said that the assessee is not into software development. Activities of the assessee, which admittedly constitute a major chunk of the overall software development, cannot be considered as different from the software development. We, therefore, refuse to accept this contention urged on behalf of the assessee. 22. Discussion of comparables: Based on the above functional profile, the TPO has some companies and the assessee has challenged the inclusion of following companies, which are discussed case by case.

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(i) Infobeans Technologies Limited The assessee has mentioned the following reasons for exclusion/rejection- 1. Functionally dissimilar:- 2. Further in absence of segmental data the comparable margin cannot be determined. 3. Information memorandum issued by the Company dated March 3, 2015 which contains financial information and business description about the company for FY 2013-14 shows that company has diverse business and is engaged in Custom Application Development ('CAD'), Content management systems, Enterprise mobility and Big Data Analytics. Further the assesssee company has stated that the above services significantly differ from the functions performed by the Appellant in the CSD segment. (ii) Persistent Systems Limited The assessee has mention the following reasons for exclusion/rejection- 1. Functionally Dissimilar: Engaged in software products, services and technology innovation including research, engineering Services such as deployment, testing, quality assurance, performance tuning, usability engineering, porting, documentation services, deployment services. 2. R& D activities: The company incurs significant R&D expenditure which has resulted in significant intangibles. 3. Segmental information not available: As per the annual report of the company, it does not maintain segment information in relation to its product and service segment separately. It maintains segment in relation to market segment that it caters to. 4. Own significant intangibles: Persistent owns significant intangibles which have either been developed or have been acquired from third parties as part of its inorganic growth strategy. (iii) Larsen & Toubro Infortech Limited The assessee has mention the following reasons for exclusion rejection- 1. Functionally dissimilar: L&T is engaged in product engineering services which is different from assessee's CSD segment.

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27 ITA No.7745/Del/2018 Nokia India Pvt. Ltd. vs. JCIT

28 ITA No.7745/Del/2018 Nokia India Pvt. Ltd. vs. JCIT

unless the impact of extraordinary event is proved by the assessee on the financials of the company, the extraordinary event in itself cannot become the only factor for excluding the comparable. Thus, it is submitted that as the assessee has not been able to prove the impact on financials of extraordinary event accordingly, M/s L& T Infotech cannot be excluded. At best, if the Hon'ble Bench deem fit the same can be remitted back to the TPO/DRP for analyzing the impact of extraordinary event. Also the department relied on the Hon'ble Delhi High Court decision in the case of Rampgreen Solutions Pvt. LTd. vs. DCIT (2023) 154 taxmann.com 541 (Delhi Tribunal), wherein the functional similarity was considered as the prime most criteria for judging the comparability of two companies. 3. Reliance is also placed on the decision of Hon'ble I Bench only in the case of TPG Software private Limited Vs. DCIT for A.Y 2014-15 in ITA no. 6468 / DEL / 2018 only has done in depth analysis of financial statements of M/s Mindtree Limited and M/s Persistent Systems Limited for the same A.Y i.e 2014-15 only i.e F.Y 2013-14 and in that case also the assesssee company has raised the similar grounds for claiming exclusions of these two comparables with regard to software development services to its AE. For ready reference, the relevant extract is reproduced below Mindtree Ltd. 17. The assessee has selected this comparable in the TPSR for the A.Y. 2012-13 and the company is generating revenue from software development and software services.

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business independent tes ting in frastructure management services, mobility, product engineering and SAP Services." 21. The above functional profile, clearly shows that M/s Mindtree Ltd. is a so ftware servicing various sectors and for the sake of specializa tion/convenience the company had divided/structured its so ftware development services functions in 5 sectors. This is nothing new, as all the companies for the sake of convenience/specializa tion /better productivity divides/ structures its functions. Also in the financial statement at page 63of PB, it is clearly mentioned that the entire income is from software development services only. This fact is further mentioned at page 123 of PB under the quantitative detail column. At page 123 in para 3.9 under the heading "quantitative details" it is clearly mentioned that the assessee is involved in software development services only and accordingly no other segment is applicable in the case of the assesee. Thus the assessee contention about no segmental in formation is not tenable. Further, with regard to the intangible of Rs.6.7 crore comes to 0.2% o f turnover of Rs.3031.6 crore However, the assessee also owns intangible of Rs.6.03 crore including goodwill, which is 13.85% of turnover of Rs. 43.53 crore. Thus this contention of assesssee is without any basis and thus based on the above analysis, the assessee company is functionally similar comparable to M/s Mindtree Ltd. Persistent Systems Ltd.

Persistent System Ltd. 24. The Revenue held that this is functionally comparable as the companies found to be providing software services. The Id. AR submitted that the company is mainly involved in software product development and development of end to end solutions. The assessee, on the other hand, is engaged in providing software development services and does not develop software products or end to end solutions. The Id. AR submitted that this company is engaged in sale of software products and not software services. The Ld. AR further argued that, 1. Segmental financials are not available, 2. The comparable is involved in R&D activities and has intangibles, 3. The comparable had an extraordinary event namely acquisition of Cloud Squads Inc. 4. High turnover 27 times as that of the assessee

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“15. In case of Persistent Systems, limited Id AR submitted that Persistent Systems Ltd. is engaged in the business of development and sale of software products and therefore, cannot be regarded as comparable to the assessee, a routine software service provider. At page 27 (Pg 192 o f Annual Report paper book) it is stated that the company specializes in building software products and the business of the company is inter-alia focused on products. Also, a t page 105 (Pg 270 of annual report paper book) of the annual report it is stated that the company derives significant portion of its revenue from export o f software services and products (IP based software products). It is further submitted that at Page 164 & 183 of the Annual report it is stated that the company specializes in software products, services and technology innovations. It is further submitted that segmental pro fitability of this company from provision of software services is not available in the annual report and accordingly, Persistent Systems Ltd cannot be regarded as an appropriate comparable for the purpose of benchmarking analysis.

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"Income from software services Revenue from time and material engagements is recognized on time proportion basis as and when the services are rendered in accordance with the terms of the contracts with customers. In case of fixed price contracts, revenue is recognized based on the milestones achieved as specified in the contracts, on proportionate completion basis. Revenue from royalty is recognized in accordance with the terms of the relevant agreements. Revenue from maintenance contracts is re cognized on a pro-rata basis over the period of the contract. Unbilled revenue represents revenue recognized in relation to work done on time and material projects and fixed price projects until the balance sheet date for which billing has not taken place. Unearned revenue represents the billing in respect of contracts for which the revenue is not recognized. The Company collects service tax and value added taxes (VAT) on behalf of the government and, therefore, these are not economic benefits flowing to the Company. Hence, they are excluded from revenue.

Therefore, we do not agree with the arguments of the assessee, and hold that Persistent System Ltd. does not sale products, but it is engaged only in sale o f software services. No other reasons were given to us for its exclusion; hence, we are of the view that Persistent system has rightly been included as Comparable company by Id DRP and TPO.

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services only. The para 32 of the Hon'ble ITAT order is very pertinent and reproduced below for ready reference:- 27. The Annual Report of this company is placed at pages 762 to 895 of the paper book. In its Profit and Loss account, sale of software services and products is at Rs.31,231/- and in Schedule 11, bifurcation is given for sale of software services and products - export and domestic. Though segmental in formation is provided in the Annual Report, from which sale of software services can be separately known from the sale of products, but the in formation received by the TPO u/s 133(6) of the Act, the company has in formed that its software products sales constituted 0.73% of the Revenue which means that more than 99% of the Revenue is from software services. 33. The Id counsel for the assessee vehemently stated that this company is functionally dissimilar as it is engaged in outsourced software product development services as investment in Intellectual property led sales. The Id. counsel for the assessee further stated that this company has undertaken significant restructuring and has very high turnover, but failed in convincing us the impact of these things on the overall margin of the company. Therefore, we are of the considered view that this company passes all the filters and has been rightly taken in the final set of comparables. No interference is called for. Thus in view of the above, it is absolutely clear that this company is involved in sale of software services only for the same assessment year i.e. A.Y. 2014-15 only, like the assessee company and these are the findings/decisions of Hon'ble Jurisdictional ITAT only, which have a binding precedence. Also, the P&L account shows M/s PSL. has only one stream of income (page 449) i.e. from sale of software services only. 28. The assessee has quoted certain case laws including the decision of the Hon'ble Delhi High Court in the case of Microsoft India Ltd. however the facts of that case were different i.e. M/s Microsoft was found engaged in rendering software development services and ITES. Further the assessment year involved in that case was A.Y. 2011-12 and A.Y. 2012-13 which are dif ferent from the present appeal. Also, the other decisions cited are distinguishable and they were rendered before the decision of Hon'ble ITAT in the case of case o f Steria India Ltd. vs. Addl.CIT in [2020) 122 taxmann.com 267 (Delhi - Trib.).

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(iii) Occurrence of extraordinary event/The assessee has also alleged opening of new offices by M/s PSL. a. Acquisition of Cloud Squads. The PSL has acquired clouds Squads only in February 2014 (i.e. only in the end) and it is small company and the assessee has failed to mention the impact on financials /P&L on such acquisitions. Also the allegation that assessee has opened new branch offices in Germany and South Africa will at best have negative impact on P&L. because it is a established fact that whenever new offices are opened initially it has negative impact on pro fits because it takes time to stabilize the business activities from new offices. (iv) High turnover. The assessee has alleged that the PSL has turnover of 1184 crores ie high as compared to the assessee company and M/s PSL enjoys economic of scale. This fact has been answered by the TPO in detail in page 33 to 36 of his order and for the sake of brevity, arguments are not repeated. The TPO has clearly demonstrated by comparing revenue/turnover with opera ting margins of all the 14 comparables and clearly demonstrated that there is no correlation between the high turnover and the profit margins. Further it is established fact, that the turnover may have role in manufacturing industries but in service industries the criteria or the principle of economics of scales does not work. The assessee has also placed reliance on the decision of Hon'ble Delhi High Court in the case of Pr. CIT Delhi-1 vs. M/s Agnity India Technologie s Pvt. Ltd. in ITA No. 447/2018 to claim that companies with high turnover cannot be compared with low turnover companies. The decision of the Hon'ble High Court has been perused and it is seen that in that case M/s Vipro Technology was excluded as a comparable on several grounds and the contentions of the assessee are not clearly borne

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out of the decision of the Hon'ble Delhi High Court, a fact, which has been duly observed by the Hon'ble Bench also. Further, the assessee reliance on DRPS findings for A.Y. 2012-13 with regard to high turnover companies is also not mentioned in the order of the Hon'ble Delhi High court. (v) Intangibles: Further the assessee has alleged that M/s PSL owns intangibles of Rs. 16 crores however if we compare it with sales of Rs. 1184 crores then it is only 1.35% of the turnover which is negligible. It is also not only of place to mention that assessee company has intangible including goodwill of Rs. 6.03 crore against sales of Rs. 43.53 crore, which comes out to 13.85% of turnover. (vi) R & D activity: The assessee has also taken the ground that M/s PSL is involved in Research & Development activity. The details of Research and development expense s by M/s PSL is given on note 35 of notes forming part of financial statements (page 195 Annual report/page 463 of PB). The total research and development expenses are Rs. 3.61 crore for F.Y. 2013-14 which comes to 0.30% of total turnover, which is negligible. Thus based on the above analysis, this company i.e. M/s PSL is functionally similar and also comparable on all parameters/aspects to the assessee company. 30. The Id. AR rebutted the submissions of the Id. DR. The salient features of the arguments of the Id. AR are as under: While rejecting exclusion of Persistent Systems, the Hon'ble Tribunal in Steria's case has held that the said company is only into software development, however, did not consider the fact the company in its audited financials at page 164 (refer pg 432 of the annual report compilation), under Note 1: Nature of operations, itself classified as global company specializing in software products, services and technology innovation. The Company offer complete product life cycle services. 31. The Id. AR argued that the following arguments was never presented before the Bench while dealing the case of Steria (supra). Revenue from time and material engagements is recognized on time proportion basis as and when the services are rendered in accordance with the terms of the contracts with customers.

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In case of fixed price contracts, revenue is recognized based on the milestones achieved as specified in the contracts, on proportionate completion basis, Revenue from royalty is recognized in accordance with the terms of the relevant agreements. Revenue from maintenance contracts is recognized on a pro-rata basis over the period of the contract. Unbilled revenue represents revenue recognized in relation to work done on time and material projects and fixed price projects until the balance sheet date for which billing has not taken place. Un-earned revenue represents the billing in respect of contracts for which the revenue is not recognized. The Company collects service tax and value added taxes (VAT) on behalf of the government and, therefore, these are not economic benefits flowing to the Company. Hence, they are excluded from revenue.

The Id. AR argued that Persistent Systems has been held to be not comparable to the Software Development service provider in the absence of segmental and relied on the following case laws:

EMC Software and Services India Pvt. Ltd. (IT(TP)A No.- 3375/Bang/2018 CGI Information Systems and management consultants Private Limited vs. ACIT. IT(TP)A No. 586/Bang/2015 Saxo India Pvt. Ltd. vs. ACIT: ITA No. 6148/Del/2015- The Id. AR argued that the companies having significantly higher turnover than the assessee is not a good comparable: PCIT vs. Agnity India Technologies Pvt. Ltd.: ITA 447/2018-(Delhi High Court). Aggressive Digital Systems (P) Ltd. vs. ITO: [2022] 97 ITR-(T) 687 (Delhi Trib.). Nuance Transcription Services India Private Limited vs. ACIT: [IT(TP)A No. 3230/Bang/2018). Deliverhealth Solutions india Pv t. Ltd. vs The AO: [IT(TP)A No. 721/Bang/2021). 32. Having gone through the submissions, we find that the turnover is within the acceptable range, the FAR matching, the segmental information is not

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required as there is single common segment of revenue and in the absence of financial implication on the occurrence of extraordinary events and having found intangibles being 1.35% as negligible and same with the R&D activities which is 0.3% of the turnover and hence, we hold that Persistent Systems Ltd. can be considered as a right comparable. 4. Infobeans Technologies Ltd: For infobeans Technologies Ltd., the department places reliance on the decision of Hon'ble Pune ITAT in the case of Velocity Tech-Sol India Pvt. Ltd. vs. ACIT, Circle-13, Pune in ITA NO. 1694/PUN/2018 for A.Y. 2014- 15. In this case, the Hon'ble Bench after relying on several decisions of Hon'ble ITAT and also after making in depth analysis of the financial of the M/s Infobeans Technologies Ltd. has upheld the inclusion of this company with M/s Velocity Tech- SOL India Ltd. with regard provisions of software development services to its AEs. Relying on the above noted decision and also considering several decisions of Hon'ble Tribunals, again the Hon’ble Delhi ITAT in the case of Agilent Technologies (International) Pvt. Ltd. Vs. DCIT, Circle-1(1), Gurgaon in ITA No.727/Del/2019 for A.Y.2015-16 has compared this company has functionally comparable to the companies providing software development services to its AEs. The above noted written submission may kindly be taken on record. 33. Considered the rival submissions and material placed on record. With regard to ground no. 2 and its sub-grounds, we observed that the assessee objected to treatment of Foreign exchange gain/loss as non operative in the case of the assessee and also the comparables selected were having the Forex impact, which was grossly ignored by the tax authorities. After careful consideration, we observe that the revenue model of the assessee is that they are wholly owned subsidiary of Nokia Corporation and is primarily engaged in the business of assembling, manufacturing, distribution, buying, selling, importing, exporting and repairing of mobile phones and rendering of contract software development services related to only mobile phones. The risk factor in international transactions are considerably reduced to nil and all the exchange risks are being transferred to its holding company. The relevant risk chart as brought to our notice by the Ld DR are as under:

Type of risks Nokia India Nokia Corp Business risk/market risk no Yes R&D risk no Yes

37 ITA No.7745/Del/2018 Nokia India Pvt. Ltd. vs. JCIT Contract risk no No Service Liability no Yes Price risk no No Credit and collection risk no No Foreign exchange risk No Yes Manpower risk no Yes From the above chart, it is very clear that the assessee does not own any risk and any exchange fluctuations in the international transactions are borne by the parent company. With the above risk factor on record, in our considered view, when the assessee gets the revenue as per the contract value and all other risks are mitigated by the AE. This can be understood with the following example. Let’s say that the assessee gets usd 1000 as the contract price and all the risks are taken care by the AE, then the assessee will get the contract price in India at Rs. 85000/- (ex.rate @ Rs.85/-). If there is any movement in the currency rates, say moves upward or downward at Rs. 87/- or Rs. 83/-, the difference of Rs.2000/- is passed on to the AE. Therefore, the assessee are assured to get the contract price at Rs.85000/-. The exchange fluctuation account is only to monitor the exchange movement and settlement mechanism with the AE and it does not form or impact anyway in the operating revenue or operating expenditure of the assessee. The assessee will be compensated the contract price or invoice value by the AE. Therefore, it can have no place in the financial results of the assessee company. Hence, the operating income/expenses of the assessee is not impacted by the currency fluctuations. If there is upward movement, the AE will make suitable adjustment in the contract prices. It is relevant to note that the revenue/ cost model adopted by the AE by suitably taking care of the exchange risk of the subsidiary company, the relevant exchange risk is the cost/revenue to the AE, as and when they compensate the same. This can never a risk factor to the assessee leading to incurring any revenue income or loss to the assessee. This findings is based on the submissions that the transactions are only with the AE’s and any other transaction not involving the AEs, may be claimed as operating expenditure, as the risk factor is mitigated only with the transactions with AE. Therefore, all the transactions are recorded by the assessee are only relating to transactions with its own AE. Hence, we are inclined to agree with the findings of tax authorities. 33. With regard to relying on the Safe Harbor Rules by the revenue, the assessee objected by submitting that as per Rule 10TB and 10TC, the

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assessee has to be a eligible assessee as well as it is applicable only to eligible international transactions. We observed that the DRP has not applied any rules to determine the assessee as eligible assessee. It just referred to the definition of operating expenses to explain the operating revenue and expenses have to have a forex fluctuation risk, otherwise, it cannot be considered as part of operating revenue or expenditure. Therefore, the relevant ground is rejected. 34. With regard to contention that inconsistent approach adopted by the TPO in considering exchange/loss as operating in respect of comparable companies whereas it is considered as non operative in the case of the assessee, we observe from the findings of the Ld DRP in the page 12 to 14 of the order that they have analysed the comparable company wise and gave a clear and detailed findings. The contentions of the assessee are properly dealt by the Ld DRP in their findings. Therefore, the relevant contentions raised by the assessee are rejected. 35. Coming to the various judicial precedents submitted by the assessee relating to the application of foreign exchange fluctuation as operating, we observe that the distinction is on the application of risk profile on the subject. All the facts imbedded in the case law relied by the assessee were having total risk of forex with the respective companies/assessees. When the risk is not borne by the assessee as in the present case, it cannot rely on the decision where the relevant risks are borne by the respective companies/assessees. Therefore, in our considered view, the case law relied by the assessee are distinguishable to the facts in the present case. Therefore, this contention of the assessee also rejected. Accordingly, the relevant grounds raised by the assessee are dismissed. 36. Coming to the final comparables selected by the TPO in the MPA segment, we observed that the TPO has rejected the Zenith Computers Limited (ZCL) as comparable with the assessee company and assessee prayed that this comparable should be included as it is functionally similar to the assessee company. On careful verification of the facts on record, the TPO has applied filter to eliminate persistent loss making companies as one of the criteria and accordingly, it was observed that this company was making persistent loss in the last three years including current assessment year. The assessee has highlighted that the ZCL has incurred losses in FY 2012-13, 2013-14 and earned profit in FY 2011-12. Therefore, it does fit into the definition of persistent loss

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making company. On evaluation we observed that ZCL is incurring losses in FY 2012-13, 2013-14 and also 2014-15. Therefore, we have to see the pattern of the relevant health of the comparable companies before it is selected for comparison. In this case, it may be functionally comparable but this company has failed in the selection criteria of persistent loss. Therefore, we are inclined to reject the submissions of the assessee and accordingly dismissed the ground no. 2.4.1 raised by the assessee. 37. Coming to the next issue of exclusion of two comparables selected by the TPO relating to Whirlpool and Penguin Electronics, we observed that it was submitted that both the comparables are functionally dissimilar with the submission that they are engaged in the manufacturing and trading of home appliances, kitchen appliances and other products which are different to the business of manufacturing mobile phones and accessories. They also own intangibles and R&D facilities by incurring substantial expenditure. Whereas in the case of the assessee, it is merely relating to mobile phones and R&D division is separate division having separate profit centre. On the other hand, Ld DR objected vehemently submitting that this issue was not raised before lower authorities. 38. Considered the rival submissions and material placed on record. We observe that the assessee is exclusively engaged in the manufacturing, trading of mobile phones. The functions in manufacturing, pricing, branding etc are unique to the mobile phones and its accessories. It cannot be generalized with any of the home appliances or kitchen appliances. The comparables selected are Whirlpool and Penguin, which basically deals in various home as well as kitchen appliances, the products are many kind and distinct to the assessee company. These can never the proper comparables to the present assessee. Accordingly, we direct the AO/TPO to delete the above said comparables from the final comparables. Accordingly, the grounds raised by the assessee are allowed in this regard. 39. With regard to comparables selected for CSD segment, after considering the submissions of the both the parties, the assessee has objected particularly for selecting four comparables by the TPO, the same are discussed below: a. Infobeans Technologies: It is submitted before us that it is functionally dissimilar, no segmental data were made available and it is involved in the high tech software services. On the other hand, Ld DR submitted that the profile of the assessee company clearly

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demonstrate that it is involved in the entire spectrum of software development from planning to ultimate testing and integration of the module developed for the AE. The entire process of software development is done by the assessee and the ownership and conceptualization may be done by its AE. This issue was not taken at lower level, raising at this level is objectionable. After considering the facts on record, we are of the view that no doubt the functions performed by the assessee in developing the software is similar to any comparable companies but the concept and ownership are also plays major role in the determining the price and risk involved. The comparables selected by the TPO should also match the same profiles for comparison. In this case, the assessee is only a contract software developer and it does not have any risk factor and also conceptualization and ownership is always with its AE. The selection of comparables has to be on same page, if required certain adjustment can be made to bring them at par. It cannot be completely ignored on the main financial aspects which plays the crucial criteria of running or selection of business module. We observed that in the case of Avaya India P. Ltd (supra) held as under: “7.2 Before us, the learned counsel referred to page 275 (Note- 20) and 276 (Note-27) and submitted that no sufficient data to establish with certainty that assessee only was engaged in software development. He submitted that as per note 27, export of goods/services were calculated on FOB basis, thus the company was engaged in sale of products. The learned counsel referred to page 742, which is website details of the company and submitted that the company was engaged in providing diversified services. The learned counsel relied on the decision of the Delhi bench of the Tribunal in the case of Xchanging Technology Services India Pvt. Ltd. Vs DCIT, Circle-27(2), New Delhi, ITA No.1222/Del/2015 (Assessment Year: 2010-11), wherein it is held that the company cannot be accepted as comparable in absence of sufficient financial information. 7.3 The learned DR, on the other hand, relied on the order of the lower authorities. 7.4 We have heard rival submission of the parties. We find that the Note 27 of the annual report has provided details of earning in foreign exchange, which mentioned that export of goods/services amounting to Rs.32,96,59,883/- have been calculated on FOB basis.

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The Note 20 of the annual report mention revenue from operations earned on sale of software (export) amounting to Rs.32,96,59,883/-. Thus, in view of the Note 27, the quantum of export of the goods and export of the services cannot be ascertained and thus in view of no segmental data of export of the goods and export of the services available separately, we are of the opinion that the company cannot we selected as comparable at entity level. Accordingly, we direct the Ld. AO/TPO to exclude the company from the set of the comparables.” Respectfully following the above decision, we are inclined to direct the TPO to delete this comparables. b. Persistant Systems: it is engaged in software products, services and technology innovation including research, engineering Services such as deployment, testing, quality assurance, performance tuning, usability engineering, porting, documentation services, deployment services. Further, it incurs significant R&D expenditure which has resulted in significant intangibles. It also not made available segmental informations. As per the annual report of the company, it does not maintain segment information in relation to its product and service segment separately. It reported only the market segments and not based on various product and services it caters to. Further it owns significant intangibles. On the other hand, Ld DR objected to the above submissions. After considering the both submissions, we observe that the assessee is only contract software developer, the development risk and ownership risk is not with the assessee. We observe that in the case of Avaya India Pvt. Ltd. and Alcatel Lucent India Ltd are held as under: “8.3 We have heard the rival submission of the parties. On page 290 of the paper-book, in the notes forming part of the financial re- statement of the company, under the head segmental information, it is mentioned that the company operates predominantly for providing software products, services and technology innovation covering full life-cycle of products to its customers. The segemental information, however, has been provided for the verticals in the field of ‘telecom and wireless’, ‘life science’ and ‘healtchare and infrastructure and

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systems’. No segmental data of software products and services are available in the annual report of the company. In the circumstances, we are of the opinion that the company cannot be selected as comparable at entity level in absence of any segmental data of software product and software services. Accordingly, we direct the Ld. AO/TPO to exclude the company from the set of comparables.” In Alcatel Lucent India Ltd, it is held as under: “11. The first objection which has been raised by the assessee is against the inclusion of the concern, Persistent Systems Ltd. The annual report of the said concern is placed at pages 183 to 260 of the Annual Report Compilation. The Revenue has been shown from operations and the said concern has recognized sale of software services at Rs.11,841 million. The said company in the notes formingpart of financial statements under the head 'segment information" had reported as under:- 26. Segment Information "The company's operations predominantly relate to providing software products, services and technology innovation covering full life cycle of product to its customers. The primary reporting segments are identified based on review of market and business dynamics based on risk and returns affected by the type or class of customers for the services provided which are as follows:- a. Telecom and Wireless b Life science and Healthcare c Infrastructure and Systems 12. The segmentals of the said division are not available and in such facts and circumstances where the concern picked up had different functional profile, the margins of the said concern cannot be applied in order to benchmark the international transaction undertaken by the assessee. The Tribunal in assessee's own case in Assessment Year 2013-14 vide para 4 has observed that the said concern was engaged in both product and development of software development services and hence, needs to be excluded from the final set of comparables. The functional profile of the said concern continues to be same and consequently, we direct its exclusion from the final list of comparables.

Respectfully following the above decisions of the coordinate benches, we are inclined to direct the AO to delete the above comparables from the final list of comparables.

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c. Larsen and Toubro Infotech: It is engaged in product engineering services whereas the assessee is engaged in CSD segment. Further, the L&T Infotech has disclosed insufficient segmental data and more importantly there is demerger of product engineering services business and it had impacted profit entity level. The Hon’ble Delhi High Court had held that it is not valid comparable on account of extraordinary events. On the other hand, Ld DR objected to the above submissions. We observed that in the case of Global Logic India Ltd (supra), the coordinate bench held as under:

“6.8 During the year, the extraordinary event of demerger of product engineering service business (PES) has occurred with effect from 01/01/2014, which has also impacted the profit of the company at the entity level. In the decision of the Tribunal in case of Xchanging Technology Service India Private Limited (ITA No.1897/Del./2004), which has been approved the Hon'ble High Court in ITA No. 813/2015, the company is held to be not valid comparable on account of extraordinary events. Thus, In view of the extraordinary event in the year under consideration also, this company is liable to be excluded from the set of the comparable.

6.9 Accordingly, in view of the functional dissimilarity at entity level and extraordinary event during the year, this company is directed to be excluded from the financial set of the comparables.” Respectfully, following the decision of Co-ordinate Bench decision, we are inclined to allow the ground raised by the assessee. d. Mindtree Ltd: It is submitted that it is functionally dissimilar, it is into Non-linear models, engaged in providing software delivery platforms, Owns significant intangibles and it is into R&D Activities, also there is no segmental data available and declared High Turnover. After considering the submissions of both the parties, we observe that the Coordinate Bench in the case of Avaya India P. Ltd (supra) and Alcatel Lucent India Ltd (supra) held as under:

“9.3 We have heard the rival submission of the parties. The various segments mentioned in the annual report comprises of manufacturing, BFSI, hi-tech, travel and transportation and others, but the assessee is primarily engaged in providing global software development in these areas. In the background to significant

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accounting policies, however, mention other services offered by the company which also include business process management, business technology consulting, cloud, digital businesses, independent testing, infrastructure management services, product engineering and SAP services. The company also own intellectual property rights as pointed out by the learned counsel as against no intellectual property rights owned by the assessee, and thus, assets of the company cannot be compared with the assessee. In view of functional dissimilarity as well as the difference in the assets owned by the company vis-à-vis the assessee, we direct the Learned AO/TPO to exclude the company from the set of the final comparables.

Respectfully, following the above decisions, we are inclined to allow the grounds raised by the assessee.

“(f) Wherever the Contracting States to a tax treaty intended to extend the treaty protection to the dividend distribution tax, it has been so specifically provided in the tax treaty itself. For example, in India Hungry Double Taxation Avoidance Agreement [(2005) 274 ITR (Stat) 74; Indo Hungarian tax treaty, in short], it is specifically provided, In the protocol to the Indo Hungarian tax treaty it is specifically stated that “When the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the

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hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend”. That is a provision in the protocol, which is essentially an integral part of the treaty, and the protocol to a treaty is as binding as the provisions in the main treaty itself. In the absence of such a provision in other tax treaties, it cannot be inferred as such because a protocol does not explain, but rather lays down, a treaty provision. No matter how desirable be such provisions in the other tax treaties, these provisions cannot be inferred on the basis of a rather aggressively creative process of interpretation of tax treaties. The tax treaties are agreements between the treaty partner jurisdictions, and agreements are to be interpreted as they exist and not on the basis of what ideally these agreements should have been.

(g) A tax treaty protects taxation of income in the hands of residents of the treaty partner jurisdictions in the other treaty partner jurisdiction. Therefore, in order to seek treaty protection of an income in India under the Indo French tax treaty, the person seeking such treaty protection has to be a resident of France. The expression ‘resident’ is defined, under article 4(1) of the Indo French tax treaty, as “any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature”. Obviously, the company incorporated in India, i.e. the assessee before us, cannot seek treaty protection in India- except for the purpose of, in deserving cases, where the cases are covered by the nationality non-discrimination under article 26(1), deductibility non-discrimination under article 26(4), and ownership non- discrimination under article 24(5) as, for example, article 26(5) specifically extends the scope of tax treaty protection to the “enterprises of one of the Contracting States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State”. The same is the position with respect of the other non- discrimination provisions. No such extension of the scope of treaty protection is envisaged, or demonstrated, in the present case. When the taxes are paid by the resident of India, in respect of its own liability in India, such taxation in India, in our considered view, cannot be protected or influenced by a tax treaty provision, unless a specific provision exists in the related tax treaty enabling extension of the treaty protection.

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(h) Taxation is a sovereign power of the State- collection and imposition of taxes are sovereign functions. Double Taxation Avoidance Agreement is in the nature of self-imposed limitations of a State’s inherent right to tax, and these DTAAs divide tax sources, taxable objects amongst themselves. Inherent in the self-imposed restrictions imposed by the DTAA is the fact that outside of the limitations imposed by the DTAA, the State is free to levy taxes as per its own policy choices. The dividend distribution tax, not being a tax paid by or on behalf of a resident of treaty partner jurisdiction, cannot thus be curtailed by a tax treaty provision.”

CONCLUSION:

Respectfully, following the above decision, we dismiss the additional grounds raised by the assessee.

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Order pronounced on 30th August, 2024.

Sd/- Sd/- (YOGESH KUMAR U.S.) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 30/08/2024 Pk/sps Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT

ASSISTANT REGISTRAR ITAT, NEW DELH