ORANGE BUSINESS SERVICES INDIA SOLUTIONS PVT. LTD.,GURGAON vs. DCIT, GURGAON

ORDER

PER BEENA A. PILLAI, JM:

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1. The Learned Assessing Officer ('Ld. AO)/ Learned Transfer Pricing Officer ('Ld. TPO') (following the directions of the Learned Dispute Resolution Panel ('Ld. DRP')) erred on facts and in law in enhancing the income of the Appellant by Rs. 13,34,87,027 without appreciating the factual positions/ submissions of the Appellant.

2.1. not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case;

2.2. disregarding the Arm's Length Price (,ALP') as determined by the Appellant in the Transfer Pricing (,TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules') as well as fresh search; and in particular modifying/ rejecting the filters applied by the Appellant;

2.3. rejecting comparability analysis undertaken by the Appellant in the TP documentation/ fresh search and conducting a fresh comparability analysis based on application of additional revised filters, or disregarding Appellant's filters in determining the ALP for the international transactions;

2.4. disregarding multiple year/ prior years' data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year ('FY') 2010-11) data for comparable companies should be used;

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2.5. including companies having high margin / volatile operating profit margins in the final comparables' set for benchmarking a low risk captive unit such as the Appellant;

2.6. including certain companies in the final set of comparables that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed;

2.7. resorting to arbitrary rejection of low-profit / loss making companies and companies with diminished revenues based on erroneous and inconsistent reasons;

2.8. excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed;

2.9. by committing factual/computational errors in selection/ rejection of proposed comparables and/ or in the operating profit mark-ups of the comparables;

2.10 ignoring the business/ commercial reality that the Appellant undertakes minimal business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact; and 2.11. disregarding judicial pronouncements in India in undertaking the TP adjustment.

3. The Ld. DRP erred in disregarding the detailed arguments/ submissions put forth by the Appellant during the course of the D RP / assessment proceedings while passing its direction under section 144C of the Act;

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4. The Ld. AO has grossly erred by proposing to compute interest under section 234B of the Act;

5. The Ld. AO has grossly erred in initiating penalty under section 271(1)( c) of the Act mechanically and without recording any satisfaction for its initiation. The above grounds are without prejudice to each other.”

6 I.T.A.No.869./Del/2016 TPO's order dated December, 2014, he has benchmarked the international transaction by taking some of the comparables which is tabulated as under:- A. ITES segment: S.No. Name of the company OP/OC 1 Accentia Technologies Ltd. 29.18% 2 Acropetal Technologies Ltd. (segment) 14.36% 3 e4e Healthcare Business Services P. Ltd. 9.77% 4 eClerx Services Ltd. 56.82% 5 ICRA Techno Analytics Ltd. (Segment) 25.24% 6 Infosys BPO Ltd. 17.86% 7 Jindal Intellicom Ltd. 13.70% 8 Microland Ltd. (ITES segment) 8.5% 9 TSCS E-serve Limited 69/31% 27.19% B. Software Development Services: S.No. Company Long name OP/OC 1 Acropetal Technologies Ltd. (Segment) 36.69% 2 Akshay Software Technologies Ltd. 0.16% 3 E-infochips Limited 56.44% 4 iGate Global Solutions Ltd. 23.71% 5 Infosys Ltd. 43.54% 6 Larsen & Toubro Infotech Ltd. 18.40% 7 Mindtree Limited (Segment) 10.74% 8 Persistent Systems & Solutions Ltd. (Merged) 22.12% 9 Persistent Systems Ld. 23.08% 10 R.S. Software (India) Ltd 16.20% 11 Sankhya Infotech Ltd. 26.20% 12 Sasken Communication Technologies Ltd. 24.36% 13 Tata Elxsi Ltd.(Segment) 13/00% 14 Wipro Technologies Ltd 54.42% 15 Zylog Systems Ltd. 28.74% Average 26.52% 3.4. Based on the above, TPO proposed the adjustment of Rs.25,116,626/- towards software and ITeS services. On an objection before DRP, vide direction dated 10.12.2015/22.12.2015, the DRP upheld the draft order

7 I.T.A.No.869./Del/2016 of the Ld.TPO. Pursuant to the directions of DRP the DY CIT circle 3, accordingly passed an order making the adjustment as under: S.No. Description Amount 1 Software development service 2,17,49,949 2 IT Enabled Service 18,56,70,724 Total 20,74,20,673 3.5 Aggrieved by the order of Assessing Officer, assessee is now in appeal before us.

9 I.T.A.No.869./Del/2016 global network platforms and services, coordination, remote configuration, and implementation of quality customer networking solutions. Therefore this comparable is ordered for its exclusion accordingly.”

4.2 On the contrary, the Ld. D.R. supported the order of DRP and Ld. TPO. He thus prayed for inclusion of this company as a comparable. 4.3 We have perused the orders of the authorities below and the submissions made by both the parties. We have perused the order of this tribunal for assessment year 2010-11(supra) in assessee’s own case. It is observed that there is no difference in the functional profile of the assessee for the year under consideration with that of the assessee for assessment year 2010-11. As rightly contended by the Ld.AR, this company has been excluded from the list of comparables by this Tribunal for assessment year 2010-11 for the reasons reproduced hereinabove. Respectfully following the decision of this Tribunal in assessee’s own case, for the Assessment Year 2010-11(supra), we are inclined to exclude this company from the final list of comparable. ii. Infosys BPO Ltd:-

4.4 Ld. A.R. submitted that the Tribunal in assessee’s own case for the Assessment Year 2010-11 (supra) has rejected the inclusion of this company as comparable on the ground that it is engaged in high-end integrated

10 I.T.A.No.869./Del/2016 services. The coordinate bench of this Tribunal has rejected this comparable by holding as under:

“We have considered the rival contention regarding exclusion of Infosys BPO Ltd. It is engaged in high end integrated services and therefore it is functionally dissimilar. The Infosys brand is indisputably is a huge brand and definitely, result of that brand goes to this comparable. Therefore, the brand of Infosys definitely results in opening higher profits to this company. In view of the following decisions, the same is required to be excluded and hence it is ordered accordingly.”

4.5 On the contrary, the Ld. D.R. supported the order of DRP and Ld. TPO. He thus prayed for inclusion of this company as a comparable. 4.6 We have perused the orders of the authorities below and the submissions made by both the parties. We have perused the order of this Tribunal for assessment year 2010-11(supra) in assessee’s own case. It is observed that there is no difference in the functional profile of the assessee for the year under consideration with that of the assessee for assessment year 2010-11. As rightly contended by the Ld.AR, this company has been excluded from the list of comparables by this tribunal for assessment year 2010-11 for the reasons reproduced hereinabove. Respectfully following the decision of this Tribunal in assessee’s own case, for the Assessment Year 2010-11(supra), we are inclined to exclude this company from the final list of comparable.

11 I.T.A.No.869./Del/2016 iii. TCS e Serve Ltd.:- 4.7 Ld. A.R. submitted that the Tribunal in assessee’s own case for the Assessment Year 2020-11 (supra) rejected the inclusion of this company as comparable on the ground that this comparable, provides high end technology services such as software testing, verification and validation of the software. The coordinate bench of this Tribunal has rejected this comparable by holding as under: “We have also considered the rival contention for exclusion of TCS e-service Ltd. It is mainly involved in transaction processing and technology services. It carries on business of providing technology service such as software testing, verification and validation. It is also developed a software such as transport management software therefore functionally this company is dissimilar to the assessee company. It also owns huge intangible and use of 'Tata' Brand, which has definitely benefited this comparable, it is directed to be excluded.

4.8 On the contrary, the Ld. D.R. supported the order of DRP and Ld. TPO. He thus prayed for inclusion of this company as a comparable. 4.9 We have perused the orders of the authorities below and the submissions made by both the parties. We have also perused the order of this Tribunal for assessment year 2010-11(supra) in assessee’s own case. It is observed that there is no difference in the functional profile of the assessee for the year under consideration with that of the assessee for assessment year 2010-11. As rightly

12 I.T.A.No.869./Del/2016 contended by the Ld.AR, this company has been excluded from the list of comparables by this tribunal for assessment year 2010-11 for the reasons reproduced hereinabove. Respectfully following the decision of this Tribunal in assessee’s own case, for the Assessment Year 2010-11 (supra), we are inclined to exclude this company from the final list of comparable.

a. Infosys Ltd.:- The ld.AR submitted that the DRP has rejected this comparable in assessment year 2010-11 and therefore this company was not contended to be excluded before this tribunal by the assessee for assessment year 2010-11(supra). He submitted that following the rule of consistency this comparable may be excluded for the year under consideration. On the contrary, the Ld. D.R. supported the order of the authorities below and prayed for inclusion of this company as a comparable.

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5.1 We have perused the order of the authorities below, and the DRP’s order for assessment year 2010-11. 5.2 We are of the considered opinion that a consistent approach must be followed while selecting/rejecting the set of comparables when facts are identical. It is an admitted position that the DRP had excluded this company as a comparable as it has high turnover and has a huge brand value. It is observed by us that the DRP for the year under consideration on one hand notes that this company has diversified operations and that this company is primarily engaged in the development of software and software services. Whereas on the oher hand, admits to that the assessee provides information technology enabled network management and other back-office support to its group companies. The brand of Infosys undisputedly is huge and results in obtaining high profits to the company. In our view this company is required to be excluded from the final list of comparables. b. Persistent Systems Ltd.:- 5.3 Ld. A.R. submitted that the Tribunal in assessee’s own case for the Assessment Year 2010-11 (supra) rejected the inclusion of this company as comparable on the ground that segmental details were not available separately. The coordinate bench of this Tribunal has rejected this comparable by holding as under: We have perused the arguments on the same. Firstly on perusal of the balance sheet of this comparable it

14 I.T.A.No.869./Del/2016 is noted that that this company has not provided segmental information for sale of services and sale of products of software's. Further It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is engaged in contract software development services. We find that, as submitted by the assessee, the segmental details are also not available separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. v. Asstt. CIT [2012) 137 ITD 1/22 taxmann.com 96 (Mum.) that in the absence of segmental details/information a company it cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly.

5.4 On the contrary, the Ld. D.R. supported the order of DRP and Ld. TPO. He thus prayed for inclusion of this company as a comparable. 5.5 We have perused the orders of the authorities below and the submissions made by both the parties. We have perused the order of this Tribunal for assessment year 2010-11(supra) in assessee’s own case. It is observed that there is no difference in the functional profile of the assessee for the year under consideration with that of the assessee for assessment year 2010-11. As rightly contended by the Ld.AR, this company has been excluded from the list of comparables by this tribunal for assessment year 2010-11 for the reasons reproduced hereinabove. Respectfully following the decision of this 15 I.T.A.No.869./Del/2016 Tribunal in assessee’s own case, for the Assessment Year 2010-11(supra), we are inclined to exclude this company from the final list of comparable. c. Wipro Technology Services Ltd:- 5.6 Ld. A.R. submitted that the Tribunal in assessee’s own case for the Assessment Year 2010-11(supra), rejected the inclusion of this company as comparable on the ground that this company is a subsidiary of Wipro Ltd, which has a considerable brand name, and further that the entire revenue during the year in this company is covered by a master service agreement entered into by breakthrough with CITI group services. The coordinate bench of this Tribunal has rejected this comparable by holding as under: We carefully considered the rival contention regarding exclusion of this comparable. This company had agreed an agreement with CITI Technology Services Ltd, which is 100% subsidiary of Wipro Technology Ltd. The entire revenue during the year is covered by a master service agreement entered into by Wipro with CITI Group Services. Further, this company is also a subsidiary of Wipro Ltd., which company has a considerable brand name, therefore benefit accruing to this company from the brand name of Wipro cannot be denied. Therefore relying on the decision of the coordinate bench in the case of Agnity Technology Pvt. Ltd, in for Assessment Year 2010-11, wherein the Infosys owns of its brand name was held to be incomparable on the same analogy, brand value of 'Wipro' does help this comparable. Hence, we direct TPO to exclude this comparable, it is ordered accordingly.”

16 I.T.A.No.869./Del/2016 5.7 On the contrary, the Ld. D.R. supported the order of DRP and Ld. TPO. He thus prayed for inclusion of this company as a comparable. 5.8 We have perused the orders of the authorities below and the submissions made by both the parties. We have perused the order of this Tribunal for assessment year 2010-11in assessee’s own case. It is observed that there is no difference in the functional profile of the assessee for the year under consideration with that of the assessee for assessment year 2010-11. As rightly contended by the Ld.AR, this company has been excluded from the list of comparables by this tribunal for assessment year 2010-11 (supra) for the reasons reproduced hereinabove. Respectfully following the decision of this Tribunal in assessee’s own case, for the Assessment Year 2010- 11(supra), we are inclined to exclude this company from the final list of comparable. d. Zylog Systems Ltd.:- 5.9 Ld. A.R. submitted that the Tribunal in assessee’s own case for the Assessment Year 2010-11 (supra) rejected the inclusion of this company as comparable on the ground that this company has undergone restructuring process during the year under consideration and cannot be held as a comparable in view of the extraordinary circumstances. The coordinate bench of 17 I.T.A.No.869./Del/2016 this Tribunal has rejected this comparable by holding as under: We have considered the rival contention, wherein it is stated the Zylog Systems Ltd is engaged in the sale of software service as well as its products and has operation in Wifi place and broadband connectivity. It is apparently an onsite service company. This is evident from the various comparables of only reports and related documents produced before us. Zylog system Ltd also undergone into the business of restructuring where it is clear Dugout fair flex matrix. Therefore, it is apparent that the company, which have undergone the business restructuring process during the year, cannot be held to be a comparable in view of the extraordinary circumstances. The company is also owning significant intangibles and carrying on research and development activities ownership significant intangibles cannot be held to be a comparable with the assessee and therefore on this ground too this comparable is ordered accordingly to be excluded.

5.10 On the contrary, the Ld. DR supported the order of DRP and Ld. TPO. He thus prayed for inclusion of this company as a comparable. 5.11 We have perused the orders of the authorities below and the submissions made by both the parties. We have also perused the order of this Tribunal for assessment year 2010-11 (supra) in assessee’s own case. It is observed that there is no difference in the functional profile of the assessee for the year under consideration with that of the assessee for assessment year 2010-11. As rightly contended by the Ld.AR, this company has been 18 I.T.A.No.869./Del/2016 excluded from the list of comparables by this Tribunal for assessment year 2010-11(supra) for the reasons mentioned hereinabove. Respectfully following the decision of this Tribunal in assessee’s own case, for the Assessment Year 2010-11(supra), we are inclined to exclude this company from the final list of comparable.

by the assessee stand allowed.

8. In the result, appeal filed by the assessee stands allowed. Order pronounced in the open court on 31st May, 2016.