M/S LABVANTAGE SOLUTIONS PVT. LTD.,KOLKATA vs. DCIT, CIR-2(1), KOLKATA, KOLKATA

1 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH: KOLKATA [Before Shri M. Balaganesh, AM & Shri S.S. Viswanethra Ravi, JM]

I.T.A No. 1051/Kol/2015 Assessment Year: 2009-10 M/s. Labvantage Solution Pvt. Ltd. Vs. Deputy Commissioner of Income-tax, (PAN: AAACL5340H) Circle-2(1), Kolkata. (Appellant) (Respondent) & I.T.A No. 599/Kol/2015 Assessment Year: 2010-11

Deputy Commissioner of Income-tax, Vs. M/s. Labvantage Solution Pvt. Ltd. Circle-2(1), Kolkata. (PAN: AAACL5340H) (Appellant) (Respondent) & I.T.A No. 617/Kol/2015 Assessment Year: 2010-11 M/s. Labvantage Solution Pvt. Ltd. Vs. Deputy Commissioner of Income-tax, (PAN: AAACL5340H) Circle-2(1), Kolkata. (Appellant) (Respondent)

Date of hearing: 22.08.2016 Date of pronouncement: 19.10.2016

For the Assessee: Shri Mawheet Dalal, Advocate & Shri Gunjan Khanna, AR For the Revenue: Shri G. Mallikarjuna, CIT, DR

ORDER Per Shri M. Balaganesh, AM:

These appeals of the assessee arise out of the proceedings for the Asst Years 2009-10 and 2010-11 of the Learned Dispute Resolution Panel (DRP) dated 24.6.2015 and 31.12.2014 respectively in which directions are given to the Learned AO u/s 144C(5) read with section 144C(8) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’). As the issues involved in both the appeals are identical in nature, they are taken up together and disposed off by this common order for the sake of convenience.

2 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11

ITA No. 1051/Kol/2015 – Asst Year 2009-10

2.1. The brief facts of this issue is that the assessee company filed its return of income on 29.9.2009 and received intimation u/s 143(1) of the Act on 13.10.2010. No notice u/s 143(2) of the Act was issued on the assessee selecting the case for scrutiny. However, a reference was made by the ld AO to ld TPO who passed an order proposing an adjustment of Rs. 2,43,53,752/- to Arm’s Length Price (ALP) determined by the assessee. Since no assessment proceeding was pending at that time in order to give effect to the order of the ld TPO, the ld AO reopened the assessment by issuing notice u/s 148 of the Act. In the reassessment proceedings, no fresh reference was made to ld TPO u/s 92CA(1) of the Act for determination of ALP in respect of international transactions of the assessee. The reassessment was completed by making an addition towards ALP to the tune of Rs. 2,43,53,752/- as made by the ld TPO and disallowance u/s 40(a)(ia) of the Act to the tune of Rs. 27,575/-. The assessee filed objections before the ld Dispute Resolution Panel (DRP) objecting to the validity of reassessment and on merits. The ld DRP disposed off the objections vide its proceedings u/s 144C(5) of the Act dated 24.6.2015 stating that the assessee is not an eligible assessee as defined u/s 144C(15)(b) of the Act and accordingly the jurisdiction of the ld DRP could not be invoked. Aggrieved, the assessee is in appeal before us on various grounds. The principal ground revolves around objecting to the validity of the reassessment framed by the ld AO by making an adjustment to ALP based on order of the ld TPO u/s 92CA(3) of the Act which was admittedly made vide illegal reference to ld TPO before the initiation of reassessment proceedings when the assessment proceedings were not pending by way of selecting the case for scrutiny. Apart from this, the assessee also preferred appeal on merits of the addition made towards adjustment to ALP, among others.

3 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11

2.2. The ld AR filed a chart reflecting the list of dates and gists explaining the chronology of events from the date of filing the return till the date of passing of final assessment order by the ld AO pursuant to the order of the ld DRP. The various arguments of ld AR are summarized below:- (i) The return filed by the assessee was not selected for scrutiny by issuance of notice u/s 143(2) of the Act. Hence it could be concluded that no assessment proceeding was pending at that time. (ii) Without the pendency of valid assessment proceeding, the ld AO made reference to ld TPO u/s 92CA(1) of the Act for determination of ALP . The assessee co-operated with the proceedings of ld TPO. (iii) The ld TPO passed an order u/s 92CA(3) of the Act on 29.1.2013 suggesting an adjustment to ALP to the tune of Rs. 2,43,53,752/- . (iv) Since no assessment proceedings were pending, the ld AO did not frame any assessment for giving effect to the order of the ld TPO. (v) Later the ld AO issued notice u/s 148 of the Act by reopening the assessment for giving effect to the order of the ld TPO. (vi) The assessee complied with the reassessment proceedings . (vii) No fresh reference was made to ld TPO u/s 92CA(1) of the Act in the reassessment proceedings for determination of ALP. (viii) The ld AO just adopted the adjustment to ALP suggested by the ld TPO in his order dated 29.1.2013 (which was done vide illegal reference) and made addition to that extent in the reassessment proceedings completed on 15.9.2014. (ix) The assessee preferred objections before the ld DRP against the said draft order of the ld AO contending the illegal reference made to ld TPO when no valid proceedings were pending and the ld AO adopting the said adjustment to ALP suggested in the old order us/ 92CA(3) of the Act and also objected that no fresh reference was made to ld TPO in the reassessment proceedings. Accordingly the validity of reassessment and addition made thereon to this extent was objected to by the assessee apart from the contesting the issue on merits.

4 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 (x) The ld DRP passed an order on 24.6.2015 stating that the assessee is not an eligible assessee as defined in section 144C(15)(b) of the Act and accordingly the ld DRP cannot assume jurisdiction and directed the ld AO to proceed as per law. (xi) The ld AR argued that the entire addition of Rs. 2,43,53,752/- made in the reassessment based on ld TPO’s order , which was passed vide illegal reference, deserves to be deleted , for which he placed reliance on the decision of the co-ordinate bench of this tribunal in the case of Bucyrus India Pvt Ltd vs DCIT in ITA No. 616/Kol/2015 dated 15.10.2015. (xii) The ld AR also argued that in the reassessment proceedings, no fresh notice u/s 143(2) of the Act was issued by the ld AO. However, this ground was withdrawn by the ld AR during the course of hearing before this tribunal, for which necessary endorsement was also made by him in the papers submitted before us. (xiii) The ld AR argued that since no reference was made to ld TPO in the reassessment proceedings for determination of ALP, the ld AO ought not to have passed any draft assessment order on 15.9.2014 and instead should have passed the final reassessment order as is done regularly. Hence the reassessment order passed by him is void abinitio and bad in law. (xiv) The final order passed by the ld AO dated 8.7.2015 is bad in law in as much as the ld AO failed to comprehend the facts and circumstances of the case and apply the ld DRP’s order in the proper legal perspective. (xv) The ld AR argued by placing reliance on the provisions of section 153(2) of the Act that reference u/s 92CA of the Act could be made only during the course of assessment or reassessment proceedings. He placed reliance on Instruction No. 3 dated 20.5.2003 in this regard.

Based on the aforesaid legal arguments, he prayed for deletion of the addition in the sum of Rs. 2,43,53,752/- made in the reassessment.

2.3. In response to this, the ld DR argued that there is no requirement of pendency of scrutiny of assessment proceedings for making reference to ld TPO . It is purely in the discretion of the ld AO to refer the case to ld TPO for determination of ALP. The

5 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 reference was made to ld TPO after obtaining prior approval from the ld CIT. It is an admitted fact that assessment could not be framed by the assessee by making an addition suggested in the sum of Rs. 2,43,53,752/- by the ld TPO in his order dated 29.1.2013, as no scrutiny assessment proceedings were pending on that date. It is an admitted fact that no notice u/s 143(2) of the Act was issued and served on the assessee in the original proceedings. However, that does not debar the ld AO to make reference to ld TPO for determination of ALP. He argued that admittedly, the order passed u/s 92CA(3) of the Act vide reference made to him, suggested an adjustment to ALP in the sum of Rs. 2,43,53,752/- which would constitute information enabling the ld AO to have reason to believe that income had escaped assessment. Accordingly, the ld AO reopened the assessment by issuing notice u/s 148 of the Act. Since the order of ld TPO is already on record, the ld AO thought it fit not to refer the case again to ld TPO for doing the same work in order to avoid multiplicity of proceedings and to reach finality in the same at the earliest. This earnest intention of the ld AO cannot be doubted with. With regard to the reliance placed by the ld AR on the CBDT Instruction No. 3 dated 20.5.2003, he argued that the said instruction exclusively relates only to ld TPO’s order and not related to selection of case for scrutiny. He stated that the said circular was replaced subsequently in the year 2016. The assessee had not objected to the illegal reference to ld TPO as it is evident that the assessee had duly cooperated with the ld TPO proceedings. The decision rendered by this tribunal in the case of Bucyrus India Pvt Ltd supra in turn relied on decision of Hon’ble Karnataka High Court in the case of CIT vs SAP Labs Pvt Ltd in ITA No. 842 of 2008 and ITA No. 339 of 2010 dated 25.8.2014. In the case before the Hon’ble Karnataka High Court, there was no return pending and hence no reference to ld TPO could be made. It did not deal with pendency of scrutiny proceedings.

2.4. We have heard the rival submissions. The facts stated hereinabove remain undisputed are not reiterated herein for the sake of brevity. We find that the entire issue is squarely covered by the decision of this tribunal in the case of Bucyrus India Pvt Ltd vs ACIT in ITA No. 616/Kol/2015 dated 15.10.2015 wherein it was held as below:- “4. We have heard the rival submissions and perused the materials available on record. We find that the whole scheme of assessment proceedings have to be looked

6 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 into for deciding the case before us. Normally when a return is filed by the assessee, it would either get completed u/s 143(1) of the Act by receiving intimation from the Assessing Officer. If the case is selected for scrutiny by issuance of notice u/s 143(2) of the Act within the prescribed time, then the assessment would get completed u/s 143(3) or 144 of the Act. Hence it is well settled that when no scrutiny notice u/s 143(2) is served on the assessee, the assessment would deemed to be completed based on intimation u/s 143(1) of the Act, if served on the assessee, or the acknowledgement of return itself would be deemed to be the assessment order. Hence practically the assessment gets completed at this stage itself in the belief of the assessee unless otherwise reopened by issuing separate notice u/s 148 of the Act. The reference to Learned TPO for determination of ALP of international transactions have been spelt out in the statute u/s 92CA of the Act. For the sake of convenience, the relevant provisions of section 92CA(1) is reproduced hereunder:- 92CA – Reference to Transfer Pricing Officer (1) Where any person, being the assessee, has entered into an international transaction or specified domestic transaction in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Principal Commissioner or Commissioner, refer the computation of the arm’s length price in relation to the said international transaction of specified domestic transaction under section 92C to the Transfer Pricing Officer.

4.1. In this regard, the relevant Instruction No. 3 of 2003 dated 20.5.2003 issued by the Central Board of Direct Taxes requires consideration. For the sake of convenience, the said Instruction No. 3 of 2003 dated 20.5.2003 para 2 is reproduced hereunder;-

“ In order to make a reference to the TPO, the Assessing Officer has to satisfy himself that the taxpayer has entered into an international transaction with an associated enterprise. One of the sources from which the factual information regarding international transaction can be gathered in Form No. 3CEB filed with the return which is the nature of an accountant’s report containing basic details of an international transaction entered into by the taxpayer during the year and the associated enterprise with which such transaction is entered into, the nature of documents maintained and the method followed. Thus, the primary details regarding such international transactions would normally be available in the accountant’s report. The Assessing Officer can arrive at prima facie belief on the basis of these details whether a reference is considered necessary. No detailed enquiries are needed at this stage and the Assessing Officer should not embark upon scrutinizing the correctness or otherwise of the price of the international transaction at this stage. In the initial years of implementation of these provisions and pending development of adequate data base, it would be appropriate if a small number of cases are selected for scrutiny of transfer price and these are dealt with effectively. The Central Board of Direct Taxes, therefore, have decided that wherever the aggregate value of international transactions exceeds Rs 5 crores, the case should be picked up for scrutiny and reference under section 92CA be made to the TPO. If there are more than one international transaction with an associated enterprise or there are transactions with more than one associated enterprises the aggregate value of which exceeds Rs 5 crores, the transactions should be referred to the TPO. Before making reference to the TPO, the Assessing Officer has to seek approval of the Commissioner / Director as contemplated under the Act. Under the provisions of section 92CA reference is in relation to the international transaction. Hence all transactions have to be explicitly mentioned in the letter of reference. Since the case will be selected for scrutiny before making reference to the TPO, the Assessing Officer may proceed to examine other aspects of the case during

7 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 pendency of assessment proceedings but await the report of the TPO on the value of international transaction before making final assessment.

The threshold limit of Rs 5 crores will be reviewed depending upon the workload of the TPOs. The work relating to selection of cases for scrutiny and reference to TPO on the above basis in respect of pending returns filed for the assessment year 2002-03 should be completed by June 30, 2003”.

From the aforesaid Instruction No. 3 of 2003 issued by CBDT which is binding on the officers of the income tax department, makes it crystal clear that a reference u/s 92CA of the Act could be made to the TPO only when the case is selected for scrutiny. In the instant case, the case is not selected for scrutiny which fact is also conceded by the Learned DR, and hence the scrutiny assessment proceedings per se had not commenced. Hence we hold that no case was pending before the Learned AO while making reference to Learned TPO and accordingly, the order passed by the Learned TPO on 28.1.2014 making an adjustment of Rs. 7,51,20,484/- to ALP is declared void ab initio and illegal and hence cannot be relied upon by the lower authorities.

4.2. We place reliance on the CBDT Circular No. 549 dated 31.10.1989 which states that if an assessee, after furnishing the return of income does not receive a notice u/s 143(2) from the department within the prescribed time, he can take it that the return filed by him has become final and no scrutiny proceedings are to be started in respect of that return. In the instant case, at the time of issue of notice u/s 92CA of the Act (i.e reference to TPO), no return was pending on the basis of which notice u/s 92CA could have been issued. We place reliance on the decision of the coordinate bench decision of Pune Tribunal in the case of Maximize Learning Private Limited vs ACIT in ITA No. 2234/PN/2012 dated 2.2.2015 for Asst Year 2007-08, wherein it was held an assessing officer could make reference to the TPO u/s 92CA of the Act only after selecting the case for scrutiny assessment.

4.3. We also place reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT vs M/s Sap Labs pvt Ltd in ITA No. 842 of 2008 and ITA No. 339 of 2010 vide order dated 25.8.2014. “ In this case, the assessee filed its return of income for Asst Year 2002-03 on 31.10.2002. The same was processed u/s 143(1) of the Act. The assessee received notices daed 1.4.2004 u/s 148 of the Act and 12.4.2004 u/s 92CA of the Act from the TPO seeking details about the international transactions entered into by the assessee with the group companies on a reference made by the Assessing Authority. At the time of issue of notice u/s 92CA of the Act, no valid return was pending on the basis of which notice u/s 92CA of the Act could have been issued. Since no notice u/s 143(2) of the Act was issued pursuant to filing of the original return, the assessment is deemed to have become final. In reply to the notice issued u/s 148 of the Act, the assessee filed a letter dated 21.4.2004 requesting the Assessing Authority to treat the return filed on 31.10.2002 as return in compliance with the notice u/s 148 of the Act. Infact the TPO on 20.1.2005 passed an order u/s 92CA of the Act accepting the pricing of the Assessing Authority. However, the CIT invoking his power u/s 263 of the Act initiated proceedings and set aside the order of the Assessing Authority on the ground that it is erroneous and prejudicial to the interest of the revenue. It is against that order, the assessee preferred an appeal to the Tribunal. The Tribunal has held that when two views are possible and when the TRP has accepted valuation by the Assessing Authority determining the arm’s length price, the commissioner had no jurisdiction to interfere with the said order u/s 263 of the Act and moreover on the day the reference was made by the Assessing Authority, there was no return pending for

8 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 consideration and therefore, the Tribunal has set aside the order of the Commissioner. It is against the said order, the revenue is before this Court. From the aforesaid facts, it is clear that on the day the reference was made by the Assessing Authority to the Transfer Pricing Authority, there was no return pending for consideration by him and therefore, the very reference was bad. Even otherwise, the said TPO did not find fault with the adjudication of determining arm’s length price by the Assessing Authority. In those circumstances, the Commissioner committed an error in exercising his power u/s 263 of the Act and the Tribunal was justified in interfering with the said order. Therefore, we do not see any merit in appeal no. 842 /2008. Accordingly, it is dismissed. Consequently, the impugned order which is the subject matter of ITA 339/2010 which is a consequential order is also dismissed.”

In view of the aforesaid facts and circumstances and respectfully following the aforesaid decision, we hold that the reassessment proceedings initiated based on the ld TPO’s order dated 29.1.2013 suggesting an adjustment of Rs. 2,43,53,752/- to ALP was based

9 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 on illegal reference by the ld AO and is accordingly void ab initio and bad in law. Hence the entire reassessment proceedings initiated based on such illegal reference and illegal order of ld TPO cannot be construed as information which would have live link to the formation of belief to have reason to believe on the part of the ld AO that income had escaped assessment within the meaning of section 147 of the Act. Hence we hold that no addition in the sum of Rs. 2,43,53,752/- towards adjustment to ALP could be made in the reassessment. Once this addition goes, then the very root of the reassessment proceedings also vanishes and no other addition could be made thereon. Accordingly, the entire reassessment proceedings deserve to be quashed in the facts and circumstances of the case.

2.5 In view of our above conclusion, we allow the ground no. 1 raised by the assessee by declaring that the reassessment order of the ld AO is bad in law and void ab initio. In view of this decision, the adjudication of other grounds becomes infructuous and hence no decision is given on the merits of the additions and on other grounds raised by the assessee.

2.6. In the result, the appeal of the assessee in ITA NO. 1051/Kol/2015 for the Asst Year 2009-10 is allowed.

ITA No. 599/Kol/2015 – Asst Year 2010-11 – Revenue Appeal

3.1. The ld AR stated that the tax effect in the appeal of the revenue is less than Rs 10 lacs and accordingly stated that the appeal of the revenue is not maintainable. In this regard, he stated that the ld DRP gave relief to the assessee with regard to the working capital adjustments to be carried out while determining the ALP and accordingly the difference in disputed income thereon is only Rs. 11,78,977/-, for which the tax effect

10 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 would be less than Rs 10 lacs. He provided the workings for Rs. 11,78,977/- being the difference in working capital adjustments. Placing reliance on CBDT Circular No. 21/2015 dated 10.12.2015, he prayed that the appeal of the revenue is not maintainable. In response to this, the ld DR fairly conceded to the fact that the tax effect of disputed addition was less than Rs 10 lacs and is squarely covered by the latest CBDT circular.

3.2. We have heard the rival submissions. We find that the following workings were provided by the ld AR before us to prove that the tax effect on the disputed addition is less than Rs. 10 lacs :-

Computation of TP adjustment based on original TPO order dated 30.1.2014

Operating Cost Rs. 10,81,62,982 ALP @ 40.34% Rs. 15,17,95,929 Less: Sales with Non –AE Rs. 2,61,49,487 Sales to AE (excluding reimbursement of expenses) Rs. 11,54,80,823 TP Adjustment Rs. 1,01,65,619

Computation of TP adjustment based on revised TPO order dated 23.2.2015

Operating Cost Rs. 10,81,62,982 ALP @ 39.25% Rs. 15,06,16,952 Less: Sales with Non –AE Rs. 2,61,49,487 Sales to AE (excluding reimbursement of expenses) Rs. 11,54,80,823 TP Adjustment Rs. 89,86,642

Difference in Adjustment due to Working Capital Rs. 11,78,977

3.3. It would be pertinent to reproduce the relevant portion of the said Circular No. 21 / 2015 dated 10.12.2015 :- 3. Henceforth, appeals / SLPs shall not be filed in cases where the tax effect does not exceed the monetary limits given hereunder:-

S.No. Appeals in Income Tax matters Monetary Limit (in Rs)

1 Before Appellate Tribunal 10,00,000/- 2 Before High Court 20,00,000/-

11 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 3 Before Supreme Court 25,00,000/-

3.4. We have gone through the Circular No. 21 / 2015 dated 10.12.2015 and the revenue was not able to inform that whether the said case falls under any of the exceptions contemplated in the said Circular. We also find that the Circular makes it very clear that the revised monetary limits shall apply retrospectively to pending appeals also. We find that the Circular is binding on the tax authorities. This position has been confirmed by the Hon’ble Apex Court in the case of Commissioner of Customs vs Indian Oil Corporation Ltd reported in 267 ITR 272 (SC) wherein their Lordships examined the earlier decisions of the Apex Court with regard to binding nature of the Circulars and laid down that when a Circular issued by the Board remains in operation then the revenue is bound by it and cannot be allowed to plead that it is not valid or that it is contrary to the terms of the statute. Hence we hold that the appeal(s) of the revenue deserve to be dismissed in terms of low tax effect vide Circular No.21 / 2015 dated 10.12.2015. Accordingly, this being a low tax effect case, we dismiss the appeal of the revenue in limine , as unadmitted, without going into the merits of the case.

3.5. In the result, the appeal of the revenue in ITA No. 599/Kol/2015 for the Asst Year 2010-11 is dismissed.

ITA No. 617/Kol/2015 – Asst Year 2010-11 – Assessee Appeal

5.1. The brief facts of this issue is that the Labvantage Solutions Private Limited (“ LVS India” ) and Labvantage Solutions inc. (“LVS US” / “AE”) are group companies as both

12 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 are directly or indirectly held by TCG Lifesciences Ltd. LVS US is a global solutions provider that helps companies optimize their laboratory productivity, and leverage the latest information management and communication technologies in order to effectively share analytical data throughout their worldwide organizations. LVS US is engaged in development, marketing of Laboratory Information Management Systems (LIMS) Software , testing and customer configuration services, provision of local sales and customers support services. The proprietary software is conceptualized and owned by LVS US. LVS India is engaged in the development and customization of LIMS for its AE. The software development and customization work is sub-contracted by LVS US to the assessee. The assessee vis a vis the group is involved in the execution of the software development and coding of software service (“software services”) outsourced to it by LVS US. Further, LVS India, in the domestic sector, caters to the laboratory requirements of process industries, pharmaceutical companies and contract laboratory organizations. It has licensed LIMS product called ‘Sapphire’ to the domestic customers and has undertaken customization of the software for these customers according to their requirements. It was submitted that LVS India is independently responsible for rendering services to the domestic customers. LVS Inc. is not involved in any manner for provision of services to domestic customers. Thus, LVS India is also engaged in selling software licenses to customers for which it pays a royalty to LVS US.

5.2. The assessee had following international transactions with its AE during the financial year 2009-10 relevant to Asst Year 2010-11 :- (i) Provision of software design & development services Rs. 11,54,80,823 (ii) Payment of Royalty to LVS US Rs. 72,84,012 (iii) Purchase of Software from LVS Inc. Rs. 3,10,709 (iv) Recovery of Expenses from LVS Inc. Rs. 1,03,31,396 (v) Recovery of Expenses from LVS Shanghai Rs. 34,56,746 (vi) Reimbursement of Expenses to LVS Inc. Rs. 715

Out of the above, the international transactions referred to serial (i) and (ii) alone are subject matter of appeal before us. The assessee used Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with a Profit Level Indicator (PLI) of Net Cost Plus (NCP) Margin .

13 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11

5.3. The assessee has raised the following grounds before us in this regard:- “2. Determination of effective profitability of the Appellant from the international transactions.

2.1. The learned AO, DRP and TPO erred on facts is not taking cognizance of the domestic segment of the Appellant.

2.2. Accordingly, the learned AO, DRP and TPO erred on facts in including the expenses incurred towards domestic segment as part of the cost base, while calculating the effective Net Cost Plus Mark up (‘NCP’) earned by the Appellant from the international transactions with its Associated Enterprises (‘AEs’) 2.3. The learned AO, DRP and TPO failed to take cognizance that the "Domestic segment" of the Appellant is deemed to be at arm's length, since the same includes revenue from third-party customers under uncontrolled circumstances. 3. Erroneous disallowance of the Royalty payment

3.1 The learned AO, DRP and TPO erred in determining the arm's length price of the royalty paid at 'NIL' while determining the amount of adjustment. 3.2 The learned AO, DRP and TPO also erred in not appreciating the separate benchmarking analysis done by Appellant, by virtue of which such payment of royalty by the Appellant to its AEs was determined at arm's length.

3.3 The learned AO, DRP and TPO erred in not appreciating that the Appellant did not pay any price to its AE for purchase of software, licensed to third party customers. Further, the Appellant was also allowed a license free period, wherein, the entire revenues generated from such sale was retained by the Appellant. Also, the updates in relation to such software is provided free of cost by the AE to the Appellant.

3.4 The learned AO, DRP and TPO erred in not taking cognizance of the benefits derived by the Appellant on account of such royalty payments.

3.5 The learned AO, DRP and TPO erred in making double adjustments on account of royalty payments by determining the arm's length price of such royalty payments at 'NIL' and also including such royalty payouts as part of the cost base while determining the arm's length price for the software design & development services transaction.

On the facts and circumstances of the case, the learned AO, TPO and DRP erred in determining the arm's length price undertaken by the Appellant with respect to software design & development services without appreciating the contentions, arguments, evidences and data put forward by the Appellant during the course of the proceedings before them and in doing so have grossly

4.1 Erred on the facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus the Appellant prays that the fresh benchmarking analysis conducted is liable to be quashed.

14 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 4.2 Erred on the facts in rejecting the comparable companies arrived at in the Transfer Pricing Study without considering the functional and risk analysis of the Appellant and the comparable companies. 5. Erroneous computation of adjustment amount by the TPO 5.1. The learned AO, DRP and TPO erred in computing the adjustment amount at 14,776,387 by erroneously including the following: (a) Cost of domestic segment (b) Payment of royalty. 6. Initiation of penalty proceedings 6.1. The Appellant submits that based on the facts and the circumstances of the case, there was no basis for the AO to propose to initiate penalty proceedings under section 271(1)(c) of the Act.” During the course of hearing, the ld AR stated that he is not pressing the Grounds 4.3 to 4.11 before us, which was also mentioned in his written submissions filed before us. Accordingly, those grounds (i.e 4.3 to 4.11) are dismissed as not pressed.

5.4. The assessee had used TNMM as the MAM with PLI of NCP margin and arrived at a set of 15 comparable companies with NCP margin of 14.79% vis a vis 44.94% of the assessee from its Export segment. The list of comparables selected by the assessee are as follows:-

Sl. Name of the Company Weighted Average NCP No. (%) (FY 2008-2010)

1 Akshay Software Technologies Ltd 10.38 2 CG-Vak Software & Exports Ltd 4.59 3 Eforce India Private Limited 3.21 4 Evoke Technologies Private Limited 20.82 5 Helios & Matheson Information Technology Ltd 22.58 6 L G S Global Ltd 17.70 7 Mindtree Ltd 14.48 8 Persistent Sytems Ltd 22.34 9 Powersoft Global Solutions Ltd 17.60 10 R S Software (India) Ltd 9.06 11 R Systems International Ltd 15.16 12 Sasken Communication Technologies Ltd 15.94 13 Tata Elxsi Ltd 18.86 14 Thirdware Solutions Ltd 22.05 15 Vama Industries Ltd 7.07

ARITHMETICAL MEAN 14.79%

15 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11

5.5. The ld TPO ignored the segmental computation furnished by the assessee and revised the NCP margin of the assessee from 44.94% to 30.94% by considering the overall NCP margin for LVS India. He determined the ALP of companies at 40.34% by conducting a fresh benchmarking exercise by selecting 9 comparable companies. The list of comparables selected by the TPO is as under:-

Sl. Name of the Company NCP No. (%)

1 Spry Resources India Pvt Ltd 33.25 2 Kuliza Technologies Pvt Ltd 30.75 3 Evoke Technologies Private Limited 18.75 4 C T I L Ltd 19.56 5 Infinite Data Systems Pvt Ltd (Merged) 88.25 6 E-Infochips Bangalore Ltd 71.92 7 Thirdware Solutions Ltd 33.36 8 Thinksoft Global Services Ltd 17.35 9 Inteq Software Ltd 49.91

AVERAGE 40.34%

5.6. While computing the adjustment of software services for LVS India , the ld TPO inter alia included the following:-

(a) Domestic as well as the AE cost for the software segment as total cost (b) Royalty expenses paid by LVS India (though separate adjustment for the same has been done) (c) The ld TPO considered the NCP margin of 40.34% as ALP margin and (d) Consequently made TP adjustment of Rs. 1,57,27,755/-.

Apart from the above, the ld TPL also determined the ALP of Royalty paid at Rs Nil and accordingly made an adjustment of Rs. 72,84,012/- separately for this transaction.

16 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 5.7. The ld AO passed a draft assessment order pursuant to the order of the ld TPO. The assessee preferred objections before the ld DRP against the adjustments made to ALP by the ld AO / ld TPO who disposed off the objections by giving the following directions :-

(a) Sustained adjustment made towards Royalty of Rs. 72,84,012/-. (b) Allowed exclusion of recovery transaction amounting to Rs. 1,37,88,142/- for determining the TP adjustment and thereby an upward adjustment in respect of software services provided to AE was made at Rs. 74,92,375/-. (c) Allowed working capital adjustment and therefore recalculated the ALP of TPO’s comparables at 39.25%.

5.8. Incorporating the ld DRP’s directions, the ld AO made a revised adjustment to ALP of Rs. 1,47,76,387/- as below:-

Upward adjustment for software development Service (Sales to AE) 74,92,375

Upward adjustment for royalty 72,84,012 ------------------- 1,47,76,387 -------------------

E-Infochips Bangalore Limited The ld AR argued that this company is functionally not comparable to the assessee. He argued that as per the annual report of the said company, the business profile of the company is ambiguous as to the exact nature of the software services. Further, as per the segmental reporting, the company is also engaged in providing IT enabled services and no segmental income break up is available for the same. Thus it would not be correct to

17 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 classify E-Infochips as a software development company. The ld AR stated that the ld TPO had obtained information u/s 133(6) of the Act wherein they had stated that they are only in IT sector, whereas their annual report states that they are in IT and IT enabled services. In case of this contradiction, the information available in public domain (i.e the annual report) should be considered. He also argued that the section 133(6) of the Act information was never confronted on the assessee in the show cause notice. It came directly only in the ld TPO’s order.

He also stated that in the following judgements, this comparable i.e E-Infochips has been held to be functionally not comparable :-

(a) Hyderabad Tribunal in the case of Pegasystems Worldwide India Pvt Ltd vs ACIT in ITA No. 1758/Hyd/2014 dated 16.10.2015 for Asst Year 2010-11. (b) Ahmedabad Tribunal in the case of Allscripts (India) Private Ltd vs DCIT in ITA No. 771/Ahd/2014 dated 5.6.2015 for Asst Year 2009-10 (c) Delhi Tribunal in the case of Headstrong Services (India) Pvt Ltd vs DCIT in ITA No. 714/Del/2015 dated 18.3.2016 for Asst Year 2010-11 (d) Hyderabad Tribunal in the case of AMD Research & Development Centre India Pvt Ltd vs DCIT in ITA No. 275/Hyd/2015 dated 20.11.2015 for Asst Year 2010- 11 (e) Hyderabad Tribunal in the case of Parexel International (India) P Ltd vs ACIT in ITA No. 1918/Hyd/2014 dated 8.1.2016 for Asst Year 2010-11 (f) Hyderabad Tribunal in the case of CNO IT Services (India) Private Limited vs DCIT in ITA No. 336/Hyd/2015 dated 19.2.2016 for Asst Year 2010-11

Infinite Data Systems Pvt Ltd (Merged) The ld AR argued that this company is functionally not comparable to the assessee and it is having a different business model. The company is engaged in providing entire gamut of solutions comprising of technical consulting, design and development of software, maintenance, system integration, implementation, testing and infrastructure management services. Further it is stated from the records that the revenue is primarily driven from technical support and infrastructure management services. Further, as per the Annual Report of 2009, at Page 1, it is stated that the Holding Company M/s Infinite Computer Solutions (India) Limited signed an agreement (Build, Operate and Transfer Model) with Fujitsu Services Limited to set up Global Delivery Centers in India to provide offshore

18 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 delivery capabilities to Fujitsu & Fujitsu’s associated companies. Infinite Data Systems commenced its operations on 1st January 2009 and as per segment reporting disclosure, the company’s operations predominantly relate to providing software technical consultancy services to its sole customer Fujitsu Services Limited. The ld AR argued that these facts have also been acknowledged by the ld TPO at page 77 of his order. Also, it would be worthwhile to note that Infinite Data Systems Pvt Ltd completed its three years contract with Fujitsu, post which, the business was transferred to Fujitsu and thus the company has been merged with its Holding Company – Infinite Computer Solutions (India) ltd during the financial year 2011-12.

The ld AR argued that the assessee company is a service provider in area of software development whereas the comparable company Infinite Data Systems Pvt Ltd was created for purposes of transfer of business. The services and business model of assessee company and comparable company is entirely different. He also argued that there exist abnormal circumstances in the said comparable. During the last 3 years, variations in margins earned shows an abnormal circumstances leading to huge fluctuations and supernormal profit , the margin earned by Infinite is 88.25% which is abnormally high. Such companies which are making more than twice the arithmetical mean margin as computed by the ld TPO should not be considered as comparable. The ld AR referred to page 591 of the Paper Book where the details of the fluctuation in the revenue, profit and margins has been provided. Accordingly, he prayed for rejection of this comparable.

Spry Resources India Pvt Ltd The ld AR argued that this company is functionally not comparable to the assessee. He argued that the said company is engaged in software consultancy services which is not similar to assessee business. The assessee is engaged providing software development services, payroll services and corporate training services. The company executes turnkey solution to its clients including onsite need assessment, feasibility study and consulting services and off site development of the projects. Further, from the perusal of the annual report for the year ended 31.3.2010, that the software development expenditure amounting to Rs. 1,47,08,428/- are at 54% of total expenditure amounting to

19 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 Rs. 2,71,86,621/-. Further, the ld TPO had also mentioned in page 64 of his order that Eforce India (P) Ltd is selected by the assessee is engaged into software consultancy service and accordingly the same is functionally not comparable. He argued that applying the same logic, Spry Resources also is engaged into consultancy service and hence the same should not be treated as comparable.

6.1. He prayed for inclusion of one of the comparable chosen by the assessee viz Akshay Software Technologies Ltd. He stated that ld TPO rejected this comparable on the ground that it is functionally not comparable as it provides technical support for integration of SWIFT software to its clients of the user of SWIFT in financial industry. The ld AR stated that Akshay Software is a company engaged in software development activities. The income schedule as disclosed in the annual report of the said comparable clearly demonstrates that the company is engaged in software services. However, the USA based subsidiary of the company i.e Akshay Software International Inc. (Akshay US) is a registered partner of SWIFT selling SWIFT solutions and products as an extended arm of SWIFT in North America. Thus the contention of the ld TPO / ld AO is erroneous since it is clearly evident from the annual report of the comparable company itself that it is engaged in rendering software development services only. The ld AR also placed reliance on the decision of Delhi Tribunal in the case of Qualcomm India Pvt Ltd vs ACIT in ITA No. 5239/Del/2010 dated 10.6.2013 wherein Akshay Software had been clearly held to be functionally comparable .

6.2. He argued that with the aforesaid exclusions and inclusion of comparables with the list of other comparables chosen by the ld TPO, the assessee’s margin would be clearly justified to be at ALP and hence no adjustment need to be made in the facts and circumstances of the case.

6.3. With regard to disallowance of Royalty payment of Rs. 72,84,012/- is concerned, he argued that during the relevant year under appeal, the assessee had paid royalty to its AE on the license sales made by it to the third party customers as well as on the maintenance revenue generated from such licenses earlier sold to third party customers. He argued

20 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 that since such payment was integral to the operations of assessee, and in the nature of operating expenses, such transaction was aggregated with the provision of software design and development services transaction and benchmarked using TNMM as the Most Appropriate Method. Thus, owing to closely linked and integrated nature of said transaction, TNMM is the MAM for its evaluation. He placed reliance on the following decisions in support of his contentions :- (a) Hon’ble Delhi High Court in the case of CIT vs EKL Appliances Ltd reported in (2012) 24 taxmann.com 199 (Delhi) (b) Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P) Ltd vs CIT reported in (2015) 374 ITR 118 (Del) (c ) Delhi Tribunal in the case of AWB India (P) Ltd vs DCIT reported in (2014) 50 taxmann.com 323 (Delhi-Trib.)

6.3.1. The ld AR argued that the ld TPO took entity level margin which includes payment of royalty. Having done so, he again disallowed complete royalty thereby leading to double addition. In this regard, he placed reliance on the decision of the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P) Ltd vs CIT reported supra – relevant page is page 1327 of the paper book vide para 101 of the judgement

6.3.2. He argued that the ld TPO cannot use segmental activity for royalty alone but use entity level benchmarking for software development activity.

6.3.3. He drew the attention to the relevant page of the ld TPO’s order where the issue of royalty has been discussed and argued that the ld TPO had simply reproduced the guidelines and determined the ALP of Royalty as Rs Nil, without understanding the nature of activities of the assessee and the purpose of payment of royalty.

6.3.4. The ld AR argued that the ld TPO has to apply any one of the 5 methods prescribed in the statute for determination of ALP. In this regard, he placed reliance on the decision of the Delhi Tribunal in the case of AWB India (P) Ltd vs DCIT reported supra.

21 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 6.3.5. The ld AR drew the attention of the order of the ld DRP wherein the assessee had explained the benefits derived by it through increased turnover from the financial years 2004-05 to 2009-10 as below:- Year Revenue derived Additional Benefit Benefit % (on from Third party benefit derived Royalty sales) customers (including from third payment to US software Sales & parties due to Maintenance sale of Revenue) software 2004-05 21,681,971 3,510,587 0 25,192,558 100% 2005-06 13,736,036 1,024,860 0 14,760,896 100% 2006-07 34,967,014 565,460 0 35,532,474 100% 2007-08 21,884,197 2,937,000 0 24,821,197 100% 2008-09 16,050,097 6,007,496 7,133,376 14,924,217 68% 2009-10 16,389,028 9173402 7,284,012 18,278,418 72% Total 124,708,343 23,218,805 14,417,388 133,509,760 90%

The ld AR argued that the above table would prove that the assessee had derived benefits of around 90% in terms of additional revenue and minimal / no cost by virtue of paying royalty to its AE. He further argued that it would not have derived such revenues from third party customers if LVS Inc. had not granted such license to assessee. He further argued that under comparable circumstances, no third party would have given such license free of cost or allowed assessee to retain majority share of the revenue. He argued that there has been increase in the revenues and profitability post addition of this software sales and maintenance revenue. The details of the same are as below:-

Financial Year Revenues Profit before Tax 2006-07 10,68,45,669 (94,71,976) 2007-08 12,48,44,081 1,63,12,532 2008-09 13,03,45,542 2,21,06,636 2009-10 14,16,86,146 2,80,93,792

He argued that while this is so, the observation of the ld DRP, that the assessee had not been able to establish how the payment of royalty to its AE had improved its domestic sales, is without any basis. The long term benefits derived by the assessee out of the royalty payments has been proved beyond doubt by the increase in revenues and profitability of the assessee .

22 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 6.3.6. He argued that what is effectively carried out by the assessee is only trading in software as far as this transaction is concerned. The assessee bought software from its AE and sold it locally to third party customers and 40% of it is given to the AE as Royalty. The fact that no royalty was paid by the assessee for the first four years is in view of the fact that it could get waiver from its AE for non payment of royalty. This royalty admittedly is paid pursuant to the Royalty agreement entered into with AE and which was also placed before the lower authorities.

6.3.7. The ld AR argued that without prejudice to the aforesaid arguments, assessee had also conducted the benchmarking analysis for the payment of royalty / license fees paid by third parties (licensee) to the licensor for sub licensing of software. The average royalty / license fees details from the benchmarking analysis is given below:- Sl. No. Licensor Licensee Royalty Rate % 1 RAND IMAGINIT Technologies, Inc Autodesk, Inc. 50.00 2. Bit-Arts Limited Smarte Solutions, Inc. 30.00 3. JetForm Corporation Indigo pacific Pty. Ltd. 50.00 4. Infospace, Inc. Mitsui & co., Ltd. 40.00 5. Open Solutions Inc. (OSL) BISYS, Inc. 30.00 6. ADAM Software, Inc. (licensor) Mindscape, Inc. (distributor) 25.00 7. IMNET Systems, Inc. HealthVISION 75.00 8. APACHE Medical Systems, Inc. Cerner Corporation 50.00 Mean 43.75

Accordingly he argued that the payment of 40% royalty by the assessee to its AE is lower than the arithmetic mean of the royalty pay outs by the comparables. Accordingly, it was argued that the payment of royalty is at Arm’s Length.

23 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 7.1. With regard to comparable sought to be excluded by the ld AR i.e E-Infochips Bangalore Limited, on the basis of dispute on the exact nature of services in which such comparable was engaged, the ld DR argued that the ld TPO had obtained information u/s 133(6) of the Act wherein the said party had replied about their nature of services which had to be considered as a direct and authentic information. With regard to the argument of the ld AR that this information sought u/s 133(6) of the Act was not shared with the assessee , he stated that this argument was never advanced by the assessee before the lower authorities and hence the same is to be rejected. Hence it has been rightly chosen by the ld TPO as a comparable.

7.2. With regard to second and comparables sought to be excluded i.e Infinite Data Systems Pvt Ltd (Merged) and Spry Resources India Pvt Ltd, and inclusion of one comparable i.e Akshay Software Technologies Ltd, he placed reliance on the order of the ld TPO and accordingly stated that the same had been rightly chosen as comparables by the ld TPO and rightly rejected by the ld TPO from the comparables respectively.

7.3. With regard to payment of royalty, he argued that the fact as to whether there was double addition was made due to entity level benchmarking may be directed to be verified to the file of the ld AO.

24 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 capital adjustment and therefore re-calculated the Arm’s length margin of ld TPO’s comparables at 39.25%. We find that the ld AR before us agreed to go by the comparables chosen by the ld TPO in his order with the following exceptions :- Prayed for exclusions of (i) E-Infochips Bangalore Ltd ; (ii) Infinite Data Systems Pvt Ltd (Merged) ; and (iii) Spry Resources India Pvt Ltd

8.1. We find that apart from this, the ld AR had prayed for inclusion of one comparable chosen by the assessee i.e Akshay Software Technologies Ltd in the list of comparables chosen by the ld TPO. We find that the ld AR stated that if the aforesaid three exclusions and one inclusion is carried out to the list of comparbles chosen by the ld TPO, then the margin arrived in such arithmetical mean would be lesser than the margins declared by the assessee and hence there would be no necessity to dispute the other comparables of the ld TPO and consequently no adjustment to ALP in this regard is required to be made. Hence the questions for our consideration would be as follows:-

(a) Whether the assessee is justified in seeking for exclusions of three comparables chosen by the ld TPO viz (i) E-Infochips Bangalore Ltd ; (ii) Infinite Data Systems Pvt Ltd (Merged) ; and (iii) Spry Resources India Pvt Ltd , in the facts and circumstances of the case. (b) Whether the assessee is justified in seeking for inclusion of one comparable i.e Akshay Software Technologies Ltd to the comparables chosen by the ld TPO, in the facts and circumstances of the case.

8.2. Exclusion of E-Infochips Bangalore Ltd We find that this company had reported NCP of 71.92% . It is not in dispute that the assessee is engaged in software development. Hence comparable should also be in the companies engaged in the similar sector. We find from the business profile of the said comparable as evident from its annual report, that it is engaged in IT and IT Enabled Services. Even as per segmental reporting, the company is also engaged in providing IT enabled services and no segmental income break up is available for the same. Thus it

25 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 would not be correct to classify E-Infochips as a software development company. We find that the ld TPO had obtained information from this company u/s 133(6) of the Act wherein the party had stated that it is engaged only in IT sector. Admittedly, the information obtained u/s 133(6) of the Act behind the back of the assessee and not even confronted with the assessee and came to the knowledge of the assessee only in the order u/s 92CA(3) of the Act. In these circumstances, we find lot of force in the argument of the ld AR that the information available in the public domain i.e the annual report, should be taken as correct. Moreover, we also find that the annual report is being circulated to the larger sections of the public in compliance with the provisions of Companies Act, 1956 and Listed Company regulations prescribed by SEBI. We also find that the co-ordinate benches of various tribunals had held that this company should not be treated as comparable. The recent decision of the Co-ordinate Bench of Hyderabad Tribunal in the case of CNO IT Services (India) Private Limited vs DCIT in ITA No. 336/Hyd/2015 dated 19.2.2016 for Asst Year 2010-11 had held as under:-

E-Infochips Bangalore Ltd 8.3. After considering the rival contentions and perusing the annual reports placed on record, we are of the opinion that this company cannot be selected as comparable company for TP analysis. First of all, this company is engaged in both software development as well as ITES. Assessee being only captive service provider, the above company cannot be considered as comparable on functional basis. Not only that, as pointed out, segmental information pertaining to the above company is not available. As seen from the TP orders, documents placed on record, TPO relied on later year’s annual report in extracting the information. Variation in profitability over the years alone cannot be a reason to exclude the company from comparability analysis but as rightly pointed, the absence of segmental information, how much profit earned was on the software development or ITES cannot be examined. In the absence of clarity on operational

26 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 details and comparable company having diversified activities, we are of the opinion that this company cannot be chosen as a comparable company in Assessee’s case in this assessment year. We are also aware of the decision of the Co-ordinate Bench given in earlier assessment year on the reason that segmental reporting was not available. Be that as it may, since the said company is functionally different from Assessee’s activities and in the absence of segmental information, we direct AO/TPO to exclude the above while working out the comparability analysis. We uphold the plea of Assessee in this regard.

We also find that as stated earlier, the other decisions relied upon by the ld AR also had held that this comparable is functionally not comparable. We deem it fit and appropriate to consider the recent decision rendered in this regard. In view of the aforesaid finding and judicial precedent relied upon, we hold that the comparable chosen by ld TPO i.e E- Infochips Bangalore Ltd is functionally not comparable with the assessee company.

8.3. Exclusion of Infinite Data Systems Pvt Ltd (Merged) We find that this company had reported NCP of 88.25% . It is not in dispute that the assessee is engaged in software development. Hence comparable should also be in the companies engaged in the similar sector. We find that this company is having a different business model and engaged in providing entire gamut of solutions comprising of technical consulting, design and development of software, maintenance, system integration, implementation, testing and infrastructure management services. We find from the paper book that the revenue is primarily derived from technical support and infrastructure management services. We find that Infinite Data Systems Pvt Ltd commenced its operations on 1st January 2009 and as per segment reporting disclosure, the company’s operations predominantly relate to providing software technical consultancy services to its sole customer Fujitsu Services Limited. Further, as per the Annual Report of 2009, at Page 1, it is stated that the Holding Company M/s Infinite Computer Solutions (India) Limited signed an agreement (Build, Operate and Transfer – BOT Model) with Fujitsu Services Limited to set up Global Delivery Centers in India to provide offshore delivery capabilities to Fujitsu & Fujitsu’s associated companies. We find that these facts have also been acknowledged by the ld TPO at page 77 of his order. The ld AR stated that it would be worthwhile to note that Infinite Data Systems Pvt Ltd completed its three years contract with Fujitsu, post which, the business was transferred to Fujitsu and thus the company has been merged with its Holding Company – Infinite

27 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 Computer Solutions (India) ltd during the financial year 2011-12. We are inclined to agree with the submissions of the ld AR that this Comparable Infinite Data Systems Pvt Ltd was created for purposes of transfer of business. Hence the nature of services and business model of assessee company and comparable company are entirely different. Apart from this, we also find that there exist abnormal circumstances in the said comparable. During the last 3 years, variations in margins earned show an abnormal circumstances leading to huge fluctuations and supernormal profit , the margin earned by Infinite is 88.25% which is abnormally high. It was argued that such companies which are making more than twice the arithmetical mean margin as computed by the ld TPO should not be considered as comparable. The ld AR referred to page 591 of the Paper Book where the details of the fluctuation in the revenue, profit and margins has been provided. It is true that where company in which extraordinary events had taken place during the year like major acquisitions which had impact on profits of company, it could not be selected as comparable to assessee engaged in software development. We place reliance in this regard on the decision of Hyderabad Tribunal in the case of Excellence Data Research (P) Ltd vs ACIT reported in ( 2016) 74 taxmann.com 13 (Hyd Trib) dated 12.9.2016 for Asst Year 2010-11 , wherein it was held that :-

28 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 18.1 For the relevant A.Y. 2010-11, the Ld. Counsel for the assessee has drawn our attention to the information available on Accentia Technologies Ltd., to demonstrate that the said company is into diversified knowledge process outsourcing activities. It is seen there from that the said company is involved in Healthcare documentation as well as receivables, management services including installation and maintenance of all software, hardware and band width infrastructure required for the same, deployment of man power and service delivery in all these areas. It is also seen that it is engaged in legal process outsourcing. From Schedule-IV showing the fixed assets of the assessee, it is also seen that the said company owns goodwill/brand/IPRs (Intellectual Property Rights). From the notes to the accounts, it is also seen that a subsidiary of the company Asscent Infoserve Pvt. Ltd., has been amalgamated with the company consequent to which, assets and liabilities of the erstwhile company were transferred and vested in the company w.e.f. 1st April, 2008 and the scheme has been given effect to in the accounts of the year. Therefore, it is clear that there is an extraordinary event in the case of Accentia Technologies Ltd., during the relevant financial year particularly since the approval for amalgamation has been given by the Hon'ble High Court of Mumbai vide orders dated 21stAugust, 2009 and by the Hon'ble Karnataka High Court vide orders dated 6th February, 2010. This event would definitely have an effect on the profit margins of the said company and therefore, has to be excluded from the list of comparables as rightly done by the DRP. Therefore, we do not see any reason to interfere with the order of the DRP on this company also. Accordingly, ground No. 3 of the Revenue is dismissed". Since the order of the Tribunal in the case of Hyundai Motors India Engg. (P.) Ltd. (supra) for the same A.Y, we direct the AO/TPO to exclude this company from the final list of comparables. 11. TCS e-Serve International Ltd: As regards the comparability of this company with the assessee, the learned Counsel for the assessee submitted that the TCS international also provides software testing, verification and validation which are different from ITES services providers by the assessee. It is also submitted that the segmental information of TCS International are not available in the annual report. The exceptional circumstances of the company reported in annual report such as acquisition of India based captive business outsourcing arm, resulting in acquisition of an aggregate amount of $ 2.5 billion over a period of 9.5 years and its impact on the financial implications of the company also brought to our notice. It is submitted that these peculiar circumstances have been considered by the Coordinate Bench of this Tribunal in the case of Hyundai Motors India Engg. (P.) Ltd. (supra) for exclusion of the list of comparables. Respectfully following the decision of the Bench, these two comparables TCS e-Serve International Ltd and TCS e-Serve Ltd directed to be excluded.

In view of the aforesaid findings and judicial precedent relied upon, we hold that the comparable chosen by ld TPO i.e Infinite Data Systems Pvt Ltd (Merged) is functionally not comparable with the assessee company.

8.4. Exclusion of Spry Resources India Pvt Ltd We find that this company had reported NCP of 33.25% . It is not in dispute that the assessee is engaged in software development. Hence comparable should also be in the companies engaged in the similar sector. We find that this company is engaged in software consultancy services which is not similar to assessee business. We find that the

29 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 ld TPO while rejecting the comparable chosen by the assessee i.e Eforce India (P) Ltd, had mentioned in page 64 of his order that the said comparable is engaged into software consultancy service and accordingly the same is functionally not comparable with the assesse which is engaged in software development. Hence the ld TPO had consciously decided to exclude comparables engaged in software consultancy services. Hence on this ground, he ought to have engaged this comparable also i.e Spry Resources Pvt Ltd also which is engaged in software consultancy services. In view of this, we hold that the comparable chosen by ld TPO i.e Spry Resources India Pvt Ltd is functionally not comparable with the assessee company.

8.5. Inclusion of Akshay Software Technologies Ltd We find that this company had reported NCP of 10.38% . It is not in dispute that the assessee is engaged in software development. Hence comparable should also be in the companies engaged in the similar sector. We find that the ld TPO had rejected this comparable on the ground that it provides technical support for integration of SWIFT software to its clients of the user of SWIFT in financial industry. We find from the annual report of this comparable enclosed in the paper book, that it is also engaged in software development activity which is quite evident from the income schedule of the said comparable. We find that the USA based subsidiary of the company i.e Akshay Software International Inc. (Akshay US) is a registered partner of SWIFT selling SWIFT solutions and products as an extended arm of SWIFT in North America. Thus the contention of the ld TPO / ld AO is erroneous since it is clearly evident from the annual report of the comparable company itself that it is engaged in rendering software development activity only. We find that this comparable i.e Akshay Software Technologies Ltd had been accepted as comparable in IT sector in the Co-ordinate Bench decision of Delhi Tribunal in the case of Qualcomm India Pvt Ltd vs ACIT in ITA No. 5239/Del/2010 dated 10.6.2013 , wherein it was held that :-

30 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 hardware design and systems and also for the reasons that sales of Akshay Software is only Rs. 6.21 crores against sales of Rs. 125 crores to the assessee. We, however, find that the Ld.T.P.O in the assessment year 2007-08 as it is clear from the TPO order for the said assessment year made available at Page No-69 of the paper book volume 3 , has accepted that Akshay Software is comparable in the light of identical functions. On perusal of profit and loss account of the Akshay Software, we find that Schedule -12 of it shows break up of the sales of the company as Rs. 4,97,88,191 towards exports of Software services, Rs. 1,17,29,263/- towards domestic software services and Rs. 6,30,000/- towards sale of product. Under these circumstances, we find substance in the contention of the Ld. A.R. that Akshay Software should have been accepted as comparable to bench mark the international transaction of the assessee also because in the assessment year 2007-08, the Ld. T.P.O himself has accepted the company as comparable. We accordingly direct the Ld. T.P.O to accept Akshay Software as comparable to determine the Arms Length Price of the assessee.

In view of the aforesaid findings and judicial precedent relied upon, we direct the ld TPO to include the aforesaid comparable i.e Akshay Software Technologies Ltd as functionally comparable with the assessee company.

8.6. Accordingly, we direct the ld TPO to exclude above three comparables i.e (i) E- Infochips Bangalore Ltd ; (ii) Infinite Data Systems Pvt Ltd (Merged) and (iii) Spry Resources India Pvt Ltd and also direct to include one comparable i.e Akshay Software Technologies Ltd with the list of other comparables chosen by the ld TPO and determine the ALP of the assessee and accordingly decide whether any adjustment need to be made thereon, in accordance with law. Accordingly, the grounds raised by the assessee in this regard are allowed for statistical purposes.

31 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 integral to the operations of assessee, and in the nature of operating expenses, such transaction was aggregated with the provision of software design and development services transaction and benchmarked using TNMM as the Most Appropriate Method. We find that the table mentioned in the arguments of ld AR hereinabove would prove that the assessee had derived benefits of around 90% in terms of additional revenue and minimal / no cost by virtue of paying royalty to its AE. Admittedly, LVS Inc had granted the license to the assessee for which royalty payment has been made, pursuant to which the assessee was able to derive such revenues from third party customers. Hence the argument of the ld AR that under comparable circumstances, no third party would have given such license free of cost or allowed assessee to retain majority share of the revenue, is well founded and deserves to be accepted. It is true that there has been increase in the revenues and profitability post addition of this software sales and maintenance revenue as detailed hereinbelow:-

Financial Year Revenues Profit before Tax 2006-07 10,68,45,669 (94,71,976) 2007-08 12,48,44,081 1,63,12,532 2008-09 13,03,45,542 2,21,06,636 2009-10 14,16,86,146 2,80,93,792

Hence the benefit derived by the assessee out of payment of royalty has been duly established by the assessee beyond doubt. We also find that the revenues had also increased periodically with corresponding increase in Profit before tax year after year justifying the payment of royalty.

9.1. We find that the ld TPO without appreciating the fact of increased revenues for the assessee, had determined the ALP for royalty payment to AE at Rs Nil. We are not inclined to appreciate the action of the ld TPO in determining the ALP for royalty payment at Rs Nil. We place reliance on the decision of the Hon’ble Delhi High Court in the case of CIT vs EKL Appliances Ltd reported in (2012) 24 taxmann.com 199 (Delhi), wherein it was held that :- 22. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered

32 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised.

9.2. We also find that this issue has been addressed by yet another decision of the Hon’ble Delhi High Court in the case of CIT vs Cushman and Wakefield (India) (P) Ltd reported in (2014) 46 taxmann.com 317 (Delhi) vide order dated 23.5.2014 , wherein it was held that the authority of ld TPO is to conduct a transfer pricing analysis to determine ALP and not to determine whether there is a service or not from which assessee benefits and therefore, the ld TPO cannot determine ALP of payments made by assessee to its AE at Nil taking a view that assessee did not derive any benefit from services rendered by AE.

9.3. Hence we hold that the assessee had duly satisfied the ‘benefit test’ out of payment of royalty to its AE. On that count itself, the deduction of royalty payment does not deserve to get disturbed.

9.4. We also find that the assessee had also conducted the benchmarking analysis for the payment of royalty / license fees paid by third parties (licensee) to the licensor for sub licensing of software. The same is also reproduced in the order of the ld DRP wherein the arithmetical mean has been arrived at 43.75% . We find that the revenue had not disturbed the benchmarking analysis and the comparables chosen by the assessee in their orders. In the instant case, it is not in dispute that the assessee had paid royalty @ 40%. Hence on this count also, the royalty paid by the assessee to its AE is at ALP.

33 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11 9.5. In view of our aforesaid findings, we hold that the ld TPO had erred in determining the ALP of Royalty payments at Rs Nil and accordingly direct the ld TPO to allow the deduction for payment of Royalty as the same is also duly benchmarked by the assessee which were not disputed by the revenue and we hold that royalty @ 40% paid by the assessee is at ALP. Accordingly, the grounds raised by the assessee in this regard are allowed.

Dated : 19th October, 2016

Jd.(Sr.P.S.)

34 ITA No. 599, 1051 & 617/Kol/2015 Labvantage Solution Pvt. Ltd. AY 2009-10 & 2010-11

Copy of the order forwarded to:

APPELLANT – M/s. Labvantage Solutions Pvt. Ltd., Bengal Intelligent 1. Park, Bldg D, 3rd floor, Block EP & GP, Sector-V, Salt lake Electronics Complex, Kolkata-700 091. Respondent –DCIT, Circle-2(1), Kolkata. 2 The CIT(A), Kolkata 3. 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order,

Asstt. Registrar.