9911796707
TMI Blog2022 (8) TMI 893X X X X Extracts X X X X X X X X Extracts X X X X ..... AE, the AO referred the matter to the TPO u/s 92CA of the IT Act for determination of the ALP of the international transaction entered into by the assessee with its AEs. During the course of TP assessment proceedings, the TPO noted that the assessee has entered into the following international transactions as mentioned in the TP study report:- Nature of transaction Value of international transaction Provision of information technology enabled services 1,654,155,070 Provision of software development services 363,519,061 Cost recharges 8,766,863 2.1 The TPO observed that the financial results of the tax payer and the method of benchmarking as reported in the transfer pricing report is as under:- Particulars Software ITES Operating revenues 363,519,061 1,694,228,110 Operating expenses 321,015,223 1,544,710,632 Operating profit 42,503,838 149,517278 NCP (percent) 13.24 9.68 Method used TNMM TNMM PLI NCP(%) NCP(%) No. of comparables 16 07 Mean margin of comparables 13.06 14.62 No. of comparables for which data used for the financial year 2005-06 15 07 No. of comparables for which data used for the financial year 2006-07 16 07 No. of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining the following revised list of 18 comparables whose average OP/OC was at Rs.21.85%:- S.No. Name of the Company OP/OC (%) 1. Avani Cimcon 21.65 2. Bodhtree Consulting Limited 19.14 3. e-zest Solution Limited 28.95 4. Flextronics (Ancient Technologies Limited) 8.07 5. Igate Global Solution Limited 13.9 6. Infosys 40.41 7. LGS Global Limited 41.94 8. Kals Information System Limited (Seg) 26.64 9. Mindtree Limited (Segment) 15.51 10. President System Limited 27.23 11. Quintegra International Limited (Seg) 21.74 12. R System International Limited (Seg) 15.3 13. R.S. Software 6.46 14. Sasken Communications Technologies Limited (Seg) 13.44 15. Tata Elxsi 18.97 16. Thirdware Solutions Limited 18.01 17. Wipro Limited (Seg) 28.38 18. Sofitel India Limited 25.59 Average 21.85 4.1 After allowing the working capital adjustment at 0.62%, the arm's length margin was determined at 21.23%. The operative para of the AO at page 3 of his order reads as under:- Total Operating Cost (A) 321,015,223 Arm's Length Operating Profit @21.23% 389,166,755 Price charged in International transaction 363,519,061 105% of International ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tively referred to as 'impugned transactions'). 2. the DRP has erred in concurring with findings of the AO/ TPO and disregarding, without appropriate justification, the economic analysis undertaken by the Appellant for establishing the ALP of the impugned transactions. 3. the AO/ TPO has erred in conducting a fresh economic analysis for determination of the ALP of the impugned transactions and holding that the Appellant's international transaction pertaining to provision of contract software development services and contract IT-enabled services are not at arm's length. 4. the AO/ TPO has erred by: a) not accepting the use of multiple year data, as adopted by the Appellant in its TP documentation; and b) determining the arm's length margins / prices using data pertaining only to financial year ('FY') 2007-08 which was not available to the Appellant at the time of complying with the Indian TP documentation requirements. 5. the AO/ TPO has erred, by wrongly rejecting certain comparable companies and adding functionally dissimilar companies to the final set of comparables for the impugned transactions. 6. the TPO/AO has erred by rejecting certain comparable companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the appeal. The Appellant prays for appropriate relief based on the said grounds of appeal and facts and circumstances of the case." 5. The Tribunal, vide order dated 14th June, 2013, partly allowed the appeal of the assessee for statistical purposes. Against the order of the Tribunal, the assessee went to the Hon'ble High Court. The Hon'ble High Court, vide order dated 2nd July, 2015, restored the issue to the file of the Tribunal for fresh adjudication by observing as under:- "1. This is an appeal against the order of the Tribunal dated 14.06.2013 rendered in an appeal against the order of the Dispute Resolution Panel. 2. Learned counsel appearing on behalf of the appellant reframed the questions of law as under:- "1) Whether on the facts and circumstances of the case, the order of the Tribunal was perverse and it fell into error while giving open-ended, capricious/arbitrary directions to the AO/TPO to reconsider certain comparable companies afresh, placing reliance on the Special Bench constituted in the case of Giesecke & Devirent on application of turnover filter, which was pending adjudication and subsequently disbanded? 2) Whether on the facts and circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopt appropriate proceedings including in any appeal that may be filed against the main order. 5. The second issue has been decided against the appellant. We clarify that we are not considering the same at this stage. The matter before the Tribunal remains inconclusive at this stage in view of what we have mentioned regarding the first question namely that the order of the Tribunal is not capable of being implemented on account of ITA No. 5924/DEL/2012 having been withdrawn and the Special Bench in that matter having been dissolved. In our view, it would be appropriate that the matter is finally decided by the Tribunal and the appellant be granted liberty to challenge the order if necessary including on question no. 2 in an appeal against the final order. There would be no question of limitation, in such a case. The limitation would begin only after the final decision of the Tribunal. 6. It is also clarified that it would be open to the Tribunal to decide whether or not to permit the appellant to make any further arguments on the second question. It is also clarified that all the contentions raised in this appeal regarding question no. 2 can also be raised in the appeal that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices is not comparable to the assessee which is a captive service provider which by itself performs merely back office support functions. He submitted that the ITAT had sought to include this comparable on the basis of the decision of the coordinate Bench of the Tribunal in the case of Rampgreen Solutions Pvt. Ltd. Vs. CIT, ITA No.6286/Del/2012. However, the decision of the Tribunal in the case of Rampgreen Solutions Pvt. Ltd. has been set aside by the Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. Vs. CIT vide ITA No.102/2015. Therefore, the basis of inclusion does not stand today. 8.1 He also drew the attention of the Bench to the decision of the Hon'ble Punjab & Haryana High Court in the case of Mercer Consulting (India) Pvt. Ltd., where the Hon'ble High Court has discussed the issue of outsourcing. 8.2 He drew the attention of the Bench to the decision of the Mumbai Bench of the Tribunal in the case of John Deere India Pvt. Ltd., vide ITA No.2236/PN/2012 where the Tribunal has held that when both the companies have different operating models, there cannot be any comparison between the two entities having different business spheres and distinct mode of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TERNATIONAL INFOSYS BPO FY 2007-08/AY 2008-09 FY 2007-08/AY 2008-09 TURNOVER INR 169.41 crores @ pg 42 of Appeal set INR 825 crore @ pg 20 of Annual Report BRAND EXPENSE NIL @pg 319 of PB II INR 78.32 lacs (@ pg 25 of Annual Report ASSET BASE INR 54 crore @pg 315 of PB II INR 130.8 crore @pg 19 of Annual report 12. Referring to the decision of the Tribunal in Assessee's own case vide ITA No.1084/Del/2016 for AY 2007-08 order dated 18.11.2019, copy of which is placed at pages 1-55 of the case law compilation, he submitted that the coordinate Bench of the Tribunal, following the decision of the Hon'ble Delhi High Court in case of Avaya India Pvt. Ltd. has excluded this company from the list of comparables. Relying on various decisions, filed in the case law compilation, he submitted that Infosys BPO Limited should be excluded from the list of comparables. 13. So far as Wipro Limited (BPO Segment) is concerned, the ld. Counsel for the assessee submitted that this company is also not a valid comparable due to incomparable scale of operations and presence of huge intangibles and brand value of Wipro. He submitted that the turnover of Wipro for the impugned asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - (Refer page 51 of FY 0607 annual report) Refer page 51 of FY 07-08 annual report) Refer page 69 of FY 09-10 annual report Revenue 285.000.00 287,231.664.00 509,346,944.00 801,440,931.00 100683.04% 77.33% 57.35% Profit/Loss as per financials 43,164,681.00 66,771,702.00 152,336,854.00 252,670,608.00 54.69% 128.15% 65.86% 16. He submitted that the Tribunal in the first round of litigation had remanded the matter back to the file of TPO to verify facts whether the merger has an effect on the comparability of this company. 17. So far as exclusion of HCL Comnet is concerned, he submitted that this company was already remanded back by the Tribunal before the TPO/AO for verifying the RPT/ sales computation of the company. Therefore, he has no objection if this comparable is restored to the file of the AO/TPO for verification of the RPT filter. 18. So far as Coral Hub is concerned, he submitted that Coral Hub should be excluded from the list of comparables as it follows outsourcing model of business whereas the assessee is a captive service provider which by itself performs its back office support functions. The two models are very d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnologies Pvt Ltd. Further, coordinate Bench of the Tribunal in the case of Alcatel Lucent India Limited vide ITA No. 6856/Del/2015) has excluded Infosys Technologies Ltd., from the list of comparables on account of high turnover and the decision has been upheld by the Hon'ble jurisdictional High Court. He accordingly submitted that Infosys Technologies Ltd., should be excluded from the list of comparables. He also relied on the following decisions:- 1) Pentair Water India Pvt. Ltd. v. CIT (ITA No. 18/2015) - Mumbai High Court 2) Alcatel Lucent India Limited (ITA No. 6856/Del/2015) has been upheld by the Hon'ble Delhi High Court vide its order dated 18.07.2017 in ITA 515/2017 3) UT Starcom Inc. (India Branch)(ITA No.5848/Del./2011) which has been upheld by the Hon'ble Delhi High Court vide its order dated 25.09.2017 in ITA 767/2017 22. So far as Wipro Limited is concerned, he submitted that Wipro Ltd. is engaged in the business of IT services and trading of IT products to its clients and there is no breakup of revenue between IT Service and Products. Further, the company has also undergone an amalgamation which has resulted in an exceptional performance of the company during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntory in its books of accounts. The annual report of the company also states that it is engaged in production and supply of software product. Even the segmental accounts does not provide the bifurcation of software services and products separately. Therefore, this company should not be included in the final comparable list. 25. So far as Persistent Systems Limited is concerned, he submitted that Persistent is a functionally different company, engaged in Software Development and software products with no segment at financials available. The Annual report of the above company which is placed in the paper book provides that the company's revenue comprises of sale of products and services . The company also maintains the segmental accounts on consolidated basis only which can be verified from page 83 of the annual report. Further, the major revenue is from outsourced product development. Referring to the decision of the Tribunal in assessee's own case for AY 2007-08 vide ITA No. 1084/DeI/2016, order dated 18.11.2019 he submitted that this company was rejected from the final list of comparables on account of Persistent being a product company with no separate segmental accounts, has un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Referring to the decision of the Tribunal in the case of ABB Global Industries & Services Limited vide ITA No. 1612/Bang/2012, he submitted that ABB Global Industries & Services Ltd., was held to be incomparable to the assessee due to functional dissimilarity and non-availability of segmental details. Referring to the decision of the Bangalore Bench of the Tribunal in the case of ST Microelectronics Pvt Ltd. Vide IT(TP)A No.949/Bang/2011, he submitted that the Tribunal had excluded Avani Cimcon from the list of comparables on the ground that this company is engaged in software products where there is no bifurcation of revenue from sale of export and services. Relying on various other decisions, he submitted that Avani Cimcon should be excluded from the list of comparables. 29. So far as LGS Global Limited is concerned, the ld. Counsel for the assessee submitted that LGS Global Limited is not comparable as the company is engaged in rendering diversified services like product evaluation design and development, business process outsourcing ("BPO") and other activities which are different from that of the assessee which is a captive services provider rendering software services. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he list of comparables on the ground that it is engaged in proprietary software products and owns its own intangibles. He accordingly submitted that the above comparable should be excluded from the list of final set of comparables. 32. So far as Softsol India Limited is concerned, the ld. Counsel for the assessee only requested to consider the correct margin. He submitted that the TPO while giving effect to the DRP directions has computed the margin of Softsol India Limited at 25.59% as against the correct margin of 15%. He submitted that for computation of margin, the assessee has relied upon the Safe Harbor Rules notified by CBDT, which specifies the operating and non-operating items while computing the margin. He submitted that if the above companies are excluded, then, the adjustment shall be nill. 33. The ld. DR, on the other hand, heavily relied on the orders of the AO/TPO/DRP. 34. We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. First of all, we take up the grounds challenging the inclusion of the comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld require an enterprise carrying on its own activities to maintain staff along with attendant facilities to ensure compliance with such legislation. The financial difference between such enterprises is bound to be enormous. 39. ........ 40. The Tribunal's decision not to consider this case is, therefore, correct." 37. We find the issue of comparability of Coral Hub to captive back-office service providers is also covered in the favour of the appellant for the same AY by the decision dated 25.05.2017 of the High Court in IT A Nos. 924/2016 in the case of New River Software Services Pvt. Ltd. v. Pr. CIT Income Tax(l), New Delhi] wherein it has been held as under: "As far as exclusion of Coral Hub Ltd. (earlier known as Vishal Information Technology Ltd.). the 1TAT has, in the impugned order, given the following reasons therefor: "8.3. Coral Hub (Vishal Information Technologies Ltd.): The annual report of this company is contained at page 476 to 525 of the PB. However, the actual operations carried out by assessee have not been specified. The assessee's main contention is that this company was outsourcing a considerable portion of their business as is evident from the ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said entity. 38.1 We find in the case of Maersk Globed Centers (India) Pvt. Ltd. (supra), the DRP itself had accepted the objection of the Assessee and had excluded Vishal as a comparable for the reason as quoted below:- "... that it had a very low employment cost and very high cost on account of venture payment, which suggested that its business model was that of an outsourcing company and in view of this functional difference, Vishal Ltd. could not be considered as a comparable. " 39 We further find during the subject year, the comparable company has an inventory of INR 8.05 crore (as per internal page 9 of the annual report) whereas Agilent does not have any such inventory (page 311 of the PB). This implies that the company is also engaged in trading activities as a pure service provider will not have such inventory in its books of accounts and therefore, cannot be compared with the assessee company which is a pure service provider company and therefore has to be excluded from the list of comparables. The various other decisions relied on by the ld. Counsel for the assessee also supports his case for exclusion of Coral Hub Ltd. In view of the above discussions, we are o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x (supra), wherein, the Tribunal directed the exclusion of eClerx as a comparable for the reason that it was engaged in providing KPO Services and further that it had also returned supernormal profits " 41. We find, the Hon'ble High Court of Punjab and Haryana in the case of Mercer Consulting (India) Pvt. Ltd. (ITA No. 101/HC/Pun & Har/2015), held as under:- "25. The TPO relied upon a CBDT circular dated 26.09.2000 which furnishes a list of products or services that may be considered as Information Technology Enabled Products/Sendees (ITES) for the purpose of sections 10-A and 10-B of the Income Tax Act, 1961. The circular enumerates fifteen categories. As rightly observed by the Tribunal these categories refer to products and services which are entirely different in description and functions. The manufacture of such products and the provision of such services also have entirely different financial requirements and consequences. The instances cited by the Tribunal are apposite. Geographical Information Systems Services and the assessee's services are included in the circular and therefore, fall within the category of ITES. It does not follow that they are comparable to eac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given in the impugned order on the inclusion of E-cierx. On perusal of the financial statement as pointed out by the learned counsel, we find that E-clerx out of total expenses of Rs.66.01 crores has spent Rs.43.71 crore for outsourcing its contract for services, whereas in the case of the assessee, the entire expenditure has beendone through its own human resources. The major operation of this company seems to be based on outsourcing model and in an outsourcing model the assets deployed in the form of human resources, infrastructure and other intangibles differs from an entity which operates from its own human resources. In the case of the assessee, the entire back of its support have been provided by the assessee, and therefore, following the judicial precedents in the case of B.C. Management Services (supra), we hold that E-clerx should not be included for the comparability and analysis and accordingly same is directed to be excluded." 45. We find the issue of comparability of Eclerx to captive back-office service providers is also covered in favour of the assessee in the decision of the coordinate Bench of the Tribunal vide ITA Nos. 5829/De//2015, 6134/Del/2015 and 6572/Del/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices. Under these circumstances also it would be very difficult to find out as to what is the profit margin from the sales and marketing services which is entirely a different from the functions carried out by the assessee. Further before us, the learned counsel has relied upon catena of decisions of this Tribunal and also High Courts, wherein E-clerx has been held to be incomparable with the companies providing purely back office support services. In view of aforesaid cumulative factors, we hold that E-clerx cannot be held to be a good comparable for bench marking the assessee's margin to arrive at ALP and accordingly, we direct the AO/TPO to remove this comparable." 46. We also note that in relation to the point of outsourcing, the Punjab & Haryana High Court in the case of Mercer Consulting (India) Pvt. Ltd. (ITA No.101/2015) has stated that an outsourcing company has a different business model and cannot be compared to a company undertaking normal business activity. The relevant observations of the Hon'ble High Court are as under:- "37. The next question is whether Coral Hub Limited ought to be included in the list of comparables. The ground on which the assesse contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices including Photogrammetry, Remote Sensing, Cartography, Data Conversion, related Computer based Services and other related services during the year under assessment (page 23 of Annual Report for FY 2007-08) 49. We find for the same AY, the Mumbai Bench of the ITAT in the case of John Deere India Pvt. Ltd. (ITA No. 2236/PN/2012) which was upheld by the Mumbai HC (ITA No. 63/Mum/2017), has observed as under:- "10. With respect to Genesys International, the Tribunal noted that the same Company was engaged in providing geo-spatial services. The activities of the assessee were therefore, at variance from that of Genesys. It was on this count that the Tribunal held that the said Company was functionally different from the assessee. No question of law therefore, arises. " 50. We find, for the same AY, the co-ordinate Bench of the Tribunal in the case of IHG IT Services (India) Pvt. Ltd. (ITA No.6381/Del/2012), has observed as under:- "29. We have heard both the parties, have gone through the records and gone through the Annual Report of Genesys International Corporation Ltd. We find that the assessee is engaged in the back office support 1TES system for its AE in respect of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected in the final comparable list. In addition to above, it is also provided that during the subject year, the company has intangibles of INR 1.26 crore (page 34 of the annual report) whereas Agilent does not have any such intangibles (page 311 of the Paper book). In view of the above discussion, we are of the considered opinion that Genesys International Corporation Ltd., should be excluded from the list of comparables. 54. So far as exclusion of Infosys BPO Limited is concerned, we find it is an undisputed fact that Infosys BPO is a giant company with huge turnover. (page 196 of the paper book I). It is mentioned that the revenue of Infosys BPO Limited is 5 times of Agilent. Further, the company has a brand value which has a significant role on its profits. From the details, we find the amount of revenue, expenditure on brand building along with the asset base is as under:- PARTICULARS AGILENT INTERNATIONAL INFOSYS BPO FY 2007-08/AY 2008-09 FY 2007-08/AY 2008-09 TURNOVER INR 169.41 crores (@ pg 42 of Appeal set INR 825 crore (@ pg 20 of Annual Report BRAND EXPENSE NIL @pg 319 of PB II INR 78.32 lacs @pg 25 of Annual Report ASSEST BASE INR 54 crore @pg 315 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rison of TCS E-Serve Limited with Infosys BPO Limited with each of them employing 13,342 and 17.934 employees respectively and making Rs.37 crores and Rs. 19 crores as contribution towards brand equity. When Rule 10(B) (2) is applied i.e. the FAR analysis, namely, functions performed, assets owned and risks assumed is deployed then brand and high economic upscale would fall within the domain of "assets" and this also would make both these companies as unsuitable comparables." 57. So far as brand is concerned, we find the co-ordinate Bench of the Tribunal in assessee's own case for AY 2014-15 (ITA No. 4191/Del/2018) has removed the comparable by observing as under:- "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 lnfosys 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 companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be excluded from the comparability analysis of ITeS segment. Accordingly we direct the learned TPO/AO to exclude the above comparable and then compute the arm's-length price of the ITeS segment of the assessee." 58. We further find the ground of incomparable scale and size has been upheld by the Delhi High Court in the case of Sanvih Info Group Pvt. Ltd. (ITA No. 420/Del/2019) wherein it has been held as under:- "8. It appears that the comparable discussed in Agnity India Technologies Pvt. Ltd. (supra) which was sought to be excluded was an Infosys Group Company which undoubtedly was 'a giant corporation'. On the other hand, in Chrys Capital Investment Advisors India (P.) Ltd. the three comparables included were Brescon Corporate Advisors Limited, Keynote Corporate Services Limited and Khandwala Securities Limited and the rejected comparables were IDFC Investment Advisors Ltd., Sumedha Fiscal Services Limited and Future Capital Holdings Limited. Clearly therefore none of the comparables involved was a 'giant corporation ' like Infosys. Consequently, this Court is not persuaded that the ITAT erred in the present case in excluding Infosys BPO Limited relying on the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious aspects, noted earlier, which clearly distinguished Infosys BPO from assessee and, therefore, we direct this comparable to be excluded from the list of comparables. " 61. The various other decisions relied on by ld. Counsel for the assessee also support his case for exclusion of Infosys BPO Limited from the list of comparables. We therefore direct the AO/TPO to exclude Infosys BPO Ltd. from the list of comparables. 62. So far as exclusion of Wipro Limited (BPO segment) is concerned, we are of the considered opinion that Wipro BPO is not comparable to the appellant due to incomparable scale of operations and presence of huge intangibles and the brand value of Wipro. We find the turnover of the company is very high vis-a-vis the appellant. The company has a turnover which is more than 6 times of the appellant which can be verified from the details filed in the paper book. PARTICULARS AGILENT INTERNATIONAL WIPRO BPO FY 2007-08/AY 2008-09 FY 2007-08/AY 2008-09 TURNOVER INR 169.41 crores @pg 42 of Appeal set INR 1,058 crores @pg 212 of standalone Annual Report 63. We find the co-ordinate Bench of the Tribunal in Assessee's own case for AY 2007-08 (1TA No. 1084/Del/2016 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid letter dated 08.03.2011 to the TPO that Acropetal is into software development also and since the segmental information is not available, it would not be safe to rely on the finance of this company. Therefore, we order exclusion of this comparable from the set of comparables. " 69. In view of the above discussion and in view of various other decisions relied on by ld. Counsel for the assessee, we are of the considered opinion that Acropetal Technologies is not a valid comparable. We, therefore, direct the AO/TPO to exclude this company from the list of comparables. 70. Now, coming to exclusion of Accentia Technologies Limited is concerned, we find Accentia is not comparable as an extraordinary event has taken place during the subject assessment year. The company was merged with two other companies (page 187 of the paperbook I). We find the co-ordinate Bench of the Tribunal in Assessee's own case in AY 2007-08 (ITA No. 1084/Del/2016) has held as under:- "33. So, in view of the facts and circumstances of the case and following the decision (supra) rendered by the coordinate Bench of the Tribunal, we are of the considered view that Accentia is not a suitable comparable on grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y observing as under:- "40. So, by following the ratio laid down by the Hon'ble High Court in Agnity India Technologies Pvt Ltd. (supra) and order passed by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2011-12 (supra), we are of the considered view that Infosys Technologies having turnover of Rs.13,149 crores with asset base of Rs.2150 crores having brand expenditure of Rs. 69 lakhs as against turnover of Rs. 32 crores of taxpayer with nil brand expenditure and asset base of Rs.29 crores; and that Infosys Technologies has also incurred Rs.49 crores on the R&D expenditure and its revenue from 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-a-vis taxpayer, hence ordered to be excluded. " 77. We find the Tribunal in Appellant's own case for AY 2011-12 (ITA No. 477 /Del/2016), has rejected this comparable from the list of comparables by observing as under:- "7.4 If we apply the aforesaid comparative criteria as laid down by Jurisdictional High Court, we find th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its parent company and 'prone to minimum/ limited risk; that the Infosys Technologies Limited is having huge significant intangibles and having huge assets leading to the exorbitant turnover; that it is not in dispute that functional profile of assessee company and CIT vs. Agnity India Technologies Pvt. Ltd. is similar; that moreover, in the SDS segment, numerous companies are. available for comparability. So, in the given circumstances, we are of the considered view that Infosys Technologies Limited is not a valid comparable in this case, hence ordered to be excluded. " 81. We find the facts in the relevant AY are similar which was demonstrated by the ld. Counsel for the assessee as under:- PARTICULARS AGILENT INTERNATIONAL INFOSYS TECHNOLOGIES LIMITED FY 2007-08/AY 2008-09 FY 2007-08/AY 2008-09 TURNOVER INR 36.35 crores @pg 42 of Appeal set INR 15,648 crores @pg 67 of Annual Report EMPLOYEE COST INR 100.18 crores @pg 312 of PB II INR 7,259 crores @pg 71 of Annual Report BRAND EXPENDITURE NIL @pg 319 of PB II INR 55 crores @pg 71 82. We find, the ground of incomparable scale and size has been upheld by the Hon'ble Delhi High Court in the case of Sanvih ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. DCIT (ITA 6454/Del/2012 & 279/Del/2013) has observed as under:- "41. 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: "41. After considering the rival submissions and perusing the relevant material on record, we have absolutely no doubt in our mind that this company cannot be considered as comparable to the assessee inasmuch as it is a giant company in terms of parameters discussed above while dealing with the case of Infosys Ltd. The Hon 'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. (supra) has upheld the exclusion of this company also from the list of comparables on the basis of certain parameters, which are fully applicable to the instant assessee as well. It is, therefore, directed to exclude this company from the list of comparables. The assessee succeeds. 42. Keeping in view the functional profile of Toluna India Pvt. Ltd. (supra) vis-a-vis the assessee, respectfully following the decision of coordinate Bench, this comparable is directed to be excluded from the list of comparables. " 86. We find the coordinate Bench of the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferent company mainly engaged in Software Development, training, consulting, and Equipment development. We find the co-ordinate Bench of the Tribunal in the case of Aircom International (India) Pvt. Ltd. vide ITA No.6402/Del/2012 has observed as under:- "The TPO's inclusion of this company in the list of comparables is that the software products and training constitute only 4.24% of its revenue. This inference has been drawn on the basis of the information supplied by this company stating: ''the use of readymade object laboratories is only to the tune of about (3.4 to 6.96) % in the year 2007-08 to 2008-09 ". We fail to comprehend as to how the above line conveys that the software products' revenue stands at 4.24%. What has been written is that the company's use of the readymade object laboratories is only to the tune of maximum 4.24%. By no imagination this can be construed as revenues from software products. When we peruse the Annual report of this company, which is available in the paper book, it can be seen that there is no such mention of software products revenue limited to 4.24%. On the contrary; it has been mentioned in the Notes to the financial statement that: "the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Toluna India (P.) Ltd. (supra), the Tribunal has excluded this comparable from the list of comparables by observing as under: '27.1. The TPO observed that this company was engaged in Software development and training. As the software products constituted only 3% of its revenue and training revenue constituted 8.56%, the TPO held that this segment of KALS Information Systems Limited was rightly includible. 27.2. After considering the rival submissions and perusing the relevant material on record, it is an admitted position that the TPO adopted Software development segment of this company by noticing that this- segment also included revenues from software products and training. In view of the fact that the assessee is not engaged in imparting any training on commercial basis or selling its software products, we hold that the financials of this company under this segment cannot be compared with the assessee. The contribution by the sale of software products or training to the overall revenue of this segment cannot be precisely ascertained to determine the question of its comparability. As such, this case is directed to be excluded. The assessee succeeds." 94. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 38. Keeping in view the functional profile of Toluna India Pvt. Ltd. (supra) vis-a-vis the assessee, respectfully following the decision of coordinate Bench, this comparable is directed to be excluded from the list of comparables. .................. Persistent Systems Ltd. 63. For the very same reasons as in AY 2007-08, we exclude this comparable from the list of comparables. Assessee succeeds." 98. We find the co-ordinate Bench of the Tribunal in case of Alcate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the reply tendered by this company that it is engaged in providing software development and also consulting IT services. In opposition, the assessee company is engaged in providing software development services alone and is not rendering consulting IT services. The effect of the revenue from consulting IT services in the overall financials of the company is not available. As this company is also providing consulting IT services, which is an essential ingredient of its revenues from 'Software development services', we cannot treat it as comparable , with the assessee company, which is not providing any consulting IT services. The same is, therefore, directed to be excluded. " 101. We find the Bangalore Bench of the Tribunal in the case of ABB Global Industries & Services Limited (ITA No. 1612/Bang/2012) directed to exclude this company from the list of comparables due to functional dissimilarity and unavailability of segmental data by observing as under:- "7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee who was rendering software development services only. ........ 41.We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable." 103. The various other decisions relied on by the ld. Counsel for the assessee also support his case for the proposition to exclude Avani Cimcon Technologies on account of functional dissimilarities and insufficient segmental details. We, therefore, direct the AO/TPO to exclude this company from the list of final comparables. 104. So far as exclusion of LGS Global Limited ("LGS") is concerned, we are of the considered opinion that LGS is not comparable as the company is engaged in rendering diversified services like product evaluation design and development, business process outsourcing ("BPO") and other activities which are different from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata with respect to all the three elements - wherever they apply. In the Comparable Uncontrolled Price (CUP) method - which is premised upon the elements in Rule lOB(l)(a), the methodology adopted is the price charged or paid for property transfer or services provided in the Comparable Uncontrolled transaction. Therefore, the nature of the transaction and the appropriate filter determines the elements that are to be considered in TNMM. Therefore, the costs, sales and assets employed wherever relevant are to be applied. From this perspective, the revenue's contention that segmental data was available, cannot be accepted. The mere availability of proportion of the turnover allocable for software product sales per se cannot lead to an assumption that segmental data for relevant facts was available to determine the profitability of the concerned comparable." 108. In view of the above discussion, we direct the AO/TPO to exclude LGS Global Ltd. from the list of comparables. 109. So far as Quintegra Solutions Limited ("Quintegra") is concerned, we find this company is engaged in rendering diversified services like product engineering, development of proprietary software products, and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.6 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer. Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. " 112. We find the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Limited vide ITA No. 1303/Bang/2012, has observed as under:- "18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on land who is a software service provider." 113. In view of the above discussions, we hold t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The payment of freight charges to a non-resident does not qualify as royalty or fee for technical services under section 9(l)(vi) and 9(l)(vii) of the Act. Further, in the absence of permanent establishment ('PE') of Dell in India in terms of Article 5 of Double Tax Avoidance Agreement ('DTAA') between India and Malaysia, payment to Dell on account of freight charges would not be taxable as business profits in India. He submitted that in absence of taxability of the above payment in the hands of Dell in India as FTS/royalty and there being no PE in India, the assessee is not under an obligation to withhold taxes while making such payment to Dell. For the above proposition, he relied on the decision of Hon'ble Supreme Court in case of GE India Technology Centre Private Limited (Civil Appeal Nos. 7541-7542 of 2010). 119. So far as expenses on hotel accommodation of Rs. 603,363 is concerned, he submitted that during the subject year, the assessee incurred expenses of Rs. 603,363 on account of expenses on hotel rooms hired by its employees payable to Park Residency and Lamba's House. As per explanation to section 194I of the Act, the term "rent" means any payment, by whatever name c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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