M/S. STERIA INDIA LTD.,NOIDA vs. DCIT, NEW DELHI

impugned order to this extent and direct that the interest income apportioned to the eligible unit be not separately reduced since the Business profits eligible for deduction u/s 10A were already exclusive of the same. This ground is allowed.

9.1. Ground no. 2 is against making of transfer pricing adjustment amounting to Rs.75,47,44,000/- in the `Software development services’ segment of the assessee.

9.2. Briefly stated, the facts of the case are that the assessee is a subsidiary of Steria UK Corporate Ltd., UK, an I.T. service company in the United Kingdom. The assessee provides both software and BPO services to its customers. It reported, inter alia, an international 11 transaction of `Provision of software services’ with the transacted value of Rs.3,31,67,83,807/-. The Transactional Net Margin Method (TNMM) was selected as the most appropriate method with the Profit level indicator (PLI) of Operating Profit/Operating Cost (OP/OC).

Certain companies were selected, whose mean OP/OC was shown within the permissible range of the assessee’s declared profit rate. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the arm’s length price (ALP) of the international transactions. In the original order dated 17.1.2014 passed by the TPO, 16 companies were considered as comparable with an average of OP/OC at 33.45%. The Dispute Resolution Panel (DRP), vide its order dated 20.10.2015, directed to consider the forex fluctuation gain/loss as an item of operating nature and also to exclude three companies from the final set of comparables drawn by the TPO, namely, Infosys Ltd., Persistent Systems Pvt. Ltd. and Wipro Technologies Services Ltd. The AO, in his final order dated 30.11.2015, giving effect to the DRP’s direction, considered foreign exchange fluctuation as an item operating nature in the hands of comparables only. Thereafter, certain 12 rectification proceedings were taken up before the DRP, TPO and AO.

Vide the final order passed by the AO u/s 154 dated 28.4.2016, the amount of TP adjustment got reduced to Rs.37,39,22,000/- with the following 12 companies as comparable :-

Sl.No. Name of the Company WC adjusted OP/OC (%) 1. Akshay Software Technologies Ltd. 1.07 2. E-Infochips Bangalore Ltd. 67.97 3. Evoke Technologies Ltd. 22.74 4. E-Zest Solutions 18.14 5. Larsen & Toubro Infotech Ltd. 25.29 6. LGS Global Ltd. 10.29 7. Mindtree Ltd. 25.8 8. RS Software (India) Ltd. 15.16 9. Sasken Communication Tech Ltd. 27.78 10. Tata Elxsi Ltd. 19.79 11. Thinksoft Global Services Ltd. 12.37 12. Thirdware Solutions 42.8

Profile of Steria Group as a whole has been given in para 2.03 of the TP study report, which manifests that the Steria Group is a major I.T. service provider in Europe in Public sector, Financial services, Telecommunications and media, Retail, Utilities and Transport. Profile of the assessee has been set out in para 2.02 of the paper book. Under the segment ‘Software services’, the assessee is engaged in providing Software development services to Steria UK both offshore software development services rendered in India and onsite software development rendered at the client’s location in UK. Apart from that, the assessee is also providing Maintenance services to Steria Ltd., UK in respect of the projects handled from India and the projects executed at the client’s location in UK. In addition, the assessee is providing Testing services, which comprise of Testing and quality assurance consultancy, Managed testing services, Business process testing, Test automation, Specialized testing and Test environment services. We have also gone through the Agreement effective from 1.4.2009 between the assessee and Steria Ltd., UK, whose copy has been provided to us. This Agreement provides that Steria Ltd., UK, undertakes software projects primarily for UK clients and the assessee is engaged in providing similar services as Steria Ltd., UK. There is no detailed elaboration of services to be rendered except a brief mention in clause 2 of the Agreement, as per which Steria Ltd., UK, shall identify specific requirements/projects in respect of which it may wish to avail, inter alia, software services from the assessee at the prescribed rates of remuneration. This shows that the assessee is basically engaged in providing software development services to its only client, Steria Ltd., UK, catering to its customers in Public sector, Financial services, Telecommunications and media, Retail, Utilities and Transport. With this backdrop of the nature of services rendered by the assessee, we will proceed to examine the comparability or otherwise of the companies assailed before us.

12.1. Before that, we would like to deal with a submission advanced by the ld. AR, which is common to most of such companies, that certain Benches of the Tribunal in other cases have held them to be not comparable. In that view of the matter, it was urged that those companies, being ex facie incomparable, be excluded from the list of comparables drawn by the TPO.

12.2. We express our reservations in accepting such a broad proposition. It is axiomatic that if company ‘A’ is functionally different from company ‘B’, then, such a company cannot be considered as comparable. Two companies can be treated as comparable when both are discharging the overall similar functions, though there may be some minor differences in such functions, not marring the otherwise comparability. Notwithstanding the functional similarity, many a times a company ceases to be comparable because of other reasons as well. To cite an example, if company ‘A’, though functionally similar to company ‘B’, but has related party transactions (RPTs) breaching a particular level, then, such company cannot be considered as comparable to company ‘A’ in the year in which the RPTs breach such a level. If, however, in the subsequent year, the related party transactions fall below that barrier, then such company would again become comparable. In the like manner, a company might have been treated as non-comparable due to the TPO adopting its entity level results for comparison with the segmental results of the case before him, but in a later case, the TPO may take only the related segment results. In such a later case, the company treated as non-comparable to the first company may become comparable to the second company. To put it simply, if company ‘A’ has been held to be incomparable vis-a-vis company ‘B’, then it is not essential that company ‘A’ would be incomparable to company ‘C’ also.

What is relevant to consider is, firstly, the functional profile of company ‘A’ vis-a-vis company ‘C’. If both are functionally similar, then notwithstanding the fact that company ‘A’ was held to be incomparable to company ‘B’, it may still be comparable to company ‘C’. Despite the fact that company ‘A’ is functionally similar to company ‘B’, it still 17 might have been declared as incomparable to company ‘B’ because of other relevant reasons. If company ‘A’ passes the same reasons vis-a- vis company ‘C’, then company ‘A’ will find its place in the list of comparables of company ‘C’, notwithstanding the fact that it was held to be incomparable to company ‘B’. The crux of the matter is that the mere fact that company ‘A’ has been held to be not comparable in a judicial order passed in the case of company ‘B’, does not per se make it incomparable in all the subsequent cases to follow. Not only company ‘A’ held to be incomparable to company ‘B’ can be comparable to company ‘C’, but company ‘X’ held to be comparable to company ‘Y’ can also be incomparable to company ‘Z’, depending upon the functional profile and the applicability or otherwise of the related factors. Thus, it is clearly deductible that if a particular company has been held to be not comparable in the case of another company, then such former company will also cease to be comparable to the assessee company also. The comparability of each company needs to be ascertained only after matching the functional profile and the relevant reasons of the other company. Ergo, this preliminary contention raised on behalf of the assessee is rejected as devoid of merits.

The assessee is aggrieved against its inclusion in the final tally of comparables.

14.2. After considering the rival submissions and perusing the relevant material on record, we find from the Annual report of this company, a copy of which is placed at page 212 onwards of the paper book, that its only source of revenue is `Income from Software services’ to the tune of Rs.43,04,66,481. Segmental information has been given 19 as note no. 16 on page no. 219 of the paper book indicating that: “The company is primarily engaged in Software Development and I.T. enabled Services which is considered the only reportable business segment…….”. From the above Note, it is clear that this company is engaged in rendering not only Software development, but also I.T. enabled services and has combined revenues from both the streams clubbed under the main head of ‘Income from software services.’ The assessee is also engaged in rendering Software development services and I.T. enabled services. However, both these segments have been separately benchmarked and the dispute under consideration is only qua the segment of Software development services. Since there is no separate information available of this company relating to Software development services and the details of income have been given in a consolidated manner also including I.T. enabled services segment, we are not inclined to treat this company as comparable on entity level with the only Software development services segment of the assessee. This company is, therefore, directed to be excluded from the list of comparables. 20 ii) Thirdware Solutions 15.1. The TPO proposed this company as comparable. The assessee objected to its inclusion in the list of comparables by contending that its segmental results were drawn on geographical basis.

The TPO rejected the assessee’s contention by noticing that the revenues in the Overseas segment came from export of software services and the balance revenue coming from India segment were in relation to Subscription, Sale of licence and Other software services. The assessee is aggrieved against the inclusion of this company in the list of comparables on the basis of such geographical segments.

15.2. We have heard the rival submissions and perused the relevant material on record. The Annual accounts of this company are available on pages 222 onwards of the paper book. From the copy of Profit & Loss Account, it can be seen that there are two items of income, viz., `Sales’ and `Other income’. Bifurcation of `Sales’ as per Schedule 12 consists of Export from SEZ units, Export from STPI unit, Revenue from subscription, Sale of Licence and Software services. It is further discernible from the Segment reporting, as reproduced on page 76 of the 21 TPO’s order, that the figures have been given on the basis of Geographical segments, viz., `India’ comprising of Products and other services and `Overseas’ comprising of Software services. The TPO has taken only the `Overseas’ segment for the purposes of inclusion in the list of comparables, which encompasses only export of software services. As the segment of the assessee under consideration is also only Software services, it is vivid that this segment of Thirdware Solutions taken by the TPO fully matches and is hence comparable. We, therefore, hold that the TPO was justified in including this company in the list of comparables.

16.1. This company was chosen by the TPO as comparable by noticing that its operations predominantly related to providing systems integration and software development services in the information technology field. The assessee’s objections as to the functional dissimilarity were ignored. That is how, the assessee is in appeal before us against the inclusion of this company in the final set of comparables.

16.2. After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available on page 241 onwards of the paper book, from which it can be seen that it has two items of revenue, viz., `Sales and services’ and `Other income’. Breakup of ‘Sales and services’ totaling Rs.37,637.04 lac is available as per Schedule 13. First item amounting to Rs.2167.51 lac is ‘Sales and support’ and the remaining amount of Rs.35469.53 lac is `Services’. The TPO has taken entity level figures of this company for comparison. On going through the details of Current assets, it can be seen that there are inventories amounting to Rs.6.24 lac as at the end of the year. This shows that this company, apart from rendering software development services, is also engaged in making sales of software, which is component of ‘Sales and support’ amounting to Rs.2167.51 lac. As the assessee is not engaged in any sale of products, this company, on entity level, ceases to be comparable. We, therefore, order for the exclusion of this company. iv) Sasken Communications 17.1. This company was originally taken by the assessee as comparable, which was not objected to by the TPO. The ld. AR contended that this company was inadvertently included in the list of comparables. Inviting our attention towards the Annual report of this company, it was impressed that it has shown revenues under one head alone with the caption of ‘Revenues’, which is common to Software services, Software products and Other services. As the assessee was not engaged in any software Products, the ld. AR contended that the same be excluded.

17.2. The ld. DR vigorously objected to the even consideration of the contention of the assessee for the exclusion of Sasken Communications on the reasoning that it was chosen as comparable by the assessee itself and now it was impermissible to resile from its own stand. Referring to page 213 of the paper book, being Annexure 4, which is part of the Transfer pricing study report, the ld. DR pointed out that this company has been consistently treated by the assessee as comparable, not only in the year under consideration, but immediately two preceding years as 24 well. On merits, it was pointed out that segmental information has been given by this company in Note no. 9 to the Notes to Accounts. He invited our attention towards Segmental Profit & Loss Account giving break-up of revenue amounting to Rs.40,150.89 lac in three parts, namely, from Software services at Rs.37,736.22 lac, Software products at Rs.2,041.90 lac and Other services Rs.372.77 lac. It was shown that there is also a mention in the Annual report of separate profits in respect of the above three segments. It was, ergo, argued that there was no warrant for excluding this company from the final set of comparables.

17.3. We are disinclined to sustain the preliminary legal objection taken by the ld. DR that the assessee should be prohibited from taking a stand contrary to the one which was taken at the stage of the TP study or during the course of proceedings before the TPO. It goes without saying that the object of assessment is to determine the income in respect of which the assessee is rightly chargeable to tax. As the income not originally offered for taxation, if otherwise chargeable, is required to be included in the total income, in the same breath, any income wrongly included in the total income, which is otherwise not chargeable, should be excluded. There can be no estoppel against the provisions of the Act.

Extending this proposition further to the context of the transfer pricing, if the assessee fails to report an otherwise comparable case, then the TPO is obliged to include it in the list of comparables, and in the same manner, if the assessee wrongly reported an incomparable case as comparable in its TP study and then later on claims that it should be excluded then, there should be nothing to forbid the assessee from claiming so, provided the TPO is satisfied that the case so originally reported as comparable is, in fact, not comparable. The Special Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd)

(SB) 1 has also held that a case which was included by the assessee and also by the TPO in the list of comparables at the time of computing the ALP, can be excluded, if the assessee proves that the same was wrongly included.

17.4. Reverting to the facts of the extant case, we find that the assessee itself treated this company as comparable not only in this year but also in at least two preceding years. Though there is no legal embargo in claiming that this company was wrongly treated as comparable, but the TPO must get an opportunity to vet the assessee’s claim of non- comparability. The Annual report of this company giving break-up of the segmental revenues etc. was not available with the TPO, who simply accepted the assessee’s claim of comparability. Now since the assessee is resiling from its consistent stand of comparability, it is but natural that the TPO should also be given an opportunity to examine the assessee’s claim and then decide as to the comparability or otherwise of this company. We, therefore, set aside the impugned order to this extent and direct a fresh examination of the assessee’s claim in this regard.

(i) CG Vak Software & Exports Ltd. 19.1. This company was included by the assessee in the list of comparables. The TPO excluded the same by noticing that it was operating in I.T. and ITES segments. The assessee is aggrieved against such exclusion.

19.2. We have heard the rival submissions and perused the relevant material on record. The Annual report of this company is available on pages 1-42 of the paper book. It can be seen from the Profit & Loss Account of this company that the first item under the head ‘Income’ is ‘Income from Software Development, Services & Products’, which has been split into two parts, namely, `Overseas’ and `Domestic’ markets.

Under the head ‘Significant Accounting Policies’, this company has provided under the head ‘Revenue recognition’ that the revenue from software development services and products are recognized on completion of contract or stage of completion as per the applicable terms and conditions agreed with customers. When we peruse Schedule-12 detailing `Income from Software Development, Services & Products’ in `Overseas’ market, it comes to the fore that apart from earning income from Software services, this company also earned income from ‘Business process outsourcing services’, which falls in the realm of I.T. enabled services. Note no. 6 to Notes annexed and forming part of the accounts for the year further divulges that this company earned income from `Medical transcription’, which has been rightly categorized as `Business process outsourcing’ services. Directors’ report under the head `Review of Business’ discloses that: `The contributions of business from various markets were : Software services contributed to 86% and BPO services 14%’. Since the income of this company also includes income from I.T. enabled services and there is no segmental information qua the software services alone, we are constrained to treat it as comparable and the same is held to have been rightly excluded.

19.3. While dealing with E-Infochips Bangalore Ltd. (supra), whose inclusion was assailed by the assessee, we have adopted the same reasoning for directing its exclusion. In line with the reasons ascribed to above while excluding E-Infochips Bangalore Ltd., Bangalore, we countenance the action of the TPO in excluding this company from the list of comparables.

(ii) Goldstone Technologies Ltd. 20.1. This company was included by the assessee in the tally of comparables which was excluded by the TPO by holding that it was engaged in the field of I.T. and I.T. enabled services and presently rendering I.T. enabled services. The assessee’s contention that it was only in software development services, was rejected by the TPO after referring to the relevant pages of the Annual report of this company.

The assessee is aggrieved against such exclusion.

20.2. Having heard both the sides and perused the relevant material on record, we find from the Profit & Loss Account of this company which is available on page 71 of the paper book that it earned `Income’ by way of `Sales exports’ and `Sales domestic’. Bifurcation of such Sales has been given in Schedule No.13 with the narration: “Software & Services – Exports – Domestic.” Thus, it is clear that this company, apart from earning income from software, is also earning income from I.T. enabled services. In its Annual report, under the head “12. Additional information required as per Paras 3 and 4 of Part II of the Schedule VI to the Companies Act, 1956”, it has been reported that: “The Company is engaged in Information Technology & Information Technology Enabled Services.” Segment revenues have been set out in Note 9, from which it is discernible that it earned income, inter alia, from “Media Division” amounting to Rs.17.40 Millions. The above discussion amply proves that it is not only exclusively engaged in rendering Software development services, but also I.T. enabled services and has also earned income from Media Division. No separate segmental information for deducing the PLI of this company from Software development is available on record. As we are considering the assessee’s `Software development’ segment alone, this company at entity level, ceases to be comparable. We, therefore, uphold the impugned order on this score.

(iii) Quintegra Solutions Ltd.

21.2. The assessee treated this company as comparable which version was rejected by the TPO on the ground that it was also a Product company having declining sales and very high debtors. The assessee has challenged the exclusion of this company.

21.2. Having heard both the sides and perused the relevant material on record, we find that the sales of this company are on falling trend. In the year ending 31.3.2008, this company made sales of Rs.88.12 crore which in the next year stood reduced to Rs.77.2 crore and in the year under consideration to Rs.37.38 crore, with a further slide to Rs.17.69 crore in the next year. “Review of Operations and Outlook” given in the Director’s Report makes it explicit that: “The company has not recovered from the burden of the heavy loss incurred by takeover of some companies as briefed in the last annual report.” This deciphers that the company is regularly incurring losses, which fact is further borne out from its Profit & Loss Account indicating having incurred loss of Rs.15.77 crore in this year and Rs.21.30 crore in the preceding year.

Though simplicitor high or low turnover cannot be a criteria for excluding a company from the list of comparables as has been held by the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd. vs. DCIT (2015) 376 ITR 183 (Del), but the persistent losses coupled with declining turnover over the period indicate abnormal financial circumstances, which render it non-comparable and 32 justify the exclusion of such a company from the list of comparables.

Under these circumstances, we are satisfied that the TPO was right in excluding this company from the list of comparables.

The order pronounced in the open court on 04.11.2016.