TMI Blog2023 (7) TMI 1143X X X X Extracts X X X X X X X X Extracts X X X X ..... sys Limited) - We hold that ITL cannot be accepted as functionally comparable with the Appellant in the present case. Accordingly, the Assessing Officer/TPO are directed to exclude Infosys Technology Ltd. from the final set of comparables and re-compute ALP as well as transfer pricing adjustment, if any, accordingly. Zylog Systems Limited - 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. Disallowance of deduction claimed u/s 10A/10AA in respect of receipts under Intellectual Property Services Agreement between Accenture Global Services, GmBH and the Appellant - HELD THAT:- We direct the AO to compute deduction under Section 10A/10AA of the Act taking into account the receipt pertaining to IPSA as per the directions issued by the Tribunal in the aforesaid decisions as well as the directions issued by the DRP for the Assessment Year 2013-14 and 2014-15. Accordingly, Ground raised by the Appellant is allowed. Claim for deduction for education cess - HELD THAT:- In view of retrospective amendment in Section 40(a)(ii) of the Act and the judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 1,232,163,512/- after claiming a deduction of INR 1004,74,24,372/-. under Section 10A/10AA of the Act. The case of the Appellant was selected for scrutiny. The Assessing Officer noted that during the previous year relevant to the Assessment Year 2011-12, Appellant had, inter alia, provided IT Services and BPO Services to its Associated Enterprises (AEs) in various countries. Therefore, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act for computation of Arm s Length Price (ALP) of the International Transaction entered into by the Appellant with its AEs. 3.2. The TPO noted that the Appellant had aggregated international transaction pertaining to IT Services and BPO Services for benchmarking the transaction. However, according to the TPO the International Transaction pertaining to IT Services were separate and distinct from International Transactions pertaining to BPO Services. According to the Assessing Officer, the IT Services and BPO Services constituted different classes of activities/transactions which should have been benchmarked separately. Therefore, the Appellant was asked by the TPO to submit separate segmenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Appellant. The Assessing Officer passed the Final Assessment Order, dated 13/01/2016, under Section 143(3) read with Section 144C(13) of the Act assessing total income of the Appellant at INR 767,28,94,180/-, inter alia, (a) after making transfer pricing adjustment of INR 622,35,39,483/- and (b) restricting the claim of deduction of INR 1004,74,24,343/- to INR 979,91,12,697/- holding that the Appellant was not entitled to claim deduction under Section 10A/10AA of the Act in respect of receipt of INR 190,37,22,852/- from the Intellectual Property Service Agreement, dated 16/10/2005. 3.7. Being aggrieved, the Appellant has preferred the present appeal against the Final Assessment Order, dated 13/01/2016. The grounds raised by the Appellant are taken up hereinafter in seriatim. 4. Ground No. 1 4.1. Ground No. 1 raised by the Appellant does not require adjudication and therefore, the same is dismissed as being general in nature. 5. Ground No. 2 to 18 and Ground No. 23 5.1. Ground No. 2 to 18 and Ground No. 23 are directed against the Transfer Pricing Adjustment of INR 622,35,39,483/- made by the Assessing Officer. 5.2. The Learned Authorised Representative for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this company was rightly offered by the assessee in the list of comparables and, hence, the same should not be excluded. 43. We are disinclined to sustain the preliminary objection taken by the ld. DR that the assessee should be estopped from taking a stand contrary to the one which was taken at the stage of the TP study or during the course of proceedings before the TPO. It goes without saying that the object of assessment is to determine the income in respect of which an assessee is rightly chargeable to tax. As an income not originally offered for taxation, if otherwise chargeable, is required to be included in the total income, in the same breath, any income wrongly included in the total income, which is otherwise not chargeable, should be excluded. There can be no estoppel against the provisions 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from sale of software to the total income of the company. In the absence of any segmental information provided by the company in respect of software services, we cannot approve the inclusion of this company in the list of comparables. The same is directed to be excluded. xx xx 7. We notice that insofar as Infosys Technology Limited and Persistent Systems Limited are concerned, the learned ITAT observed that while the profit of the aforesaid three comparables is derived from both software development services as well as software products, however there is no precise information about the contribution made from the income derived from the sale of software to the total income of the companies. Thus, in the absence of segmental information provided by the companies in respect of the software services, the aforesaid companies have been excluded from the list of the comparables. We do not find any perversity in the approach adopted by the learned ITAT which would call for our inference. The third comparable . (Emphasis Supplied) 5.4. Respectfully following the above judgment of the Hon ble Delhi High Court we hold that for the Assessment Year 2011-12, Persiste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a 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. 46. Rule 10B(l)(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(l)(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion in the final list of comparables under Rule 10B(1)(e)(ii). We, therefore, direct removal of this 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. [Emphasis Supplied] 7. We notice that . The third comparable viz Wipro Technology Services Limited has been held to be disqualified under Rule 10B(1)(e)(ii), to become a comparable for uncontrolled transaction for the purposes of inclusion in the final list of comparables. The rationale for exclusion has been upheld by this court in Principal Commissioner of Income Tax-7 v. Open Solutions Software Services Pvt. Ltd. 8. At this juncture, we would like to note that this Court in Open Solutions (supra) upheld the exclusions of some of the comparables in question, in a similar factual situation, noting as under: 28. xx xx 29. As regards the second c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnology Services) by Wipro Ltd, since the comparable company continues to deliver services to Citi Group, this entire transaction would be considered as a related party transaction. The pre-arrangement between Citi group and Wipro Ltd. is a deemed international transaction as per Section 92B (2). Therefore, we are of the considered view that this comparable has been rightly deleted since it is no longer an uncontrolled transaction and cannot serve as a comparable in the benchmarking mechanism for the present assessee, since the RPT filter of this company failed to meet the filter criteria of 25% of RPT, as applied by TPO. The Tribunal in a similarly situated case, deleted Wipro Technology Services Ltd, since it had ceased to be an uncontrolled transaction under Section 92B (2) of the Act. The same order of deletion has been upheld by this Court in PCIT vs. Saxo India Pvt. Ltd., ITA 682/16vide order dated 28.09.2016. The assessee therein was engaged in the business of design and development of customized software applications. The relevant paragraphs of the Tribunal's order reads as under: 16.5. Adverting to the facts of the instant case, we find that Wipro Technology Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ior judgment of the Hon ble Delhi High Court in the case of Principal Commissioner of Income-tax Vs. Open Solutions Software Services: ITA No. 201 of 2018 reported in [2020] 116 taxmann.com 708 (Delhi)[18-05-2020] wherein the contention of the Revenue that there was a bar to challenge a comparable once it clears the filter had also been rejected. The relevant extract of the judgment reads as under: 34. In view of the above, it emerges that none of the comparables have been excluded on the ground of high turnover alone. The test of functional similarity applied by the Tribunal is in consonance with the legal position discussed hereinabove. Therefore, we do not find merit in the contentions urged by the Revenue on this ground. Equally meritless is the contention of the Revenue regarding the bar to challenge the comparables after the acceptance of the filters. The filters are applied to narrow down the search to find the comparables that are closest to the assessee. The use of filters has to be necessarily validated from the annual reports. Since the TPO would have to do this exercise on the basis of the actual data in the report of the comparables, he would surely have the freed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abled services, and no segmental information is available. The AR further submitted that it has debited manufacturing cost amounting to Rs. 8,30,094/- thereby indicating that the company also dealing in products therefore, the DRP was right in exclusion of iGate Global Solutions Ltd. 21. We have heard the rival contentions and perused the material on record. The ld. DRP has excluded iGate Global Solutions Ltd., on the ground that though it is earning revenue from IT Services and IT enabled services, it is considered revenue received from both segment as one segment. In the absence of segmental information, the company cannot be retained as comparable. We find that though the company is deriving revenue from two different segments, it has failed to report segmental information in its annual reports. Therefore, we are of the considered view that the DRP was right in rejecting iGate Global Solutions Ltd., as comparable. We do not find any error in the findings of the DRP. Hence we are inclined to upheld findings of the DRP and reject the ground taken by the Revenue. (Emphasis Supplied) 5.13. In the above appeal, the Tribunal had upheld the decision of the DRP to exclude Gold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentation, and then also accepted by the TPO, the Assessee would be precluded from challenging the inclusion in further appellate proceedings. He points out that the Assessee is not questioning the filters applied by the TPO and adds that the filter applied by the TPO was in fact more stringent than the one applied by the Assessee. He submits that since the Comparables met the said filter test and were included in the list, the Tribunal has completely erred in excluding them. 6. The reasoning of the learned ITAT for excluding the three comparables, as mentioned in the impugned order is as extracted hereinbelow: (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 is also having revenues from software products. The assessee's objections have been recorded on pages 80-82 of the TPO's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces Pvt. Ltd. 8. At this juncture, we would like to note that this Court in Open Solutions (supra) upheld the exclusions of some of the comparables in question, in a similar factual situation, noting as under: 28. Let us briefly evaluate the reasoning of the ITAT for deleting the comparables. As regards the first comparable-Infosys Ltd., it possesses huge tangibles of more than Rs. 1,00,000/- Crores. It is a full-fledged risk bearer with a turnover of more than Rs. 12,000/- Crores. The functions of Infosys Ltd. are highly diversified, and branching out into product conceptualization, core design, research development to marketing and sales of products, etc. No such function is carried out by the assessee. Being a captive service provider, its function is completely confined to software development services for its AE. There are no intangibles owned by the assessee and it incurs no expenditure on research development. We find that these distinguishing factors are highly substantial and cannot be ignored or severed from the comparison. The contractual terms of the transaction will be heavily influenced by this and other factors, such as, the overall economic standing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Appellant had accepted Zylog Systems Limited as a comparable and had not objected to its inclusion before DRP. The company passed through all the filters selected by the TPO and is therefore, functionally comparable. 5.19. We find that in the case of Commissioner of Income Tax 7, Vs. Tata Power Solar Systems Ltd.:[2017] 245 Taxman 93 (Bombay)/[2017] 298 CTR 197 (Bombay)[16-12-2016], a decision on which reliance was placed by the Learned Authorised Representative for Appellant, it has been held by the Hon ble Bombay High Court as under: 2. The Revenue urges the following questions of law for our consideration: (a) Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in excluding two comparables viz. Indowind Energy Ltd. and B. F. Utilities Ltd. for determination of Arm's Length Price (ALP) of international transaction with AEs, when these two comparables were originally included by the assessee company among the comparables? (b) xx xx 3. Re Question (a) (a) xx xx (b) xx xx (c) By the impugned order, the Tribunal allowed the Respondent- Assessee's appeal. It held that merely because an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned ITAT for excluding the three comparables, as mentioned in the impugned order is as extracted hereinbelow: xx xx (iii) Persistent Systems Ltd. 41. Though this company was included by the assessee in its list of comparables, the same has still been challenged before us. The ld. AR contended that this company was erroneously included in the list of comparables as it is also a product company which is apparent from the Annual report of this company. 42. The ld. DR raised a preliminary objection to the effect that once a company has been considered by the assessee as comparable in its TP documentation and the same has been accepted by the TPO, the same cannot be challenged in the further appellate proceedings. He relied on the impugned order to contend that this company was rightly offered by the assessee in the list of comparables and, hence, the same should not be excluded. 43. We are disinclined to sustain the preliminary objection taken by the ld. DR that the assessee should be estopped from taking a stand contrary to the one which was taken at the stage of the TP study or during the course of proceedings before the TPO. It goes without saying that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs. Mercer Consulting (India) P. Ltd. (2017) 390 ITR 615 (P H) have also approved similar view. In view of the foregoing discussion, we do not find any substance in the preliminary objection taken by the ld. DR. 5.21. Thus, in view of the above judgments, assessee can seek exclusion of a comparable originally selected/included by such assessee in the list of comparables. Accordingly, we proceed to adjudicate the plea of exclusion of Zylog Systems Limited. In order to support the aforesaid plea, the Learned Authorised Representative for the Appellant had relied upon the decision of the Delhi Bench of the Tribunal in Fiserv India Pvt. Ltd. Vs. ACIT, Circle 9(1), New Delhi [ITA No. 700/Del/2016, dated 31/08/2020, Assessment Year 2011-12] during the course of the hearing. The relevant extract of the aforesaid order on which reliance was placed reads as under: 15.3 We have heard rival submission of the parties and perused the relevant material on record. On perusal of the profit and loss account of the company which is available on page 1051 of the paper-book, we find that the Revenue of Rs. 899,11,06,874/- has been shown from Software Development services and the products and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion claimed under section 10A / 10AA of the Act on income derived under the IPSA. 41. During the year under consideration, the assessee provided service under the IPSA from its units located in Software Technical Park of India (STPI) and Special Economic Zone (SEZ). The assessee claimed the aforesaid deduction under section 10A / 10AA of the Act only in respect of STPI / SEZ units which made profits during the year. The assessee did not claim any deduction under section 10A / 10AA of the Act in respect of IPSA revenue earned by STPI/SEZ units which had incurred losses. While completing the assessment, the Assessing Officer, however, did not allow assessee s claim of deduction under section 10A / 10AA in respect of IPSA revenue by holding that they are not in the nature of ITES. While doing so, he followed his decision in assessment year 2007 08 and 2008 09. 42. The DPR also upheld the decision of the Assessing Officer. 43. The learned Sr. Counsel for the assessee submitted, while deciding identical issue in assessment year 2008 09, the Tribunal has held that the services rendered under IPSA being in the nature of ITES, the assessee is eligible to claim deduction unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be permitted to take contrary view with regard to the nature of a particular item of income for its own advantage. Once, the income under the IPSA has been classified to be in the nature of ITES, assessee s claim of deduction under section 10A of the Act have to be allowed. In view of the above, we direct the Assessing Officer to allow assessees claim of deduction under section 10A of the Act n respect of income earned from IPSA. However, we make it clear such deduction has to be computed on the amount of ₹ 90,41,87,522 as claimed in the return of income and as per grounds raised before us. 46. It is also noticed that learned DRP in assessee s own case for assessment year 2013 14 and 2014 15, has directed the Assessing Officer to allow assessee s claim of deduction under section 10AA of the Act in respect of revenue earned under IPSA. In view of the aforesaid, we direct the Assessing Officer to compute deduction under section 10A / 10AA in respect of IPSA income following the direction of the Tribunal and DRP as referred to above. This ground is allowed (Emphasis Supplied). 6.3. Respectfully following the above decisions of the Tribunal in the case of the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X
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