ASST. CIT, BANGALORE vs. M/S CGI INFORMATION SYSTEMS & MANAGEMENT CONSULTANT PVT. LTD.,, BANGALORE

assessment order dated 23/01/2015 passed u/s 143(3) r.w.s.144C(13) of the Income-tax Act,1961 [ for short ‘the Act’] by the ACIT, Bangalore [for short ‘AO’] for the assessment year 2006-07.

The grounds stated here under are independent of, and without prejudice to one another: 1. The directions of the Dispute Resolution Panel are opposed to law and facts of the case.

2. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in law in directing the AO to exclude the expenditure incurred in foreign currency both from the export turnover as well as from total turnover for the purpose of computation of deduction u/s 10A, without appreciating the fact that the statute allows exclusion of such expenditure only from export turnover by way of specific definition of export turnover as envisaged by Sub-clause (4) of Explanation 2 below Sub-section (8) of Section 10A and the total turnover has not been defined in this Section.

3. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in directing the AO to compute deduction u/s 10A in the above manner by placing reliance on the decision of Hon'ble High Court of Karnataka in the case of M/s Tata Elxsi Ltd., which has not become final since the same has not been accepted by the Department and SLPs are pending before the Hon'ble Supreme Court.

IT(TP)A No.346/Bang/2015 Page 3 of 29 4. On the facts and in the circumstances of the case, whether the Hon'ble Dispute Resolution Panel can make adjustment on the basis of advance received from AEs in absence of debtors and inventory in the case of assessee for calculating the cost of working capital built in the profit margin.

5. On the facts and in the circumstances of the case, whether the Hon'ble Dispute Resolution Panel were justified in directing the TPO to adjust the profit margin of the assessee for the entire amount of advances received from AE on the ground that there is time value of money.

6. On the facts and in the circumstances of the case, the Hon'ble Dispute Resolution Panel erred by not upholding the approach of the TPO in its order.

7. On the facts and in the circumstances of the case, whether the Hon'ble Dispute Resolution Panel is correct in excluding M/s. ICRA Techno Analytics Ltd and M/s. Persistent Systems Ltd while the comparables are qualifying all the qualitative and quantitative filters applied by the TPO.

8. On the facts and in the circumstances of the case, whether the Hon'ble Dispute Resolution Panel is correct in excluding INFOSY Ltd on the basis of decision in a different case for a different FY while the comparable is qualifying all the qualitative and quantitative filters applied by the TPO. 9. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. 10. The appellant craves leave to add, alter, amend and I or delete any of the grounds mentioned above.

IT(TP)A No.346/Bang/2015 Page 4 of 29 Inc., USA. The assessee-company is engaged in providing software development services only to its AEs. Being a captive service centre providing contact services to its AEs, assumes less than normal risks and all the significant business and entrepreneurial risks are borne by the overseas affiliates.

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Particulars Amount in Rs. Outcome of TP Order Provision of Software 357,45,58,538/- Adjustment of Development and support Rs.21,42,63,159/- services Reimbursement of expenses 56,78,41,835/- Accepted to be at arm’s length

Purchase of capital goods 7,84,793/- Accepted to be at arm’s length Recovery of expenses 10,24,08,932/- Accepted to be at arm’s length Payment of technical service 2,21,10,725/- Accepted to be at fees arm’s length

5. The assessee-company sought to justify the consideration received for the international transaction entered with its AE to be at arm’s length price [ALP]. The assessee-company had also submitted transfer pricing study report adopting TNMM as most appropriate method and operating profit by total cost as a profit

IT(TP)A No.346/Bang/2015 Page 5 of 29 level indicator for the transferring pricing study. The assessee- company applied Transactional Net Margin Method [TNMM] which was considered to be the most appropriate method for purposes of bench marking the international transactions. The assessee- company’s profit margin was computed at 14.41% in respect of software services segment. The assessee-company claimed that the same was comparable with other companies rendering software development services. For the purpose of transfer pricing study, the assessee-company had chosen 16 companies as comparable entities in respect of software development services and arithmetic average of operating profit margins of said comparables was computed at 13.25% in respect of software development services. According to the assessee-company, its PLI was much higher than the arithmetic mean of the comparable entities. Hence, it was claimed that the transactions with its AE are at arm’s length.

IT(TP)A No.346/Bang/2015 Page 6 of 29 study report. The TPO proceeded to identify a different set of comparable entities for the purpose of determining the ALP.

While doing so, the ld. TPO had applied the following filters:

Step Description 1 Companies whose data for FY 2009-10 is not available-excluded 2 Companies whose software development service revenue <Rs.1 Cr – excluded 3 Companies whose software development service revenue is <75% of the total operating revenues – excluded 4 Companies which have more than 25% related party transactions of the sales – excluded 5 Companies which have less than 75% of the revenues as export sales – excluded 6 Companies whose employee cost is <25% of turnover – excluded 7 Companies having different financial year ending – excluded 8 Companies which have persistent losses for the period under consideration – excluded 9 Companies having peculiar economic circumstances – excluded 10 Companies that are functionally different - excluded

7. The TPO rejected 12 comparables selected by the assessee- company in the TP study and introduced 7 new companies by undertaking fresh TP study and finally selected the following comparables:

IT(TP)A No.346/Bang/2015 Page 7 of 29 Sl. Name of the Company Mark-up Mark-up NO. on Total on Total Costs Costs (WC- (WC – adj) unadj) (in %) (in %) 1 ICRA Techno Analytics Ltd., (Seg) 24.94 24.69 2. Infosys Ltd., 44.98 44.78 3. Kals Information Systems Ltd., 34.41 30.46 (Seg) 4. Larsen & Toubro Infotech Ltd., 19.33 19.43 5. Mindtree Ltd., (Seg) 14.83 12.74 6. Persistent Systems & Solutions 15.38 15.15 Ltd., 7. Persistent systems Ltd., 30.35 28.11 8. R S Software (India) Ltd., 10.29 10.45 9. Sasken Communication 17.36 16.41 Technologies Ltd., 10. Tata Elxsi Ltd., (Seg) 20.93 17.20 11. Thinksoft Global Services Ltd., 17.05 13.96 AVERAGE MARGIN 22.71 21.21

8. The TPO computed average profit margin of the comparables at 22.71% and after giving working capital adjustment of 1.5%, adjusted arithmetical mean of PLI was determined at 21.21%. On the above basis, the TPO computed the transfer pricing adjustment in respect of software segment as follows:

Arm’s Length Mean Margin 22.71% Less: Working Capital 1.50% Adjustment Adjusted mean margin of the 21.21% comparables Operating Cost (‘OC’) Rs.312,44,36,534/- Arm’s Length Price (‘ALP’) = Rs.378,81,29,523/- 121.21% of OC Price Received Rs.357,45,58,538/- Short fall being adjustment Rs.21,25,70,985/- u/s. 92CA

IT(TP)A No.346/Bang/2015 Page 8 of 29

24/02/2014 incorporating the above adjustment and also addition of Rs.19,34,512/- u/s 10A of the Act. The AO also held that the communication expenses, travelling expenditure be reduced from the export turnover for the purpose of computing the deduction u/s 10A of the IT Act, 1961.

IT(TP)A No.346/Bang/2015 Page 9 of 29 verification. The AO completed the assessment u/s 143(3) r.w.s.144C(3) of the Act vide order dated 23/01/2015.

3. “Chapter 3 of the Act deals with incomes, which do not form part of total income. Section 10-A is a Special provision in respect of newly established Undertakings in free trade zone, etc. The said provision is enacted as an incentive to exporters to enable their products to be competitive in the global market and, consequently, earn precious foreign exchange for the country. Therefore, while interpreting these provisions, this aspect has to be borne in mind. Section 10-A(1) provides for a deduction of profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years and the same is IT(TP)A No.346/Bang/2015 Page 10 of 29 excluded from the total income of the assessee. Sub-section (4) is the provision which provides for the manner in which the said profits and gains have to be arrived at. It reads as under: 4. "For the purposes of sub-sections (1) and (1A), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried en by the undertaking".

IT(TP)A No.346/Bang/2015 Page 11 of 29 interpreting the aforesaid provisions of Section 80HHC, the Courts have laid down various principles, which are independent of the statutory provisions. The question is, whether those independent principles can be adopted while defining 'total turnover' in the absence of a definition in Section 10-A. The Apex Court, in the case ofLakshmi Machine Works (supra) held at para. 15 as under: "15. It is important to note that tax under the Act is upon 12. income, profits and gains. It is not a tax on gross receipts. Under Section 2(24) of the Act the word "income" includes profits and gains. The charge is not on gross receipts but on profits and gains. The charge is not on gross receipts but on profits and gains properly so- called. Gross receipts or sale proceeds, however, include profits. According to "The Law and Practice of Income Tax" by Kanga and Palkhivala, the word "profits" in section 28 should be understood in normal and proper sense. However, subject to special requirements of the income-tax, profits have got to be assessed provided they are real profits. Such profits have to be got to be ascertained on ordinary principles of commercial trading and accounting. However, the income-tax has laid down certain rules to be applied in deciding how the tax should be assessed and even if the result is to tax as profits what cannot be construed as profits, still the requirements of the income-tax must be complied with. Where a deduction is necessary in order to ascertain the profits and gains, such deductions should be allowed. Profits should be computed after deducting the expenses incurred for business though such expenses may not be admissible expressly under the Act, unless such expenses are expressly disallowed by the Act [see page 455 of "The Law and Practice of Income-tax by Kanga and Palkhivalal. Therefore, schematic interpretation for making the formula in section 80HHC workable cannot be ruled out. Similarly, purposeful interpretation of section 80HHC which has undergone so many changes cannot be ruled out, particularly, when those legislative changes indicate that the Legislature intended to exclude items like commission and interest from deduction on the ground that, then did not possess any element of "turnover" even though commission and interest emanated from exports. We have to read the words "total turnover" in section 80HHC as part of the formula which sought to segregate the "export profits" from the "business profits". Therefore, we have to read the formula in entirety. In that formula the entire business profits is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover/total turnover which constitute section 80HHC concession (deduction). Income in the nature of "business profits" was, therefore, apportioned. The above formula fixed a ratio in which "business profits" under section 28 of the Act had to be apportioned. Therefore, one has to give weightage not only to the words "total turnover" but also to the words "export turnover", "total export turnover" and "business profits". That is the IT(TP)A No.346/Bang/2015 Page 12 of 29 reason why we have quoted hereinabove extensively the illustration from the Direct Taxes (Income tax) Ready Reckoner of the relevant word. In the circumstances, we cannot interpret the words "total turnover" in. the above formula with reference to the definition of the word "turnover" in other laws like Central Sales tax or as defined in accounting principles. Goods for export do not incur excise duty liability. As stated, above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under section 80HHC. They were not eligible even without the clarification introduced by the Legislature by various amendments because they did not involve any element of turnover. Further, in all other provisions of the income-tax, profits and gains were required to be computed with reference to the books of account of the assessee. However, as can be seen from the Income-tax Rules and from the above Form No. 10CCAC in the case of deduction under section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing section 80HHC deduction was "business profits" as computed under section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. Section 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports. In the case of combined business of an assessee having export business and domestic business the Legislature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. This method earlier existed under Excess Profits-tax Act. it existed in the Business Profits-tax Act. Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part of "turnover", excise duty and sales tax also cannot form part of the "turnover". Similarly, "interest" emanates from exports and yet "interest" does not involve an element of turnover. The object of the Legislature in enacting section 80HHC of the Act was to confer a benefit on profits accruing with reference to export turnover. Therefore, "turnover" was the requirement. Commission, rent, interest etc. did not involve any turnover. Therefore, 90 per cent of such commission, interest etc. was excluded from the profits derived from the export. Therefore, even without the clarification such items did not form part of the formula in section 80HHC(3) for the simple reason that it did not emanate from the "export, turnover", much less any turnover. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the "turnover". Just as interest, commission etc. did not emanate from the "turnover", so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent etc. do yield profits, but they do not partake

IT(TP)A No.346/Bang/2015 Page 13 of 29 of the character of turnover and, therefore, they were not includible in the "total turnover". The above discussion shows that income from rent, commission etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. In fact, in Civil Appeal No. 4409 of 2005, the above proposition has been accepted by the Assessing Officer See: page No. 24 of the paper book, if so, then excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of "turnover" which is the position even in the case of rent, commission, interest etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government Therefore, if they are made relatable to exports, the formula under section 80HHC would become unworkable. The view which we have taken is in the light of amendments made to section 80HHC from time-to-time." The said judgment has been re-affirmed by the Apex Court, 13. in the ease of CIT v. Catapharma (India) (P.) Ltd. [2007] 292 ITR 641/ 162 Taxman 455. The Bombay High Court had an occasion to consider the 14. meaning of the word 'total turnover' in the context of Section 10-A, in the case of CIT v.Gem Plus Jewellery India Ltd. [2011] 330 ITR 175 [2010] 194 Taxman 192 (Bom.). Interpreting sub-Section (4) of Section 10-A, it is held as under: "Under sub-section (4) the proportion between the export 15. turnover in respect of the articles or things, or, as the case may be, computer software exported, to the total turnover of the business carried over by the under-taking is applied to the profits of the business of the undertaking in computing the profits of the business of the undertaking in computing the profits derived from export. In other words, the profits of the business of the undertaking are multiplied by the export turnover in respect of the articles, things or, as the case may be, computer software and divided by the total turnover of the business carried or by the undertaking. The formula which is prescribed by sub-section (4) of section 10A is as follows: Profits of the Export turnover in respect Profits derived from business of the × of the articles or things or export of articles or undertaking computer software = things or Computer Total turnover of the business carried on by the software undertaking The total turnover of the business carried on by the 16. undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator inasmuch as the export turnover is a part of the total turnover.

IT(TP)A No.346/Bang/2015 Page 14 of 29 The export turnover, in the numerator must have the same 17. meaning as the export turnover which is a constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Explanation 2 to section 10A by which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in, or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles things or software outside India. Therefore in computing the export turnover the Legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the 18. Revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the Revenue, however, misses the point that the expression "total turnover" has not been definded at all by Parliament for the purposes of section 10A. However the expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined be Parliament and there is a specific exclusion of freight and insurance, the expression "export turnover" cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision to the contrary. However, no such provision having been made, the principle which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. "export turnover" would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though it has been specifically excluded from "export turnover" for the purposes of the numerator would be brought in as part of the "export turnover" when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided." The special bench of the Tribunal, in the case of ITO v. Sak 19. Soft Ltd. [2009] 313 ITR (AT) 353/ 30 SOT 55 (Chennai) also had an occasion to consider the meaning of the word 'total turnover'. After referring to the various judgments of the High Court as well as the Supreme Court held as under:

"53. For the above reasons, we hold that for the purpose of 20. applying the formula under sub-section (4) of Section 10-B, the freight telecom charges or insurance attributable to the delivery of articles or IT(TP)A No.346/Bang/2015 Page 15 of 29 things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula….." The formula for computation of the deduction under Section 21. 10-A would be as under: Profits of the business × export turnover Total turnover From the aforesaid judgments, what emerges is that, there 22. should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10-A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the ease of Section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in Section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in Section 10- A, there is nothing in the said Section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export

IT(TP)A No.346/Bang/2015 Page 16 of 29 turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore, the formula for computation of the deduction under Section 10-A, would be as under: Export turn over Profits of the business of × (Export turnover + the undertaking domestic turn over) Total Turn Over In that view of the matter, we do not see any error 23. committed by the Tribunal in following the judgments rendered in the context of Section 80HHC in interpreting Section 10-A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in these appeals. The substantial question of law framed is answered in favour of the assessee and against the revenue.”

14. Ground Nos. 2 and 3 challenges the direction of the Hon’ble DRP to exclude the travelling expenditure and telephone expenses incurred in connection with the software products from both

IT(TP)A No.346/Bang/2015 Page 17 of 29 export turnover as well as total turnover. This direction is in consonance with the law laid down by the Hon’ble Jurisdictional High Court in the case of CIT Vs. Tata Elxsi Ltd., 349 ITR 98 and therefore we do not find any reason to interfere with the findings of the learned CIT. Accordingly, we dismiss the grounds of appeal filed by the revenue.

15. Ground Nos. 4 and 5 challenges the direction of the Hon’ble DRP to consider the advances received from AEs as a part of payables for the purpose of computing the working capital adjustment.

IT(TP)A No.346/Bang/2015 Page 18 of 29 order dated 01.12.2015 in and 1161/Bang/2011.

The advance received from AE par takes the character of trade payables which is to be adjusted against the future invoice. As a result of receipt of this advance money the necessity for borrowings from outside is reduced to that extent thereby reducing the cost of the borrowings. Thus it has a direct bearing on the profitability of the concern. Therefore the trade payable should be considered while computing the working capital adjustment. Thus the grounds of appeal filed by the revenue are dismissed.

19. Ground Nos. 6, 7 and 8 challenges the direction of Hon’ble DRP to exclude the companies ICRA Techno Analytics Ltd., Persistent Systems Ltd., and Infosys Ltd., on the ground of functional dissimilarity. Now, we shall deal with each of the comparables.

IT(TP)A No.346/Bang/2015 Page 19 of 29 ICRA Techno Analytics Ltd., (seg) The learned CIT (A) argued that the Hon’ble DRP ought not to have deleted these companies from the list of the comparables on the ground of functional dissimilarity. On other hand the ld. Counsel for the assessee submitted that these comparables were excluded by the coordinate bench in the case of DCIT V. Electronics for Imaging India P. Ltd., [(2016) 70 taxmann.com 299.

We heard the rival submissions and perused the material on record. We find from the order of the Hon’ble DRP that in the case of ICRA Techno Analytics Ltd., the Hon’ble DRP after perusing the Annual Report had come to conclusion that the service segment comprised of software development, software consultancy, engineering services, web development, web hosting etc., for which no segment details were available. The revenue had not led any evidence on record controverting the above findings.

Even the Hon’ble coordinate bench in the case of DCIT V.

Electronics for Imaging India P. Ltd., [(2016) 70 taxmann.com 299 had held that this company is not comparable with the software development company in view of the fact that it is engaged in the diversified activities. The relevant paragraph is reproduced below:

“We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software

IT(TP)A No.346/Bang/2015 Page 20 of 29 development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE.”

Respectfully following the decision of the coordinate bench, we do not find any reason to interfere with the findings of the DRP that this company is not comparable with that of a software development service provider.

Persistent Systems Ltd: The Hon’ble DRP deleted the company from the list of comparables on noticing that the software segment consisted both of sale of software services and products and no segmental information was available and it further noticed that the company was predominantly outsourcing software product development services. Even the coordinate bench in the case of Electronics for Imaging India P. Ltd., (supra) has recorded similar finding vide para 26 of order:

“Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company

IT(TP)A No.346/Bang/2015 Page 21 of 29 also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables.”

The revenue had not filed any evidence contradicting the above findings. Therefore, we do not find any reason to differ from the findings of the Hon’ble DRP.

Infosys Ltd: The Hon’ble DRP had directed the exclusion of companies from the list of comparables on the ground that it owns intangibles and high brand value. And the coordinate bench in the case of Electronics for Imaging India P. Ltd., also recorded similar findings vide para 19 of the order which is reproduced below:

“We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We note that in the case of Agnity India Technologies (P.) Ltd., (supra), the Delhi Bench of the Tribunal has considered the comparability of this company and the findings of the Delhi Bench of the Tribunal has been confirmed by the Hon’ble Delhi High Court. The Hon’ble Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. We further note that this company

IT(TP)A No.346/Bang/2015 Page 22 of 29 provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting re-engineering, maintenance, systems integration as well as products for banking industry.”

C.O. No. 110/B/2015

In the objections filed before the Hon’ble DRP, the attention was drawn to the Annual Report wherein the related party transactions were reported. The DRP had upheld the exclusion of this company on altogether different reason i.e., the expenditures in foreign currency are more indicating that it was predominantly engaged in the onsite development of software. The ld. Counsel submitted that the TPO never applied this filter and therefore the DRP ought not have excluded this company from the list of comparables and reliance also placed on the decision of the coordinate bench in the case of Arowana Consulting Ltd., V. ITO in IT(TP)A NO. 235/Bang/2015.

Therefore, it is submitted that this company cannot be considered as comparable with that of assessee company on the grounds of functional dissimilarity and reliance in this regard was placed on the coordinate bench’s decision in DCIT v. Electronics for Imaging India P. Ltd., [(2016) 70 taxmann.com 299 (Bang – Trib.)].

IT(TP)A No.346/Bang/2015 Page 25 of 29 We heard the rival submissions and perused the material on record. Now it is settled law that a company which is engaged in pure services provider cannot be compared with the company which is engaged in the development of software products. There is no dispute that this company was engaged in the development of software products as well as software services and no segment details were available. Therefore the decision of the coordinate bench in this case of DCIT v. Electronics for Imaging India P. Ltd., [(2016) 70 taxmann.com 299 (Bang – Trib)] is squarely applicable and the relevant paragraph is reproduced below:

“We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The ld. DR has not disputed the fact that comparability of this company has been examined by this Tribunal in a series of decisions including in the case of Trilogy e- business Software India (P.) Ltd., (supra). We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of Rs.60,47,977/-. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider.

Accordingly, we do not find any error or illegality in the impugned findings of the DRP.”

IT(TP)A No.346/Bang/2015 Page 26 of 29

The system integration & support segment is involved in value- added reselling involving systems integration and support for a wide range of technical computing hardware and software solutions involving high-end computing platforms, mechanical design automation tools, enterprise storage solutions, digital media and life sciences solutions through its tie-ups with global leaders in these respective areas. It is now fairly settled that a product design company cannot be compared with the pure software services provider like that of the assessee company and therefore this company deserves to be rejected from the list of comparables following the law laid down by the coordinate bench in the case of DCIT v. Electronics for Imaging India P. Ltd., [(2016) 70 taxmann.com 299 (Bang – Trib.)

IT(TP)A No.346/Bang/2015 Page 28 of 29 the Mumbai Bench of the Tribunal vide its order dated 11.5.2012 in para 9.7 has held as under:-

7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm’s length price for the assessee, hence, should be excluded from the list of comparable parties.

IT(TP)A No.346/Bang/2015 Page 29 of 29 31. In the result, the revenue’s appeal is dismissed and the assessee’s cross-objections are partly allowed.