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2020 (3) TMI 1138

..... lishment of the company - HELD THAT:- As decided in own case [2014 (4) TMI 929 - ITAT DELHI] and [2014 (1) TMI 1637 - ITAT DELHI] Assessing Officer ignored this fact that the assessee's 100% EOU was established in AY 1997- 98 related to AY 1998-99. AO denied exemption on surmises and conjectures by taking hyper technical approach. Since the assessee was entitled to exemption u/s 10B of the Act, then the period cannot be said to be exhausted in the year under consideration, hence we uphold the findings of the Commissioner of Income Tax(A) in the impugned order. Accordingly, ground no.2 of the revenue is dismissed. Transfer Pricing adjustments - Comparable selection - HELD THAT:- Appellant company was established as a back-end software services company and works mainly for its parent Infogain, USA. The appellant company is also registered under the STP Scheme and has been claiming tax u/s 10B of the Act, thus companies functionally dissimilar with that of assessee need to be deselected from final list. - ITA No. 5870/DEL/2011 - 17-3-2020 - Shri N.K. Billaiya, Accountant Member, And Ms Suchitra Kamble, Judicial Member For the Assessee : Ms. Ananya Kapoor, Adv, Shri Shivansh Pandya .....

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..... . counsel for the assessee drew our attention to the orders of the Tribunal for Assessment Year 2005-06 and 2006-07 and pointed out that the Tribunal has allowed the claim of deduction to the assessee. 9. Per contra, the ld. DR strongly supported the findings of the DRP. 10. We find force in the contentions of the ld. counsel for the assessee. The claim of deduction was considered by the Tribunal in ITA No. 2339/DEL/2010 for Assessment Year 2005-06. The relevant findings of the co-ordinate bench read as under: 8. On careful consideration of rival contentions and careful perusal of record and citations submitted before us, we observe that the revenue has not disputed this point that the assessee got approval as 100% EOU as per approval dated 27.01.1997. We further observe that in the impugned order, the Commissioner of Income Tax(A) has held that the Assessing Officer was completely in error in holding that since the assessee started its business in AY 1992-93, then the prescribed period of 10 years for the purpose of exemption u/s 10B of the Act had come to an end by AY 2001-02. We also observe that the said section 10B envisages setting up of export oriented undertaking which is a .....

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..... hat the Assessee was entitled to exemption u/s 10B of the Act then the period of exemption started from Assessment Year 1998-99 and cannot be said to be exhausted in the year under consideration in the present appeal i.e 2006-07. The relevant paragraph of ITAT order read as under:- 7. Further, the CIT(A) has concluded its findings and observations by directing the Assessing Officer to grant exemption u/s 10B of the Act to the assesssee with following operative para of the impugned order:- In the case of the assessee, neither the period of five years nor the block period of eight years expired when the amendment replacing the word ten for five was introduced by IT (Second amendment) Act, 1998 w.e.f 1/4/1999. Since the assessee was entitled to exemption in the year in which amendment became effective & operative, the assessee will be entitled to the extended period of exemption because the period of five years had not exhausted up to assessment year 1999-2000. Since the right of the assessee was continuing in the year of amendment and was not lost on the date when the amendment came into existence, the view taken by the Ld. CIT(A) cannot be upheld. So far as the objections of the .....

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..... h Court of Delhi in the case of Legato Systems India Pvt. Ltd and decisions of Hon ble Punjab & Haryana High Court in the case of Excel Softech Ltd, (supra), we are of the firm opinion that the Commissioner of Income Tax (A) rightly granted relief to the assessee by directing the Assessing Officer to grant exemption u/s 10B of the Act for the assessee. We are unable to find any perversity, ambiguity, perversity or any other valid reason o interfere with the findings of the Commissioner of Income Tax (A). Per contra, we clearly observe that the Assessing Officer ignored this fact that the assessee s 100% EOU was established in A.Y 1997-98 related to A.Y 1998-99. The Assessing Officer denied exemption on surmises and conjectures by taking hyper technical approach. Since the assessee was entitled to exemption u/s 10B of the Act, then the period cannot be said to be exhausted in the year under consideration, hence we uphold that the findings of the Commissioner of Income Tax (A) in the impugned order. Accordingly, Ground No. 2 of the Revenue is dismissed. 4. Respectfully following the above judgment of ITAT C Bench, Delhi in Assessee s own case for the immediate preceding year to t .....

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..... its associated enterprises. 3. TNMM was selected as the most appropriate method. 4. The search for uncontrolled comparables was done using Prowess and Capitaline Database. 5. The taxpayer considered companies whose year ends on dates other than March 31. 6. The comparability analysis was done based on the data available in the Prowess/Capitaline databases. The published financial statements of the companies were examined wherever available. It is not clear in how many companies detailed analysis was done by the tax payer. 18. The appellant used the search of the databases, which yielded a set of 44 comparables with an average profit margin @ 11.94% and since the margin shown by the appellant was 13.77%, the international transactions were reported to be at arm s length. 19. The TPO examined the TP report of the appellant and found that the assessee has not gone into the verticals/horizontals within the software industry in its comparability study. The TPO further excluded those companies whose data was not available for F.Y. 2006-07. The TPO further selected those companies whose revenues from software development and relates services are more than 75% of the operating revenues fo .....

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..... levant portion of the TP order and pointed out that the appellant is also a giant company and belongs to Chris Capital Group. It is the say of the ld. DR that Infogain is itself a big brand value and mergers and acquisitions is an ongoing process and the appellant itself has acquired Blue Star Infotech Ltd and Synetario Technology and therefore, the MBA cannot be a basis for excluding the comparables. 26. In her rejoinder, the ld. counsel for the assessee pointed out that acquisition of Chris Capital Group took place in 2015 and the same is with M & A of Blue Star Infotech Limited and Synetario Technology. It is the say of the ld. counsel for the assessee that anything that happened after a decade cannot influence the international transaction for the year under consideration. 27. We have given thoughtful consideration to the orders of the authorities below. Before proceeding further, let us understand the business profile of the assessee which is as under: Software Services Associated enterprises are in the business of carrying out software development projects for their clients on a contractual basis. Work in respect of these projects is outsourced in full or in part to Infog .....

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..... of the opinion that the brand value of an entity has a significant role in its ability to garner profits and negotiate contracts. Thus, while considering the comparables, the likelihood of profits derived or attributable to the brand having regard to the consistency of the quality of services that an entity is able to offer would be relevant; although functionally, the two entities may be similar in terms of the services or products they offer, brand does play its own role in price or cost determination. If this singular aspect is kept in mind, the ITAT s approach cannot be faulted with. 31. The Special Leave Petition filed by the Revenue was dismissed by the Hon'ble Supreme Court vide order dated 30.11.2018 in SLP [Civil] Diary No. 32469/2018. 32. Once again, the Hon'ble High Court of Delhi in the case of M/s Avaya India Pvt Ltd ITA No. 532/2019 order dated 24.07.2019 has held as under: 18. On the aspect of exclusion of comparables that have a high economic upscale viz., Infosys, TCS and Wipro, particular reference may be made to the decision of this Court in PCIT v. BC Management Services Pvt. Ltd. (supra) where a particular reference was made to TCS E-serve as under: &qu .....

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..... greater profits; besides they operated on economic upscale." 33. In light of the aforementioned judicial decisions of the Hon'ble Supreme Court and Hon'ble High Courts, we direct the Assessing Officer/TPO to exclude Infosys Technologies Ltd and WIPRO Ltd. from the final set of comparables. TATA Elxsi Ltd 34. We find that the TPO has taken the software development and services segment for comparison. However, we find from the Annual Report of this company that this segment is bifurcated into three sub-segments:- Embedded product design services - industrial design and engineering services - Visual computing labs. 35. In our considered opinion, these services are not comparable to the assessee. For similar reasons, the co-ordinate bench in the case of Global Logic India Pvt Ltd in ITA No. 5809/DEL/2011 has excluded this company from the final set of comparables. The relevant findings read as under: 28. The TPO considered this company as comparable despite the assessee s objections. 29. We find that this company has two main segments, namely, Software development and services and System integration services. The TPO has adopted Software development and services segment w .....

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..... ceptional financial results due to mergers/demergers etc. Similar view has been taken by the Delhi Benches of the Tribunal in several cases including Toluna India Pvt. Ltd. Vs. ACIT (ITA No. 564/D/2013). It is patent that the mergers/demergers largely influence the profitability of a company during the year of happening of such event, which makes it incomparable. As there have been acquisitions by Megasoft Ltd., during the year in question and the financial results of the erstwhile company stand included in the overall profitability of this company, respectfully following the precedents, we hold that this company cannot be considered as a comparable. 39. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables. Persistent Systems 40. The Annual Report of this company shows that there have been acquisitions in this year pursuant to the sanction from the Hon'ble Bombay High Court for amalgamation of Control/Net India Pvt Ltd effective from 1.4.2006, pursuant to which all the assets, liabilities and losses of control/net are merged with the assets, liabilities and reserves of the company. Further, we find .....

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..... lso successfully completed three mergers, namely, Sasken Network Systems Ltd., and Integrated Softtech Solutions Pvt. Ltd., the two Indian based wholly owned subsidiaries which merged with the assessee. It also transpires from this Annual report that the companies getting merged with the assessee company also provided software services focused on telecom operating systems. Thus, it is abundantly patent that the segmental results taken by the TPO of this company have been influenced by the mergers and acquisitions taken place during the year, thereby making such financial results as incomparable. Following ITA No.5857/Del/2011 the reason given above, we order for the exclusion of this company from the list of comparables. 43. Considering the business profile of this company, in the light of judicial decisions referred to hereinabove, we direct for exclusion of this company from the final set of comparables. Celestial Labs Ltd 44. The Annual report of this company shows that this company is into manufacturing and supply of medicines and is also engaged in biopharma and biotech manufacturing and customized IT solutions, manufacture of drugs, clinical trials and contract research activ .....

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..... et of comparables. Flextronics Software Systems Ltd 46. The Annual Report of this company shows that this company is an end-to-end provider of communication products, services and solutions to network equipment providers, handset manufacturers, service providers and business process outsourcing sectors. This company also supplies both products and services to its customers and is engaged in selling products which makes it functionally dissimilar from the assessee. For these reasons, the co-ordinate bench in the case of Tata McGraw Hill Education Pvt Ltd [supra] has directed for exclusion of this company from the final set of comparables. The relevant findings read as under: Flextronics Software Systems Ltd. (Seg.) 10.1. The TPO included this company with operating profit ratio of 25.31%, in the list of comparables despite the assessee's contention that it is a software products company as well as a service provider. 10.2. After considering the rival submissions and perusing the relevant material on record, it can be seen from the Annual report of this company that it is an end-to-end provider of communication products, services and solutions to network equipment providers, hand .....

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..... y is into production of software products which apparently cannot be a comparable to assessee dealing with contract software development and not into sale of any product. Therefore, we direct TPO/AO to exclude this company from the list of comparables. 49. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables. KALS Infomation Systems Ltd 50. The Annual Report of this company shows that this company is engaged in training and software products since its inception. The Annual report shows that STPI Unit engaged in development of software and software products and a training centre engaged in training of software professionals on online projects, which makes this company functionally dissimilar from the appellant company. For similar reasons, the co-ordinate bench in the case of Tata McGraw Hill Education Pvt Ltd [supra] has directed for exclusion of this company from the final set of comparables. The relevant findings read as under: 13.1. The TPO included this company in the list of comparables by observing that its operations were in software products, software services and training. Information u/s 133(6 .....

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..... ervices and high end technical services which come under the category of KPO services. For similar reasons, the co-ordinate bench in the case of Meritor LVS India [P] Ltd ITA No. 1231/Bang/011 has directed for exclusion of this company from the final set of comparables. The relevant findings read as under: 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the IT(TP)A.1231/Bang/2011 Page - 13 ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in 'e-Business Consulting Services', consisting of Web Strategy Services, I T design services and .....

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..... - 14 comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O./TPO is accordingly directed." 53. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables. Avani Cimcon Technologies Ltd 54. The Annual Report of this company shows that this company derives revenue from both software development services and sale of software products [D Exchange] without any segmental details which makes this company functionally dissimilar. For similar reasons, the co-ordinate bench in the case of Global Logic India Pvt Ltd [supra] has excluded this company from the final set of comparables. The relevant findings read as under: 9. The TPO observed on page 89 of his order that this company is also a software development and consulting company. In his opinion, all the filters applied by him were fulfilled and, as such, this company was liable to be considered as comparable. The assessee objected to the incl .....

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..... lar reasons, the coordinate bench in the case of Global Logic India Pvt Ltd [supra] has excluded this company from the final set of comparables. The relevant findings read as under: 15. The TPO considered this company as comparable by observing that it was into the software development services. The assessee s objections were repelled. 16. We find from the Annual accounts of this company that it is engaged in rendering ITES BPO services, application management services, offshore delivery, project management services, public sector services, maritime practices and executive education information system, etc. The above description of the nature of works carried out by this company manifests that the character of services provided by the assessee company cannot at all be considered as comparable with this company. Similar view has been taken by the Tribunal in the case of Toluna India Pvt. Ltd. (supra). Following the same, we direct it to be considered as not comparable. 57. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables. Ishir Infotech Ltd 58. The Annual Report of this company shows that this compan .....

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..... method allows broad flexibility tolerance in the selection of comparables. This proposition having been rejected, the Court in Rampgreen Solutions (supra) held as under: "43. In our view, the aforesaid approach would not be apposite. In so far as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the transfer pricing method adopted. In other words, the comparable transactions/entities must be selected on the basis of similarity with the controlled transaction entity. Comparability of controlled and uncontrolled transactions has to be judged, inter alia, with reference to comparability factors as indicated under rule 10B(2) of the Income Tax Rules, 1962. Comparability analysis by the transactional net margin method may be less sensitive to certain dissimilarities between the tested party and the comparables. However, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable arm's length price. Therefore, as far as possible, the comparables must be selected keeping .....

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..... handling the said services of rights issues and with a direction to exclude it if the TPO found it in the affirmative. Such an approach of the ITAT is not in accordance with the principles laid down in Rampgreen Solutions (supra). The ITAT's findings acknowledge that Sumedha may not be functionally similar to the Assessee, as admittedly, the Assessee does not render services relating to rights issues. Starting the entire exercise of comparability analysis from the stage of the TPO would result in an unending cycle of proceedings especially when the relevant material in the form of annual reports etc. was available on the record. The ITAT ought to itself have determined whether Sumedha is to be retained at all in view of its own findings. Remanding the issue to the TPO was an incorrect approach. (ii) Brescon Advisors Limited - In the case of Brescon, the ITAT analysed the annual reports and noticed that the income of Brescon is from fee based financial services, from debt resolution and debt syndication. Brescon also earned revenue from sale of investments. The ITAT has equated Advisory services related to debt financing' with financial services from debt resolution and deb .....

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..... is concerned, the same cannot be faulted with in as much as every Assessee is entitled to make submissions as to the selection of comparables and choose what is advantageous to it. So long as the same can stand the test of legal scrutiny, it cannot be held that such challenges are not maintainable. 25. In this backdrop, when sub-advisory agreement dated 1st July, 2006 along with the addendum thereto, is examined, the services of the Assessee cannot be termed as that of merchant banking though there may be some overlap in the advisory segment of the services provided by merchant bankers. In view of the services rendered by the Assessee, Question (i) is answered in the negative i.e. in favour of the Assessee and against the Revenue. Question (ii) 26. In view of the above discussion on the various comparables, the findings of the ITAT in respect of Sumedha, Brescon and Ladderup are set aside. We have been informed by the learned counsel for the parties that subsequent to the order of the ITAT, the TPO passed an order which resulted in a final assessment order being passed by the AO. The matter is currently pending in appeal, by the Assessee, before the CIT (A). All those consequential .....

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