EQUANT SOLUTIONS INDIA PVT LTD,GURGAON vs. DCIT, GURGAON

“That on the facts and circumstances of the case, and in law; ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11

1) The Assessment order passed by the Ld. Assessing Officer pursuant to the directions of ld. Dispute Resolution Panel (ld. DRP) is bad in law and void ab-initio.

2) The Ld. AO (following the directions of the Ld. DRP), erred both on facts and in law in confirming the addition of Rs. 23,21,00,865/- to the income of the appellant proposed by the Transfer Pricing Officer (Ld. TPO) by holding that its international transactions pertaining to its Information Technology enabled services (‘ITES’) and Contract Software Development (‘CSD') services do not satisfy the arm’s length principle envisaged under the Income-tax Act, 1961 (‘the Act’) and in doing so, the Ld. DRP and the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO’s action of :

2.1. not appreciating that none of the conditions set out in section 92C (3) of the Act are satisfied in the present case,

2.2.ignoring the fact that the appellant is entitled to tax holiday under section 20A of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions;

2.3.disregarding the arm’s length price (‘ALP’), as determined by the appellant in the Transfer Pricing (‘TP’) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (‘Rules’) as well as fresh search; and in particular modifying/rejecting the filters applied by the appellant; 2 ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11

2.4. disregarding multiple year/ prior years ‘data as used by the appellant in the TP documentation and holding that current year (i.e. Financial Year (‘FY’) 2009 -10 data for comparable companies should be used;

2.5.rejecting comparability analysis undertaken by the appellant in the TP documentation/ fresh search and conducting a fresh comparability analysis based on application of additional/ revised filters, or disregarding appellant’s filters or applying inconsistent filters in determining the ALP for the international transactions;

2.6. Including companies having high margin/ volatile operating profit margins in the final comparables ’set for benchmarking a low risk captive unit such as the appellant;

2.7. Including certain companies in the final set of comparables that are not comparable to the appellant in terms of functions performed, assets employed and risks assumed;

2.8. resorting to arbitrary rejection of low-profit/ loss making companies and companies with diminished revenues based on erroneous and inconsistent reasons;

2.9. excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the appellant in terms of functions performed, assets employed and risks assumed; ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11

2.10. by committing a number of factual/ computational errors in selection/ rejection of proposed comparables and/ or in the operating profit margins of the comparables;

2.11.ignoring the business/ commercial reality that the appellant undertakes minimal business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the appellant on account of this fact;

2.12.by denying the benefit of a working capital adjustment while computing the ALP and thereby disregarding the law, international guidance and judicial precedents in this regard;

2.13. disregarding judicial pronouncements in India in undertaking the TP adjustment;

3. The Ld. DRP erred in disregarding the detailed arguments/ submissions put forth by the appellant during the course of the DRP/ assessment proceedings while passing its direction under section 144C of the Act;

4. The Ld. AO has grossly erred by proposing to compute interest under section 234B and 234D of the Act mechanically and without recording any satisfactory reasons for the same.”

(b) assessee is enjoying tax holiday u/s 10A of the income tax act therefor it does not need to transfer its profits to AE and there is no motive in showing lesser income,

(c) applicability of multiple year data instead of single year data,

(d) application of inconsistent filters etc.

In the synopsis filed by the assessee, it is also reiterated. Therefore, we restrict this appeal to those sub grounds of ground no. 2, which are relevant for individual comparables only and reject all other grounds.

./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11

Sr International Transaction Amount No 1 Purchase of networking equipment 481356/-

2 Provision for information technology 1840406649/- services

3 Payment of interest on loan 14823600

As per T P Study report of assessee As per TPO

Sr International Number of OP/TC Mean Number of Mean margin No Transaction comparables margin of comparables of comparabl comparables es

1 Provision of IT 16 15.02 12.21% 13 25.17% services %

2 Provision for 13 15.02 12.12% 9 30.45 % ITes %

database. Average PLI of these 16 comparables came to 12.21% and as per assessee and profit margin of 15.02% was above the mean margin of comparables. After the fresh search, assessee came out with 21 comparables out of which TPO rejected 14 comparables and included six more comparables rejected by assessee by applying accept/ reject matrix and therefore ultimately TPO chose 13 comparables out of which one comparable Infosys Limited was excluded by DRP and therefore finally 12 comparables remained for benchmarking. List of such comparables and their average PLI is as under S.no. Name of the Company Margin (OP/TC)

1 Akshay Software Technologies Ltd -1.07% 2 Evoke Technology 18.56% 3 Larsen & Toubro Infotech Ltd 19.06% 4 LGS Global Limited 12.78% 5 Mindtree Ltd (Seg) 13.92% 6 Persistent Systems Ltd 29.02% 7 Sasken Communication Technologies Ltd 17-54%

8. Sonata Software Ltd 35.87% ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11

9 Tata Elxsi (Seg) 20.29%

10 Thinksoft Global Services Ltd. 17-35%

11. Wipro Technology Services Ltd 73-35%

12. Zylog Systems Limited 25.07%

AVERAGE 23.14%

(a) Persistent systems Limited (b) Sonata Software Limited (c) Wipro Technology services ltd (d) Zylog Systems Limited

on the decision of Honourable Delhi High court in case of Chrys capital investment Advisors (India) private limited V DCIT 376 ITR 183 (Delhi) where in it is held that mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from list of comparables for purposes of determination of ALP In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable.

a. TPO has taken Persistent Systems Limited (Persistent) which has a margin 29.02% as comparable holding that the company is engaged in software developing services. The ld DRP rejected the claim of the assessee for its exclusion. Before us, the ld AR submitted that this company is functionally different because it renders outsourced product development services and developed product as paxpro, ChemLMS etc. He further contended that segmental information of sale of software services and sale of product are not available and therefore it should be excluded. He relied on the decision of 3DPLM Software solutions Limited V 42 11 ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 tamann.com 333 ( bang.) and Yadlee Infotech Pvt limited TS- 465-ITAT 2014 ( bang.) b. Ld. DR Relied on the order of AO and submitted that AO has given sufficient reason for selection of this comparable. c. We have perused the arguments on the same. Firstly on perusal of the balance sheet of this comparable it is noted that that this company has not provided segmental information for sale of services and sale of products of software’s. Further It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is engaged in contract software development services. We find that, as submitted by the assessee, the segmental details are also not available separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. v. Asstt. CIT [2012] 137 ITD 1/22 taxmann.com 96 (Mum.) that in the absence of segmental details/information a company it cannot be taken into account for comparability analysis, We hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly.

a. The TPO has included Sonata Software Ltd, which has a margin of 35.87%. As per TPO’s RPT/ sales ratio is 11.93% and therefore to be included as comparable. Ld DRP also held that this comparable is accepted. Before us, the ld. AR of the assessee submitted that AO has wrongly calculated related party transaction of this company wherein for the purpose of calculation TPO has only taken profit and loss account items and not balance sheet items such as receivables and payables. It was submitted that this company has huge transaction during the year from its related party i.e. Sonata Software Ltd., North America Incorporation. It was further submitted that this company’s transaction includes receivables, living allowances payables, travelling expenses, assets purchase and others with related party, which has been ignored, by TPO and DRP both. He submitted a detailed chart extracted from the balance sheet of this company to substantiate his claim. According to working given before us and before DRP the RTP by sales percentage in this company is 59.35% as compared to 11.93 % computed by TPO. He further submitted that this company has volatile margin of profit and to cement his argument he submitted the Op/TC margins of the company showing 4.80 % in one year ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 swinging up to 37% in a comparison chart for four years. Therefore this comparable should be excluded as per his submission. b. Ld. DR relied on the order of TPO and DRP. He further submitted that RPT percentage as submitted by the assessee were not raised before the TPO/ DRP and therefore for correctness of this figures the issue relating to this comparable should be set aside to the file of TPO for verification. c. We have heard both parties, perused material on record. We find that if the RPT is in excess of 25 % which is the filter set by TPO himself then this comparable fails that filter and therefore to be excluded. It is established principle that higher the RPT more vulnerable the Comparable is for exclusion. However, this contention was not raised before the TPO, as we did not find the same in order of TPO while discussing this comparable. Therefore, in the interest of Justice we set aside the issue of this comparable to the file of TPO to verify the contention of assessee that RPT in the case of this comparable is wrongly calculated. We order accordingly.

./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11

a. TPO has included Wipro Technology Services Ltd having a margin of 73.35% and it has been upheld by DRP. Before us, the ld AR submitted that this company has huge related party transaction as company’s total revenue is governed by master service agreement with CITI technology services Limited where the 100 % of the equity is owned by Wipro. Therefore, the entire revenue of this is much related party. It was further submitted that it has turnover of more than 24 times of the assessee and has huge brand value of Wipro and therefore it should be excluded. He further buttressed his claim of exclusion by submitting the volatile PLI of the company from 52.55 % to 80.81 % in a chart for three years. b. Ld. DR Relied on the order of TPO and DRP for the reason given for selection of this comparable. c. We carefully considered the rival contention regarding exclusion of this comparable. This company had agreed an agreement with CITI Technology Services Ltd, which is 100% subsidiary of Wipro Technology Ltd. The entire revenue during the year is covered by a master service agreement entered into by Wipro with CITI Group Services. Further, this company is also a subsidiary of Wipro Ltd., which company has a considerable brand name, 15 ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 therefore benefit accruing to this company from the brand name of Wipro cannot be denied. Therefore relying on the decision of the coordinate bench in the case of Agnity Technology Pvt. Ltd, in for Assessment Year 2010-11, wherein the Infosys owns of its brand name was held to be incomparable on the same analogy, brand value of ‘Wipro’ does help this comparable. Hence, we direct TPO to exclude this comparable, it is ordered accordingly.

a. The TPO has included Zylog Systems Ltd, which has having a margin of 25.07%, and according to the TPO, it is functionally similar. The ld DRP has conquered with the view of the TPO. Before us, ld. AR submitted that this company derives its income from sale of software services as well the products and has diversified operation in Wifi space and broadband connectivity. It is predominantly and onsite Service Company therefore it is functionally different. It was also contended that this company has commenced acquisition during the year, therefore there are extraordinary special events, and hence this comparable should be rejected. It was also stated that 62% of the total asset of the company is intangible and therefore it should be excluded. b. Ld Dr relied on the orders of lower authorities. 16 ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 c. We have considered the rival contention, wherein it is stated the Zylog Systems Ltd is engaged in the sale of software service as well as its products and has operation in Wifi place and broadband connectivity. It is apparently an onsite service company. This is evident from the various comparables of only reports and related documents produced before us. Zylog System Ltd also undergone into the business of restructuring where it is clear Dugout fair flex matrix. Therefore, it is apparent that the company, which have undergone the business restructuring process during the year, cannot be held to be a comparable in view of the extraordinary circumstances. The company is also owning significant intangibles and carrying on research and development activities ownership significant intangibles cannot be held to be a comparable with the assessee and therefore on this ground too this comparable is ordered accordingly to be excluded.

S.No Name Of The Company Margin (OP/TC) 1. Accentia Technologies Ltd. 42.52% 2. Cosmic Global Ltd. 18.28% 3. E4e Healthcare 31.03% 4. Fortune Infotech Limited 22.80% 5. Jindal Intellicom Limited 13.62% 6. Infosys BPO Limited 31.44% 7. TCSE-Serve International Ltd. 54.03% 17 ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11

8. TCSE-Serve Ltd. 63.42% 9. Microland Limited (IT Enabled segment) -3.11% Mean OP/ TC 30.45%

(a) Accentia Technologies Limited (b) Infosys BPO Limited (c) TCSE Serve international Limited (d) TCS E serve Limited

assessee contended that the comparable company provides high- end functions such as knowledge process outsourcing, legal process outsourcing. Further, the company is providing software as a service in healthcare outsourcing area. The company also developed software products in BPO management and healthcare therefore it is functionally dissimilar and should be excluded as comparable. He further submitted that the comparable has significant amount of brand and IPR and further it does not contain segment wise result with respect to various segment in which it operates. Further during the Financial Year 2009-10 there is amalgamation also in the comparable company which is an extra ordinary event and therefore it affect overall profitability of the company. As regards the selection of this comparable, the learned counsel for the assessee has relied on the decisions of this Tribunal in the cases of Capital IQ Information Systems (India) Pvt. Ltd. v. Addl./Dy. Commissioner of Income-tax, Circle 1(2), Hyderabad and vice versa (ITA No. 124 and 170/Hyd/2014 dated 31.7.2014); Hyundai Motors India Engineering P. Ltd., Hyderabad v. DCIT, Circle 2(2), Hyderabad (ITA NHo. 255/Hyd/2014 dated 31.7.2014), wherein M/s. Accentia Technologies Limited(Seg) was excluded by the Tribunal from the list of comparables on the ground that it was ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 a case of mergers and acquisition, and the company was also found to be functionally different. b. LD Dr relied on the order of lower authorities and also submitted that all these reasons have been considered by TPO while selecting the comparables. c. We have considered the rival contention. During the year this comparable has been gone into substantial business restructuring resulting into extraordinary circumstances during the FY 2009-10 subsidiary of Ascentia got amalgamated with this company and the figures of the business results for the year ending 31st March 2010. In this case also excluded the figures of amalgamated company and due to which the comparable has high OP by TC margin. The relevant observations of the Tribunal as recorded in para 19.2 of the order passed in the case of Excellence Data Research Pvt. Ltd., Hyderabad v. ITO Ward 2(1), Hyderabad (ITA No. 159/Hyd/2014 dated 31.7.2014); being relevant in this case, are reproduced below-

"19.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, being an extraordinary event which had an impact on the profit, 20 ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected."

As pointed out by the learned counsel for the assessee, there was amalgamation of a company during the relevant year, and the said company, therefore, cannot be considered as comparable due to this extraordinary event which occurred in the relevant year as rightly held by the Tribunal inter alia in the case of Excellence Data Research P. Ltd. (supra). We, therefore, follow the decision of the coordinate bench of this Tribunal in the case of Excellence Data Research Services Pvt. Ltd. (supra) and direct the AO/TPO to exclude the Accentia Technologies Limited from the list of comparables on this ground. Further, this company also provides KPO services, LPO and DPO besides offering software services. Therefore as this enrolled in knowledge processing outsourcing it is functionally dissimilar to the ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 assessee. Further, it does not contain segment wise functional results and in absence of such segmental information, it cannot be used for comparing the PLI of the assessee. It is also noted that it is also having significant amount of brands, intellectual property rights and goodwill as compared to the assessee. Therefore, in view of the above reasons this company is required to be excluded. Further relying on the decision of Jurisdictional high court in case of Rampgreen Solutions Pvt Ltd (TS-387-HC-2015(DEL)-TP) where in it is held that KPO are ITeS where the service providers have to employ advanced level of skills and knowledge. This is absent in this case of assessee which is low end ITES service provider such as which enables network management and other back office support services performed by assessee which primarily include remote monitoring and maintenance of Equant global network platforms and services, coordination, remote configuration, and implementation of quality customer networking solutions. Therefore this comparable is ordered for its exclusion accordingly.

a. This comparable has a margin of 22.80% and before the TPO, it was submitted that the company has provided ITE services and therefore it is not compared with software development segment 22 ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 of the assessee. The DRP rejected the contention of the assessee holding that it was profile of the comparable is similar to the assessee and therefore before us the assessee has objected the inclusion of this comparable. According to the assessee, this company is engaged in web application, mobile application, web designing and SEO provider. Therefore, it is functionally different and should be excluded. b. Ld. DR relied on the orders of lower authorities c. We have carefully considered the rival contentions. We have heard both parties and carefully perused and considered the material on record. There is no dispute that the assessee is operating purely in the ITES sector providing services to its AEs, whereas comparable selected, by TPO has developed and owns its unique web based software by which it provides niche services to its customers. The issue of whether Fortune Infotech Limited is to be taken as a comparable with ITES entities having no intangibles of their own was considered in detail by the co- ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) at paras 15.0 to 15.3.4 thereof. At para 15.3.4 of this order, the Tribunal held that this company; Fortune Infotech Limited requires to be excluded from the list of comparables observing that - 23 ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11

"...On perusal of the details furnished and submissions made, it is seen that this company has developed its own software called "Finetran" and "image index" for performing specialized services in medical transcription and patient record management. On appraisal of the same, we are of the opinion that this comparable company has developed unique software from which it would derive substantial benefits /advantages when compared with the assessee which is undertaking pure call centre services. Applying the principle that companies which are on similar standards only should be taken as comparables, we hold that this company which has unique intangibles cannot be taken as a comparable for the assessee and accordingly direct the Assessing Officer / TPO to exclude it from the list of comparables in this case."

Respectfully following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra), we direct the Assessing Officer / TPO to exclude Fortune Infotech Limited from the list of comparable companies.

./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11

a. The assessee further objected to inclusion of Infosys BPO Ltd has comparable which has a margin at 31.44%. Before the TPO assessee submitted that, this is the company, which has very high turnover and has huge brand value. Submission of the assessee that higher profits is because of highly established brand in the market place. TPO rejected the contention of the assessee holding that the assessee has failed to establish how the brand has influenced increased profitability of the comparable. The ld DRP also rejected the contention of the assessee. Before us, the assessee submitted that comparable is engaged in high-end integrated services in improving the competitive position of their clients and manage their business process and providing value added services to them. Further, the Infosys also carrying huge brand value and therefore this comparable should not be taken. b. Ld DR Relied on the orders of lower authorities and stated that all the reasons have been considered by the TPO and DRP for inclusion of this comparable.

./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 c. We have considered the rival contention regarding exclusion of Infosys BPO Ltd. It is engaged in high and integrated services and therefore it is functionally dissimilar. The Infosys brand is indisputably is a huge brand and definitely, result of that brand goes to this comparable. Therefore, the brand of Infosys definitely results in opening higher profits to this company. In view of the following decisions, the same is required to be excluded and hence it is ordered accordingly.

a. This comparable was taken by TPO where the margin is 54.02%. The TPO has taken this comparable considered this a company in IPS industry and considered it as a singled segment. The TPO was also of the view that there are no exceptional circumstances, which is related in the increase in the profit. Before DRP the argument of the assessee were rejected and it was held that far profile of the company is similar to that of the appellant. Before us it was submitted that in addition to BPO services this company is engaged in providing technical services like software testing, verification and validation of the software which falls under software development services activity, which also includes transaction processing, technical services, therefore it is functionally dissimilar. Further it was also 26 ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 contended that there is no segmental date ITES and software development activity of the company is available and this comparable owns substantial amount of intangibles in the form of software licenses and it owns Tata Bran in which company is making payment. It was further submitted that the company has volatile margin over the year and its profitability has gone up 173% on account increased in infrastructure and therefore this comparable should be excluded. b. Ld. DR relied on the orders of lower authorities and supported them. c. We have considered the rival contention regarding the exclusion of TCS E-service International Ltd. the comparable is engaged in the business of BPO service and provides high-end technology services such as software testing, verification and validation of the software. Therefore, it is functionally dissimilar to the assessee. Further annual report of the company does not provide any segmental information related to ITES as well as software development services. The company also owns intangible of substantial amount and is benefitted usually by the Tata Brad. The company is also making appellant for use of such brand. Therefore this aspect also makes this comparable is ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 inappropriate and therefore we order to exclude this comparable.

a. TPO included this comparable, which has a margin of 63.42%. The ld DRP has also held that the far profile of the company is similar. Before us, ld. AR submitted that the company is dissimilar functionally. In addition to BPO services, it is also engaged in technical services such as software testing, verification and validation. It has also developed software such as transport management software. It does not have segmental reporting too. It was further submitted that the company owns substantial intangible assets in form of software licenses and it makes a payment for Tata Brand and therefore it gets the benefit use brand value of Tata. b. Ld. DR relied on the orders of lower authorities and submitted that all the above reasons for selection of this comparable has bene considered by the TPO. c. We have also considered the rival contention for exclusion of TCS e-service Ltd. It is mainly involved in transaction processing and technology services. It carries on business of providing technology service such as software testing, verification and ./2015 Equant Solutions India Pvt. Ltd. V DCIT A.Y. 2010-11 validation. It is also developed a software such as transport management software therefore functionally this company is dissimilar to the assessee company. It also owns huge intangible and use of ‘Tata’ Brand, which has definitely benefited this comparable, it is directed to be excluded.

and not in case of the service industry. He denied this because assessee has failed to demonstrate that difference in working capital deployed is making a difference in margin earned by the assessee and its comparables.

(Order Pronounced in the Court on 21/01/2016)