ASST CIT 12(4), MUMBAI vs. TATA CONSULTANCY SERVICES LTD ( FORMLERY M.S, TCS BUSINESS TRANSFORMATION SOLUTION LTD), BANGALORE

The first inter connected issues in this appeal of Revenue and the CO of the assessee is as regards to allowing benefit of ±5% in the computation of arm’s length price under section 92C(2A) of the Act. For this Revenue has raised following grounds No. 1 and 2: -

At the outset, it is noticed that the CO filed by the assessee is time bared by 557 days and assessee has filed condonation petition dated 12- 05-2015. The facts relating to condonation of delay are that the copy of appeal memo in form No. 36 filed by the Revenue was served on the assessee on 04-10-2013. The assessee filed cross objection on 14-05- 2015, thereby, CO is time barred by 557 days. The condonation petition of the assessee dated 12-05-2015 only stated that the assessee was under bonafide belief that in view of the relief granted by CIT(A) in respect of standard deduction 5%, the amount of adjustment decided against the respondent being not significant, respondent need not merely defend the appeal. But due to decision of Income Tax Appellate Tribunal Special Bench (Delhi) in the case of ITO vs. IHG IT services India Private

I am the Authorised Signatory of the Respondent, which is a company registered under the Companies Act 1956 and whose office is situated at 9th Floor, Nirmal Building, Nariman Point Mumbal -400021.

Against the Assessment order passed under section 143(3) of the Income Tax Act.1961 ('The Act"), for Assessment Year 2005-06. the Respondent had filed an appeal before the learned Commissioner of Income Tax (Appeals) - I ['the CIT(A)'] on certain additions I disallowances and certain Transfer Pricing adjustments

The CIT(A) vide order dated 23 August, 2012, partly allowed the appeal and partly deleted the transfer pricing adjustment.

Against the order of the CIT(A). the Department preferred an appeal before the Hon’ble Tribunal. The copy of the appeal in

The Respondent harbored a bonafide belief that in view of Hon'ble CIT(A) granting relief of the Respondent in respect of 5% standard deduction, the amount of adjustment's decided against the Respondent (i.e. inclusion of companies dissimilar to the Respondent) being not significant, the Respondent needs merely to defend the appeal. However, in view of the subsequent decision of the Hon’ble Income Tax Appellate Tribunal. Delhi Special Bench, in the case of ITO vs. WIG IT Services (India) Private Limited, the favourable ruling of the Hon'ble CIT(A) in relation to granting standard deduction of 5% is likely to get reversed and would consequently increase the amount of adjustment significantly

When the matter came up for discussion with Respondent tax our consultant, the Respondent was advised that the Respondent should file cross objection against the said appeal

Pursuant to the said advice, this cross- objection is being filed by the Respondent along with the petition for condonation of delay in filing the said cross-objections.

Now, before us the learned Counsel for the assessee read out the condonation petition and affidavit filed by the CEO/ Managing Director of the assessee company. When it was pointed out to the learned Counsel what is the reasonable cause for delay of this cross objection, he could not give any satisfactory reply. He alternatively argued another proposition that the respondent can raise the issue on grounds decided against him under Rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963 as decided in the case of ITO vs. Smt. Gurinder Kaur (2006) 102 ITD 189 (Delhi) and also of Hon’ble Bombay High Court in the case of B.R. Bamasi vs. CIT [1972] 83 ITR 223 (Bom), which was dealing with the case of rights of the respondent to defend the order appealed against and held that the respondent would be entitled to raise new ground in defense of the order appealed against, provided it does not necessitate any other evidences to be recorded, the nature of which would not only be defense to the appeal itself, but may also effect the validity of the entire assessment proceedings. Further, the Hon’ble Bombay High court in the case of CIT vs. Gilbert & Barker Manufacturing Co., U.S.A. [1978] 111 ITR 529 (Bom) made no distinction between the appellant and the respondent in an appeal before the Tribunal and held that both are entitled to raise new points or contentions subject only to the condition firstly that no new facts are require to be brought ton record and is capable of being disposed on the facts on record, subject to opportunity to the other sides to meet that point which is laid to be raised for the first time in appeal.

In the present case before us, during the course of hearing, the assessee argued for exclusion of certain comparables which were argued before CIT(A) decided against the assessee, which were raised

Now we will take up the appeal of Revenue and the arguments raised by assessee under rule 27 of the Tribunal Rules.

Brief facts are that during the year under consideration the assessee has provided software development services i.e. IT services and also IT enable services i.e. ITES services to its associate enterprises. The TPO adopted Transactions Net Margin Method (in short ‘TNMM’ as the most appropriate method and conducted a fresh comparability analysis whereby, he selected 17 comparables in IT services segment and 9 comparables in ITES segment for determining arm’s length price of both the transactions. Accordingly, TPO made TP adjustment in respect to IT services and ITES services to its AE. The assessee preferred the appeal before CIT(A), who partly allowed the appeal of the assessee, whereby he excluded the comparable in in IT services segment i.e. Exensys Software Solutions Limited and also granted standard deduction of ± 5%.

As regards to the exclusion of comparable taken for bench mark of the IT segment of the assessee, the revenue contested the exclusion made by CIT(A) of Exensys Software Solutions Limited and argued that this company qualifies all the required filters proposed by TPO as the company’s turnover is Rs. 7.3 crore in FY year 2004-05 relevant to this AY 2005-06. The company does not have any subsidiary/foreign shareholding and the company has also does not have any related party transactions. Revenue contended that the assessed did not object to or

We find that this very company was considered by the Tribunal K Bench Mumbai in ITA No. 1610/Mum/2011 for AY 2005-06 in the case of DCIT vs. Globe Op Financial Services India vide order dated 13.06.2016 has considered for exclusion by observing as under : -

Therefore, following the consistent view of the co–ordinate bench and also for the reason that amalgamation effected during the year might have impacted the margin of this company, we agree with the learned Commissioner (Appeals) that it cannot be treated as a comparable.”

From the above & the facts of the case, we find that it has nowhere brought out as to how this company is a product company. Further, this company has only one segment and as per Director’s report during the year under consideration the company has earned an income of Rs. 737.79 lakhs which consists of an export turnover of Rs. 691.76 lakhs. This was due to amalgamation of Hollon India Ltd. with the assessee and amalgamation was approved by Hon’ble Andhra Pradesh High Court vide his order dated 05-09-2005 effective from 01-04-2004. In view of these facts, this company cannot be compared with the assessee due to extra ordinary event of amalgamation during the year under consideration. Accordingly, we are of the view that the CIT(A) has rightly directed for exclusion. We confirm the order of CIT(A) on this issue and the appeal of Revenue is dismissed.

Similarly, the assessee in its plea taken under rule 27 of the Tribunal Rules, requested for exclusion of Infosys Technologies Ltd. in IT segment, which was not excluded by CIT(A). According to CIT(A), scale of operation is not comparable with assessee and Infosys Technologies Ltd. But, according to him, scale of operation and economy of scale does not affect the profitability in the service industry as would be there in the brick and mortar companies and manufacturing companies. According to CIT(A), even the assessee could not brought Page 9 of 25

At the outset Ld. Counsel for the assessee stated that the this comparable is covered in favour of assessee by co-ordinate Bench decision in the case of Intoto Software India Private Limited vs. ACIT in ITA No. 1196/Hyd/2010 for the assessment year 2005-06 vide order dated 24.05.2013 and which was affirmed by Hon’ble Andhra Pradesh High Court in ITTTA No. 233 of 2014 dated 27-03-2014, and the Tribunal vide Paras 18-21 reads as under: -

The learned D.R. however, supported the Orders of the authorities below.

We have heard both the parties. We find that Infosys Technologies Ltd., though, is into the similar

In the result, we direct the Assessing Officer/TPO to exclude this company from the list of comparables.”

We find that Infosys had hybrid business model of supplying products and providing services to its customers which cannot be compared a pure software service provider, which the assessee is and therefore, this company should be excluded as comparables. There is no segmental data available between product and service segment of this company. Even Infosys Technology Limited is having huge turnover as reported in FY 2004-05 at Rs. 6859.66 crores, the details are enclosed in assessee’s paper book at page 609. Even the Brand Intangibles has value of Rs. 14,153 crores and the details of the same are provided by the assessee in its paper book at page 690. In view of these differences, and the fact that this company excluded in the IT segment by co-ordinate Bench in the case of Intoto Software India Private Limited (supra). Respectfully following the co-ordinate Bench decision, we direct the CIT / TPO to exclude this company from comparables. We direct the CIT accordingly.

Similarly, the assessee in its plea taken under rule 27 of the Tribunal Rules, requested for exclusion of Thirdware Solutions Ltd. in IT segment, which was not excluded by CIT(A). The CIT included as comparable to this company for the reason that the company qualifies all Page 11 of 25

At the outset Ld. Counsel for the assessee stated that the this comparable is covered in favour of assessee by co-ordinate Bench decision in the case of Intoto Software India Private Limited vs. ACIT in ITA No. 1196/Hyd/2010 for the assessment year 2005-06 vide order dated 24.05.2013 and which was affirmed by Hon’ble Andhra Pradesh High Court in ITTTA No. 233 of 2014 dated 27-03-2014, and the Tribunal vide Paras 23 & 26 decided the issue, which reads as under: -

As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company Page 13 of 25

We find that THIRDWARE SOLUTIONS LIMITED has hybrid business model of supplying products and providing services to its customers, which cannot be compared to a pure software service provider. Further, it also earns Revenue from subscriptions and no segmental data are available between the product and service segment. We also find that the company’s sales in export segments are reported at Rs. 14.74 crores but no further details are available about the nature of export. In view of these facts, we are of the view that this company is not comparable and should be excluded. We direct the AO / TPO accordingly.

The next issue by the assessee in its plea taken under rule 27 of the Tribunal Rules, requested for exclusion of VISHAL INFORMATION TECHNOLOGIES LIMITED in ITES segment, which was not excluded by CIT(A). It was contended by the assessee that Employee Cost to Total Revenue ratio is less than 25%, hence not meeting TPO’s own filter and moreover, it is a distributor Company which is not comparable to the assessee. But the TPO noted that this company qualified all the filters applied and as per the details available in public domain, the company is functionally comparable, had more than Rs. 1 cr. turnover and did not have significant related party transactions. The company’s profit and loss account was reproduced by the TPO from the prowess database. The CIT(A) also noted from the its annual accounts wherein, under the Schedule 15, the trading and operating expenses have been given which

At the outset Ld. Counsel for the assessee stated that the this comparable is covered in favour of assessee by co-ordinate Bench decision in the case of DBOI Global Services Pvt. Ltd vs. ACIT in ITA No. 812/Mum/2012 for AY 2005-06 dated 24-08-2016 and also by the decision of Hon’ble Delhi High Court in the case of Rampgreen solutions Pvt. Ltd. Vs. CIT in ITA No. 102/2015 dated 10-08-2015. Hon’ble High Court has considered the issue as under :-

Even Tribunal in DBOI Global Services Pvt. Ltd. (supra) has considered for exclusion of Vishal Information Technologies Ltd. as under: -

On perusal of the records, we find that Vishal Information Technologies Limited outsourced most of its business as against assessee’s business was done in house. Further, the employee cost to total cost in the case of Vishal Information Technologies Limited is 1.36% as against 25% incurred by assessee. In view of these facts, we direct the AO/ TPO to exclude this comparable and this plea of the assessee is allowed. We direct the AO accordingly.

The next issue by the assessee in its plea taken under rule 27 of the Tribunal Rules, requested for exclusion of WIPRO BPO SOULTIONS LIMITED in ITES segment, which was not excluded by CIT(A). The assessee contended that Scale of Operations are not comparable with the assessee and the turnover of the WIPRO BPO SOULTIONS LIMITED is Rs.647 crores, and hence, this company should not be included in the set. The AO/ TPO stated that this company qualifies all the filters applied by the TPO. As per the details available in public domain the company is functionally comparables and had more than Rs. 1 Cr. turnover did not have significant related party transactions. The company’s profit and loss account was reproduced by the TPO from the Prowess data base. The CIT(A) noted that there is no doubt that the scale of operation is not comparable. But the scale of operation and economy of scale does not affect the profitability in the service industry as would be there in the brick and mortar companies of the manufacturing companies. Further the assessee in its submission has not brought out any facts/ figures which could prove that the economy of scale has affected the profitability of this economy of scale has affected the profitability of this company. It is also seen that in the software industry even the small companies have earned much better margins and vice-versa. Accordingly, the contention of the

At the outset Ld. Counsel for the assessee stated that the this comparable is covered in favour of assessee by co-ordinate Bench decision in the case of DBOI Global Services Pvt. Ltd vs. ACIT in ITA No. 812/Mum/2012 for AY 2005-06 dated 24-08-2016. The Tribunal has excluded this comparable vide para 16 as under: -

We have considered the submissions of the parties and perused the material available on record. We have noted that the Transfer Pricing Officer while selecting / rejecting comparable has applied the turnover filter of more than ` 1 crore. It is also a fact on record that the Transfer Pricing Officer excluded one of the companies selected by the assessee viz. Online Media Solutions Ltd. by stating that the turnover of assessee is more than 23 times of the selected company. That being the case, applying same logic, the Transfer Pricing Officer should have excluded Wipro BPO Solutions Ltd. as turnover of Wipro at ` 647.71 crore is about 27.55 times of the turnover of assessee at `23.51 crore. The Hon'ble Jurisdictional High Court in Pentair Water India Pvt. Ltd. (supra) excluded high turnover companies like HCL Comnet Systems, Infosys, Wipro Ltd., due to huge disparity in turnover. Applying the same principle, Wipro BPO Solution cannot be treated as comparable to the assessee. We have also noted, for the aforesaid reason, different benches of the Tribunal in the decisions cited before us by the learned Authorised Representative have

In view of the above, we have perused the facts of the case and find that WIPRO BPO SOLUTIONS LIMITED is not comparable for the reason that the WIPRO is a market leader and element of Brand value is associated with them. Even the turnover of WIPRO BPO SOLUTIONS LIMITED is Rs. 647.71 crores for the FY 2004-05, which is at least 153 times of the turnover of the assessee. The turnover of the assessee is merely Rs. 6.33 crores. The details are given at page 47 and 770 of assessee’s paper book. In view of the above, we direct the AO/ TPO to exclude this comparable and this issue of assessee is allowed.

The next issue by the assessee in its plea taken under rule 27 of the Tribunal Rules, requested for exclusion of MAPPLE E-SOLUTIONS LIMITED in ITES segment, which was not excluded by CIT(A). The assessee contended that the company has intangibles to the extent of Rs. 83,88,737/- and the presence of intangibles would enable the company to have an edge over similar companies functioning in the same sector as the company and also enable it to have a better brand recall over its competitors. Accordingly, it is not comparables to the assessee’s operation. The AO / TPO and CIT(A) was of the view that the company is into ITES and satisfies all the filters applied by the TPO. The CIT(A) noted that the presence of intangible assets is specifically not pointed out in the annual report of the company by the assessee. Further from schedule 5 (fixed assets of the annual report presence of any intangible assets is not seen). It is also not clear if there is any intangible asset then what kind of it is? Sometimes even the software licenses used for general business purposes are also termed as intangible assets. Under such facts and circumstances, the contention of the assessee that the company would have different profitability because of the presence of

At the outset Ld. Counsel for the assessee stated that the this comparable is covered in favour of assessee by co-ordinate Bench decision in the case of Market Tools Research Pvt. Ltd., Vs. DCIT in ITA No. 1150/Hyd/2011 for AY 2005-06 dated 05-02-2014 vide para No. 15 and 16 as under :-

Having heard the submissions of the parties and considering the material on record, we find that various Benches of the ITAT including Hyderabad Benches have held that the aforesaid company cannot be treated as comparable as its financial results are not reliable. As can be seen from the materials placed on record, even in assessee's own case the ITAT, Hyderabad Bench and DRP respectively for the assessment years 2007 08 and 2008 09 have directed not to treat this company as a comparable. In such view of the matter, we direct the AO/TPO not to consider this company as a comparable.”

Similar arguments were placed before us, and on perusal of case records, we find that the financials of Mapple E-Solutions Limited cannot be relied upon for the purpose of comparability with the assessee because the directors of the company were found engaged in fraudulent activities. Accordingly, we direct the AO / TPO to exclude this comparable. We direct the AO accordingly.

The second issue in this appeal of Revenue is as regards to the order of CIT(A) in allowing deductions under section 10A of the Act. For this Revenue has raised following ground No. 3: -

Briefly stated facts are that the AO during the course of assessment proceedings noticed that the assessee for the purposes of computation of income and deduction under section 10A of the Act is reflected an amount of Rs. 41,35,81,870/- as export turnover. On verification of records, the AO found that the assessee company is included within the turnover the following expenses for its information technology (IT) and Information Technology Enable services (ITES) units as under: -

According to AO, in view to the proviso to explanation 2VI of section 10A(8) of the Act, the expenses of Rs. 1,45,5,363/- towards freight, telecommunications and insurance attributable to the delivery of the computer software outside India is to be reduced from export turnover. According to hi, the providing services relating to computer development and deployment falls within the meaning of technical services. Accordingly, he reduced the amount of Rs.12,32,4,801/- from the export turnover and deduction was computed under section 10A by disallowing an amount of Rs. 2,44,85,132/-. Aggrieved, assessee preferred the appeal before CIT(A), who allowed the claim of the assessee by observing in Para 5.4(iii) and (iv) as under: -

Aggrieved, now Revenue is in second appeal before Tribunal. The learned Counsel for the assessee stated that in assessee’s own case for the AY 2004-05 Hon’ble Bombay High Court in Income Tax Appeal No. 3474 of 2010 dated 30-06-2011 has allowed the claim of the assessee vide para 7 and 8 as under: -

The learned Counsel for the assessee also drew our attention to the Tribunal’s order in assessee’s own case for AY 2003-04 and 2004-05 in ITA No. 1311 and 2125/Mum/2012 wherein Tribunal has allowed the claim of the assessee vide para 7. The learned Sr. DR conceded the position.

After hearing the rival contentions and gone through the facts and circumstances of the case, we find that the issue is squarely covered in favour of assessee in assessee’s own case for AY 2003-04 and 2004-05 which was confirmed by Hon’ble Bombay High Court. Respectfully, following the same we confirm the order of CIT(A) and dismissed the issue of Revenue’s appeal.

In the result, the plea of assessee under rule 27 of the Tribunal Rules is allowed and the appeal of Revenue is dismissed. Order pronounced in the open court on 18-10-2017.