ATOS INDIA P. LTD,MUMBAI vs. DCIT RG 8(1), MUMBAI

सुनवाई क� तार�ख / 05/04/2016 Date of Hearing : 30/06/2016 आदेश क� तार�ख /Date of Order: आदेश / O R D E R Per Ashwani Taneja (Accountant Member): This appeal has been filed by the assessee against the final assessment order dated 16.01.2014 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 passed in pursuance to the directions given by the Dispute Resolution Panel (in short

2 Atos India P. Ltd. referred to as “DRP”) vide its order dated 18.11.2013 for A.Y. 2009-10, on the following grounds:

– TP Grounds: “1. Ground No. 1 - On the facts and circumstances of the case and in law, the Hon'ble Dispute Resolution Panel - I ('Hon'ble DRP') erred in directing the Deputy Commissioner of Income Tax, Circle - 8(1), Mumbai ('AO')/ Additional Commissioner of Income Tax, Transfer Pricing - 1(1), Mumbai ('TPO') to make an adjustment of Rs.25,13,81,559 in relation to the international transaction of provision of software development services.

2. Ground No. 2 - On the facts and circumstances of the case, the Hon'ble DRP erred in directing the Learned AO/ TPO to make an adjustment of Rs.2,63,31,853 on account of notional interest on the alleged overdue receivables from AEs. 2.1. Without prejudice to above, the Learned TPO erred in inadvertently considering the interest on overdue receivables as per the submission dated 22 October, 2012 instead of submission dated 1 November, 2012 (referred to in the TP Order). Accordingly, the adjustment in relation to notional interest on overdue receivables amounted to Rs. 2,63,31,853 instead of Rs. 1,08,69,820.

3. Ground No.3 - On the facts and circumstances of the case, the Hon'ble DRP erred in not directing the Learned AO/ TPO to grant working capital adjustment by making an incorrect observation that the Appellant did not claim the working capital adjustment in its TP study. The Appellant prays that the Learned AO/ TPO be directed to grant the working capital adjustment.

DT Grounds: 4. Ground No. 4 - Disallowance of project risk expenses 4.1 On the facts and in the circumstances of the case and in law, the Learned AO has erred in disallowing an amount of Rs. 1,08,17,012 in respect of project risk expenses incurred by the Appellant pertaining to contract entered with HPCL. 4.2 Without prejudice to ground no. 4.1 above, the Company requests your Honour to direct the Learned AO to grant a deduction of the aforesaid expenses in the year of actual - payment/ settlement.

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In doing so, the Appellant requests your Honour that the expenses claimed by the Appellant in the earlier years (i.e. FY 2006-07, FY 2007-08 and FY 2008-09) with respect to phase I, II and III, should be allowed in the year of actual settlement in the books of accounts i.e. when the net amount is received from HPCL after the completion of the respective phase. 4.3 On the facts and in the circumstances of the case and in law, the Learned AO has erred in disallowing an amount of Rs.1,46,31,238 in respect of project risk expenses incurred by the company pertaining to contract entered with P&G. 4.4 Without prejudice to ground no.4.3 above, the company requests Your Honour to direct the Learned AO not to tax the aforesaid amount of liquidated damages in the year of reversal/write-back in case the same is disallowed during the year under consideration. 4.5 On the facts and in the circumstances of the case and in law, the Learned AO has erred in disallowing an amount of Rs. 1,21,89,645 in respect of project risk expenses incurred by the company pertaining to contracts entered with other parties. 4.6 Without prejudice to ground no. 4.5 above, the company requests Your Honour to direct the Learned AO not to tax the aforesaid amount of liquidated damages in the year of reversal/write-back in case the same is disallowed during the year under consideration.

5. Ground No. 5 - Denial of deduction under section 10A in respect of Bangalore unit acquired on slump sale 5.1 On the facts and in the circumstances of the case and in law, the Learned AO erred in disallowing the deduction under section 10A of the Act amounting to Rs. 1,97,92,908. While doing so, the Learned AO erred in disregarding the Circular No. 1/2013 issued by the Central Board of Direct Taxes ('CBDT') which clarifies that benefit of deduction under section 10A should be allowed to an undertaking even after slump sale.

6. Ground No. 6 - Grant of lesser deduction under section 10A of the Act in respect of remaining units 6.1 On the facts and circumstances of the case and in law, the Learned AO erred in reducing foreign currency expenses only from export turnover and not from total turnover

4 Atos India P. Ltd. thereby reducing the benefit of deduction under section 10A by Rs. 6,89,82,112 in respect of the remaining units.

7. Ground No.7. Denial of set-off of brought forward losses and unabsorbed depreciation of Sema Software India Private Limited 7.1 On the facts and circumstances of the case and in law, the Learned AO erred in denying the set-off of brought forward losses and unabsorbed depreciation of entity taken over i.e. Sema Software India Private Limited. Ground No. 8- Short credit of TDS, advance taxes and self assessment tax 8.1 On the facts and in the circumstances of the case, the Learned AO has erred granting short credit of TDS, advance tax and self assessment tax to the extent of Rs. 99,05,886, Rs. 82,00,000 and 15,79,545 respectively. Ground No.9- Excess levy of interest under section 234B and 234C of the Act 9.1On the facts and in the circumstances of the case, the Learned AO has erred in levying excess interest under section 234B and 234C of the Act.

10. Ground No. 10- Initiation of penalty proceedings 10.1 On the facts and in the circumstances of the case, the Learned AO has erred in proposing to initiate penalty under Section 271(1)(c) of the Act for various proposed additions/disallowances.”

accordingly, the same has been taken into consideration while disposing the grounds raised in appeal memo.

3.1. The brief background of the business of the assessee as given in the order of the DRP (i.e. Dispute Resolution Penal) is that during the year assessee was an Information Technology (IT) Service Company engaged in the business of development and maintenance of computer software, development and sale and export of software services and provision of technical consultancy. The company’s main international transaction with its Associated Enterprises (AE’s) was of ‘provision of software development services’. It was also mentioned by DRP in its order that apart from the above transaction, the company also had certain other international transactions with its AEs viz. receipts of software development services, receipt of communication and network related services, allocation of IT infrastructure charges, reimbursement of various expenses, payment of software licenses etc.

4.1. During the course of transfer pricing proceedings it was noted by the TPO that TNMM (Transactional Net Margin Method) was most appropriate method (MAM) to benchmark these international transactions of the assessee with its AEs

6 Atos India P. Ltd. and there is no dispute on the selection of TNMM as MAM. The TPO carried out a fresh search of comparables and in the final Accept-Reject Matrix, it contained 14 comparables as per the table given in para 10 at the page 29 of TPO’s order, according to which the margin of the assessee taking OP/TC as its PLI (Profit Level Indicator) came out to be 21.52% as against 14.76% as shown by the assessee for its software segment. Consequently, an adjustment for Rs.24,96,72,932/- was proposed by the TPO. Further, for the SSIPL software development segment, the assessee had shown OP/TC of 14.16% as against 21.52% as determined by the TPO on the basis of Accept-Reject Matrix of the comparables. Consequently, an adjustment of Rs.17,08,627/- was proposed by the TPO. Thus, aggregate adjustment of Rs.25,13,81,559/- (i.e. Rs.24,96,72,932 + 17,08,627) was proposed by the TPO in its order.

4.2. Being aggrieved, the assessee had filed an objection before the DRP where no relief was given and order of the TPO was upheld.

4.3. Being aggrieved, the assessee filed an appeal before the Tribunal.

4.4. During the course of hearing before us, Ld. Counsel of the assessee submitted that with a view to reduce and narrow down the controversy, the assessee wishes to contest now only

7 Atos India P. Ltd. three comparables as were selected by the TPO and requests for exclusion of same, as per details given below: 1. Infosys Ltd.(40.49%) 2. Bodhtree Consulting Ltd. (61.38%) 3. Sonata Software Ltd. (29.77%)

4.5. It was submitted by the assessee that these three comparables cannot be included for benchmarking transactions of the assessee, in view of the detailed submissions made hereinafter and if these three comparables are excluded, then the assessee’s case comes within the acceptable range of +/- 5% and that would obviate the need to contest all other issues. Under these circumstances, we find it appropriate to first deal with aforesaid three comparables (before taking up other issues, if the needed) as under:

8 Atos India P. Ltd. i. CIT v. Agnity India Technologies P. Ltd.-ITA No.1204/2011 (Del HC) ii. OSI Systems P. Ltd. v. DCIT (ITA No.542 & 683/Hyd/2014) iii. Alliance Global Services IT India P. Ltd. v. DCIT(ITA No.58/Hyd/2014 iv. Telcordia Technologies India P. Ltd. v. ACIT (ITA No.7821/Mum/2011 5.1. Per contra, Ld. CIT-DR submitted that huge turnover or high scale of operations ipso facto does not make a company non-comparable. It was further submitted that entrepreneurship of a comparable company cannot be any criteria to make a company as non-comparable because every company is an entrepreneur in its own class. Even, the assessee company is an entrepreneur. With regard to the case laws, it was submitted that unless parity is drawn, the case laws cannot be used blindly. It was further submitted that in the case laws relied upon by the Ld. Counsel, many objections made on behalf of the revenue were not considered. It was further submitted that there is no relation between margin and turnover and therefore, there was no justification of removing comparables like Infosys Ltd, merely because it has a large scale of operations. He relied upon the judgment of Mumbai Bench of ITAT in the case of Willis Processing dated 01.03.2013 in support of his proposition that Infosys Ltd. should not be excluded. He also relied upon the judgment of Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) P. Ltd. v. DCIT 376 ITR 183.

5.2. We have gone through the orders of the lower authorities and submissions made by both the sides before us. The 9 Atos India P. Ltd. undisputed facts before us are that during the year under consideration turnover of the assessee of software development segment was Rs.423.71 crores and SIPL segment was Rs.2.10 crores as against turnover of Rs.20,264 crores of the Infosys Ltd., which is more than 45 times of the turnover of the assessee company. Further, expenditure incurred on brand building, advertising/sales promotion etc. was to the tune of Rs.0.46 crores by the assessee company as against Rs.933 crores by Infosys Ltd. Further, it is noted that the assessee company is operating at minimal risk basis. On the other hand, Infosys is a market leader and there is huge brand value associated with it. It has been further brought to our notice that the assessee company is merely captive software development service provider, whereas Infosys is running its business as full-fledged entrepreneur company. It is noted by us on the basis of annual report of Infosys that it provides end to end business solution that span entire software like cycle encompassing technical consulting, design, development, re- engineering, maintenance system integration, package evaluation and implementation, contesting and infrastructure management services. Infosys also offers software products for banking industry and its revenue is primarily derived from software development and from licensing of software products. On the other hand, the assessee company functions as a captive service provider; it is not required to compete with its group companies for the contracts as it operates as a global offshore service centre. It is brought to our notice that assessee does not own intangibles nor does it invest in the 10 Atos India P. Ltd.

Research and Development activities. For the purpose of bring out a clear distinction between the profiles of the assessee and Infosys, this point was repeatedly emphasised by the assessee that the assessee company bears minimal entrepreneurial and market risk. Under these circumstances, we find that Infosys stand on an altogether different pedestal and falls in different class in the industry. It is not only difference is turnover but its own huge brand value makes it an entrepreneur of its own category. It is a giant of its own kind. On the other hand, the assessee company would not stand even anywhere near to a company like Infosys on various parameters. Under these circumstances, it would not be just and fair to put both these companies at a comparable scale. If it is so done, it may push an assessee towards an unfair, unacceptable and unreasonable situation. It is further noted by us that as on date this issue is no more res-integra.

5.3. For the sake of ready reference, we may first refer to a judgment of Hon’ble Delhi High Court in the case of CIT v. Agnity India Technology (P.) Ltd.; and relevant observation from this judgment are reproduced hereunder:

“5. The tribunal has observed that the assessee was not comparable with Infosys Technologies Ltd., as Infosys Technologies Ltd. was a large and bigger company in the area of development of software and, therefore, the profits earned cannot be a bench marked or equated with the respondent, to determine the results declared by the respondent- assessee. In paragraph 3.3 the tribunal has referred to the difference between the respondent- assessee and Infosys Technologies Ltd. For the sake of convenience, we are reproducing the same:- "

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Basic Particular Infosys Agnity India Technologies Ltd. Risk Profile Operate as full- Operate at fledged risk taking minimal risks as entrepreneurs the 100% services are provided to AEs Nature of Diversified- Contract Software Services consulting, application design, development, re-engineering Development Services and maintenance system integration, package evaluation and implementation and business process management, etc. (refer page 117 of the paper book) Revenue Rs.9, 028 Crores Rs.16.09 Crores

Ownership of Develops/owns proprietary products branded/proprietary like Finacle, Infosys Actice Desk, products Infosys iProwe, Infosys mConnect, Also, the company derives substantial portion of its proprietary products (including its flagship banking product suite „Finacle‟) Onsite Vs. Offshore -As much as half of the software The appellant provides only development services rendered by offshore services (i.e., Infosys are onsite (i.e., services remotely from India) performed at the customer‟s location overseas). And offshore (50.20%) (Refer page 117 of the paper book) than half of its service, income from onsite services. Expenditure on Rs.61 Crores Rs. Nil (as the 100% Advertising/Sales services are provide to AEs) promotion and brand building Expenditure on Rs. 102 crores Rs. Nil Research & Development Other 100% offshore (from India)

6. Learned counsel for the Revenue has submitted that the tribunal after recording the aforesaid table has not affirmed

12 Atos India P. Ltd. or given any finding on the differences. This is partly correct as the tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a captive unit of the parent company and assumed only a limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with the respondent- assessee as seen from the financial data etc. to the two companies mentioned earlier in the order i.e. the chart. In the grounds of appeal the Revenue has not been able to controvert or deny the data and differences mentioned in the tabulated form. The chart has not been controverted.

7. Learned counsel for the appellant Revenue during the course of hearing, drew our attention to the order passed by the TPO and it is pointed out that based upon the figures and data made available, the TPO had treated a third company as comparable when the wage and sale ratio was between 30% to 60%. By applying this filter, several companies were excluded. This is correct as it is recorded in para 3.1.2 of the order passed by the TPO. TPO, as noted above, however had taken three companies, namely, Satyam Computer Service Ltd., L&T Infotech Ltd. and Infosys Technologies as comparable to work out the mean.

8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The tribunal for valid and good reasons has pointed out that Infosys Technologies Ltd. cannot be taken as a comparable in the present case. This leaves L&T Infotech Ltd. which gives us the figure of 11.11 %, which is less than the figure of 17% margin as declared by the respondent-assessee. This is the finding recorded by the tribunal. The tribunal in the impugned order has also observed that the assessee had furnished details of workables in respect of 23 companies and the mean of the comparables worked out to 10%, as against the margin of 17% shown by the assessee. Details of these companies are mentioned in para 5 of the impugned order.

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9. In view of the aforesaid position, we do not think that any substantial question of law arises for consideration. The appeal is dismissed.” 5.4. Similarly, in the case of OSI Systems Pvt. Ltd. (supra), the Hyderabad Bench had taken a similar view and relevant observations of the Bench are reproduced hereunder: “26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, by order dated 28.11.2013 with regard to this comparable has held as follows:- "11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co- ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does

14 Atos India P. Ltd. not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in (Del)/2010 at Para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the breakup of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded from the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee as brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy EBusiness Software India Pvt. Ltd. (supra) for Assessment Year 2007- 08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from 15 Atos India P. Ltd. software products. It is also seen that the breakup of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly." The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies.”

5.5. Similar view was taken by Mumbai Bench in the case of Telcordia Technologies India P. Ltd. v. ACIT 222 taxmann.com 96 with the following observations: “7.4 Infosys Technologies Ltd. : The parameter for identifying comparable entity has to be seen from the angle of functions formed by the company, size of the company in terms of the sales revenue, stage of business cycle and company’s growth cycle. In the case of Infosys, there are huge intangible assets which as per the information provided by the learned AR are valued at Rs.69,552 crores, which comprises of brand value itself at Rs.22,915 crores. Based on such fund valuation, the profit of Infosys is predominantly due to its premium branding. It is India’s No.2 software service exporter and Third in the world as an IT Service company. It is a giant company which is evident from its revenue fund from the sales which itself is more than Rs.13145 crores and expenditure on advertisement/sales promotion and expenditure on R & D is at Rs.69 crores and Rs.167 crores respectively, whereas in the case of the assessee the revenue is only 10.7 crores with no expenditure on advertisement, sales and promotion etc., which are borne by the associated enterprises. Even from the test of ‘FAR’ i.e. function performed, assets employed and risk assumed, comparability analysis miserably fails in this case. The comparison of function and profile as has been reproduced

16 Atos India P. Ltd. in para 6(iv) above, mostly shows that the profit level indicators in relation to return of cost, return of sales and return of assets are huge between Infosys and the assessee company and therefore, the Infosys cannot be treated as comparable entity for making comparability analysis with the assessee company. The comparability of Infosys Technology of the company as that of an assessee has been dealt with ITAT Delhi Bench in the case of ‘Agnity India Technologies Private Limited’ (ITA No.3856/Delhi/2010), wherein it was held that Infosys is a giant in the area of development of software and it assumes all risks, leading to higher profit and cannot be compared with the company which is a captive unit of its parent company assuming only limited currency risk. In view of the above finding, we hold that the Infosys cannot be taken as a comparable for determining the arms length price in the case of the assessee.

5.6. It is further noted by us that similar view has been taken in plethora of other judgments and therefore, keeping in view facts of this case and respectfully following these judgments, we find that Infosys Ltd. should not be considered as part of comparables. It is further noted by us that case laws relied upon by the Ld. CIT-DR are not applicable on the facts of the case before us. Thus, taking into account all the facts and circumstances of the case, we direct the TPO to exclude Infosys Ltd. form the list of comparables.

17 Atos India P. Ltd. not accept the prayer of the assessee on the ground that since the assessee had selected it as comparable; therefore, the same cannot be requested for exclusion by the assessee himself, in view of ‘Doctrine of Estoppel’ which prevents the assessee to raise objections before the DRP for the first time. It was further held by the DRP that there was no difference in the functionality between the assessee and the said comparable.

6.1. During the course of hearing before us it has been submitted by the Ld. Counsel that this company is not comparable with the assessee company. It was submitted that Bodhtree Consulting Ltd. is not a reliable comparable. It was submitted that its margin is comparatively much higher in comparison to the operating margin earned by other comparable companies. It was further submitted that from the history chart of the margin earned by the company in previous and subsequent years, it is quite evident that this company was operating under abnormal business conditions. Reliance was placed on the following judgments for the proposition that companies with the abnormal profit/loss should not be considered for finding out appropriate comparable companies for the purpose of determining Arm’s Length Price: (i) Adobe Systems India Pvt. Ltd. (ITA No.5043/Del/2010 (ii) Sonata Solution Ltd. (ITA No.3514/Mum/2010) (iii) NIT Ltd. (ITA No.1844/Del/2009 (iv) SAP Lab India Pvt. Ltd. v. ACIT (ITA No.398/Bang/2008

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6.2. It was further submitted by the Ld. Counsel that as per law, an assessee can show even before the appellate authority for the first time that a particular company is not comparable with the assessee company, even if, it was selected as a comparable company inadvertently or by mistake by the assessee in the transfer pricing report and for this purpose Ld. Counsel relied upon following judgments: (i) OSI Systems P. Ltd. v. DCIT (ITA No.542 & 683/hyd/2014 (ii) Mindteck India Ltd. vs. DCIT- (iii) Q Logic India P. Ltd. vs. DCIT- ITA No.227/Pun/2014 (iv) Lionbridge Technologies P. Ltd. vs. ITO (ITA- No.668/Mum/2014 6.3. Per contra, Ld. CIT-DR vehemently opposed the submissions of the assessee. It was submitted by him that this company was selected by the assessee himself and therefore, now at this stage the assessee cannot itself take a U-turn and make out a distinction between the assessee and said comparable. In response to the judgments quoted by the Ld. Counsel in his support, it was stated by Ld. CIT-DR that there cannot be an absolute and open ended law that assessee can include or exclude any comparable at any stage.

6.4. We have carefully gone through the submissions of the assessee as well as Ld. CIT-DR. It is noted that admittedly, this comparable was included by the assessee itself in it’s list of comparables. But the assessee objected to for inclusion of the same before the Dispute Resolution Penal (DRP). It was 19 Atos India P. Ltd. shown to the DRP that the said company was a product company and there was huge fluctuation in the margin trend of the said company showing that the said company was under unusual business circumstances. It is noted by us that claim of the assessee was rejected by the DRP without verifying the substance in the arguments of the assessee.

6.5. We have gone through the margin trend of the said company and find the same to be highly fluctuating. For the sake of ready reference, the margin trend of the said company is reproduced hereunder: Financial 2006-07 2007-08 2008-09 2009-10 2010-11 Year Sales 10.40 10.40 16.57 22.81 21.93 Total Cost 5.80 8.81 10.26 17.78 43.90 (TC) Operating 4.59 1.60 6.30 5.03 -21.97 Profit(OP) OP/TC 79.13% 18.14% 61.38% 28.28% -50.04% Thus, there is no doubt that margin of this company has been fluctuating from (-) 50.4% to (+) 79.13%. Further perusal of the above chart shows that turnover of the company remain in the range of 10 crore to 22 crores but margin of the said company has been fluctuating between (-) 50.4% to (+) 79.13%. Such a huge variation in the margins despite the fact that scale of operation did not change that much, shows that the business circumstances of the assessee company were not normal and said company indeed passed through unusual or 20 Atos India P. Ltd. abnormal business circumstances. Under these circumstances, we do not find this company as a safe and reliable to be used as a comparable company. It is further noted by us that similar view has taken in various judgments as have been relied by the Ld. Counsel whose names have been mentioned above.

6.6. With regard to the other issue of raising of the objection by the assessee for the first time before the DRP, it is noted that a law is in favour of the assessee on this issue as well. It is noted by us that in the case of OSI System Pvt. Ltd. (supra), similar situation arose with respect to this very comparable and Hon’ble Hyderabad Bench decided the issue as under: "26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008-09. It was affirmed by the learned

21 Atos India P. Ltd. counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company.”

6.7. It is thus noted from the above that Hon’ble Hyderabad Bench excluded this comparable on this ground also that it was a software product company and not a software development service company. Further, the said assessee himself had originally included this company in the list of comparables. Further, it is noted that this comparable was excluded also by Hon’ble Banglore Bench in the case of Mindteck India Ltd. (supra) on the ground of high fluctuation in the operating margins, with the following observations: “16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centers (supra) had an occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspect held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit if abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid of the Special Bench and in view of the admitted position that the assessee follows

22 Atos India P. Ltd. fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from F.Y. 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consisted change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would be safe to exclude Bodhtree consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly.”

6.8. Similar view has been taken by the Hon’ble Pune Bench in the case of Q Logic India P. Ltd. (supra) and by Hon’ble Mumbai Bench of the Tribunal in the case of Lionbridge Technologies P. Ltd. (supra). Thus, keeping in view facts and circumstances of this case and position of law as discussed above, we find this company as not comparable with the assessee company and the same is directed to be excluded.

7.1. Per contra Ld. CIT-DR submitted that requisite working in this regard is not available here, and thus without verifying the facts no proper decision can be taken.

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7.2. We have gone through the orders of the lower authorities and facts made available before us. It is noted from the order of the DRP that this contention was made by the assessee before the DRP also, which was dismissed on the ground that the assessee was not able to demonstrate the basis of computing 50.38%. The DRP made its own computation and observed that RPT were to the tune of 16% only. It is stated by Ld Counsel that calculations done by the DRP were not confronted to the assessee and clarifications the assessee were not obtained by the DRP. Ld. Counsel has vehemently contended before us that the DRP has misunderstood the facts and made wrong computation and these facts can be got verified through AO/TPO. In our considered view, it is a matter of fact to be ascertained from financial statements of the said company and other supporting documents that how much exact amount of transactions is on account of related party transactions. In our view, without verifying the facts properly final decision should not be taken by the assessee. Though, Ld. Counsel has drawn our attention on the judgment of Delhi Bench of Tribunal in the case of Fiserv India Pvt. Ltd. v. ITO 60 taxmann.com 48 wherein it was held that in the case of Sonata Software Ltd-related party transactions to sales ratio is more than 40% during the A.Y. 2009-10, but keeping in view request of Ld. CIT-DR and to meet ends of justice, we find it appropriate to send it back to the file of the AO/TPO to compute the same properly and exclude it from the list of comparables if ratio of RPT to Sales is found to be more than 25%. The assessee shall be free to raise any legal or factual

24 Atos India P. Ltd. issue with respect to this comparable. The AO/TPO shall give adequate opportunity of hearing to the assessee to submit requisite details and evidences and case laws in support of its claim, which shall be taken into consideration on objective basis before deciding this issue afresh. We direct accordingly.

8.1. We have gone through the orders of the lower authorities and submissions made before us by both the sides. During the course of hearing it has been shown to us that assessee had given proper working in the Transfer Pricing Report as well as subsequent proceedings before the lower authorities. Our attention was drawn on various pages of the paper book showing that requisite details were supplied to the lower authorities but no specific query or doubt was raised by any of the authorities. It is noted by us that Hon’ble Delhi Bench of the Tribunal in the case of Mercer Consulting India Ltd. vs. DCIT (ITA No.966/Del/2014 for A.Y. 2009-10 order dated

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06.09.2014 observed with regard to granting of working adjustment as under: “16.1. The next issue raised by the ld. AR is against non- granting of working capital adjustment claimed by the assessee for the first time before the TPO. The assessee requested the TPO to grant working capital adjustment. The assessee’s claim was jettisoned on the ground that the assessee failed to demonstrate that there was a difference in the levels of working capital employed by it vis-a-vis the comparables. The TPO further observed that : “The claim of working capital adjustment is not a matter of right.” He further went on to add that the issue of working capital can be relevant when there is a situation of inventory remaining tied up or receivables being held up and such situation will not be relevant to the service industry. That is how the assessee’s contention on this issue was repelled. The DRP also followed the suit by noticing that the working capital adjustment is difficult to apply due to the lack of accurate and reliable data. It also held that the issue of working capital would be relevant only when there is a situation of inventory remaining tied up or receivables being held up. The assessee contests the non-granting of the working capital adjustment.”

8.2. We find that this issue has been aptly addressed by the Hon’ble Bench in the case of Mercer Consulting India Ltd. (supra). This issue could not have been brushed aside by the lower authorities in the manner as has been done in this case. We find that ample details have already been filed by the assessee before lower authorities, therefore, in all fairness and justice we send this issue to the file of the AO/TPO who shall consider this decision and shall give an adequate opportunity of hearing to the assessee to file further details and evidences as may be required and considered appropriate by the assessee and shall decide this issue afresh on objective basis

26 Atos India P. Ltd. after considering the details and evidences as may be placed on record by the assessee.

10.1. During the course of hearing both the parties agreed that this issue is covered by the order of the Tribunal in assessee’s own case for A.Y. 2007-08 in vide order dated 13.01.2016.

10.2. We have gone through the order of the lower authorities as well as that of the Tribunal for the earlier year and find that identical issue has been decided by the Tribunal in A.Y. 2007- 08 with the following observations: “3.3.We have heard the rival submissions and perused the material before us. We find that while recommending upward adjustment for charging interest for the delayed receipts the TPO had considered the terms and conditions of the agreement entered in to by the assessee with its 27 Atos India P. Ltd.

AE.s., that the agreement stipulates that for delayed payment(beyond a period of one month)the AEs. had to pay interest @2%,that the AO had called for details in that regard about the period of delay and as per the AO the assessee did not provide the necessary information, that as per the direction of the AO the assessee had calculated the interest amount for the delayed receipts from its AEs. In our opinion, the transaction in question is an international transaction and not a result of a transaction as argued by the AR. The assessee had provided specific services to its AE.s. therefore the series of events cannot be termed a result of international transaction. Once it has been decided that issue before us is a Transfer Pricing issue then the value of the transaction has to be determined. It is a case where the TPO has relied upon on the agreement entered into by the assessee with its AE and has treated it as a Benchmark. We find that no independent source was searched or relied upon by the him. It is a fact that the agreements with the third parties did not contain any clause for charging interest for delayed payment. Thus, the matter has its own peculiarities. The assessee has entered in to agreement with the AE.s. and value of the transaction will have to be decided. The arguments of factoring of delayed payment in the value of service cannot be brushed aside especially when it is found that the OPTC margin earned by the assessee was 29.41 % and it was quite higher than the parties compared with i.e.app.15%.The TPO had not considered these vital issues and had applied the flat rate of 2%,as mentioned in the agreement. In our, opinion the alternate argument advanced by the assessee of adopting LIBOR rate is worth considering, if the facts of the case under appeal are deliberated upon. We are of the opinion that in the interest of justice interest rate should be fixed at LIBOR+200 points for the delayed payments received by the assessee from its AE.s. for the period as mentioned in the agreements.AO is directed to recalculate the interest amount accordingly. Ground no.4-5 are decided in favour of the assessee, in part.”

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10.3. Both parties agreed that facts are similar; under these circumstances we send this issue back to the file of the AO/TPO with the directions to follow the order of the Tribunal for A.Y. 2007-08 and to compute upward adjustment to be made accordingly on account of interest. This ground is disposed accordingly.

11.1. We have gone through the orders of the lower authorities as well as that of the Tribunal of A.Y. 2007-08. It is noted that the assessee had incurred liquidated damages with respect to HPCL (phase 3) project for Rs. 1,08,17,012/- to be incurred for various projects. It was found by the lower authorities that these transactions were neither accrued nor crystallized during the year under consideration. The assessee provided in its books expenses incurred on the projects of HPCL (phase 3), and others for an aggregate amount of Rs.5,49,31,772/- which was totally disallowed by the AO and confirmed by the DRP.

11.2. During the course of hearing before us, Ld. Counsel of the assessee has contested the issue by way of ground no.4.1

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& 4.2 pertaining to the expenses of HPCL project only. The expenses with regard to P & G and others projects were not contested and Ground No. 4.3 to 4.6 were not pressed by the Ld. Counsel and nothing was argued with respect to these grounds and therefore, grounds Nos. 4.3 to 4.6 are dismissed.

11.3. With regard to Ground No.4.1 and 4.2 wherein the assessee has contested this issue of expenses with regard to HPCL, it is noted that similar issue has arisen before the Tribunal in A.Y. 2007-08 wherein the Tribunal had partly deleted the addition and partly confirmed. We find it appropriate to send this issue back to the file of the AO to follow the order of Tribunal for A.Y. 2007-08 for deciding this issue afresh. The AO shall give adequate opportunity of hearing to the assessee to file requisite details and documentary evidences. Thus, grounds nos. 4.1 & 4.2 are allowed for statistical purposes in terms of our direction as given above and ground Nos. 4.3 to 4.6 are dismissed as not pressed.

12. Ground No.5: This ground deals with the issue of denial of deduction u/s 10A amounting to Rs.1,97,92,908/- in respect of Bangalore unit acquired on slump sale. In the assessment order, the AO denied the benefit of deduction relying upon the assessment order for the preceding years i.e. A.Y. 2008-09 on the ground that the said unit was not a newly established undertaking and that it was acquired by assessee company by virtue of a slump sale transaction entered into by the assessee

30 Atos India P. Ltd. company with FCI Technology Services Limited, and thus, the claim of deduction was not in accordance with sub-section (7A) of section 10A of the Act which provides for admissibility of deduction under this section to a unit transferred by virtue of any scheme of ‘amalgamation or merger’ but there is no mention there in with regard to any provision for allowing deduction with respect to unit which is acquired by way of ‘slump sale’. It was further mentioned by the AO that the assessee did not provide properly stamped copy of agreement of slump sale entered into by the assessee with the said company. Before the DRP also the assessee did not get any relief as the order of the AO was confirmed.

12.1. During the course of hearing before us, Ld. Counsel drew our attention on page no.486 of the paper book being copy of agreement which was required by the AO. It was submitted that this agreement along with other documents were submitted to the AO but without expressing any doubts, the benefit of deduction was denied. Our attention was also drawn on CBDT Circular dated 17.01.2013 wherein the board has clarified that benefit of deduction would be allowable, even under the case of slump sale subject to fulfillment of other prescribed conditions. Our attention was drawn on various pages of the paper book containing evidences of registration of the Bangalore unit as STPI unit and other evidences to show compliance of all the prescribed conditions. Reliance was placed by the Ld. Counsel on the judgment of Hon’ble Bombay High court in the case of CIT vs. Sonata Software Ltd. 343 ITR

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397 wherein Hon’ble High Court held that benefit of deduction would be available even if unit is acquired under slump sale and it was further held that benefit of deduction shall not be denied merely because of change in the ownership.

12.2. Per contra, Ld. CIT-DR mentioned that there was no denial to the legal position that merely because of change in ownership benefit of deduction should not be denied, but in this case facts and evidences were not clearly brought by the assessee on record to show compliance of various other conditions and therefore, this issue should be sent back to the file of the AO for examining allowbility of deduction as per law and facts.

12.3. We have gone through the orders of the lower authorities as well as submissions made by both the sides before us. In our view, the relationship between the undertaking and the deduction can be compared with the relationship between the mother and baby that is to say that ‘wherever mother goes- the baby follows’. In other words, the benefit of deduction is available to the undertaking if the undertaking is taken over by another assessee with all the assets and liabilities and its business remains the same. The benefit of deduction allowable to the undertaking for the remaining period would be allowable to the person who has acquired the undertaking, provided other prescribed conditions are also fulfilled. In this regard, it has been clarified by the board in its circular dated 17.01.2013 which has been relied upon by the Ld. Counsel

32 Atos India P. Ltd. before us. The relevant portion of the said circular is reproduced herein for the sake of ready reference: “(iv)WHETHER TAX BENEFIT UNDER SECTION 10A, 10AA, AND 10B WOULD CONTINUE TO REMAIN AVAILABLE IN CASE OF SLUMP SALE OF A UNIT/UNDERTAKING. The vital factor in determining the above issue would be facts such as how a slump sale is made and what is its nature. It will also be important to ensure that the slump sale would not result into any splitting or reconstruction of existing business. These are factual issues requiring verification of facts. It is, however, clarified that on the sole ground of change in ownership of an undertaking, and the tax holiday can be availed of for the unexpired period at the rates as applicable for the remaining years, subject to fulfillment of prescribed conditions.”

12.4. In addition to the above, this issue also came up before Hon’ble Bombay High Court in the case of CIT v. Sonata Software Ltd, (supra). The relevant portion containing useful observations of Hon’ble High Court is reproduced hereunder: “11. The Tribunal in the present case has come to the conclusion that where a running business is transferred lock, stock and barrel by one assessee to another assessee the principle of reconstruction, splitting up and transfer of plant and machinery cannot be applied. According to the Tribunal the benefit of Section 10A attaches to the undertaking and not to the assessee which owns the undertaking. The benefit of Section 10A was held to have attached itself to the STP unit of the software division which was owned by IOCL till 19 October 1994 and it was owned by the assessee subsequent to that date. What is material, according to the Tribunal, is not who owns the undertaking but whether the undertaking is entitled to the benefit available under Section 10A. As regards the issue of transfer by IOCL to the assessee, the Tribunal noted that Section 10A(9)was substituted by the Finance Act 2000 with effect from 1 April 2002. Section 10A(9) provided that where

33 Atos India P. Ltd. during any previous year the ownership or beneficial interest in an undertaking of the business is itxal-311- 2004 transferred by any means, the deduction under sub- section (1) shall not be allowed to the assessee for the Assessment Year relevant to such previous year and the subsequent years. The Tribunal noted that if a transfer between IOCL and the assessee were to be effected after 1 April 2001, that would result in the undertaking being disentitled to the benefit under Section 10A. This was a pointer to the fact that prior to the substitution a transfer of ownership or beneficial interest in the undertaking would not disentitle an assessee to the benefit of Section 10A. (As a matter of fact it may also be noted that the provisions of Section 10A(9) were omitted by the Finance Act 2003 with effect from 1 April 2004).

13. For the aforesaid reasons, the first question of law would have to be answered in the affirmative in favour of the assessee and against the Revenue.

12.5. Thus, the position of law is very clear the benefit of deduction shall not be denied to the assessee merely because

34 Atos India P. Ltd. the undertaking was acquired by the slump sale. The deduction is attached to the undertaking and therefore should be allowed to the assessee provided other prescribed conditions are fulfilled. But there has been some confusion with regard to appreciation of factual evidences. It has been shown to us that complete evidences including agreement and other various evidences were available. But AO has mentioned in the assessment order that the agreement filed with the AO was not eligible and it was not properly stamped. No proper discussion has been made by the DRP also in its order. Under these circumstances, we find it appropriate to send this issue back to the file of the AO to enable him to make proper verification of facts and evidences to analyze the other prescribed conditions. The deduction cannot be denied merely on the ground that the unit was acquired under slump sale. The AO shall give adequate opportunity of hearing to the assessee before deciding this issue afresh. Thus, with these directions this issue is sent back to the file of the AO with the directions given above.

13.1. It was submitted by Ld. Counsel that this issue was covered in the favour of the assessee with the order of the 35 Atos India P. Ltd.

Tribunal for A.Y. 2007-08. The Ld. DR did relied upon the order of the lower authorities.

13.2. We have gone through the orders of the lower authorities and order of the Tribunal for A.Y. 2007-08 in assessee’s own case dated 13.01.2006 and find that identical issue has been decided by the Tribunal in its order with the following observations: “5.The effective Ground of appeal

, filed by the AO, is about direction given by the FAA for reducing expenditure incurred in foreign currency for providing technical services from total turnover, while computing deduction u/s.10A of the Act. During the assessment proceedings, the AO asked the assessee as to why the expenses incurred in foreign exchange in providing technical services in respect of Akriti Soft Tech unit should not be excluded for export turnover. The assessee relied upon certain cases and submitted that if expenses were to be reduced from export turn over then the same should be reduced from total turnover as well. However, the AO did not agree with the assessee and recomputed the exemption u/s.10A of the Act. 5.1.In the appellate proceedings the assessee brought to the attention of the FAA, the judgment delivered by the Tribunal for the AY.2002-03 and other cases. Referring to the judgment of the Tribunal for the AY 04-05 in assessee’s own case, the FAA held that expenses incurred in foreign exchange towards technical services provided outside India amounting to Rs.6.65cr from export turnover alone was not as per law, that same had also to be reduced from total turnover. 5.2.During the course of hearing before us,the DR left the issue to the discretion of the bench. The AR stated that the Hon’ble Bombay High Court in assessee’s own case has decided the issue in íts favour for the AY.s. 2002-03-2005-

06. We have heard the rival submission and perused the material before us we find that the Tribunal as well as the Hon’ble Bombay High Court has decided the issue against the AO and in favour of the assessee (IT Appeal No.3733

36 Atos India P. Ltd. of 2010, 1446 of 2011 and 1409 of 2011 and 1410 of 2011 dt. 29.7.11, 8.2.13., 11.1.2013 and 11.1.2013).Respectfully, following the same effective ground of appeal, raised by the AO, is decided against him.”

13.3. Thus, respectfully following the decision of the Tribunal and judgment of Honble High Court in assessee’s own case for the earlier years, we decide this issue in favour of the assessee and direct the AO to follow the orders of the earlier years. The AO should reduce the amount of impugned expenses incurred on foreign currency from export turnover as well as total turnover for computing the amount of deduction allowable u/s 10A. Thus, this ground is allowed.

14. Ground No.7. This ground is not pressed and therefore, dismissed.

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Order pronounced in the open court on 30th June, 2016.