TMI Blog2020 (8) TMI 855X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of the said entity as well as the segmental details of the hardware division, if any, directly from the said entity and then decide the issue of comparability. We, therefore, set aside the finding of learned TPO for including the company into set of comparables as well as the direction given by the DRP on this issue and restore the matter to the file of the Assessing Officer/TPO for deciding the same afresh in the light of the observations already made by us, after giving the assessee a proper and sufficient opportunity of being heard. E-Zest Solutions Limited - As far as issue of functional dissimilarity on the ground of conceptualization of the software is concerned, we do not agree with the argument of the learned Counsel of the assessee. although the company is functionally similar to the assessee but in view of the figure of increase in the stock gives rise to the possibility of trading segment. As complete information is not available in public domain, in our opinion, the Learned TPO can collect the relevant information from the company using the authority under section 133(6) of the Act and if he finds that trading segment exist and no separate results are available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d adequate opportunity of being heard. Persistent Systems Ltd. - As revenue from sale of software services and product has been shown that ₹ 6,101.27 million. There is no separate bifurcation of the revenue from the software services and therefore in absence of segmental data of software services, the company cannot be included as a comparable at entity level. Accordingly, on the ground of the functional dissimilarity of the entity level, we direct the Learned AO/TPO to exclude the company from the final set of the comparables. Wipro Technology Services Ltd. company is directed to be excluded from the set of the final comparables. Zylog Systems Ltd. - As the Revenue as shown from Software Development services and the products and no separate revenue or segmental result for software development services have been reported in the annual report. In absence of any separate segmental result of software development services available in public domain, we reject the company as comparable on functional dissimilarity at entity level. Accordingly, we direct the Ld. AO/TPO to exclude this company from the set of the final comparables. - ITA No.700/Del./2016 - - - Dated:- 31-8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta available in the database (Prowess database and Capitaline database) at the time of filing the income tax return on a bonafide belief that the data in the database is reliable and correct and furnish the Transfer Pricing Study ( TP Study ). 5. That the AO and DRP erred in confirming the action of the TPO impliedly rejecting the Transfer Pricing Study of the Appellant and in conducting a fresh benchmarking analysis on the basis of conjectures and surmises. 6. That on facts and circumstances of the case and in law, the AO and DRP erred in confirming the action of the TPO in applying the following filters: A. Use of only current year (i.e. FY 2010-11) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for the FY 2010- 11 was not available in the public domain, B. Rejecting companies with turnover below ₹ 5 crores without applying an upper filter of ₹ 500 crores C. Rejecting companies whose revenues from services is less than 75% of the total operating revenues without appreciating that the said filter has no effect on comparability analysis, D. Rejecting companies with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain/loss and hedging costs/premium as a nonoperating income/expense. 12. That the AO and DRP erred in confirming the action of the TPO in not allowing risk adjustment claimed by Appellant in terms of Rule 10B(l)(e) read with Rule 10B(3) of the Income tax Rules, 1962. 13. That the DRP erred in law in confirming the action of the AO/TPO in mechanically initiating penalty proceeding under Section 271(l)(c) of the Act by holding that penalty under Section 271(l)(c) is consequential in nature. 14. The AO erred on facts and circumstances of the case and in law in charging interest under Section 234B and 234D of the Act and computing interest under Section 234B in violation of the provisions of the Act. The above grounds are in alternative and without prejudice to each other, and the Appellant craves leave to add, amend, alter or vary from the above grounds of the appeal before or at the time of hearing. 2. Briefly stated facts of the case are that the assessee company is incorporated in India under the Companies Act, 1956 on 31/05/2002 as a wholly-owned subsidiary of Results International System INC , USA, which in turn is 100% subsidiary of Fiserv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable companies. The learned TPO carried out his own search of the comparable companies and added 16 more companies to the set of the comparable companies. The average PLI of the 19 companies was worked out to 22.68% and after applying the margin over the operational cost, the learned TPO in his order dated 16/01/2015 proposed an adjustment of ₹ 20,29,99,837/- to the value of the International Transaction. The Assessing Officer issued draft assessment order on 27/02/2015, after incorporating transfer pricing adjustment of ₹ 20,29,99,837/- and other addition for disallowance of credit card expenses. Aggrieved with the additions proposed by the Assessing Officer, the assessee filed objections before the Learned DRP. 2.3 The learned DRP after considering objection of the assessee issued following directions: 1. To check the employee cost of M/s. LGS Global Ltd. and to include in the final list of comparables companies if it passes the employee cost filter. 2. To compute the margin computation as per Safe Harbour Rules and provide the copy of computation of profit margin of both taxpayer and the comparables alongwith the order. 2.4 The lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segment reporting has not been provided as the company deals in one bueinss segment and in one geographic area. Thus, the assessee provides software development services and IT enabled services also. (iv) The profile of the assessee has been reported in the transfer pricing study (Page 33 of the paper-book Voulme-1), which reads that the assessee has been established to render software development and maintenance services, data analytics/global analysis to Fiserv global services INC and the assessee is a property and casualties insurance (P C) expert for (a) outsourcing for Information Systems (b) management of new or replacement systems and (c) project development and management. (v) The assessee has provided various steps of the functions carried for providing services to the AEs on page 54 of the paper-book Volume 1, which is part of the transfer pricing study. The functions performed by the assessee include project plan, analysis, design, build and testing, staffing and recruitment, personal management and administration etc. (vi) On page 55 of the paper-book (volume-1), it has again been reiterated that the assessee renders software development and main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atisfy the filter of service income applied by the learned TPO. 8.2 We have heard rival submission of the parties. On perusal of the order of the learned DRP we find that learned DRP has upheld the filter of the rejection of the companies with service income less than 75%. The Ld DRP has observed that this filter has been upheld in the case of the assessee by the Tribunal in assessment year 2010-11 in order dated 26/06/2015. 8.3 Further, the learned DRP has reproduced a table of income from software services and computer hardware and according to which, revenue from software services constitute 85% of the total receipt of ₹ 26,03,84,251/- (i.e. ₹ 22,11,35,689 + 3,92,48,562). For ready reference, said table is reproduced as under: 01/04/2010 to 31/03/2011 Details of principal products and services. Unless otherwise specified, all monetary values are in INR 1. 2. ITC number of product N.A. N.A. Description of product of services SOFTWARE SERVICES Computer Hardware` ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it and loss account of the assessee revenue is shown from the software services and thus we do not find any error in the finding of the learned DRP that service revenue of the company is more 85% of the total revenue and it satisfies the filter of service income more than 75%, therefore the profit results of the company are eligible for comparison with the software services of the assessee. However, details of margin on hardware sales is not available and if the margin on hardware is too high as compared to software services, the company may not be suitable for comparison. Due to lack of sufficient information in respect of the company available in the public domain, in the interest of substantial justice, we feel appropriate to restore the issue of comparison to the Ld AO/TPO with the direction to the TPO to obtain such information in the form of relevant schedules of the Profit Loss Account of the said entity as well as the segmental details of the hardware division, if any, directly from the said entity and then decide the issue of comparability. We, therefore, set aside the finding of learned TPO for including the company into set of comparables as well as the direction given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the analysis phase of the function of the assessee, under which documents are sent to the client for approval. He submitted that even the acceptance test is done under approval from the client and the associated enterprises. According to him, in view of the functions carried out by the assessee, the contention of the Learned Counsel that software development is not conceptualized by the assessee, is not correct. 9.3 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. As far as issue of functional dissimilarity on the ground of conceptualization of the software is concerned, we do not agree with the argument of the learned Counsel of the assessee. On page 55 of the paper book, the assessee has provided detail of various phases of the activities under the functions of the software development as under: Fiserv India renders software development and maintenance services to Associated Enterprises on project basis. The projects entail requirement study, analysis and design of the system, coding and testing of the product. Fiserv India employees are technically qualified professionals in their respecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock by the assessee, there is apparently contradictory information in the annual report of the company. According to page 225 of the paper-book volume 1, the quantitative details in respect of opening stock, purchase, sales and closing stock is not applicable as the company is engaged in providing computer software development related services only, whereas in the profit and loss account available on page 2 to 13 of the paper book, there is increase in the stock of ₹ 1,26,03,745/-. Thus, although the company is functionally similar to the assessee but in view of the figure of increase in the stock gives rise to the possibility of trading segment. As complete information is not available in public domain, in our opinion, the Learned TPO can collect the relevant information from the company using the authority under section 133(6) of the Act and if he finds that trading segment exist and no separate results are available for the software development segment, then he shall exclude the company from the set of the comparables. Accordingly, we restore the issue of the comparability of the company to the file of the Learned AO/TPO for deciding afresh after providing adequate oppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infosys Technologies Ltd., the reason being that the latter is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited Currency risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in this order. Therefore, we are of the view that this case is required to be excluded 11.5 The aforesaid order was upheld by the Hon'ble Delhi High Court after taking note of the chart as given below: Basic Particular Infosys Technologies Ltd. Assessee Risk Profile Operate as full-fledged risk taking entrepreneurs Operate at minimal risks as the 100 percent services are provided to AEs Nature of services Diversified-consulting, application design, development, reengineering and maintenance system integratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the exclusion of two comparables in question and highlights that M/s Infosys Ltd. is engaged not merely in software development both offsite and onsite and that it receives the substantial revenues on account of onsite software financial development the activity which the assessee does not carry out. It is also submitted that besides this, the other distinguishing factor vis-a-vis that M/s Infosys Ltd. is that concern also owns brand intangibles- an advantage which the assessee does not possess. Lastly, the assessee is captive as opposed to status of M/s Infosys Ltd. With respect to M/s Persistent Technologies, it is pointed out that in a previous order in ITA No. 279/2016 dated 04.05.2016 ( Principle Commissioner of Income Tax vs. M/s Cashedge India Pvt. Ltd) held that having regard to the rules i.e. Rule 10 B to 10 E of Income Tax Rules, the data of M/s Persistent Systems Ltd- could not have been included. Here, it is urged that the assessee is also a member of the Cashedge India group and is engaged in same and identical business. The AY also coincides with that of assessee i.e. AY 2010-2011. For these reasons, we are of the opinion that no substantial question of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities and submitted that argument of strengthening of the brand does not stand on its legs as the AE of the assessee i.e. Fiser USA is having very big brand value and therefore it also fetches higher margins for rendering services to its clients. 11.3 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. On perusal of the profit and loss account of the company reproduced by the learned TPO on page 36 of his order, it is evident that the revenue of ₹ 2331,81,22,096/- has been shown from software development services and products and there is no separate segment of the software development services available in the annual report of the company. In such a huge turnover, the composition of revenue from the software development services and from sale of the software products is not separately available in the annual report. In such circumstances, the company cannot be termed as functionally similar at entity level with the assessee, who was engaged in providing software services to its associated enterprises. In view of the functional dissimilarity, we direct the Learned AO/TPO to exclude this company from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,94,90,457 6.67,28.828 Other income [abstract] Receipt income investments [abstract] Receipt income current investments [abstract) Receipts dividend current investments [abstract] Receipt dividend current mutual funds 4,18,608 2,29,840 Receipts dividend current investments 4,18,608 2,'29,840 Receipt income current investments 4,18,608 2,29,840 Receipt income investments 4,18,608 2,29,840 Other income 4,18,608 2,29,840 12.4 On perusal of the above, it is evident that revenue has been shown from the software services only and no revenue has been shown from sale of the products or from royalty etc. Merely menti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e paper book and submitted that company has incurred research and development expenditure during the year. He also referred to pay 656 of the paper book to demonstrate that the company has earned revenue from sale of the software services and the products. In view of the arguments, he submitted to exclude this company from the set of the comparables. 13.2 The learned DR on the other hand relied on the order of the lower authorities. 13.3 We have heard rival submission of the parties and perused the relevant material on record. We find that in assessment year 2010-11, the company was rejected by the Tribunal on the ground of high turnover, but in view of the decision of the Hon ble Delhi High Court cited by the Learned DRP in their order, we agree with the finding of the learned DRP that high turnover cannot be a ground for rejection of the company as comparable if it is otherwise functionally similar to the taxpayer. Further, Hon ble Delhi High Court in the assessment year 2010-11 rejected the company mainly on the ground that published data was not available in the case of the company. But in the year under consideration there are no such circumstances and the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 945 of the paper-book volume 3 and submitted that this company was incorporated as Citi Technology Services Ltd. a subsidiary of the Citigroup Banking Corporation and under a share purchase agreement on 21/01/2009, all the shares of the company were purchased by the Wipro Ltd, which is the holding company of the Wipro technology services. He submitted that in following decision of the Tribunal, the company has been rejected as a comparable in view of the transaction of the company with the Citigroup held as tainted transaction: i. Pr. CIT Vs. Cashedge India Pvt. Ltd., ITA 279/2016, page 3 para 6 ii. Element K India Pvt. Ltd. Vs. ITO (AY 2011-12) ITA No. 6001/Del/2015, pages 13 to 16 para 3 iii. NaviSite India Pvt. Ltd. Vs. ITO (AY 2011-12) ITA No. 1054/Del/2016, paged 12 to 15- para 12 to 13.5 iv. Aircom International (India) Pvt. Ltd. Vs. DCIT (AY 2011-12) ITA No.222/Del./2016- pages 7 to12 para 11 to 16 v. Microsoft India (R D) Pvt. Ltd. Vs. DCIT (AY 2011-12) ITA No. 691/Del./2016 pages 47 to 51 para 45 to 47 vi. ST- Ericcson India Pvt. Ltd. Vs. ACIT (AY 2011-12) ITA No. 6247/Del./2015- pages 28 to 30 para 46 to 47 vii. Bechtel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... changed to Wipro Technology Services Limited ('WTS' or 'the Company') on 16 March 2009. It is observed from the above that, Wipro Technology Services Ltd., which was earlier Citi Technology Services Ltd., was held by Citi Corp. Banking Corporation, USA upto 20th January, 2009. Wipro Ltd., parent company of which executed agreement with Citi Group Inc., for acquiring Citi Technology Services Ltd., now called Wipro Technology Services Ltd. On 21.1.2009, Wipro Ltd. signed master agreement with Citi Group Inc., for the delivery of technology Infrastructure Services and application development and maintenance services for the period of six years, which also includes the year 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. It is observed that the issues raised by Ld. CIT DR in respect of comparability of this comparable has been dealt with by coordinate bench of Delhi Tribunal in Saxo India Pvt.Ltd vs. ACIT (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the instant case, we find that Wipro Technology Services Ltd. earned revenue from Master services agreement with Citigroup Inc. for the delivery of technology infrastructure services. This agreement was, in fact, executed between the assessee's AE, Wipro Ltd., and Citigroup Inc., a third person. This unfolds that the transaction of earning revenue from software development support and maintenance services by Wipro Technology Services Ltd., is an international transaction because of the application of section 92B(2) i.e., there exists a prior agreement in relation to such transaction between Citigroup Inc. (third person) and Wipro Ltd. (associated enterprise). In the light of this structure of transaction, it ceases to be uncontrolled transaction and, hence, Wipro Technology Services Ltd., ITA No. 6001/Del/2015 Element K India Pvt. Ltd. disqualifies to become a comparable uncontrolled transaction for the purposes of inclusion in the final list of comparables under Rule 10B(1)(e)(ii). We, therefore, direct removal of this company from the list of comparables. Respectfully following the same we also direct removal of this company from the list of comparables. 14.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P accepted the company as valid comparable in view of the functional similarity. 15. Before us, the Learned Counsel of the assessee submitted that the company is engaged in provision of the various business activities and no segmental result for software development services is available. He referred to Annual Report of the company for Financial Year 2010-11. He referred to page 1022 and 1051 of the paper book Volume 3 and submitted that the company earns it revenue from software development services and products. He also referred to page 1061 of the paper book and submitted that company derives its revenue primarily from software development services, consultancy services, projects and e-governance projects. He further submitted that company does not meet the 75% software development services to revenue filter adopted by the learned TPO. He referred to page 1024 of the paper book and submitted that contribution of the revenue from software development is only 21.6%. He sought to exclude this company on these grounds. 15.1 The learned DR, on the other hand, relied on the order of the lower authorities. 15.2 We have heard rival submission of the parties and peru ..... X X X X Extracts X X X X X X X X Extracts X X X X
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