Income Tax Appellate Tribunal - Delhi
Cadence Design Systems (India) Pvt. ... vs Acit, New Delhi on 2 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I(2)' NEW DLEHI
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER
AND
SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER
I.T.A. No. 6315/Del/2015
Assessment Year: 2011-12
Cadence Design Systems (I) P. Ltd. vs Asstt. Commissioner of Income-tax
O Floor, Hotel The Surya, Circle -5(2), New Delhi.
New Friends Colony, New Delhi.
(Appellant) (Respondent)
Appellant by: S/Shri Nageswar Rao, Sandeep S. Karhail,
Sharanik Chakrabarty, Adv
Respondent by: Shri H.K. Choudhary, CIT DR
Date of hearing: 06.03.2018
Date of Pronouncement: 02.04.2018
ORDER
PER K. NARASIMHA CHARY, JM
Aggrieved by the assessment order dated 27. 10.2015 read with the directions dated 31.8.2015 by the learned DRP whereunder a sum of Rs.17,84,42,262/- was added towards arm's length price adjustment u/s 92CA of the Act, assessee preferred this appeal.
22. Briefly stated facts are that the assessee, Cadence Design Systems (India) P. Ltd., is a wholly owned subsidiary of Cadence Design Systems Inc. and was established in India in order to undertake software development and research services, related information technology, back office support service and related pre sales marketing and post sales technological services in India. Assessee provides R&D services and ITes services from its unit located in the Noida Special Economic Zone (SEZ) and the Software Technology Parks (STP) unit located in Bangalore. Further the IT group in India provides systems supports to all the Cadence offices across the world. They derive income in the business of development and export of computer software and providing technical support and training services. Assessee is a captive service provider and risk mitigated entity inasmuch as it is compensated on a cost place markup basis for the services rendered to its associated enterprise (s).For the AY 2011-12, the assessee filed the return of income on 25.11.2011 declaring a total income of Rs.44,54,97,708/- and during the scrutiny learned AO found that during that year the assessee had the international transactions with associated enterprises, as such, referred the matter to the learned Transfer Pricing Officer("TPO") u/s 92CA(1) of the Act. Learned TPO tabulated the international transactions entered into by the assessee, transfer pricing approach of the assessee for bench marking purpose, as follows:
S. Natureof Value (Rs) Method No. Arm's Result
No transaction applied of length of
. comp result assesse
arabl e
es
1 Provision of 1,886,342,446 TNMM 23 12.84% 15.04%
software
3
research and
development
services
2 Provision of IT 488,122,843 TNMM 14 118.09% 15.00%
Back Office
support
services
3 Provision of 406,345,339 TNMM 11 2.84% 12.12%
pre-sales
marketing and
post sales
technical
support
services
4 Payment of 169,646 CUP 3 1.19% 1%
interest LIBOR LIBOR
towards foreign
currency loan
3. Learned TPO proposed the adjustments of Rs.14,10,06,876/- in respect of the IT segment and Rs.7,10,53,705/- in respect of ITES segment put together Rs.21,20,60,581/-. Assessee filed objections before the learned DRP and pursuant to the directions given by the learned DRP, learned AO passed the impugned order making an addition of Rs.17,84,42,262/- towards TP adjustment and Rs.346,434/- on account of expenses claimed on wrong allocations of Director's salary.
4. Challenging addition on account of ALP adjustment, the assessee is before us in this appeal on as many as 16 grounds. Grounds 1 & 2 are general in nature and do not require specific adjudication and get covered by the result of adjudication of Grounds No.3 to 12. Grounds 3 to 12 relate to transfer pricing issue in respect of both IT and ITES segments, which are contentious in nature and 4 therefore, we deal with the arguments relating to these two segments separately. Grounds 13 &14 relate to the corporate tax issues. Ground No.15 is against the initiation of penalty and it is premature one. Ground No.16 relates to the interest, which is consequential in nature.
5. First of all, we shall deal with the software research and development services. In this segment, the assessee is compensated with cost plus mark up of 15% and the actual PLI of the assessee is 15.04%. Assessee entered into an agreement with the CDS for providing the research and development services on 1.1.2011. The functions performed and risks assumed by the assessee with regard to the provision for software research and development services, as spelt out in the transfer pricing documents form are as follows:
Functional analysis The functions performed by Cadence India and CDS with regard to the identified transaction are outlined below:
In order to understand the relative value of the product development work performed by Cadence India, one needs to understand the overall value drivers of software development performed by Cadence India.
Conceptualization of services Software product lifecycle ("SPL") is generally a 3 phase, multi step process involving Product Management team, Marketing team and Product Engineering team. The 3 phases of Product Engineering are Product Definition, Product Development and Servicing.
In the Product Definition (Conceptualization) phase, a value proposition and a product prototype are developed based on customer feedback from the servicing phase, surveys, competitive analysis, the product leader's vision for future and CDS's overall vision for the product category. Then, marketing research is performed to test the value proposition and the marketing feasibility of a product prototype. The product leadership team and product engineers will work with the marketing research team to address software engineering issues and technical feasibility. When the prototype is finalized the next phase of the lifecycle begins.5
The second phase is Product Development, which is a multi-step process involving determination of the requirements, design, implementation, verification and release. Again, each stage is a collaborative effort among the Product Engineering Team, the Marketing Team and Product Management to ensure that the product is on track to meet the value proposition framework. Product Engineering is a generic term to identify software architecture development, design, code development, testing and various other technical services.
The final phase is known as Servicing. In this phase, the marketing team is researching and tracking product awareness and perceptions, customer satisfaction deployment and user experience. This information is used by the product leaders to help determine the concept of the next version of the product.
Cadence India's Role in the SPL The most important aspect of determining the marketability and profitability of a software product is the decision of "what" to develop next. This decision is made at CDS, based on the factors described above in the Product Definition Phase ("PDP"). All of the work in the PDP is performed outside of India. Cadence India's role is limited to rendering software research and development services to CDS. Ail decisions regarding Product Definition are made by CDS. In particular, all decisions regarding which products to develop, product design and how much to invest in such development are made by the CDS. Cadence India is involved in rendering software development services as per the directions, guidance and blueprint provided by CDS; ------- ' Marketing and business development CDS conceptualizes the marketing strategy for the sale of its products and services and undertakes functions such as customer lead identification, marketing and securing the orders for the products to be developed. As part of its marketing function, CDS is involved in the identification of key prospective customers and understanding their requirements.
Being a captive unit of CDS, Cadence India does not undertake any marketing or business development functions.
Requirement analysis CDS provides the software module specifications, instructions, product specifications for the software to be developed by Cadence India. Based on instructions/information provided by CDS, the requirements are internally 6 analyzed by Cadence India and converted into functions and features of the intended application.
Upon receiving the approval from CDS, Cadence India commences work.
Coding, testing and documentation Cadence India undertakes code development in accordance with product specifications defined by CDS. The code generated is subsequently tested to ensure that functions performed by the code are in accordance with the protocol design and standard specifications, Cadence India generates and makes available documentation for the software developed and transferred. The software developed by Cadence India is subsequently integrated into the final software product by CDS and other Cadence group entities.
Project management Although the day-to-day management of the project is undertaken by Cadence India, CDS is responsible for the overall project management. Cadence India's responsibility is confined to the project management and the end deliverables with respect to the module of the software being developed by it. CDS also regularly conducts meetings to analyze the progress and monitors the project plan. However, the ultimate responsibility of the work undertaken by Cadence India rests with CDS.
Quality control, testing and integration Cadence India is responsible for ensuring that requisite quality/ performance standards are complied with while rendering services. Cadence India is responsible to ensure that services provided meet certain quality and performance requirements and adhere to established prescribed standards.
Risk analysis Briefly summarized below are some of the key business risks, faced by Cadence India and CDS in relation to the software development services rendered by Cadence India.
Business/ market risk Business risk arises when a firm is subject to adverse sales conditions due to either increased competition in the marketplace, adverse demand conditions within the market, or the inability to develop markets or position products to 7 service targeted customers. Cadence India bears no business risk as it provides software development services only to CDS and is assured of a specified return on its costs.
Capacity utilization risk Provision of services requires substantial investment in infrastructure, in terms of premises, equipment, connectivity, etc. The risk of optimal utilization of capacity is borne by the entity making the investment. Since, Cadence India is compensated on the basis of a full cost plus markup; it is assured of the recovery of costs of any underutilized / unutilized resources and is not exposed to any utilization risk.
Service liability risk Service liability risk refers to the risk associated with the possibility of facing legal action from customers due to defects in the products provided. Cadence India renders services only to its associated enterprise and as per its contractual arrangements with CDS, this risk rests with CDS. CDS is contractually liable to final customers for the products sold by it.
Re-workrisk Re-work risk arises in a situation where the product sold/service provided does not meet the requisite quality/delivery standards and requires re-work. Cadence India is reimbursed all costs including re-work costs along with a specified mark up. Cadence India does not bear any re-work risk.
Credit and collection risk When an entity supplies products or services to a customer in advance of customer payment, the firm runs the risk of default of such payment. Cadence India does not bear any credit and collection risk since it bills directly to its associated enterprise i.e. CDS, which makes payment on a monthly basis or in advance. Payment to Cadence India is not contingent upon payment received by CDS from its customers. However, CDS bears credit and collection risk as it sells its products to final customers.
Foreign exchange risk Exchange rate risk relates to the potential variability of profits that can arise because of changes in foreign exchange rates and arises whenever the transacting currency of an entity is different from its functional currency.8
Cadence India invoices CDS for its services in USD, which is different from its functional currency. However, since Cadence India is remunerated on all its costs including foreign exchange loss, Cadence India does not bear the foreign exchange risk in relation to transactions with CDS. CDS is exposed to any foreign currency risk in this context.
Briefly tabulated are the key risks, borne by Cadence India and CDS in relation to the software development services provided by Cadence India to CDS.
6. Basing on the FAR analysis the assessee carried comparability analysis by providing the TNMM as the most appropriate method with PLI (OP/OC) to reach the figure 15.04%. In their transfer pricing study report, the assessee selected the following 23 companies with weighted average by OP/OC at 12.84%, and so stating that its margin was at ALP.
Weighted average of operating S.No. Name of the company profits on operating costs (%) 1 Akshay Software Technologies Ltd. 4.58% 2 Ancent Software International Ltd. 6.83% 3 Aztecosoft Limited ( Consolidation) 6.80% 4 Caliber Point Business Solutions Ltd. (Segmental) -0.95% 5 Cat Technologies Ltd. 26.90% 6 CG Vak Software & Exports Ltd. (Segmental) 0.31% 7 Evoke Technologies P. Ltd. 20.05% 8 Goldstone Technologies Ltd. 3.70% 9 Helios & Matheson Information Technologies Ltd. 17.22% 10 KPIT Cummins Infosystem Ltd. (Consolidated) 12.53% 11 Larsen & Toubro Infotech Ltd. 18.19% 12 LSG Global Ltd. 14.53% 13 Maveric Systems Ltd. 14.50% 14 Mindtree Limited (Segmental) 12.08% 15 Persistent Systems Ltd. 23.91% 16 Quintegra Solutions Ltd. -0.29% 9 17 R.S. Software (India) Ltd. 11.99% 18 R. Systems International Ltd. (Segmental) 12.10% 19 Sasken Communications Technologies Ltd. 22.79% 20 Saven Technologies Ltd. (Consolidated segmental) 17.52% 21 Thinksoft Global Services Ltd. 11.54% 22 Thirdware Solutions Ltd. 21.75% 23 Zylong Systems Ltd. 16.64% Arithmetic Mean 12.84%
7. However, the learned TPO conducted a detailed analysis and selected following 19 comparable companies and reached the average OP/OC of 21.47%:
S.No. Company Name OP/OC
1 Acropetal Technologies Ltd. (Segment) 36.69%
2 Akshay Software Technologies Ltd. 0.16%
3 Celstream Technologies P Ltd. 12.26%
4 Evoke Technologies P. Ltd. 8.11%
5 E-Infochips Limited 56.44%
6 e-Zest Solutions Ltd. 34.83%
7 Infosys Ltd. 43.53%
8 Kireeti Soft Technologies Ltd. 3.63%
9 Larsen & Toubro Infotech Ltd. 18.40%
10 Mindtree Ltd. (Segment) 10.74%
11 Persistent Systems & Solutions Ltd. 22.12%
(Meged)
12 Persistent Systems Ltd. 23.08%
13 R.S. Software (India ) Ltd. 16.20%
14 Sakhya Infotech Ltd. 26.20%
15 Sasken Communications Technologies 24.36%
Ltd.
16 Tata Elxsi Ltd. (segment) 13.00%
17 Thirdware solutions 16.19%
18 Wipro Technologies Ltd. 54.42%
19 Zylog SystemsLtd. 28.74%
AVERAGE 23.64%
10
8. Learned DRP confirmed the selection of 19 comparable companies in respect of software development section, and pursuant to the directions of the Ld. DRP, the recomputation of ALP is:
Operating Cost 1,641,012,105
Arm's Length value at a margin of 21.47% 1,993,337,404
Price received 1,886,342,446
105% of Price received 1,980,659,568
Proposed adjustment u/s 92CA 106,994,958
9. In this appeal, as submitted by the learned AR, assessee is challenging the exclusion of Five companies, vis., Infosys Limited, Wipro Technology Services Limited, Acroperal Technologies Limited (Segmental), E-Infochips Limited and E- zest Solutions Ltd. and also praying for inclusion of Seven companies, viz., CG VAK software & Exports Ltd., Goldstone Technologies Ltd., Thinksoft Global Services Ltd., Cat Technologies Ltd., LGS Global Ltd., R. Systems International Ltd., and Blue Star Infotech Ltd.
10. Now we shall deal with the arguments relating to the inclusion or exclusion of these disputed comparables with reference to the documents available on record.
Infosys Ltd.:
11. Assessee disputes the inclusion of this company on the ground of functional dissimilarity by stating that this company is engaged in technical consulting, design, development, re-engineering, maintenance systems integration, package evaluation, infrastructure Management services, etc. It is also submitted by 11 learned AR that this company derives income from sale of software products such as Finacle Analyz, Flypp, iEngage etc. besides holding significant intangibles including brand value. This company operates at a very large scale with sales of Rs.25,385 crores and earning super normal profits of about 43.53% and its revenue comprises of more than 50% of income from on site.
12. Before the learned TPO the assessee objected the inclusion of this company on the grounds of functional dissimilarity, non availability of segmental information, earning super normal profits, engaged in significant R&D activities, possessing significant intangible assets, huge brand value and the risk profile etc. However, learned TPO, vide paragraph nos.69 to 75 of his order, dealt with this aspect and rejected the contentions of the assessee on the grounds of the company being engaged in the software development activities and the intangible assets and brand have no impact on the profitability of this company. He observed that a brand may generate revenue but with a cost compensating any extra benefit derives from such effort. He also observed that the assets owned by the assessee and Infosys have no bearing on the PLI.
13. Learned DRP referred to the decision in Chryscapital Investment Advisors (India) Pvt Ltd (ITA No. 417/2014) (Delhi HC) and rejected the contention of the assessee basing on the super normal profit so also while relying upon Rampgreen solutions Pvt. Ltd. Vs. Commissioner of Income Tax (2015) 377 ITR 0533 (Delhi) to say that a company cannot be excluded only for the reason of earning high profits.
14. In addition to the reiteration of the contentions raised before the authorities below, learned AR brought it to our notice that in assessee's own case 12 for AY 2009-10 in ITA No.2074/Del/2014, it was found that Infosys Ltd. is not comparable to the assessee. Learned DR placed reliance on the orders of the authorities below and the reason for including this company in the list of comparables.
15. Financials of Infosys lends any amount of support to the argument of the assessee referred to above. Further, vide paragraph No.7 to 7.4 in the order in ITA 2074/Del/2014, a coordinate Bench of this Tribunal considered in assessee's own case for the AY 2009-10 the comparability of Infosys with the assessee in detail, and while placing reliance on the decision of the Hon'ble jurisdictional High Court in CIT vs. Agnity India Technologies P. Ltd. in ITA No.1204/2011 (Del) held that Infosys Ltd .cannot be compared with the assessee company and the observations of the bench needs to be extracted hereunder.
(B) INFOSYS TECHNOLOGIES LIMITED (42.44%)
7. The assessee's main contention for exclusion of Infosys Technologies Limited had been that firstly, its services are incomparable with the assessee because Infosys is into technical consultancy design, development, re-engineering maintenance, system integration, package evaluation and implementation and infrastructure management services; secondly, it has huge R&D work for its products, which are more than Rs.267 crores, whereas in the case of the assessee it is Nil; thirdly, Infosys has huge intangibles and brand value is also huge whereas in the case of the assessee it is nil; and lastly, Infosys is into large scale of operations which is evident from the fact that during the year it had turnover of Rs.20,265 crores, whereas in the case of the assessee, it is only 248.53 crores. Thus, the company having such a huge turnover cannot be held to be comparable under FAR. The TPO and DRP, held that revenue from software products of Infosys Technologies Limited is only Rs.848 crores out of its operating revenues of Rs.20,297 crores and its revenue from software services is Rs.19,416 crores. Thus, software development services of Infosys Technologies Limited can very well be compared with that of the assessee. Regarding expenditure on R&D expenses, the 13 DRP observed that it is merely 1.3% of the revenue of Infosys, which cannot be said to be substantial.
7.1 Before us, the ld. Counsel for the assessee, Shri Nageshwar Rao, beside aforesaid contention strongly relied upon the decision of the Tribunal in the case of Fiserv India (P.) Ltd.(supra); and the judgment of Hon'ble Delhi High Court in thecae of CIT vs. Agnity India technologies Pvt. Ltd. in ITA No.1204/2011 (Del).
7.2 On the other hand, the ld. Sr. D.R., submitted that Infosys Technologies Limited has been assessee's own comparable in this year as well as in the earlier year also and the same was not challenged in the earlier year, therefore, the assessee cannot challenge the same comparable in this year once it has accepted this comparable in assessment year 2008-09. In support of his contention, the ld. Sr. DR strongly relied upon the decision of the Tribunal in the case of Capgemini India Pvt. Ltd. vs. ACIT 7861/MUM/2011 and the decision of E-valueserve.com Pvt. Ltd. vs. ITO in ITA No.4001/DEL/2013. Thus, Infosys Technologies Limited has rightly been taken as a comparable by the TPO.
7.3 We have heard the rival submissions and perused the relevant finding given in the impugned order as well as material ref rred to before us. First of all, Infosys Technologies Limited is a giant enterprise with turnover of more than Rs.20,264 crores. Its expenditure on R&D was Rs. 267 crores and it has huge brand value and significant intangible assets, which have been valued at approximately Rs.1,34,478 crores. If these assets are to be compared with those of the assessee, it can be seen that it has 'nil' expenditure on R&D and no significant intangible asset. On this ground alone, various Benches of the Tribunal have held that Infosys Technologies Limited cannot be compared with small software companies, who are into contract software development services. A company like Infosys with mega operations and having significant assets and brand value and full-fledged risk taking entrepreneur developing and selling proprietary products cannot be held to be comparable with the captive service and contract software development companies as the comparability analysis fails on all the factors of FAR. The Hon'ble Delhi High Court in the case of CIT vs. Agnity India technologies Pvt. Ltd. (supra) made a comparative chart while dealing with similar comparative analysis, which for sake of ready reference is reproduced hereunder:-
14 Infosys Technologies Ltd. Assessee
Basic Particular
Risk Profile: Operate as full-fledged risk taking Operate at minimal
entrepreneurs risks as the 100
percent services are
provided to AEs
Nature of services: Diversified-consulting, application design, Contract software
development, re-engineering and development services
maintenance system integration, package
evaluation and implementation and
business process management, etc.
Turnover: 20,264 crores 209.83 crores
Ownership branded/ Develops/owns proprietary products like
proprietary Finacle, Infosys Actice Desk, Infosys
iProwe, Infosys mConnect. Also the
products: company derives substantial portion of its
proprietary products (including its flagship
banking product suite 'Finacle')
Onsite v. Offshore As much as half of the software The appellant provides
development services rendered by Infosys only offshore services
are onsite (i.e. services performed at the (i.e. remotely from
customer's location overseas) and offshore India)
(50,20 per cent) than half of its service,
income from onsite services
Expenditure on Rs.80 crores. Rs. Nil (as the 1
advertising/sal es percent services are
promotion and brand provided to AEs)
building:
Expenditure on Rs.236 crores Rs.Nil
Research and
development
Other 100 per cent offshore
(from India)
15
7.4 If we apply the aforesaid comparative criteria as laid down by Jurisdictional High
Court, we find that the same would be applicable on the facts of the present case also and, therefore, respectfully following the judgment of the Hon'ble Delhi High Court (supra), we hold that Infosys Technologies Limited cannot be compared with the assessee-company, which is operating at minimal risk and is a contract software development service provider. Accordingly, we direct the TPO to exclude Infosys Technologies Limited from the comparable list.
16. On a perusal of the Annual Report of the company and also the above observation of a coordinate Bench of this Tribunal in the order in ITA No.1204/2011 (Del) we are satisfied with the argument of the Ld. AR that this company is functionally not comparable with the assessee. Further, no change of circumstances is brought to our notice compelling us to take a different view from the one taken in assessee's own case on the comparability of Infosys with assessee. We, therefore, while respectfully following the ratio of the coordinate Bench extracted (supra) hold that the Infosys Technologies has to be excluded from the list of comparables. Learned AO is directed so.
Wipro Technologies Services (P) Ltd.:
17. Assessee objected the inclusion of this company on the ground of drawing huge revenues from the service of Citi group companies, functional dissimilarity, non availability of segmental information and earning super normal profits. However, learned TPO brushed aside the contention of the assessee stating that earning of super normal profits was made possible by the Wipro due to the commercial efficiency gained by them.
18. Learned DRP again placed reliance on Chris Capital (supra) and Ramp Green (supra). He observed that inasmuch as both Wipro and assessee are engaged in the development of software and software services, they are functionally similar 16 and earning of super normal profits is of no consequence in respect of their comparability.
19. It is the argument of the learned AR that Wipro earns its entire income from services rendered to Citi Group of companies. According to him, the Wipro is engaged in IT software solutions/maintenance and technology infrastructure software services. Segmental information provided in its annuals is insufficient. Wipro with its profit rate of 54.42% earns super normal profits. He placed reliance on the decisions of the coordinate benches of this tribunal in Orange Business Services India Solutions P. Ltd. vs DCIT in ITA No.869/Del/2016 and Ness Technologies (India) P. Ltd. vs DCIT in ITA No.696/Mum/2016 and anr.
20. Learned DR submitted that in Ness India Technologies P. Ltd. the Mumbai Tribunal followed the decision of Delhi Bench in the case of Saxo India P. Ltd. vs ACIT, ITA No.6148/Del/2015 order dated 5th February, 2016 and such decision in Saxo relates to some other earlier year, as such, without adverting to the changes that have taken place subsequent to that assessment year, it is not proper to follow the same. He further submitted that though the Wipro Technologies Services P. Ltd. was a subsidiary of the Citi Technologies Services Ltd., subsequently, by way of agreement dated 21.1.2009 Wipro Ltd. acquired all the interest of Citi group, as such, the assessee cannot complain basing on the related party filter.
21. Per contra, it is the submission of the ld. AR that as per the information available in the public domain, Wipro Technologies Services Ltd. was incorporated as Citi Technologies Services Ltd., a subsidiary of CitiCorp. Banking Corporation subsequently, though all the shares of the company was purchased by Wipro Ltd., 17 under a long term agreement dated 21.1.2009 Wipro signed a master service agreement with the Citi Group Inc. for a delivery of technology infrastructure services and application development and maintenance service for six years providing delivery of at least $500 million in service revenue over this period. This fact cannot be ignored. Nextly, he submitted that though the learned DR argued that the Mumbai Tribunal in Ness Technologies (supra) has not properly followed the decision in Saxo (supra) which relates to earlier years, it cannot be denied that for AY 2011-12 the Delhi Tribunal in Orange Business Service Solutions, under very similar circumstances found that Wipro Technologies Services is not a good comparable inasmuch as this company is a subsidiary to Wipro Ltd. and the entire revenue during the year is covered by a master service agreement entered into by break through with Citi Group services.
22. We have gone through the material available before us. From page no.294 of the paper book which consists of the submissions of the assessee before the ld. TPO, the assessee brought to the notice of TPO that in the annual report of the Wipro Technologies Services Ltd. it was mentioned that Wipro signed a master service agreement with Citi Group Inc. for delivery of technology infrastructure services Ltd. and application of maintenance service for a period of six year under the agreement dated 21.1.2009. This fact could not be refuted by the revenue.
23. In Orange Business Service Solutions case in ITA No 869/Del/2016, under very similar circumstances found that Wipro Technologies Services is not a good comparable inasmuch as this company is a subsidiary to Wipro Ltd. and the entire revenue during the year is covered by a master service agreement entered into by break through with Citi Group services. Further, vide schedule No.18.9 it is clearly 18 stated that this company is engaged in providing software related support services primarily information technology software solutions/maintenance and technology infrastructure support service to Citi group entities globally and it is considered as one segment.
24. We, therefore, find no reason not to believe that the entire revenues of this Wipro Technology services Ltd. are covered during the year by the master service agreement between Wipro Ltd. and Citi Group Inc. For this reason, we do not agree with the authorities below that this is a good comparable to the assessee. Learned AO is directed to delete this company from the list of comparables.
Acropetal Technologies Ltd. (Segmental):
25. Assessee objected this company to be in the list of comparables mainly on the ground that this company employees cost is less than 25% of the total cost and also that this company is engaged in significant R &D activities and incurring significant advertisement, marketing and promotion expenses as a percentage of sale. Learned TPO observed that there appears to be merely a difference in classification of expenses in the annual report for FY 2010-11, and if we look at figures for the FY 2011-12 in the annual report, the expenses on salary and wages are correctly classified, and, as such, this is a good comparable as it has also engaged in offshore model of work as that of the assessee.
26. Ld. DRP held that this company is in software development, passed the employee cost filter, there is no evidence of increase in margin profit on account of creation of incubation business unit, as per website the company started as engineering design services and expanded its foray of services to add software service capabilities and as per page 53 of annual report, segment wise breakup of 19 the revenue is also available. For these reasons, ld. DRP recorded that it is a good comparable.
27. Ld. AR brought to our notice that the salaries and consultancy charges including bonus incurred by Acropetal was Rs.13.51 crores whereas the technical sub contract expense was Rs.55.77 crores which accounts for only 13.74% and accordingly it does not pass through the filter proposed by the ld. TPO.
28. Ld. DR justified the orders of the authorities below basing on the observations of the ld. TPO and considered by the learned DRP to the effect that it is only a matter of difference in classification of expense and the financials of subsequent years ratify the same
29. Per contra, ld. AR submitted that when the matter relates to the FY 2010- 11 and the annual report is available in the public domain, the audited reports of this year are to be considered but not the financials of the next year.
30. On a perusal of page No.45 & 46 of the annual report of Acropetal, we find that the submission of the ld. AR is justified. We, therefore, direct the ld. AO to verify the employee cost percentage to the total cost and if it does not pass the filter, to exclude the same.
20E-Infochips Limited:
31. Assessee resisted the inclusion of this company in the list of comparables mainly contending that the company's revenue from software development services is less than 75% of its operating revenue and also that it is engaged into diversified activities as could be seen from the annual report of this company. Earning of super normal profits was also contended before the ld. TPO. However, ld. TPO observed that the assessee is also engaged in Semantics, under two heads of income i.e. income from software development and income from IT services which put together amounts to 86% of the total income, as such the assessee cannot insist on considering the income only from software development. He further observed that the other activities are of very small volume and integrally connected with the function of providing software services.
32. Ld. DRP observed that the revenue from software services of this company is as high as 85% of total receipts and there was no earning from sale of software products. Only a small component of earning is from hardware. Following Chrys Capital case (supra) he held that when the companies are otherwise comparables, earning of super normal profit is not a ground to reject the company.
33. It is the argument of the ld. AR that the ld TPO vide paragraph No.16(i) of order selected one of the filters as "companies who have export sales less than 75% of the sales from the software development are excluded", but E-Infochip Ltd. has got the ratio of service revenue to total operating revenue at 73.38% only. He further submitted that the significant accounting policy of this company vide item No.5 at page 43 of its annual report shows that the company is engaged in the software development and IT enable services and products which are 21 considered the only reportable segment and, for want of segmental data relating to software development this company is not even comparable. Reliance is placed on the decision in Mumbai Tribunal in Ness Technologies (supra).
34. Ld. DR submitted that as could be seen from the scheduled income at page no.144 of the annual report paper book revenue from software development, hardware maintenance and information technology consultancy are part of the information technology services and it accounts for 86% of the revenue. He further submitted that even the assessee is having income from software development and ITES services. He submitted that for all practical purposes this company has only one segment that is software development and the revenue from this is about 86%, satisfying the filter.
35. We have gone through the annual report of this company for FY 2010-11 and found that the revenue from software development was 19, 21, 09, 661/-, revenue from hardware maintenance was Rs. 3,92,48,562/-and revenue from information technology consultancy was Rs. 2,90,26,028/-. Ld. DR asks as to club all these items of revenue under the head revenue from information technology services. We find it difficult to accept this plea of the Ld. DR and to hold that the information technology consultancy service also falls under the head software development so as to bundle it under that head.
36. In Rampgreen Solutions Pvt. Ltd. Vs. CIT on the aspect of employee cost it was held as under:-
38. ...even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most 22 of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity."
37. In Ness technologies (India) Private Limited case (supra) this aspect was argued before the Mumbai Tribunal. Having considered the rival contentions in the light of the annual report of this company and also the decision of a coordinate bench of Delhi Tribunal in the case of Saxo India private limited, it was held that this company is not a good comparable and deserves to be excluded from the final set of comparables for benchmarking the international transaction of provision of software development services undertaken by the assessee. Relevant portion of this division needs to be extracted hereunder for culling out the ratio:-
"9.5 In our considered opinion, qualitatively speaking, the activities undertaken by M/s.E-Infochips Limited are not comparable to the pure software development services undertaken by the assessee as a captive service provider to its associated enterprises. Factually, it is also emerging that there is no segmental break-up available with respect to the production and sale of software products undertaken by the said concern, which is an aspect incomparable to the activities of the assessee. For the said reasons, we do not find any justification for inclusion of the said concern and the same is hereby directed to be excluded from the final set of comparables."
38. For similar reasons stated above we are of the considered opinion that insofar as the assessee is a captive software development service provider, M/s M/s.E-Infochips Limited is not a good comparable and while upholding the stand 23 of the assessee, we direct the library ever to delete this from the list of comparables.
E-Zest Solutions Ltd.
39. Assessee objected the inclusion of this company in the set of comparables mainly on the ground that this company is engaged into diversified range of software activities and its annual report shows that this company is an SEI-CMMi level III and ISO 9001:2008 certified product engineering and software development company, having special expertise in emerging technologies such as cloud, SAAS, business intelligence and mobility, and predicate it has been serving clients in more than eight industries across the globe with over 2000 software professionals on-board. The product engineering services/outsourced product development services of this company include the product design and development, product feature enhancement, product platform migration, software product testing, product maintenance and support, product release and license management, SAAS/SOA services, web 2.0 services etc ; enterprise application development services include customer relationship management, enterprise resource planning, business intelligence, knowledge management, enterprise application integration, consulting etc; ID services include global on- site/offshore software development, custom software development/bespoke software development, independent software testing, RIA/Ajax application development etc and technology expertise of this company includes the technology competency centers in relation to Microsoft competency Centre, Sun Java competency Centre, open source competency Centre, Cloud computing practice, mobility practice and BI practice.
2440. Ld. TPO observed that an independent enterprise that has to survive on its own will make efforts to have different customers, i.e., unlike the assessee which actually faces a single customer risk. He further observed that the assessee has not recognized with this risk in its risk metrics. He, therefore, using his company as a comparable.
41. Ld. DRP considered all the submissions of the assessee in detail but held that this company is engaged in software development service, as such is a valid comparable to the taxpayer.
42. It is the submission of the Ld. AR that page No. 39 of the annual report of this company under the heading, shows an entry relating to increase/(decrease) in stock. Further, at page No. 42 of the annual report white schedule 7 inventory is there is an entry work in process. Under the significant accounting policies of identity "I" at page No. 48 of the annual report, it is mentioned that "valuation of inventories: inventories are accounted for at cost, automatically realizable value, whichever is less." Ld. AR submitted that the inventory is not a feature to be seen in software development industry. Basing on the sea submitted that the business model of the assessee is quite different from that of the e-zest and solutions Ltd.
43. Per contra, Ld. DR submits that in the entire annual report of this company there is no mention of any sale of any product and the entire revenues of this company or only from service. He therefore submitted that there is nothing in the annual report to suggest that this company is involved in any products of sale thereof and to hold that the business model of these two companies is different.
44. The comparability of this company this company with the captive software development service provider like the taxpayer in this case has been considered 25 by a coordinate bench of this tribunal in relation to the assessment year 2011-12, in detail in the case of M/s Symantic software and services India private limited versus DCIT, in ITA No. 614/Del/2016 and the observations of the Tribunal are very much relevant for the purpose of this case also. While paragraph number 8 a coordinate bench of this tribunal held as follows:-
8. We heard the rival submissions, perused the material on record and judicial decisions. The comparables company is engaged in product engineering services in the nature of High end knowledge process outsourcing and also in product engineering software Development Company having expertise in emerging technologies cloud Saas, Business Intelligence and mobility for more than 10 years and serving 8 industries across the globe with over 200 software professionals.
Whereas, the assessee company is in the software development and also ITES services and cannot be considered as the functionally comparable and we rely on the decision of Bangalore Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) at Para 14.4:
" 14. E-Zest Solutions Ltd.
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 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 in Technology Consulting Services including product development consulting services.
These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive 26 information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co- ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not 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." Considering these facts and the decision of the Tribunal, we direct the Ld. TPO to exclude the E-Zest Solutions Limited from the list of the comparables.
45. It is clear from the above that the e-Zest solutions Ltd is a rendering product development services and high-end technical services which come under the category of capable services and on the ground is not comparable with a company which is into software development services. Though the Ld. DR stated 27 that in the entire annual report there is no mention as to the sale of any product and entire income is from service, there is no explanation forthcoming before us justifying the entries at page No. 39,42 and 48 of the annual report on the aspect of inventories.
46. Having regard to the facts and circumstances of the case and more particularly in view of the profile of the easiest solutions as could be found in the annual report of this company in detail, where of the considered opinion that this company is rendering broad portfolio of services including product engineering and software development. It has a special expertise in emerging technologies such as cloud, SAAS, business intelligence and mobility etc and it also holds and maintains inventory. For these reasons as has been held in M/s Symantec software and services India private limited case (supra), we find that while the assessee is into software development services, E-Zest solutions Ltd is engaged in product engineering services in the nature of High end knowledge process outsourcing and also in product engineering software Development Company having expertise in emerging technologies cloud SAAS, Business Intelligence and mobility for more than 10 years and serving 8 industries across the globe with over 200 software professionals and on that ground it is not a comparable for benchmarking the international transaction of software development service. We accordingly direct the library ever to exclude this company from the list of comparables.
47. Now we shall examine the question of inclusion of seven companies, viz., CG VAK software & Exports Ltd., Goldstone Technologies Ltd., Thinksoft Global Services Ltd. Cat Technologies Ltd., LGS Global Ltd., R. Systems International Ltd., 28 and Blue Star Infotech Ltd. At the outset Ld. AR reported that the blue Star Infotech Ltd is not pressed. Recording the same we direct the continuance of exclusion of this company in the list of comparables.
48. In respect of CG Vak software and exports Ltd and R systems International Ltd, it is the submission on behalf of the assessee that in respect of AY 2009-10 these two companies were ordered to be included by a coordinate bench of this tribunal in ITA No. 2074/Del/2014, while following the decision of the Hon'ble jurisdictional High Court in Chryscapital Investment Advisers India Private Limited(supra) , and M/s Mercer Consulting India Private Limited(supra).
49. CG Vak Software And Export Ltd is excluded by the Ld. TPO on the ground that it does not pass the employee cost filter. It was submitted before the Ld. TPO that the line-item "Cost of Services" should be taken as employee cost, but the Ld. TPO stated that if such a course of action is adopted, this will be a purport; whereas the principles of comparability under the Income tax Rules make it clear that if comparability cannot be set up even between the tested party and the potential comparable, it should not be used as a comparable. He further stated that there is no need to force an entity into the set of comparables, even in the options of dependable data, as there are sufficient good comparables.
50. While according to the Ld. TPO this company has not passed through the employee cost filter, Ld. DRP recorded that this company does not pass the turnover filter, and altogether different criteria tested by the Ld. DRP.
51. It is the submission of the assessee that the revenue from software services is more than 5 crores of rupees and the company passes the employee cost filter with the 69.45%. It is further submitted that there is no change in business model 29 from the earlier years. In respect of AY 2009-10 the tribunal included this company in the set of comparables whereas for the AY 2010-11 Ld. DRP accepted this company. He, therefore, submits that in all fairness this company should have been included in the set of comparables.
52. We have perused the annual report of this company. At page No. 19 thereof under the head expenditure the cost of service is noted. Except this, we will not find any expenditure relating to the employee cost whether it is called salaries and wages so on and so forth. There is no dispute that this company is engaged in software development service. Further the revenue from software development, services and products is Rs. 6,29,80,650/-which includes Rs. 5,24,54,418/- from offshore software services. For AY 2009-10, in the order of the Tribunal vide paragraph No. 18 it is noted that for such assessment year the TPO and DRP rejected this company on the ground that it does not fulfill the turnover criteria of Rs. 5 Crore and after considering the financials of this company the Tribunal rejected version that this company cannot be held to be incomparable simply on the ground of no turnover, unless it is demonstrated that the assets and the risks are completely different and non-incomparable. No employee cost filter is referred to in this order. However on a reading of the profit and loss account of this company incorporated at page No. 19 of its annual report we are of the considered opinion that the cost of services represents the cost of employee only. Further the revenue from offshore software services is more than 5 crores. In the circumstances this facts need to be verified at the end of the AO and if this company passes the employee cost filter it has to be included in the list of comparables. If the assets and risks are comparable, as is held by the Hon'ble jurisdictional High Court in Chrystcapital Investment Advisers India Private Limited 30 (supra) and S&P capital IQ (India) (P) Ltd versus DCIT (2016) 72 taxmann.com 236, low turnover is not a ground to reject this company. We, therefore, direct the Ld. TPO to consider the cost of services incurred by this company as the employee cost, and verify whether it passes the employee cost filter. In case this passes the employee cost filter on treating the cost of services as employee cost, Ld. TPO will include the same in the list of comparables.
53. In respect of R systems International Ltd, Ld. TPO recorded that one of the reasons for rejection of this company is that it has a year ending other than March. Ld. DRP recorded that the assessee company is having financial year covering the period between 01/04/2009 2 31/03/2010 and a valid comparison can be made only if the comparable companies to have the same financial year. On this ground Ld. DRP also rejected his company from the list of comparables.
54. It is submitted on behalf of the assessee that the quarterly financial statements for financial year 2010-11 are available. It is further brought to our notice that for AY 2010-11 this company is directed to be included vide orders in ITA No. 380/Del/2015. It is therefore clear that in respect of assessment years 2009-10 and 2010-11 this company finds a place in the list of comparables, suggesting that this company is functionality similar and is otherwise comparable with the assessee, but for want of the financial statements for the entire period of financial year 2010-11. Now it is submitted that the quarterly financial statements are available for FY 2010-11. In these circumstances, we direct the Ld. TPO to consider the quarterly financial statements for FY 2010-11 for the purpose of inclusion are otherwise of this company.
31Goldstone technologies Ltd
55. Assessee contends that this company is functionally comparable as is engaged only in software development activities. It is brought to our notice that fire AY 2010-11 this company was accepted as a good comparable by the Ld. DRP. Ld. ADR placed reliance on the orders of the authorities below.
56. We have gone through the order dated 11/11/2014 passed by the Ld. DRP in assessee's own case for AY 2010-11 and found from para No. 48 thereof that the Ld. DRP recorded that this company is into IT services, software development and ITES services sector which is also the domain of the taxpayer as can be seen from the profile of the taxpayer mentioned in para 2 of the order. It is not the case of the Revenue that there is any change in the business model of the assessee from the earlier years nor are any circumstances brought to our notice which render this company which was comparable for the earlier year as non- comparable for this year. We, therefore, in view of the reasoning given by the Ld. DRP for the earlier year, hold that this company is a good comparable, and accordingly direct the Ld. TPO to include this company in the final list of comparables to benchmark the international transaction of software development services.
Think soft global services Ltd
57. As could be seen from the order of the Ld. TPO this company was rejected for failing the export earnings filter and the assessee challenged before the Ld. TPO basing on the consolidated financials. Ld. DRP observed that in respect of this company revenue from software testing on-time-and-material contracts is recognized based on software tested and billed to clients as per the terms of 32 specific contracts. On fixed-price contracts, revenue is recognized on the proportionate completion method on the basis of the work completed. Revenue from software testing includes reimbursement of expenses billed as per the terms of contracts. However, the taxpayer company is engaged in the business of providing software development and maintenance services the assessee is not functionally comparable with M/s Thinksoft Global Services Ltd. Ld. DRP held that this company failed the export turnover filter.
58. It is argued on behalf of the assessee that Thinksoft's exports were 87.44% of sales and this company is otherwise functionally comparable because software testing is part of software development life-cycle. Ld. DR placed reliance on the orders of the authorities below.
59. It is submitted on behalf of the assessee that in assessee's own case for AY 2010-11 Ld. TPO accepted this company is a good comparable and there is no change in the business model of the comparable as compared to the assessee in the relevant year. This fact is not controverted by the revenue. When it's not explained before us as to how a good comparable in the previous year has become non-comparable in this year, we are unable to accept the contention of the revenue that this company is not a good comparable. Further basing on the annual report of this company, we find that the export sales of this company Rs.55,92,43,389/-, domestic sales are Rs. 5,38,83,429/-. It therefore appears that the percentage of the export sales to the total operating revenue is about 87.44% and thereby this company passes the export filter. As a matter of fact, this point was argued before the Ld. DRP. However, Ld. DRP did not touch this point in the 33 discussion but stated that this company is functionally different inasmuch as it is into software testing services.
60. Be that as it may, there is no dispute that this company was accepted by the Ld. TPO in taxpayer's own case for the immediately preceding year and no change of circumstances either in the business model of the assessee or that of the comparable are brought to our notice. This suggests the functional comparability of the company to that of the taxpayer. We, therefore, direct the Ld. TPO to verify the export sales vis-a-vis the total operating revenue from the annual report of this company and to include it in the list of comparables if it passes the export earnings filter.
Cat technologies Ltd
61. Ld. TPO rejected this company on the ground that it is functionally different and has RPT in excess of 25% of sales. Ld. TPO recorded that this company is involved in a variety of services and in the absence of proper segmental accounts the same cannot be treated as a suitable comparable. Further the taxpayer has taken extracts from the consolidated annual report rather than the standalone annual report relied upon by the TPO.
62. Ld. DRP observed that as per the audit report the company's exclusive business is medical transcription, training software development and consulting services as such this is the only reportable segment. On this ground Ld. DRP refused to interfere with the order of the Ld. TPO.
63. It is argued on behalf of the assessee that this company also provides software development consulting services and there are no equity transactions. It 34 is further submitted by the Ld. AR that this company is accepted by the TPO in assessee's own case in AY 2010-11 and there is no change in the business model of the comparable or the assessee from the previous year. Revenue did not contradict this statement made on behalf of the assessee. In the absence of any proper exploration as to how a good comparable in the previous year has become a bad comparable in this year, we find it difficult to sustain the openion of the authorities below. However whether or not this company passes the RPT filter is a question of fact and the grievance of the assessee before the Ld. DRP was that the assessee's rebuttal of passing of the RPT filter has not been countered by the Ld. TPO in the impugned order. As could be seen from the order of the TPO, though it is stated that the company is having RPT in excess of 25%, TPO did not advert to the financial of this company. So also the DRP. We, therefore, remand this matter to the file of the TPO to consider the rebuttal of the assessee that refers to the financials of this company and to reach a fresh conclusion on the aspect of this cat technologies Ltd passing or not the RPT filter.
LGS global Ltd.
64. Ld. TPO rejected this company on the ground that it failed the employee cost filter, stating that data relating to employee cost is not available to further analyze. Ld. DRP sustained the same. It is an undisputed fact that the TPO accepted LGS Global Ltd as a good comparable in respect of the assessment year 2010-11 and it is submitted by the Ld. AR that in the absence of any material to the contrary, we hold that this LGS Global Company is functionally comparable to the assessee. However, the aspect of employee cost filter has to be considered.
3565. It is argued on behalf of the assessee that the employee cost of LGS global Ltd is 91.41% of the total costs. It is argued that the Ld. TPO relied on the terminology used in the profit and loss account "Purchase And Personal Cost" to hold that it indicates a combination of two expenses, namely, "Purchase" and "Personal Cost", but while doing so the Ld. TPO failed to appreciate that this terminology has been used for employee related costs only as there are no dealings of tangible items in this company. It is further submitted that this fact is also evident from the fact that the LGS Global does not have any inventory of stock in trade of goods are revenue from sale of such purported purchased items. This is a verifiable fact. Ld. TPO has to verify whether there is any inventory or stock in trade of goods or revenue from the sale of such purported items, in the absence of which it is reasonable to believe that the expense under the head "Purchase and Personal cost" would amount only employee related cost. We, therefore, set aside this issue to the TPO to cast the above verification and to treat the purchase and personnel cast as the employee related cost if there is no inventory or stock in trade of goods or revenue from sale of such purported purchased items.
66. Now turning to the transfer pricing adjustment on provision of IT back office support service (ITES segment), according to the assessee, they have been rendering the services on cost plus margin of 15% under the agreement with CDS, according to which the functions performed and risks assumed, which are summarized in respect of this international transactions in the transfer pricing study, as follows:
36Functional analysis Functions performed by Cadence India and its associated enterprise with regard to the identified transaction are outlined below:
Determining the scope of services broad scope of work to be undertaken by Cadence India in connection with the identified --section is outlined in a Service Agreement between Cadence India and CDS.
Provision of services Cadence India is responsible to provide the agreed services as and when requested by overseas entities as per terms laid out in the Agreement.
Quality assurance Though there is no penalty for a lapse in quality, Cadence India is required to ensure that services provided are of a certain requisite quality and adhere to established international group standards.
Risk analysis Briefly summarized below are some of the key business risks, which would be applicable to Cadence India and CDS in relation to the above mentioned identified international transaction.
Business risk / market risk Business risk arises when a firm is subject to adverse sales conditions due to either increased competition in the marketplace, adverse demand conditions within the market, or the inability to develop markets or position products to service targeted customers Cadence India bears no business risk as it renders IT back office support services only to CDS and is assured of a specified return on its costs. CDS is exposed to open market conditions that directly impact its business and thus it bears market risk. Since, Cadence India is compensated by way of an assured return, the Company does not bear any business risk.
Credit and collection risk Credit and collection risk arises when an entity supplies products or services to a customer in advance of customer payment and runs the risk of default of such 37 payment.
Cadence India does not bear any credit and collection risk since it transacts with its associated enterprise i.e. CDS Service liability risk Service liability risk is borne by a company when its service offerings fail to perform at accepted or advertised standards and the company is required to compensate the customer or undertake defect resolution at its own cost. CDS is the ultimate contracting entity and thereforeassumes the overall responsibility forthe quality of the services rendered byCadence India.
Therefore, CDS bears the ultimate service liability risk.
Utilization risk Utilization risk relates to the possibility of non-recovery of fixed costs being incurred. This may happen due to circumstances such as lack of production, lack of demand, inability to recover prices, etc. Provision of services requires substantial investment in infrastructure, in terms of premises, equipment, connectivity, etc. The risk of optimal utilization of capacity is borne by the entity making the investment.
Since, Cadence India is compensated on a total cost plus mark up basis by CDS, it is assured of the recovery of costs of any underutilized / unutilized resources. Thus, Cadence India is not exposed to utilization risk and the same is borne by CDS.
Re-work risk Re-work risk arises in a situation where the product sold/service provided does not meet the requisite quality/delivery standards and requires re-work. In case the services provided by Cadence India do not meet the requisite standards, the same may require re-work; however, since Cadence India is reimbursed for all costs including re-work costs along with a specified mark up. Cadence India does not bear any re-work risk.
Foreign exchange risk Exchange rate risk relates to the potential variability of profits that can arise because of changes in foreign exchange rates and arises whenever the transacting currency of an entity is different from its functional currency.38
Cadence India invoices CDS for its services in USD, which is different from its functional currency and thus assumes the risk of foreign exchange fluctuations. However, the cost base for mark-up includes any loss arising to Cadence India from foreign exchange translations and therefore ultimately the foreign exchange risk would be borne by CDS.
67. It is therefore, clear that under this segment also the assessee happens to be a risk mitigated entity. The assessee was compensated by CDS for the services rendered with a fee which is equivalent to the operating expenses that were incurred plus an amount equivalent to 15% of the operating expenses. The payment terms laid down that the assessee would invoice CDS for the services on periodic basis and the CDS would pay the invoiced amount within 90 days thereafter. In their Transfer Pricing Study, the assessee adopted the TNMM as the most appropriate method with OP/OC as PLI. Assessee proposed 14 comparables with PLI of 18.09.
Weighted average of
S.No. Name of the company operating profits on
operating costs (%)
1 Accentia Technologies Ltd. 46.20%
2 Aditya Birla Minacs Worldwide Ltd. 0.30%
3 C G Vak Software & Exports Ltd. -2.39%
(Segmental)
4 CaliberPoint Business Solutions Ltd. 18.09%
5 Cepha Imaging P. Ltd. 1.94%
6 Coral Hub Ltd. 41.04%
7 Cosmic Global Ltd. 32.71%
8 Fortune Infotech Ltd,. 9.95%
9 Informed Technologies India Ltd. 23.94%
10 Infosys BPO Ltd. 22.53%
11 Jeevan Softech Ltd. (Segmental) 46.34%
12 Jindal Intellicom P. Ltd. 6.39%
13 Microgenetics Systems Ltd. 0.87%
39
14 R. Systems International Ltdf. 5.01%
(Segmental)
Arithmetic Mean 18.09%
68. However, learned TPO selected the following seven comparables with an average PLI of Rs.31.74 and proposed an adjustment of Rs.7,10,53,705/-.
S.No. Name of the company OP/OC
1 Accentia Technologies Ltd. 29.18%
2 E4e Healthcare Business Services P. Ltd. 9.77%
3 Eclerx Services Ltd. 56.82%
4 ICRA Techno AnalyticsLtd. (segment) 25.54%
5 Infosys BPO Ltd. 17.86%
6 Jindal Intellicom Ltd. 13.70%
7 TCS E-serveLtd. 69.31%
Average 31.74%
69. Pursuant to the direction of the learned DRP, ld. TPO excluded the ICRA Techno Analytics Ltd. (segment) with PLI of 25.54 and basing on the average of the remaining six comparables at 31.71 proposed an adjustment of Rs.7,14,47,304/-. The recomputation of the ALP is as follows:
Operating Cost 424,850,161
Arm's length value at a margin of 31.71% 559,570,147
Price Received 488,122,843
105% of Price received 512,528,985
Proposed Adjustment u/s 92CA 71,447,304
70. On the aspects of these comparables the assessee is challenging the inclusion of four comparables, viz., Accentia Technologies Ltd., eClerx Services Ltd., Infosys BPO Limited, TCS E-Serve Limited, and prays for inclusion of seven comparables, viz., R. Systems International Ltd., CG VAK Software & Exports Ltd., 40 Informed Technologies India Ltd., Microgenetics Systems Ltd., Microland Ltd, Datamatics Financial Services Ltd., Cosmic Global Ltd.:
Accentia Technologies Ltd.(ATL):
71. Contention of the assessee is that though initially this company has been chosen by them as a comparable in its TP report, subsequently it was realized that this company is functionally different from the assessee inasmuch as, according to the annual report vide page nos.5, 6, 12, 23 to 34, the company is engaged in the process outsourcing (KPO) and legal process outsourcing (LPO) and separate process for HRCM is not available.
72. Ld. TPO held that this company earns its income from medical transcription, billing and collection, coding and fixed deposits, the first three meeting of the operating income of the company and also that these activities are in the nature of DPO or back office services. Learned DRP observed that the profile of ATL is similar to the taxpayer and ATL is into IT enabled services.
73. It is the argument of the learned AR that Clause 5 of the notes to the accounts on segmental information reads that the company has only one segment of activity, viz. "Health care Receivable Management". It is so mentioned at page no.53 and 70 of the annual report. Basing on the diversified activities of this company as enumerated particularly at page nos.23 to 34 of the annual report, learned AR argued that this company is not a good comparable. He further brought it to our notice that in assessee's own case for the Asstt. Years 2009-10 and 2010-11, this company was found to be functionally different from the assessee.
4174. Per contra, learned DR submitted that ATL is not a software development company and as could be seen from the financials of this company vide schedules forming part of the consolidated balance sheet at page no.67 under schedule 8 the company earns its income from health care information technology management. He further submitted that as per the profile of the assessee, it is not a typical IT enabled services provider confining only to back office support services inasmuch as the assessee also deals with the services including, -
Unix Windows administration and support;
Internal helpdesk services;
Application development and support;
Web development and support; and Customer support
75. He, therefore, submits that there is an element of development and support relating to software service in case of assessee also. He further submitted that the functional analysis depicted by the assessee in their TP study report at Item No.1 of Annexure 7, to be found at page 681 of the paper book is very much in agreement with the analysis of comparable companies done by the assessee at page no.685 thereof, and the assessee cannot have any grievance when the authorities below accepts the same.
76. We have carefully considered the contentions of the parties in the light of the records. Page No.23 of the Annual Report of this company clearly shows that the ATL has initially ventured into ITES business through Geo soft technologies and it is at present into providing consultancies to share the knowledge that aspirant starting healthcare documentation units in India and set up its consultancy division to provide end-to-end consultancy services to start-ups. It further needs that with the increasing requirements to match with the ongoing 42 technological changes, years after started a project division under the name of iridium. With a forecast the approach, the product team was able to come up with an end-to-end global workflow automation systems that help in the day today workflow. Products like iridium medical transcription automation software (IMTAS), iridium certified home base in medical transcription (ICHMT), iridium certified medical transcription (ICMT), Falcon-2000, F1 HBPO automation software, iridium real-time school (IRD as), iridium accounts management system (IMS), iridium inventory management system (IMS), iridium payroll management systems (IP MS), iridium business transcription system (IBD), iridium hospital management system (i.e. HMS) or a few of the products that got the wide acceptance amongst its customers. As a matter of fact the information provided under page nos. 23 to 34 of the annual report inspires us to believe that the assessee is no match to this company in its high end KPO functions. Even if we assume for a while that there is an element of development and support of software service in assessee's functionality, still the proportion of scale is very huge.
77. Further, no change of functionality of either the ATL or the assessee is brought to our notice so that we can take a different view from the one taken in earlier years. There is no denial of the fact in the earlier years i.e. AY 2009-10 and 2010-11 this company was held to be functionally different from the assessee. However, in 2009-10, there was acquisition of Oak technologies. The observations of the Tribunal in respect of this company in the order relating to the AY 2009-10 are extracted in the order for the AY 2010-11. Independent of the acquisition, the fact stares at the face of the revenue and that there is consistent finding that ATL is functionally different from the assessee and in the immediately 43 preceding paragraphs we also found so. We, therefore, hold that the ATL cannot be included in the list of comparables and the same is directed to be deleted from the list.
EClerx Services Ltd.:
78. Assessee objected the inclusion of this company on the ground of functional dissimilarity. Learned TPO held that eClerx offering services in data analytical and processing which is part and parcel of ITES segment. He further stated that the Snapshots taken from the annual report prove that it is an ITES company operating in the same segment as that of the assessee. Learned DRP found that so long as the services of these companies are ITES services, variance in service lines and verticals does not matter. He further held that inasmuch as the assessee is authorised to provide the services like Unix Windows administration and support;
Internal helpdesk services;
Application development and support;
Web development and support; and Customer support, it cannot be classified as a BPO and on that score the decision of the Hon'ble jurisdictional High Court in Rampgreen Solutions P. Ltd.vs CIT (supra) has no application.
79. It is pleaded on behalf of the assessee that the functions of eClerx involves providing financial services to like trade processing reference data, accounting and finance expense management activities and sale marketing services like web content management and merchandizing institution, web social media etc. At 44 page 35 of the annual report of this company it is specifically stated that eClerx has become one of India's most KPOs to be apprised for and rated it maturity level 3 of the People Capability Maturity Model. He further brought to our notice that for AY 2009-10, in assessee's own case it was found that eClerx Services Ltd. is functionally dissimilar to the assessee. In so far as Asstt. Year 2010-11 is concerned, ld. DRP accepted the contention of the assessee and held at page no.44 of its order that whereas the assessee has also been to high end services, the domain of eClerx is into an entirely different area, thereby rendering eClerx non comparable with the assessee.
80. Per contra learned DR submitted that inasmuch as both the assessee and Eclerx are providing similar services, it is not covered by Rampgreen case (supra) and on this ground ld. DR justified the inclusion of this company.
81. We have gone through the record. There is no change in the functionality of either of the companies from the earlier years and it is undisputable that for the AY 2009-10, a Coordinate Bench of this Tribunal considered the contentions on either side which are similar to the contentions now advanced before us and reached a conclusion that eClerx is a best KPO company, outsourcing substantial work to third parties during that year whereas the assessee was providing back office support services with their own human resource. On that score applying the ratio of Rampgreen solution (supra), eClerx was directed to be excluded from the list of comparables.
82. Further for AY 2010-11, vide item No.5 of paragraph no.6.9.25 at page No.44 and 45 ld. DRP considered the functionality of eClerx Services ltd. at length and in detail to held that the eClerx operates in an entirely different domain and 45 not a good comparable. In the absence of any explanation as to the non applicability of these findings for the current year, we do not find any reason not to accept the same or to take a different view. We, therefore, direct the ld. AO/TPO to exclude this company from the list of comparables.
Infosys BPO Limited and TCS E-Serve Limited:
83. Now coming to Infosys BPO Limited and TCS E-Serve Limited, these two companies are disputed by the assessee on the ground of functional dissimilarity inasmuch as Infosys BPO Ltd. is providing high end integrated services for business platforms, customer services outsourcing, finance and accounting, human resources outsourcing, legal process outsourcing, sales and fulfillment, sourcing and procurement outsourcing etc. And also having goodwill of Rs.227 crores; whereas TCS e services providing technical services in the nature of software testing, verification and validation of software at the time of implementation and data centre management activities. Ld. AR submitted that both these companies are having significantly large scale operations.
84. Ld. TPO rejected these contentions and held that these two companies are engaged in providing ITES services and, therefore, are good comparables. He further held that holding of intangible has no effects on the profits. Ld. DRP held that these companies are functionally similar, high turnover has no correlation to high profits and when they are functionally similar large scale operation is no ground to reject the same. In respect of TCS e-services, he held that the contention of the assessee that its transactions with Citi Bank group are not shown in the Notes to Accounts cannot be accepted because once there is change 46 in the ownership of the erstwhile company, the Citi group of companies cannot be held to be related to TCS e services.
85. Ld. DR brought to our notice that for the AY 2010-11, a Coordinate Bench of this Tribunal extensively dealt with the comparability of these two companies and reached a conclusion that these two companies are valid comparables for the back office support transactions. He submitted that there is no change of functions of these two companies from earlier years. So also the functions of the assessee. He, therefore, urged to uphold the action of the ld. DRP for this year.
86. In reply, it is the argument of the ld. AR that the order for AY 2010-11 was pronounced on 5.1.2018 and the assessee is carrying the matter in appeal to higher forums. However, he brought to our notice that a Coordinate Bench of this Tribunal in B C Management Services P. Ltd. vs DCIT, ITA 6134/Del/2015 and batch by order dated 25.5.2017 held that "18. We have heard the rival submissions perused the relevant findings given in the impugned orders as well as the material placed on record. One of the main points of distinction which is quite ostensible is that the "TCS E serve" is a subsidiary of Tata consultancy services Ltd, which is one of the leading and gentle company in the world and has an inherent element of very high brand value associated with it. Such a high brand value definitely has an impact on the pricing policy, niche market, contractual terms, etc. and thereby affecting the profit margins. Annual report of this company reflects that used payments have been made by TCS e-serve to TCS Ltd further use of the brand as a "royalty". This fact itself shows the effect of brand value in the pricing mechanism. And further analysis it is the same that the employee cost base is more than 64 times than the assessee and even the turnover is also more than 67 times as compared to the assessee. This only goes to suggest that assets employed by "TCS e-serve" along with Hughes intangibles in the form of brand value definitely has a huge effect in PLI and vitiates the comparability under FAR analysis with a company like assessee which is a captive service of either without much intangibles and risks. Another important thing which has been pointed out by Ld. counsel is that, the 47 operation of "TCS e-serve" broadly comprise of transaction processing and technical services including software testing, verification and validation for which no segmental bifurcations is available. In the options of such vital information of the margins of such varied segments it becomes quite difficult to put such company in the comparability basket so as to benchmark and correct profit margin."
It is, therefore, clear that because of the employee cost base of TCS e services at 64 times and turnover at 67 times compared to the assessee in such case, suggest that the assets employed by TCS e-serve with huge intangible in the form of brand value, definitely has a huge effect in PLI and vitiates the comparability under FAR analysis with a company which is a captive service provider without much tangibles and risks. It is further pointed out that the operations of TCS e-serve broadly comprise of transaction processing and technical services including software testing, verification and validation, for which no segmental bifurcation is available, in the absence of which margins of various segments would be difficult to be compared. Ld. AR submitted that these observations are applicable to the case of the assessee also on all fours. He further submitted that these observations of the Tribunal are upheld by the Hon'ble jurisdictional High Court in PCIT vs B.C Management Services P Ltd., ITA 1064 & 1083 of 2017, in the following manner:-
On a reading of the order of the Tribunal in B C Management case (supra), it is clear that the Tribunal did not find that TCS e-Serve is functionally dissimilar to the B C Management services P Ltd. (supra). In spite of the same, the Tribunal recorded that the employee cost base at more than 64 times and the turnover at more than 67 times as compared to the assessee therein suggests that the assets employed by the TCS e-serves along with huge intangibles in the form of brand value impacted the PLI and vitiated the comparability under FAR analysis. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value; that distinguished 48 it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court cannot be termed as unreasonable. The rationale for exclusion is, therefore, upheld.
87. It is, therefore, clear now that in spite of a close functional similarity between the assessee and the TCS E-serve, in view of the close connection between TVS e-serve and Tata Consultancy Services Ltd., which is a high brand value; that distinguished it and marked it out for exclusion. The rationality for exclusion adopted by the Tribunal basing on the brand value associated with TCS Consultancy which reflected an impacted TCS e-serve profitability in a positive manner is upheld by the Hon'ble jurisdictional High Court which is binding on this Tribunal. Merely because the binding precedent of the Hon'ble High Court in this order dated 28.11.2017 was not brought to the notice of the Tribunal when it pronounced its order on 5.11.2018 does not make any difference on the binding nature of this decision or its applicability to the facts of the present case. As a matter of law, had such decision been brought to the notice of the Tribunal in assessee's own case for the AY 2010-11, still it would have bound the Tribunal to follow the same.
In the circumstances, we find no option but to follow the binding precedent of the jurisdictional High Court in the case of B.C. Management Services P. Ltd. (supra) and to hold that. Infosys BPO Limited and TCS E-Serve Limited are not good comparables to the assessee and both these companies deserve to be deleted from the list of comparables from bench marking the international transactions.
49R. Systems International Ltd
88. Now coming to the companies sought to be included, R. Systems International Ltd. was rejected by the ld. TPO on account of different financial year end. However, it is submitted by the ld. AR that under similar circumstances in assessee's own case for AY 2009-10, a Coordinate Bench of this Tribunal relying on the ruling of the Hon'ble Punjab & Haryana High Court in CIT vs Mercer Consulting India P. Ltd., ITA NO.101 of 2015, held that if the audited quarterly results can be used to compute margin for the year ending on March 2009 then the company should be included in the final set of comparables.
89. Similar is the situation in respect of this year also inasmuch as ld. TPO rejected on the ground of this company having a year ending other than March and ld. TPO upholding the same. Since no change of the circumstances for the earlier year is either pleaded or proved by the revenue, in the absence of any dispute on the functional similarity of the comparable and the assessee, while respectfully following the order of a coordinate bench in respect of AY 2009-10, we hold that if the audited quarterly results can be used to compute margin for the year ending on March 2011, then company should be included in the list of comparables. We, therefore, direct the ld. TPO to include this company in the list of comparables subject to the condition that the audited quarterly results for the year ending with March 2011 are available.
CG VAK Software & Exports Ltd., Informed Technologies India Ltd., and Microgenetics Systems Ltd.
90. CG VAK Software & Exports Ltd., Informed Technologies India Ltd., and Microgenetics Systems Ltd. were rejected by the ld. TPO on the basis of turnover filter and ld. DRP confirmed the same.
5091. Ld. AR argued that under TNMM, differences in turnover are neutralized and such filter is not relevant for the entities operating on cost plus mark up. He also brought to our notice that in assessee's own case for AY 2009-10 (ITA No.2074/Del/2014) relying on the Hon'ble Delhi High Court ruling in the case of Chryscapital Investment Advisors India Ltd. vs DCIT in ITA No.417/2014, a Coordinate Bench of this Tribunal held that CG VAK Software & Exports Ltd cannot be held to be incomparable simply on the ground of low turnover. We have gone through the order of the Tribunal on this aspect and vide paragraph no.18.3, the Tribunal recorded that, -
18.3 We have heard the rival submissions and perused the relevant finding given in the impugned order. The main reason for not including this company is that its turnover is less than Rs 1 crore. So far as exclusion of this comparable on basis of turnover filter criteria of less than Rs. 1 crore, we find that, first of all, it was a comparable chosen by the assessee and at the time of selection process the assessee as stated had not applied any turnover filter for accepting or rejecting the comparables. Once the turnover filter has not been applied at the quantitative level then comparability has to be done on qualitative level based on FAR analysis. If on FAR analysis it is found that there are differences on account of either assets deployed, risk assumed materially affecting the cost or margin then only comparability analysis fails in such cases. Further, under the TNMM, the comparability of an international transaction with an uncontrolled transaction is to be seen with reference to functions performed after taking into assets employed and the risk assumed. While reckoning the comparability analysis under TNMM, the main emphasis is into net margin realized on the transactions undertaken and not the price of the product or services. The transfer pricing rules under Rule 10B and 10C also contemplate for eliminating the material effects and to make reasonably accurate adjustment for eliminating the differences on account of such material effects. Mere circumstance of a company which otherwise confirm to the comparability analysis in terms of Rule 10B(2) and (3), huge profit or huge turnover ipso facto does not lead to its exclusion unless and of course it is shown that turnover or huge profit is on account of factor leading to a different results in FAR analysis. We find that the Hon'ble Delhi High Court in the case of Cryscapital Investment Advisors India Pvt. Ltd. vs. DCIT (supra) after detailed analysis of rule 10B(3), same principle has been reiterated that if the 51 company is functionally comparable then same cannot be rejected on the basis of turnover. The Hon'ble High Court in its very detailed judgment wherein it was required to answer, whether the comparable can be rejected on the ground that they have high profit margin as compared to the assessee in TP analysis, hasalso dealt upon the turnover factor in detail and reiterated that if the company is functionally comparable then same cannot be rejected on the basis of turnover. Thus, following the ratio laid down by the Hon'ble Delhi High Court, we hold that the company cannot be held to be incomparable simply on the ground of low turnover, unless it is demonstrated that the assets and risk are completely different and are incomparable. Thus, we direct the TPO to include CG Vak Software And Exports Ltd. as a comparable company.
92. Same reasoning is applicable in respect of these three companies for this year also. While respectfully following the ratio laid down by the Hon'ble jurisdictional High Court in Chryscapital Investment Advisors India Ltd. vs DCIT(supra), and the above observations of the Tribunal in assessee's own case in the preceding year, we hold that these three companies cannot be held to be incomparable simply on the ground of low turnover, so long as there is no functional dissimilarity. We, therefore, direct the ld. AO/TPO to include these three companies, vis. CG VAK Software & Exports Ltd., Informed Technologies India Ltd., and Microgenetics Systems Ltd. in the list of comparables.
Microland Ltd., Datamatics Financial Services & Cosmic Global Ltd:
93. Microland Ltd. was rejected by the ld. TPO on the ground that this company has been making persistent losses. Datamatics Financial Services Ltd. was rejected on the ground that this company failed the service income filter. And Cosmic Global Ltd. was rejected for failing the export earnings filter. Though it is submitted by the ld. AR that Datamatics and Cosmic Global were accepted by the TPO for AY 2010-11 and there is no change in the business model, it is not proved before us that in such AY 2010-11 also these two companies failed the service 52 income filter and export turning filter respectively, but in spite of the same the ld. TPO accepted the same. Mere similarity in business model is not enough to accept the earlier order. It has to be shown that passing or failing of filters was also involved there. In the absence of any such proof it is very difficult to accept the contention of the assessee that since these two companies were accepted in the earlier years they have to be accepted for this year also irrespective of the passing or otherwise of these two filters.
94. In so far as Microland is concerned, it is rejected for making persistent losses. Though diminishing revenues is not a ground to reject a company from the list of comparables, making persistent losses takes it away from the list of comparables. For these reasons we find it difficult to include these three companies, viz. Microland Ltd, Datamatics Financial Services Ltd., and Cosmic Global Ltd. in the list of comparables.
95. Grounds No. 13 & 14 relate to the allocation of directors remuneration between STP and non STP units, which are admittedly considered and decided by the coordinate benches of this Tribunal for the AY 2008-09 in ITA No.29/Del/2013 by order dated 20.5.2016, for AY 2009-10 in ITA No.2074/Del/2014 and for the AY 2010-11 in ITA 380/Del/2015 by order dated 5.1.2018. For all the years the issue was remitted to the file of the ld. AO for fresh examination and for the asstt. Years 2009-10 and 2010-11, the Tribunal relied upon the following observations made in assessee's own case for the AY 2008-09,-
"14. In support of the grounds i.e. Ground Nos. 6 to 8, the Learned AR submitted that the Assessing Officer has erred in not correctly verifying the record submitted during the course of assessment proceedings contrary to DRP directions. He was not justified in disallowing income-tax holidays claimed by the assessee in respect 53 of STP unit hi its 8th year of operation. The authorities below have also erred in allocating director's remunerations between STP unit and non-STP units by ignoring the facts placed on record and holding that the assessee intentionally debited director's salary to non-STP units to reduce its taxable income without appreciating the operating model being followed by the assessee. The Learned AR submitted that assessee's STP unit has its own finance/operational team which is responsible for the day to day affairs/functioning of the said unit. The directors of the assessee have no active involvement on the affairs of STP units. All cost related STPI unit and non-STPI unit of assessee were being booked into irrespective unit and no apportionment was required/done for any other cost. He submitted further that assessee was operating on cost + mark up arrangements with its overseas group companies. Under the said arrangement, the assessee was entitled to receive pre-agreed mark up on cost incurred by it. Allocating cost from non-STP unit to STP unit will result in reducing the cost based for the assessee, which will eventually lead to lower taxable income. Thus, the reason provided by the Assessing Officer for making the adjustment does not stand correct in the case of assessee. The Learned AR submitted that in the subsequent years 2009-10 and 2010-11, the claimed deduction under sec. 1OA was allowed. He referred page Nos. The Learned AR also tried to point out typographical and arithmetical errors in the working of the disallowance under sec. 10A of the Act by the Assessing Officer at page Nos. 6 to 8 of the assessment order. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
19. Considering the above submissions, we find that in the case of CTT vs. Western Outdoor Interactive (P) Ltd. (supra), the Hon'ble High Court has been pleased to hold that benefit of deduction under sec, 10A is available for a particular number of years on satisfaction of certain conditions under provisions of the Act and unless relief granted for first assessment year in which claim is made and accepted, the Assessing Officer cannot withdraw relief for subsequent years, Undisputedly, it is 8th year of the claim of deduction under sec. 1 OA of the Act made by the assessee and it has been allowed in earlier years and in subsequent remaining two assessment years, i.e. 2009-10 and 2010-11. Before the ITAT, as discussed above, the Learned AR has tried to meet out the objections raised by the Assessing Officer in making the disallowance of the claimed deduction. In brief, the submission of the assessee against the objection of the Assessing Officer that the assessee has intentionally debited directors' salary to non-STP units to reduce its taxable income, the submission of the assessee remained that the assessee maintains its account in a manner that costs relating to STP and non-STP units are booked in the respective units; MD responsible for 54 establishing/leading strategic R&D partnership and R&D central operations functions for NOIDA site where major portion ofR&D work was carried out; director financed responsible for finance and accounting, legal, tax and company secretarial compliance functions at Noida; STP unit at Bangalore since has its own core management staff and each person is responsible for their areas, the cost of such personnel are debited to their undertaking only; and appellant operates own cost plus model, hence, increase in cost in non-STPI unit will result in increase in Revenue and, therefore, results in increase in tax liability. Against the objection of the Assessing Officer that separate books of account are not maintained, the submissions of the assessee remained that as per the provisions of law, there is no requirement of maintaining separate books of account for a unit eligible to claim deduction under sec. 10A of the Act; and that it is the 8 year of claim of deduction under sec. IOA of the Act and the claim of deduction under sec. 1OA of the Act only needs to be seen in first year. Against the objection of the Assessing Officer that additions shown in block of computers is not in agreement with records maintained in computers, the submissions of the assessee remained that as per fixed assets schedule provided to the Assessing Officer total addition in computer made during financial year 2007-08 in STP unit was Rs. 32,05,095; in the assessment order, the Assessing Officer stated that as per details provided to him,addition made in block of computer was of Rs.31,73,495 which is against the facts on record; the Assessing Officer compared alleged additions of Rs.31,73,495 with details extracts from SAP and wrongly concluded that amounts do not match. The Learned AR in his above submissions has pointed out as to how the Assessing Officer has committed mistake in coming to the conclusion that amounts do not match. The Learned AR submitted that total addition made to block of computers as per SAP details after correcting above mistakes made by the Assessing Officer is Rs.32,05,095 which matches with fixed assets scheduled submitted to the Assessing Officer during assessment proceedings. Against the objection of Assessing Officer that invoices raised in US dollars are not verifiable with amounts recorded in books as some amounts is in INR, the submission of the assessee remained that all the details on account of service income was furnished before the Assessing Officer; invoices are usually raised in USD, however, if there is. an adjustment entry to be passed, same is passed in INR in the ledger account; and audit adjustment entry was passed by auditor for financial year 2007-08; bonus expenses pertaining to financial year 2008-09 inadvertently considered by Cadence India as cost for financial year 2007-08 and as the assessee operates on a cost plus model invoice on such cost was raised already in financial year 2007- 08; etc. The grievance of the assessee in this regard also remained that the Assessing Officer has not followed DRP's directions. It was submitted that as per directions issued by the DRP, the Assessing Officer was directed to rectify the 55 details of accounts submitted by the assessee with regard to additions in the computer account and differed Revenue. Keeping in view these material submissions of the assessee, we set aside the matter to the file of the Assessing Officer to verify the above submissions and decide the issue afresh in view of the decision of Hon'ble Bombay High Court in the case of CIT vs. Western Outdoor Interactive Pvt. Ltd. (supra)."
96. We, therefore, respectfully following the above observations of the Tribunal in the immediately preceding Asstt. Years, set aside the direction of the ld. DRP and restore the issue to the file of the ld. AO with similar directions and to be decided in the same manner. Ground Nos. 13 & 14 are accordingly treated as allowed for statistical purpose.
97. In the result, appeal of the assessee is allowed in part for statistical purpose.
Order pronounced in the open court on this the 2nd day of April, 2018.
Sd/- Sd/-
(R.K. PANDA) (K. NARASIMHA CHARY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 2nd April, 2018
'VJ'
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT By order
Asstt. Registrar, ITAT