M/S. DELL INTERNATIONAL SERVICES INDIA PVT. LTD.,,BANGALORE vs. DCIT, BANGALORE

This is an appeal filed by the assessee directed against the order of assessment order passed u/s 143(3) r.w.s. 144C of the Income-tax Act,1961 [‘the Act’ for short] for the assessment year 2010-11 dated 20th September 2010.

IT(TP)A No.1302/B/2010 Page 2 of 20 2. The assessee raised the following grounds of appeal:

1. “Transfer Pricing adjustment under section 92CA of the Act Call Centre Services - Primary Objections a) The Honourable DRP and the learned AO have erred in rejecting Comparable Uncontrolled Price (hereinafter referred to as the - 'CUP") data on the grounds that the margins earned by the third party service providers differ from that of the appellant. b) The Honourable DRP and the learned AO have erred in rejecting CUP data on the grounds that the employee cost to sales ratio of the third party service providers differ from that of the appellant. c) The Honourable DRP and the learned AO have failed to appreciate the fact that for the applicability of CUP method the nature of services and the price of the transactions should be compared and not the margins earned by the parties. d) The Honourable DRP and the learned AO have failed to appreciate that for the applicability of CUP the cost/business models of the parties are not relevant and the same should not be a criterion for rejecting CUP. e) The Honourable DRP and the learned AO have made adjustments to the international transactions entered into by the appellant in the Call Centre services segment without any reasonable basis and without considering the supporting CUP data submitted by the appellant. f) The Honourable DRP and the learned AO grossly erred in not appreciating the fact that the services rendered by the appellant and the third party service providers are identical. g) The Honourable DRP and the learned AO have erred in not appreciating the existence of comparability between the services rendered by the appellant and the independent unrelated third party service providers. h) The Honourable DRP and the learned AO have erred in not appreciating the fact that all the relevant copies of the agreements, contracts, etc were furnished not only to the TPO but also before the honourable DRP.

IT(TP)A No.1302/B/2010 Page 3 of 20 Shared Services - Primary Objections a) The Honourable DRP and the learned AO have grossly erred in combining the transactions carried out by the appellant in the Shared Services segment with the transactions carried out in the Call Centre services segment. b) The Honourable DRP and the learned AO have erred in not appreciating the nature and type of the activities conducted by the Shared Services segment vis-a-vis the Call Centre services segment.

Notwithstanding the above, a supplementary analysis has been carried out by the appellant using the Transaction Net Margin method (hereinafter referred to as "TNMM") as an alternative method to test the international transactions. The following common conceptual objections arises Common Conceptual Objections — for both segments The Honourable DRP and the learned AO grossly erred in upholding the income adjustment proposed by the learned TPO in arriving at the ALP of the international transactions entered into by the appellant. The appellant is in appeal before the honourable bench of the Income Tax Appellate Tribunal (hereinafter referred to as "ITAT") under section 253 (1) (d) against the order passed by the learned AO in pursuance of the directions of the learned Honourable DRP.

Margin earned by Dell India is reflective of services rendered by a contract service Provider a) The Honourable DRP and the learned AO should have appreciated the fact that the appellant has conducted an exhaustive and elaborate benchmarking analysis, to arrive at a set of companies that are broadly comparable with the appellant in respect of functions performed, assets employed and risks assumed, and benchmarked the average net margins earned by the independent comparables with the net margins earned by the appellant. b) The learned TPO has not shared the NASSCOM reports, studies undertaken by audit firms of repute, and other articles in the print media to evidence that the ITES segment has grown at an average rate of around 50% over the last five years and at 37% during the financial year 2005-06. c) The Honourable DRP and the learned AO have failed to recognise that the appellant is a contract service provider who is insulated

IT(TP)A No.1302/B/2010 Page 4 of 20 from all major risks in the business to even attain the average industry growth rate.

a) The Honourable DRP and the learned AO have erred in upholding TPO's contention of accepting the following companies with fluctuating profits. • Cosmis Global Ltd. • Asit C Mehta Financial Services Ltd • Goldstone Infratech Ltd • Ace Software Exports

3. The powers bestowed under Section 133(6) should be employed judiciously and in compliance with the principles of natural justice a) The Honourable DRP and the learned AO ought to have appreciated that the powers conferred under Section 133 (6) of the Act, ought to be employed in such a manner so as to comply with the provisions of judiciousness as well as with the principles of natural justice. b) The Honourable DRP and the learned AO ought to have appreciated that the appellant would never be privy to such classified information in any public domain and therefore would not be in a position to use it while preparing the transfer pricing report; c) The Honourable DRP and the learned AO have grossly erred in completely ignored the fact that the learned TPO has placed substantial reliance on the information obtained through the 133(6) route to reject or accept a company without relying on the information available in the Annual report, a document that forms part of the public domain. d) The Honourable DRP and the learned AO erred in selecting comparables with different year ending selected by the TPO based on the financial information received pertaining to the period from 1st April, 2005 to 31st March, 2006, using 133(6) replies. The aggrieved appellant proposes that the following companies ascertained as comparables based on the aforementioned dichotomy be rejected:

IT(TP)A No.1302/B/2010 Page 5 of 20 • Datamatics Financial Services Limited • Goldstone Infratech Limited • Spanco Limited 4. Application of the Related Party Transaction (hereinafter referred to as "RPT") a) The Honourable DRP and the learned AO grossly erred in upholding the RPT threshold limit of 25% as arrived at by the learned TPO for the purposes of accepting/eliminating companies as comparables b) The TPO has erred in selecting the aforementioned threshold limit in purely arbitrary, and ad hoc manner, and without any reasonable basis. c) The Honourable DRP and the learned AO have erred in upholding the TPO's threshold limit of 25%, without taking into consideration the tenets laid down in the judicial decisions on the same grounds as issued by the Honourable Benches of the Delhi and Bangalore ITATs in the cases of Sony India' and Philips India2 respectively. d) The Honourable DRP and the learned AO have erred in not considering the basic proposition of the arm's length price was the absolute absence of related party dealings, as laid down by the jurisdictionaltrans:.ctions i.e., there should not be even a single Rupee attributable to related party dealings, as laid down by the jurisdictional ITAT in the case of Philips India. e) The Honourable DRP and the learned AO have erred in not considering the ruling of Delhi Tribunal in the case of Sony India that the RPT filter could be relaxed in the event there are not sufficient comparable companies for comparability purposes. f) The Honourable DRP and the learned AO have erred in not rejecting the following comparables proposed by the learned TPO If 0 percent is chosen as the threshold limit for RPT filter as provided in the Philips case:

IT(TP)A No.1302/B/2010 Page 6 of 20 If 10 percent is chosen as the threshold limit for RPT filter as provided in the Sony case:

If 15 percent is chosen as the threshold limit for RPT filter as provided in the Sony case:

5. Use of contemporaneous data a) The Honourable DRP and the learned AO erred in concluding that the appellant ought to have employed contemporaneous data in the preparation of the Transfer Pricing report. b) The Honourable DRP and the learned AO erred in interpreting the word "Shall" in Rule lOB (4) to mean that data for the same Financial Year in which the international transaction was actually entered into is a mandatory requirement. Also the Honourable DRP and the learned AO ought to have appreciated that the transfer pricing regulations provide contemporaneous documentation to be mandatory, and not use of data for the same financial year. c) The Honourable DRP and the learned AO ought to have appreciated the fact that the objective underlying the use of multiple-year data was to ensure that the outcomes of the international transactions for the year under consideration were based on all the earlier periods which were relevant for determination of transfer price.

6. Market Risk Adjustment should be allowed

a) The Honourable DRP and the learned AO have grossly erred in accepting the learned TPO's rejection of market risk adjustment submitted by the appellant based on the Capital Asset Pricing Model (CAPM) model.

IT(TP)A No.1302/B/2010 Page 7 of 20 b) The Honourable DRP and the learned AO have erred in not appreciating the difference in the functional profile that exists between the appellant who functions in the role of a captive service provider vis-a-vis the independent unrelated comparable companies who operate in the capacity of entrepreneurial entities. c) The Honourable DRP and the learned AO also erred in concluding that the market risk adjustment will be nullified against the existence of single customer and political risks. d) The Honourable DRP and the learned AO ought to have appreciated that the TPO cannot net off the market risk adjustment with the single customer risk adjustment without even deriving the same.

7. Safe harbour and Application of +-5% Arm's length range a) The Honorable DRP and the learned AO have erred in supporting the learned TPO's assertion that the amended provision regarding the provision of the arm's length range as per the Finance Act 2009 was applicable to the financial year (FY) 2005-06 as well.

b) The Honorable DRP and the learned AO ought to have considered the fact that the amendment introduced was with effect from 1st October 2009 and the said amendment was not retrospective in nature. c) The Honorable DRP and the learned AO have erred in not considering that if at all any adjustment is made, the same should be made only to the lower limit of the 5% range set out u/s 92C(2).

8. Anti Avoidance a) The Honorable DRP and the learned AO ought to have appreciated that Transfer Pricing provisions are in the form of an anti-avoidance legislation and that such provisions are required to be interpreted on the rules of strict interpretation.

9. The employee cost filter of 25% of revenue needs to be applied by the TPO

b) The learned DRP as well as the learned AO failed to appreciate the fact that the logic of application of this filter to the IT segment should have been extended to the ITES segment as well as even in the ITES segment, employees constitute the predominant asset.

IT(TP)A No.1302/B/2010 Page 8 of 20 c) The Honorable DRP and the learned AU have erred in not eliminating the following comparables: • Cosmic Global Ltd • Vishal Information Technologies Ltd • Asit C Mehta Financial Services Ltd • Goldstone Infratech Ltd • Spanco Ltd • Ace Software Exports Ltd a) Companies eliminated erroneously citing inadequate information should be accepted as comparables. a) The Honourable DRP and the learned AU have erred in upholding TPO's contention of rejecting the following comparables on the grounds of inadequate information:

• Nittany Outsourcing Services Pvt. Ltd • Cameo Corporate Services Ltd b) The Honourable DRP and the learned AU ought to have appreciated that the learned TPU failed to be consistent in his approach by not issuing the requisite notices under the provisions of Section 133(6) of the Act notices to these companies as well.

10. Datamatics Financial Services Ltd (Datamatics) should be Rejected a) The Honourable DRP and the learned AU have erred in accepting the learned TPU's contention of taking Datamatics as a comparable ignoring the submission made by the appellant.

b) The Honourable DRP and the learned AU ought to have appreciated that Datamatics should be rejected based on the following reasons- • The company does not have segmental information pertaining to the ITES segment of the company for FYE 2006. • The ITES revenue comprises 28.04% of the total revenues and does not qualify the revenue filter postulated by the learned Transfer Pricing Officer.

11. Cosmic Global Ltd (Cosmic Global) should be Rejected a) The Honourable DRP and the learned AU have erred in accepting the contention of the learned TPO that Cosmic Global is a comparable company on the following grounds: • The company depicts a wildly fluctuating trend in revenue

IT(TP)A No.1302/B/2010 Page 9 of 20 • Employee cost as a percentage of revenue stands at 23.47% whereas the threshold limit of acceptance of a company is 25% of the revenues.

12. Vishal Information (Vishal Information) should be Rejected The Honourable DRP and the learned AO have erred in upholding the learned TPO's contention that Vishal Information is a comparable company on account of the following reason: • Employee cost as a percentage of revenue stands at 1.49% whereas the threshold limit of acceptance of a company is 25% of the revenue

13. Asit C Mehta Financial Services Ltd (Nucleus Netsoft & GIS Ltd) should be Rejected

a) The Honourable DRP and the learned AO have erred in upholding the learned TPO's contention that Asit C Mehta Financial Services Limited is a comparable company on the following grounds: • The company appears as a merged entity under the name "Nucleus Netsoft & Gis India (Merged)" and is to be rejected on the basis of lack of data availability. • Trend analysis of the revenue depicts an abnormal/supernormal growth for the financial year ended 31st March 2006 vis-à-vis 31st March 2005 and 31st March 2004. • Percentage of employee cost to revenue is 12.22%, which is below the qualifying percentage of 25%

The Honourable DRP and the learned AO have erred in upholding the learned TPO's contention that Goldstone Infratech Limited is a comparable company on account of the following reasons: • Recourse to the provisions of Section 133 (6) of the Act and such data was not available in public domain. • The BPO segment comprises of only 16% of the total operating revenue and hence is less than the limit specified by the learned TPO. • The company further has forex earnings of 0.12%, which is less than the limit of 25% adopted by the Transfer Pricing Officer.

IT(TP)A No.1302/B/2010 Page 10 of 20 • The revenues the company are depicting abnormal fluctuations on a year-on-year basis. Percentage of employee cost to revenue is 8.68%, which is below the qualifying percentage of 25% 15. Spanco Limited (Spanco) should be Rejected The Honourable DRP and the learned AO have erred in upholding the learned TPO's contention that Spanco Limited is a comparable company on account of the following reasons: • Recourse to the provisions of Section 133 (6) of the Act and such data was not available in public domain. • BPO segment comprises of only 38% of the total operating revenue and hence is less than the limit specified by the learned TPO. • The company further has forex earnings of 23%, which is less than the limit of 25% adopted by the Transfer Pricing Officer. • Trend analysis of the revenue depict an abnormal/supernormal growth for the financial year ended 31st March 2006 vis-à-vis 31st March 2005 and 31st March 2004. • Percentage of employee cost to revenue is 23%, which is below the qualifying percentage of 25% • 16. ACE Software Exports Limited (ACE Software) should be Rejected

The Honourable DRP and the learned AO have erred in upholding the learned TPO's contention that ACE Software Exports Limited is a comparable company on account of the following reasons: o Trend analysis conducted on the profit margins of the company depicted a wildly fluctuating trend. o The Company does not qualify the employee cost filter as the personnel expenditure as a percentage of revenue for the financial year ended 31st March 2006 stood at 7.65%, which was well below the qualifying percentage of 25%. o The company cannot be compared to the appellant as the company is engaged in the development and sale of software. o No segmental information is available with respect to the ITES Segment

IT(TP)A No.1302/B/2010 Page 11 of 20 17. Nittany Outsourcing Services Pvt. Limited (Nittany) should be accepted as a comparable: a) The Honourable DRP and the learned AO erred in upholding the learned TPO's contention of rejecting Nittany as a comparable stating that the annual report was not available for the YE 2006 and also that a notice under Sec 133(6) could not be served on the company.. b) The Honourable DRP ought to have appreciated that the learned TPO failed to be consistent in his approach by failing to issue the concerned Notice under Section 133(6) to the this company.

II. Corporate Tax

The Honourable DRP and the learned AO erred in considering the entire telecommunication charges as attributable to the delivery of computer software outside India although it was submitted that no part of the expenditure relating to telecommunication was incurred in delivery of computer software outside India and the provision of technical services outside India.

The Honourable DRP and the learned AO have erred in not considering the contention of the appellant that the telecommunication charges are incurred for obtaining the specific bandwidth capacity which is used for downloading of data/software for carrying out the primary business activity of providing call centre support to the customers of various Dell overseas entities worldwide.

IT(TP)A No.1302/B/2010 Page 12 of 20 The Honourable DRP and the learned DOT has also erred in not accepting the contention of the appellant that the definition of "Total Turnover" under section 80HHC / 80HHE should be used to compute the deduction under section 1OA of the Act.

Notwithstanding and without prejudice to the above, the Honourable DRP and the learned AO further erred in not considering that should a portion of the telecommunication expenses be reduced from the export turnover, such expenses should also be reduced from the total turnover in arriving at the deduction under section 1OA of the Act.

The Honourable DRP and the learned AO have erred in not taking cognizance of the decision of the jurisdictional Income Tax Appellate Tribunal, Bangalore in the appellant's own case on an identical issue for the assessment years 2003-04 and 2003-04 vide & 309/Bang/2007 dated 16.11.2007, wherein it has been held that should the expenses be reduced from export turnover then such expenses ought to be reduced from total turnover also.

The Honourable DRP and the learned AO have also erred in not relying on the decision of the Special Bench of the Chennai Tribunal in the case of Sak Soft Limited v. ITO (ITA No. 691 & 1953/Mds/2007) wherein it has been held that if the telecommunication, freight and insurance expenses are reduced from the export turnover then the same would also have to be reduced from the total turnover in order to compute the deduction under section 1OA The Honourable DRP and the learned AO erred in not placing reliance on the below mentioned judicial precedents wherein it was held that should the telecommunication, freight and insurance expenses be reduced from the export turnover then the same would also have to be reduced from the total turnover in order to compute the deduction under section 1OA; • ITO v. D.E. Block India Software (P) Ltd, ITA 983 & 984 - Hyderabad Tribunal; • Tata Elxsi v. CIT - bang - Bangalore Tribunal; • M/s i-Gate Global Solutions Ltd v. The ACIT - ITA No.248 & 249/Bang/2007 - Bangalore Tribunal; • Patni Telecom (P) Limited v. ITO (22 SOT 26) - Hyderabad Tribunal; • Nous Infosystems (P) Ltd v. ITO ITA No. 1042/Bang/07 (AY 2003-04) - Bangalore Tribunal;

IT(TP)A No.1302/B/2010 Page 13 of 20 • ANZ operations & Technology Private Limited v. CIT - - Bangalore Tribunal; • KPIT Cummins Infosystems (Bangalore)(P) Ltd. V. ACIT - 26 SOT 529 - Bangalore tribunal; • ACIT v. Honeywell Technology Solutions Lab. Pvt. Ltd (ITA No. 344 & 345 Bang./2009) - Bangalore Tribunal; • i2 Technologies India Private Limited v. ACIT - ITA No. 277 / Bang / 2009 - Bangalore Tribunal The appellant craves leave to add, alter and modify the above grounds during the course of the appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that the order of the learned AO be set aside.”

IT(TP)A No.1302/B/2010 Page 14 of 20 Pricing Officer (TPO) for the purpose of determining arm’s length price (ALP) in respect of reported international transactions. The TPO, vide order dated 30/10/2009 passed u/s 92CA of the Act, proposed TP adjustment of Rs.136,34,05,692/- under the provisions of sec.92C. Accordingly, the AO passed draft assessment order dated 23/12/2009. After receipt of draft assessment order, the assessee-company filed objections before the Hon’ble Disputes Resolution Panel (DRP). The Hon’ble DRP had disposed of the objections. The AO finally passed the assessment order u/s 143(3) r.w.s.144C of the Act vide order dated 20/09/2010 incorporating the directions of the Hon’ble DRP.

IT(TP)A No.1302/B/2010 Page 15 of 20 of MAP. As a result of this, assessee-company had filed revised grounds of appeal withdrawing the grounds challenging the TP adjustment in respect of its transactions with its AE of US country.

“3.4. Before us, the main argument of the Ld. Counsel was that since the mark-up MAP has concluded the Arm's Length mark-up at 14.38% for 96% of the total transactions done with the AE's, then without prejudice to the other submissions, for remaining transactions of 4% also same treatment should be given, same bench marking should be done, and ALP mark-up of 14.38% should be applied, more particularly, because of the fact that the AO or DRP have not made any distinction between the 'US' entities and 'non-US' entities. It was further submitted that although the assessee can very well contest these additions, but this concession has come from the assessee's side with a view to bury the litigation, notwithstanding the facts that no addition should have been made as the case of the assessee falls within +/- 5% range. It was also submitted that the assessee reserves its right to contest the levy of any kind of penalty, as and when initiated, if any. Our attention has been drawn to the annual accounts of the company and orders of the lower authorities to show that no distinction has been made between the '96%' and '4%'transactions.

IT(TP)A No.1302/B/2010 Page 16 of 20 3.5. On the other hand, Ld. CIT-DR, vehemently opposing the arguments of the Ld. Counsel, submitted that there is no concept of determination of ALP under the Mutual Agreement Procedure. The rules and regulations of transfer pricing as prescribed u/s. 92C Chapter X of the Income Tax Act are not applicable under MAP, and therefore, no ALP was determined under MAP, and therefore, assessee cannot claim to take any benefit of the mark-up reached under MAP i.e. @ of 14.38%. Accordingly to him, the ALP should be computed freshly and independently for the remaining 4% transactions, and for this purpose this issue can be sent back to the lower authorities”.

Additional grounds Issue: Deduction under Section 10A ought to be granted on the increased income determined as per Mutual Agreement between Competent Authorities of India and USA Gist of our submission: 1. Additional Ground of appeal may kindly be admitted and the issue referred to the A.O for examination and determination

2. The enhanced income as determined under MAP satisfies all the conditions stipulated in Section I OA for claiming deduction

3. The enhanced income determined under MAID will not be covered by Proviso to Sec 92C (4), as it is applicable only to computation of income under that section. Computation of Income under MAP process will not be covered under that section,

IT(TP)A No.1302/B/2010 Page 17 of 20 4. Since the assessee had embarked on the MAP procedure and its acceptance of the resolution terms IS voluntary (it had the option to disregard the MAP resolution), it is in the nature of suo motu adjustment to income from international transactions and it is settled principle that I OA deduction is allowable on suo-motu Transfer Pricing ("FP') adjustment”

11. As regards reduction of telecommunication expenses export turnover, now the law is quite settled that while reducing telecommunication expenses from export turnover, the same should also be reduced from the total turnover on the reasons of parity as held by the jurisdictional High Court in the case of CIT vs. Tata Elxsi Ltd. (349 ITR 98). Accordingly, we direct the TPO/AO to reduce the telecommunication expenses from the IT(TP)A No.1302/B/2010 Page 19 of 20 export turnover as well as the turnover while computing deduction u/s 10A of the Act.