DCIT vs. M/S AKAMAI TECHNOLOGIES INDIA PVT. LTD.,, BANGALORE

Deputy Commissioner of Income-tax, Circle 11(1), Bangalore. … Appellant Vs. M/s.Akamai Technologies India Pvt.Ltd. Salarpuria Softzone, 80/1, ‘A’ Wing, 2nd & 3rd floor, Bellandur Outer Ring Road, Bangalore-560037. … Respondent PAN:AAICS0950 J AND Cross Objn.No.174/Bang/2015 (In IT(TP)A No.879/Bang/2013) (Assessment year: 2005-06) (by the assessee) **** Revenue by : Dr.P.K.Srihari, Addl.CIT. Assessee by : Shri P.K.Prasad, Advocate. Date of hearing : 03/03/2016 Date of pronouncement : 16/03/2016 O R D E R

Per INTURI RAMA RAO, AM :

IT(TP)A No.879/B/13 & CO 174/B/15 Page 2 of 22 2. The revenue raised the following grounds of appeal:

1) “The order of the Learned CIT (Appeals) in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2) The CIT(A) erred in directing the AO to re-compute the deduction allowable u/s 10A of the I.T. Act after reducing the communication charges from the total turnover also. 3) The Ld. CIT(A) ought to have appreciated that there is no provision in section 10B which requires the concerned expenses, which are required to be reduced from the export turnover as per clause (iv) of the Explanation to Section 10B to be reduced from the total turnover also. 4) The Ld.CIT(A) ought to have considered the fact that the jurisdictional High Court decision relied upon by him has not been accepted by the department and a SLP has been filed before the Hon'ble Supreme Court which is still pending. 5) The learned CIT(A) erred in holding that the size, turnover of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding Wipro BPO Solution Ltd and Sutherland Global Services Pvt. Ltd., as comparables in the segment. 6) The Ld CIT(A) erred in excluding the comparable companies: Mercury Outsourcing Management Ltd., and Flextronics Software Systems Ltd on the basis of abnormal loss Without defining what constitutes abnormal loss filter and how the same is determined. 7) The Ld. CIT(A) erred in directing the inclusion of M/s Pentasoft Technologies Ltd. as an appropriate comparable rejecting the diminishing revenue filter used by the TPO to exclude companies that do not reflect the normal industry trend. 8) The CIT(A) erred in holding that the different accounting year filter, was an inappropriate filter for the purpose of comparability analysis.

IT(TP)A No.879/B/13 & CO 174/B/15 Page 3 of 22 9) The CIT(A) has erred in holding that the different accounting year filter, was an inappropriate filter for the purposes of comparability analysis without indicating how the computation of the margins could be correctly done since two financial years were involved as compared to the taxpayer which in any case would then be contradictory to CIT(A)'s own decision who has upheld the rejection by the TPO of multiple year's data and use of only current year's data for the purpose of TP analysis. 10) The CIT(A) has erred in holding that Nucleus Netsoft & GIS Ltd. is an inappropriate comparable without appreciating the fact that the taxpayer accepted that the same passed through all the filters applied by the TPO during the course of the TPO proceeding. 11) The CIT(A) erred in holding that Nucleus Netsoft & GIS Ltd. is an inappropriate comparable without appreciating the fact that the comparable passed through all the filters applied by the TPO (both qualitative and quantitative). 12) The CIT(A) erred by treating business reputation as an important determinant for the purposes of comparability analysis without appreciating the fact, on the facts and in the circumstances it is neither supported by any statistical analysis and being unascertainable, therefore is an inappropriate reason for rejection. 13) The CIT(A) erred in holding that M/s Maple e Solution Ltd. is an inappropriate comparable given the facts that the company satisfies the functionality test (both qualitative and quantitative) and the taxpayer did not produce any data regarding the reasons for the exceptionality in its performance to support its contention of in appropriate comparability. 14) The CIT(A) has erred in holding that M/s Apex Advanced Technology Pvt. Ltd. is an appropriate comparable in contradiction to the information available in the consolidated financial statement that the primary operations of the group falls under a single business segment viz Export of computer software and therefore the company has a different functional profile as compared to the taxpayer.

IT(TP)A No.879/B/13 & CO 174/B/15 Page 4 of 22 15) The CIT(A) has erred in holding that M/s Apex Advanced Technology Pvt. Ltd. is an appropriate comparable given the facts that the comparable does not pass through all the filters applied by the TPO for the purposes of comparability analysis. 16) For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored. 17) The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged, at the time of hearing of the appeal.”

IT(TP)A No.879/B/13 & CO 174/B/15 Page 6 of 22 Sl. Company Name Margin as Margin in No. taken by FY 2004- taxpayer 05 1. Ace Software Exports Ltd. 5.83% 14.63% 2. Allsec Technologies Ltd -0.54% 27.11% 3. CMC Ltd. 17.68% 1.46% 4. CS Software Enterprise Ltd. 11.21% 14.55% 5. Compudyne Winfosystems Ltd. -42.27% -123.00% 6. Fortune Infotech Systems 68.34% 17l.43% 7. Genesys International Corporation Ltd. 35.89% -2.06% 8. Mercury Outsourcing Mgt Ltd. 4.88% -36.94% 9. Nucleus Netsoft & GIS Ltd. -0.17% 40.06% 10 Spanco Telesystems and Solution Ltd. 25.62% 22.89% 11 Transworks Information Services Ltd. -5.30% 2.87% 12 Vishal Information Tech Ltd. 33.87% 45.65% Total 155.04% 24.65% Average 12.92% 2.05%

a. Companies whose turnover while doing so, <Rs.1 crore were excluded. b. Companies who have less than 25% of their revenues as export sales were excluded.

IT(TP)A No.879/B/13 & CO 174/B/15 Page 7 of 22 c. Companies who have more than 25% related party transactions of the sales were excluded. d. Companies who have diminishing revenues/ persistent losses for the period under consideration were excluded. e. Companies having different financial year ending (i.e. not March 31, 2006) or date of the company not available for the 12 month period i.e. 01/04/2005 to 31/03/2006 were excluded. The TPO finally selected the following comparables:

Sl. Company Name PLI No. 1 Allsec Technologies Ltd. 29.85 2 Safron Global Ltd. 24.88 3 Vishal Information Tech Ltd 45.62 4 Cosmic Global Ltd (Tulsyan Tech Ltd. 17.02 5 Transworks Information Services Ltd. 2.81 6 Wipro BPO Solution Ltd. 18.59 7 Ace Software Exports Ltd. 14.5 8 Nucleus Netsoft & GIS Ltd. 40.06 9 Maple E-solutions Ltd. 28.75 Total 222.08 Average 24.68 The TPO computed average profit margin of the comparables finally selected at 23.01%. On the above said basis, the TPO computed the transfer pricing adjustment as follows:

Arms length price @ 123.01% of operating cost …. Rs.6,07,20,555/- Price received …. Rs.5,43,38,993/- Shortfall being adjustment u/s 92CA Rs. 63,81,562/-

7.2 As regards the comparables selected by the TPO, the respondent-assessee-company accepted the inclusion of company Allsec Technologies Ltd., in the list of comparables but prayed for IT(TP)A No.879/B/13 & CO 174/B/15 Page 9 of 22 correction of its margin. The ld.CIT(A) after considering the material had directed that the margin of this comparable should be adopted at 26.19% as against 29.38% adopted by the TPO. As regards the inclusion of Vishal Information Technologies Ltd., in the list of comparables, the ld.CIT(A) had not accepted the contention of the respondent-assessee-company that the business model of the comparable is different from that of the respondent-assessee-company. Therefore, the ld.CIT(A) upheld the action of the TPO in including this company as a comparable. The Nucleus Netsoft & FIS Ltd., the comparable selected by the TPO was directed to be excluded from list of comparables on the grounds of functional dissimilarities. The comparable viz., Maple E Solutions Ltd., was also directed t be excluded from the list of comparables selected by the TPO, as the reputation of the ground was under serious indictment. The ld.CIT(A) also directed the inclusion of M/s.Apex Advanced Technology Ltd., Finally, the ld. CIT(A) computed the arithmetic mean of operating margins of the comparables finally as follows:

Sl. Company Name OP/TC No. % 1 Ace Software Exports Ltd. 14.50 2 Allsec Technologies Ltd. 26.19 3 Apex Advanced Technology Ltd. 14.16 4 Cosmic Global Ltd 17.02 5 Pentasoft Technologies Ltd. 7.85 6 R Systems International Ltd. 8.12 7 Safron Global Ltd. 24.88 8 Transworks Information Services Ltd. 2.81 9 Vishal Information Technologies Ltd. 45.62 Arithmetic mean 17.91

IT(TP)A No.879/B/13 & CO 174/B/15 Page 10 of 22 The ld.CIT(A) further held that pre-operative and preliminary expenditure does not form part of the operating cost and consequently, the operating margin on total cost was calculated at 13.29%.

10. Ground No.5 challenges the direction of the ld.CIT(A) to delete Wipro BPO Solution Ltd., applying the filter of turnover and size. This company was not considered by the respondent- assessee-company in its TP study. This was proposed as a comparable by the TPO. The respondent-assessee-company has objected for inclusion of this company on the basis of high

IT(TP)A No.879/B/13 & CO 174/B/15 Page 11 of 22 turnover of the company. The ld.CIT(A) upheld the application of turnover filter. However, he held that this turnover filter should be applied objectively for low and high turnover companies. Accordingly, the ld.CIT(A) directed that since the turnover of Wipro BPO Solutions Ltd., was Rs.617.71 crores this company was directed to be deleted. The revenue challenges this direction contending that turnover is not a relevant factor for deciding the comparability. However, the ld.AR of the respondent-assessee- company submitted that this company cannot be considered as a comparable even on the grounds of functional differences. In support of this, he relied on the decision of the Hyderabad bench of Tribunal in the case of Market Tools Research Pvt.Ltd. (ITA No.1150/Hyd/2011) and Mumbai bench of Tribunal in the case of Maersk Global Services Centre (India) P. Ltd. (ITA No.3774/Mum/2011).

10.1 We heard the rival submissions and perused the material on record. The Hon’ble Bombay High Court in the case of CIT vs.Pentair Water India Pvt. Ltd. (381 ITR 216) had held that the turnover was a relevant factor for the purpose of comparability of two entities. However, without going into this issue, as rightly submitted by the learned AR of the respondent- assessee-company, it was held by the co-ordinate benches of Hyderabad and Mumbai benches in the cases cited supra, Wipro BPO Solutions Ltd., cannot be considered as a comparable entity in view of the fact that it is gigantic company owning intangibles

IT(TP)A No.879/B/13 & CO 174/B/15 Page 12 of 22 and having substantial brand value. Co-ordinate bench (Hyderabad) of the Tribunal, in the case of M/s.Market Tools Research Pvt.Ltd., (supra) held as follows:

“20. It is a fact that WIPRO BPO is a big company owning intangibles and having substantial brand value. It had generated considerable goodwill, reputation and brand value in the market. It is also a fact that it earns substantial revenue from products which are sold at a premium unlike the assessee which is only a contract service provider to its AE. Another relevant factor which cannot be lost sight of is, as can be seen from para 14.5 of his order, the TPO applying the turnover filter has excluded companies having turnover from ITES at less than 1 crore. Applying the same logic he should also have excluded companies having extraordinarily high turnover. While the assessee's turnover is about 5 crores, turnover of WIPRO BPO is 617.71 crores i.e almost 120 times more. Considering the aforesaid facts we are of the view that WIPRO BPO cannot be considered to be a comparable to the assessee.”

10.2 In the case of Maersk Global Services Centre (India) P. Ltd.(supra), Mumbai bench of the Tribunal held that:

“Insofar as WIPRO BPO Solutions Limited is concerned, we find that their turnover is eleven times greater than that of the assessee. This company having such a higher brand value along with much higher turnover, in our considered opinion, has been rightly excluded by the ld.CIT(A).”

Therefore respectfully following the decisions of the co-ordinate benches of Tribunal in the cases cited supra, we hold that WIPRO BPO Solutions cannot be considered as a comparable entity, and the findings of the ld.CIT(A) are upheld accordingly. The ground of appeal of the revenue is dismissed.

IT(TP)A No.879/B/13 & CO 174/B/15 Page 13 of 22 11. Ground No.6 challenges the direction of the ld.CIT(A)to exclude Mercury Outsourcing Management Ltd., and Flextronics Software Systems Ltd., on the basis of abnormal loss without defining what constitutes abnormal loss filter and how the same is determined.

Flextronics Software Systems Ltd., was identified by the respondent-assessee-company during the course of proceedings before the TPO whereas Mercury Outsourcing Management Ltd., was selected by the respondent-assessee-company in its TP study. Both the comparables were rejected by the TPO on the ground the comparables were persistent loss making companies. The ld.CIT(A) also accepted the findings of the TPO on this ground. Therefore, the revenue is not aggrieved by exclusion of these companies from the list of comparables. Hence, the ground of appeal is dismissed as such.

12. Ground No.7 challenges the direction of the ld.CIT(A) to include M/s.Pentasoft Technologies Ltd., in the list of comparables. This comparable was offered by the respondent- assessee-company during the course of proceedings before the TPO. TPO rejected this company as comparable for the reason that no annual report was available on public domain and the company was reporting decreasing sales against the industry trend. The ld.CIT(A) held that the diminishing revenue cannot be accepted as a filter and directed the TPO to include this company in the list of comparables.

IT(TP)A No.879/B/13 & CO 174/B/15 Page 14 of 22 12.1 Ld.AR of the respondent-assessee-company drawn our attention to page 215 to 260 of the paper book which contains the Annual report for 2004-05 and specific attention was drawn to page 221 of the paper book which highlights the business performance of the company, which is as under:

“2. Business Performance: The total income for the financial year ended 31st March 2005 is Rs.55.94 Crores as compared to Rs.101.69 Crores for the previous year. The net profit stood at Rs.2.51 Crores compared to previous year figure of 2.34 Crores. Your company was able to maintain the net profit at the same level as that of last year even though there has been substantial fall in revenue due to several cost cutting measures and improved margins in the business undertaken by the company.

During the year under review the company has gone for acquisition of new products rights to strengthen its software products division. Besides these, the company has also undertaken several short-term training courses for companies and educational institutions resulting in healthy bottom line. With the Scheme of amalgamation of your company with M/s.Silicon Valley Infotech Ltd., Kolkatta, your company will be able to perform better in this area.

Based on above Scheme of amalgamation, your company has made out one time settlement proposal to various institutions which will clear most of the liabilities of the company.

12.2 We have considered the rival submissions and material on record. From the above it is clear that the though there was fall in gross revenue, net profit could be maintained at the same level due to several cost cutting measures and improved margins in the business undertaken by the respondent-assessee-company.

IT(TP)A No.879/B/13 & CO 174/B/15 Page 15 of 22 Therefore, the criterion of diminishing revenue is not applicable to this comparable company even if the criterion is held to be relevant. We uphold the order of the ld.CIT(A) in directing the TPO to include this company in the list of comparable. The ground of appeal of the revenue dismissed.

13. Ground Nos.8 and 9 are not pressed by the revenue. Hence, the same are dismissed as not pressed.

14. Ground Nos.10 to 12 challenge the direction of the ld.CIT(A) to exclude Nucleus Netsoft & GIS Ltd., from the list of comparables. This company was selected by the respondent- assessee-company as a comparable. However, during the course of proceedings before the TPO, the respondent-assessee-company objected for inclusion of this company in the list of comparables on functional differences and super normal profits. However, the TPO rejected this contention and retained in the list of comparables.

14.1 On appeal before CIT(A), the ld.CIT(A) concurred with the views of the respondent-assessee-company and directed the TPO to delete this company from the list of comparables.

14.2 The ld. DR argued that this company was considered by the respondent-assessee-company itself as a comparable and therefore, the respondent-assessee-company should not contest on the inclusion.

IT(TP)A No.879/B/13 & CO 174/B/15 Page 16 of 22 14.3 On the other hand, ld.AR of the respondent-assessee- company has submitted that this company was engaged in the Geographical Information Systems Services and also earned super normal profits and therefore, cannot be considered as a comparable with the respondent-assessee-company. In support of this, he has drawn our attention to the Annual Report. He also relied on the decision of the co-ordinate bench (Hyderabad) of Tribunal in the case of BA Continuum India Pvt. Ltd. In dated 24/10/2013 wherein it has been held as under:

“13. We have heard both the parties and perused the material on record. In our opinion, this issue was considered by the Tribunal in the case of DCIT vs. Hellosoft India Pvt. Ltd. (ITA No.640/Hyd/2009 dated 15/1/2013) wherein it was held that companies having extraordinary high profit/loss cannot be considered as comparables. Being so, the companies having extraordinarily high profit or loss are to be excluded as comparables.

14.4 The decision of the Hyderabad bench of Tribunal in the case of BA Continuum India Pvt. Ltd. (supra) is based on the decision of Sapient Corporation Pvt.Ltd. vs. DCIT (11 Taxman.com 69)(Del). Subsequently, the co-ordinate (Bangalore) bench of the Tribunal in the case of Trilogy E- Business Software India Pvt. Ltd. (140 ITD 540)(Bang.) held that there is no bar to considering companies having abnormal losses or profits as comparable as long as they are functionally comparable. The Tribunal however, held that if there are specific reasons for abnormal profits or losses or other general reasons as IT(TP)A No.879/B/13 & CO 174/B/15 Page 17 of 22 to why they should not be considered as comparable, then they can be excluded for comparability. It was further held that the onus lies on the tax-payer to prove the existence of abnormal factors. This decision was subsequently followed in: i. Auto desk (India) Pvt. Ltd. Vs. DCIT (ITA No.1108/ Bang/2010); ii. Yodlee Infotech (P) Ltd. Vs. ITO (31 taxmann.com 230)(Bang.Trib.) iii. BP India Services Pvt.Ltd. vs. DCIT (ITA No.4425/ Mum/2010 (Bom) iv. Rusabh Diamones vs. ACIT (TS-91-ITAT-2013- MUM-TP) v. ITO vs. Nextlinx India Pvt. Ltd. TS-722-ITAT- 2012(Bang)-TP vi. 24/7 Customer.Com Pvt.Ltd. vs. DCIT (140 ITR 344(Bang) vii. Exxon Mobil Co.India (P) Ltd. (46 SOT 294)(Mum) viii. DCIT vs. Exxon Mobile Co. I Pvt. Ltd.TS-754-ITAT- 2012(Mum)TP ix. Capgemini India (P) Ltd. Vs. ACIT (33 taxmann.com 5)(Mum-Trib.) x. Wills Processing Services (P) Ltd. Vs. DCIT (TS-49- ITAT-2013(Mum)-TP.

Even the Hon’ble Delhi High Court in the case of Cyryscapitl Investment Advisors (India) P.Ltd. vs. DCIT (376 ITR 183) held vide para.33 that the mere fact that there is a huge profit does not lead to its exclusion from the list of comparables. The relevant paragraph is extracted below:

“33. Such being the case, it is clear that exclusion of some companies whose functions are broadly similar

IT(TP)A No.879/B/13 & CO 174/B/15 Page 18 of 22 and whose profile in respect of the activity in question can be viewed independently from other activitiescannot be subject to a per se standard of loss making company or an "abnormal" profit making concern or huge or "mega" turnover company. As explained earlier, Rule 10B (2) guides the six methods outlined in clauses (a) to (f) of Rule 10B(1), while judging comparability. Rule 10B (3) on the other hand, indicates the approach to be adopted where differences and dissimilarities are apparent. Therefore, the mere circumstance of a company otherwise conforming to the stipulations in Rule 10B (2) in all details, presenting a peculiar feature such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The TPO, first, has to be satisfied that such differences do not "materially affect the price...or cost"; secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made.”

Therefore, this company cannot be excluded by applying the filter of abnormal profits. The ld.AR of the respondent-assessee- company further argued that this company needs to be excluded from the list of comparables on functionality differences.

14.5 We heard rival submissions and perused the material on record. The respondent-assessee-company had not filed any evidence in support of the functions carried out by the comparable. For the purpose of comparability, analysis of FAR is sine qua non, in the absence of the same on record, we are unable to render any finding on this aspect of the argument. Therefore, we are unable to agree with the finding of the ld.CIT(A) that this company should be excluded from the list of comparables even on the ground of functional dissimilarity. We

IT(TP)A No.879/B/13 & CO 174/B/15 Page 19 of 22 direct the AO to include this company in the list of comparables. These grounds of appeal of the Revenue are allowed.

15. Ground No.13 challenges the direction of the ld.CIT(A) directing the TPO to delete M/s.Maple e Solution Ltd., from the list of comparables. This comparable was chosen by the TPO and the ld.CIT(A) deleted from the list of comparable accepting the contention of the respondent-assessee-company that the company operated for a period of 4 months and the group to which the company belongs is under serious indictment and following the decision of the Delhi bench of Tribunal in the case of CRM Services India (P) Ltd. Vs. ITO (ITA No.4068/Del/2009).

15.1 The ld. DR vehemently argued that this company cannot be excluded from the list of comparables as the data available for 4 months can be converted into annual data. There is no allegation against the company that it is engaged in any fraudulent activities. On the other hand, ld.AR of the respondent- assessee-company while reiterating the submissions made before the lower authorities, had placed reliance on the following decisions in support of the contention that this company should be excluded from the list of comparables: i. BA Contininuum India Pvt. Ltd. (ITA No.1154/Hyd/2011) ii. Market Tools Research Pvt.Ltd. (ITA No.1150/Hyd/2011) iii. IVY Comptech Pvt Ltd. (ITA No.1558/Hyd/2010)

IT(TP)A No.879/B/13 & CO 174/B/15 Page 20 of 22 15.2 We heard the rival submissions and perused the material on record. We find that the ld.CIT(A) has excluded this company on the ground that the management of the group companies to which this comparable company belongs, indulged in mal practices or fraud. Though the Tribunal in the cases relied upon by the ld. AR of the respondent-assessee-company has accepted this contention, in the subsequent decision of the co-ordinate (Mumbai) of the Tribunal in the case of Wills Processing Services (India) (P) Ltd. Vs. DCIT (TS-49-ITAT-2013)(Mum)-TP held that the allegation of fraud against management of this group company was in the year 1980-1990 and there were no allegations of mal practices or fraud in connection with business of this company and therefore, rejected the contention of the assessee-company that this company should be rejected as comparable. This decision was rendered considering the decisions cited supra. We accordingly hold that this company cannot be rejected as a comparable following the decision of the Mumbai bench of Tribunal in the case cited supra. Accordingly, we allow this ground of appeal of the revenue.

16. Ground Nos.14 & 15 challenge the direction of the ld.CIT(A) to include M/s.Apex Advanced Technology in the list of comparables. This comparable was by the respondent-assessee- company during the course of proceedings before the TPO. The TPO rejected this company as comparable using the wrong annual report of the group company. The ld.CIT(A) held that the TPO

IT(TP)A No.879/B/13 & CO 174/B/15 Page 21 of 22 has considered the financials of the group company viz., M/s.Apex Knowledge Solutions Pvt. Ltd., while coming to the conclusion that it cannot be a comparable to the respondent-assessee- company. Therefore, the ld.CIT(A) directed the AO to include this company in the list of comparables.

16.1 The ld. DR vehemently argued that this company cannot be treated as a comparable as the main business of the company is export of computer software. On the other hand, ld. AR of respondent-assessee-company relied upon the orders of the ld.CIT(A).

16.2 We heard the rival submissions and perused the material on record. It is undisputed fact that the TPO had considered the financials of a different company. Therefore, he had no occasion to examine the FAR of this comparable. We are of the considered opinion that the interest of justice would be met if this ground is restored to the file of TPO for fresh analysis of FAR of this company and then come to the conclusion whether this can be considered as a comparable or not. Hence, this ground of appeal of revenue is partly allowed for statistical purposes.

IT(TP)A No.879/B/13 & CO 174/B/15 Page 22 of 22 18. The cross objection filed by the assessee-company is only in support of the order of the ld.CIT(A) and no fresh relief is sought for. Hence, the same is dismissed as infructuous.