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TMI Blog2020 (4) TMI 913X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware product and have huge turnover is not comparable to the assessee as a captive service provider to its associated enterprises, therefore, we direct the assessing officer to exclude this comparable from the final set of comparable. Exclusion of Wipro Technology Services Ltd. as it had related party transaction. e Infochips Ltd has provided hardware maintenance and product, providing back officer services and have substantial inventory. Sasken Communication Technology Ltd is engaged in software product. And Persistent system Ltd has huge intangible, made investment in intellectual property right and huge turnover. Therefore, accepting the similar view we are also of the view that these comparable cannot be compared with captive service provider. Hence, we direct the AO/TPO to exclude these four comparable. Zylog System Ltd. company is engaged in R D activities, has a license fee and developed in house intangible. Thus, cannot be compared with captive service provider. Thus we direct the TPO/AO to include CG Vak Software Export Ltd and exclude Infosys Ltd, Wipro Technology Services Ltd., e Infochips Ltd, Sasken Communication Technology Ltd, Persistent system Ltd and Z ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n law, the learned TPO as well as the Hon'ble DRP erred in rejection of metiiodical and scientific search process undertaken by die appellant. 3.2 On facts and in the circumstances of the case and in law, the Hon'ble DRP erred in upholding / confirming the action of the learned TPO in cherry picking of companies without providing any cogent reason or without sharing the search process or accept-reject matrix of the comparable companies selected by him. 4. Violation of provisions of Rule 10B(2) and 10B(3) and arbitrary rejection of comparable! selected by the Appellant 4.1 On the facts and in the ckcumstances of the case and in law, the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the TPO in adding new comparables which differ in functions undertaken, assets employed and risk assumed as compared to appellant in contravention of the provisions of Rule 10B(2) (3) of the Rules; and 4.2 On facts and in the ckcumstances of the case and in law, the learned TPO as well as the Hon'ble DRP erred in rejecting CG-VAK Software Exports Ltd. stating that the company with fluctuating margins should be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etic mean of seven comparables was 10.97%. Accordingly, the assessee claimed that its transaction of software services with its AE was at arm s length. The TPO rejected 4 comparables of assessee and included his own 16 comparables and on the basis of following twenty final set of comparables, worked out the arithmetic mean of 20 comparables at 23.64%:- Sl.No Company OP / OC Comment 1 Acropetal Technologies Limited (Segment) 36.69% Also selected by the assessee 2 Akshay Software Technologies Ltd 0.16% -do- 3 Celstream Technologies Pvt Ltd 12.26% Proposed by TPO 4 Evoke Technologies Pvt Ltd 8.11% -do- 5 E-infochips Limited 56.44% -do- 6 E-Zest Solutions Limited 34.83% -do- 7 iGate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly the TPO suggested adjustment of Rs.2.13 crores with regards to both the transaction reported by assessee with its AE. The TPO vide its order dated 31.03.2015 rectified his order and suggested adjustment was revised to Rs. 2,49,64,384/- in place of Rs. 2,13,96,384/-. On receipt of report of TPO, the AO passed the draft assessment order. The draft assessment order was served upon the assessee on 12-03-2015. The assessee exercised its option for filing objection before Dispute Resolution Panel (DRP). The DRP, vide its direction dated 14-12-2015 directed to exclude e-Zest Solution and Sankya Infotech Ltd from the list of comparables and with regard to correctness of PLI (OP/OC) of comparables directed to take correct PLI of comparable. Accordingly, as per the direction of DRP the computation of arms lengths price adjustment was worked out at Rs. 2,05,78,185/- in the final assessment order dated 27.01.2016 passed under section 143(3) rws 144C(13). Aggrieved by the additions / adjustments on ALP with regard to the transaction with its AE, the assessee filed this appeal before us. 5. We have heard the submission of Ld.AR of the assessee and the Ld. DR for the revenue. The Ld.AR of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces Ltd is engaged in rendering infrastructure services, application development and maintenance services of Citi group. Wipro Technology Services Ltd entered into an agreement with Citi group Inc. for acquiring of Citi group interest in Citi Technology Services Ltd. This company has signed most service agreement with Citi group Inc. for delivery of technology, infrastructure services and application development and maintenance of service for a period of six years. This company is managing to earn more than the industry average and has a very difficult risk profile and, therefore, is not comparable with the assessee which is capital service provider. This comparable was excluded by Tribunal in following cases:- Saxo India Private Ltd vs ACIT ITA No.6148/Del/2015, Pr.CIT Delhi vs Saxo India Private Ltd ITA No.682/2016 C.M. Appl.3574-35746/2016 Delhi High Court, Aithent Technologies Pvt. Ltd ITA No.1286/Del/2017, Mobileum (India) Pvt Ltd (Formerly known as Roamware India Pvt Ltd- IT(TP)A 945 2047Mum/2016, Aithent Technologies Pvt. Ltd ITA No.1286/Del/2017 ITA No.1020/Del/2017, Mobileum (India) Pvt Ltd (Formerly known as Roamware India Pvt Ltd- IT(TP)A 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Pvt Ltd vs DCIT ITA No.6856/Del/2015 For exclusion of Sasken Communication Technologies Ltd 11. The Ld.AR submits that this company is engaged in advertising business and provides telecommunications software services and solution to network equipment manufacturers, mobile terminal, hardware design, IC design services and IT infrastructure. This comparable owned IPs. Turnover of this company is Rs. 349 Crore, which more than 19 times of assessee s turnover which is only Rs. 20 Crore. It has high turnover comparable to assessee. This comparable was rejected by Tribunal and Delhi High Court in the following cases:- Alcatel Lucent India Ltd vs DCIT ITANo. 6856/Del/2015 Pr CIT vs Alcatel Lucent India Ltd ITA 515/2017 HIGH COURT OF DELHI Aithent Technologies Pvt. Ltd ITA No.1286/Del/2017 ST.Ericcson India Pvt Ltd vs ACIT,Cir.24(2) ITA 6247/Del/12015 Electronic Imaging India Pvt. Ltd vs DCIT ITA No.1506/Bang/2016 For exclusion of Persistent Systems Ltd 12. The Ld.AR of the assessee submits that this comparable company has huge intangibles. It has made investment in intellectual property rights and providing software product. No segmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the contention of assessee was not accepted by DRP by taking view that those companies with fluctuating margins are to be excluded. We have noted that the coordinate bench of Kolkata Tribunal in Nomura Structured Finance Services Pvt Ltd in ITA 284/Kol/2016 while considering the comparability of this comparable pass the following order: 11.2. CG -VAK Software and Exports Limited. The Ground No. 16 raised by the assessee is with regard to the comparable chosen by the assessee but rejected by the ld TPO in respect of CG-VAL Software and Exports Limited. The ld. TPO rejected this comparable stating that it is engaged into medical transcriptions which is different from the assessee and hence not functionally comparable. The ld. AR argued that the company is engaged in the business of software services and also into medical transcription and that for the purpose of comparability, the assessee had only used the date for software segment of the said company. He referred to the relevant pages in the annual report of the said company in support of his contentions and pleaded that the same be included in the list of comparables while computing the arm's length margin. We find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... note of decision rendered on this aspect by Tribunals and Hon'ble High Courts if any. Both the parties before us fairly agreed that let similar direction be given for the year under consideration also. Accordingly, the Ground No. 16 raised by the assessee is remanded to the file of ld TPO with similar directions that were given for Asst Year 2010-11 by this tribunal. Accordingly, the Ground No. 16 raised by the assessee is allowed for statistical purposes. (* under line by us) 14. Considering the decision of tribunal that this comparable is not consistent loss making as it had made profit in the relevant assessment year, hence, we direct the TPO/AO to include this comparable in the final set of comparable. 15. Infosys Ltd. This comparable company was accepted as a comparable by TPO. As we have noted of the learned AR of the assessee submit that this comparable could not be regarded as a good comparable because it has substantial R D intangible patents, tremendous brand value attached to image. It is a great company and high turnover which is around 1200 times of sales of assessee. The TPO rejected the contention of assessee by taking with it turnover is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... final set of comparables are quite justified. Notably, the said concern is also engaged in the production of software products such as 'Finacle', 'Flypp' and 'Infosys iSmart as is evident from the copy of the Annual Report of such concern, which has been placed in the Paper Book at pages 483 to 500. In fact, we find that the Transfer Pricing Officer has himself accepted the fact that the said concern is engaged in software products. Apart therefrom, it is quite well understood that Infosys has a brand image which is quite incomparable to the assessee before us, which is wholly acting as a captive service provider for its associated enterprises. In this view of the matter, it is quite evident that the said concern cannot be compared to an assessee who is undertaking pure software development services as a captive service provider. 9.4 At the time of hearing, Ld. Representative for the assessee had also pointed out that the said concern was excluded by the DRP itself in the case of the assessee for the earlier assessment year of 2010-11 on account of its functional profile being different, against which the Department has not preferred any appeal to the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee contended that there was functional dissimilarity inasmuch as this company was engaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenues of this company from Products was only 15% of total revenue and hence the same qualified to be eligible for comparison. The DRP did not allow any relief. 10.2 After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at Rs. 3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er considering the rival submissions, we find from page 58 of the TPO's order that he has recognized sale of software products to the tune of Rs.37 crore and odd. Though the break-up of revenue from software services and software products is available, but, the break-up of operating costs and net operating revenues from these two segments have not been given. It is further observed that the TPO has taken entity level figures for the purposes of making comparison. Since such entity level figures contain revenue from both software services and software products, as against the assessee only providing software services, we are disinclined to treat this company as comparable. The assessee's contention is accepted on this issue (vii) Wipro Technology Services Ltd. 16.1 The assessee objected to the inclusion of this company in the list of comparables by arguing that apart from this company being functionally different and the availability of insufficient segmental information, there were also significant related party transactions. The TPO did not accept the assessee's contention of the related party transactions and proceeded to include it in the final set of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions in order to fall within the ambit of sub-clause (ii) of rule 10B(1)(e), should be both comparable as well as uncontrolled. 'Uncontrolled transaction' has been defined in Rule 10A(a) to mean: 'a transaction between enterprises other than associated enterprises, whether resident or non-resident.' This shows that in order to be called as an uncontrolled transaction, it is sine qua non that the same should be between the enterprises other than the associated enterprises. Section 92B(2) provides that: 'A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise'. On going through the prescription of sub-section (2) of section 92B, it is clearly borne out that a transaction with a non-AE shall be deemed to be a transaction entered into between two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view we are also of the view that these comparable cannot be compared with captive service provider. Hence, we direct the AO/TPO to exclude these four comparable. 19. Zylog System Ltd. This comparable was accepted by the TPO by taking view that high turnover does not impact the profitability of the company. Before DRP the assessee contended that SEBI has barred its Chairman and CEO as SEBI in its investigation found its promoters for making false and distorted disclosers. It was also contended that this company is engaged in various product and having 42 times turnover compared with the assessee. The ld. DRP has not given any specific finding while affirming the action of TPO. The coordinate bench of Delhi Tribunal in Alcatel Lucent India Ltd (supra) while discussing the comparability of Zylog System Ltd held that this company is engaged in R D activities, has a license fee and developed in house intangible. Thus, cannot be compared with captive service provider. Thus, we direct the AO/TPO to exclude these four comparable. 21. In view of the aforesaid discussion we direct the TPO/AO to include CG Vak Software Export Ltd and exclude Infosys Ltd, Wipro Technology Services Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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