BANCA SELLA S.P.A. CHENNAI BRANCH (IT DIVISION),CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

The Revenue has raised the following grounds of appeal:- 2.

‘’2.1 The DRP has directed the AO to assess the entire sale consideration of RS.49,98,97,967/- as determined by the TPO under the head capital gain as per the provisions of sec SOB of the act instead of 'Business Income' assessed by AO. 2.2. The DRP has not verified the facts of the case that of as per copy of business transfer agreement, it is found that what is being transferred by the assessee is the , 417, 557/Mds/15 :- 3 -: And C.O.No.45/Mds/2015 business a such along with even the working personnel also. Assessee has treated its personnel as assets. Personnel cannot be treated as 'assets' as defined as per the provision of section 2( 14) of IT ACT. 2.3. The learned DRP fails to note that in the valuation at the time of transfer, personnel have been valued separately, which is clearly in contravention to the provisions of the section 2(42C). The stand taken by the assessee itself is contradictory because on one hand it treats personnel as assets and on the other hand it valuates them separately. Hence this transaction cannot be consider simply as a slump sale as per the provisions of Section 5OB of IT ACT 1961 2.4 The learned DRP held that there was no 'element of non-competition in the transaction' which was not acceptable as per the agreement it is seen that the assessee is transferring the right, title and interest in the business forever to the its Associated Enterprise. From the above it is very clear that the assessee is foregoing its right to conduct business in that specified line of business. Hence there is an element of non-competition and the non-compete fees is to taxable in the hand so of the recipient of such income with effect from 01.04.2013 u/s 28(va) of the IT Act 1961. 2.5 The DRP has failed to note that the Assessing Officer had clearly established with detailed reasoning in the assessment order’’.

The Brief facts of the case are that the assessee company is 3. in business of Software Development filed Return of Income on 04.09.2010 with total income of �14,52,43,615/- and the Return of income was processed u/s.143(1) of the Act on 04.09.2010.

Subsequently, the case for selected for scrutiny and notice u/s.142(1) , 417, 557/Mds/15 :- 4 -: And C.O.No.45/Mds/2015 and 143(2) of the Act were issued. In compliance to notices, the ld. Authorised Representative of assessee appeared from time to time and filed information and ld. Assessing Officer verified information submitted. The ld. Assessing Officer found that assessee company entered into international transactions with Associate Enterprise were value exceeds �15 Crores and the ld. TPO relied on the Arms Length Price (ALP) as mentioned in form No.3CEB and passed order u/s.92CA of the Act with upward adjustment of �39,84,34,513/- towards Associate Enterprise sales and the business value transferred to the Associated Enterprise. The ld. Assessing Officer made other additions and passed draft assessment order u/s.143(3) r.w.s. 144C(1) of the Act dated 28.03.2014. Subsequently, assessee filed objections in form 35A alongwith relevant annexures objecting to the proposed objections made in the Draft assessment order before Dispute Resolution Panel. The ld. Dispute Resolution Panel considered the submissions, objections and findings of the ld. Assessing Officer and ld. TPO and passed order dated 06.01.2015 and the ld. Assessing Officer passed order u/sec. 143(3) r.w.s. 144C(13) 92CA(3) OF THE Act with additions on 21.01.2015.

3.1 On the first objection of adjustment of �49,98,97,967/- u/sec. 92CA of the Act in respect of sale of business as going concern. , 417, 557/Mds/15 :- 5 -: And C.O.No.45/Mds/2015 The assessee filed objections but ld. Dispute Resolution Panel considered the information determined value of business and sale consideration for transferring the business as going concern of Associated Enterprise as determined by the ld. TPO as reasonable and upheld the same.

3.2 In respect of second objection of �2,10,13,546/- on account of sales to Associated Enterprises, the ld. Dispute Resolution Panel found that action of the ld. TPO justifying the upward adjustment as assessee’s international transactions of sales towards Associated Enterprise at �21,18,54,204/- as against �19,08,40,658/- and upheld the action of the ld. TPO on sale to Associated Enterprise.

3.3 On third objection, the gains of transfer sale of business were the ld. Assessing Officer treated as Business income were the contention of the assessee being capital gains and the ld. Dispute Resolution Panel relying on the value determined by the ld. TPO were entire sale consideration �49,98,97,967/- was assessed under capital gains u/s.50B of the act and objections of the assessee were favoured.

3.4 The ld. Assessing Officer made addition towards Associated Enterprise sales �2,10,13,546/- as computed by the ld. TPO vide order , 417, 557/Mds/15 :- 6 -: And C.O.No.45/Mds/2015 dated 28.01.2014 and further as dealt in para 3.3 above as the per directions of the ld. DRP, the ld. Assessing Officer considered the entire sale consideration of �49,98,97,967/- assessed under the head Capital Gains as per the provisions and made an addition of �37,74,20,967/- and passed order u/s.143(3) r.w.s. 92CA(3) of the Act dated 17.12.2014. Aggrieved by the directions of ld. DRP and the order of Assessing Officer, the Revenue has filed an appeal before Tribunal.

3.5 The main contention of the Revenue being that the ld. Assessing Officer was correct in treating the sale consideration as business income instead of taxable under the head Capital Gains. The ld. DRP has not verified the agreements were business is transferred alongwith working structure and the transaction cannot be considered as slump sale. The ld. DRP has overlooked the facts and mentioned that there is no element of non competition in the transaction. But the assessee compny is transferring the rights, title and interest in the business to the Associated Enterprise and it is a clear case the assessee is forgoing its right to conduct business in such specified line and the amount paid takes the characteristic of non compete fee is taxable in the hands of the recipient. Further, non compete fees is made taxable from the assessment year 2003-2004 u/s.28(va) of the , 417, 557/Mds/15 :- 7 -: And C.O.No.45/Mds/2015 Act whereas transfer of software undertaking being treated as non compete fee and therefore the order of the ld. Assessing Officer relied on DRP be set aside and treat the sale consideration under the head income from Business.

3.6 Contra, the ld. Authorised Representative of assessee contested the grounds and submitted that the submissions of the ld. Departmental Representative to treat the transactions as non compete fee is without any basis and charged to income from business. The ld. Assessing Officer should have considered the mode of transactions as transfer. The amount received is a slump sale amount pursuant to takeover of software undertaking by Banca Sella S.p.A. Chennai Branch. The ld. DRP considered the slump sale amount paid is not in the nature of compete fee but differential loss or compensation lost by the assessee company in profit earning capacity. The ld. Authorised Representative relied on the order of the ld. DRP which has considered the facts and objections and directed the ld. Assessing Officer to treat the entire sale consideration �49,98,97,967/- under the head Capital Gains held at para 3.3.2 of order as under:- ‘’3.3.2 The above conclusion of the Assessing Officer is not correct, for two reasons. Firstly, there were no clauses of "non- competition" in the agreement of transfer of the business as a going concern. In the absence of any such explicit clauses, it is not , 417, 557/Mds/15 :- 8 -: And C.O.No.45/Mds/2015 proper to conclude that there was an element of non-competition in consideration. Secondly, almost the entire business of the assessee is from its AE (holding company). As mentioned in the earlier paragraphs, the assessee is a captive software developer for its AE. The AE has 99.99% share holding in the assessee company. The present sale of the business as a going concern was to the Indian branch of the AE only. When the assessee has transferred its entire business with "stock-lock-barrel" to another concern where the holding company is directly interested, the assessee can no longer carry on the business, as it has neither any infrastructure facility (after the transfer) nor has the decision making power to do so. In such a case, the presence or absence of non-competition will not arise. Therefore, in our opinion, there was no element of non- competitiveness in the present transaction of the sale of business to the AE. Therefore, the Assessing Officer is directed to assess the entire sale consideration of Rs.49,98,97,967 as j -, determined by the TPO, under the head capital gains as per the provisions of sec.50B of the Act. The assessee succeeds in its objections in this regard’’.

The ld. Authorised Representative further submitted that no consideration is attributable to non compete fee if not agreed between parties and prayed for dismissing the appeal.

3.7. We heard the rival submissions, perused the material on record and judicial decisions cited. The contention of the ld. , 417, 557/Mds/15 :- 9 -: And C.O.No.45/Mds/2015 Departmental Representative that the amount paid in the transfer of the business of the assessee is in the nature of non compete fee and to be taxed as Revenue receipt and taxable as Business income. On perusal of the agreements and the assessment order, the transaction entered by the assessee company which was incorporated in the year 1996 and the assessee company is primarily engaged for provision of software development services in Financial and Banking domain for their exclusive deployment and production for Sella Group Companies.

Whereas shareholding of the assessee company 99.99% is held by Sella Holdings Netherlands being outside India and further Sella Holdings Netherlands shares are held 100% by Banca Sella Holding S.P.A. Italy. The assessee has entered into international transactions with his Associated Enterprise. The assessee considering the business module and terms of agreements has transferred software undertaking to company Banca Sella S.p.A. Chennai Branch for a valuable consideration of �12,24,77,000/- Associated Enterprise on transfer of business and treated as Capital Gains and was offered to tax separately under Capital Gains and disclosed in Schedule 15 of notes of Accounting. On reference to the ld. TPO, the ld. TPO was made upward adjustment towards business value to the extent of �37,74,20,967/-. On perusal of the terms and provisions of software and business transfer agreements referred by the ld. Assessing Officer , 417, 557/Mds/15 :- 10 -: And C.O.No.45/Mds/2015 in the Draft assessment order and agreement of sale the consideration payable, prime facie is slump sale and such transactions cannot be considered as a non compete fee chargeable to tax. Further, the amendment of Sec. 28(va) of the Act was made to tax the non compete fee received from assessment Year 2003-04. Therefore the provision of non compete fee terminology cannot be accepted and we dismiss the ground of the Revenue and upheld the findings of the ld. DRP in treating as income from Capital Gains.

3.8 In the result, the appeal of the Revenue in of assessment 2010-2011 is dismissed.

C.O.No.45/Mds/2015 in The 4. assessee has filed the Cross objection and raised the following grounds:-

1 The learned AO/TPO/DRP ought to have appreciated that the customer of the assessee had decided to carry on business by itself through its Branch and has in effect stopped giving work to the assessee and in such circumstances the amount paid by the customer was towards compensation for impairment of the profit making apparatus and is a capital receipt NOT subject to tax in the hands of the Appellant

2 The AO/TPO/DRP ought to have appreciated that when the amount received is not taxable in the hands of the Appellant provisions of TP are not applicable.

, 417, 557/Mds/15 :- 11 -: And C.O.No.45/Mds/2015

4.1 The ld. Authorised Representative submitted that the assessee company has decided to transfer software service undertaking owned in India. The assessee on transfer of such software undertaking the consideration constituted capital receipt in the hands of the assessee. The compensation paid for loss of impairment of profit is a capital receipt not subjected to tax in the hands of the assessee and the amount is not taxable and also Transfer Pricing provisions are not attracted. Further, the assessee was a dedicated Software services provider for the GBS group. The assessee had entered into a Master Services Agreement with Sella

Servizi Bancari S.C.p.A ('SSB'), the shared services entity of the GBS group, for the provision of the Software development and related support services to the GBS Group. The Software services operations of the assessee related to application development and maintenance of Software used by GBS group, based on , 417, 557/Mds/15 :- 12 -: And C.O.No.45/Mds/2015 requirements provided by the group. The Software services development was done on the proprietary framework developed by GBS on which all of the Group's banking application run; and is exclusively used by the Group. Hence, there was a clear distinction between a routine software development company that would typically provide its services to a broad customer-base and the Assessee, also performed Software development functions exclusively for a Single customer - viz. SSB. In the previous year

2009-2010, as a part of a reorganization exercise, Assessee's customer (i.e. SSB) decided to undertake the Software development activity under its own umbrella. Consequently, the Software services undertaking of the assessee - including all assets, liabilities and employees - were taken over by SSB with effect from February

14, 2010. The status of the assessee was thereby reduced to that of a shell company. The aforesaid transaction was entered with an Associated Enterprise, based on Business Transfer Agreement drawn-up to effectuate the transition of the Software undertaking to SSB, for the purpose of regulatory and Tax compliances.

Further, there were no comparable instances of similar transactions, a Valuation study was commissioned to ensure that the consideration for giving-up the software undertaking is in accordance with Arm's Length Principle. Further, Without prejudice , 417, 557/Mds/15 :- 13 -: And C.O.No.45/Mds/2015 to the grounds raised in its appeal, it is submitted that by taking- over assessee's Software undertaking and carrying out the Software services on its own, the assessee's customer (i.e. SSB), had effectively stopped giving work to the assessee. The Transaction had the effect of impairing the profit-making apparatus of the assessee, and the Honorable DRP has also specifically noted the aforesaid facts at 3.1.3. It is also important to mention here that the assessee has sold its entire business as a going concern, i.e. with stock- lock- barrel. The assessee is not having any other business activities or any other establishments. Hence, after the sale of the above business as a going concern, the assessee has become a shell company with no assets /Iiabilities left. In other words, the present sale of the assessee's business as a going concern is almost equivalent to the takeover of a company by another company.

As mentioned the assessee is a captive software developer for its AE. The AE has 99.99% share holding in the assessee company. The present sale of the business as a going concern was to the Indian branch of the AE only. When the assessee has transferred its entire business with "stock-lock- barrel" to another concern where the holding company is directly interested, the assessee can no longer carry on the business, as it has neither any infrastructure facility (after , 417, 557/Mds/15 :- 14 -: And C.O.No.45/Mds/2015 the transfer) nor has the decision making power to do so. In such case the consideration received represented a compensation for loss of the profit-making apparatus of the assessee. The ld. DRP has made categorical observations as under:-

If any prudent person wants to sell his business, he expects a suitable compensation for the ‘source’ as well as the ‘annual revenue’ from the said source. This is based on a simple displacement theory or replacement theory of the source. In the present case, the source of revenue is the existing business and the expected revenue is �4.72 crores per annum. If this business is transferred out, the assessee will be losing its 'revenue earning source' and in its place, a 'new revenue earning asset will come into existence, which is in the form of cash (the sale consideration).

In light of the categorical and accurate findings recorded by the Honorable DRP that the Transaction had resulted in loss of profit- earning source, it is submitted that the receipt from the Transaction would constitute a "capital receipt" in assessee's hands, not subject to tax. The ld. AR supported his case and relied on the decision of Tribunal of Mumbai in the case of 3i Infotech [ITAT Nos.

3354/MUM/2010 & Others, 3i Infotech Limited]. Whereas 3i Infotech, a subsidiary of IClCI Bank was engaged in providing back-office support services exclusively to the Bank. For providing such services,

3i Infotech had put in place adequate resources in terms of IT , 417, 557/Mds/15 :- 15 -: And C.O.No.45/Mds/2015 infrastructure, software, manpower etc. In the year 2002, the Bank decided to carry on these activities independently and took-over the senior personnel of 3i infotech handling the back-office operations. A sum of Rs. 15 crores was paid as compensation for loss of business/ future earnings. The said compensation was treated as capital receipt by 3ilnfotech on the ground that the compensation was for loss of a source of income and had affected the profit-making structure of the company. The Department challenged the stand of the assessee on the ground that there was no transfer of assets which as normally the case in such type of business transfers.

Further, the CIT(A) noted that the assessee was carrying on back- office and software development activity and pursuant to termination of the contract with its customer IClCI Bank for back-office operations, the assessee had closed the back-office business and did not enter into contract for similar services with any other customer. In effect, the assessee had given up one source of income completely and the compensation received was held to be a capital receipt. The stand of CIT(A) was also upheld by the Honorable ITAT relying on the ruling of the Honorable Supreme Court in the case of Kettlewell Bullen & Co.

Vs CIT [1965 AIR 65](SC) and It is also submitted that the aforesaid ruling is squarely applicable to the assessee's case. Further, in light of the Department contention in the aforesaid ruling that the entire business should have been transferred, it is submitted that the , 417, 557/Mds/15 :- 16 -: And C.O.No.45/Mds/2015 assessee's case stood on an even better footing inasmuch that the entire undertaking lock-stock-barrel was taken over by the customer, as also noted by the Honorable DRP. The finding of the DRP as read in conjunction with the principles conclude that the sum received by the Assessee constituted a "capital receipt" in its hands. The jurisdictional High Court ruling in the case of CIT Vs. T.I.&M Sales Ltd [259 ITR 116- Madras HC], which was rendered on similar facts, although relating to transfer of a distributorship business. The assessee company also wishes to place reliance on the following rulings of the Supreme Court which originally laid down the principles relating to treatment of sum received on impairment of a source of business:

• Kettlewell Bullen & Co. Vs CIT [1965 AIR 65](SC); • CITVs Vazir Sultan & Sons [361TR 175](SC); • CIT Vs Shaw Wallace & Co [LR 59 lA 206](SC); • CIT Vs Maheshwari Devi Jute Mills [57 ITR 36](SC) and the Transfer Pricing provisions come into play only when an assessee is in receipt of income or claims an expense in relation to a transaction entered into by the assessee with its AE. In the given case, since the receipt from the Transaction relating to Transfer of Software business undertaking constituted a 'capital receipt' in the hands of the assessee, Not liable to be taxed and Transfer Pricing provisions were , 417, 557/Mds/15 :- 17 -: And C.O.No.45/Mds/2015 not applicable to assessee's case.

4.2 Contra, ld. Departmental Representative has objected to the Cross-objections and opposed that the provisions of Transfer Pricing are applicable even to the transactions in India irrespective of the fact that the Arms Length Price covered u/s. Rule 10AB is applicable to relevant assessment year and vehemently opposed to the grounds.

4.3 We heard the rival submissions, perused the material on record and judicial decisions cited. The ld. Authorised Representative contention that the transfer of undertaking has resulted in loss and is not subjected to tax. On perusal of the submissions, the consideration received is in the nature of compensation and not subjected to Income Tax cannot be accepted as held by us in Revenue appeal and the amount is taxable. We find that the assessee has transferred its business operations in India to Banca Sella S.P.A. having its branch in India. Whereas the ld. TPO considered the provisions are applicable only to the International transactions and the valuation method is applied. We perused the provisions of Rule 10AB as under:-

‘’For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international , 417, 557/Mds/15 :- 18 -: And C.O.No.45/Mds/2015 transaction [or a specified domestic transaction]shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.’’ We also rely on decision of DCIT vs. IJM (India) Infrastructure Ltd in dated 29.04.2014 held as under :- ‘’ITAT have heard both the parties and perused the material on record, The issue in dispute is identical as considered by this Tribunal in assessee’s own case for A.Y. 2008-09 reported in 147 ITD 437 wherein the Tribunal held as follows: ‘’PE should be tread as resident in India. Moreover, under the provisions of DTAA with Malaysia, PE is treated as a separate legal entity, independent of its foreign principal enterprise. Further, Article 24 of the DTAA contains a non- discrimination provision. It prohibits a Contracting State from making any discrimination in the matter of taxation between its own national and national-of the- other Contracting State, who are placed-in similar circumstances. In other words, a Contracting State is obliged to provide the same tax -treatment to a national on the other Contracting State as it would give to its own nationals. Article 3(h) of the DTAA defines the term "national" to include both-natural persons and artificial persons, such as companies, etc. Therefore, PE should be treated as resident in India inasmuch as the business profits attributable to PE are taxable in India and all business decisions relating to PE are entered and concluded in India. In other words, the control and management of the affairs of PE are situated in India, the PE should be treated as resident in India, treating PE otherwise amounts to violation of Article 24.Joint venture formed by assessee were resident in India. In the present case, all the decisions relating to the affairs of the Joint Venture are taken in India and the business is executed in India through a Joint Venture Agreement in India. Indisputably, Joint Ventures are residents in India. Ever otherwise, Clause 3 of Article 4 of Malaysia provides that a person which includes AOPs also shall be deemed to be residents of the State in which its place of effective management is situated. On perusal of the Joint Venture agreements, it can be seen the, all the decisions relating to the Joint Venture are taken in India and, therefore, the JVs are to be treated as "residents" only. Transfer pricing , 417, 557/Mds/15 :- 19 -: And C.O.No.45/Mds/2015 regulation not applicable. Further in the present case the transactions are between two resident parties as outlined at paras 3.18 and 3.19 of this order. There is no possibility of shifting of profits outside India on erosion of country's tax base. Therefore, its transactions with AEs are outside the purview of the transfer pricing regulations. This PE is assessed to income-tax in India in the status of foreign company in respect of its business profits. No shifting of profits outside India or erosion of taxes in India is involved, that is, there is no motive to shift the profits or evade the taxes in India inasmuch as its business profits are taxable as separate entity in India. The primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more AEs in terms of section 92A(1) and 92A(2) of the Act. After considering the entire facts and circumstances of the present case and the findings of the DRP, we are of the opinion that the transactions taken piece are with domestic enterprises and at least one among the AEs are not non-resident. Both the assessee and other parties which whom the assessee entered into transactions are the residents for the purpose of Indian Taxation. Any transaction between them will not constitute an international transaction. The transactions between the assessee and IJMIs do not fall under section 92B(2) of the Act and same is the position in case of other entities with whom assessee carried on the impugned transactions. In ITAT's opinion, the argument of the is devoid of merit. Accordingly, the legal ground raised by the assessee is allowed.

In support of the claim of the assessee that the business transfer are not covered under Rule 10AB. The ld. Authorised Representative filed a preamble of legislature intent and judicial decisions. We found from the decisions that the provisions of Rule 10AB are effective from assessment year 2012-2013. Therefore, the action of the TPO irrespective of the fact that objections have been filed is not justified in making the aforesaid adjustment and we direct the TPO to eliminate the upward adjustment on Business value transferred to the , 417, 557/Mds/15 :- 20 -: And C.O.No.45/Mds/2015 Associated Enterprise as the provisions of determining Arms Length Price are not covered under Rule 10AB and accordingly, we partly allow the Cross objections filed by the assessee.

4.4 In the result, the Cross Objection No.45/Mds/2015 filed by the assessee is partly allowed.

(assessee appeal):-

5.1 The assessee’s main ground relating to the TPO adjustment on sale of software services business to the Associated Enterprise. The ld. DRP confirmed the TP adjustment in respect of business transferred by the assessee to the Associated Enterprise. This software services remained in India before the transfer and after transfer and both transfer took place within India and there is no evasion of tax and TPO provision are not applicable. The DRP upheld the ld. TPO action without considering the objections were the assessee business was valued by assessee’s independent expert valuer were the figure were substituted with Transfer Pricing Officer. The method of value adopted by experts DCF method and NAV method is one of the acceptable valuation method and the same was rejected and DCF , 417, 557/Mds/15 :- 21 -: And C.O.No.45/Mds/2015 valuation was applied. The DCF valuation extended to eight years from four years adopted by the expert valuers and also growth rate projection adopted by the experts valuers estimated specifically for assessee’s line of business and the risk-free rate of 4.5% for DCF method for incorrectly discounted and prayed for set aside the value adopted by the ld. TPO which is not applicable.

5.2 On the other hand, the ld. Departmental Representative relied on the orders of TPO and DRP directions and supported with judicial decisions.

5.3 We heard the rival submissions, perused the material on record and judicial decisions cited. In respect of TPO adjustments on sale of software services business, the ld. TPO does not have powers to make upward adjustment and we have decided this issue in favour of the assessee in Cross Appeal in para 4.3. Accordingly, we allow the ground of the assessee.

Further, the ld. TPO has not computed proper margin and working capital adjustment and risk adjustment. The ld. TPO also erred in not considering levy of 5% as provided in proviso u/sec. 92C(2) while determining Arms Length Price and prayed to include comparables and other issues.

6.2 Contra, the ld. Departmental Representative relied on the orders of the TPO and DRP and vehemently opposed to the grounds.

6.3 We heard the rival submissions and perused the material on record. The comparables obtain by the assessee and ld. TPO has been considered. The assessee filed a chart alongwith comparables to be excluded and included in determining Arms Length Price. The ld. TPO while determing the Arms Length Price has considered the following comparables.

FCS Software Solutions Ltd and 10. Askhay Software Technologies.

Subsequently, the assessee filed objection before ld. DRP and ld. DRP considered the comparables as determined by TPO. Before us, the assessee company wants to include Quintegra Solutions Ltd and CG- VAK Software & Export Ltd. In Kals information systems Ltd, the margin worked out by the ld. TPO is 27.54 and the contention of assessee that the said company is creating and providing 3D animation software content as a captive service provider to its Associated Enterprise. The company is also providing software development activities and quality assurances services to its Associated Enterprise on an exclusive basis and also provides software maintenance support functions like documentation of the programmed code, IT integration and configuration management to its Associated Enterprise and it is a product development company. Therefore shold be rejected as comparable and relied on the judicial decisions Ikanos Communication India P. Ltd in CNO IT Services (India) P. Ltd in ITA No.336/Hyd/2015, M/s. Lionbridge Technologies P. Ltd in ITA No.7415/Mum/2014, Obopay Mobile Technology India P. Ltd (46 ITR(T) 42, Parexel International (India) P.

Ltd (66 taxmann.com 150), pegasystems Worldwide India (P) Ltd – Lexreported and Prana Studios Pvt. Ltd in ITA No.2077/Mum/2014. , 417, 557/Mds/15 :- 24 -: And C.O.No.45/Mds/2015 6.4 The ld. Departmental Representative relied on the orders of lower authorities.

6.5 We heard the rival submission, perused the material on record and judicial decisions. The company is not functionally comparable to the assessee company as the company is in providing 3D animation as captive service provider and also provide software development activities and segmental information is not available.

Hence, we accept the contention of the ld. Authorised Representative and this company is excluded from the comparables and we direct the ld. TPO to exclude this company from comparables.

6.6 In Spry Resources India Pvt. Ltd the ld. TPO worked out margin at 22.37. The company would undertake maintenance projects for the development projects concluded in the previous year.

Company to focus on e-governance. However, profit and loss account does not show any revenue from maintenance projects. As per revenue recognition policy, the company has revenue from sale of software. However, no further segmental is available to show sale of software. Hence, the financial statements are not reliable.

6.7 We heard the rival submissions, perused the material on record. As per the Annual report of the company, the company has , 417, 557/Mds/15 :- 25 -: And C.O.No.45/Mds/2015 earned Revenue from Software consultancy and sale of software products and there is no breakup of Revenue segment wise between software products and software services. The operating income @16% from work in progress and the software consultancy and products functions differ from software development activities carried out by the assessee. Since there is no segmental income and company is not functionally in comparables, we are inclined to accept the contention of the ld. Authorised Representative and company should be excluded from the comparables. Accordingly, we direct the ld. TPO to exclude the company from comparables.

6.8 In ICRA Techno Analytics Ltd, the ld. TPO worked out margin at 25.79. The Company is engaged in diverse activities such, as income from sales software development & consultancy, licensing & sub-licensing fee, web development and hosting. However, no segmental data is available within the broad head of services and relied on the Judicial decisions of Ikanos Communication India P. Ltd in and Obopay Mobile Technology India P. Ltd (46 ITR(T) 42.

6.9 We on perusal found that the said comparable company ICRA is in the business of software development & consultancy, , 417, 557/Mds/15 :- 26 -: And C.O.No.45/Mds/2015 engineering and diversified into domain of business analytics and business processing outsourcing and earned its Revenue from software development, consultancy, licensing, sub-licensing and others. As per the Annual report, the Revenue recognition from sale is recognized as and when delivery of branded software is made booked at net trade discount and in respect of development and consultancy, licensing and sub-licensing fee. The Revenue is recognized to the extent of services are performed. However, there is no breakup of Revenue development software development services and other services. The assessee company has not disclosed separate segments for ascertaining profitability and also cannot be regarded for the purpose of TNM analysis. We are of the opinion that the said company should be excluded from the list of comparables and we direct the ld. TPO to exclude.

6.10 In the case of Taksheel Solutions Limited, the ld. TPO worked out margin at 30.72 and the TPO himself sought to reject comparable companies which earned revenues from predominately onsite services RS Software is rejected based on the Onsite Revenue filter. Even Taksheel Solutions Limited earns significant margins from on site services. , 417, 557/Mds/15 :- 27 -: And C.O.No.45/Mds/2015 6.11 We heard the rival submissions, perused the material on record. We found that the comparable company having compressive IT solutions by providing software development services for the enterprises engaged in financial services. The arguments of the ld. Authorised Representative that it has significant onsite Revenue and segmental comparables. We reject for excluding comparables and the assessee does not succeed on this ground.

6.12 In the case of FCS software solutions Ltd, the ld. TPO worked out margin after providing for working capital at 41.64 and it is also Functionally different in providing ITES services which are not akin to software development services; and no segmental data available in the financial statements of the company and relied on the judicial decisions of TIBCO software (India) P.Ltd in Barclays Technologies Centre India Pvt. Ltd in ITA No.2279/PN/2012 and Emptoris Technologies India Pvt. Ltd in ITA No.436/PN/2013.

6.13 We heard the rival submissions, perused the material on record. The comparable company should have similar services and activity of the assessee whereas the comparable company is the , 417, 557/Mds/15 :- 28 -: And C.O.No.45/Mds/2015 business of IT consulting education based on internet and infrastructure management working on remote net management data backup as per Annual report produced. Out of the above broad category of services lines the transaction can be comparable only with IT services comparables and the company derives only 42% of Revenue from the IT consulting. Therefore, the company has not provided segment to ascertain accurate profitability of service lines.

Considering the apparent facts, we direct the ld. TPO to compare the comparable company to the extent of segment reporting of only IT consulting and we remit the issue to the ld. TPO.

6.14 In the case of Quintegra Solutions Ltd the assessee has margin of (9.42) and was rejected on the basis that there is persistent loss. However, the same is not factually correct and the ld. Authorised Representative relied on the judicial decisions of Goldman Sachs (India) Securities Pvt. Ltd in Brigade Global Services P. Ltd 28 ITR (Trib) 411 and Bobst India P. Ltd 63 taxmann.com 339.

6.15 We heard the rival submissions, perused the material on record and judicial decisions cited. The comparable company was rejected as it is persistent loss filter and having accumulated loss and this loss was incurred due to takeover of some companies and due to , 417, 557/Mds/15 :- 29 -: And C.O.No.45/Mds/2015 the takeover and merger with foreign company being a exceptional year cannot be comparable. But the Hon’ble High Court in the case of CIT vs. Goldman Sachs (India) Securities Pvt Ltd in of 2013 referred at page 4 of order where the question of loss making unit cannot be used a s a comparable for determining Arms Length Price whereas loss making unit is loss due to other factor cannot be treated as incomparable and also supported with Tribunal decisions.

Considering the High Court decision, we are inclined to direct the ld. TPO to include the said company as comparable.

6.16 In the case of CG-VAK Software & Exports Ltd, the assessee has included with margin (9.96) rejected on the basis that there is persistent losses. However, the same is not factually correct.

Immediately preceding the year, the company had earned segmental profits and relied on judicial decisions of Ness Technologies (India) Pvt. Ltd in and Goldman Sachs (India) Securities Pvt. Ltd in ITA No.7724/Mum/2011.

6.17 We heard the rival submissions, perused the material on record and judicial decisions cited. The ld. TPO has wrongly excluded said comparables company as a persistent loss making company.

Whereas the said company has earned net profit both in preceding , 417, 557/Mds/15 :- 30 -: And C.O.No.45/Mds/2015 and subsequent year. But the comparable turnover to be current financial year is less than �1 crores is respect of income from software development, product and services of domestic region as against the turnover of assessee company �22.71 crores. Accordingly, in our opinion turnover is small compared to assessee’s company and the comparable is rejected.

6.18 The ld. Authorised Representative has argued the above said grounds before us in respect of other grounds raised by the assessee in appeal with reference to TP issue are only consequential.

6.19 In the result, the appeal of the assessee in is partly allowed for statistical purpose.

Aggrieved by the order, the assessee filed an appeal before the Tribunal.

7.1 Before us, the ld. Authorised Representative made a submissions that the ld. TP adjustment made by the ld. TPO upheld by the DRP �31,12,718/- provided to the Associated Enterprise rejected without any reasoning irrespective of the fact that assessee applied Transaction Net Margin (TNM) whereas it was substituted with own analysis. The ld. TPO ignored that the assessee being first year of operation the assessee operated only for one and half months whereas margin of comparable based on full year of operation which cannot be accepted. The ld. TOP erred in selection of comparables were sum of the comparables are on different footing and segment and working conditions. Further the ld. TPO rejected the comparables without any proper reasoning and also TPO erred in adopting working capital adjustment margins in respect of transferor of the business Sella Synergy India P. Ltd despite following search methodology as comparables for TNMM analysis and also the ld. TPO further erred in levy of 5% as provided in provision for calculating Arms Length Price of 5% deduction. , 417, 557/Mds/15 :- 33 -: And C.O.No.45/Mds/2015 7.2 On the other hand, the ld. Departmental Representative relied on the ld. TPO order and supported the inclusive comparables and opposed to the exclusive comparables.

7.3 We heard the rival submissions, perused the material on record and judicial decisions cited. In Kals information systems Ltd, the margin worked out by the ld. TPO being 36.25. The contention that this company is creating and providing 3D animation software content as a captive service provider to its Associated Enterprise. The company is providing software development activities and quality assurances services to its Associated Enterprise on an exclusive basis and also provides software maintenance support functions like documentation of the programmed code, IT integration and configuration management to its Associated Enterprise and it is a produce development company and relied on the judicial decisions Ikanos Communication India P. Ltd in CNO IT Services (India) P. Ltd in ITA No.336/Hyd/2015, M/s. Lionbridge Technologies P. Ltd in ITA No.7415/Mum/2014, Obopay Mobile Technology India P. Ltd (46 ITR(T) 42, Parexel International (India) P.

Ltd (66 taxmann.com 150), pegasystems Worldwide India (P) Ltd – Lexreported and Prana Studios Pvt. Ltd in ITA No.2077/Mum/2014. , 417, 557/Mds/15 :- 34 -: And C.O.No.45/Mds/2015 7.4 The company is not functionally comparable to the assessee company as the company is in providing 3D animation as captive service provider and also provide software development activities and segmental information is not available. Hence, we accept the contention of the ld. Authorised Representative and this company is excluded from the comparables and we direct the ld. TPO to exclude this company from comparables.

7.5 In Spry Resources India Pvt. Ltd the ld. TPO worked out margin at 33.00. The company would be undertaken maintenance projects for the development projects concluded in the previous year.

Company to focus on e-governance. However, profit and loss account does not show any revenue from maintenance projects. As per revenue recognition policy, the company has revenue from sale of software. However, no further segmental is available to show sale of software. Hence, the financial statements are not reliable.

7.6 We heard the rival submissions, perused the material on record. As per the Annual report of the company, the company has earned Revenue from Software consultancy and sale of software products and there is no breakup of Revenue segment wise between , 417, 557/Mds/15 :- 35 -: And C.O.No.45/Mds/2015 software products and software services. The operating income @16% from work in progress and the software consultancy and products functions differ from software development activities carried out by the assessee. Since there is no segmental income and company is not functionally in comparables, we are inclined to accept the contention of the ld. Authorised Representative and company should be excluded from the comparables. Accordingly, we direct the ld. TPO to exclude the company from comparables.

7.7 In ICRA Techno Analytics Ltd, the ld. TPO worked out margin at 28.90. The Company is engaged in diverse activities such, as income from sales software development & consultancy, licensing & sub-licensing fee, web development and hosting. However, no segmental data is available within the broad head of services and relied on the Judicial decisions of Ikanos Communication India P. Ltd in and Obopay Mobile Technology India P. Ltd (46 ITR(T) 42. In the case of CTIL Limited, the ld. TPO worked out margin at 17.03.

7.8 We on perusal found that the said comparable company ICRA is in the business of software development & consultancy, engineering and diversified into domain of business analytics and business processing outsourcing and earned its Revenue from software , 417, 557/Mds/15 :- 36 -: And C.O.No.45/Mds/2015 development, consultancy, licensing, sub-licensing and others. As per the Annual report, the Revenue recognition from sale is recognized as and when delivery of branded software is made booked at net trade discount and in respect of development and consultancy, licensing and sub-licensing fee. The Revenue is recognized to the extent of services are performed. However, there is no breakup of Revenue development software development services and other services. The assessee company has not disclosed separate segments for ascertaining profitability and also cannot be regarded for the purpose of TNM analysis. We are of the opinion that the said company should be excluded from the list of comparables and we direct the ld. TPO to exclude.

7.9 In the case of Taksheel Solutions Limited, the ld. TPO worked out margin at 41.87 and the TPO himself sought to reject comparable companies which earned revenues from predominately onsite services RS Software is rejected based on the Onsite Revenue filter. Even Taksheel Solutions Limited earns significant margins from onsite services.

7.10 We heard the rival submissions, perused the material on record. We found that the comparable company having compressive IT solutions by providing software development services for the , 417, 557/Mds/15 :- 37 -: And C.O.No.45/Mds/2015 enterprises engaged in financial services. The arguments of the ld. Authorised Representative that it has significant onsite Revenue and segmental comparables. We reject for excluding comparables and the assessee does not succeed on this ground.

7.11 In the case of FCS software solutions Ltd, the ld. TPO worked out margin after providing for working capital is 49.99. The Functionally different - providing ITES services which are not akin to software development services; and no segmental data available in the financial statements of the company and relied on the judicial decisions of TIBCO software (India) P.Ltd in Barclays Technologies Centre India Pvt. Ltd in ITA No.2279/PN/2012 and Emptoris Technologies India Pvt. Ltd in ITA No.436/PN/2013.

7.12 We heard the rival submissions, perused the material on record. The comparable company should have similar services and activity of the assessee whereas the comparable company is the business of IT consulting education based on internet and infrastructure management working on remote net management data backup as per Annual report produced. Out of the above broad category of services lines the transaction can be comparable only with IT services comparables and the company derives only 42% of Revenue from the IT consulting. Therefore, the company has not , 417, 557/Mds/15 :- 38 -: And C.O.No.45/Mds/2015 provided segment to ascertain accurate profitability of service lines.

Considering the apparent facts, we direct the ld. TPO to compare the comparable company to the extent of segment reporting of only IT consulting and we remit the issue to the ld. TPO.

7.13 In the case of Quintegra Solutions Ltd the assessee has margin (9.42) and was rejected on the basis that there is persistent loss. However, the same is not factually correct and relied on the judicial decisions of Goldman Sachs (India) Securities Pvt. Ltd in Brigade Global Services P. Ltd 28 ITR (Trib) 411 and Bobst India P. Ltd 63 taxmann.com 339 7.14 We heard the rival submissions, perused the material on record and judicial decisions cited. The comparable company was rejected as it is persistent loss filter and having accumulated loss and this loss was incurred due to takeover of some companies and due to the takeover and merger with foreign company being a exceptional year cannot be comparable. But the Hon’ble High Court in the case of CIT vs. Goldman Sachs (India) Securities Pvt Ltd in ITA No.2222 of 2013 referred at page 4 of order where the question of loss making unit cannot be used a s a comparable for determining Arms Length Price whereas loss making unit is loss due to other factor cannot be treated as uncomparable and also supported with Tribunal , 417, 557/Mds/15 :- 39 -: And C.O.No.45/Mds/2015 decisions. Considering the High Court decision, we are inclined to direct the ld. TPO to include the said company as comparable.

7.15 In the case of CG-VAK Software & Exports Ltd, the assessee has included 9.96 rejected on the basis that there is persistent losses.

However, the same is not factually correct. Immediately preceding the year, the company had earned segmental profits and relied on judicial decisions of Ness Technologies (India) Pvt. Ltd in and Goldman Sachs (India) Securities Pvt. Ltd in ITA No.7724/Mum/2011.

7.16 We heard the rival submissions, perused the material on record and judicial decisions cited. The ld. TPO has wrongly excluded said comparables company as a persistent loss making company.

Whereas the said company has earned net profits both in preceding and subsequent year. But the comparable turnover to be current financial year is less than �1 crores is respect of income from software development, product and services of domestic region as against the turnover of assessee company. Accordingly, in our opinion turnover is small compared to assessee’s company and the comparable is rejected. , 417, 557/Mds/15 :- 40 -: And C.O.No.45/Mds/2015 7.17 The ld. Authorised Representative has argued the above said grounds before us in respect of other grounds raised by the assessee in appeal with reference to TP issue are only consequential.

7.18 In the result, the appeal of the assessee in is partly allowed for statistical purpose.

Order pronounced on Thursday, the 15th day of September, 2016, at Chennai.