TaxTMI 
TaxTMI 
2019 (12) TMI 358
X X X X Extracts X X X X
X X X X Extracts X X X X
....qua the assessment year 2007-08 on the 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 accep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the directions of the Hon'ble DRP in respect of certain items (viz. treatment of fringe benefit tax and computational errors while computing operating margins 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 interna....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be made :- A. Software Development Segment Rs. 49,176,297 B. ITES Rs. 229,459,111 Total : Rs. 278,635,408" 5. The taxpayer carried the matter before the ld. DRP by way of filing objections, who has given partial relief to the taxpayer 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,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....luded by the taxpayer one by one. WIPRO LIMITED (BPO SEGMENT) (WIPRO) 12. Ld. AR for the taxpayer sought exclusion of Wipro from the final set of comparables on the grounds inter alia that it is a product company; that it has significant intangibles; that Wipro has acquired substantial business and brand of North West Switchgear Ltd.; that Wipro is a giant company 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 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ue of Wipro that the taxpayer is also a big brand and moreover, brand is always built with lot of corresponding expenses and relied upon the orders of the ld. TPO/DRP. 17. The contentions raised by the ld. DR for the Revenue are not sustainable when we examine the profile of Wipro in totality which is a giant company having huge turnover of Rs. 940 crores vis-à-vis turnover of the taxpayer of Rs. 142 crores, which is 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t an entity is able to offer would be relevant; although functionally, the two entities may be similar in terms of the services or products they offer, brand does play its own role in price or cost determination. If this singular aspect is kept in mind, the ITAT's approach cannot be faulted with." 22. Similarly, Hon'ble Delhi High Court in H & S Software Development and Knowledge Manager Centre Pvt. Ltd. (supra) has confirmed the exclusion 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, 200....
X X X X Extracts X X X X
X X X X Extracts X X X X
....omparability. ....... 11. We find that there is a direct order by the Delhi Benches of the Tribunal in which these two companies have been excluded because of financial irregularities committed by their directors. In the absence of any contrary order brought on record by the ld. DR permitting the inclusion of companies under cloud, in the list of comparables, respectfully following the precedent we direct the exclusion of these two companies from the list of comparables." 26. Maple has been ordered 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....axpayer's own case in ITA No.4191/Del/2018 for AY 2014-15 order dated 06.05.2019. 31. Ld. DR for the Revenue, on the other hand, relied upon the orders passed by the ld. TPO/DRP. 32. Coordinate Bench of the Tribunal in taxpayer's own case for AY 2014-15 (supra) ordered to excluded Infosys BPO as a comparable for benchmarking the international transaction for ITES segment by returning following findings :- "17. We have carefully considered the rival contention and perused the orders of the lower authorities wherein the reasons given for inclusion of the above comparable company 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the business model of the taxpayer. Moreover, when we examine scale of business of Infosys BPO vis-à-vis the taxpayer, it is a giant company with huge turnover and having significant intangibles because as per annual report, relevant page 1239 of the paper book, Infosys BPO is having a turnover of Rs. 649 crores whereas turnover of the taxpayer is Rs. 142 crores. Moreover, Infosys BPO has brand expenditure of Rs. 56 lakhs as against nil expenditure of the taxpayer. 24. Moreover, ratio laid down by Hon'ble Delhi High Court in case of Avaya India Pvt. Ltd. (supra) is applicable to the 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent are 100683% and 5148%. 31. Coordinate Bench of the Tribunal in AOL Online India Pvt. Ltd. in ITA No.1036/Bang/2011 has also examined the suitability of Accentia as a comparable vis-à-vis routine ITES provider and ordered to be excluded on ground for extra ordinary events i.e. amalgamation of subsidiary resulting in growth of revenue of 100683% and on functional non-comparability as Accentia is into the activity of medical transcription, billing & coding and software development and implementation and on the ground that business promotion expenses constitute 28.34% of the total operating revenue 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 Tribu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....12% 24 Wipro Ltd. (Seg.) 33.48% Average 23.78% After working capital adjustment OP/OC% 31.56% 35. Consequently, ld. TPO proposed the adjustment of ALP qua provision of SDS segment as under ;- Operating Cost 27,94,85,304/- Arms Length Price 31.56% of the Operating Cost Arms Length Price (ALP) @ 131.56% of operating cost 36,76,90,866/- Price received vis-à-vis the Arms Length Price : Arms Length Price (ALP) @ 131.56% of operating cost 36,76,90,866/- Price charged in the international transactions 32,16,44,804 Shortfall being adjustment u/s 92CA 4,60,46,062/- 36. Ld. AR for the taxpayer in order to compress the controversy 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 X X X Extracts X X X X
X X X X Extracts X X X X
....DS provider, a captive service provider by the Tribunal by returning following findings :- "5. The tribunal has observed that the assessee was not comparable with Infosys Technologies Ltd., as Infosys Technologies Ltd. was a large and bigger company in the area of development of software and, therefore, the profits earned cannot be a bench marked or equated with the respondent, to determine the results declared by the respondent-assessee. In paragraph 3.3 the tribunal has referred to the difference between the respondent-assessee and Infosys Technologies Ltd. For the sake of convenience, we are reproducing the same:- Basic Particular Infosys Technologies Ltd. Agnity India Risk Profile Operate as full-fledged risk taking entrepreneurs 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/ ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rom the software product has increased to 67.6% whereas segmental financials are not available, so Infosys is not a suitable comparable. So, in these circumstances, we are of the considered view that Infosys Technologies is not a suitable comparable vis-à-vis taxpayer, hence ordered to be excluded. WIPRO LIMITED (WIPRO) 41. The taxpayer sought exclusion of Wipro for benchmarking its international transactions qua SDS segment on the grounds inter alia that Wipro is a product company; that its segmental accounts are not prepared on consolidated basis; that Wipro has an inventory amounting to Rs. 2,404 millions which shows that it is engaged in trading function apart from rendering services; that Wipro is a giant company as its size and scale vis-à-vis the taxpayer make 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ds letter dated 13.01.2009 issued by the Kals to the TPO in response to notice issued u/s 133 (6) of the Act wherein in para 5, it is categorically mentioned that income from export/ sales/software products and export of sales/software training is shown as nil. 47. No doubt, in the Notes to the Financial Statement, available at page 1913 of the paper book, categorically claims that Kals is engaged in development of software and software products since its inception. The company consisting of STP unit engaged in development of software and software products and a training centre engaged in training of software professionals on online projects. 48. At the same time, when we examine page 1911 of the paper book, Kals has shown inventory of Rs. 1.01 crores since entire data is available in the public 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 inter....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elopment service provider in case of AVL India Software (P.) Ltd. (supra) by returning following findings :- "37. We find that in the case of Toluna India Pvt. Ltd (supra), the Tribunal has excluded this comparable from the list of comparables by observing as under: "33. After considering the rival submissions and perusing the relevant material on record, we hold that this company also cannot be considered as comparable because of merger of another company into it, which fact is evident from page 196, of @ the paper book. It can be seen that a subsidiary company was merged into this company pursuant to judgment of Hon'ble Bombay High Court w.e.f. 1.4.06. Because of the merger of subsidiary into this company, we hold that the financial position of this company cannot be construed as normal capable 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 unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Report' proves that Tata Elxsi incurred Rs. 10.91 crores i.e. 3.54% of the total revenue as R&D expenditure and all these functions are not being performed by the taxpayer which makes it incomparable to the taxpayer. 58. Coordinate Bench of the Tribunal in case of Mentor Graphics (India) Pvt. Ltd. (supra) ordered to exclude Tata Elxsi as a comparable vis-à-vis SDS provider by returning following findings :- "5.5 ...........ITAT while excluding Tata Elxsi Ltd. are in Para 5.04 and 5.04.1. The same are being reproduced as under for a ready reference:- "5.04 Tata Elxsi Limited ('Tata Elxsi") - The Ld. AR has submitted that this company has been included by the TPO on the ground that it is functionally similar to the assessee company. The Ld. AR has also submitted that this company has software segment and 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 grou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ite distinct from that of the assessee. It can be seen that this company is into development of hardware and software for embedded products such as multi-media and some other electronics, etc. Apart from that, this company is also engaged in making some programmes developing technology intellectual property. As the nature of activity carried out by the assessee in question is nowhere close to that of Tala Elxsi Ltd., we hold that this company cannot be included in the list of comparables. Accordingly, this company is directed to be excluded. The assessee succeeds." 60. In view of the matter, we are of the considered view that Tata Elxsi is not a suitable comparable vis-à-vis the taxpayer to benchmark its international transactions qua SDS segment. MEGASOFT LIMITED (MEGASOFT) 61. The taxpayer sought exclusion of Megasoft from the final 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 S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arable. Accordingly, this company is directed to be excluded. The assessee succeeds." 65. Similarly, coordinate Bench of the Tribunal in AOL Online India Pvt. Ltd. (supra) also ordered to exclude Megasoft as comparable vis-à-vis routine SDS provider by returning following findings :- "4.2. Assessee is objecting to the balance of the comparables and objections on each of the comparables are as under: "Megasoft Ltd. ....................... 1. Functionally Not Comparable - company has two segments - BLUEALLY and XIUS-BCGI Under the XIUSBCGI company carried out product development. Software development is carried out under BLUEAPPLY division. 2. The product segment has employee cost of 27.65% whereas software services segment has employee cost of 50%. Similarly profit margin on cost in product segment is 117.95% and in case of software services 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(IP) No.1086/Bang/2011 for AY 07-08 held that the companies should be excluded for the reasons as held in the following paras: "22. The learned counsel for the assessee submitted that these two companies are also to be excluded from the list of comparables on the basis of the finding of this Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. dt 22.2.2013, wherein at pages 17 and 22 of its order the distinctions as to why these companies should be excluded are brought out. He submitted that the facts of the case before us are similar and, therefore, the said decision is applicable to the assessee 's case also. 23. The learned DR however objected to the exclusion of these two companies from the list of comparables. On a careful perusal of the material on record, we find that the Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. (cited supra) has 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rder to exclude Ishir from the final set of comparables. HELIOS & MATHESON INFORMATION TECHNOLOGIES LTD. (HELIOS & MATHESON) 72. The taxpayer sought to exclude Helios & Matheson on the grounds inter alia that it is functionally dissimilar being engaged in software sales and services and it earns also revenue from training development and from sale of software of which segmental financials are not available and relied upon the decisions of Toluna India Pvt. Ltd. and AOL Online India Pvt. Ltd. (supra). 73. When we examine the financials of Helios & Matheson in the annual report, available at page 1663 of the paper book, it shows that Helios & Matheson is having income from software sale and services to the tune of Rs. 178,63,80,304/- with no segmental financials so as to explain the income from software services and to specify income from software sales and income from software services. When we examine page 1666 of the paper book it is 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 sal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsidered as suitable for inclusion in the list for TP analysis. AO/TPO is directed to exclude the above comparables." 76. In view of the matter, we are of the considered view that Helios and Matheson cannot be a suitable comparable vis-à-vis the taxpayer being functionally dissimilar as it has income from software sales and services with no segmental financials available, hence we order to exclude the same from the final set of comparables. THIRDWARE SOLUTIONS LTD. (THIRDWARE) 77. Though the taxpayer has challenged the Thirdware as comparable, but during the course of arguments, the ld. AR for the taxpayer submitted that he does not press exclusion of Thirdware from the final set of comparables, hence it is ordered to be retained. AVANI CIMCON TECHNOLOGIES LTD. (AVANI) 78. The taxpayer sought exclusion of Avani from the SDS segment on the grounds of functional dissimilarity being engaged into software products and the segmental results are not available in the public domain. 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 relie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rk Systems Ltd. and Integrated Softech Solutions Ltd. leading to robust growth as its revenue have increased by 55% from Rs. 308.1 crores in 2005-06 to Rs. 477.1 crores in 2006-07 with software services including Network Engineering Services contributing 95% to the revenue. Its own profit grew from Rs. 22.9 crores in FY 2006-07 to Rs. 45.3 crores during the year under assessment, registering a growth of 93% as is evident from annual report available at page 2357 of the paper book. 83.1 Furthermore, perusal of Schedule 3 forming part of the balance sheet qua fixed assets, available at page 2425 of the paper book, shows that Sasken has intangible assets amounting to Rs. 5.72 crores as against nil of the taxpayer. Sasken has also incurred R&D expenditure to the tune of Rs. 22.23 crores as per profit & loss account, available at page 2423 of the paper book, as against nil R&D expenditure of the taxpayer. 83.2 Furthermore, as per Schedule 3 forming part of the balance sheet, available at page 2425 of 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nst nil R&D expenditure of the taxpayer. So, all these facts make Flextronic not a suitable comparable vis-à-vis the taxpayer which is a routine SDS provider as a risk bearing entity. Moreover, a product company cannot be compared for benchmarking the international transactions vis-à-vis routine SDS provider. 88. Coordinate Bench of the Tribunal in Toluna India Pvt. Ltd. (supra) excluded Flextronic as a comparable vis-à-vis routine SDS provider on the ground that this company is having a product revenue of Rs. 92.1 crores whereas the taxpayer is not selling any product by returning following findings :- "21.2. After considering the rival submissions and perusing the relevant material on record, we find this company to be not comparable to that of the assessee. The reason for our this decision is that the TPO has taken segmental data of 'Product and service segment' of this company which has Product revenue of Rs. 92.1 crore. In contrast to it, the instant assessee is not selling 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....