UCB INDIA P. LTD,MUMBAI vs. ADDL CIT RG 7(3), MUMBAI

Aforesaid appeal at the instance of the assessee is directed against the assessment order dated 30th October 2012, passed under section 143(3) r/w 144C(13) of the Income Tax Act, 1961 (for short "the Act") in pursuance of the direction of the Dispute Resolution Panel (DRP) for the assessment year 2008–09.

2 UCB India Pvt. Ltd.

“Based on the facts and circumstances of the case, UCB India Private Limited (hereinafter referred to as the 'Appellant') craves leave to prefer an appeal against the order passed by the Additional Commissioner of Income Tax, Range 7(3), Mumbai [hereinafter referred to as the 'learned AO] under section 144C(13) read with section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act'), in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel (hereinafter referred to as the 'Hon'ble DRP'). On the facts and in the circumstances of the case and in law, the learned AO/ Deputy Commissioner of Income-tax - Transfer Pricing 11(10) (hereinafter referred to as the 'learned TPO')l Hon'ble DRP: General 1. erred in making an addition of Rs 82,0 1,497 to the total income of the Appellant; Rejection of economic analysis 2. erred in making an addition of Rs 8,45,126 by not accepting the economic analysis undertaken by the Appellant for the international transaction of provision of IT and network support services provided to its AE; 3. erred in rejecting companies considered as comparable by the Appellant without providing sufficient opportunity to be heard; Undertaking fresh economic analysis and use of contemporaneous data; 4. erred in undertaking fresh comparability analysis post specified date; 5. erred in collating and relying on the information obtained from response to notice issued under section 133(6) of the Act which was not available in public domain; Use of arbitrary filters 6. erred in applying rejection criteria/ filter in arbitrary, subjective and erroneous manner for purpose of selecting comparable companies like turnover criteria employee cost criteria, onsite revenue criteria and export turnover criteria; Use of additional comparable companies 7. erred in considering additional companies which are functionally different, as comparable to the Appellant, for benchmarking its international transaction of provision of IT and network support services;

3 UCB India Pvt. Ltd.

8. erred in considering additional companies which has insufficient descriptive information, as comparable to the Appellant, for benchmarking its international transaction of provision of IT and network support services; Incorrect margins 9. erred in computing incorrect margins of comparable companies by considering rent income as operating income and by not allocating the unallocated expenses to the comparable segment; 10. erred in not giving specific findings on incorrect margin computations of comparable companies; Working Capital Adjustment and Risk Adjustment 11. erred in comparing full-fledged risk bearing entities with the Appellant's captive operations without making any risk adjustment for differences between the risk profile of comparable companies vis-à-vis the risk profile of the Appellant; 12. erred in not considering the working capital adjustment which is required to be undertaken in the Appellant's case to account for the difference in the working capital levels between comparable companies (as identified by the learned TPO) and the Appellant; Disallowance of e-connectivity expenses 13. erred in making an addition of Rs 31,76,461 by considering e- connectivity charges as incurred for acquiring software, which resulted in benefit of enduring nature and thereby classifying the expenses as Capital in nature; Double addition on account of depreciation 14. erred in adding the depreciation amount of Rs 20,89,955 instead of deducting the same, while computing the assessed income resulting into double addition of the depreciation amount; Interest under section 234A 15. erred in considering incorrect taxable income for computing interest under section 234A of the Act.”

4 UCB India Pvt. Ltd.

5 UCB India Pvt. Ltd. to the A.E. towards information technology and software support service, the assessee had undertaken transfer pricing study through an independent external agency. Transactional Net Margin Method (TNMM) was selected as most appropriate method to bench mark the transaction with Operating Profit to Operating Cost (OP/OC) as Profit Level Indicator (PLI). Assessee had selected 23 companies as comparables in transfer pricing study by using multiyear data. As the arithmetic mean of the comparable companies was 14.41% as against margin shown by the assessee at 13.97%, the price charged to A.E. was considered to be at arm's length. For the assessment year under consideration, assessee filed its return of income on 24th December 2008, declaring total income of ` 22,04,20,020. In the course of assessment proceedings, the Assessing Officer noticing that assessee had entered into international transaction with its A.E. made a reference to the Transfer Pricing Officer for determining the arm's length price of the I.T. and network support services by the assessee to its A.E. The Transfer Pricing Officer after examining the transfer pricing study and various other documents called for, noticed that certain comparables selected by the assessee did not represent the I.T. industry in true sense as the assessee has not applied appropriate filters. Though, in the course of proceedings before the Transfer Pricing Officer the assessee also submitted the updated single year

6 UCB India Pvt. Ltd. margin of the comparable companies selected by it whose arithmetic mean worked out to 14.24% but the Transfer Pricing Officer did not accept the same. He was of the view that the transfer pricing study furnished by the assessee is not acceptable as it is not in accordance with rule 10B(4) as the comparable companies were not selected on the basis of data relating to current financial year. He also observed that most of the comparables do not stand scrutiny of FAR analysis. Accordingly, he proceeded to reject the transfer pricing study of the assessee and proceeded to determine arm's length price independently. Though, the Transfer Pricing Officer accepted TNMM as most appropriate method with OP/OC as PLI, however, by applying some fresh set of filters, he searched data bases to select comparables. The search in data bases conducted by the Transfer Pricing Officer yielded 23 companies as comparables with arithmetic mean of 24.99% as against margin shown by assessee at 13.97%. By applying arithmetic mean of the comparables to the operating cost, the Transfer Pricing Officer determined the arm's length price of the I.T. relating to provisions of international transaction and software support services to A.E. at ` 95,84,221, as against the price charged by the assessee of ` 87,39,095. Resultant shortfall of ` 8,45,126 was treated as I.T. adjustment. In terms with the order passed by the Transfer Pricing Officer, the Assessing Officer framed the draft

7 UCB India Pvt. Ltd. assessment order by adding the amount of ` 8,45,126. Being aggrieved of such addition assessee filed his objections before the DRP.

8 UCB India Pvt. Ltd. only companies with turnover from ` 50 lakh to ` 20 crore should be treated as comparables to the assessee. In support of his proposition that high turnover companies cannot be treated as comparable the learned Authorised Representative relied upon the decision of the Hon'ble Jurisdictional High Court in CIT v/s Pentair Water India Pvt. Ltd., Tax Appeal no.18/2015 dated 16th September 2015. He also relied upon the decision of the Hon'ble Delhi High Court in CIT v/s Agnity India Technologies Pvt. Ltd., [2013] 36 Taxmann.com 289 (Del.) as well as number of other decisions of the Tribunal for excluding companies with reasonably high turnover. Without prejudice to the aforesaid argument, as alternative contentions, learned Authorised Representative also objected to selection of certain comparables on functional dissimilarity which are as under:–

Infosys Technologies Limited

also engaged in development of products. In this context, he referred to the Profit & Loss account of the company. Further referring to the Balance Sheet of the company learned Authorised Representative submitted, the company has shown brand value as its intangible asset. The company has significant R&D activity leading to creation of intellectual property right. He, therefore, submitted under no circumstances, it can be treated as a comparable. He submitted, even otherwise also, as the company is having a turnover of ` 15,653 crore it is a giant company, hence, cannot be compared to a captive service provider like the assessee. For such proposition, he relied upon the following decision:– i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013; ii) Barclays Technology Centre India Pvt. Ltd. v/s ACIT, ITA no.2279/Pn./2012, dated 30.10.2014; iii) Adaptec India P. Ltd. v/s ACIT, ITA no.206/Hyd./2014, dated 25.03.2015; iv) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013; v) Capgemini India P. Ltd. v/s ITO, ITA no.7099/Mum./2012, 10.12.2015; vi) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215; vii) LGS Global Ltd. v/s ACIT, ITA no.1885/Hyd./2011, dated 27.6.2014; viii) CIT v/s Quark Systems India P. Ltd., dated 16.5.2011 (P&H HC);

10 UCB India Pvt. Ltd. ix) Adaptec India P. Ltd. v/s ACIT, ITA no.1758/Hyd./2012, dated 21.3.214

BODHTREE CONSULTING LIMITED

i) Barclays Technology Centre India Pvt. Ltd. v/s ACIT, ITA no.2279/Pn./2012, dated 30.10.2014; and ii) Adaptec India P. Ltd. v/s ACIT, ITA no.206/Hyd./2014, dated 25.03.2015;

CELESTIAL BIOLABS LIMITED

11 UCB India Pvt. Ltd.

Representative submitted, the company has claimed product development expenditure. He, therefore, submitted the company cannot be treated as comparable to the assessee. He further submitted, the turnover of the company being more than ` 20 crore, it should not be treated as comparable. In support of his contention, he relied upon the following decisions:– i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013; ii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013; iii) LGS Global Ltd. v/s ACIT, ITA no.1885/Hyd./2011, dated 27.6.2014;

E–ZEST SOLUTIONS LIMITED

i) Barclays Technology Centre India Pvt. Ltd. v/s ACIT, ITA no.2279/Pn./2012, dated 30.10.2014; ii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013;

12 UCB India Pvt. Ltd. iii) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215;

KALS INFORMATION SYSTEMS LIMITED

i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013; ii) Barclays Technology Centre India Pvt. Ltd. v/s ACIT, ITA no.2279/Pn./2012, dated 30.10.2014; iii) Adaptec India P. Ltd. v/s ACIT, ITA no.206/Hyd./2014, dated 25.03.2015; iv) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013;

13 UCB India Pvt. Ltd. v) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215;

TATA ELXSI LIMITED

i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013; ii) Adaptec India P. Ltd. v/s ACIT, ITA no.206/Hyd./2014, dated 25.03.2015; iii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013; iv) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215;

WIPRO LIMITED

into diversified activities including development of products and no segmental information is available. In this context, he referred to the Profit & Loss account of the company as on 31st March 2008. Besides, the learned Authorised Representative submitted, the turnover of this company being ` 11,276 crore it cannot be a comparable to the assessee. In support of his contention, the learned Authorised Representative relied upon the following decisions:– i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013; ii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013; iii) Capgemini India P. Ltd. v/s ITO, ITA no.7099/Mum./2012, 10.12.2015; iv) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215; v) LGS Global Ltd. v/s ACIT, ITA no.1885/Hyd./2011, dated 27.6.2014; vi) Adaptec India P. Ltd. v/s ACIT, ITA no.1758/Hyd./2012, dated 21.3.214

15 UCB India Pvt. Ltd. without raising an additional ground in terms of rule 11 of I.T. (AT) Rule, 1963, it cannot raise the issue at this stage. He submitted, the assessee while selecting comparables in its transfer pricing study has not applied the turnover filter which is evident from the fact that the assessee itself selected Infosys Technologies Ltd. Learned Departmental Representative submitted, only on the basis of turnover companies cannot be excluded if otherwise they are functionally similar to the assessee. He submitted, in case turnover filter was not applied at the initial stage, it cannot be applied to exclude companies as comparable. In this context, he relied upon the decision of the Hon'ble Delhi High Court in CIT v/s Nortel Networks India Pvt. Ltd. As far as the objections of the assessee relating to selection of certain product based companies, learned Departmental Representative submitted the web pages relied upon by the assessee as submitted in the paper book were available before the Transfer Pricing Officer and whether they relate to the impugned assessment year is not known, therefore, they cannot be relied upon. Further, learned Departmental Representative referring to the annual report of the companies objected to by the assessee submitted, mostly the selected companies are engaged in providing software development services, hence, are comparable to the assessee. Learned Departmental Representative submitted, even assuming that some of the companies are into

16 UCB India Pvt. Ltd. development of products, unless they are effecting mass sales of such product they cannot be considered as product companies. He, therefore, submitted, there is no reason to exclude some of the companies selected by the Transfer Pricing Officer on the basis of argument advanced by the assessee.

17 UCB India Pvt. Ltd. and must have been in the records of the Transfer Pricing Officer but the Transfer Pricing Officer also collected information under section 133(6) from these companies which were never confronted to the assessee. He further submitted, the information obtained from the website of the comparables were relied upon by the assessee before the DRP and the data contained therein are contemporaneous. He, therefore, submitted, the objection of the learned Departmental Representative being without any basis is not acceptable.

transfer pricing study of the assessee has himself applied turnover filter by rejecting companies having revenue earned from software development service of less than one crore. However, he has not fixed any upper limit while applying the turnover filter. When the Transfer Pricing Officer has applied turnover filter by rejecting companies having less than ` 1 crore turnover from software development services, logically, he should have fixed an upper limit for rejecting companies having very high turnover as well. As could be seen, as against the turnover of ` 87,39,095 by the assessee from software development services some of the comparables selected by the assessee have turnover of more than ` 20 crore. In fact, turnover of Infosys Technologies Ltd., Tata Elxsi Ltd. and Wipro Ltd. respectively are ` 15,653 crore, ` 342 crore and ` 11,276 crore.

view of ours is supported by various decisions of the Tribunal as well as the Hon'ble Jurisdictional High Court in Pentair Water India Pvt. Ltd. (supra). In the aforesaid view of the matter, we direct the Transfer Pricing Officer to exclude companies having turnover of more than ` 20 crore from software development services segment from the list of comparables. As far as the objection of the learned Departmental Representative with regard to assessee’s objection against Infosys Technologies Ltd., we may observe, no doubt, the assessee in the transfer pricing study and even in the course of proceedings before the Transfer Pricing Officer has selected Infosys Technologies Ltd. as a comparable. However, fact remains the transfer pricing study report as well as the updated margin submitted by the assessee in the course of proceedings before the Transfer Pricing Officer were rejected. It is further evident, after rejecting the transfer pricing study report, the Transfer Pricing Officer undertook a search process himself by applying certain filters which yielded certain comparables including Infosys Technologies Ltd. Therefore, it cannot be said that Infosys Technologies Ltd. is a comparable selected by the assessee. The observations made by the Transfer Pricing Officer in Para–5.3 of his order clearly prove that Infosys Technologies Ltd., was proposed as comparable by the Transfer Pricing Officer after search in data base. Moreover, we have noted that not only before the Tribunal but before

20 UCB India Pvt. Ltd. the DRP also the assessee had objected to wrong application of turnover filter by the Transfer Pricing Officer. This is evident from Para–4.2 of DRP’s order. Therefore, as borne out from the record, for the first time assessee has not raised the issue of rejection of certain comparables on the basis of turnover. That being the case we are unable to accept the contention of the learned Departmental Representative. In view of the aforesaid, we direct Assessing Officer / Transfer Pricing Officer to determine arm's length price afresh after removing the companies having turnover of more than ` 20 crore. However, at this stage, we make it clear our decision to exclude companies having turnover of more than ` 20 crore is purely in the context of the the peculiar facts of the present appeal, hence, should not be considered as a precedent.

Bodhtree Consulting Limited

noticed that this company is engaged in development of products also. In case of Barkley Technology Centre India P. Ltd. v/s ACIT, ITA no.2279/Pn./2012, dated 28th January 2015, the Tribunal, Pune Bench, held that this company is into product development hence, cannot be treated as comparable. As the aforesaid decision of the co–ordinate bench is for the very same assessment year 2008–09, respectfully following the same, we hold that this company cannot be treated as comparable.

Celestial Biolabs Limited 24. On a perusal of the Profit & Loss account of this company, a copy of which is at Page–213 of the paper book, we have noted that the company is engaged in sale of products. Further, the annual report of the company as well as Schedule–VII of the Balance Sheet indicates that this company is into product development. Thus, on the basis of information contained in the annual report of the company for the financial year 2007–08 it emerges that the company is involved in sale of products and segmental details are not available. We have also noted that the Tribunal, Bangalore Bench, in IBM India Pvt. Ltd. (supra), following another decision of the same bench in Logica Pvt. Ltd. in ITA no.1129/B./2011, had rejected this company as a comparable as it is engaged in the clinical research and manufacture of bio products and other products. The same view was again

22 UCB India Pvt. Ltd. reiterated by the Tribunal, Bangalore Bench, in DPLM Software Solutions Ltd. (supra). As these decisions pertain to the very same assessment year respectfully following the same, we hold that Celestial Biolabs Ltd. cannot be treated as a comparable.

Kals Information Systems Limited

i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013; ii) Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013; iii) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215;

23 UCB India Pvt. Ltd.

Tata Elxsi Limited 27. The reason on which the assessee has sought exclusion of this company as a comparable as it is engaged in product design service which includes design and development of hardware and software. On a perusal of the annual report of the company for the financial year 2007–08, a copy of which is at Page–245 of the paper book, it is noticed that this company has two main segments, which are software development and services segment and systems integration and support segment. Under the software development and service segment, the company has undertaken product design services which comprises of design and development of hardware / software. Thus, as could be seen, this company is not a purely software development service provider. Considering the aforesaid factual aspect, Tribunal, Hyderabad Bench, in Net Cracker Technologies Solutions India Pvt. Ltd. (supra) excluded this company as comparable. The same view was expressed by the Tribunal in IBM India Pvt. Ltd. (supra) and 3DPLM Software Solutions Pvt. Ltd. (supra) for assessment year 2008– 09. Moreover, this company gets excluded due to its very high

24 UCB India Pvt. Ltd. turnover of ` 342 crore during the relevant financial year as against the turnover of ` 87,39,095 of the assessee. Therefore, respectfully following the decisions of the co–ordinate bench of the Tribunal referred to above which are for the very same assessment year, we exclude this company as comparable.

Wipro Limited 28. On a perusal of the annual report of the company which has been placed in the paper book, it is noticed that it has diversified activities, however, segmental details have not been provided in the audited financial account. That besides the turnover of this company during the relevant financial year was ` 11,276 crore, as against paltry turnover of ` 87,39,095 of the assessee. For the aforesaid reasons, different benches of the Tribunal have consistently held that Wipro Ltd., cannot be comparable to a purely captive software development services provider. In this context, we refer to the following decisions:– i) IBM India P. Ltd. v/s JCIT, IT(TP)A no.1543/Bang./2012, order dated 20.12.2013; ii) 3DPLM Software Solutions Ltd. v/s DCIT, ITA no.1303/Bang./ 2012, dated 28.11.2013; iii) Capgemini India P. Ltd. v/s ITO, ITA no.7099/Mum./2012, 10.12.2015; iv) Net Cracker Technology Solutions (I) P. Ltd. v/s ACIT, ITA no.86/Hyd./2013, 17.6.215; v) Adaptec India P. Ltd. v/s ACIT, ITA no.1758/Hyd./2012, dated 21.3.214

25 UCB India Pvt. Ltd.

Infosys Technologies Limited

26 UCB India Pvt. Ltd. of software cannot be treated as comparable. For this reason, we exclude Infosys Technologies Ltd., from the list of comparable.

E–Zest Solutions Limited

27 UCB India Pvt. Ltd.

28 UCB India Pvt. Ltd.

acquiring any software, hence, the expenditure is revenue in nature. The same view was again reiterated in assessee’s own case in assessment year 2006–07 in ITA no.8819/Mum./2010 dated 3rd June 2016 and ITA no.1218/Mum./2014 and 1422/Mum./2014 dated 18th May 2016, for assessment year 2009–10. Respectfully following the consistent view of the Tribunal in assessee’s own case, we allow assessee’s claim for deduction, thereby, deleting the addition of ` 31,76,461. Ground no.13, is allowed.