TaxTMI 
TaxTMI 
2026 (8) TMI 175
X X X X Extracts X X X X
X X X X Extracts X X X X
....A No.- 6226/Del/2025 preferred by the assessee against the order of Commissioner of Income Tax (Appeal)-26, (hereinafter referred as the 'Ld. CIT(A)') dated 02.09.2025 arising out of the penalty order dated 31.03.2022 passed u/s. 271(1)(c) of the Act, passed by the ACIT, Central Circle-15, New Delhi (hereinafter referred as the 'AO') pertaining to A.Y. 2007-08. Since common issues are involved in these two appeals, the same is being disposed of by way of this common order for the sake of convenient and brevity. ITA No.- 5553/Del/2011 "That on the facts and circumstances of the case, and in law, 1. The Ld. Dispute Resolution Panel (DRP) erred both on facts and in law in confirming the Ld. AO/TPO's action of making an adjustment of Rs. 57,29,49,678 to the income of the appellant by holding that the international transactions undertaken by the appellant in do not satisfy the arm's length principle envisaged under the Income-tax Act 1961 ('Act'). In doing so the Ld. DRP has grossly erred in agreeing with the Ld. TPO's action of. 1.1. not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the p....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... total revenues as a search criteria for short listing and evaluating comparables for software development services; 1.6.6. exclusion of companies with onsite revenues greater than 75% of their export revenues for selecting comparables for contract software development services; and rejecting, in particular, the following filters applied by the Appellant in its TP documentation/ fresh search: 1.6.7. companies having other operating income (i.e. income other than manufacturing and trading income) to sales greater than 50% were accepted; 1.6.8. companies with net worth less than zero were rejected: 1.6.9. companies having research & development costs to sales less than 3% were accepted; and 1.6.10. companies having advertising, marketing and distribution costs to sales less than 3% were accepted. 1.7. including high-profit making companies in the final comparables' set for benchmarking a low risk captive unit such as the Appellant (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the single-minded int....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t that the Appellant is entitled to tax holiday under section 10A 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, 1.3. disregarding the 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) and in particular modifying/ rejecting the filters applied by the Appellant; 1.4 committing certain factual errors in accept-reject of comparables included in/excluded from in the final set of companies, 1.5. disregarding multiple year/ prior years' data as used by the Appellant in the TP documentation and holding that current year (ie. FY 2006-07) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; 1.5.1 without prejudice, in case the current year data is used, the appellant should be allowed to submit a fresh search so that all companies (for whom data for FY 2006-07 is now available, but....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch as the Appellant (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the single-minded intention of making an addition to the returned income of the Appellant;1.9. including certain companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 1.10. resorting to arbitrary rejection of low-profit/ loss making companies based on erroneous and inconsistent reasons; 1.11 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; 1.12. ignoring the business/commercial reality that since the Assessee is remunerated on an arm's length cost plus basis, i.e. it is compensated for all its operating costs plus a pre-agreed mark-up based on a benchmarking analysis, the Appellant undertakes minimal business risks as against comparable companies that are full fledged risk taking entrepreneurs, 1.12.1 that due to the fact that the appellant is a captive contr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tuous, 3. The solitary issue involved in ITA No. 5553/Del/2011 is with regard to the inclusion/exclusion of comparables. It is submitted that. this is the second round of litigation for this appeal for Alcatel Lucent Technologies India P Ltd (ALTI) now known as Alcatel Lucent India Ltd (ITA 5553/DEL/2011) before ITAT Delhi. The remand is qua the Software Development Segment (SWD segment) and given the scope of limited remand, other than the exclusion of Ishir Infotech Limited, Sasken Communication Technologies Limited, Tata Elxsi Ltd and inclusion of Akshay Software - no other comparable/issue can be argued. 4. The ld AR submits that under the Software Development Services (SWS) Segment, Alcatel Lucent India Ltd (earlier known as ALTI) is engaged in provision of contract software development services amongst other services to its AEs. SWD was benchmarked using TNMM in the TP Study. The TPO did not change TNMM while benchmarking, but only questioned filters and comparables. It is submitted that post remand by HC, the assessee only seeks to exclude 3 comparables as appearing in TPO's OGE set - Ishir, Sasken and Tata Elxsi and even if inclusion of Akshay is not contested - their....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n.com 431 (Delhi - Trib.) (item 4 of table after para 11 on pg. 308 of paperbook-II) iv) Even if director's remuneration is added as employees cost, even then Employee Cost would be 5.3% - Hewitt Associates (India) Pvt Ltd v. ACIT., ITA 5736/DEL/2011., order dated 31.05.2022 (para 14-14.5 on pg.133-134 of paperbook-II) v) Computer Sciences Corporation India (P.) Ltd. v. ACIT [2023] 155 taxmann.com 510 (Indore - Trib.) where it has been clarified that professional fees would not form a part of employee cost and for AY 2007-08, Ishir would fail the employee cost filter (para 21.5 on pg. 218 of paperbook-II) 6. With respect to Sasken Communication Technologies Ltd, it is submitted that initially it was a part of TP study but exclusion was sought at TPO order stage on ground of significant intangibles, failing R&D filter and extra-ordinary event of restructuring. The TPO rejected these objections and included Sasken as comparable holding that R&D to sales > 3% filter, was to be rejected. Onsite revenue filter is qualified. The DRP upheld the inclusion. 6.1 The ld AR argued that Sasken has extra-ordinary events in its financial statements-merger/acquisition of en....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inctly different from routine software development service (see pg. 187 and 200 of AR paperbook). It is stated that for same AY, SDS segment has been considered dissimilar by ITAT Delhi in Agilent Technologies (International) Private Limited v. ACIT., ITA 1084/DEL.2016, order dated 18.11.2019 (Delhi ITAT) (para 64-69 on pg. 112-113 of paperbook-II) and in Hewitt Associates (India) (P) Ltd v. ACIT., [2022] 142 taxmann.com 322 (Delhi-Trib) (para 23-23.5 on pg. 141-142 of paperbook-II); Motherson Sumi Infotech & Design Ltd. v. ACIT., [2019] 112 taxmann.com 300 (Delhi - Trib.) (para 36 on pg. 299 of paperbook-II); Global Logic India Pvt Ltd v. ACIT., ITA No. 5809/DEL/2011, order dated 22.01.2015 (para 28-29 on pg. 186 of paperbook-II). Reliance is also placed on ITAT Delhi in Kaplan India (P.) Ltd v. ACIT., [2019] 105 taxmann.com 210 (Delhi - Trib.) (para 5.5 on pg. 318 of paperbook-II) 8. With respect to Akshay Software, the ld AR argued for its inclusion. It is submitted that it was a Part of TP study, excluded by TPO after applying the 75% onsite revenue filter after holding that Akshay's onsite revenue was more than 75% of its total revenue (pg. 92 of appeal set). The Annual Rep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orts Ltd 14.75% 14.75% 15 Tata Elxsi Ltd 30.31% Tata Elxsi to be excluded on functional dissimilarilty Arithmetic Mean 17.90% 14.87% Margin as per the assessee (initial search) 9.70% 9.70% Upper end of the range (+/- 5%) 15.19% 15.19% Within ALP NO YES 10. Per contra, the Ld. DR strongly contended that in the case of Ishir Infotech Ltd., the TPO applied the employee cost filter only as a trigger for further evaluation of functionality of companies in detail. The TPO actually, applied the Related Party Transaction (RPT) filter, which is reflected from page 73 of the paper book. The Ld. DR further submitted that the Hon'ble High Court has send back the matter for examination of the business model, which was not argued earlier. With regard to Tata Elxsi Ltd, the ld DR submitted that the issue may be restored to the file of the TPO for examining the business model of the companies selected as comparables. With respect to Shasken Communication Technologies Ltd, it is the say of the Ld. DR that the issue relating to amalgamation/merger is a new fact, which was not raised b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an 25% of operating revenues in the case of Ishir. The assessee contests the said employee cost filter and states that employee cost of Ishir is only 3.95% which indicates different business model of outsourcing. Further, the assessee raises objection that the information garnered from notice u/s. 133(6), was not shared with the assessee to elicit response from the assessee. 12.2 We further find from the perusal of the TPO's order that there is no reference or indication as to how the actual employee cost to sales ratio is calculated by the TPO. While the TPO calculates it at more than 25%, the calculation furnished by the assessee now, ranges from 3.95 % to 5%. In such factual matrix, and in the light of the hon'ble High Court decision to remand, we are of the considered view that the issue of the inclusion/exclusion of Ishir Infotech Ltd be set aside to the file of the TPO for a fresh adjudication in the light of arguments presented now. The TPO is directed to examine the employee cost filter in the case of Ishir Infotech afresh in the light of financials gathered from Ishir Infotech u/s. 133(6) and calculation submitted by the assessee as also to take into consideration the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment company wherein Tata Elxsi provides embedded product design services and development of hardware and software embedded products. In such factual matrix, and in the light of the hon'ble High Court decision to remand, we are of the considered view that the issue of the inclusion/exclusion of Tata Elxsi Ltd be set aside to the file of the TPO for a fresh adjudication in the light of arguments presented now. The TPO is directed to examine the software Development segment of Tata Elxsi from the functional point of view as also to take into consideration the case laws relied upon by the assessee and adjudicate afresh on its inclusion/exclusion. The TPO is directed to accord reasonable opportunities to the assessee to represent its case. The grounds are disposed off in aforesaid terms. 12.6 With respect to Akshay Software, we find that the TPO has rejected its inclusion as comparable after holding that Akshay's onsite revenue was more than 75% of its total revenue. The assessee has argued that the Annual Report of Akshay Software is silent on onsite and offsite revenue classification while the TPO has relied upon 133(6) response obtained. We find that this aspect of margins in off....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gence and has furnished accurate particulars in its return of income, transfer pricing certificate and transfer pricing report obtained from an external independent expert. 6. That on the facts and circumstances of the case and in law, the Ld. AO and Ld. CIT(A) have erred in not appreciating the fact that, the Ld. Transfer Pricing Officer, though accepted the method adopted by the Appellant to the most appropriate method and profit level indicator selected by the Appellant for determining the ALP of the international transactions, proposed an adjustment only on account of difference of opinion in selection of comparable companies and there does not exist any "mens rea" or deliberate act of concealment or furnishing inaccurate particulars in the present case warranting levy of penalty. 7. That on the facts and circumstances of the case and in law, the Ld. CIT(A) grossly erred in ignoring the settled position of law that where a substantial question of law is admitted by the Hon'ble High Court in quantum proceedings, as in the current case, penalty under section 271(1) is not leviable. 8. That without prejudice to the above, on the facts and circumstanc....