M/S UNISYS INDIA PRIVATE LIMITED,BANGALORE vs. DCIT, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE

BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER

IT(TP)A No.67/Bang/2015 Assessment year : 2009-10

M/s. Unisys India Private Ltd., Vs. The Deputy Commissioner of Purva Premier, 135/1, Income Tax, Residency Road, Circle 12(5), Bangalore. Bangalore – 560 025. PAN: AAACU 1502G APPELLANT RESPONDENT

IT(TP)A No.70/Bang/2015 Assessment year : 2009-10

The Deputy Commissioner of Vs. M/s. Unisys India Private Ltd., Income Tax, Purva Premier, 135/1, Circle 7(1)(1), Residency Road, Bangalore. Bangalore – 560 025. PAN: AAACU 1502G APPELLANT RESPONDENT

Revenue by : Shri G.R.Reddy, CIT(DR) Assessee by : Shri Kanchan Kaushal, CA

Date of hearing : 29.09.2015 Date of Pronouncement : 30.09.2015

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O R D E R Per N.V. Vasudevan, Judicial Member These are cross appeals by the Revenue and assessee against the order dated 14.11.2014 of the CIT(Appeals)-IV, Bangalore relating to assessment year 2009-10.

ITA 70/B/15 (Revenue’s appeal)

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assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance

attributable to the delivery of articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing

technical services outside India. The Assessee submitted that none of the

items of aforesaid items fell within the definition of Export Turnover. Alternatively, it was submitted that if the aforesaid amounts are excluded

from the Export Turnover, the same should also be excluded from the Total Turnover. The AO did not accept the claim of the Assessee and excluded

the aforesaid items from the Export turnover while computing deduction u/s.10A of the Act.

holding that the aforesaid expenses should be excluded both from the export turnover as well as from the total turnover. Aggrieved by the order

of the CIT(A) directing exclusion of the aforesaid items of expenditure both

from the export turnover and also from the total turnover, the revenue has raised ground No.2 before the Tribunal.

export turnover should also be excluded from the total turnover. In view of the aforesaid decision of the Hon’ble High Court of Karnataka, we are of

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the view that ground No.2 raised by the revenue in its appeal is without any merit and the same is accordingly dismissed.

CIT(A) in directing the AO not to set off loss of non-STPI units against the profits of the STPI units while computing deduction u/s.10A of the Act in

respect of the profits of the STPI Units. The assessee is a company engaged in the business of software development. It is not in dispute that

the assessee had STPI units which was entitled to claim deduction in respect of its profits u/s. 10A of the Act. The assessee also had non-STPI

units, the income of which was taxable. One of the non-STPI units of the

assessee had carry forward losses. The STPI unit had positive income on which deduction u/s.10A of the Act was claimed. The Assessing Officer

on the reasoning that the exemption u/s. 10A is in the nature of a deduction, was of the view that the carry forward losses of the non-STPI

unit should be set off against the profits of the STPI unit eligible for

deduction u/s. 10A. The CIT(A) reversed the order of the AO and held that the losses of non STPI units should not be set off against the eligible profits

of the STPI unit while allowing deduction u/s.10A of the Act. In doing so the CIT(A) followed the decision of the Hon’ble Karnataka High Court in the

case of CIT Vs. Yokogawa India Ltd., 341 ITR 385 (Karn.) wherein it was held that provisions of Sec.10A of the Act are in the nature of exemption

provisions and not in the nature of deductions under Chapter VIA of the Act

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and therefore the profits or losses of the Sec.10A unit will not enter the computation of total income of the Assessee at all.

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“9. We have heard the rival submission and perused the material on record. In the following decisions in assessee’s own case, it has been held that deduction under section 10A should be allowed in respect of profits of the business of the eligible undertaking without reducing the losses of other units/brought forward losses/unabsorbed depreciation allowance:- • Asstt. CIT v. Yokogawa India Ltd. [2007] 111 TTJ (Bang.) 548/ 13 SOT 470 (Bang.). • Yokogawa India Ltd. v. Asstt. CIT [IT Appeal No. 1157 (Bang.) of 2007, dated 29-8-2008]. 9.1 Deduction under section 10A is available in respect of each undertaking. The provisions of sections 28 to 44D are to be applied to each undertaking and not each business. This is because, section 10A is undertaking specific. That, the section is undertaking specific is discernible from the following :- • “Under sub-section 1 profits derived by the undertaking from the export of articles and things qualify for deduction; • Sub-section 2 prescribes certain conditions to be fulfilled by the undertaking for being eligible to the benefits of section IOA; • Under sub-section 4, it is profits of the business of the undertaking that qualify for deduction. Similarly, the definition of export turnover refers to the sale proceeds of the exports made by the undertaking; • Under sub-section 5, an audit report is to be furnished in support of claim of deduction. Such an audit report is to be submitted for each eligible undertaking.” 9.2 The decision relied on by the learned DR mainly in the case of Himatsingike Seide Ltd. (supra) is distinguishable since in that case, the assessee owned only one 100 per cent export oriented unit. The unabsorbed depreciation allowance was in relation to the same unit. However, in the present case, as stated earlier, the respondent operates through three units. Out of the three units, one unit was registered under STPI scheme and was eligible for exemption under section 10A. The other two units were non 10A units. It was in the non 10A units, that the losses

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were incurred. The facts of the present case and the facts before the Karnataka High Court in Himatsingike Seide Ltd.’s case (supra) are different. Similar is the factual situation insofar as the order of the Tribunal in Intellinet Technologies India (P.) Ltd. case (supra).”

Court in the case of Yokogawa (supra) had to deal with two substantial

question of law. The first substantial question of law was on the right of set off of loss of non-eligible unit against the profit of the eligible unit on which deduction u/s.10B was to be allowed. The Hon’ble Court in para 10 to 20 of its judgment dealt with the issue. The Hon’ble Court noticed that Sec.10- A(1) of the Act (which is in pari materia with Sec.10-B of the Act) read as follows:

“10B. Special provisions in respect of newly established undertaking in free trade zone etc.,-(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the

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Previous-year in which the under-taking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :” (emphasis supplied)

In view of the aforesaid decision of the Hon’ble Karnataka High Court, we

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are of the view that the claim as made by the Assessee for carry forward of loss of the non-eligible unit had to be allowed without set off of profits of the 10A/10B unit. We hold accordingly and dismiss the relevant ground of appeal of the revenue.

the CIT. On appeal by the department, the High Court in CIT Vs.

Himatasingike Seide Ltd. 286 ITR 255 (Kar) reversed the order of

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the Tribunal and held that the brought forward depreciation had to be adjusted against the profits of the EOU before computing the exemption allowable u/s 10B. In Civil Appeal No.1501 of 2008 dated 19.9.2013 against the aforesaid decision of the Hon’ble Karnataka High Court, the Hon’ble Supreme Court observed as follows while dismissing the appeal:-

“Having perused the records and in view of the facts and circumstances of the case, we are of opinion that the civil appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly.”

IT(TP)A No. 67/B/14 (Assessee’s appeal)

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of arm’s length price (ALP) in respect of international transaction of rendering software development services by the assessee to its AE. In

ground No.4 raised by the revenue in its appeal, it has urged that the CIT(A) erred in holding that the size and turnover of a company are

deciding factors for treating a company as a comparable company and on

that reasoning excluding Infosys Ltd., as a comparable company in the Software Development Segment of the Assessee.

on November 28, 1994. All shares of the Assessee are held by Unisys

Mauritius Limited, which is ultimately held by Unisys Corpn., USA. During FY 2005-06, Unisys India was essentially engaged in providing IT enabled

services(ITES) and software development (IT) to its overseas group companies. The Assessee is organized into two operating divisions one in

Bangalore and one in Mumbai. The Bangalore division primarily provides

Software and BPO Services while Mumbai division is primarily engaged in purchase and resale of Unisys Products and Provision of Support Services.

were as follows:-

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Description Software services Rs. ITES Rs. Operating Revenue 85,16,22,269 129,55,58,033 Operating Cost 77,29,72,192 114,37,06,621 Operating Profit 7,86,50,077 15,18,51,412 OP/TC 10.18% 13.28%

the determination of Arm’s Length Price (ALP) in respect of receipts by the

Assessee from it’s AE in respect of transaction of rendering software

development services (IT) and ITES.

Software Development Services (IT Segment)

was at Arm’s Length, the Assessee filed a Transfer Pricing analysis. The

Assessee adopted TNMM as the most appropriate method. The Profit

Level Indicator (PLI) chosen was Operating profit to operating cost. The

TPO arrived at a final set of 11 comparables and their operating margins as

follows:-

Sl. Name of the Comparable Sales Cost Margin No. (in Rs.) (in Rs.) 1 Kals Information Systems Ltd 2,14,04,686 1,87.93,813 l3.89% 2 Akshay Software 12,23,21,483 11,31,49,350 8.11% Technologies Ltd. 3 Bodhtree Consulting Ltd. 16,05,75,212 9,89,56,821 62.27% 4 R S Software (India) Ltd. 1,49,57,12,634 1,36,01,02,589 9.97%

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5 Tata Elxsi Ltd. (segmental) 3,78,43,03,000 3,14,63,15,000 20.28% 6 Sasken Communication 4,05,31,20,000 3,18,69,97,000 27.91% Technologies Ltd. 7 Persistent Systems Ltd. 5,19,69,10,000 3,67,52,70,000 41.40% 8 Zylog Systems Ltd. 7,34,93,51,475 6,81,69,98,160 7.81% 9 Mindtree Ltd. (seg) 7,93,22,79,326 5,74,06,73,058 5.52% 10 Larsen and Toubro Infotech 19,50,83,81,374 15,64,12,76,626 24.72% 11 Infosys Ltd. 2,02,64,00,00,000 1,39,17,00,00,000 45.61% Average mean 24.32%

13.70%, which was not within the (+) or (-) 5% range of the arithmetic

mean of the final set of comparable companies chosen by the TPO. The

TPO therefore proceeded to determine the ALP of the international

transaction by applying the arithmetic mean of the final list of comparable

companies chosen by him. After allowing working capital adjustment, the

TPO computed the ALP as follows:-

Arm’s Length Mean Margin on cost 24.32% Less: Working Capital Adjustment (Annex.C) to the 1.13% TPO’s order Adjusted margin 23.19% Operating Cost 77,29,72,192 Arms Length Price 123.19% of Operating Cost 95,22,24,443 Price Received 85,16,22,269 Shortfall being adjustment u/s 92CA 10,06,02,174

was a relevant criteria in choosing comparable companies and accordingly

excluded Infosys Ltd., from the list of comparable companies. The

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revenue, as we have already seen has raised ground No.4 before the Tribunal in its appeal against the aforesaid decision of the CIT(A). The

CIT(A) confirmed the order of the AO/TPO in so far as it relates to selection of comparable companies and other aspects of objections raised by the

Assessee against the order of the AO/TPO. Aggrieved by the order of the

CIT(A), the Assessee is in appeal before the Tribunal.

comparability analysis carried out by the TPO. As we have already seen, the assessee had chosen a list of 11 comparable companies, which are

given in the earlier part of this order. One of the comparable companies so

chosen by the TPO was Persistent Systems Ltd., which was also a comparable proposed by the Assessee in its TP study. The Assessee

however objected to this company being chosen as a comparable company before the TPO (at page 13 of the TPO’s order) that this company is

functionally different, but did not raise a specific objection before the DRP

An additional ground was filed before the Tribunal raising a specific ground that Persistent Systems Ltd., should be excluded from the list of

comparable companies on the ground that the said company is functionally different and in this regard has also placed reliance on decisions of

tribunals rendered on the issue of this company being functionally comparable with a software development service provider such as the

Assessee. The decision so rendered are at a later point of time to the TP

study carried out by the Assessee.

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Bench in the case of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd. 38 SOT 207 wherein it was held that a taxpayer is

not estopped from pointing out a mistake in the assessment though such

mistake is the result of evidence adduced by the taxpayer. The learned counsel further submitted that the aforesaid two companies were held to be

software product companies and therefore not comparable with software development service provider such as the Assessee in several decisions

rendered by the Tribunal. The decisions rendered by the Tribunal are later in point of time to the Transfer Pricing Study undertaken by the Assessee.

The Assessee is entitled to take note of the subsequent judicial

pronouncement and seek to exclude a company which is functionally not comparable with that of the Assessee. The learned DR opposed the prayer

for admission of additional ground. He pointed out that the Assessee in their Transfer Pricing study accepted these companies as comparable and

therefore cannot now seek to exclude the said companies. The learned DR

objected to admission of the additional ground of appeal.

We are of the view that the question as to whether the aforesaid two companies are comparable or not with the Assessee company in terms of

FAR analysis, has to be decided on the basis of data which is available in

the public domain i.e., published annual report of these two companies..

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Therefore facts necessary to apply the filter sought to be relied upon by the Assessee in the additional ground of appeal are already available on

record. Therefore there can be no valid objection to deciding the question of applying the aforesaid filter, if otherwise it is found to be a valid filter.

On the question of the Assessee having chosen the aforesaid two

companies as comparable and therefore cannot be permitted to chance its stand now, we are of the view that the decision of the Special Bench,

Chandigarh in the case of Quark Systems (supra) clearly supports the plea of the Assessee. The Special Bench in the aforesaid decision in the case

of Quark Systems (supra) has after considering the OECD Commentaries observed as follows:-

“35. In para 4.16 of latest report, the OECD provides the following guidelines : "In practice, neither countries nor taxpayers should misuse the burden of proof in the manner described above. Because of the difficulties with transfer pricing analysis, it would be appropriate for both taxpayers and tax administrations to take special care and to use restraint in relying on the burden of proof in the course of the examination of a transfer pricing case. More particularly, as a matter of good practice the burden of proof should not be misused by tax administrations or taxpayers as a justification for making groundless or unverifiable assertions about transfer pricing. A tax administration should be prepared to make good faith showing that its determination of transfer pricing is consistent with the arm’s length principle even where the burden of proof is on the taxpayer, and the taxpayers similarly should be prepared to make good faith showing that their transfer pricing is consistent with the arm’s length principle regardless of where the burden of proof lies."

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as the Assessee in several decisions rendered by the Tribunal, the main

decision being in the case of IT(TP) A.No.108(Bang) 2014 order dated 12.12.2014 in the case of Yodlee Infotech Pvt.Ltd. Vs. ITO. The decision

rendered by the Tribunal are later in point of time to the Transfer Pricing Study undertaken by the Assessee. The Assessee is entitled to take note

of the subsequent judicial pronouncement and seek to exclude a company

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which is functionally not comparable with that of the Assessee. Even in respect of the other companies high turnover has been held to be a criteria

to reject a company as a comparable in the aforesaid decision of ITAT Bangalore in the case of Trilogy E-Business Software India Pvt.Ltd.

(supra). As held by the Special Bench in the case of Quark Systems

(supra), there cannot be any tax liability on the basis of admission and the determination of tax liability has to be in accordance with law. In the light

of the aforesaid judicial pronouncement, we are of the view that the additional ground of appeal deserves to be admitted for adjudication.

Accordingly, the additional ground is admitted for adjudication.

comparable chosen by the TPO in the final list of comparables chosen by him. The assessee has also submitted that some of the comparable

chosen by the Assessee ought not to have been rejected by the TPO. We

will deal with each of such comparable companies in the following paras.

COMPANIES INCLUDED IN THE FINAL LIST OF COMPARABLES WHICH THE ASSESSEE WANTS TO BE EXCLUDED:-

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

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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, ITA No.7633/Mum/2012, 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 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

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is a software product company and not a software development services

company.

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, ITA

No.1303/Bang/2012, 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 not own any intangible and hence does not have an additional advantage in the market. It is submitted that this

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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 ITA No.3856 (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 break up 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 form 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 has 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 E-Business 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 software products. It is also seen that the break up 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.”

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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.

Trilogy e-business Software India Pvt. Ltd. (supra). The following

were the relevant observations of the Tribunal:-

“(d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal’s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows:

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“16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds.” Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable.”

Following the aforesaid decision of the Tribunal, we hold that KALS Information Systems Ltd. should not be regarded as a comparable.

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29.3.2013. Following were the relevant observations of the Tribunal:-

II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the "software products and services" segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under "Revenue recognition" in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software

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service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not available. He finally submitted that this was a good reason to exclude this company also from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of Rs.230 crores in the total segment revenue of Rs.263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions :

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"It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07." 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below:”

“5.12 ………… This Tribunal in the case of 3DPLM Software Solutions Ltd. Vs DCIT [IT(TP)A 1303/Bang/2012 dated 28-11-2013] had also held that Persistent Software Systems Pvt. Ltd., was in product designing services and into software product development. In the same decision it was also held that M/s. Infosys Technologies Ltd, had considerable intangibles like

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IPR, and was also into software product development. It was also held that M/s. Tata Elxsi Ltd., was developing niche products and into product designing services. Hence, these companies would in any case have to be excluded from the comparables being functionally different.”

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“13. As regards ground No.3(f), learned counsel for the assessee submitted that the AO/TPO while considering the working capital adjustment, has arrived at the working capital adjustment in the case of the assessee at 5.97%, but while giving effect to the working capital adjustment, has restricted the said adjustment to 1.71% in case of uncontrolled comparables selected by the TPO. The learned counsel for the assessee submitted that the TPO has not given any basis for such restriction of the working capital adjustment. He submitted that the CIT(A) also has not applied his mind to this issue but has summarily confirmed the order of the AO and therefore it has to be set aside. 14. On going through the TPO’s order as well as annexure D referred to in the transfer pricing order on working capital adjustment, we find that the AO has not given any basis for restricting the adjustment to 1.71%. In all the cases relating to transfer pricing adjustment, this Tribunal has been

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directing to give working capital adjustment on actual basis and the TPO having arrived at 5.97% ought to have adopted the same instead of restricting it to 1.71%. In view of the same, we deem it proper to remand this issue to the file of the AO/TPO for working out the ALP after giving adjustment of working capital as per the calculation of the AO in annexure D annexed to the transfer pricing order. This ground of appeal is accordingly allowed.”

ITES SEGMENT

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ITES FINAL COMPARABLES – A. Y. 2009-10 Sl.No. Name of the company Margin 1 Infosys B P O Ltd 24.41% 2 Aditya Birla Minacs Worldwide Ltd 23.86% Microland Ltd (both segments) 1.53% 4 Allsec Technologies Ltd -16.63% 5 Accentia Technologies Ltd 46.40% 6 Informed Technologies India Ltd 22.61% 7 Cosmic Global Ltd 40.61% 8 Eclerx Services Ltd 57.46% AVERAGE PLI 25.03%

“4.8.3Computation of Arms Length Price :

The arithmetic mean of the Profit Level Indicators is taken as the arms length margin. Please see Annexure B1 for details of computation of PLI of the comparables. Based on this, the arms length price of the ITES services rendered by the taxpayer to its AE (s) is computed as under :

Arm's Length Mean Margin on cost 25.04% Less : Working capital adjustment 0.91% (Annex.C) Adjusted margin 24.12% Operating Cost 3114,37,06,62 1 Arms Length Price (ALP) @ 124.12% of 141,95,68,658 Operating Cost Price received 129,55,58,033 Shortfall being adjustment u/s.92CA 12,40,10,625

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Infosys BPO Ltd :

"This company is listed at sl. 13 in the list of comparable companies chosen by the TPO. As far as this company is concerned, it is the submission of the learned counsel for the assessee that this company has a brand value and therefore there would be significant influence in the pricing policy which will impact the margins. Schedule 13 to the profit and loss account of this company for the F.Y. 2007-08 shows that this company incurred huge selling and marketing expenses. Page 133 of the annual report of this company for the F.Y. 2007-08 shows that this company realizing its brand value has chosen to value the same on the basis of its earnings and that of Infosys. The brand value of the Assessee and Infosys has been valued at Rs.31,863 crores. Infosys BPO, being a subsidiary of Infosys, has an

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element of brand value associated with it. This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. Infosys BPO is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factors will take this company out of the list of comparables. We therefore accept the contention of the assessee that this company cannot be regarded as a comparable."

Accentia Technologies Ltd. :

"(1) Accentia Technologies Ltd. (Seg.)

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company for the A.Y. 2007-08 wherein the fact that this company had acquired Thunga Software Pvt. Ltd., GSR Physicians Billing Services Inc., GSR Systems Inc. and Denmed Inc. is mentioned. Our attention was also drawn to the decision of the Hyderabad ITAT Bench in the case of Capital IQ Information Systems India Pvt. Ltd. v. DCIT [ 2013] 32 Taxman.com 21 (Hyd. Trib). In the aforesaid decision, the Hyderabad Bench of the Tribunal had to deal with a case of determination of ALP in the case of an assessee who was providing ITES business support services for the A.Y. 2007-08. The TPO had considered Accentia Technologies Ltd. as a comparable. The DRP however held that the said company cannot be compared as a comparable owing to extra ordinary events that took place during the previous year. The Tribunal upheld the order of the DRP observing as follows:-

“I. Accentia Technologies Ltd. 10. It is the submission of the assessee that this company cannot be treated as a comparable because of uncomparable financial results arising out of amalgamation in the company. In this regard, the assessee has relied upon the order of the DRP for the assessment year 2008-09 in assessee's own case. It is seen that the DRP while considering similar objection placed by the assessee in the case of another company, viz. Mold Tek Technologies Ltd., in the proceedings relating to the assessment year 2008-09, has observed in the following manner- "17.5. In addition to the above, the Director's Report of accounts of Moldtek Technologies for FY 2007-08 were revised. On a perusal of the annual report it is noticed that Teckmen Tools Pvt. Ltd. and the Plastic Division of the company were demerged and the resulting company was named as Moldtek Plastics Ltd. The KPO business remained with the company. A perusal of the Annual report revealed that to give effect to the merger and demerger, the financial statements were revised and restated after six months form the end of the financial year 31.3. 2008. The assessee filed Form No.21 under the Companies Act with the Registrar of Companies on 26th August, 2008. Thus the effective date of the scheme of

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merger and demerger was 26th August, 2008. The Annual Report supported the argument of the assessee that there were merger and demerger in the financial year and it was an exceptional year of performance as financial statements were revised by this company much after the closure of the previous year. The Panel agrees with the contention of the assessee that it is an exceptional year having significant impact on the profitability arising out of merger and demerger." 11. On careful consideration of the matter, we also agree with the aforesaid view of the DRP that extra-ordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place. It is the contention of the assessee that in case of the aforesaid company, there is amalgamation in December, 2006, which has impacted the financial result. This fact has to be verified by the TPO. If it is found upon such verification that the amalgamation in fact ahs taken place, then the aforesaid comparable has to be excluded.”

amalgamation during the previous year relevant to AY 2008-09 and therefore the aforesaid decision of the Tribunal cannot be applied blindly.

In this regard, the learned counsel for the assessee brought to our notice

that even during the previous year relevant to AY 2009-10 there was an amalgamation of Acentia Technologies Ltd with another company by name

Asscent Infoserve Private Limited. The following Notes to accounts appear in the Annual Report :-

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"(B) NOTES TO ACCOUNTS 1. Amalgamation of Asscent Infoserve Private Limited with the Company. Pursuant to the scheme of amalgamation of the erstwhile Asscent Infoserve Private Limited (subsidiary of the company) with the company as approved by the shareholder in the court convened meeting held on the 25th day of April, 2009 and subsequently sanctioned by the honorable high court of Judicature at Mumbai vide order dt 21st August 2009 and Honorable high court of Karnataka at Bangalore vide order dt 6th February 2010, the assets and liabilities of the erstwhile company was transferred and vested in the company with effect from 1st Apr, 2008 and the scheme has been given effect to in the accounts of the year."

Cosmic Global Ltd.:

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Eclerx Services Ltd., :

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Form 26AS, than the CBDT Instruction No.5/2013 dated 8.7.2013 whereby it had directed all the Assessing Officers to verify the TDS certificate and not go only on the basis of entry in Form 26AS, will apply. We are of the view that it would be just and appropriate to direct the AO to verify the claim of assessee for credit of TDS and foreign tax paid in light of the CBDT Instruction referred to above. The AO will afford opportunity of being heard to the assessee in this regard.

Pronounced in the open court on this 30th day of September, 2015.

Sd/- Sd/-

( ABRAHAM P. GEORGE ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member

Bangalore, Dated, the 30th September, 2015.

/D S/

Copy to: 1. Revenue 2. Assessee 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file

By order

Assistant Registrar, ITAT, Bangalore.