TaxTMI 
TaxTMI 
2019 (12) TMI 358
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....grounds inter alia that :- "On the facts and circumstances of the case and in law, the learned Assessing Officer CAO') has erred in passing the assessment order under section 254/143(3) read with section 144C of the Income-tax Act, 1961 ('file Act') after considering the adjustments made by the learned Transfer Pricing Officer ('learned TPO') in his order passed under section 254 read with 92CA(3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel ('DRP') Each of the ground is referred to separately, which may kindly be considered independent of each other That, on the facts and circumstances of the case and in law 1. The learned TPO / AO / DRP have erred m making an addition of INR 180,674,599 to the total income of the Appellant in respect of International transactions pertaining to provision of software development services and provision of IT-enabled services by the Appellant to its associated enterprises ('AEs') (hereinafter referred to as 'impugned transactions'). 2. The learned TPO / A.O / DRP have erred by not accepting the economic analysis undertaken by the Appellant in accordance ....
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....ins of the Appellant and comparable companies), thus acting in contravention of provisions of section 144C(10) of the Act. 11 The learned AO has grossly erred In initiating penalty proceedings under section 271 (1)(c) of the Act 12. The learned AO has erred in levying interest under section 2348 and 234C of the Act while completely disregarding the provisions of the Act and the judicial precedence." 3. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Agilent Technologies (International) Pvt. Ltd., the taxpayer is a wholly owned subsidiary of Agilent Technologies International Europe, BV and is into the business of providing Software Development (IT) Services and Information Technologies Enabled Services (ITES) to its overseas company. As per report in Form 3CEB, the taxpayer provided Software Development (IT) services and ITES to its Associated Enterprises (AE) and thereby entered into international transactions as under:- Name of transaction Value of international transaction Purchase of fixed assets 4,222,962 Purchases for repairs and maintenance 1,885,599 Provision of IT Enabled services 1,452,567,224 Provision o....
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....xpayer in both ITES as well as IT segment. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal. 6. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. 7. Undisputedly, TNMM as the MAM applied by the taxpayer to benchmark its international transactions qua IT and ITES segment has been accepted by the ld. TPO/DRP. After giving effect to the ld. DRP directions, ld. TPO computed the average of Software Development services segment at 31.56% and in case of ITES segment at 22.72% and proposed ALP adjustment of Rs. 13,46,28,537/- and Rs. 4,60,46,062/- in ITES and IT segment respectively. 8. Ld. AR for the taxpayer in order to compress the issue raised in the present appeal contended that at this stage, the taxpayer is seeking exclusion of Wipro Limited (BPO segment), Maple Esolutions Ltd., Triton Corp. Ltd., Infosys BPO Ltd., HCL Comnet Systems & Services Ltd. and Accentia Technologies Ltd. in ITES segment and sought exclusion of Infosys Technologies Ltd., Wipro Li....
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....y with huge turnover and relied upon the decisions in cases of Avaya India Pvt. Ltd. ITA 532/2019, American Express (India) Pvt. Ltd. ITA No.1868/Del/2015, Oracle (OFSS) BPO Services Pvt. Ltd. ITA 124/2018, H&S Software Development and Knowledge Management Centre Pvt. Ltd., New River Software Services Pvt. Ltd. ITA 924/2016, Pentair Water India Pvt. Ltd. vs. CIT ITA 18/2015 & Everest Business Advisory India (P) Ltd. ITA No.41/Del/2013 & 1191/Del/2013. 14. When we examine the letter issued by the Wipro to ld. TPO pursuant to the notice issued u/s 133 (6) of the Act, available at page 989 of the paper book, it is categorically mentioned in para 4 that BPO segment of Wipro covers various activities i.e. IT Services and product. Furthermore, when we examine summary of segmental profit & loss for FY 2006-07, available at page 991 of the paper book, Wipro has sold goods worth Rs. 63,13,70,75,351/-. Furthermore, when we examine TPO's order at page 92, external page 139 of the appeal set, it has come on record that Wipro has acquired 9 companies detailed as under :- (i) mPower Software Services Inc. and subsidiaries (100% stake acquired in December 2005) - Customer Related Intangibles....
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.... admittedly a captive service provider compensative on a cost plus mark-up basis, having significant customer related, market related and technology related intangibles and also into acquisitions during the year under assessment. 18. Coordinate Bench of the Tribunal in case of [PAGE 61 OF case laws PAPER BOOK] examined the suitability of Wipro vis-àvis American Express (India) Pvt. Ltd., a routine ITES provider, and ordered to exclude the same from the final set of comparables. 19. The ratio laid down by Hon'ble Delhi High Court in the case of Avaya India Pvt. Ltd. in ITA 532/2019 order dated 24.07.2019 is also applicable to the facts and circumstances of the case to the extent that scale of operation of a company vis-à-vis tested party is required to be kept in view and a giant company cannot be compared with a captive contract service provider working on a small scale by returning following findings :- "27. There is merit in the contention of the Assessee that the scale of operations of the comparables with the tested entity is a factor that requires to be kept in view. TCS E-Serve has a turnover of Rs. 1359 crores and has no segmental revenue whereas the Ass....
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....of Wipro by the Tribunal on ground of significant brand presence for profits at large corporate size. So, in view of the facts and circumstances of the case and following the law laid down by Hon'ble Delhi High Court in the cases supra, we are of the considered view that Wipro is not a suitable comparable vis-à-vis taxpayer, hence ordered to be excluded. MAPLE ESOLUTIONS LTD. (MAPLE) 23. The taxpayer sought exclusion of Maple from the final set of comparables for benchmarking the international transactions on ground of merger and acquisitions which has affected its profit leading to abnormal results with growth of 64% in sales over the previous year. The taxpayer has made analysis of revenue and profit of Maple for AY 2006-07, 2007-08 & 2008-09 in tabulated form as under :- Maple Esolutions Ltd. FY 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 Particulars Amount (INR) Amount (INR) Amount (INR) Amount (INR) Refer Page 1308 of PB Refer internal page 63 of FY 07-08 annual report Refer internal page 63 of FY 08-09 annual report Revenue 74,312,955.54 122,132,832.77 336,459,841.54 38,599,505.82 64.35% 175.49% -88.53% ....
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....to be excluded in many other cases decided by the Tribunal on the ground that its financial results are not credible as its Directors have been indicted in frauds. So, in view of the matter, we find that Maple is not a suitable comparable vis-à-vis taxpayer, hence ordered to be excluded. TRITON CORP. LTD. (TRITON) 27. The taxpayer sought to exclude Triton again on ground of acquisition and on the ground that its financials are not credible as its Directors were indicted for fraud; that it is a product company and segmental financials are not available and relied upon the decision of Cabliberated Healthcare Systems India Pvt. Ltd. (supra). Ld. AR for the taxpayer in support of his arguments brought on record that financial results of Triton for FYs 2006-07, 2007-08 & 2008-09 in tabulated form which are extracted as under:- Triton Corp Ltd. FY 2005-06 FY 2006-07 FY 2007-08 FY 2008-09 Particulars Amount (INR) Amount (INR) Amount (INR) Amount (INR) Refer Page 1344 of PB Refer page 22 of annual report Revenue 317,529,518.00 533,671,726.00 1,431,655,866.00 327,661,569.00 68.07% 168.27% -77.11% Refer Page 1344 of PB ....
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....y for the purpose of benchmarking of the arm's-length price of the international transaction of the ITeS segment of the assessee. The assessee has also placed before us the annual report of Infosys BPO Ltd for 2013 - 14. On looking at the annual report itself it is clear that the company has an imprint of Infosys brand all over it. In the companies overview at page number 4 of the annual accounts as mentioned that this company is the business process outsourcing subsidiary of Infosys and is engaged as outsourcing service provider. In the management discussion and analysis placed at page number 14 of the annual report, it is stated that Infosys BPO provides business process management services to organizations that outsource their business processes and Infosys BPO is majority owned and controlled subsidiary of Infosys Ltd. Rich industry experience held the company to understand the evolving needs of the clients better and provided them with the ability to offer appropriate solution across different industry verticals and horizontals , quickly. Further in paragraph number 1 it is stated that the company is committed to providing best- in - class services to both horizontal and verti....
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....e facts and circumstances of the case that scale of operation of comparable vis-à-vis tested party is a factor requires to be kept in mind. So, keeping in view the size and scale of Infosys BPO vis-à-vis the taxpayer, it is not a suitable comparable. 25. Hon'ble Delhi High Court has also confirmed the exclusion of Infosys BPO vis-à-vis routine ITES provider in case of H & S Software Development and Knowledge Management Centre Pvt. Ltd. (supra) by returning following findings :- ".......In the other two cases of M/s. Infosys BPO and Wipro BPO Ltd., the ITAT again in the opinion of this Court, quite correctly held that the corporate entities had a significant brand presence for profits and large corporate size, which could not be compared to the assessee's transactions." 26. In view of the facts and circumstances of the case discussed above and following the decision rendered by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2014-15 (supra) and decisions supra rendered by Hon'ble Delhi High Court, we are of the considered view that Infosys BPO is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded....
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....e earned by the company. 32. Suitability of Accentia has also been examined by the coordinate Bench of the Tribunal in ICC India Pvt. Ltd. in ITA No.25/Del/2012 and ordered to exclude the same by returning following findings :- "(i) Accentia Technologies Ltd. (Seg) : The assessee is objecting to the aforesaid company being treated as a comparable on the ground that during the year Geosoft Technologies (Trivandrum) Ltd. and Indian Technologies (India) Pvt. Ltd. amalgamated with Accentia during the year resulting in abnormal rise in profits. The Delhi Bench of the Tribunal in Cienna India (P) Ltd. vs DCIT 57 taxmann.com 329 ( DelhiTrib) as well as the Mumbai Bench in Petro Araldite (P) Ltd Vs. DCIT 144 ITD 625 (Mumbai-Trib) have held that a company cannot be considered as comparable because of financial results become distorted due to mergers, demergers etc. Similar view has also been taken by the Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd vs ACIT in ITA No. 5654/Del/2011. As there were amalgamations in Accentia Technologies Ltd. during the financial year in question, this fact makes it incomparable with the assessee company. In view of the aforesaid, we di....
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....raised by way of grounds no.6 & 7 qua adjustment in SDS segment contended that the ld. TPO/DRP have erred in selecting 12 out of 24 comparables and as such sought their exclusion viz. (i) Infosys Technologies Ltd., (ii) Wipro Ltd. (IT Seg.), (iii) KALS Informations Systems Ltd, (iv) Persistent Systems Ltd., (v) Tata Elxsi Ltd (Seg.), (vi) Megasoft Ltd., (vii) Hellos & Matheson Information Technology Ltd., (viii) Thirdware Solutions Ltd., (ix) Avani Cincom Technologies Ltd., (x) Sasken Communication Technologies Ltd. (Seg.), (xi) Flextronics Software Systems Ltd. (Seg), and (xii)Ishir Infotech Ltd.. We would decide the suitability of each of the aforesaid comparables one by one. INFOSYS TECHNOLOGIES LTD. (INFOSYS TECHNOLOGIES) 37. The taxpayer challenged the inclusion of Infosys Technologies as a comparable vis-à-vis the taxpayer to benchmark the international transactions on the grounds inter alia that it is functionally dissimilar being a product company; that it is a giant company with huge turnover and brand expenditure and further contended that this comparable was excluded by the Tribunal in taxpayer's own case in ITA No.477/Del/2016 for AY 2011-12 order dated 13.02....
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....eneurs Operate at minimal risks as the 100% services are provided to AEs Nature of Services Diversified-consulting, application design, development, reengineering and maintenance system integration, package evaluation and implementation and business process management, etc. (refer page 117 of the paper book) Contract Software Development Services. Revenue Rs. 9, 028 Crores Rs. 16.09 Crores Ownership of branded/ proprietary products Develops/owns proprietary products like Finacle, Infosys Actice Desk, Infosys iProwe, Infosys mConnect, Also, the company derives substantial portion of its proprietary products (including its flagship banking product suite "Finacle") Onsite Vs. Offshore As much as half of the software development services rendered by Infosys are onsite (i.e., services performed at the customer's location overseas). And offshore (50.20%) (Refer page 117 of the paper book) than half of its service, income from onsite services. The appellant provides only offshore services (i.e., remotely from India) Expenditure on Advertising/Sales promotion and brand building Rs. 61 Crores Rs. Nil (as the 100% services are provide to AEs) Expenditu....
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....ake all the difference and relied upon the decision of Toluna India Pvt. Ltd. in ITA No.6407/Del/2012, H&S Software Development, Knowledge Management Centre Pvt. Ltd. in ITA 912/2017 and Alcatel Lucent India Ltd. in ITA 515/2017. 42. When we examine annual report of Wipro, relevant page 1465 of the paper book, it shows that in the standalone financial statement, Wipro is earning its income from sales and service but when we examine its further bifurcation of revenue at page 1474 of the paper book, it shows that it has revenue from software services, sale of computers, toilet soaps, lighting products, etc.. Moreover, cost of goods sold under IT segment as per information supplied to the TPO u/s 133 (6) of the Act is Rs. 6313 crores whereas segmental accounts are prepared only on standalone basis. Furthermore, when we examine size and scale of Wipro vis-à-vis the taxpayer it has come on record that Wipro is having turnover of Rs. 9,616 crores as against Rs. 32 crores of the taxpayer. Similarly, Wipro has asset base of Rs. 2,626 crores as against Rs. 29 crores of the taxpayer. Hon'ble Delhi High Court vide order dated 29.07.2016 in ITA 393/2016 in Toluna India Pvt. Ltd. confi....
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....blic domain, it is difficult to rely upon the information obtained u/s 133 (6), so it would be in the interest of justice to set aside this issue to the TPO to decide afresh after providing adequate opportunity of being heard to the taxpayer. PERSISTENT SYSTEMS LTD. (PERSISTENT) 49. The taxpayer sought to exclude Persistent from the final set of comparables for benchmarking its international transactions qua SDS segment on the grounds inter alia that Persistent is functionally dissimilar being engaged in software products with non-availability of segmental financials; that the asset base of Persistent is 5 times more than the taxpayer i.e. asset base of Rs. 161 crores as against Rs. 29 crores of the taxpayer and relied upon the decisions of Lime Labs (I) Pvt. Ltd. in ITA No.1703/Del/2015, AVL India Software (P.) Ltd. (supra), Saxo India Pvt. Ltd. in ITA No.6148/Del/2015 and affirmed by Hon'ble Delhi High Court in ITA 682/2016. 50. However, on the other hand, ld. DR for the Revenue by relying upon the information supplied by Persistent in response to the notice issued u/s 133 (6) of the Act contended that revenue of Persistent from product licenses is Rs. 21.57 millions which ....
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....ble of a good comparison. Following the Mumbai Bench decision in Petro Araldite (P) Ltd. (supra), we direct the exclusion of this company from the list of comparables. The assessee succeeds." 54. So, in view of the matter, we are of the considered view that Persistent being a product company with no separate segmental accounts, has undergone merger during the year under assessment and having revenue from the outsources product development; having R&D expenditure of Rs. 2.71 crores as against nil of the taxpayer, having revenue from licence of products and is also earning royalty from the sale of products, is not a suitable comparable vis-à-vis taxpayer which is a routine SDS provider, hence ordered to be excluded. TATA ELXSI LIMITED (SDS SEGMENT) (TATA ELXSI) 55. The taxpayer sought exclusion of Tata Elxsi as comparable for benchmarking the international transaction qua SDS segment on the grounds inter alia that Tata Elxsi is engaged in embedded product design services which include design of hardware and software; that company is engaged in product R&D, development of hardware and software embedded products; that segmental results show only two segments i.e. software ....
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....d that this segment does not contain any revenue by way of sale of products and, therefore, the company was not functionally comparable. The Ld. AR has submitted that Tata Elxsi Ltd. has two segments viz. Systems Integration& Support and Software Development & Services. 5.04.1 It is seen that this company was excluded as a comparable on the ground that it was engaged in the development of specialized/niche products in the following rulings: JDA Software India (P) Ltd. Vs. ITO ([2016J 66 taxmann.com 327) (AY 2006-07), Yodlee Infotech P. Ltd. Vs. ITO [TS-63-ITAT-2013 (Bang)-TPJ (AY 2006-07), HCL EAI Services Ltd. Vs. DCIT [TS-133ITAT-2013(Bang)- TP], Goldman Sachs Services Private Limited [TS-435-ITAT- 2015(BangJ-TPJ (AY 2006-07), Novell Software Development (India) P. Ltd. [TS-257ITAT-2016 (Bang) (AY 2007-08), Telecordia Technologies India P. Ltd. [TS-325-ITAT- 2012(Mum)J (AY 2007-08), Virtusa (India) Pvt. Ltd. Vs. DCIT [TS253-ITAT-2013(HYD)-TPJ (AY 2007-08). In Virtusa (India) Pvt. Ltd. Vs. DCIT [TS-253- ITAT-20J3(HYD)TPJ the Hyderabad Bench of the ITAT in ITA No.1962/Hyd/2011 followed the decision of the Mumbai Bench rendered in the case of Telcordia Technologies India P. Ltd. ....
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....al set of comparables to benchmark international transactions qua SDS segment on the grounds inter alia that Megasoft is a software product service company and its segmental financials are not available; that asset base of Megasoft is 5.3 times larger than the taxpayer; that there was an amalgamation from August 2006 onwards with Visual Soft Technologies Ltd. taking over assets, liabilities, rights and obligations of Visual Soft Technologies Ltd. and relied upon the decisions in Avaya India Pvt. Ltd. in ITA 532/2019, Toluna India Pvt. Ltd. in ITA No.5645/Del/2011 and AOL Online India Pvt. Ltd. in ITA No.1036/Bang/2011. 62. When we examine page 1972 of the paper book under the head 'Management Discussion and Analysis', it has come on record that Megasoft has doubled its product revenue from Rs. 694 million to Rs. 1448 million with a record profit of Rs. 560 million. It is also come on record that Megasoft delivers value to customers and stakeholders through innovative technologies used for its own product development and for co-creating value for other product companies through its two divisions. 63. When we examine ld. DRP order at page 15, Megasoft has been retained as compara....
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....ices segment is 23.11 %. Hence both the segments are substantially different. .......................It was admitted that these objections were considered in the Co-ordinate Bench decision in the case of Broadcom India Research Private Limited in IT(IP)A No.1180/Bang/2011. Further, in the case of NXP Semiconductors India P. Ltd. Vs. ACIT in IT(IP)A No.1174/Bang/2011 also examined the above comparables. Similarly in the case of Capgemini India P. Ltd., Vs. ACIT [46 SOT 195} (Mum) has also examined these comparables. In all these decision of the Co-ordinate Benches, the objections as stated in the above column were examined in detail and the above said companies were held to be not comparable to the functionality of the said assessee's company. Since the facts are similar and assessee's business is also similar and TPO has selected the same comparables, we are of the opinion that the said comparables listed above cannot be considered as suitable for inclusion in the list for TP analysis. AO/TPO is directed to exclude the above comparables." 66. In view of what has been discussed above, we are of the considered view that Megasoft is not a suitable comparable vis-&agrav....
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....s taken a note of dissimilarities between the assessee therein and Lucid Software Ltd. As observed therein Lucid Software Ltd. company is also involved in the development of software as compared to the assessee, which is only into software services. Similarly, as regards Ishir Infoteck Ltd., the Tribunal has considered the decision of the Tribunal in the case of 24/7 Co. Pvt. Ltd to hold that Isltir Infotech is also outsourcing its work and, therefore, has not satisfied the 25% employee cost filter and thus has to be excluded from the list of comparables. As the facts of the case before us are similar, respectfully following the decision of the co-ordinate bench, we hold that these two companies are also to be excluded." 70. Ishir is ordered to be excluded by the coordinate Bench of the Tribunal in AOL Online India Pvt. Ltd. (supra) on account of failing employee cost filter as comparable vis-à-vis SDS provider by returning following findings :- "Ishir Infotech Ltd . ......................... Fails employee cost filter - only 3.96% of the operating revenue of the company (schedule 15 on page 13 of the Annual Report and page 7 of the Annual Report for operating revenu....
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....also proved that there is no quantitative details available with Helios & Matheson. Relevant portion is extracted as under :- "The company is engaged in training development and maintenance of computer software, the production of sale of such software cannot be expressed in any generic unit, hence, it is not possible to give the quantitative details of sales and certain information as required under part ii of schedule vi to the companies act, 1956." 74. Suitability of Helios & Matheson as comparable has been examined by the coordinate Bench of the Tribunal in Toluna India Pvt. Ltd. (supra) and ordered to exclude the same by returning following findings :- "23.2 ................further be noticed that the TPO has taken the figures of this company which represent 'Income from software sales and services'. Obviously, the assessee is not engaged in software sales. In view of our above discussion while dealing with the comparability of Flextronics Software Systems Limited, we are satisfied that this company cannot be considered as comparable and is, hence, directed to be excluded from the list of comparables. The assessee succeeds." 75. Similarly, Helios & Matheson ha....
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....ain. The taxpayer relied upon the information qua Avani from website wherein it is stated that Avani has developed its very first version of product called 'DXchange' in the year 2006 and relied upon the decisions in ST Microelectronics Pvt. Ltd. in ITA No.949/Bang/2011, Aircom International (India) Pvt. Ltd. in ITA No.6402/Del/2012 and Saxo India (P.) Ltd. (supra). 79. Ld. DR for the Revenue, on the other hand, contended that Avani is a pure software development service provider and relied upon the information given at pages 993, 994 and 996. At pages 993, 994 & 996 of the paper book, it is categorically mentioned that Avani is a pure software development service provider. 80. When there is an inherent contradiction between the data relied upon by the taxpayer from the website of the company and the data available in the annual report, we are of the considered view that the issue is required to be set aside to TPO to decide afresh after scanning the data available in the public domain by providing adequate opportunity of being heard to the taxpayer. SASKEN COMMUNICATION TECHNOLOGIES LTD. (SOFTWARE SERVICE SEGMENT) (SASKEN) 81. The taxpayer sought exclusion of Sasken as a....
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.... the paper book, it is proved on record that Sasken is having asset base of Rs. 95 crores which is 3.2 times as against Rs. 29 crores of the taxpayer. All these facts make Sasken not a suitable comparable vis-à-vis the taxpayer for benchmarking the international transactions qua SDS segment. 84. Coordinate Bench of the Tribunal in Toluna India Pvt. Ltd. (supra) directed exclusion of Sasken on grounds of acquisition as a comparable vis-à-vis SDS segment. Similarly, coordinate Bench of the Tribunal in Tata McGraw Hill Education Pvt. Ltd. (supra) also excluded Sasken on ground of merger of Sasken Network Systems Ltd. and Integrated Softech Solutions Ltd. on the ground that its financial results makes incomparable vis-à-vis routine SDS segment. 85. In view of what has been discussed above and following the aforesaid decisions rendered by the coordinate Bench of the Tribunal, we are of the considered view that keeping in view the acquisition, merger, asset base, R&D expenditure and inorganic growth of Sasken, it is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded. FLEXTRONIC SOFTWARE SYSTEMS LTD. (FLEXTRONIC) 86. The ta....
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....ling any software products, but, is doing the job assigned to it on cost plus basis. The contention of the ld. DR that since the majority of the revenue from 'Product and services segment' was from the services segment and, hence, this company should be considered as comparable, is bereft of any force. When figures of Products and services are combined, it cannot be ascertained as to how much contribution was made by the product division or the service division to the overall revenue of the Product and services segment. As the assessee is admittedly not engaged in selling its software products, such a company cannot be considered as comparable. It can be seen from the annual report of this company, a copy of which is available on page 88 of the paper book, that it consolidated its existing product portfolio and took steps to expand into further technologies by increasing the momentum in key initiatives in WIMAX, IMS, SIP & ISSIESS domains. This company has its own products such as ASN, WIMAX, Gateway Product with ASN Light. It is further relevant to note that the year ending of this company is not coinciding with that of the assessee and it is not known as to how the TPO ha....