Income Tax Appellate Tribunal - Delhi
Serco India Pvt. Ltd., Gurgaon vs Dcit, Gurgaon on 10 January, 2022
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I-2', NEW DELHI
Before Sh. Saktijit Dey, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
ITA No. 1460/Del/2014 : Asstt. Year : 2009-10
Serco India Pvt. Ltd., Vs DCIT,
6th Floor, Tower-B, Building No. 8, Circle-2,
DLF Cyber City, Phase-II, Gurgaon
Gurgaon
(APPELLANT) (RESPONDENT)
PAN No. AAJCS6704P
Assessee by : Sh. Suraj Bhan Nain, CA
Revenue by : Sh. M. Baranwal, Sr. DR
Date of Hearing: 04.01.2022 Date of Pronouncement: 10.01.2022
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order dated 07.01.2014 passed by the AO u/s 144C(13) of the Income Tax Act, 1961.
2. The assessee company has filed its orig inal return of income for A.Y. 2009-10 on 29.09.2009 at income of Rs.2,76,12,264/-, which was revised on 31.03.2011 declaring income of Rs.2,04,76,953/-. The assessee company has entered international transactions with its associated enterprises during the year. The Assessing Officer made a reference to the Transfer Pricing Officer (TPO) to determine the arm's length price and the Ld. TPO proposed upward ad justment in transfer pricing. Against the draft assessment order, the assessee filed objections before the Ld. DRP. Having regard to the directions of Ld. DRP, the assessment u/s 143(3)/144C was completed by 2 ITA No.1460/Del/2014 Serco India Pvt. Ltd.
the Ld. Assessing Officer vide order dated 07.01.2014 determining total income at Rs.6,49,70,860/-; by making addition on account of TP adjustment of Rs.3,62,50,269/- and disallowance of deduction 10A to the extent of Rs.72,175/-. Subseq uently, the TPO rectified the mistake in calculation and determined TP adjustment at Rs.1,52,15,920/- and accord ingly, the A.O. has also rectified the assessment order vide order dated 17.02.2014 determining income at Rs.3,57,65,050/-.
3. Aggrieved with the assessment order, the assessee filed this appeal tak ing the following grounds of appeal:
"1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("AO") is bad in law and void ab-initio.
2. That on facts and circumstances of the case and in la w, the reference made by the AO suffers from jurisdictional error as the AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. Transfer Pricing Officer ("TPO") for computation of the arm's length price, as is required under section 92CA(1) of the Act.
3. That on the facts and circumstances of the case and in law, the AO erred in determining the arm's length price ("ALP") of the Appellant's international transactions at Rs.204,901,460 as against Rs.18,96,85,540 determined by the Appellant and recommending an addition of Rs. 15,215,920 on that account to the Appellant's income.
4. That on facts and circumstances of the case and in law, The AO/ Ld . TPO/ Ld. Dispute Resolution Panel ("DRP") erred 3 ITA No.1460/Del/2014 Serco India Pvt. Ltd.
while making an aforesaid addition of Rs. 15,215,920 to the value of international transactions by:
4.1 modifying the comparability analysis conducted in the transfer pricing documentation of the Appellant on inappropriate and inadequate grounds;
4.2 rejecting the applicability of functional filter applied in the search process by the Appellant;
4.3 rejecting the comparable companies selected by the Appellant in the transfer pricing documentation without providing cogent and sufficient reasoning; 4.4 selecting companies which were not comparable to the Appellant on various grounds;
4.5 not allowing the benefit of working capital adjustment since the Appellant being a service company;
4.6 confirming the selection of current year (i. e. financial year 2008-09) data for comparability.
5. That on the facts and circumstance of the case and in law, the AO/ Ld. DRP erred in reducing expenditure in foreign currency amounting to Rs.5,82,813 in respect of data communication charges from 'export turnover' for the purposes of computing deduction under section 10A of the Act.
6. That on the facts and circumstances of the case and in law the Ld. AO/Ld. TPO/ Ld. DRP erred in not examining the validity of initiation of penalty proceedings u/s 271(1)(c) of the Act.
4 ITA No.1460/Del/2014Serco India Pvt. Ltd.
7. That on the facts and circumstances of the case and in law, the AO erred in charging and computing interest under section 234B of the Act."
4. The ground-wise submission is made hereunder.
Transfer Pricing
5. These grounds are against addition of Rs. 1,52,15,920/- on account of upward adjustment in arm's length price of the appellant's international transaction related to providing IT services to its AEs.
6. It is submitted that the assessee, Serco India Private Limited, was a subsid iary of Serco Group PLC, UK, incorporated in India on 27-02-2006. The company was established as a captive service center with an objective to provide IT services to Serco Group. During the year under consid eration, the assessee company has provided IT Services to Serco Group. The assessee entered into a master service agreement with its AEs for providing IT services on a cost-plus mark-up of 15%. The assessee company has entered into international transactions with its associated enterprises during the year and furnished Transfer Pricing Study for ALP . These international transactions were as under:
T yp e of in te r n ati on al T r a ns f e r P r ofi t L ev el T ot al v al u e tr an s ac ti on P ri ci n g I n d ic ate [" P LI " ] o f M eth od t r an sac ti on s (R s. ) P rov is io n of I T Se rv ic es T ra ns ac t ion a l Op era t ing 1 8, 96 ,85 ,5 4 0 N et M a r g in Pr of it / M et hod Op era t ing C os t (T NM M ) [O P /O C] R ec e ip t of s ha re a p p lic at ion - - 4 8, 07 ,39 ,0 0 5 m one y I s s ue of s ha r e c a p it a l - - 4,3 8, 38 ,0 60 R ec o v ery of ex p e ns es - - 8,3 7 ,9 95 5 ITA No.1460/Del/2014 Serco India Pvt. Ltd.
7. During this year, the assessee has shown NCP margin of 14.20% from the 'Provision of IT services' as under:
Revenue from operations Rs. 18,96,85,540 Total Expenses Rs. 16,61,01,811 Net Profit Rs. 2,35,83,729 NCF % 14.20%
8. In the TP Stud y, the assessee has benchmarked its international transactions relating to software development services using TNMM as the most appropriate method with OP/OC as PLI. In the TP Report, a final set of 8 comparab les had been taken with average P LI of 16.08% as under:
S. Name of the Company FY 2006- 07 FY 2007- 08 FY 2008-09 Weighted No. Average
1. M ic r o la n d L im i t e d -2 . 0 6 1.02 NA -0 . 3 1
2. A ll i e d D ig it a l S e r v ic e s L t d 2 5 . 5 6 26.69 31.98 28.88
3. Larsen & Toubro Infotech 15.49 18.36 NA 17.06 Ltd.
4. Helios & Matheson 39.87 36.19 18.65 30.61 I n f o r m a t i o n T e c h n o lo g y Ltd.
5. R S S o f t w a r e (I n d ia ) 13.08 6.69 NA 9.80 L i m it e d
6. S a g a r s o f t ( I n d i a ) L im i t e d 22.82 6.68 NA 12.13
7. T h ir d w a re S o l u t io n s 25.81 21.75 NA 23.43 L i m it e d
8. P S I D a t a S y s t e m s L i m it e d 7 . 2 6 6.82 NA 7.03 ( S o f t w a r e S e rv ic e s Segment) A v e ra g e 16 . 0 8% Se rc o I n d i a R e s u l ts 14 . 2 0%
9. Since, the arithmetic mean of margin of the above 8 comparable companies selected in TP Study was 16.08% which was within the +/-5% range as per proviso to section 92C(2) of the Act, the assessee's international transactions with its AEs were considered to be in consistent with arm's length price.6 ITA No.1460/Del/2014
Serco India Pvt. Ltd.
10. During the proceedings before TPO, as required by the TPO, after conducting of fresh search for suitable comparab les with updated margins and after applying filters suggested by the TPO, a list of 16 comparable companies was given with unadjusted operating margin of 10.00% and ad justed margin of 7.78%. The TPO has not accep ted these comparables, mainly on the reasons that the assessee has used multiple years data when current year data only should have been used, and the assessee has used inappropriate filters and some important filters have not been used. The TPO has used the following set of filters to select comparables:
(i) Use of current year data
(ii) Reject companies having different accounting year
(iii) Reject companies where turnover is less than Rs. 5 Crores
(iv) Select companies where the ratio of service income to total income is not at least 75%
(v) Select companies where income from exports is at least 75% of total income
(vi) Reject companies where related party transactions exceed 25% of sales
(vii) Reject companies that have employee cost less than 25% of total cost; and
(viii) Reject companies that are affected by some peculiar economic circumstances.
11. The TPO has selected the following comparables for benchmark ing the international transactions relating to IT services:
7 ITA No.1460/Del/2014Serco India Pvt. Ltd.
SI . No . Co m p a r ab l e s OP / OC ( % )
1 A ks ha y So ft wa re T ec h nolog ies Lim it ed 7.9 9
2 Az t ec h So ft L im it e d (Cons olid a t ed ) 2 7. 37 3 B od ht r ee Co ns ult in g Lim it ed 6 9. 80 4 Ca t T ec hn olo g ies Lt d. 3 4. 43 5 G olds t o ne T ec h nol ogi es (Se g ) 1 0. 28 6 I nf os y s T ec h nol og ie s Li m it ed 4 0. 74 7 La rs en & T o ub ro I nf ot ec h L im it ed 2 1. 56 8 M ind t re e L im it e d 2 7. 36 9 P ers is t e nt Sy s t em s L im it ed 3 7. 77 10 R S So ft w a re (I ) L i m it ed 1 0. 15 11 S as k e n Co mm unic a t i on T ec h L im it ed 2 2. 67 12 T at a Co ns ult a nc y Se r v ic es L im it ed 3 1. 44 13 T at a El xs i L im it e d 1 6. 89 14 T hin k Soft G lob a l 1 6. 56 15 T hird wa re Solut io ns 3 7. 27 A ve r a g e 27 .4 9
12. Accordingly, the arm's length p rice of the international transaction relating to IT serv ices was comp uted by the TPO at Rs. 23,14,36,275/- as against Rs. 18,96,85,540/- shown by the assessee. Therefore, the TPO proposed upward adjustment of Rs. 4,17,50,735/ - (Rs. 23,14,36,275 - Rs. 18,96,85,540) vide his order dated 30-01.2013. Subsequently, the TPO passed an order u/s 154- dated 19-03- 2013 and revised the proposed adjustment of Rs. 2,02,04,281 /- instead of Rs. 4,17,50,735/-.
13. Having regard to the order of TPO, the Assessing Officer passed draft assessment order dated 26-03-2013 proposing addition of Rs. 2,02,04,281/- on account of transfer pricing.
14. The assessee filed objections u/s 144C of the Act before Ld. Dispute Resolution Panel (DRP), Delhi in respect of the 8 ITA No.1460/Del/2014 Serco India Pvt. Ltd.
addition proposed to be made by TPO. The Ld . DRP has passed order u/s 144C(5) of the Act on 30-12-2013 directing to exclude one company 'Bodhtree Consulting Limited' from the list of comparab les. TPO revised, as per the directions of Ld. DRP , the average margin of comparable as under:
SI. No . Co mp a r ab l e s OP / OC ( % )
1 Ak s ha y Soft w a r e T e c hno log ies L im it e d 7.9 9
2 Az t ec h Soft L im it ed (Co ns o lida t ed ) 2 7. 37 3 Cat T ec h no log ies Lt d . 3 4. 43 4 Go ld st on e T ec hno lo gies (S eg ) 1 0. 28 5 I nfos ys Tec hno log ies L im it ed 4 0. 74 6 La rs e n & T oub ro I nf ot ec h Li m it ed 2 1. 56 7 M indt ree Li m it ed 2 7. 36 8 P ers is t en t Sys t em s Lim it ed 3 7. 77 9 R S S oftw a r e (I ) L i m it ed 1 0. 15 10 Sas k en Co m m u nic at io n Tec h L im it ed 2 2. 67 11 Ta t a Cons u lta nc y Se rv ic es L im i t ed 3 1. 44 12 Ta t a Elx s i L im it e d 1 6. 89 13 T h ink So ft G SI oba l 1 6. 56 14 T h ird w a r e So lut ions 3 7. 27 Ave r ag e 24 .4 6
15. Initially , the adjustment of Rs. 3,62,50,289/- was proposed by the TPO vide his order dated 02-01-2014. Therefore, the Assessing Officer made addition of Rs. 3,62,50,289/- in assessment order u/s 143(3)/144C dated 07.01.2014 as per directions of the Ld . DRP.
16. Subseq uently, the TPO noticed that while calculating the ALP, the operating cost was wrong ly taken at Rs. 18,15,32,885/- as against correct cost of Rs. 16,46,32,380/-. Therefore, the TPO passed rectification order dated 17.01.2014 determining adjustment to be made at Rs. 1,52,15,920/-.
9 ITA No.1460/Del/2014Serco India Pvt. Ltd.
17. Thereafter, the Assessing Officer also rectified the assessment order vide order u/s 154 dated 17.02.2014 making addition on account of TP adjustment at Rs.1,52,15,920/- and determined the total income at Rs.3,57,65,050/-. Against this addition, the appellant has taken these grounds in the appeal.
18. It is submitted that the assessee has taken many grounds of appeal against addition of Rs. 1,52,15,920/-. However, at present, it is pressing for ground regarding inclusion of six comparable comp anies as follows:
(i) Infosys Technologies Limited (ii) Tata Consultancy Services Limited (iii) Persistent Systems Limited (iv) Sasken Communication Tech Limited (v) Cat Technologies Limited (vi) Thirdware Solutions Limited 19. If these six companies are ex cluded from the list of
comparables, there will be no requirement of adjustment on account of arm's length price of international transaction related to provision of IT serv ices.
Infosys Technologies Limited
20. It is submitted that Infosys Technologies Limited, a giant company, is not comparable with the assessee, a smaller company. The comparative chart of Infosys Technologies Limited with the assessee company is as under:
10 ITA No.1460/Del/2014Serco India Pvt. Ltd.
Sr . Pa rti cu l a r s I n f osy s Te c hn ol og i es Li mi t ed Se rc o India No . P ri v a te Li mi t e d
1 R ev enu es R s . 2 0, 26 4 C r or e s Rs . 1 8. 9 7 C ro r e s (T u rnov e r) (1 068 ti m e s) 2 Ow ners hip I nf os y s ow ns pro p ri et y pr od uc ts N il of Bra nd ed / l ik e F i nac le ; I nf os y s iP row e;
Pro p r iet y I nf os y s I n Gr ee n; Sn f os ys
prod uct s m Co nnec t et c .
3 Exp end it ure o n R s .62 Cr or es N il
Bra nd Buil d ing
4 Bra nd Va lue R s . 32 ,34 5 Cro res N il
5 R es ea rc h & Ca p it a l Ex p ens es R s . 31 Cr ores N il
[D ev e lo pm ent R e v e nu e Ex p e ns es R s . 2 36 Cr ores
Exp end it ure T ot a l E xp e ns es Rs . 267 Cr or es
6 Na t u re of D iv ers ifi ed - Bu s in es s a nd Cap t iv e IT
Ser v ic es t ec h nol og y c o ns ult ing ; C us t om s oft wa r e
a pp lic a t ion d ev elop m ent ; s erv ic es .
I nf ra s t r uc t u re m a in t e na nc e
s e rv ic es ; M a in t e na nc e a nd
p rod uc t ion s upp ort ; Pa c k ag e
e na b led c ons ult ing a nd
i mp lem en ta t io n inc lud ing
e nt erp ris e s olu t io ns ; P r od uc t
e ng ine er ing s ol ut i o ns a nd p r od uc t
l ifec yc le ma na g em e nt ; Sy s te m s
i nt e g rat ion ; Va lid a t ion s o lut ions
a nd Soft w a r e a s a Ser v ic e (Sa a S)
r ela t ed s ol ut i ons et c .
7 R is k I nf os y s op e ra t es fu ll-f le dg ed r is k - M in im a l ris k a s
t ak ing ent erp r is e. 10 0 % of t he
s erv ic es a re
pr ov id ed t o A Es .
8 Onsite/Offshore About half of the software development The appellant provides
services rendered by Infosys are onsite. only offshore services
Seqmentation of Revenues -Onsite : 49.3% from India.
-Offshore : 50.7%
(Page 47 of Annual Report) (PB-329)
21. From the above, it may kindly be seen that Infosys
Technolog ies Limited is functionally dissimilar; it has huge sales/turnover of Rs. 20,264 Crores having substantial intang ible assets, incurring huge amount on R&D for development of new area of functions and it owns branded or propriety products. Further, this company has revenue from onsite and offshore activities. Whereas, the assessee is a 11 ITA No.1460/Del/2014 Serco India Pvt. Ltd.
smaller company, having no brand value, not owning any branded or propriety products, has not incurred any expenditure on R&D and has revenue only from offshore activ ities.
22. Further, Infosys Technologies Limited was into providing diversified services viz. provid ing end-to-end business solutions that leverage technology thereb y enabling clients to enhance business performance. The solution span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, system integration, package evaluation and imp lementation, and testing and infrastructure management services. In addition, this company also offered software products for banking industry. Whereas the assessee company was a captive IT service provider and provided services as desired by its AEs.
23. Therefore, Infosys Technologies Limited is no match to the assessee and hence, it is not a comparable company for benchmark ing international transactions of the assessee relating to software development services.
24. It is pertinent to mention that the Ld. DRP has excluded Infosys Limited in subsequent A.Y. 2010-11 in the case of the assessee considering the similar reasons and relying on the decision of Hon'ble Delhi High Court in the case of Agnity Ind ia Technolog ies (P.) Ltd . vs. C IT [2013] 36 taxmann.com 289.
25. It is submitted that in several decisions, it has been held that a company having high brand value and huge turnover as compared to assessee company could not be selected as comparable.
12 ITA No.1460/Del/2014Serco India Pvt. Ltd.
26. The Hon'ble H igh Court of Bombay in the case of C/7' v. Pentair Water India (P.) Ltd. [2016] 69 taxmann.com 180 has categorically concluded that "the turnover is obviously a relevant factor to consider the comparability''. Thus, significant differences in the size of the companies would impact comparability.
27. The Hon'ble Delhi High Court in the case of Ag nity Ind ia Technolog ies (P.) Ltd. [2013] 36 taxmann.com 289, on similar facts, has up held the proposition that a giant company having huge turnover cannot be compared with a smaller captive unit of the parent company . The Hon'ble High Court approved the findings of the ITAT that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to hig her profits, whereas the respondent-assessee was a captiv e unit of the parent company and assumed only a limited risk.
28. The Hon'ble Delhi High Court has also held in the following cases that a giant company having huge turnover and high brand value cannot be compared with a smaller company working as a cap tive service provider to its AEs:
Pr. CIT vs. B.C. Management Services (P.) Ltd. [2018] 89 taxmann.com 68 (Delhi) Pr. C IT-3 vs. Evalueserve SEZ (Gurgaon) Pvt. Ltd in ITA No. 241/2018 order dated 26.02.2018 Pr. CIT-7 vs. Oracle (OFSS) BPO Services (P.) Ltd . [2018] 90 tax mann.com 388 (Delhi) Avaya India (P.) Ltd . vs. Assistant Commissioner of Income Tax [2019] 108 taxmann.com 222 (Delhi) 13 ITA No.1460/Del/2014 Serco India Pvt. Ltd.
29. It has been decided in number of Tribunal decisions that the companies having a turnover from Rs. 1 Crore to Rs. 200 Crores have to be taken as a particular rang e. Since the assessee company falls in this range having total turnover of Rs. 18.97 Crores, the companies which have turnover in the range of Rs. 1 Crore to Rs.200 Crores only should be taken into consideration for comparable for the purpose of determining arm's length price. This proposition is being consistently followed by various benches of the ITAT such as:
Yokogawa IA Technolog ies Ind ia (P.) Ltd. vs. DC IT [2019] 112 taxmann.com 341 (Bangalore -- Trib .) Triology e-Business Software Ind ia (P.) Ltd. vs. DCIT, Circle 12(4), Bengaluru [2021] 127 taxmann.com 255 Autodesk Ind ia (P.) Ltd . v. DCIT, Circle 11(2), Bangalore [2016] 96 taxmann.com 263 (Bangalore - Trib) Tavant Technologies India (P.) Ltd . v. DCIT, Circle 7(1)(1), Bangalore [2020] 120 taxmann.com 122 (Bangalore - Trib .)
30. It may also be noted that the Hon'ble Karnataka High Court in the case of Acusis Software Ind ia (P.) Ltd. v. ITO, Ward-11(1), Bangalore [2018] 98 taxmann.com 183 (Karnataka) approved the decision of ITAT holding that if the turnover of the comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparab le comp any.
31. Reliance is also placed on the following decisions of the Delhi ITAT, where the assessee company was a captive service provider to its AEs, it was directed to exclude Infosys Technolog ies Limited from the list of comparab les, considering 14 ITA No.1460/Del/2014 Serco India Pvt. Ltd.
that it was a giant company, having brand value, providing diverse services and assuming all risks:
Siemens Industry Software (I) (P.) Ltd v. DC IT, Circle- 8(1), New Delhi [2018] 98 taxmann.com 369 (Delhi - Trib.) Nokia Solutions and Networks India (P.) Ltd . v. ACIT, Circle-13(1), New Delhi [2019] 111 taxmann.com 389 (Delhi - Trib.) United Health Group Information Services (P.) Ltd. vs. DCIT, Circle 18(1), New Delhi [2018] 90 taxmann.com 423 (Delhi - Trib.
Sun Life India Service Centre (P .) Ltd v. DCIT, Circle-2, Gurgaon [2017] 88 tax mann.com 371 (Delhi - Trib.)
32. In v iew of the above, it is prayed that Infosys Technolog ies Limited may kindly be excluded from the list of comparables adopted by the TPO.
Tata Consultancy Services Limited
33. It is submitted that Tata Consultancy Serv ices Limited, a giant company, is not comparable with the assessee, a smaller company. The comparative chart of Tata Consultancy Services Limited with the assessee company is as under:
15 ITA No.1460/Del/2014Serco India Pvt. Ltd.
Sr . Pa rti cu l a r s T at a Con su l t an c y Se rvi c e s Se rc o India
No . Li mi t ed P riv a te Li mi t ed
1 R ev enu es ( Rs . I n Cr or es ) Rs .1 8 .9 7 Cro res
(T u rnov e r) (1 0 57 t i m es )
Inform ati on 21,535.75
Technology and
C onsul tancy Services
Sale of equipment 868 .25
and software
licences
Other Income (Net) (456 .24)
Total 21,947.76
2 T AT A Bra nd Ni l
3 Ons it e /Offs hor e T he d ist rib ut ion of T CS's T he a p p ella nt
re v e nues f rom o n-s it e/ of fsh or e pro v id es o nly
ar e as f ollo ws : offs h or e s er v ic es
from I nd ia.
-O ffs ho re : 4 4 .22 %
-O ns it e : 51 .1 9 %
4 R is k T CS op erat es as fu ll-f led g ed M inim a l ris k a s
ris k -ta k i ng e nt e rp ri s e. 100 % of t he
s erv ic es a re
pro v id ed t o AEs .
Strategic Acquisitions and Alliances.
34. The Company has been making acquisitions d uring the past few years, with the objective of moving towards its goal of being among the top IT companies in the world .
35. During the year 2008-09, the Company has acquired Citigroup Inc.'s (Citi) 96.26% interest in TCS e-Serve Limited (formerly known as Citigroup Global Services Limited), the India-based cap tive BPO, for a total consideration of USD 504.54 million. In addition to the sale, C iti has signed an agreement for TCS to provide process outsourcing services to Citi and its affiliates for an aggregate amount of USD 2.5 billion over a period of 9.5 years. The acquisition broadens TCS' portfolio of end-to-end IT and BPO services in the global Banking and Financial Services (BFS) sector. The agreement builds upon the existing relationship between Citi and TCS whereby TCS provides application development, infrastructure 16 ITA No.1460/Del/2014 Serco India Pvt. Ltd.
support, help desk and other process outsourcing services to Citi. This acquisition has not only helped in acquiring new capabilities in the banking domain, but has also underscored the importance of TCS' long-term, sustainab le relationships with its large customers, including Citi. The acquisition complements TCS' domain expertise and has brought in new capabilities to TCS that will help drive growth going forward ."
36. Tata Consultancy Services Limited is functionally dissimilar; it has huge sales/turnover of Rs. 21,947.76 Crores having substantial intangib le assets, incurring huge amount on R&D for development of new area of functions and it owns branded or propriety products. Further, this company has revenue from onsite and offshore activities. Whereas, the assessee is a smaller company, hav ing no brand value, not owning any branded or propriety products, has not incurred any expenditure on R&D and has revenue only from offshore activ ities.
37. Further, the income of Tata Consultancy Services Limited comprises of revenues from Information Technology and Consultancy Services at Rs. 21,535.75 Crores and Sale of equipment and software licences at Rs. 868.25 Crores. There is no functional segmentation. Thus, the total revenue of the company includes consultancy services, sale of equipment and software licences. This company provides to its customers an integrated portfolio of services including a comprehensive range of IT and Application related services, Remote Infrastructure Management, BPO and Engineering services, front-ended by a strong, domain- led Global Consulting Practice. Thus, services provided cover the entire value chain of IT - from consulting to products and solutions and from 17 ITA No.1460/Del/2014 Serco India Pvt. Ltd.
implementation to support. As mentioned on page 23 of the Annual Report reproduced above, TCS has also acquired TCS e- Serve Limited (formerly known as C itigroup Global Services Limited) from Citigroup Inc. during the year, which is an extraordinary financial event.
38. Whereas the assessee company was a captive IT service provider and provided services as desired by its AEs.
39. Therefore, Tata Consultancy Services Limited is no match to the assessee and hence, it is not a comparable company for benchmark ing international transactions of the assessee relating to software development services.
40. It is submitted that in several decisions, it has been held that a company having high brand value and huge turnover as compared to assessee-company could not be selected as comparable.
41. The Hon'ble H igh Court of Bomb ay in the case of CIT v. Pentair Water India (P .) Ltd. [2016] 69 taxmann.com 180 (Bombay) has categorically concluded that "the turnover is obviously a relevant factor to consider the comparab ility". Thus, significant differences in the size of the companies would impact comparability.
42. It has been decided in number of Tribunal decisions that the companies having a turnover from IRs. 1 Crore to Rs. 200 Crores have to be taken as a particular rang e. Since the assessee company falls in this range having total turnover of Rs. 18.97 Crores, the companies which have turnover in the range of Rs. 1 Crore to Rs. 200 Crores only should be taken into consideration for comparable for the purpose of 18 ITA No.1460/Del/2014 Serco India Pvt. Ltd.
determining arm's length price. This proposition is being consistently followed by various benches of the Hon'ble ITAT such as:
Yokogawa IA Technolog ies Ind ia (P.) Ltd. v. DCIT [2019] 112 taxmann.com 341 (Bangalore - Trib.) Triology e-Business Software India (P.) Ltd . vs. DCIT, Circle 12(4), Bengaluru [2021] 127 taxmann.com 255 Autodesk Ind ia (P.) Ltd . v. DCIT, Circle 11(2), Bangalore [2016] 96 taxmann.com 263 Tavant Technologies India (P.) Ltd . v. DCIT, Circle 7(1)(1), Bangalore [2020] 120 taxmann.com 122
44. It may also be noted that the Hon'ble Karnataka High Court in the case of Acusis Software Ind ia (P.) Ltd. v. ITO, Ward-11(1), Bangalore [2018] 98 taxmann.com 183 (Karnataka) approved the decision of ITAT holding that if the turnover of the comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparab le comp any.
45. The Hon'ble Delhi High Court in the case of Ag nity Ind ia Technolog ies (P.) Ltd. [2013] 36 taxmann.com 289 (Delhi), on similar facts, has upheld the proposition that a g iant company having huge turnover cannot be compared with a smaller captive unit of the p arent company. The Hon'ble High Court approved the findings of the ITAT that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a cap tive unit of the parent company and assumed only a limited risk.19 ITA No.1460/Del/2014
Serco India Pvt. Ltd.
46. The Hon'ble Delhi High Court has also held in the following cases that a giant company having huge turnover and high brand value cannot be compared with a smaller company working as a cap tive service provider to its AEs:
B.C. Management Services (P.) Ltd. v. Dy. C IT[2018] 89 taxmann.com 68 (Delhi) Pr. CIT-3 v. Evalueserve SEZ (Gurgaon) Pvt. Ltd in ITA No. 241/2018 order dated 26.02.2018 Pr. CIT-7 v. Oracle (OFSS) BPO Services (P.) Ltd. [2018] 90 tax mann.com 388 (Delhi) Avaya India (P.) Ltd. v . Assistant Commissioner of Income Tax [2019] 108 taxmann.com 222 (Delhi)
47. Reliance is also placed on the following decisions of the Delhi ITAT, where the assessee company was a captive service provider to its AEs, it was d irected to exclude Tata Consultancy Services Limited from the list of comparables, considering that it was a giant company , having brand value, providing diverse services and assuming all risks:
Nagarro Software (P.) Ltd. v. ITO [2020] 115taxmann.com 284 (Delhi - Trib.) United Health Group Information Services (P.) Ltd. v. DCIT, Circle 18(1), New Delhi [2018] 90 taxmann.com 423 (Delhi - Trib.) Sun Life India Service Centre (P .) Ltd v. DCIT, Circle-2, Gurgaon [2017] 88 tax mann.conn 371 (Delhi-Trib.)
48. In v iew of the above, it is prayed that Tata Consultancy Services Limited may kindly be excluded from the list of comparables adopted by the TPO.
20 ITA No.1460/Del/2014Serco India Pvt. Ltd.
Persistent Systems Limited
49. It is submitted that Persistent Systems Limited, a bigger company, is not comparable with the assessee, a smaller company. The comparative chart of Persistent Systems Limited with the assessee comp any is as under:
Sr . P a rt i c u l a r s P e r s i s te nt Sy st e m s Se rc o I n d i a P ri v a t e No . L im it ed Li mi t ed 1 R e v e nu es iSa le of s o ft wa re s erv ic es a nd Rs . 1 8 .9 7 Cr ores ( T ur nov e r) p rod uc t s : R s . 519 .6 9 Cro res (m ore t ha n 2 7 ti m e s ) 2 F ix ed Ass ets Rs . 217 .0 6 Cror es Rs . 0. 22 Cr or es (m ore t ha n 9 86 ti me s ) 3 R is k P ers is t e nt Sys t em s L im it ed M inim a l r is k as 10 0 % op e ra t es fu ll-f le dg e d ris k -t a k in g of t h e s er v ic es are e nt erp ris e . pro v id ed t o AEs .
4 R es ea rc h & Rs . 5. 61 Cro res Ni l D ev e lop m e nt E xp end it ure 5 Na t u re of (i) P ers is t e nt Sys t em s L im it ed Cap t iv e I T s o ftw are S erv ic es is f unc t ion a lly d if f er ent f rom t h e s erv ic es .
Ap p e lla nt. P rofit & L oss Ac c o unt c lea r ly s hows t ur no v e r fr om " Sa l e of s oft w a re s er v ices a nd p rod uc t s " . T his s h ow s t hat t h e c omp a ny is e ng a g ed in b ot h r end er ing s oft w a r e d ev elop m ent s e rv ic es as w ell as s ale of s oft wa re p rod uc t s .
(ii) N o s eg m e nt a l i nf orm a t io n
is a v a ilab le.
50. Turnover and Assets: From the above, it may k ind ly be noted that Persistent Systems Limited is a b igger company having turnover of Rs. 519.69 Crores as compared to the assessee company which is a smaller company hav ing turnover from IT services of Rs. 18.97 Crores, which was more than 27 times. Persistent Systems Limited has employed fixed assets of Rs. 217.06 Crores, more than 986 times of the fixed assets of Rs. 0.22 Crores used by the assessee.
21 ITA No.1460/Del/2014Serco India Pvt. Ltd.
As discussed above, since the assessee falls in the range of turnover of Rs. 1 Crore to Rs. 200 Crores, therefore, Persistent Systems Limited having turnover of Rs. 519.69 Crores (more than 27 times) cannot be a comparable company. Thus, on this account itself, Persistent Systems Limited may kindly be excluded from the list of comparables.
51. In v iew of the above, it is prayed that Persistent Systems Limited may kindly be excluded from the list of comp arables adopted by the TPO.
Sasken Communication Techno logies Limited
52. At the outset, it is submitted that the TPO did not select this comparab le at the time of show cause notice issued to the assessee during TP proceedings. This company has been included in the list of comparables by the TPO in his order, without providing reasonable opportunity to the assessee. Despite objection raised by the assessee, the Ld. DRP has also not decided the objections raised by the assessee against this comparable in the order.
53. It is submitted that 'Sasken Communication Technologies Limited' is not comparab le with the assessee. The comparative chart of Sasken Communication Technolog ies Limited with the assessee company is as under:
22 ITA No.1460/Del/2014Serco India Pvt. Ltd.
Sr . P a rt i c u l a r s S as ken Com m u n ic ati on Se rc o I nd i a
No . T e ch n ol og i es L im i t ed Pri v a te Li mi t ed
1 R e v e nu es Rs . 479 .7 5 Cro res Rs . 18 .9 7 Cro re s
( T ur nov e r) (mo re t ha n 25
tim es )
2 F ix ed Ass ets Rs . 81 .49 Cr or es Rs . 0. 22 Cro re s
(mo re t ha n 370
tim es )
3 Na t u re of D iv ers i fied - P r od uc t and t ec h nol og y Capt iv e I T s oft w a re
S erv ic es lic e ns in g, s o ft wa re s e rv ic es a nd se rv ic es .
ins t a lla t io n a nd c o m m is s ion ing Se rv ic es etc .
T he c omp a ny ea rned re v e nu e f rom
t hr ee s e gm ents as und er :
P a rt i c u l a r s A mou n t i n
Rs . La k hs
T elec om Sof tw a r e Se rv ic es 40 ,5 31 .2 0
T elec om Sof tw a r e P r od uc ts 6,1 4 6 .43
Ot h er Se rv ic es 1,2 9 7 .05
T ot al 47 , 974 . 6 8
H ow ev er , t he s eg m e nt a l o p era t in g
m a rg ins a re n ot a v a ila b le . T h er ef or e, in t he a bs enc e of s e g m en ta l r ele v a nt d at a a nd p a rt ic ula rly o p e ra t in g ma rg ins , t his c omp a ny c a n no t b e c om p a ra b le w it h a s s es s ee for I T so ft w a re s er v ic es .
4 R es ea rc h & T his c om p a ny ha s inc u rred s ub st a nt ia l Nil D ev e lop m e nt e xp end it ure in R es ea rc h & E xp end it ure d ev elop m ent .
" Re s e a r ch an d D e vel op m en t an d
T e ch n ol og y A b s or p ti on
Su bs y st em a nd t he W i rel es s P rot oc o l
St ac k s w er e e nha nc ed ."
5 P at ents T he c om pa ny ha s be en g ra n te d 3 3 Nil
p at ents (U SA 2 3 + I nd ia 8 + Ot he r
Co unt ries 1 + Ac qu ire d 1 ) a n d 2 4
p at ents a r e p e nd i ng t o b e g ra nt ed .
6 R is k T h e co m pa n y op era t es f ul l-f led g e d r is k - Minimal risk as 100% of
ta k i ng e nt erp ris e. the services are
provided to AEs.
23 ITA No.1460/Del/2014
Serco India Pvt. Ltd.
54. Turnover and Assets: From the above, it may k ind ly be noted that Sasken Communication Technolog ies Limited is a bigger company having turnover of Rs. 479.75 Crores as compared to the assessee company which is a smaller company having turnover from IT services of Rs. 18.97 Crores, which was more than 25 times. Sasken Communication Technologies Limited has emp loyed fixed assets of Rs. 81.49 Crores, more than 370 times of the fixed assets of Rs. 0.22 Crores used by the assessee.
55. As discussed above, since the assessee falls in the range of turnover of Rs. 1 Crore to Rs. 200 Crores, therefore, Sasken Communication Technologies Limited having turnover of Rs. 479.75 Crores (more than 25 times) cannot be a comparable company. Thus, on this account itself, Sasken Communication Technolog ies Limited may kindly be excluded from the list of comparables.
56. In this regard, it would be fruitful to refer decision of Hon'ble ITAT Bangalore in the case of Mformation Software Technolog ies (I) (P.) Ltd. vs. ITO, Ward 12(1), Bangalore [2020] 116 taxmann.com 458 (Bangalore-Trib.) wherein companies having turnover more than 10 times of turnover of the assesses have been excluded as comparables by giving the following findings:
"10. As far as ex clusion of 7 companies listed above which are part of the final comparable companies chosen by the TPO are concerned, we find that the turnover of these companies is 10 times greater than the turnover of the assessee which is only a sum of Rs.25,50,19,320. The turnover of (i) M/S. Tata Elsi Ltd ., (Turnover Rs.378,43,03,000) (ii) Sasken Communication Technologies Ltd . (Turnover Rs.405,31,20,000) (iii) Persistent 24 ITA No.1460/Del/2014 Serco India Pvt. Ltd.
Systems Ltd. (Turnover Rs.519,69,10,000) (iv) Zylog Systems Ltd. (Turnover Rs. 734,93,51.475) (v) Mindtree Ltd.(Turnover Rs. 793,22,79,326) (vi) Larsen and Toubro Infotech Ltd. (Turnover Rs. 1950,83,81,374 and (vii) Infosys Ltd. (turnover Rs. 20264,00,00,000). It has been held by the Hon'ble Karnataka High Court In the case of Acusis Software (I) P. Ltd. vs. ITO in ITA No.223/2017, judgment dated 14.8.2018 that if the turnover of the comparable company is less or more than 10 times the turnover of assessee, then it cannot be considered as a comparable company. In the light of the aforesaid decision of the Hon'ble High Court, we are of the view that the aforesaid 7 companies were rightly excluded from the list of comp arable companies by the CIT(A). Thus Gr.No.2 & 3 raised by the revenue are dismissed."
57. In view of the above, it is prayed that Sasken Communication Technolog ies Limited may kindly be excluded from the list of comparab les.
Cat Technologies Limited
58. The company 'Cat Technolog ies Limited' is not comparable with the assessee company because it is engaged in diverse activ ities of different functions, no seg ment reporting of different activities, and abnormal growth/results during this year in this company.
59. Cat Technologies Limited is engaged in diverse activities such as software development, consulting serv ices, training , and med ical transcription services. As per Schedule-9 forming part of Profit & Loss Account, the company has shown following income from operations:
25 ITA No.1460/Del/2014Serco India Pvt. Ltd.
(i) T ra in ing I nc om e Rs .2 ,44 ,1 0 7 /- (ii ) So ft wa re D e v e lop m e nt & Co ns ult ing Se rv ic es Rs . 8,4 9 ,3 9 ,375 /- (ii i) M ed ic a l T ra ns c ri pt i on R ec eip ts R s. 83 ,7 4 ,1 94 /- T ota l Rs . 9, 35, 57 ,6 7 6 /- 60. Further, during the year, Cat Technologies Limited
launched a job portal viz. Logtalent.com for job aspirants. Extracts from page 12 of the Annual Report (PB-927) for FY 2008-09 are reproduced below:
"During the year the company launched job portal viz. Logtalent.com which was instant success with job aspirants. Encourage with success of this portal company proposed to launch 3 to 4 p ortals during the current financial year in the different fields. "
"Your Company has achieved good market reputation in the domain area of H R BPO, which is a high growth business area in the outsourcing space. BPO seeks to leverage the benefits of service delivery globalization, process design and technology to drive efficiency and cost effectiveness in customer business process. Your C ompany leverages strategic partnerships with global leaders in technology and business solutions, with the goal of providing clients with end-to-end business solutions."
61. Thus, the company is dealing in med ical transcrip tion, training, software development and consultancy services. The software development and consultancy services are clubbed together. It is also evident from the above that this company also rendered services such as job placement portal and BPO services, which cannot be compared with the business profile of the assessee company.
26 ITA No.1460/Del/2014Serco India Pvt. Ltd.
62. Furthermore, there is no separate segment of software services of the company . It may kindly be noted that expenses are not segregated according to the revenue streams and therefore, it is not possible to have separate revenue and expenditure data relating to software development services segment. As per Note-7 to the Notes on Accounts regarding Segment Reporting (PB-955), it is treated that the company considers whole of India as a single geographical segment. The relevant note is reproduced as under:
"7. SEGMENT REPORTING The Company's exclusive business is Medical Transcription, Training Software Development and Consulting Services as such this is the only reportable segment as per Accounting Standard
-17 on Segment Reporting issued by the Institute of Chartered Accountants of India. As the Company consider whole of India as a-single geographical segment, the disclosures related to secondary segments are not relevant for the Comp any."
63. Thus, it is evident that functions performed by Cat Technolog ies Limited are completely different from the IT Software Services provided by the Appellant and there was no segment reporting of d ifferent activities.
Abnormal Growth/Result:
64. The total turnover/income and profit shown by the company' at Technolog ies Limited for the five financial years are as under:
27 ITA No.1460/Del/2014Serco India Pvt. Ltd.
F.Y. 20 0 7 - 08 2 0 0 8 - 09 20 0 9 - 10 20 1 0- 1 1 20 1 1- 1 2
Total Income 6,54,22,644 9,90,07,541 8,28,76,384 7,45,62,215 8,55,62,911
P ro f it b e f o r e T a x 98,98,449 2,86,08,282 44,92,969 33,296 -5 1 , 5 7 , 3 7 7
R a t io [P B T / S a le s ] 15.13% 28 . 9 0% 5.42% 0.04% -6.03%
P B - 94 5 P B - 94 5 P B - 95 8 PB-959 P B - 96 3
Ratio [P BT/Sales]
65. Thus, there was abnormal high profit in FY 2008-09 (AY 2009-10) under consideration and there was growth in profit of 191% from the immediately preceding F.Y. 2007-08. The profit of this company is very volatile. Hence, this company cannot be considered as comparable.
66. It may be mentioned that the Ld. DRP has excluded the company 'Bodhtree Consulting Limited' as comparable in this year itself on the ground that this company had shown extraordinary rev enue growth and profits were very volatile.
67. The reliance is placed on the following decisions wherein the company 'Cat Technologies Limited' was excluded from the list of comparables on the basis of above-mentioned factors:
Sun Life India Service Centre (P .) Ltd v. DCIT, Circle-2, Gurgaon [2017] 88 tax mann.com 371 (Delhi - Trib.) 28 ITA No.1460/Del/2014 Serco India Pvt. Ltd.
GE Converteam EDC (P.) Ltd v. ACIT, Company Circle 1(3) Chennai [2017] 79 taxmann.com 408 (Chennai - Trib.) Siemens Industry Software (I) (P.) Ltd v. DC IT, Circle- 8(1), New Delhi [2018] 98 taxmann.com 369 (Delhi - Trib.) United Health Group Information Services (P.) Ltd. v. DCIT, Circle 18(1), New Delhi [2018] 90 taxmann.com 423 (Delhi - Trib.) Nokia Solutions and Networks India (P.) Ltd. v. ACIT, Circle-13(1), New Delhi [2019] 111 tax mann.com 389 (Delhi - Trib.) Nagarro Software (P.) Ltd. v. ITO [2020] 115 taxmann.com 284 (Delhi - Trib.)
68. In v iew of the above, it is prayed that this comp any 'Cat Technolog ies Limited' may kindly be excluded from the list of comparables.
Thirdware Solution Limited
69. The company 'Thirdware Solution Limited' is not functionally comparable with the assessee company. Thirdware Solution Limited' is engaged in varied activities i.e., sale of licenses, software services, export, and revenue from subscrip tion etc. for which no segmental disclosure has been made by the company in its Aud ited Financial Statements.
70. The details of sales as reflected in Schedule 12 forming part of Financial Statements (P B-976) as on 31-03-2009 are as under:
29 ITA No.1460/Del/2014Serco India Pvt. Ltd.
P a rti c u la r s A mou n t ( R s. )
SC HE D UL E 1 2 : SA L E S
Sa le of L ic enc e 2,3 2 ,3 7 ,588
So ft wa re Se rv ic es 8,9 1 ,7 7 ,023
Ex p o rt f rom SE Z U n it 47, 85 ,7 2 ,42 0
Ex p o rt f rom ST PI U n it 16, 29 ,0 0 ,63 0
R e v e nue fr om S ubs c rip t i on 1,6 4 ,3 3 ,714
T ot a l 77, 03 ,2 1 ,37 5
71. It is also sub mitted that segmental results are not
availab le. Note 23 of Notes on Accounts (PB-1007) related to 'Segment Reporting' states that the company's operation comprises; of software development, implementation, and support serv ices. Primary segment reporting is based on geographical areas.
72. From the above, it can be seen that the company 'Thirdware Solution Limited' derived revenue from various streams, such as sale of licences, software services, exports, revenue from subscrip tion etc. Thus, this company was engaged in diversified business including software products and hence, this company cannot be treated as comparable with the assessee company. Further, there is no information relating to segmental break -up in the Annual Report of this company providing information on revenue and expenditure from software serv ices only and hence, this company cannot be a good comparable with the assessee which is a captive IT service provider to its AEs. It may be noted that in the case of Fiserv Ind ia (P.) Ltd. v. ITO, Ward-13(4), New Delhi [2015] 60 taxmann.com 48 (Delhi-Trib .), the Hon'ble ITAT referred the decision of the Tribunal in the case of Conexant Systems (P.) Ltd. v . ITO [2014] 65 SOT 123 (URO)/48 tax mann.com 363 (Hyd.-Trib) wherein inter-alia it was observed that- "Even if he 30 ITA No.1460/Del/2014 Serco India Pvt. Ltd.
has adopted the filter of more than 75% of the revenue from the software services for selecting a comparab le company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products.
73. Reliance is also placed on the following decisions wherein the company Thirdware Solution Limited' was excluded from the list of comparab les on the account that it was engaged in diverse activ ities and no information regarding segment reporting was availab le:
Siemens Ind ustry Software (I) (P.) Ltd . vs. DC IT Circle 8(1), New Delhi [2018] 98 taxmann.com 369 St. Ericsson Ind ia (P.) Ltd. v. ACIT, Range-9, New Delhi [2017] 79 taxmann.com 207 (Delhi - Trib.) Nokia Solutions and Networks India (P.) Ltd . v. ACIT, Circle-13(1), New Delhi [2019] 111 taxmann.com 389 (Delhi - Trib.) Nagarro Software (P.) Ltd. v. ITO [2020] 115 taxmann.com 284 (Delhi - Trib.) Fiserv India (P.) Ltd. v. ITO, Ward-13(4), New Delhi [2015] 60 taxmann.com 48 (Delhi - Trib .) Pr. C ITS v. Fiserv India (P.) Ltd . in ITA 17/2016 for AY 2009-10 order dated 06.01.2016 (Delhi High Court)
74. In view of the above, it is prayed that this company 'Thirdware Solution Limited' may kindly be excluded from the list of comparables.
31 ITA No.1460/Del/2014Serco India Pvt. Ltd.
75. The ld. DR relied on the orders of the authorities below.
76. Heard the arguments of both the parties and perused the material availab le on record.
77. With regard to the Infosys Technolog ies Ltd . having a turnover 1068 times to that of the assessee, Tata Consultancy Ltd. having a turnover 1075 times of the assessee, Persistent Systems Ltd. having a turnover 27 times of the assessee with fixed assets more than 986 times, Sasken Communication Technolog ies Ltd. having turnover 25 times and 37 times of the fixed assets and owing to the functional dissimilarity relying on the judgment of Acusis Software India (P.) Ltd. v. ITO, Ward- 11(1), Bangalore [2018] 98 taxmann.com 183 (Karnataka), we hold that they cannot be treated as right comparable.
78. With regard Cat Technologies Ltd., the company had medical transcription receip t and training income. The profit ratio are inconsistent ranging from (-)6.03% to 28.90% in the declining phases from the year to 2007 to 2011-12. The profits of the company is very volatile, hence keeping in view the judgment of Sunlife Serv ice Centre Pvt. Ltd. Vs. DCIT 88 Taxman 371 (Del), Siemens Industries Software India Pvt. Ltd . 98 Taxman 369, we hold that the same is to be excluded from the list of comp arables. With regard to Thirdwave Solutions Ltd., we find that the company is engaged in sale of licenses, software services, export, and revenue from sub scription etc. for which no segmental disclosure has been made by the company in its Aud ited Financial Statements. Hence, we hold that the same is to be excluded from the list of comparables.
32 ITA No.1460/Del/2014Serco India Pvt. Ltd.
Corporate Taxation
79. This ground is that the AO/ Ld . DRP erred in reducing expenditure in foreign currency amounting to Rs. 5,82,813/- in respect of data communication charges from 'ex port turnover' for the purposes of computing deduction under section 10A of the Act.
80. The assessee company was involved in the business of development and export of computer software in an Undertaking registered under Software Technology Park of India and claimed deduction u/s 10A of the Act. The assessee has made total export turnover of Rs. 9,82,87,609/- in this undertaking and there was no domestic turnover in this undertaking. Therefore, the amount of export turnover and total turnover was same. During assessment proceedings, the Assessing Officer has noticed that the assessee company has incurred an expenditure of Rs. 5,82,813/- in foreign exchange as data communication charg es, which were considered attributable to delivery of computer software outside India. The Assessing Officer reduced these expenses from export turnover and calculated the amount of export turnover at Rs. 9,77,04,796/- (Rs. 9,82,87,609 - Rs. 5,82,813). However, the Assessing Officer has not reduced these expenses from total turnover. Accordingly , the Assessing Officer re-computed allowable deduction u/s 10A of the Act as under:
Net Profit of the business of the Undertaking x Export Turnover Total Turnover =1,21,71,990x 9,77,04,796 9,82,87,609 Allowable Deduction u/s 10A = 1,20,99,814/-33 ITA No.1460/Del/2014
Serco India Pvt. Ltd.
81. Thus, the Assessing Officer allowed deduction u/s 10A of Rs. 1,20,99,814/- as against Rs. 1,21,71,990/-, resulting into disallowance of deduction u/s 10A to the ex tent of Rs. 72,175/- (1,21,71,990 - 1,20,99,814).
82. The assessee filed objections before the Ld. DRP against this disallowance and submitted that if data communication charges are to be reduced from export turnover, these should be excluded from the total turnover also. But the Ld . DRP confirmed the above disallowance observing that export turnover has been defined in section 10A itself whereas total turnover has not been defined . It was noted that total turnover has been defined in other sections like 80HHC, 80HHE etc. Definition of total turnover as g iven in other sections cannot be imported into section 10A. For the purposes of section 10A, total turnover has to be taken as it means in common parlance and then in general sense, expenses cannot be reduced from total turnover. It was further pointed out that this issue is still pending before the Hon'ble Supreme Court. Hence, the Ld. DRP rejected the objection of the assessee.
83. The Hon'ble Supreme Court in the case of CIT Central-III vs. HCL Technologies Ltd. [2018] 93 taxmann.com 33 (SC) held that for computation of deduction under section 10A on the profit from export business, ex penses excluded from export turnover have also to be excluded from total turnover. The Hon'ble Supreme Court concluded as under:
"18. Accordingly, the formula for computation of the deduction under Section 10A of the Act would be as follows:
Export Pro fit = tota l Profit of the Business x Ex port turnove r as defined in Expl anation 2 ( IV ) of Sectio n 10A o f the IT Act _________ Ex port turnover as defined in Ex plana tion 2 (IV) of Section 10A of the IT Act + d omestic sale proceeds 34 ITA No.1460/Del/2014 Serco India Pvt. Ltd.
19. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature.
20. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well.
21. On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way , expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover."
84. In another case of CIT vs. Intel Technology India (P.) Ltd. [2019] 107 taxmann.com 462 (SC), the Hon'ble Supreme Court dismissed the SLP filed against the order of the High Court, where the Hon'ble High Court up held Tribunal's order holding that expenses excluded from export turnover were also to be excluded from total turnover for the purpose of section 10A of the Act.
35 ITA No.1460/Del/2014Serco India Pvt. Ltd.
85. In v iew of the above, the expenditure incurred in foreign currency on lease line charges excluded from export turnover by the Ld. Assessing Officer has to be reduced from total turnover also. Hence, the figure of total turnov er would also become Rs. 9,77,04,796/- (9,82,87,609 - 5,82,813). Appeal of the assessee on this ground is allowed.
86. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 10/01/2022.
Sd/- Sd/-
(Saktijit Dey) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 10/01/2022
*Subodh Kumar, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR