TMI Blog2018 (10) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the instant international transaction. - ITA No.1479/Del/2016, ITA No.691/Del/2016 - - - Dated:- 14-9-2018 - SHRI R.S. SYAL, VICE PRESIDENT AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER For The Assessee : Shri Nageshwar Rao And Shri Sandeep S. Karhail For The Department : Shri Sanjay I Bara, CIT, DR ORDER PER R.S. SYAL, VP: These cross appeals - one filed by the assessee and the other by the Revenue arise out of the final assessment order passed by the Assessing Officer (A.O.) u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2011-12. 2. At the outset, it is relevant to mention that when the appeal of the assessee came up for hearing before the Tribunal on 05.06.2018, it raised an additional ground contending that the transfer pricing adjustments made by the TPO are bad in law, inter alia , for the raison d etre that the TP documentation prepared by the assessee was not rejected by the Officer. Vide interim order dated 23.07.2018, a copy placed on record, the Tribunal rejected the assessee s contention by chiefly observing that the TP study made availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such services were rendered only for certain functions or modules within a product and not for the whole product, which activity, in turn, was done by MS Corporation in US. The assessee still further stated that there were a couple of minor products, like BizTalk and Data Protection Manager (DPM), for which it provided significantly more Product engineering and design work services. In performing such Product engineering services, the assessee claimed that it did not deal with any other aspect of product development, such as, market research nor did it make any decision regarding which products were to be developed. It was explained that the ultimate holding company, namely, MS Corporation, USA, generates revenue by developing, manufacturing and supporting a wide range of software products and services for different types of computing devices and in order to make such products, the assessee and other MS affiliates perform R D activity in a very limited way around the world under the overall guidance of MS Corporation, USA. The assessee explained the Software product life cycle comprising of three phases, namely, Product Definition, Product Engineering and Servicing. Under the Produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables, the TPO proposed transfer pricing adjustment of ₹ 201,21,96,582/-. The assessee assailed the correctness of the draft order passed by the A.O., incorporating the TPO s view point, before the Dispute Resolution Panel (DRP) which directed to recompute the profit margin of the comparables. On giving effect to the directions of the DRP, the TPO proposed fresh transfer pricing adjustment of ₹ 197,23,68,765/- in the international transaction of provision of Software development services, for which the addition came to be made in the final assessment order. The assessee is aggrieved by the addition. 6. We have heard both the sides and perused the relevant material on record. The assessee employed the TNMM as the most appropriate method with the PLI of OP/OC for benchmarking the international transaction of rendering software development services. Unlike some earlier years, the TPO did not dispute the application of the TNMM as the most appropriate method, nor did he dispute the PLI. The assessee has primarily challenged the inclusion of all the companies and also the exclusion of some of its selected companies by the TPO in/from the final list of comparables. 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion product key series for MS Corp products; Global Sales Experience (GSX) CRM application for MS Corp Sales and marketing efforts; Headcount Applications for maintaining headcount details for Full Time Employees (FTEs) and vendor resources; EAS Enhancement Portfolio of applications for enhancements on SAP customization for Microsoft (MS Corp) Business requirements; VL FY11 Volume Licensing software (VLSC) Licensing application for MS Corp product sales. Thereafter, the TPO has noted in para 2.4 on page 45 of his order that the TP study acknowledged that the assessee participated in the product definition process for subsequent versions of minor products like BizTalk for which the initial product definition was produced by MS Corp. (page 13 of TP study report); the assessee is responsible for design, implementation and verification of code for minor products like BizTalk and DPM (Data Protection Manager) (page 14 of the TP study report); Product definition is performed outside India with the exception of some incubation projects targeting emerging markets (page 15 of the TP study report); the assessee is creating ten inch language tools which are available for free for d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, he admitted to be working closely with other engineering leaders in Redmond, USA. For the work assigned to the assessee, he stated to be writing the functional specifications documents. Next is the interview of Shri Amit Chatterjee with designation of Managing Director and General Manager Developer Tools and Windows Azure. In response to question no. 1, he stated to be involved, along with his team, in two feature areas in engineering organization , the first one, being, the Visual Studio Product line of Microsoft which is a part of Developer Division at Microsoft and the second, being, Azure product line. Azure is a distributed operating system for the Microsoft Cloud offering, similar to the dedicated operating system for Windows desktop. Next is the interview of Shri Anil Bhansali with designation of General Manager, Windows Server and System Centre, IDC, Hyderabad. He, along with his team, stated to be involved in WinSE Charter, Windows Engineering Group Server. In response to question no. 2 about the work flow in respect of each area of its activity, he stated that the same would be submitted later. There is nothing on record to substantiate that anything was submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly one side of the story and till date, the consequences of these statements in the overall scenario, are yet not available by way of any order by the APA as to whether these were accepted or any further investigation was carried out which either corroborated the same or transpired anything else. 11. When we consider the version given in the interviews by these people that they were not at all involved in conceptualization, we find the same to be running contrary to the submissions made by the assessee before the TPO, which have been captured on page 42 of his order by means of a table in which the assessee has categorically admitted that it is involved in conceptualization and scoping of project work including defining functions specifications though in a very limited way. Despite specific requisition made by the TPO to give data as to how its role was limited or very limited in product conceptualization, the assessee did not submit any material/evidence. A finding to this effect has been recorded on page 44 of TPO s order. Again, it has been recorded on page 45 of the order that though the assessee claimed in Parent-Subsidiary Agreement (PSA) dated 01.07.2003 that it undertoo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity assurance , the assessee s role has been given as Yes (but, no economic burden of quality failure) . From the above Table, it is manifest that the assessee has categorically admitted before the TPO that it was involved, to some extent, in Conceptualization of project work, Project execution, Coding, testing documentation and Quality assurance. The TPO has repeatedly noted that though the assessee admitted in its Transfer pricing study report to be involved in development of software etc., : but it does not give any data as to how it is construed that the role in product conceptualization is limited or very limited . Similar is the position regarding the other functions, such as, Project execution and Coding, testing and documentation, in which, again, the assessee admitted to have a limited role to play, but did not spell out such role before the TPO. 14. The assessee also acknowledged in its TP Study report, as has been extracted in para 2.8 on page 46 of the TPO s order, that it is involved in the development of various products and is responsible for design implementation and verification of some products like BIZTALK and DPM ; is also involved in product defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work and cross correction by Redmond is done. It is thus clear beyond any shadow of doubt that the assessee maintained all the relevant primary records, but did not produce the same before the authorities. The assessee is simply trying to marginalize its role to a bare minimum by a lip service contrary to what has been stated in the TP study and submitted before the TPO by way of a chart, as has been discussed above. 16. Admittedly, the assessee did not carry out the entire work of the MS Products at its own. Out of the work assigned, it sub-contracted some of the work to the Indian parties, for which it made a payment of ₹ 158 crore during the year. Such payment is divided into two parts, viz., ₹ 126.75 crore towards Application Development and ₹ 31.70 crore towards Product Development. The ld. AR was directed to produce contracts entered into with all the third parties for which such a sum of ₹ 158 crore was paid so as to judge the overall nature of the work done by the assessee. Out of 12 contracts under Application Development , the assessee has filed copy of Agreements only with one party, that is, Accenture Services Private Limited. Out of 33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n writing by MSFT ( i.e. Microsoft, USA) from time to time. Subsidiary may subcontract with third parties to perform some or all of such work upon MSFT approval. In the event that MSFT contracts directly with vendors in country, MSFT may request the subsidiary to provide assistance with regard to such contracts. 19. Clause 4 of the Agreement with the caption Fees: Payment terms states that: In consideration of Subsidiary s research and development activities under Article 2 of the Agreement, MSFT shall pay Subsidiary a fee equal to one hundred and fifteen percent (115%) of Subsidiary s actual expenses . 20. Clause 5 of the PSA, which is central for our purpose, states that the intellectual property in respect of research work done by the assessee shall vest in Microsoft, USA, relevant parts of which read as under : - 5. INTELLECTUAL PROPERTY MATTERS 5.1 Research and Development. Subsidiary agrees that any and all developments made by it or under Subsidiary s direction, in connection with the performing of research and development work for MSFT shall be owned by MSFT in their entirety. Such developments shall (to the extent possible) be deemed works made for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king an unfavourable view by the Department. To get rid of such a view, the assessee entered into an Amendment and Restated PSA on 1.1.2009 w.r.e.f 1.7.2003. The preamble clause of such an Agreement acknowledges that : WHEREAS, As a result of misinterpretation by the Indian tax authorities of the Parent Subsidiary Agreement , the parties wish to expressly make their original intent known . Through this Agreement, clauses 2 and 5 of the original PSA stood substituted as under : - 2. RESEARCH AND DEVELOPMENT Subsidiary hereby agrees to undertake such research and development work as requested and approved in writing by MSFT from time to time. Subsidiary may subcontract with third parties to perform some or all of such work upon MSFT s approval. In the event that MSFT contracts directly with vendors in country, MSFT may request the subsidiary to provide assistance with regard to such contracts. Subsidiary s responsibilities are limited to best efforts to develop code or otherwise complete the project, not use IP not owned by MSFT, and deliver per project specifications as provided by MSFT. 5. INTELLECTUAL PROPERTY MATTERS Research and Development . Subsidia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Amended PSA, which stipulates that the assesse s responsibilities are limited to best efforts to develop code or otherwise complete the project . It is, therefore, utterly clear that the assessee undertook to do research and development work and the unsubstantiated contention of the assessee that it was only engaged in testing and coding at a lower level, stands nowhere. It is more so in the light of the Amended PSA, which categorically sets out that its work will not be confined to developing code but also otherwise completing the project assigned to it by Microsoft, USA. 24. The assessee continued to carry on full-fledged research work albeit in respect of a part of the overall Microsoft product, which is further established from the fact that the patents registered in USA for work done in India amounted to 113 in number over a period of five years with 6 patents in 2008, 16 in 2009, 22 in 2010, 33 in 2011 and 36 in 2012. We have randomly gone through abstracts of some inventions done by the assessee in India which were registered in the USA for patents. The first one is dated 11.06.2013 which is extracting topically related key words from related documents. Abstract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding previously visited sites. This phrase identification task is performed by considering not just the pages of a user's browsing sequence individually, but also pages visited immediately before and immediately after each page. In this way, phrases found in a page can be analyzed in the context in which the page was viewed, rather than in isolation. The identified phrases are further filtered by picking those that appear on a pre-populated topic list, and then clustering to find the most informative ones. 27. In the same way, there are total 113 inventions carried out by the assessee, which were registered in the USA. This speaks volumes of the level of work done by the assessee in India culminating into the creation of intellectual properties at its end. It is simple and plain that in order to be eligible for patent, there has to be first some invention and further such invention must meet several criteria to get patent protection, such as, the invention must consist of patentable subject matter; it must be new (novel); it must involve inventive steps. A simple testing and coding does not result into an invention, much less its patentability. The fact that 113 patentabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the same Agreements that the work done by the assessee would result into creation of intangibles, which would vest in Microsoft, USA. The fact that the assessee carried out research of sizeable nature in rendering software development services also gets established, inter alia, by the creation of intellectual properties in India which have been registered as patents in the USA. These two significant factors, viz., clauses of the PSA requiring the assessee to undertake research and development and actual creation of intellectual property in India patented in the USA, coupled with the shyness of the assessee in furnishing the primary evidence of the requisition of work by Microsoft USA and the final output etc. before the TPO and also the Tribunal amply prove that the submissions made by some of the company s Officers before APA Authorities of not being involved in any research work, do not merit acceptance. Taking a holistic view of the matter, we have absolutely no doubt in our mind that the assessee is providing research and development software services to Microsoft, USA. 31. At this stage, it is imperative to note Circular no. 3/2013 dated 26.03.2013 which lays down cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of Chapter X of the Act; 6. Indian Development Centre has no ownership right (legal or economic) on the outcome of the research which vests with the foreign principal and that this is evident from the contract as well as from the conduct of the parties. The Assessing Officer or the Transfer Pricing Officer, as the case may be, shall have regard to the guidelines above and shall take a decision based on the totality of the facts and circumstances of the case. In doing so, the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall be guided by the conduct of the parties and not merely by the terms of the contract. 32. The ld. AR contended that the guidelines laid down in the Circular are not final inasmuch as it is further provided therein that the above guidelines should be seen on the totality of facts and circumstances and the TPO shall be guided by the conduct of the parties and not merely by the terms of the contract. The ld. AR also referred to first, second and fourth reports of the Rangachary Committee dated 14.09.2012, 13.10.2012 and 05.12.2012 respectively, constituted to review taxation of Development Centres and IT Sector ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide that the assessee shall work as a R D service provider. We have fairly noticed supra that it is not only the terms of the PSA, but also the actual conduct of the assessee, which proves, without an iota of doubt, that it is a contract R D service provider inasmuch as economically significant functions involved in research or product development cycle are taken care of by Microsoft USA which also supplies other intangibles for research or product development and the assessee works under the direct supervision of MS, USA without having any economically significant risk and further having no ownership right on the outcome of the research, which vest with the MS, USA. 35. It is further interesting to note that the assessee vide its letter dated 12.01.2015, copy placed on page 664 onwards of the paper book, impressed upon the TPO that it: must be characterized as a contract R D service provider bearing insignificant risks .. we re-confirm that the functional profile of the assessee has remained unchanged from past year and the assessee continues to be a development centre undertaking contract R D activities with insignificant risk as per Circular 6/2013. The above disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., having revenues from software services and IT enabled services in a common pool, cannot be compared with the assessee s only revenues from software development services under consideration. We, therefore, order to exclude this company from the list of comparables. ( ii) Infosys Technology Ltd. 39. The second company under challenge is Infosys Technology Ltd., which was included by the TPO in the final tally of comparables. The assessee objected to such inclusion by contending, inter alia , that it is engaged in noteworthy R D activities apart from having significant intangible assets and exceptionally high turnover. The assessee also submitted that this company is functionally not comparable as it is also having revenues from software products. The assessee s objections have been recorded on pages 80-82 of the TPO s order. Not convinced, the TPO held this company to be comparable, which has been assailed in the impugned order. 40. Having heard both the sides and perused the relevant material on record, we find from the Annual report of this company, a copy of which is available on pages 1653 onwards of the paper book, that this company is also engaged in earnin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the Act. Extending this proposition further in the context of the transfer pricing, it transpires that if an assessee fails to report an otherwise comparable company, then the TPO is obliged to include the same in the list of comparables, and in the same manner, if the assessee wrongly reported an incomparable company as comparable in its TP study and then later on realizes and claims that it should be excluded, there should be nothing to prohibit it from claiming so, provided the company so originally reported as comparable is, in fact, not comparable. Simply because a company was wrongly chosen by the assessee as comparable, cannot tie its hands from contending before the Tribunal that such a company was wrongly considered as comparable which is, in fact, not. There is no qualitative difference between a situation where an assessee claims that a wrong company inadvertently included for the purpose of comparison should be excluded and the situation in which the Revenue does not accept a particular company chosen by the assessee as comparable. The underlying object of the entire exercise is to determine the arm s length price of an international transaction. Simply because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar under consideration. This shows that income from software development support and maintenance services was earned by Wipro Technology Services Ltd., from Citi Group Inc., by means of master service agreement entered into between Wipro Ltd., its parent company and Citi Group Inc., a third person. 46. Rule 10B(1)(e)(ii) provides that it is the net profit margin realized from a comparable uncontrolled transaction, which is considered for the purposes of benchmarking. The epitome of comparable uncontrolled transaction is that the companies or transactions, 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 essential 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-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is company from the list of comparables. Similar view has been taken by the Delhi Bench of the Tribunal in the case of Saxo India (P) Ltd. (2016) 67 taxmann.com 155 (Delhi-Trib.) . This order of the Tribunal stands affirmed by the Hon'ble Delhi High Court vide its judgment dated 28.09.2016 in ITA no.682/2016, C.M. APPL.35744-35746/2016 by holding that no substantial question of law arises from the Tribunal order. 48. Now, we take up the companies assailed before us which were included by the assessee in the list of comparables, but, excluded by the TPO. In all, the assessee selected 27 companies including M/s Persistent Systems Solutions Ltd., which got accepted at the hands of the TPO but excluded by us hereinabove, on a challenge made by the assessee. Out of the remaining 26 companies, the assessee has challenged the exclusion of 12 companies by the TPO from the list of comparables, which we will take up one by one for consideration and decision. ( i) Akshay Software Technologies Ltd. 49. The assessee included this company in the list of comparables which was excluded by the TPO by noting on page 56 of his order that it was not involved in rendering high-e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment services, which is a necessary ingredient under the TNMM. We, therefore, uphold the exclusion of this company from the list of comparables. ( ii) Blue Star Infotech Ltd. (Consolidated) 52. The TPO excluded this company by observing on page 56 of his order that it was not involved in rendering high-end services and, further, it was not into research and development as recorded on page 69 of his order. 53. We have gone through the Annual report of this company, a copy of which has been placed on record by the ld. AR. Profit Loss Account of this company is placed at page 91 of the paper book, which shows Sales and software services income on the Income side. Schedule-J, being, Significant Accounting Policies and Notes to the Financial Statements provides under the head Revenue recognition that: Revenue from sale of traded software licences and traded hardware is recognized on delivery to the customer. This makes it apparent that, apart from rendering software services, this company is also into software products and hardware. The Director s Report of this company clearly sets out under the heading Research and Development that: The company is pred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head Segment reporting that : The Company s exclusive business is Medical Transcription, Training Software Development and Consulting services as such this is the only reportable segment as per Accounting Standard 17 on Segment Reporting issued by the ICAI . Medical transcription is obviously a part of BPO services, falling within the ambit of IT enabled services. As the assessee under this segment is rendering only software development services, which are exclusive of ITES, following the view taken above for the exclusion of E-Infochips Bangalore above, we hold that this company was rightly excluded. ( v) CG-VAK Software Exports Ltd. 58. The TPO excluded this company by noting on page 57 of his order that it was not involved in rendering any high-end software services and, further, recorded on page 70 of his order that it was a persistent loss making company, against which the assessee has come up in appeal before the Tribunal. 59. We have heard the rival submissions and perused the relevant material on record. It is observed from page 70 of the TPO s order that as per Prowess data base, profit before interest and taxes of the software segmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LGS Global Ltd. 61. The TPO held this company to be not comparable by noting on page 58 of his order that it was not rendering any high-end software services. The TPO further noticed on page 75 of his order that this company was providing routine IT enabled services and not any research and development services. 62. Having gone through the Annual report of this company, we find from its Director s Report that it is talking of certain research and development to be undertaken in future , which is merely a goal or vision. As, admittedly, this company is not rendering any research and development services and is a simple software service provider, we approve the exclusion of this company from the tally of comparables. ( viii) Maveric Systems Ltd. 63. The TPO excluded this company by mainly observing on page 58 of his order that it was not involved in rendering high-end software services, against which the assessee has approached the Tribunal. 64. We have examined the Annual report of this company, a copy of which is available on record. It can be seen from such Annual report that it is engaged in rendering routine software development services and not research ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany. The assessee has also considered only IT service segment of this company as comparable with the exclusion of Wireless services . All the parameters, namely, rendering of research and development software services and also Product engineering services to its customers leading to the creation of patents, make this company fully comparable to the extent it earned revenues from IT services and Product engineering services, for which segmental information is available. We, therefore, direct the TPO to examine the PLI of this company from the IT services and Product engineering services and then treat the same as comparable with the segment of the assessee under consideration for the purposes of benchmarking. The impugned order is overturned to this extent. ( x) R.S. Software (India) Ltd. 67. The TPO excluded this company by noting on page 58 of his order that it was not involved in any high-end software services and, further, on page 76 that it was not into any research and development. 68. We have examined the Annual report of this company. Income from software development has been shown in the Profit Loss Account, whose copy is available on page 823 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and Business process outsourcing . It is, therefore, overt that income from the relevant segment of Software development Customization services taken by the assessee for the purposes of comparison includes Sale of products not only of its own but also those of third parties. Since the sale of Products is also included in this segment, and the assessee is not into sale of its own hardware or software and also the software of third parties, this company on segmental level becomes functionally different and ceases to be comparable with the assessee engaged in providing only research and development services under this international transaction. We, thus, hold that this company is not comparable to the assessee company. 71. In view of the above functional differences, there is no need to look for data relevant to the period 01.04.2010 to 31.03.2011. We, therefore, approve the exclusion of this company on segmental level from the list of comparables on account of functional dissimilarity as noted by the TPO. ( xii) Silverline Technologies Ltd. 72. The TPO excluded this company by assigning two reasons. One has been given on page 58 of his order to the effect that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it would mean that it is allowing its customers relatively longer period to pay their dues, which will result into higher interest cost and the resultant low net profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it for paying back the dues to its suppliers, which reduces the interest cost and increases profits. In order to neutralize the differences on account of carrying high or low inventory, trade payables and trade receivables, as the case may be, it becomes eminent to allow working capital adjustment so as to bring the case of the assessee at par with the other functionally comparable entities. We, therefore, agree in principle with the grant of working capital adjustment. Since the necessary details qua the grant of such an adjustment have not been examined because of refusal to grant such adjustment at the threshold, we are of the considered opinion that it would be fit and proper to set aside the impugned order on this issue and send the matter back to the file of the AO/TPO to carry out the working capital adjustment in the light of our above discussion. Once it is held that such an adjustment is permissib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transaction was at ALP. The TPO made certain exclusions and inclusions from/to the list of comparables drawn by the assessee. In all, 8 companies were shortlisted with average PLI of 29.57%. This led to proposing transfer pricing adjustment of ₹ 39,67,65,085/-. The A.O. passed the draft order accordingly. The assessee carried the matter before the DRP, which directed to exclude e- Clerx Services Pvt. Ltd. from the list of comparables. Giving effect to the direction given by the DRP, the TPO recomputed revised transfer pricing adjustment at ₹ 28,73,66,004/-. The Assessing Officer passed the final order making transfer pricing addition at this level. The assessee has assailed the transfer pricing addition before the Tribunal. 81. We have heard both the sides and perused the relevant material on record. The assessee has challenged the inclusion/exclusion of certain companies from/to the final tally drawn by the TPO. Before adverting to the comparability analysis, it is sine qua non to examine the functional profile of the assessee under the international transaction of Provision of IT enabled services. It is seen from the TPO s order that the assessee entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set up and usage functionalities and excludes planning, design and programming. 82. We have also gone through the interview of Shri Thomas Payyapalli with designation General Manager, India Global Technical Support Centre (I-GTSC), conducted by the APA Authorities, a copy of which has been placed in the Paper book. In response to query about the nature of work undertaken, he submitted that his team was resolving technical problems of customers and also providing technical assistance to MPN (Microsoft Partner Network) Partner Ecosystem. In answer to question no. 2, he stated that the support calls are routed through Microsoft and the systems of various support centres including India GTSC. Once the call ends here, the engineers interact with the customer, understand the root cause of the problem and provide a resolution. He further answered to question no.12 that MS Corporation provides process tools with the help of which the assessee renders services to its customers. From the above discussion, it is clear that unlike the international transaction of Provision of software development services , there is no conflict in the version of nature of services as given in TP documen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvolved in the mission of designing and developing a world class fully integrated multi-disciplined cloud based host . Application which integrates all services from electronic medical record (EMR) Practices Management System (PMS) - Code Mapping/Scrubbing Medical Billing and Receivables Management System (RCM ) Electronic Data Interchange with insurance companies. The above seamlessly integrated (SaaS) system functions as a one stop shop for a clinical provider that manages all their healthcare documentation needs, receivables managements needs . . Profit Loss Account of this company is available on page no. 2195, from which it can be seen that under the head Income , there is a first item of Sales and services. Under the head Segment information in Notes to Accounts , it has been mentioned that: Company has only one segment of activity, namely, healthcare receivable management , therefore, segment reporting as defined in AS-17 does not apply. From the above discussion, it transpires that this company is not only earning income from sale of software Products as well, but is having a common pool of income both from products and services and there is no bifurca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also held this company to be not comparable with a company providing IT enabled services only. We, therefore, direct to exclude this company from the list of comparables. ( iii) TCS E-Serve Ltd. 87. The TPO included this company in the list of comparables despite the assessee s several objections on functional non-comparability, ownership of intangibles and payment of brand equity. 88. Having gone through the Annual report of this company, it is seen that this company is engaged in the business of providing ITES/BPO services, primarily to Citi group entities globally. It has been recorded on page 88 of its Annual report that the company s operations broadly comprise transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by the Citi group to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities . Thus, it is evident that the income of this company also includes the income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is negative OP/TC from the relevant segment of IT enabled services . Since the assessee s IT enabled services segment is under consideration and the assessee has also considered Microland Ltd. as comparable on segmental basis, this segment, fetching persistent losses, sheds the character of comparability notwithstanding the fact that the other segment of software development services is not showing losses. Had there been comparison between the company s software development services segment and the assessee s software development segment, the question of persistent losses would have paled into insignificance. As Microland Ltd. (Seg.) is persistently in losses, the same cannot be considered as comparable. We, therefore, uphold the exclusion of this company from the list of comparables. (ii) R. Systems International Ltd. (Seg.); 92. The assessee included this company on segmental level in its list of comparables. However, the TPO eliminated the same by noting that it was following different year ending, namely, 31st December and, hence, was not comparable. The ld. AR fairly accepted that the above company was following calendar year for maintaining its accounts in con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated on the basis of the availability of the quarterly data from the Annual reports of this company, which could, as per his opinion, be adjusted for the financial year ending 31.3.2011. If the contention of the assessee is correct, that the relevant data for the concerned financial year can be deduced from the information available from its Annual reports, then, there can be no objection to the inclusion of the relevant segment of this company in the list of comparables with the adjusted data for the relevant financial year itself. Under such circumstances, we set aside the impugned order and remit the matter to the file of TPO/AO for examining this aspect of the matter. It is clarified that only if the assessee succeeds in providing the relevant data of this company for the concerned financial year on the basis of the information available from the Annual reports only, the TPO should include the appropriate segment of this company in the list of comparables by considering its OP/TC for the financial year ending on 31.3.2011. If, even though its quarterly data is available and can be compiled for the relevant financial year, but the amounts of operating profit or operating costs e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for their exclusion, without controverting the functional similarity of the above companies or the relevant segment. No change was made by the DRP in the views taken by the AO/TPO. 97. After considering the rival submissions and perusing the relevant material on record, we find that the assessee s turnover under this segment is to the tune of ₹ 323.46 crore. The TPO excluded the companies with the turnover of less than ₹ 5 crore. The preliminary question which looms large before us is whether the application of this filter is correct? In this regard, it is pertinent to note that the computation of arm's length price under the Indian transfer pricing provisions is embodied in section 92C of the Act. Sub-section (1) of this section provides that the arm's length price in relation to an international transaction shall be determined by any of the given methods, being the most appropriate method, having regard to certain factors. Proviso to sub-section (2), which assumes significance for the present purpose, states that : where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fication of the claim, whether it goes for or against it, and also recompute the assessee s PLI from this international transaction by reducing operating expenses in relation to the earning of rental income from the overall operating expenses to be bifurcated amongst all the sources of the revenues of the assessee from operations including the instant international transaction. 99. The only issue raised by the Revenue in its appeal, as argued by the ld. DR, is against the exclusion of E-Clerx Services Ltd. on the direction of the DRP. The TPO included this company in the list of comparables, which was objected to by the assessee before the DRP by contending that it was functionally not comparable and was engaged in KPO activities. Apart from that, it was also submitted that it was outsourcing substantial amount of its work to outsiders. The DRP did not approve the view canvassed by the TPO. Relying on the judgment of the Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. vs. CIT (2015) 279 CTR 441 (Del) , the DRP directed to exclude this company from the list of comparables. The Revenue is aggrieved by such exclusion. 100. We have heard both the sides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer decided the above issues against the assessee. The ld. DRP also upheld the view taken by the Assessing Officer in the draft order by noticing that similar view was taken by it on the above issues in the immediately preceding year. 106. Having heard both the sides, it is observed that the immediately preceding year came up for consideration before the Tribunal. Vide order dated 28.06.2016, the Tribunal in ITA no.2058/Del/2015, has restored the above issues to the Assessing Officer for a fresh decision. Since the issues in the instant appeal are admittedly of the similar nature as in the preceding year, respectfully following the precedent, we set aside the impugned order on the above scores and remit the matter to the file of Assessing Officer for deciding them afresh in accordance with the view taken in such immediately preceding year, after allowing a reasonable opportunity of being heard to the assessee. 107. Ground no. 19 is against not treating interest income of ₹ 3,13,60,627/- earned on fixed deposits by the Bangalore undertaking as eligible for benefit u/s 10A of the Act. The ld. AR candidly admitted that this issue was neither raised before the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X
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