M/S. FIL INDIA BUSINESS SERVICES PVT. LTD.,GURGAON vs. DCIT, NEW DELHI

At the outset ld. counsel for the assessee submitted that for the sake of brevity he is primarily pressing ground nos. 4.3 to 4.7. He pointed out that in the software development services segment he is primarily disputing three comparables and in the adjustment relating to IT segment, he is primarily disputing 4 comparables.

As regards adjustment directed for soft development services, ld. TPO noticed that the assessee had used TNMM as the most appropriate method in determining its international transactions and OP/TC was taken as the profit level indicator in the TNMM analysis.

Ld. TPO noticed that in the TP study the assessee had arrived at a set of 16 companies with an average margin of 10% by using multiple year data. He noticed that assessee’s own margin of this segment was worked out at 12.98%. Thus, the assessee had concluded that its international transaction in regard to software development services were at arm’s length.

As regards software development service segment, ld. counsel pointed out that in the TP study there were 16 comparables. However, after fresh search was carried out as per the various filters adopted by TPO and margins were updates, 21 comparables were selected by assessee which are mentioned in para 4 of the show cause notice contained at pages 7 & 8 of TPO’s order. He referred to page 9 of TPO’s order and pointed out that ld. TPO rejected 14 comparables and accepted 7 comparables and further included 7 new comparables. Thus, in final analysis ld. TPO took 14

Ld. counsel submitted that first comparable disputed by assessee is Infosys Technologies Limited. He pointed out that this comparable was rejected by assessee in TP study.

Ld. counsel submitted that assessee had objected to inclusion of this comparable because of the diversified functions like consulting, application design, development, re-engineering and maintenance, system integration, package evaluation and implementation and business process management etc. being carried out by this comparable. He further pointed out that the turnover of this comparable is Rs. 21,140 crores, which is approximately 150 times of the assessee’s turnover which was only Rs. 142 crores. He 8 ITA 6867/Del/2014 further pointed out that this comparable has brand ownership, which it has acquired by incurring substantial marketing expenses. Further, it owns proprietary products like finacle, Infosys ActiceDesk, Infosys iProwe, Infosys mConnect. He pointed out that this company derived substantial portion of its revenue from sale of its proprietary products (including its flagship banking product suite ‘Finacle’). On the contrary the assessee does not own any brand or proprietary products. He further pointed out that other distinguishing features from assessee were expenses incurred by Infosys on research and development which were Rs. 440 crores (Approx 2.1% of revenue), whereas assessee did not incur any expenditure on R&D. Further, offshore revenue of this company was 98.7% (total sales Rs. 21,140 crores, out of which software export revenue was Rs. 20,871 crores). He pointed out that assessee is only a captive service provider and is rendering services to its AEs only. Further, AMP expenditure of Infosys was Rs 215 crores (Approximately 1.02% of revenue) as against Nil expenditure on AMP by assessee. On the comparison of risk being undertaken by this comparable vis a vis assessee, ld. counsel pointed out that this comparable operates as full fledged risk taking entrepreneur whereas assessee being captive service provider does not take such risk. In support of various arguments noted above, ld. counsel has referred to annual report of this comparable contained in the paper book.

Ld. counsel relied on the decision of the ITAT in the case of Agnity India Technologies Pvt. Ltd. rendered in wherein this comparable has been rejected. He also referred to the decision of Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. rendered in ITA no. 102/2015 for AY 2008-09 in support of the proposition 9 ITA 6867/Del/2014 that unless the comparable satisfies the test of functional comparability, the same cannot be taken as a comparable.

The second comparable disputed by ld. counsel is Wipro Technology Services Ltd. Ld. counsel pointed out that this comparable was rejected in TP study primarily on the ground of business restructuring/ extra-ordinary circumstances and abnormally high/ volatile profit margin. Ld. counsel referred to the annual report of this company, contained at page 97 onwards of the PB. Ld. counsel pointed out that this company carries on various diversified functions – technology infrastructure development including application design, development, re-engineering & maintenance and system integration etc. specifically for Citigroup Inc. He referred to page 97 of the PB and pointed out that Wipro Technology Services Ltd. had reached an agreement with Citi Group for acquiring Citi Technology Services Ltd. On 21.1.2009 Wipro Ltd. signed a master agreement with Citi Group Inc. for the delivery of technology infrastructure Services and application development and maintenance services for the period of six years with a guaranteed revenue of US $ 500 million. After the acquisition by Wipro the name of CTS was changed to Wipro Technologies Services Ltd. on 16.3.2009. With reference to MSA, ld. counsel pointed out that this is an extraordinary event which has taken place.

Ld. counsel further submitted that the transactions with Wipro and Citi Group entities fall in the ambit of sec. 92B(2) of the Act for the following reasons: i. Wipro Ltd., parent company of the assessee, executed an agreement with Citi Group Inc. for acquiring Citi Technology Services Ltd., now called Wipro Technology Services Ltd.

Ld. counsel pointed out that the nature of business of this company is not clear from the annual report The turnover of this company is Rs. 400 crores as against Rs. 142 crores of assessee. Further, the brand ownership gives leverage to this comparable. Wipro brand was taken over by the company on merger whereas assessee does not have any brand or proprietary 11 ITA 6867/Del/2014 products. Offshore Revenue of Wipro is Rs. 3,88,46,35,089, which shows its extent of its offshore operations whereas assessee is 100% captive service provider and rendering services to its AEs. He further pointed out that no details are available in the annual report regarding related party transactions. Further, no segmental information is available in the annual report.

He further pointed out that this comparable has abnormally high margin/ volatile profit margins of 72.48% as per correct computation and 68.84% as per TP order. He pointed out that the profitability earned by this company is 73.77%, 52.55% and 80.81% from FY 2009-10 to FY 2011-12 respectively. Thus, FY 2009-10 was an abnormal FY. Further, this company is a full fledged risk taking entrepreneur whereas assessee operates as minimal risks as it is a captive service provider rendering services to Fidelity Group companies. 19. Ld. counsel pointed out that this comparable has been rejected by the Tribunal in the case of Equant Solutions India Pvt. Ltd. Vs. DCIT rendered in and in regard to functional dissimilarity ld. counsel relied on the decision of the Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. rendered in ITA nno. 102/2015 for AY 2008-09. 20. The third comparable disputed by assessee is Persistent Systems Ltd. Ld. counsel pointed out that this comparable was not considered in TP study and its inclusion was objected because of functional dissimilarity as the company being engaged in the product development. Further, there was non- availability of segmental information and extra ordinary circumstances, being acquisition of assets in Paxonic Inc. took place during the year. He pointed out that this company was involved in merger/ demerge activities.

Ld. CIT(DR) submitted that assessee has not contested the filters as adopted by ld. TPO. In this regard he referred to page 8 of TPO’s order wherein he has discussed the comparables finally selected by him. Ld. CIT(DR) submitted that assessee is objecting to only those comparables where margin is high and, thus, cherry picking three comparables. However, assessee has accepted the reject matrix adopted by TPO.

Ld. CIT(DR) referred to ld. DRP’s direction and pointed out that ld. DRP has considered all objections taken before it. He referred to page 6 of ld. DRP’s directions and pointed out that one of the issue before ld. DRP was whether AO/ TPO’s action, by applying various filters, was right in rejecting various comparables including new comparables. While considering this issue ld. DRP examined in detail various filters. He pointed out that Ld. DRP in para 7.21 has considered various case laws to buttress ld. TPO’s contentions that high turnover was not a relevant factor.

Ld. CIT(DR) submitted that ld. DRP has considered the brand, R&D and turnover filters and has given cogent reasons as to how that will not affect PLI. He pointed out that ld. DRP also included certain comparables and granted a relief of approximately Rs. 10 crores adjustment to assessee.

Ld. counsel for the assessee, in the rejoinder, submitted that assessee has specifically taken ground no. 4.1 wherein it has contested the modification/ rejection of the filters applied by assessee and ld. TPO’s action in applying additional/ revised filters. He submitted that assessee has not conceded this ground but in order to avoid detailed hearing has not seriously 13 ITA 6867/Del/2014 contested the ground. He submitted that assessee is not per se disputing the contentions of lower revenue authorities that turnover per se cannot be a relevant factor for accepting/ rejecting the comparable. But when it becomes part of other dissimilarity, which he has demonstrated with reference to the three comparables noted above, then it assumes significance. Ld. counsel pointed out that assessee has relied on the decision in the case of Equant Solutions India Pvt. Ltd. (supra) and no distinction has been shown in the profile of assessee vis a vis Equant Solutions India Pvt. Ltd. (supra) Therefore, the decision is fully applicable to the facts of the case.

We have considered the submissions of both the parties and have perused the record of the case. There is no dispute as regards the applicability of TNM method and the PLI being OP/TC. All the three comparables, which have been disputed by assessee, are primarily disputed on the functional profile of the comparables.

As far as ld. CIT(DR)’s submission that since the assessee has not contested the filters, therefore, comparables which have passed the filter, cannot be disputed, is concerned, we are not inclined to accept this plea of ld. CIT(DR), firstly because ld. counsel for the assessee has not conceded on various filters but in order to cut short the controversy did not agitate on separate filters. Be that as it may, merely because a particular comparable satisfies all the filters considered by ld. TPO and also by assessee, it cannot be concluded that the comparable has to be accepted on that basis alone. A comparable might have pass the export filter but at the same time there may be other factors like brand ownership, risk etc., which influence the profitability of a comparable and that cannot be ignored. In the case of Wipro Technologies Ltd., which is one of the comparable under 14 ITA 6867/Del/2014 consideration, there was an extraordinary factor, which was acquisition of Citi Technologies Services Ltd., renamed as Wipro Technologies Services Ltd. Though the company was taken over but the pricing arrangement continued as it was the old agreement. This definitely influenced on profitability of comparable but there was no filter which could filter ate this comparable from the list of comparables. In view of above discussion we are not inclined to accept the plea of ld. DR that merely because assessee has accepted the various filters, therefore, it cannot challenge the exclusion of comparables which passes all the filters on separate grounds., 27. The Hon’ble Delhi High court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT (ITA no. 16/2014 dated 16.3.2015), while considering the attributes of TNM method has observd in para 90 of the decision as under:

The strength of the TNM Method is that net profit indicators are affected by transactional differences in comparison with some other methods. This method is more tolerant to functional differences between controlled an uncontrolled transactions in comparison with resort to gross profit margins. Yet the net profit indicators have potentiality to introduce an-element of volatility primarily for two reasons. Firstly, factors which do not affect gross profit margin and prices can influence net profit indicators due to variation of operating expenses or vice- versa. This potentiality has reference to variation in operational expenses including AMP expenses. The other factors include tax- payers competitive position in the form of price and margins and in some cases, it may be difficult to eliminate or compute the effect of these factors. These difficulties in applying or accepting the TNM Method arise when there is complexity of functions and each party to the transaction(s) makes valuable unique contribution. Reliability of the TNM Method is sufficiently certain where one of the 15 ITA 6867/Del/2014 parties makes all contribution involved in the controlled transaction. This is the position even as per the Revenue's case in the present set of appeals. Revenue has asserted that the Indian subsidiaries, i.e. the assessees are mere dummies which implement, promote and incur AMP expenses for building brand value of the foreign AE. Value addition for the Indian AE is not pleaded or argued. Selection of the TNM Method where adopted by the assessee remains unchallenged by the TPOI Assessing Officer. (Emphasis supplied by us)

Therefore, we are in agreement with the submissions advanced by ld. counsel for the assessee that though turnover per se cannot be a basis for rejecting/ accepting a comparable, but, when TNM method is applied then functional similarity assumes considerable significance and if the functions performed along with other features, as noticed by us, while considering the comparable, are significantly different, then the said company cannot be taken as a comparable to the tested party.

One of the submission of ld. counsel is that Wipro Technoliogy Services Pvt. Ltd. and Persistent Systems Ltd. have been excluded in the case of Equant Solutions India Pvt. Ltd. (supra). This decision is contained at page 30 onwards of the PB and para 5 of this decision reads as under: “05. Facts apropos are that Equant Solutions India Private Limited assessee is a subsidiary of EGN BV, Netherlands. The company is engaged in providing information technology enables network management and other back office support services to its group companies. It also undertakes software development services for developing software applications, which are used within the Equant Group. The IT enables network management and other back office support services performed by assessee primarily include remote monitoring and maintenance of Equant global network platforms and Further under the category of software development services implementation of quality customer networking solutions.

From the above observations it is evident that this company was also undertaking software development services for developing software application which were used within the Equant group. Therefore, the functions carried out by this company were similar to that of assessee. Therefore, this decision is applicable to the facts of the case. We find that as regards Persistent Systems Ltd., Tribunal has observed in para 13 of the decision as under: “13. Persistent systems Limited a. TPO has taken Persistent Systems Limited (Persistent) which has a margin 29.02% as comparable holding that the company is engaged in software developing services. The Id DRP rejected the claim of the assessee for its exclusion. Before us, the Id AR submitted that this company is functionally different because it renders outsourced product development services and developed product as paxpro, ChemLMS etc. He further contended that segmental information of sale of software services and sale of product are not available and therefore it should be excluded. He relied on the decision of 3DPLM Software solutions Limited V 42 tamann.com 333 ( bang.) and Yadlee Infotech Pvt limited TS- 465-ITAT 2014 ( bang.) b. Ld. DR Relied on the order of AO and submitted that AO has given sufficient reason for selection of this comparable. c. We have perused the arguments on the same. Firstly on perusal of the balance sheet of this comparable it is noted that that this company has not provided segmental information for 17 ITA 6867/Del/2014 sale of services and sale of products of software's. Further It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is engaged in contract software development services. We find that, as submitted by the assessee, the segmental details are also not available separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. v. Asstt. eIT [2012J 137 ITD 1/22 taxmann.com 96 (Mum.) that in the absence of segmental details/information a company it cannot be taken into account for comparability analysis, We hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly.”

As regards Wipro Technology Services Pvt. Ltd., we find that Tribunal has observed in para 15 of the decision as under: 15. Wipro technology Services Limited. a. TPO has included Wipro Technology Services Ltd having a margin of 73.35% and it has been upheld by DRP. Before us, the Id AR submitted that this company has huge related party Transaction as company's total revenue is governed by master service agreement with CITI technology services Limited where the 100 % of the equity is owned by Wipro. Therefore, the entire revenue of this is much related party. It was further submitted that it has turnover of more than 24 times of the assessee and has huge brand value of Wipro and therefore it should be excluded. He further buttressed his claim of exclusion by submitting the volatile PLI of the company from 52.55 % to 80.81 % in a chart for three years. b. Ld. DR Relied on the order of TPO and DRP for the reason given for selection of this comparable.

Apart from these considerations, we further find considerable force in the submission of ld. counsel for the assessee as regards Wipro Technology Services Pvt. Ltd. that the agreement between Wipro and Citi Group had bearing on the pricing. It is true that after the merger of Citi Technology Services Ltd. with Wipro the existence of the Citi Technology Services Ltd. was no more there but the pricing agreed by earlier agreement between Wipro and Citi Group remained operational. The brand of Wipro continued even after acquisition. Therefore, in view of the provision of section 90B(2), the pricing got affected by the agreement and this factor on standalone basis was sufficient enough to reject this comparable from the list of comparables. We, accordingly, direct for exclusion of Wipro Technology Services Pvt. Ltd. and Persistent Systems Ltd. following the decision in the case of Equant Solutions India Pvt. Ltd. (supra) and also for the reasons given above.

As regards Infosys Technologies Ltd. we find considerable force in the submission of ld. counsel for the assessee as noted earlier, that though 19 ITA 6867/Del/2014 turnover per se cannot be the basis for rejection of a comparable, but when it becomes part of other similar like brand, ownership, R&D expenses, offshore revenue, AMP spent etc. as noted earlier, then the turnover assumes significance and, therefore, Infosys Technologies Ltd. cannot be taken as a comparable in the present set of facts. 34. In view of the decision of Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra), wherein it has been held that turnover per se cannot be the basis for rejection of a comparable and other aspects have to be taken into consideration. Accordingly, this comparable is directed to be excluded from the list of comparables. I.T. Segment: 35. Fidelity group is an international provider of financial services and investment resources that help individual and institutions to meet their respective financial objectives. Fidelity group includes a large family of mutual funds, retirement savings plans, their distributors and investment advisors and a retail brokerage as well as unrelated business. The group mainly operates in three business areas – (i) Financial Services; (ii) Employer services; and (iii) technology. 36. Financial Services primarily includes fund management, retail and institutional services. FMR company acts as the investment advisor of Fidelity’s mutual funds. Fidelity Brokerage Company provides a full range of investment and brokerage products and services to individual investors and institutional clients. Fidelity investment life insurance company offers a variety of annuity and life insurance products. It also develops, markets and supports all f the life insurance and annuity products that Fidelity offers.

In the backdrop of above functional analysis, it is evident that assessee is primarily captive service provider and is primarily catering to the needs of individual investors of Fidelity group.

In regard to the IT enabled services, rendered by assessee, the PLI of the company was arrived at 14.98% on cost in the TP study whereas the average PLI of the comparables was arrived at 13% by taking into account 15 comparables. Thus, assessee’s claim was that international transaction was at arm’s length.

After the fresh search was conducted during the course of T.P. proceedings, assessee provided in total 20 comparables, which have been listed in para 9 of ld. TPO’s order at page 12. Out of this 16 were rejected by TPO and following 4 comparables were accepted: - Cosmic Global Ltd. - Infosys BPO Ltd. - Jindal Intellicom Ltd. - Microland Ltd.

Ld. TPO further added 5 comparables which were as under:

Total margin of these 9 comparables was computed at 30.58%.

Ld. DRP confirmed the TPO’s action in regard to following comparables: - TCS E-Serve Ltd. - TCS E-Serve International Ltd. - Infosys BPO Ltd. - Accentia Technology Ltd. 44. The first comparable disputed by ld. counsel for the assessee is TCS E-Serve Ltd. Ld. TPO had included this comparable as RPT as per annual report was found to be less than 25% of sales. The assessee had rejected this company primarily on the ground that this company was having RPT. 45. Before ld. DRP the assessee raised objection on following grounds:

Ld. DRP while considering the assessee’s objection has pointed out that this company is primarily in ITes field which is evident from various extracts reproduced in DRP’s direction from the annual report. Ld. DRP further considered the assessee’s objection on taking over of this company by the TCS group and referring to page 13 of annual report observed that the company was taken over by the TCS in the preceding year and not during the relevant year under consideration.

As regards the objection raised by the assessee of the exhorbitant growth in the revenue, ld. DRP demonstrated with reference to the data contained in the annual report that the company was doing even better before the taking over by the TCS group and the growth had in fact slowed down after the takeover.

As regards the assessee’s objection that the export turnover of this company was less than 75%, ld. DRP demonstrated that on correct computation the export turnover was 79.15% and not 74.68%.

As regards the assessee’s objection that TCS E-Serve Ltd. had not shown transactions undertaken by it with its related parties, namely, Citi group company, ld. DRP pointed out that after the acquisition by Tata group, there was no reason to assume that Citi group was a related party.

We have considered the rival submissions and perused the material available on record. This comparable has been directed to be excluded in the case of Equant Solutions India Pvt. Ltd. (supra). The business profile of Equant Solutions India Pvt. Ltd. (supra), inter alia, comprised of rendering IT enabled net work management and other back office support services, 24 ITA 6867/Del/2014 which included remote monitoring and maintenance of Equant global network platforms and services, coordination, remote configuration and implementation of quality customer networking solutions. The assessee primarily undertakes to provide services for European and the Indian asset management company based in Mumbai. The assessee is primarily catering to the retail site (individual investor) to Fidelity Group business. Thus, broadly the functions performed by assessee are similar to that of Equant Solutions India Pvt. Ltd. (supra) and, therefore, this company deserves to be excluded. We find that functions performed by TCS-e-Serve Ltd. included rendering of technical services like software testing etc., which required skilled persons. As far as the objection regarding related party transaction is concerned, we are in agreement with the reasoning given by DRP that since this company was taken over by TCS group, therefore, there was no question of any separate details being given about related party transaction. However, keeping in view the various factors, pointed out by ld. counsel for the assessee, which we have noted earlier, this company cannot be taken as a comparable to the tested party.

As far as TCS E-Serve International Ltd. is concerned, ld. counsel for the assessee pointed out that as per the annual report, the functions performed by this company is to provide business process management services in banking and financial services verticals. It provides services comprising transaction process and technical services. Transaction processing includes processing, collections, customer care and payments in relation to the services by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management 25 ITA 6867/Del/2014 activities. Segmental details for income from transactions processing services are not available in annual report.

Ld. counsel pointed out that other dissimilarities which have been referred with reference to TCS-e-serve, are also in this comparable. He, therefore, submitted that this comparable should be excluded. He relied on the order of the ITAT in the cases of Equant Solutions India Pvt. Ltd. (supra) and Bechtel India Pvt. Ltd. (ITA no. 1478/Del/2015).

We have heard both the parties. We find that the functions performed by this comparable are almost similar to that of TCS-e-Serve Ltd. and since this company is also rendering technical services and segmental details for income from transaction processing service are not available, therefore, we direct for exclusion of this comparable, as has been done in the case of Equant Solutions India Pvt. Ltd. (supra) and Bechtel India Pvt. Ltd. (supra).

As regards Accentia Technology Ltd., ld. counsel pointed out that this comparable provides high end functions such as knowledge processing outsourcing legal process. Outsourcing, data process outsourcing, high end software services delivery besides offering software As A Service (“SaaS”) Model in the healthcare outsourcing area. It also developed software products such as Business Process outsourcing management (‘BPOM’) solutions and HealthDox (HRCM Solution), apart from IT enabled services. He further pointed out that during FY 2009-10 a subsidiary of Accentia got amalgamated with the latter and the said extraordinary event has affected the overall profitability of Accentia. He relied on the decisions of the ITAT in the cases of Equant Solutions India Pvt. Ltd. (supra) and Bechtel India Pvt. Ltd. (supra).

Thus, it is clear that this company is primarily diversified knowledge process outsourcing company and coupled with the fact that extraordinary circumstance of amalgamation took place during the year, this comparable is directed to be excluded from the list of comparables.

As regards Infosys BPO Ltd., ld. counsel pointed out that the functions performed by this company are high end integrated services assisting in improving competitive positioning and managing business processes in addition to providing increased value. The turnover of this company is Rs. 1127 crores as against Rs. 100 crores of ITeS segment of assessee. This company has brand ownership, which is evident from the brand related expenses incurred by this company of Rs. 69,16,780/-, whereas assessee does not have any brand or proprietary products. Further, offshore revenue, Export income has not been specified separately. Therefore, it could not be found out as to whether export turnover is 75% of total income or not. Further, selling and marketing spend is 7% of revenue, which is not present in assessee’s case. This company operates as a fullfledged risk taking entrepreneur whereas assessee is at minimal basiss. He relied on the 27 ITA 6867/Del/2014 Tribunal’s decision in the cases of Equant Solutions India Pvt. Ltd. (supra) and Bechtel India Pvt. Ltd. (supra). 64. Ld. DRP has accepted the TPO’s contention, inter alia, observing on the issue of brand ownership that creation of brand value is not on account of marketing expenses but because of superior services. Ld. DRP has observed that this service is given by employing better process and employees, therefore, the cost are higher on account of the same and most of the extra profits on account of brand value are set off because of the cost of this higher service. 65. We are unable to agree with these findings of ld. DRP because it is not demonstrated as to what is the actual basis for these findings. The findings are purely on the basis of ld. DRP’s assumptions. As we have observed earlier, accepting ld. counsel’s plea that mere high turnover cannot be the basis for accepting or rejecting comparable, but coupled with the other dissimilarities the company is to be rejected. We, therefore, following the Tribunal’s decisions in the cases of Equant Solutions India Pvt. Ltd. (supra) and Bechtel India Pvt. Ltd. (supra), direct for exclusion of this comparable. Order pronouncement in open court on 12/05/2016.