M/S ALCATEL-LUCENT INDIA LTD.,,GURGAON vs. DCIT, NEW DELHI

ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER: The present appeal has been preferred by the assessee against the order passed u/s 143(3) of the Income Tax Act, 1961 read with directions issued by the Hon’ble Dispute Resolution Panel (DRP) u/s 144C(13) of the Income Tax Act, 1961 (in brief ‘the Act’).

Particulars PLI used Margin earned by Arm’s Length Adjustment the Appellant margin proposed by the determined by TPO (in INR TPO Crores) CSD Services OP/TC 7.71% 26.72% 128.51 TSS OP/Operating 7.13% 19.49% 9.52 Revenue (OR) Total 138.03

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S.No. Company Name OP/TC 1. Acropetal Technologies Limited (IT Segment) 36.69% 2. Akshay Software Technologies Limited 0.16% 3. E-Infochips Limited 56.44% 4. Infosys Limited 43.53% 5. Larsen & Toubro Infotech Limited 18.40% 6. Mindtree Limited (Segment) 10.74% 7. Persistent Systems and Solutions Ltd. (Merged) 22.12% 8. Persistent Systems Ltd. 23.08% 9. R S Software (India) Ltd. 16.20% 10. Sankhya Infotech Limited (Segmental) 26.20% 11. Sasken Communication Technologies Ltd. 24.36% 12. Tata Elxsi Lgtd. (Segment) 13.00% 13. Wipro Technologies Limited 54.42% 14. Zylog Systems Ltd. 28.74% AVERAGE 26.72%

S.No. Company Name OP/TC 1. Octant Industries Limited 1.48% 2. Akshay Software Technologies Limited 0.16% 3. E-Infochips Limited 56.44% 4. Infosys Limited 43.53% 5. Larsen & Toubro Infotech Limited 18.40% 6. Mindtree Limited (Segment) 10.74% 7. Persistent Systems and Solutions Ltd. (Merged) 22.12% 8. Persistent Systems Ltd. 23.08% Page 4 of 50 Alcatel-Lucent India Ltd.

9. R S Software (India) Ltd. 16.20% 10. Sankhya Infotech Limited (Segmental) 26.20% 11. Sasken Communication Technologies Ltd. 24.36% 12. Tata Elxsi Lgtd. (Segment) 13.00% 13. Wipro Technologies Limited 54.42% 14. Zylog Systems Ltd. 28.74% AVERAGE 24.20%

“That on the facts and in the circumstances of the case, and in law:

2. The reference made by the ld. AO suffers from jurisdictional error as the ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was “expedient and necessary” to refer the matter to the ld. Additional Commissioner of Income Tax, Transfer Pricing – 1(3), New Delhi (“Ld. TPO”) for computation of the Arm’s Length Price (“ALP”), as is required under section 92CA(1) of the Act. 3. The Hon’ble Dispute Resolution Panel – 1 (“Hon’ble DRP”) has erred in relying on the order issued by the ld. TPO/ld. AO holding that the Appellant’s international transactions pertaining to provision of Contract Software Development (‘CSD’) and Technical Support Services (‘TSS’) entered into with the Associated Enterprises (“AEs”) do not satisfy the arm’s length principle and upholding the contentions of the ld. TPO /AO and the TP adjustments made by the ld. TPO/AO amounting to INR 1,11,47,85,326/- and INR 9,51,65,037/- pertaining to CSD Page 5 of 50 Alcatel-Lucent India Ltd. services segment and TSS segment, respectively and in doing so, has grossly erred in: 3.1 not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case. 3.2 Disregarding the ALP as determined by the Appellant in the contemporaneous TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 (“the Rules”) as well as the fresh search results (submitted by the Appellant using current year data on a without prejudice basis); and in particular modifying/rejecting the quantitative filters applied by the Appellant for benchmarking the CSD services segment and TSS segment; 3.3 Disregarding multiple year/prior years’ data as used by the Appellant in the contemporaneous TP documentation and holding that current year (i.e. FY 2010-11) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation for the CSD services segment and TSS segment; 3.4 Upholding the incorrect approach adopted by the ld. TPO of undertaking a fresh comparability analysis without providing any basis for additional/revised filters or by adopting economically and commercially inappropriate filters while determining the ALP for the Appellant’s CSD services segment and TSS segment. 3.5 Incorrectly excluding certain companies that were selected by the Appellant in its TP documentation/fresh search in its CSD

Page 6 of 50 Alcatel-Lucent India Ltd. services segment and TSS segment which were functionally comparable to the Appellant in terms of functions performed, assets employed and risks assumed by the Appellant in the aforementioned segments. 3.6 Incorrectly including certain companies that were primarily engaged in development of software products thereby owning significant intangibles or engaged in diversified business operations with no segmental information available in their annual reports and/or having highly volatile margins, in the final comparable set for determining the ALP for the Appellant’s CSD services segment. 3.7 Incorrectly including certain companies that were primarily engaged in high end consultancy and engineering services, in the final comparable set for determining the ALP for the Appellant’s TSS segment; 3.8 Arbitrarily including high-profit making companies in the final set of companies for benchmarking the international transactions of the Appellant in its CSD services segment and TSS segment without analyzing the contrasting difference in functions undertaken, assets employed and risks assumed by the said companies as compared to the Appellant’s functional profile in the aforementioned segments, thus demonstrating and intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the single-minded intention of making additions to the returned income of the Appellant;

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3.9 Resorting to arbitrary rejection of low-profit/loss making companies in the CSD services segment and TSS segment based on erroneous and inconsistent reasons; 3.10 Disregarding the fact that the ld. TPO had accepted the Appellant’s comparability analysis adopted for both CSD services segment and TSS segment in the immediate preceding year i.e. AY 2010-11 and in doing so, has also specifically erred in: 3.10.1 disregarding the fact that M/s Infosys Limited (selected by the ld. TPO as a comparable for benchmarking the Appellant’s CSD services segment) has been rejected by the Hon’ble Income Tax Appellate Tribunal, New Delhi in the Appellant’s own case in AY 2006-07; 3.10.2 disregarding the fact that M/s Mahindra Consulting Engineers Limited (selected by the ld. TPO as a comparable for benchmarking the Appellant’s TSS segment) has been rejected by the Hon’ble DRP in the Appellant’s own case in the immediate preceding year i.e. AY 2010-11; 3.11 rejecting Appellant’s claim for a working capital and risk adjustment in the CSD services segment and TSS segment without providing any cogent basis and without giving any consideration to the fact that the claim for working capital adjustment had been allowed by the Hon’ble DRP in the Appellant’s case in the immediate preceding year i.e. AY 2010- 11;

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3.12 disregarding the claim made by the Appellant (on a without prejudice basis) requesting for a proportionate TP adjustment under the TSS segment; and 4. That on facts and in the circumstances of the case and in law, the Hon’ble DRP as well as the ld. TPO/AO have erred in disregarding judicial pronouncements in India in undertaking the aforementioned TP adjustments.

5. That on facts and in the circumstances of the case and in law, the directions issued by the Hon’ble DRP are flawed as they include certain prima-facie mistakes/errors apparent from record for which, the Appellant has filed a rectification application u/s 154 of the Act before the Hon’ble DRP and the same is pending adjudication.

6. That on facts and in the circumstances of the case and in law, the order issued by the ld. TPO for giving effect to the directions of the Hon’ble DRP is incomplete for which, the Appellant has filed a rectification application u/s 154 of the Act before the ld. TPO as the ld. TPO while issuing the aforementioned order, has grossly erred in: 6.1 not completely following the directions of the Hon’ble DRP wherein it had issued specific directions to exclude M/s Wipro Technologies Limited (selected by the ld. TPO as a comparable for benchmarking the Appellant’s CSD services segment) after verifying the Appellant’s claim that the said company neither appears in the TP documentation Accept – Reject matrix submitted by the Appellant before the ld. TPO nor its financial

Page 9 of 50 Alcatel-Lucent India Ltd. data for the captioned AY was available in the public domain. However, the ld. TPO in his order issued for giving effect to the directions of the Hon’ble DRP, has not discussed anything about the said direction.

7. That on facts in the circumstances of the case and in law, the ld. AO has erred in initiating penalty proceedings u/s 271(1)(c ) of the Act mechanically and without recording any adequate satisfaction for its initiation. Corporate Tax Grounds 1. That based on the facts and circumstances of the case and in law, the ld. AO has erred in holding that liquidated damages of INR 2,34,58,106/- paid by the Appellant pursuant to breach of its contractual arrangements are penal in nature and are thus, not allowable u/s 37 of the Act.

2. That the ld. AO has erred on facts and circumstances of the case in observing that the Appellant has not produced any supporting documents/evidences and copies of agreements in support of claim of deduction of liquidated damages. The ld. AO did not appreciate that the copies of supporting documents/agreements were already filed during the course of assessment proceedings.

3. That the ld. AO has erred on the facts and circumstances of the case and in law in summarily rejecting the Appellant’s arguments and not considering the binding judicial precedents which squarely applies to the facts of the Appellant’s case.

4. That on facts in the circumstances of the case and in law, the ld. AO has erred in initiating penalty proceedings u/s 271(1)(c ) of the Page 10 of 50 Alcatel-Lucent India Ltd.

Act mechanically and without recording any adequate satisfaction for its initiation. The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of appeal either before or during the hearing before the Hon’ble Tribunal. Further, the aforesaid grounds are mutually exclusive and without prejudice to each other.”

The ld. AR, at the outset submitted that ground no. 5 regarding 8. rectification u/s 154 is no longer relevant as the assessee’s rectification application has already been disposed of. Hence, this ground is dismissed as being infructuous.

10.01 Allied Digital Services Ltd. – as per the TPO the said comparable fails the export filter. However, it is the assessee’s contention that for the purpose of comparability, it is essential to consider the functional comparability rather

Page 11 of 50 Alcatel-Lucent India Ltd. than the customers geographical location. The ld. AR submitted that the use of the filter is objected to on the ground that whether the tax payer earns its revenue from the domestic market or from the overseas, its function remains the same. The ld. AR further submitted that a company providing software services will charge the same rate from a client that is located in India or overseas. The ld. AR drew our attention to Rule 10B and submitted that since by applying this filter the profitability is being materially affected, the same should not be applied.

10.02 Helios and Matheson Information Technologies Ltd. – as per the TPO this comparable fails the different financial year ending filter. However, it is the assessee’s contention that the company files quarterly financial statements with the stock exchange which were available in the public domain and the details for the year ending 31/03/2011 can be obtained by consolidating the quarterly statements. The ld. AR submitted that the TPO has rejected this comparable on the ground that it has a different year ending. However, this problem can be overcome by apportioning the data from preceding or subsequent period so as to make the data equivalent to the financial year available for comparison with the International Transaction. It was further submitted that listed companies file quarterly audited statements and hence, collection and compilation of data was not an impossible task. Page 12 of 50 Alcatel-Lucent India Ltd. 10.03 The ld. AR submitted that the assessee has conducted a fresh search based on single year data and other quantitative filters for identifying comparable companies engaged in providing similar CSD Services as rendered by the assessee which was submitted before the Hon’ble DRP.

However, the DRP has not adjudicated on the issue. He drew our attention to annexure 1 to the Synopsis which contains the search process adopted for conducting a fresh search using financial data for AY 2011-12. The ld. AR submitted that both these comparables may be sent back to the TPO for verifying the export turnover as well as the quarterly data.

10.1 On ground no. 3.6 the ld. AR argued at length on the different comparables being objected to by the assessee and the Ld. CIT DR also put forth his arguments and objections as under:

(i) Wipro Technologies Ltd. – the ld. AR submitted that the Hon’ble

DRP had directed the TPO to reject the comparable for non availability of the data but the TPO failed to give effect to the directions of the Hon’ble DRP. The ld. AR submitted that Wipro

Technologies Ltd. does not appear in the TP documentation

Accept – Reject Matrix submitted by the assessee vide its submission dated 29/09/2014. It was further submitted that the Page 13 of 50 Alcatel-Lucent India Ltd. financial details of the company were also not available in the public domain.

The Ld. CIT DR relied on the order of the authorities below on this comparable.

(ii) E-Infochips Ltd. – The ld. AR submitted that the TPO is of the view that the activities of this company are functionally similar to the assessee’s CSD Services. However, E-Infochips is engaged in diversified services like IT Enabled Services, Development of Software Products and Solutions for Product Design and Development, Quality Assistance and Certification, reengineering, sustenance and volume production, Software Consulting and manufacturing EVM and VDB Electronic Board etc. The ld. AR further submitted that the schedule pertaining to the income statement of E-Infochips for AY 2011-12 shows that the company has a varied Revenue mix i.e. it earns revenue from Software

Development, Hardware Maintenance and Information

Technology Consultancy Services. It was further submitted that no segmental information was available in the annual report of the company as regards the revenue from sale of products and Page 14 of 50 Alcatel-Lucent India Ltd. revenue from Software Developments and hence, one cannot be deduce revenue from Software Services and the impact of the revenue from the software products on overall profit from the common pool of income from both the streams of software products and software services. The ld. AR also submitted that during the relevant assessment year E-Infochips had a significant

AMP/Sales Ratio of 15.74% whereas the assessee company did not undertake any AMP expenditure. The ld. AR also submitted that E-Infochips had an abnormal growth rate of 96% and also a volatile OP/TC margin trend which could be attributed to the fact that E-Infochips was pre-dominantly a consulting and engineering company with a strong focus on providing high and consulting services. The ld. AR also submitted that over the past three years including AY 2011-12, there has been an increased focus by E-

Infochips on rendering consulting services. The ld. AR relied on the decision rendered by the ITAT Delhi Bench in Saxo India

Private Limited (ITA No. 6148/Del/2015), wherein the ITAT

Delhi Bench has held that E-Infochips is to be rejected as a comparable on the ground that it earns income from software products and services and no segmental data is available. For the Page 15 of 50 Alcatel-Lucent India Ltd. proposition that non availability of segmental information in case of diversified operations renders a company not comparable, the ld. AR relied on the following decisions – Telcordia Technologies

India P. Ltd. (ITA No. 7821/Mum/2011), Trilogy E-Business Software India Pvt. Ltd. vs. DCIT (ITA No. 1054/Bang/2011), Transwitch India P. Ltd. vs. DCIT [ITA No. 948/Bang/2011, TS- 105-ITAT-2012(Bang)-TP], First Advantage Offshore Services Pvt. Ltd. (ITA No. 1252(Bang)/2010), CSR India (P) Ltd. vs. ITO [IT(TP)A (reference no. No. 1119/Bang/2011)], Intoto Software India Pvt. Limited, Hyderabad (ITA No. 233 of 2014). The ld. AR relied on the decision of the Hon’ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India

P. Ltd. in of 2014 for the preposition that software product companies owning intangibles cannot be compared with a software development services provider. The ld. AR also relied on the decision of the Hon’ble High Court of Delhi in the case of Rampgreen Solutions P. Ltd. in for the preposition that functionally different company cannot be considered as comparable company.

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The Ld. CIT DR submitted that on the facts of the assessee’s case the decision relied upon by the assessee in the case of Saxco India

Pvt. Limited (supra) was not applicable as even in E-Infochips there is no product and the company primarily dealt in provision of services and hence, the company was a good comparable. (iii) Infosys Limited – the ld. AR submitted that the TPO has held that Infosys is an independent company and is expected to come up with software development ventures that it can market to independent clients which does not shake its classification as a software service provider. The Ld. AR submitted that Infosys is engaged in providing software consulting and products, application design, development, reengineering and maintenance, system integration, package evaluation and implementation and business process management etc. The Ld. AR also submitted that Infosys had a significant turnover of Rs. 25385 crores which was approximately 35 times the assessee’s turnover of Rs. 728 crores. It was further submitted that Infosys developed/owns proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe and Infosys mConnect and owns significant intangibles. It was further submitted that Infosys had significant R&D expenditure of Rs. 527 crores and advertising/sales Page 17 of 50 Alcatel-Lucent India Ltd. promotion and brand building expenditure of Rs. 84 crores, whereas the assessee does not undertake any R&D and AMP expenditure.

The Ld. AR also submitted that Infosys has been rejected as a comparable by the ITAT in the case of assessee’s predecessor company Alcatel – Lucent Technologies India P. Ltd. for AY 2003- 04 and 2004-05. The Ld. AR also relied on the following decisions for the preposition that companies with high turnover have to be rejected – decision of the Hon’ble Delhi High Court in the case of M/s Agnity India Technologies P. Ltd. (ITA No. 1204/2011), Agnity India Technologies vs. Income-tax Officer- Telcordia (supra), Sonata Software Limited (ITA No. 3514/Mum/2010), Meritor LVS India (P) Limited, ITA No. 405 & 523/B/11 – ITAT Bangalore, Capital IQ Information Systems (India)

Pvt. Limited ITA No. 1961/Hyd./2011.

The Ld. CIT DR submitted that segmental data was available in the case of Infosys and it was also functionally similar to the assessee company and hence, it was an acceptable comparable.

(iv) Larsen and Turbro Infotech Ltd. – The Ld. AR submitted that the TPO has held that the company is dominantly working in software

Page 18 of 50 Alcatel-Lucent India Ltd. development activities. The Ld. AR submitted that L&T operates in software development services and earns revenue from licensing of products as would be evident from the profit and loss account of the annual report. The Ld. AR also pointed out that the annual report shows that L&T incurred cost in buying items for resale amounting to Rs. 25.55 crores this year which is a significant value. The Ld. AR also drew attention to the fixed assets schedule as contained in the annual report and pointed out that the company own significant intangibles. The Ld. AR relied on the decision of the ITAT Delhi Bench in Saxo India P. Ltd. (ITA No. 6148/Del/2015), wherein the ITAT has held that L&T cannot be taken as a comparable to a software development company. The Ld. AR also relied on the decision of the Hon’ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India P. Ltd. (ITA No. 233 of 2014), wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider. The Ld. AR drew attention to the annual report of L&T, wherein it has been mentioned that it is the company’s strategy to leverage on the well known L&T brand and create a market intangible of its own. For the proposition that non Page 19 of 50 Alcatel-Lucent India Ltd. availability of segmental information in case of diversified operations renders a company not comparable, the ld. AR relied on the following decisions – Telcordia Technologies India P. Ltd. (ITA No. 7821/Mum/2011), Trilogy E-Business Software India Pvt. Ltd. vs. DCIT (ITA No. 1054/Bang/2011), Transwitch India P. Ltd. vs. DCIT [ITA No. 948/Bang/2011, TS-105-ITAT-2012(Bang)-TP], First Advantage Offshore Services Pvt. Ltd. (ITA No. 1252(Bang)/2010), CSR India (P) Ltd. vs. ITO [IT(TP)A (reference no. No. 1119/Bang/2011)], Intoto Software India Pvt. Limited, Hyderabad (ITA No. 233 of 2014).

The Ld. CIT DR submitted that L&T also deals only in services and there were no products and the impact of acquisition on the margins is only miniscule and hence, the company cannot be rejected as a comparable.

(v) Persistent Systems and Solutions Limited – The Ld. AR submitted that Persistent Systems and Solutions Limited is a wholly owned subsidiary of Persistent Systems Ltd.. This company is engaged in diversified services such as software consultancy, software product development and system integration services unlike the assessee who

Page 20 of 50 Alcatel-Lucent India Ltd. is only involved in CSD activities. It was further submitted that this company is a part of Special Economic Zone and is entitled to various incentives provided by the Government. It was also submitted that segmental accounts in respect of various segments have not been disclosed in the accounts/annual report of this company, wherein the revenues and expenses have been presented in a consolidated form. The Ld. AR also referred to notes on accounts for revenue recognition and submitted that this company is engaged in (a) Software Development, (b) Licensing of Products, (c ) Sale of Software Products and (d) Maintenance Contracts. The Ld. AR also relied on the decision of the Hon’ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India P. Ltd. (ITA No. 233 of 2014), wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider.

The Ld. CIT DR submitted that in this case in the annual report/notes on accounts it has been mentioned that revenue is realized from products and services, whereas the income schedule does not reflect any revenue from products and hence, it can be safely assume that Page 21 of 50 Alcatel-Lucent India Ltd. this company does not have any revenue from product and as such, this company is in acceptable comparable.

(vi) Persistent Systems Limited – The Ld. AR submitted that the TPO has observed that this company’s income from sale of software products is only 8.8% of the total revenue. The Ld. AR submitted that this company is engaged into diversified services including intellectual property led software solutions and software products focusing on cloud computing, business intelligence and analytics etc. and owns significant intangibles. The Ld. AR referred to the profit and loss account of the company and submitted that it shows that the company had revenue streams from software services and products. He further pointed out that the revenues and expenses have been shown in a consolidated manner and no segmented disclosure has been made.

He further pointed out to the relevant pages in the annual report, wherein it has been stated that this company has acquired ownership of intangibles of around 50 crores. The Ld. AR submitted that since the company is engaged both in rendering software development services as well as sale of software products, in absence of segmental details, this company could not be selected as a comparable. The Ld. AR also submitted that this company has made significant Page 22 of 50 Alcatel-Lucent India Ltd. acquisitions during the year thereby failing TPO’s peculiar economic circumstances filter. The Ld. AR submitted that this company has been rejected on the ground that it earns income from software products and services and that no segmental data is available in the following cases – Saxo India Private Limited (ITA No. 6148/Del/2015), Ciena India Pvt. Ltd. (ITA No. 3324/Del/2013), Planet Online Pvt. Ltd. (ITA No. 464 and 608/Hyd./2014), 3D PLM Software Solutions Ltd. (ITA No. 1303/Bang/2012). The Ld. AR also relied on the decision of the Hon’ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India P. Ltd. (ITA No. 233 of 2014), wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider. The Ld. AR also submitted that companies facing an extra ordinary event, having volatile margins and having no segmental information cannot be selected as a comparable. He relied on the following decisions in support of his argument – Zavata India Private Limited, Hyderbad vs. DCIT (ITA No. 1781/Hyd./2011), Symphony Marketing Solutions India Pvt. Ltd. vs. ITO (ITA No. 1316/Bang/2012), NTT Data India Enterprise vs. ACIT (ITA No. 1612/Hyd./2010), Capital IQ Page 23 of 50 ITA No. 6856/D/15 Alcatel-Lucent India Ltd. Information Systems (India) Pvt. Ltd. vs. DCIT (ITA No. 1961/Hyd./2011), Petro Araldite Private Limited vs. DCIT (ITA No. 6217/Mum/2012).

The Ld. CIT DR submitted that from the perusal of the annual report revenue from product is not evident and hence, the company should remain in the list of comparables. The Ld. CIT DR further submitted that in this case the IP is related to services only and simply on the basis of statement in the annual report a company should not be discarded as a comparable.

(vii) Sankhya Infotech Limited(Service Segment) – The Ld. AR submitted that it is the TPO’s observation that segmental data in the annual report duly provides results of operations from services. The Ld. AR submitted that this company is a leading simulation and training solutions provider which provides end to end simulation solutions.

He further submitted that this company also develops customizable products for training purposes. He also submitted that this company is engaged in development of software products like Silicon thereby owning significant intangibles. He pointed out to the fixed asset schedule in the annual report and submitted that this company owns

Page 24 of 50 Alcatel-Lucent India Ltd. various software products like learning management products, training management products, simulator products, knowledge based content, optimization products, etc. He further submitted that the schedule pertaining to segment reporting in the annual report, to which the TPO has also referred to, is incomplete because depreciation and interest have not been specifically allocated to any specific segment as the underline services are used interchangeably.

Thus, this segmental information is incomplete and cannot be considered for comparability purposes. The Ld. AR further submitted that this company had a significant R&D expenditure of 7.5% and AMP expenditure of 5.15% and also had a volatile OP/TC margin. The Ld. AR further submitted that Sankhya Infotech Limited has been rejected on the ground that it owns software products in the following cases – Colt Technology Services India Private Limited [(TS-774-ITAT-2012(Del)], Integrated Decisions & Systems India (Private) Limited [(TS-629-ITAT-2011(JPR)], NTT Data India Enterprise Application Services Private Limited [IT-293- ITAT-2013(HYD-TP), Adaptech India (Private) Limited (ITA No. 481/Hyd./2011), Sunquest Information Systems (TS-299-ITAT- 2015(Bang)-TP). For the proposition that non availability of Page 25 of 50 Alcatel-Lucent India Ltd. segmental information in case of diversified operations renders a company not comparable, the ld. AR relied on the following decisions – Telcordia Technologies India P. Ltd. (ITA No. 7821/Mum/2011), Trilogy E-Business Software India Pvt. Ltd. vs. DCIT (ITA No. 1054/Bang/2011), Transwitch India P. Ltd. vs. DCIT [ITA No. 948/Bang/2011, TS-105-ITAT-2012(Bang)-TP], First Advantage Offshore Services Pvt. Ltd. (ITA No. 1252(Bang)/2010), CSR India (P) Ltd. vs. ITO [IT(TP)A (reference no. No. 1119/Bang/2011)], Intoto Software India Pvt. Limited, Hyderabad (ITA No. 233 of 2014).

The Ld. CIT DR submitted that the assessee cannot be given the liberty to pick and choose case laws and reliance should be placed on annual reports rather than judicial precedents where the annual reports give segmental data. He submitted that in this case the segmental data was very much available in the annual report and the same should not be ignored and accordingly, this company cannot be rejected as a comparable.

(viii) Sasken Communication Technologies Limited – The Ld. AR submitted that the TPO has contended that this company’s income

Page 26 of 50 Alcatel-Lucent India Ltd. from sale of software products is only 9.4% of the total revenue.

However, in absence of any segmental details pertaining to the corresponding costs, Sasken should not have been selected as a comparable. Ld. AR further submitted that this company is a provider of tele communication software services and solutions to network equipment manufacturers, mobile terminal vendors and semi-conductor companies. The company also delivers high end to end IT Solutions and provides full phone integration, IP led offerings in multi media and offerings for the android markets. This company also partners with semi conductor companies to provide turn key and end to end solutions ranging from chip design to other services. The Ld. AR drew our attention to the annual report and pointed out that the entity level figures of the company contain revenue from both software services as well as software products, whereas the assessee only provides software services. The Ld. AR further pointed out that the break up of revenue between the two segments is although available in the annual report but details regarding expenditure and profitability of the two segments have not been disclosed. The Ld. AR also pointed out that this company owns significant intangibles and also has a volatile OP/TC margin. The Ld. AR further submitted Page 27 of 50 Alcatel-Lucent India Ltd. that Sasken has been rejected on the ground that it owned IPRs and has branded products in the following cases – Freescale Semiconductor India Private Limited (ITA No. 5865/Del/2012), Motorola Solutions India Private Limited (ITA No. 5637/Del/2011).

The Ld. CIT DR submitted that in this case also the segmental data was very much available and the TPO has erred in taking the data at entity level.

(ix) Zylog Systems Limited – The Ld. AR submitted that the TPO has observed that as per the annual report of the company this company passes the service income filter and hence, can be used as a comparable. The Ld. AR further submitted that this company derives revenue from consultancy services, project and e Governance projects with a focus on software development, solutions and mobile technologies. It was further submitted that this company’s products and solutions segment covers the license fee for particular customized solutions provided together with the necessary integration work carried out. The Ld. AR further submitted that this segment typically carries superior profit margin on account of level of innovation, design work, customization, etc. Thus, it is Page 28 of 50 Alcatel-Lucent India Ltd. abundantly clear that Zylog has in -house developed intangibles thereby rendering its business model completely different from that of the assessee. The Ld. AR further pointed out to the annual report and submitted that the same shows consolidated revenues and expenses of software services and products. The Ld. AR further submitted that significant intangible is owned by the company as would be evident from the fixed asset schedule as appearing in the annual report. It was also submitted that the company had made acquisitions during the year as would be evident from the annual report. The Ld. AR further submitted that this company has significant R&D activities and also a significant AMP expenditure of 5.28%. The Ld. AR pointed out to the fixed asset schedule and submitted that it includes product development costs amounting to 18.75 crores (at net book value) and hence, this goes on to prove the fact that this company is a software product development company.

The Ld. AR further submitted that this company had a volatile OP/TC margin trend. The Ld. AR also submitted that Zylog has been considered as incomparable in Saxo India Private Limited (ITA No. 6148/Del/2015). The Ld. AR also relied on the decision of the Hon’ble High Court of Andhra Pradesh in the case of CIT II Page 29 of 50 Alcatel-Lucent India Ltd. Hyderabad vs. Intoto Software India P. Ltd. (ITA No. 233 of 2014), wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider. The Ld. AR also relied on the decision of the Hon’ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India P. Ltd. (ITA No. 233 of 2014), wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider.

The Ld. CIT DR submitted that in this case it is very much evident that there is no revenue from products and the entire revenue was from provision of services. The Ld. DR emphasized that substance should prevail over form. He pointed out that the product development cost could relate to e Governance Projects and hence, for that reason only, the company cannot be excluded as a comparable. Further submitted that the acquisition does not have any effect on profits and hence, this also cannot be a reason for exclusion from the list of comparables.

10.2 On ground no. 3.11, the ld. AR submitted that the assessee had claimed working capital adjustment in the Transfer Pricing Study and the calculations Page 30 of 50 Alcatel-Lucent India Ltd. thereof were submitted both before the TPO as well as the Hon’ble DRP.

However, both the TPO as well as the Hon’ble DRP have rejected the assessee’s claim for working capital adjustment. The Ld. AR submitted that the Hon’ble DRP has allowed working capital adjustment in the assessee’s own case in AY 2010-11. Ld. AR also submitted that the claim of working capital adjustment has now been settled in favour of the assesses in Demag Cranes & Components (India) Pvt. Limited in Cash Edge India Pvt. Limited in ITA No. 5365/Del/2010 and Vodafone India Services Pvt. Limited in ITA No. 7140/Mum/2012. On the issue of claim for risk adjustment, the Ld. AR submitted that the claim had been made both before the TPO as well as the Hon’ble DRP. However, both have denied the assessee’s claim. The Ld. AR further submitted that while estimating the return for uncontrolled company, there is a need to give an appropriate adjustment pertaining to market/systematic risk faced. Uncontrolled comparable companies operate under uncontrolled conditions bearing certain risks during the course of its operations. Therefore, such comparable uncontrolled companies earn a risk premium which is not earned by a captive software development provider similar to the assessee which is a risk averse and, therefore, the profits of the captive unit would be less than risk taking companies and hence, an adjustment in this regard is required. The Ld. AR Page 31 of 50 ITA No. 6856/D/15 Alcatel-Lucent India Ltd. placed reliance on Motorola Solutions India P. Limited in ITA No. 5637/Del/2011, Intellinet Technologies India P. Limited in ITA No. 1237/Bang/2010 and Bearing Point Business Consulting Pvt. Limited in ITA No. 1124/Bang/2011 in support of assessee’s claim for risk adjustment.

10.2.1 The Ld. CIT DR submitted that the assessee has failed to justify its claim for working capital adjustment and nothing had been demonstrated by the assessee to support its claim for the working capital adjustment. The Ld. CIT DR further submitted that the TPO had already given due consideration to this aspect and the issue needed no further adjustment. The Ld. CIT DR relied on the case of Ameriprise in to support the contention that working capital adjustment need not be granted on the facts of this case. On the issue of risk adjustment, the Ld. CIT DR submitted that level of risk varies from company to company and the assessee could not substantiate the risk factor and hence, the claim was not tenable.

The Ld. CIT DR relied on the case of Ion Trading P. Ltd. vs. ITO in and Acts Global Services P. Ltd. vs. ITO in ITA No. 30/Del/2015 for the preposition that no risk adjustment ought to be given.

10.3 On the ground relating to the issue of Transfer Pricing adjustments made in respect of Technical Support Services(TSS) Segment, it was the Page 32 of 50 Alcatel-Lucent India Ltd. submission of the Ld. AR that under this segment the assessee provided technical support service with respect to telecom equipment sold to customers in India. These services primarily include repairs and maintenance services, after sales support services, installation and commissioning services, trouble report handling services, etc. The Ld. AR submitted that the assessee primarily functioned as a support service provider and earned an OP/TC margin of 7.68%. However, the TPO arrived at an average of 19.49% (OP/TC) and made an adjustment of Rs. 951,65,037/- to the TSS segment by using the following four comparables – S.No. Company Name OP/TC 1. Consulting Engineers Limited 13.75 2. Telecommunication Consultants India Limited 10.87 (consultancy and service contract segment) 3. Wapcos Limited 30.55 4. Mahindra Consulting Engineers Limited 22.79 AVERAGE 19.49% 10.3.1 The Ld. AR referred to ground no. 3.5 of the appeal and submitted that the assessee’s contentions in respect of Kirloskar Consultants Limited which was selected by the assessee as a comparable in the TSS segment was incorrectly rejected by the TPO on the ground that it failed the RPT filter of 25%. The Ld. AR submitted that the total RPT by sales ratio is only 11.79% which is below the RPT threshold of 25% and hence, this comparable ought to be included. The Ld. AR further submitted that Page 33 of 50 Alcatel-Lucent India Ltd.

Kirloskar was selected as a comparable by the Hon’ble DRP in AY 2010-11.

The Ld. AR also raised his objections to two comparables which were selected by the TPO but are not being accepted by the assessee. The arguments of the Ld. AR were as under:

(i) Water and Power Consultancy Services Limited (WAPCOS) - the Ld. AR submitted that the TPO has held that under the application of TNMM as the most appropriate method, the difference in functional profile gets evened out and as such the company can be considered as a comparable. The Ld. AR submitted that this company is functionally dissimilar as it is engaged in rendering consultancy services in Water Resources, Power and Infrastructure and includes preliminary investigations, feasibility studies, field studies, engineering design, drawings and tendering process, project management operations and maintenance and institutional/human resource development. The Ld. AR also submitted WAPCOS is a Government of India undertaking with an abnormally high margin of 30.55%. The Ld. AR submitted that WAPCOS has been rejected as a comparable in the following cases – Nortel Networks India Pvt. Ltd. vs. ACIT (ITA No. 4765/Del/2011 & 427/Del/2013), Hennes and Mauritz India Pvt. Ltd. vs. DCIT (ITA No. 4704/Del/2012), MCI Com India Pvt. Ltd. (Now known as Verizon Page 34 of 50 Alcatel-Lucent India Ltd. India P. Ltd.) (ITA No. 4187/Del/2010), Yum! Restaurants (India) Ltd. vs. ITO (ITA No. 6168/Del/2012), Actis Advisers P. Ltd. vs. ACIT (ITA No. 6390/Del/2012), Shell India Markets Pvt. Ltd. (ITA No. 193/Mum/2013). The Ld. AR further submitted that a Government company cannot be taken as a comparable to a company having a profit motive and he relied on the following decisions in support of his submission – M/s ThyssenKrupp Industries India P. Ltd. (ITA No. 6460/Mum/2012), M/s Avaya India P. Limited (ITA No. 5150/Del/2010). The Ld. AR also relied on the decision of Rampgreen Solutions P. Ltd. in ITA No. 102/2015, wherein the Hon’ble Delhi High Court has held that functionally different company cannot be considered as comparable company. (ii) Mahindra Consulting Engineers Limited The Ld. AR submitted that the TPO has held that under the application of TNMM as the most appropriate method, the difference in functional profile gets evened out and as such the company can be considered as a comparable. He further submitted that this company is engaged in the provision of technical consultancy in Multi Disciplinary Projects which includes designing, engineering, procurement, construction, monitoring and supervision, infrastructure consulting services and integrated project Page 35 of 50 ITA No. 6856/D/15 Alcatel-Lucent India Ltd. management services. He also submitted that this company has been rejected as a comparable by the Hon’ble DRP in assessee’s own case for AY 2010-11 against which the department has not preferred any appeal. The Ld. AR also submitted that Mahindra Consulting has been rejected as a comparable in Rolls Royce India P. Ltd. in ITA No. 6636/Del/2015. The Ld. AR also relied on the decision of Rampgreen Solutions P. Ltd. in ITA No. 102/2015, wherein the Hon’ble Delhi High Court has held that functionally different company cannot be considered as comparable company.

10.3.2 The Ld. CIT DR relied on the TPO’s order on the grounds relating to the TSS segment.

10.4 On ground no. 3.12, the Ld. AR submitted that RPT on income side is 50.59%, whereas the RPT on cost side was 69.04%. It was submitted that the TPO has not made proportionate adjustment to the extent applicable to the assessee’s AE cost in the total cost based of TSS segment and, therefore, the claim of proportionate adjustment also needs to be allowed for the TSS segment. The Ld. AR relied on the decision of the Hon’ble Bombay High Court in Fire Stone International (TS-401-HC-2015(Bom.)-TP), wherein the Hon’ble Bombay High Court has deleted the TP adjustment by holding that Page 36 of 50 Alcatel-Lucent India Ltd. the same should be calculated only on International Transactions and not on the entire turnover. The Ld. AR also relied on the following decisions in this regard – T Two International P. Ltd. and Tara Jewels Exports P. Ltd. and Tara Ultimo P. Ltd. (ITA No. 5644, 5645 & 5646/Mum/2008) (AY 2004-05), IL Jin Electronics India P. Ld. Vs. ACIT (36 SOT 227), SMCC Construction India Ltd. vs. ACIT [2011] 44 SOT 63 (Del.), ACIT vs. Super Diamonds [2012] 53 SOT 243 (Mum.) and DCIT Vs. Twinkle Diamonds [2012] 53 SOT 243 (Mum.).

10.4.1 The Ld. CIT DR placed reliance on the TPO’s order.

10.5 On the corporate tax grounds 1, 2 and 3 the Ld. AR submitted that in the draft assessment order the liquidated damages were disallowed on the ground that they were in the nature of penalty/fine. He drew attention to page 16 of the order of the Hon’ble DRP for AY 2011-12 that the Hon’ble DRP following its earlier decision for AY 2010-11 had directed the AO to verify the correctness of an allow the claim of the tax payer in this regard in this year also. The Ld. AR submitted that the AO has not given effect to the directions of the Hon’ble DRP on this issue and prayed that suitable directions may be given in this regard.

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10.5.1 The Ld. CIT DR submitted that whether the liquidated damages have crystallized or not need to be verified and hence, the issue should be restored to the file of the TPO for proper verification.

The assessee has also objected to the quantum of turnover as taken by the TPO for applying the export filter. Similarly, as far as the TPO’s rejection of the comparable Helios and Matheson Information Technologies Ltd. is concerned it is seen that it has been rejected on the ground that the financial year of this company ends on a different date. It is seen that the assessee had filed results of a fresh search based on single year data and also other quantitative filters were identifying comparable companies engaged in providing similar CSD Services as rendered by the assessee.

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11.01 It is our considered opinion that as no specific finding has been given by the Hon’ble DRP but has been dealt in a general manner and the fresh comparables selected have also not been considered, it will be appropriate if these two comparables are restored to the file of the TPO for re- examination for the purpose checking the export turnover as well as the quarterly data. Hence, ground no. 3.5 is treated as allowed for statistical purposes.

11.1 As far as ground no. 3.6 of the assesse’s appeal is concerned, the comparables are being taken up one by one as under – (i) Wipro Technologies Ltd. – It is seen that the Hon’ble DRP had directed the TPO to reject the comparable for non availability of the data but the TPO failed to give effect to the directions of the Hon’ble DRP. We direct the TPO to give effect to the directions of the Hon’ble DRP in this regard and exclude this comparable.

(ii) E-Infochips Ltd. – The ld. AR has submitted that E-Infochips is engaged in diversified services like IT Enabled Services,

Development of Software Products and Solutions for Product

Design and Development, Quality Assistance and Certification, reengineering, sustenance and volume production, Software

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Consulting and manufacturing EVM and VDB Electronic Board etc and is functionally dissimilar. The ld. AR has relied on the decision rendered by the ITAT Delhi Bench in Saxo India Private

Limited (ITA No. 6148/Del/2015), wherein the ITAT Delhi

Bench has held that E-Infochips is to be rejected as a comparable on the ground that it earns income from software products and services and no segmental data is available. We do find from the FAR analysis that assessee company is functionally dissimilar to E- Infochips and hence finding support from the decision rendered by the ITAT Delhi Bench in Saxo India Private Limited (ITA No.

6148/Del/2015), we direct the TPO to exclude this comparable.

(iii) Infosys Limited –The Ld. AR has submitted that Infosys is engaged in providing software consulting and products, application design, development, reengineering and maintenance, system integration, package evaluation and implementation and business process management etc. and hence is functionally dissimilar. The Ld. AR has also submitted that Infosys had a significant turnover of Rs. 25385 crores which was approximately

35 times the assessee’s turnover of Rs. 728 crores. It was further submitted that Infosys developed/owns proprietary products like Page 40 of 50 Alcatel-Lucent India Ltd.

Finacle, Infosys Actice Desk, Infosys iProwe and Infosys mConnect and owns significant intangibles. It was further submitted that Infosys had significant R&D expenditure of Rs.

527 crores and advertising/sales promotion and brand building expenditure of Rs. 84 crores, whereas the assessee does not undertake any R&D and AMP expenditure. We find that Infosys has been rejected as a comparable by the ITAT in the case of assessee’s predecessor company Alcatel – Lucent Technologies

India P. Ltd. for AY 2003-04 and 2004-05 in ITA No. 2297/Del/2008 and 2298/Del/2008. The Hon’ble Delhi High Court in the case of M/s Agnity India Technologies P. Ltd. (ITA

No. 1204/2011) has held that companies with high turnover have to be rejected. Respectfully following the ratio, we direct the TPO to exclude this company from the final list of comparables.

(iv)Larsen and Turbro Infotech Ltd. –The Ld. AR has submitted that L&T operates in software development services and earns revenue from licensing of products and hence is functionally dissimilar.

The ITAT Delhi Bench in Saxo India P. Ltd. (ITA No.

6148/Del/2015), has held that L&T cannot be taken as a comparable to a software development company. The Hon’ble Page 41 of 50 Alcatel-Lucent India Ltd.

High Court of Andhra Pradesh in the case of CIT II Hyderabad vs.

Intoto Software India P. Ltd. (ITA No. 233 of 2014), has held that software product companies owning intangibles could not be compared with the software development services provider.

Respectfully following the ratio of these decisions, we direct the TPO to exclude this company from the final list of comparable. (v) Persistent Systems and Solutions Limited – The Ld. AR submitted that Persistent Systems and Solutions Limited is engaged in diversified services such as software consultancy, software product development and system integration services unlike the assessee who is only involved in CSD activities and is hence functionally different. It is seen that apart from functional dissimilarity, this company also own intangibles which is not so in the case of the assessee. Relying on the decision of the Hon’ble High Court of Andhra Pradesh in the (ITA No. 233 of 2014), wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider, we direct the Page 42 of 50 Alcatel-Lucent India Ltd.

TPO to exclude this company from the final set of comparables. (vi) Persistent Systems Limited The Ld. AR has submitted that this company is engaged into diversified services including intellectual property led software solutions and software products focusing on cloud computing, business intelligence and analytics etc and is hence functionally dissimilar. The company also owns significant intangibles. A perusal of the profit and loss account of the company that the company had revenue streams from software services and products. It is seen that the revenues and expenses have been shown in a consolidated manner and no segmented disclosure has been made. It is also seen that that this company has acquired ownership of intangibles of around 50 crores. since the company is engaged both in rendering software development services as well as sale of software products, in absence of segmental details, this company could not be selected as a comparable. It is seen that this company has been rejected on the ground that it earns income from software products and services and that no segmental data is available in the Page 43 of 50 Alcatel-Lucent India Ltd. following cases – Saxo India Private Limited (ITA No.

6148/Del/2015), Ciena India Pvt. Ltd. (ITA No.

3324/Del/2013), Planet Online Pvt. Ltd. (ITA No. 464 and 608/Hyd./2014), 3D PLM Software Solutions Ltd. (ITA No.

1303/Bang/2012). The Hon’ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India P.

Ltd. (ITA No. 233 of 2014), has held that software product companies owning intangibles could not be compared with the software development services provider. Further, companies facing an extra ordinary event, having volatile margins and having no segmental information cannot be selected as a comparable as has been held in – Zavata India Private Limited,

Hyderbad vs. DCIT (ITA No. 1781/Hyd./2011), Symphony Marketing Solutions India Pvt. Ltd. vs. ITO (ITA No. 1316/Bang/2012), NTT Data India Enterprise vs. ACIT (ITA No. 1612/Hyd./2010), Capital IQ Information Systems (India) Pvt. Ltd. vs. DCIT (ITA No. 1961/Hyd./2011), Petro Araldite Private Limited vs. DCIT (ITA No. 6217/Mum/2012).

Respectfully following these judicial precedents, the TPO is directed to exclude this company from the final set. Page 44 of 50 Alcatel-Lucent India Ltd.

(vii) Sankhya Infotech Limited(Service Segment) – It is seen that this company is a leading simulation and training solutions provider which provides end to end simulation solutions. This company also develops customizable products for training purposes. It is further seen that the schedule pertaining to segment reporting in the annual report, to which the TPO has also referred to, is incomplete because depreciation and interest have not been specifically allocated to any specific segment as the underline services are used interchangeably.

Thus, this segmental information is incomplete and cannot be considered for comparability purposes. It is also seen that Sankhya Infotech Limited has been rejected on the ground that it owns software products in the following cases – Colt

Technology Services India Private Limited [(TS-774-ITAT- 2012(Del)], Integrated Decisions & Systems India (Private) Limited [(TS-629-ITAT-2011(JPR)], NTT Data India Enterprise Application Services Private Limited [IT-293- ITAT-2013(HYD-TP), Adaptech India (Private) Limited (ITA No. 481/Hyd./2011), Sunquest Information Systems (TS-299-

ITAT-2015(Bang)-TP). Further, non availability of segmental Page 45 of 50 Alcatel-Lucent India Ltd. information in case of diversified operations renders a company not comparable, has been held in the following decisions – Telcordia Technologies India P. Ltd. (ITA No.

7821/Mum/2011), Trilogy E-Business Software India Pvt. Ltd. vs. DCIT (ITA No. 1054/Bang/2011), Transwitch India P. Ltd. vs. DCIT [ITA No. 948/Bang/2011, TS-105-ITAT-

2012(Bang)-TP], First Advantage Offshore Services Pvt. Ltd. (ITA No. 1252(Bang)/2010), CSR India (P) Ltd. vs. ITO [IT(TP)A (reference no. No. 1119/Bang/2011)], Intoto

Software India Pvt. Limited, Hyderabad (ITA No. 233 of 2014). Respectfully following these judicial precedents, we direct the TPO to exclude this company from the final set of comparables. (viii) Sasken Communication Technologies Limited –It is seen that this company is a provider of telecommunication software services and solutions to network equipment manufacturers, mobile terminal vendors and semi-conductor companies. The company also delivers high end to end IT Solutions and provides full phone integration, IP led offerings in multi-media and offerings for the android markets. This company also Page 46 of 50 Alcatel-Lucent India Ltd. partners with semi conductor companies to provide turn-key and end to end solutions ranging from chip design to other services. Hence the company is functionally dissimilar. It is seen that Sasken has been rejected on the ground that it owned

IPRs and has branded products in the following cases – Freescale Semiconductor India Private Limited (ITA No. 5865/Del/2012), Motorola Solutions India Private Limited

(ITA No. 5637/Del/2011). The Ld. CIT DR has submitted that in this case also the segmental data was very much available and the TPO has erred in taking the data at entity level. Hence, on an overall consideration of the facts, we restore the issue of the inclusion of this company to the file of TPO for fresh adjudication after thoroughly examining all the aspects in this regard. (ix) Zylog Systems Limited – This company derives revenue from consultancy services, project and e Governance projects with a focus on software development, solutions and mobile technologies. This company’s products and solutions segment covers the license fee for particular customized solutions provided together with the necessary integration work carried Page 47 of 50 Alcatel-Lucent India Ltd. out. It is seen that that Zylog has in -house developed intangibles thereby rendering its business model completely different from that of the assessee. Zylog has been considered as incomparable in Saxo India Private Limited (ITA No.

6148/Del/2015). The Hon’ble High Court of Andhra Pradesh in the case of CIT II Hyderabad vs. Intoto Software India P.

Ltd. (ITA No. 233 of 2014), has held that software product companies owning intangibles could not be compared with the software development services provider. Respectfully following these judicial precedents, we direct the TPO to exclude this company from the list of intangibles.

11.2 It is also seen that in the final set of comparables as freshly submitted by the assessee, the assessee has included two comparables viz. Think Soft Global Services Ltd. and Evoke Technologies Ltd. The results of the fresh search are also available on record. However, a perusal of the order of the Hon’ble DRP reveals that it has not specifically adjudicated on these two comparables. It will be appropriate if these two comparables are also considered by the TPO and accordingly, these two comparables are also remitted to the file of the TPO for adjudication.

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11.3 As far as the assessee’s ground for working capital adjustment and risk adjustment is concerned, it is seen that the assessee has submitted a claim based on a computation which is based at page 393 of the Paper Book. It is also a fact on record that the Hon’ble DRP has allowed the assessee’s claim for working capital adjustment in assessee’s own case in AY 2010-11. The Ld. CIT DR also agreed to the preposition that the issue may be restored to the file of the TPO for re-examination. On the issue of risk adjustment it was the Ld. AR submission that the issue may be restored for obtaining expert assistance. The Ld. AR also referred to the Capital Asset Pricing Method (CAPM) Computation submitted before the Hon’ble DRP and submitted that the Hon’ble DRP has not considered the computation at all. On overall factual matrix of the issue, it is our considered opinion that both these issues required restoration to the file of the TPO for reconsideration and re- examination and it is ordered accordingly.

11.4 Coming to the comparables in the TSS Segment it is seen that WAPCOS as well as Mahindra Consulting Engineers Ltd. have been objected to by the assessee on the ground of being functionally dissimilar. These two companies are also restored to the file of the TPO for verification of the assessee’s claim in this regard.

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11.5 As far as the corporate tax grounds relating to liquidated damages are concerned, it is undisputed that the DRP has accepted the assessee’s plea in AY 2010-11 and had restored the matter to the file of the AO to verify the correctness of the claim. On similar lines this issue in this year is also remitted to the file of the AO for the limited purpose of verifying the assessee’s claim that the liquidated damages have crystallized in this year.

Order pronounced in the open court on 24.08.2016