Income Tax Appellate Tribunal - Bangalore
Citrix R & D India Pvt Ltd , Bangalore vs Assistant Commissioner Of Income Tax ... on 6 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND
SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER
IT(TP)A No.383/Bang/2017
Assessment Year :2012-13
M/s. Citrix R&D India Pvt. Ltd.,
Prestige Dynasty, Ground Floor, The Assistant Commissioner of
33/2, Ulsoor Road, Income Tax,
Vs.
Bangalore - 560 042. Circle - 2 (1) (1),
Bangalore.
PAN: AABCN3639C
APPELLANT RESPONDENT
Appellant by : Shri P.K. Prasad & Shri Umashankar
Gautam, Advocate
Respondent by : Shri C.H. Sundar Rao, CIT (DR)
Date of hearing : 27.03.2018
Date of Pronouncement : 06.04.2018
ORDER
Per Shri A.K. Garodia, Accountant Member
This appeal is filed by the assessee which is directed against the assessment order passed by the AO on 21.12.2016 u/s. 143(3) r.w.s. 144C (13) of IT Act as per the directions of DRP for Assessment Year 2012-13.
2. The revised grounds filed by the assessee are as under.
"The grounds mentioned herein by the Appellant are without prejudice to one another.
1. That the order of the learned Assistant Commissioner of Income Tax, Circle 2(1) (1), Bangalore ("Assessing Officer" or "AO") pursuant to the directions of the learned Dispute Resolution Panel (learned Panel') to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. [corresponding to ground no. 1]
2. That the learned AO and the learned Panel erred in upholding the rejection of Transfer Pricing ('TP') documentation by the learned Deputy Commissioner of Income tax, Transfer Pricing --Range 1(1)(2) (learned TPO') and in upholding the adjustment to the IT(TP)A No. 383/Bang/2017 Page 2 of 20 transfer price of the Appellant in respect of Software development services and IT enabled services. [corresponding to ground no. 2]
3. That on the facts and circumstances of the case, the learned AO/learned Panel erred in upholding the rejection of comparability analysis of the Appellant in the TP documentation and accepting the fresh comparability analysis performed by the learned TPO. [corresponding to ground no.3 (a)]
4. That on the facts and circumstances of the case, the learned AO/learned Panel erred in disregarding application of multiple year/prior year data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2011-12) data for companies should be used for comparability. [corresponding to ground no. 3(b)]
5. That on the facts and circumstances of the case, the learned AO/learned Panel erred in upholding the learned TPO's approach of using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining the arm's length price. [corresponding to ground no. 3(c)]
6. That on the facts and circumstances of the case, the learned AO/learned Panel erred in upholding the learned TPO's approach of using the export sales income less than 75% of the sales filter and the employee cost less than 25% of turnover filter for the exclusion of comparables. [corresponding to ground no. 3(d)]
7. The learned AO in pursuance of the order of the learned TPO and the directions of the learned Panel erred on facts and law while including Persistent Systems Limited as a comparable in respect of its software development services segment whereas the same should have been excluded for the reasons of functional dissimilarity. [corresponding to ground no. 3(e)]
8. The learned AO in pursuance of the order of the learned TPO and the directions of the learned Panel erred on facts and law while including Infosys Limited as a comparable in respect of its software development services segment whereas the same should have been excluded for the reasons of functional dissimilarity, huge R&D expenditure, etc. [corresponding to ground no. 3(e)]
9. The learned AO in pursuance of the order of the learned TPO and the directions of the learned Panel erred on facts and law while including Genesys International Limited as a comparable in respect of its software development services segment whereas the same should have been excluded for the reasons of functional dissimilarity. [corresponding to ground no. 3(e)] IT(TP)A No. 383/Bang/2017 Page 3 of 20
10. The learned AO in pursuance of the order of the learned TPO and the directions of the learned Panel erred on facts and law while including Larsen & Toubro Infotech Limited as a comparable in respect of its software development services segment whereas the same should have been excluded for the reasons of functional dissimilarity. [corresponding to ground no. 3(e)]
11. The learned AO in pursuance of the order of the learned TPO and the directions of the learned Panel erred on facts and law while including Infosys BPO Limited as a comparable in respect of its IT enabled services segment whereas the same should have been excluded for the reasons of huge brand value Market leading capacity, etc. [corresponding to ground no. 3(e)]
12. The learned AO in pursuance of the order of the learned TPO and the directions of the learned Panel erred on facts and law while including BNR Udyog Limited as a comparable in respect of its IT enabled services segment whereas the same should have been excluded because it fails the related party filter. [corresponding to ground no. 3(e)]
13. The learned AO in pursuance of the order of the learned TPO and the directions of the learned Panel erred on facts and law while including TCS e-serve Limited as a comparable in respect of its IT enabled services segment whereas the same should have been excluded for the reasons of functional dissimilarity, huge brand value, etc. [corresponding to ground no. 3(e)]
14. The learned AO in pursuance of the order of the learned TPO and the directions of the learned Panel erred on facts and law while excluding Akshay Software Technologies Limited as a comparable in respect of its software development services segment whereas the same should have been included for the reasons of functional similarity. [corresponding to ground no. 3(f)]
15. The learned AO in pursuance of the order of the learned TPO and the directions of the learned Panel erred on facts and law while excluding CG-VAK Software & Exports Limited as a comparable in respect of its software development services segment whereas the same should have been included for the reasons of functional similarity. [corresponding to ground no. 3(f)]
16. The learned AO in pursuance of the order of the learned TPO and the directions of the learned Panel erred on facts and law while excluding Evoke Technologies Private Limited as a comparable in respect of its software development services segment whereas the same should have been included for the reasons of functional similarity. [corresponding to ground no. 3(f)] IT(TP)A No. 383/Bang/2017 Page 4 of 20
17. That on the facts and circumstances of the case, the learned AO/learned Panel erred in upholding the TPO's approach of not providing risk adjustment and thus ignored the limited risk nature of the services provided by the Appellant and in not providing an appropriate adjustment towards the risk differential, even when full- fledged entrepreneurial companies are selected as comparables. [corresponding to ground no. 3(g)]"
That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal."
3. It was submitted by ld. AR of assessee that ground nos. 1 to 6 are general and ground nos. 7 to 10 and 14 are in respect of software segment and ground nos. 11 to 13 are in relation to ITES segment and ground nos. 15 & 16 are not pressed. Regarding ground no. 17, he submitted that this issue is consequential. Hence we decide ground nos. 7 to 10 and 14 in respect of software development segment and ground nos. 11 to 13 in respect of ITES segment. As per ground nos. 7 to 10, the assessee is requesting for exclusion of 1) Persistent Systems Ltd., 2) Infosys Ltd., 3) Genesys International Ltd. and
4) Larsen & Toubro Infotech Ltd. As per ground no. 14, the assessee is requesting for inclusion of Akshay Software Technologies Ltd. As per ground nos. 11 to 13 in respect of ITES segment, the assessee is requesting for exclusion of Infosys BPO Ltd., BNR Udyog Ltd. and TCS e-Serve Ltd. The ld. AR of assessee has submitted two charts for each of these two segments. In respect of request for exclusion of Persistent Systems Ltd., reliance has been placed on two Tribunal orders i.e. Tribunal order rendered in the case of Electronic Arts Games (India) Pvt. Ltd. vs. ACIT in ITA No. 444/Hyd/2017 for the same Assessment Year, copy of relevant pages available on pages 2502 to 2504 of the paper book and in the case of Agilis Information Technologies India Pvt. Ltd. vs. ACIT in ITA No. 555/Del/2017 for same Assessment Year, copy of relevant pages available on pages 2484 to 2485 of the paper book. In respect of request for exclusion of Infosys Ltd., reliance has been placed on the same Tribunal order of Delhi Bench rendered in the case of Agilis Information Technologies India Pvt. Ltd. Vs. ACIT (supra), copy of relevant pages available on pages 2479 to 2481 of the paper book and on another Tribunal order IT(TP)A No. 383/Bang/2017 Page 5 of 20 rendered in the case of Alcatel-Lucent India Ltd. Vs. Addl. CIT in ITA No.1112/Del/2017 for the same Assessment Year, copy of relevant pages available on pages 2518 & 2519 of the paper book. In respect of request for exclusion of Genesys International Services Ltd., reliance has been placed on two Tribunal orders but these Tribunal orders are not for the same Assessment Year and in fact, one order is for Assessment Year 2008-09 in the case of Symphony Marketing Solutions India Pvt. Ltd. Vs. ITO in IT(TP)A No. 1316/Bang/2012 and in the case of M/s. Lionbridge Technologies Pvt. Ltd. Vs. ITO Assessment Year 2009-10 in ITA No. 668/Mum/2014 for and therefore, these two Tribunal orders are not relevant for deciding this issue. On page no. 3 of the relevant chart for software development segment, it has been submitted that DRP has first excluded several comparables but continued with the TPO's set of comparables and in support of his contention, our attention was drawn to page no. 22 of DRP directions and it was pointed out that on this page, it is noted by DRP that only four comparables can be retained as comparables and those companies are 1) Larsen & Toubro Infotech Ltd., 2) Mindtree Ltd., 3) Persistent Systems Ltd. and 4) R S Software (India) Ltd. and then noted that mean margin of adjusted OP/OC after working capital adjustment of these four companies comes to 19.90% and thereafter, the DRP observed that since this is more than the adjusted mean margin of 19.40% as per the order of TPO passed on the 10 comparables selected by the TPO, the DRP held that the set of comparables selected by TPO is upheld by approving the adjusted margin of 19.40% instead of 19.90% as per the four comparables approved by DRP. He submitted that in view of this finding of DRP, only these four comparables should be considered and out of that, the assessee is requesting for exclusion of Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd. and these should be examined and decided in addition to assessee's request for inclusion of Akshay Software Technologies Ltd. The ld. DR of revenue supported the DRP directions.
4. We have considered the rival submissions. First of all, we reproduce the relevant paras from pages 22 and 23 of the directions of DRP. The same are as under.
IT(TP)A No. 383/Bang/2017 Page 6 of 20 "If the strict comparability is applied, in view of the above findings in respect of comparables objected by the assessee, only the following companies can be retained as comparable:-
Adjusted OP/OC SI. after Names of the companies OP/OC No. working capital adjustment Larsen & Toubro Infotech 1 25.47% 24.22% Ltd.
2 Mindtree Ltd. 15.01% 13.45%
3 Persistent Systems Ltd. 27.20% 25.64%
4 R S Software (India) Ltd. 15.34% 16.29%
Mean margin 20.75% 19.90%
The above adjusted mean margin of 19.90%, based on the strict comparability of the comparables, works out more than the adjusted mean margin of @ 19.40% in the TP order, based on the 10 comparables selected by the TPO.
It is clear from the above that the larger set of the comparables takes care of the differences between the comparables as compared to a smaller set of the comparables selected based on the strict comparability. Accordingly, we are of the view that the comparables selected by the TPO are appropriate for determination of the Arm's Length Margin. Accordingly the set of the comparables selected by the TPO is upheld by approving the adjusted margin of @ 19.40% instead of 19.90%, from the above exercise.
5. From the above Para reproduced from the order of DRP, we find that the DRP has held that only four companies are acceptable as good comparables and revenue is not in appeal against this decision of DRP. In our considered opinion, having held that only these four companies are good comparables, the remaining comparables selected by TPO cannot be considered in final list of comparables only because the mean margin of those four comparable is more than the 10 comparables selected by TPO. Hence, we hold that only these 4 comparables are good comparables and we have to consider and decide about the assessee's request for exclusion of two comparables out of these 4 comparables i.e. Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. and in addition to that, we have to decide about the assessee's request for IT(TP)A No. 383/Bang/2017 Page 7 of 20 inclusion of one comparable i.e. Akshay Software Technologies Ltd. Regarding the assessee's request for exclusion of Larsen & Toubro Infotech Ltd., we find that reliance has been placed by ld. AR of assessee in the relevant chart on the Tribunal order rendered in the case of M/s. Aptean Software India Pvt. Ltd. vs. DCIT in IT(TP)A No. 1826/Bang/2016 for the same Assessment Year and it has been stated in the chart that the relevant pages of the paper book are 2466 & 2467 and in addition to this, reliance has been placed on another Tribunal order rendered in the case of Agilis Information Technologies India Pvt. Ltd. Vs. ACIT (supra) and it has been stated that the relevant pages are 2481 & 2482 of the paper book and this Tribunal order is also for the same Assessment Year. When we examine the Tribunal order rendered in the case of M/s. Aptean Software India Pvt. Ltd. vs. DCIT (supra), we find that it is noted by the Tribunal in Para 2 of this Tribunal order that this company is primarily engaged in software development services in various sectors for clients of the holding company. As per the order of TPO in the present case, it is noted by the TPO in Para 2.1 of his order that assessee company is engaged in the business of providing software research and development and IT enabled services in the nature of order processing services to its AEs. The adjustments were made as per TPO's order separately for software research and development segment and ITES segment and therefore, the profile of the tested party in the present case and in that case is similar and therefore, in our considered opinion, this Tribunal order is applicable in the present case. But as per Para nos. 3, 4 and 5 of this Tribunal order Larsen & Toubro Infotech Ltd. was excluded by applying the turnover filter but without considering the judgment of Hon'ble Delhi High Court rendered in the case of Chryscapital Investment Advisors (India) (P.) Ltd. vs. DCIT as reported in 376 ITR 183 in which it was held that huge profit or huge turnover, ipso facto does not lead to exclusion of a comparable and the TPO first, has to be satisfied that such differences do not "materially affect the price or cost" and secondly, an attempt should be made to make reasonable adjustment to eliminate the material effect of such differences. Hence, if only this tribunal order is considered, the matter has to go back to the file of AO/TPO for fresh decision in the light of this judgment of Hon'ble Delhi High Court. Hence, we examine the applicability of another Tribunal order rendered in the IT(TP)A No. 383/Bang/2017 Page 8 of 20 case of Agilis Information Technologies India Pvt. Ltd. vs. ACIT (supra). As per Para no. 2 of this Tribunal order, it is noted that this company is engaged in the activities of software development as in the present case and therefore, this Tribunal order is also applicable in the present case and this Tribunal order is also for same Assessment Year i.e. 2012-13. The issue regarding exclusion of Larsen & Toubro Infotech Ltd. is discussed and decided by Tribunal as per paras 4.8 to 4.10 of this Tribunal order and for the sake of ready reference, these paras of this Tribunal order are reproduced herein below from relevant pages 2481 and 2482 of paper book and the same are as under.
"4.8. Larsen & Turbo Infotech Ltd.
The Ld. AR submitted that segmental data is not available. As per the annual report, the company is IT BPO service provider. The Ld. AR relied upon the order decision of Delhi Bench of the Tribunal in case of Saxo India Pvt. Ltd. vs. ACIT (ITA No. 6148/Del/2015), wherein, L&T Infotech Ltd. was directed to be excluded holding that the company is also engaged in business of software product and segmental information is not available. The appeal filed by the Revenue was dismissed by the Hon'ble Delhi High Court in ITA No 682/2016. The Ld. AR further submits that Delhi Bench of the Tribunal in the case of Alcatel-Lucent India Ltd, vs. DCIT (ITA No. 6856/Del/2015) directed to exclude Larsen & Toubro on account of functional dissimilarity and unavailability of segmental data. The Ld. AR also relied upon the following decisions, wherein, Larsen & Toubro was directed to be excluded on account of unavailability of segmental data:
• Pegasystems Worldwide India Pvt. Ltd vs. ACIT (ITA No. 1758/Hyd/2014) • Cerner Healthcare Solutions P Ltd vs ITO (ITA No, 44/Bang/2015) • Invensys Dvelopment Centre India Pvt. Ltd. vs. DCIT (ITA No 383/Hyd/2014) • M/s Broadcom India Research Pvt. Ltd. vs, DCIT (ITA No, 62/Bang/2014) 4.9 The Ld. DR relied upon the orders of the TPO and DRP 4.10 We have heard both the parties and perused the material available on record. This company is engaged in two business segments, namely, software development services and software products. However, separate segmental data with respect to business segment is not available in the annual report of the company. From the audited financial statement and website, it is evident that the company is earning revenue from two business segments, viz., software development and software product. Therefore, this IT(TP)A No. 383/Bang/2017 Page 9 of 20 company should be excluded from the comparables. Thus, we direct the TPO to exclude this comparable."
6. From the above paras reproduced from this Tribunal order, it is seen that this company was excluded by the Tribunal in that case on this basis that this company is earning revenue from two business segments i.e. software development and software product and separate segmental data is not available in the Annual Report of that company. Respectfully following this Tribunal order, we hold that in the present case also, this company Larsen & Toubro Infotech Ltd. should be excluded from the list of final comparables.
7. Now we discuss and decide about Infosys Ltd. In support of this request for exclusion of Infosys Ltd. also, reliance has been placed by ld. AR of assessee in the chart on the same Tribunal order rendered in the case of Agilis Information Technologies India Pvt. Ltd. Vs. ACIT (supra) which is for same Assessment Year and we have already seen that this Tribunal order is applicable in the present case. Para nos. 4.5 to 4.7 of this Tribunal order are relevant in respect of Infosys Ltd. and hence, these paras are also reproduced herein below from paper book pages 2478 to 2481 of paper book. The same are as under.
"4.5. Infosys Ltd.
The Ld. AR submitted that as per page 9 of the annual report, the company has set up a network of research labs and during the relevant previous year 143 unique patent applications were filed by the company. The Ld. AR further submitted that the company has been granted 47 patents out of which 46 are in USA and one in Luxemburg. At page 26 of the annual report it is also stated that the company recognizes it's strong brand as one of it's competitive strengths. In this regard the Ld. AR submitted that the Hon'ble Delhi High Court in the case of Agnity India Technologies (ITA 1204/2011 dated 10.07.2013) directed for exclusion of Infosys Ltd. from the list of comparable companies not merely on the basis of high turnover but on the basis that Infosys Ltd is a full risk bearing entrepreneur whereas the assessee therein is a captive software service provider. The Ld. AR further submitted that Infosys Ltd apart from being a giant in the field of software product, also owns various unique intangibles in the form of proprietary products, patents, brands etc which leads to creation of significant competitive advantage resulting high operating margins which are valuable intangibles due to which it is earning exceptionally high operating IT(TP)A No. 383/Bang/2017 Page 10 of 20 margins. The Ld. AR submitted that since Infosys Ltd is engaged in development and sale of software products. The software products developed by the company includes Finacle TM, Finacle core banking solution, Finacle digital commerce solution, Finacle WatchWiz, Infosys Health Benefit Exchange, etc. Thus, this company is functionally different from the assessee company. The Ld. AR relied upon the order of Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. vs. ACIT (ITA No, 5645/del/2011) wherein the Tribunal directed to exclude Infosys holding that the company is a giant risk taking company and cannot be compared with a captive service provider. Delhi Bench of the Tribunal in the case of Ut Starcom Inc. (India Branch) vs. DDIT (ITA No. 5848/Del/2011), also directed to exclude Infosys holding that the company is a giant risk taking company and cannot be compared with a captive service provider. Delhi Bench of the Tribunal in the case of Avaya India Pvt. Ltd. vs. DCIT (ITA No. 146/Del/2013) directed to exclude Infosys on account of being a giant company.
Delhi Bench of the Tribunal in the case of AVL India Software Pvt. Ltd. vs. DCIT (ITA No, 6454/Del/2012) directed to exclude Infosys holding that the assessee providing services to its AE on a cost plus basis without having any intangible assets cannot be compared with a giant company like Infosys. The Ld. AR relied upon the following decisions, wherein, Infosys Technologies Ltd, was directed to be excluded holding that the company is a giant company having significant intangibles:
i. Nokia Siemens Networks India Pvt. Ltd vs. ACIT (ITA No. 5837/Del/2011) ii. FIL India Business Services Pvt. Ltd. vs. DCIT (ITA No. 6867/Del/2014) iii. Sony Mobile Communications International AB (India Branch Office) vs. DDIT (ITA No. 769/Del/2014) iv. Headstrong Services (India) Pvt. Ltd vs. DCIT (ITA No. 714/Del/2015) v. Bentley Systems India Pvt. Ltd. vs, ACIT (ITA No. 6161/Del/2013) vi. Sun Life India Service Centre Pvt. Ltd. vs. DCIT (ITA No. 1489/Del/2014) vii. Avaya India (P) Ltd. vs. ACIT (ITA No. 5528/Del/2011) viii. Alcatel-Lucent Technologies vs. DCIT (ITA No, 2298/Del/2008) ix. DCIT vs. Mentor Graphics (ITA No. 2634/Del/2011) The Ld. AR also relied upon the following decisions of the various Benches of Tribunal wherein it has been held that companies engaged in sale of software products cannot be regarded as appropriate comparable for the purpose of benchmarking the international transaction of provision of software services:
(i) Connexant Systems India Pvt. Ltd vs. ITO ITA No 1429/Hyd,/2010 IT(TP)A No. 383/Bang/2017 Page 11 of 20
(ii) Intoto Software Ltd Pvt. Ltd. (ITA No 1196-97/Hyd/2010 & 2102/Hyd /2010)
(iii) NXP Semiconductors India Pvt. Ltd. vs. ACIT (ITA No. 1174/Bang/2011)
(iv) (Sapient Corporation Pvt. Ltd vs. DCIT (ITA No 5263/Del/2010)
(v) Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/10
(vi) Trilogy E-Business Software vs. DCIT : 47 SOT 45(URO)
(vii) Nethawk Networks India Pvt. Limited. Vs. ITO (ITA 7633/Mum/2012)
(viii) Toluna India Pvt. Ltd. vs. ACIT (ITA No.5645/Del/2011)
(ix) Lear Automotive India P. Ltd. Vs. ACIT (ITA No. 5612/Del/2011)
(x) Global Logic India Pvt. Ltd. vs. ACIT (ITA No. 5809/Del/2011) 4.6. The Ld. DR relied upon the orders of the TPO and the DRP.
4.7 We have heard both the parties and perused the records available before us. This company has set up a network of research labs and granted 42 patents. Infosys is a giant risk taking company besides that, it is engaged in development & sale of Software Products and also owns intangible assets. Thus, as held by the Hon'ble High Court and this Tribunal in various decisions, this company has to be excluded. We, therefore, direct TPO to exclude this company from comparable."
8. As per the above paras reproduced from this Tribunal order, it is seen that in that case, Infosys Ltd. was excluded on this basis that this company has set up a network of research labs and granted 42 patents and also noted that Infosys is a giant risk taking company and besides that, it is engaged in development & sale of Software Products and also owns intangible assets. The Tribunal has followed the judgment of Hon'ble Delhi High Court rendered in the case of Agnity India Technologies in ITA 1204/2011 dated 10.07.2013 and decided the issue in favour of the assessee and it was held that this company should be excluded from the list of final comparables. Respectfully following this Tribunal order and in turn following the judgment of Hon'ble Delhi High Court rendered in the case of Agnity India Technologies (supra), we direct the AO/TPO in the present case to exclude Infosys Ltd. also from the list of final comparables.
9. As per above discussion, we have held that as per page no. 22 of the order of DRP, only four comparables are to be considered and out of that we have IT(TP)A No. 383/Bang/2017 Page 12 of 20 decided about exclusion of two companies in software development segment. So in the final list of comparables for this segment, there will be only two comparables i.e. Mindtree Ltd. and R S Software (India) Ltd. In addition to this now, we decide about the assessee's request for inclusion of one comparable i.e. Akshay Software Technologies Ltd. In respect of assessee's request for inclusion of this comparable, ld. AR of assessee has placed reliance on two Tribunal orders i.e. the Tribunal order rendered in the case of M/s. Citrix R&D India Pvt. Ltd. Vs. DCIT in IT(TP)A No. 1289/Bang/2014 for Assessment Year 2009-10 and the Tribunal order rendered in the case of DCIT Vs. M/s. Wabco TVS Ltd. in ITA No. 883/Mds/2015 for Assessment Year 2010-11 and since, the Assessment Years in both these two Tribunal orders is different, these two Tribunal orders are not relevant for the purpose of inclusion of this comparable. The DRP has decided the issue against the assessee on this basis that the company provides professional services and ERP services, but the entire revenue has been shown as income from software services and there is no segmental information available. This finding of DRP could not be controverted by ld. AR of assessee and since, the Tribunal orders cited by ld. AR of assessee is not supporting the case of the assessee because these Tribunal orders are for different Assessment Years, we find no reason to interfere in the order of DRP on this issue and we hold that Akshay Software Technologies Ltd. cannot be included in the final list of comparables of software development segment. Accordingly, ground no. 14 of assessee's appeal is rejected.
10. Now we take up the assessee's request regarding exclusion of 3 comparables in ITES segment i.e. Infosys BPO Ltd., BNR Udyog Ltd. and TCS e-Serve Ltd. For Infosys BPO Ltd., the ld. AR of assessee has placed reliance on a Tribunal order rendered in the case of M/s. e4e Business Solutions India Pvt. Ltd. vs. ITO in IT (TP) A No. 451/Bang/2017 for the same Assessment Year and copy of relevant page is available on page 2700 of the paper book. In Para 2.1 of this Tribunal order, it is noted by Tribunal that this company is subsidiary of e4e Business Solutions LLC and it is rendering interactive entertainment services support to its parent company and other AE's in the nature of testing, compatibility, localization services and end user customer support services and IT(TP)A No. 383/Bang/2017 Page 13 of 20 these services have been characterized as Information Technology Enabled Services ('ITES'). Hence the profile of the assessee company and this company is similar and therefore, this Tribunal order is applicable in the present case. The issue regarding exclusion of Infosys BPO Ltd. has been discussed and decided by Tribunal as per paras 12 and 12.1 to 12.3.2 which are available on pages 2697 to 2700 and for the sake of ready reference, these paras are reproduced herein below.
"12 Infosys BPO Ltd., ('Infosys') 12.1 This company was selected by the TPO and included in the final set of comparables overruling the objections of the assessee to its inclusion on grounds of its being functionally different from the assessee. Before us also, the assessee seeks exclusion of this company from the list of comparables on grounds this company, 'Infosys', being functionally different as it is engaged in providing integrated IT and BPO solutions across a variety of verticals like Banking, Communication, Media and Entertainment, Manufacturing, Retail and Energy sectors. It is also contended that this company has diversified activities, owns IPR's and has tremendous brand value. In support of its claims/contentions, this assessee placed reliance on the decision of the coordinate bench in the assessee's own case for Asst. year 2011-12 in IT (TP) A No.1397/Bang/2016 dated 13/1/2017.
12.2 Per contra, the ld DR for Revenue supported the orders of the authorities below.
12.3.1 We have been heard the rival contentions and perused and carefully examined the material on record, including the judicial pronouncement cited. We find that the coordinate bench of this Tribunal in its order in the asseesse's own case for asst year 2011-12 in IT (TP) A No. 1397/Bang/2016 dated 13/1/2017has excluded this company, 'Infosys', from the set of comparables for the reason that it is functionally different; being an established market leader, enjoying immense brand value and goodwill, with huge economies of scale and geographical dispersion of customers. The relevant portion from the order of the coordinate bench at Para 11 is extracted hereunder:-
" 11. The relevant portion of the order from the assesse's case in IT (TP)A no. 1765/Bang/2013 & IT(TP)A.1783/Bang/2013 dt 04.11.2015 for ay 2008-09 is extracted as under :
" 6.7 Infosys BPO Ltd.
IT(TP)A No. 383/Bang/2017 Page 14 of 20 6.7.1 As far as this company, chosen by the TPO as comparable, is concerned, the learned Authorised Representative for the assessee submitted that this company, being a wholly owned subsidiary of Infosys Technologies Ltd. would enjoy a premium in the market, due to brand value and goodwill of the parent company, whereas the assessee is a low end provider of BPO / ITES support services. It is submitted that Infosys BPO Ltd. incurred huge selling and marketing expenses and is not only a market leader but also has huge, breadth in terms of economies of scale with diversity and worldwide geographical dispersion of customers. It is submitted that in view of these factors, Infosys BPO Ltd. is functionally dissimilar and different from the assessee in the case on hand. In support of its proposition for excluding this company from the list of comparables, the learned Authorised Representative placed reliance on the decision of the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 wherein this company was excluded from the set of comparables.
6.7.2 Per contra, the learned Departmental Representative supported the orders of the TPO in including this company as a comparable to the assessee. 6.7.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that the coordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09 has excluded this company i.e. Infosys BPO Ltd. from the list of comparables to low end ITES / BPO support service providers as it is functionally different being an established market leader, enjoying huge brand value and goodwill, with huge economies of scale and diversity and geographical dispersion of customers. At Para 24 of its order, the co-ordinate bench has held as under :-
" (7) Infosys BPO Ltd
24. This company is listed at Sl.13 in the list of comparable companies chosen by the TPO. As far as this company is concerned, it is the submission of the ld. counsel for the assessee that this company has a brand value and therefore there would be significant influence in the pricing policy which will impact the margins. Schedule 13 to the profit & loss account of this company for the F.Y. 2007-08 shows that this company incurred huge selling and marketing expenses. Page 133 of the annual report of this company for the F.Y. 2007-08 shows that this company realizing its brand value has chosen to value the same on the basis of its earnings and that of Infosys. The brand value of the IT(TP)A No. 383/Bang/2017 Page 15 of 20 Assessee and Infosys has been valued at Rs.31,863 Crores.
Infosys BPO, being a subsidiary of Infosys, has an element of brand value associated with it. This is also clear from the presence of brand related expenses incurred by this company. Presence of a brand commands premium price and the customers would be willing to pay, for the services/products of the company. Infosys BPO is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factors will take this company out of the list of comparables. We therefore accept the contention of the assessee that this company cannot be regarded as a comparable."
Following the above cited decision of the co-ordinate bench of this Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) for Assessment Year 2008-09, we are of the view that in the case on hand also, where the assessee is only providing low end ITES / BPO support services, this company i.e. Infosys BPO Ltd. is to be excluded from the list of comparables to the assessee in the case on hand. We hold and direct the TPO accordingly.
Thus, the assessee has made out a case in its favour from the above decisions. Following them, the TPO is directed to exclude Accentia Technologies Ltd ,Acropetal Technologies Ltd & Infosys BPO Ltd from the list comparables and the assessee's corresponding appeal grounds are allowed."
12.3.2 As the facts of the case in the year under consideration are broadly the same as in the earlier years, as has been brought out from a perusal of the relevant portions of the Annual Report of this company, 'Infosys', and following the aforesaid decision of the coordinate bench of this Tribunal in the assessee's own case for the earlier asst. year 2011-12 (Supra), we hold that this company shall be excluded from the set of comparables. We hold and direct accordingly."
11. We find that this comparable was excluded on this basis that it is functionally different being an established market leader, enjoying immense brand value and goodwill, with huge economies of scale and geographical dispersion of customers. Respectfully following this Tribunal order, we hold that in the present case also, Infosys BPO Ltd. should be excluded in the final list of comparables in the ITES segment.
IT(TP)A No. 383/Bang/2017 Page 16 of 20
12. The second company for which there is request of the assessee for exclusion in ITES segment is BNR Udyog Ltd. In support of assessee's request for exclusion of this company, reliance has been placed by ld. AR of assessee on Tribunal order rendered in the case of M/s. Swiss Re Global Business Solutions India Pvt. Ltd. Vs. DCIT in IT(TP)A No. 2315/Bang/2016 for the same Assessment Year, copy of relevant pages available on paper book pages 2676 to 2678. In Para 2 of this Tribunal order, it is noted that this company is engaged in providing IT enabled back office services i.e. ITES and therefore, in the present case, this Tribunal order is applicable. As per Para nos. 5 to 8 of this Tribunal order, the issue was decided regarding exclusion of this company on this basis that it does not pass through the turnover filter because the turnover of this segment of BNR Udyog Ltd. is Rs. 1.47 Crores whereas the turnover of that assessee was Rs. 71.37 Crores and therefore, it was less than 10% of turnover of turnover of that company but while deciding the issue, the judgment of Hon'ble Delhi high Court rendered in the case of Chryscapital Investment Advisors (India) (P.) Ltd. Vs. DCIT (supra) was not considered and therefore, the assessee could not make out a case for exclusion of this company. At the best, this issue may be restored back to the file of AO/TPO for fresh decision in the light of this judgment of Hon'ble Delhi High Court rendered in the case of Chryscapital Investment Advisors (India) (P.) Ltd. Vs. DCIT (supra). We hold accordingly and restore this matter back to the file of AO/TPO for fresh decision in the light of this judgment of Hon'ble Delhi High Court rendered in the case of Chryscapital Investment Advisors (India) (P.) Ltd. vs. DCIT (supra) after providing adequate opportunity of being heard to assessee. We would like to mention that in support of assessee's request for exclusion of this comparable, reliance was placed on another judgment of Hon'ble Delhi High Court rendered in the case of PCIT Vs. M/s. Oracle (OFSS) BPO Services Pvt. Ltd. in ITA 124/2018 but this judgment is for Assessment Year 2007-08 and therefore not relevant.
13. Now the only remaining comparable which has to be discussed and decided is TCS e-Serve Ltd. Reliance has been placed on Tribunal order rendered in the case of Baxter India Pvt. Ltd. Vs. ACIT in ITA No. 6158/Del/2016 for the same IT(TP)A No. 383/Bang/2017 Page 17 of 20 Assessment Year, copy of relevant pages available on pages 2557 to 2559 of the paper book. When we examine this Tribunal order, we find that as per Para 2 of this Tribunal order, it was noted that this company is providing captive ITES to its AEs and therefore, this Tribunal order is applicable in the present case. The issue regarding exclusion of TCS e-Serve Ltd. was decided by Tribunal in that case as per paras 21 and 22 of Tribunal order and hence, for the sake of ready reference, these two paras are reproduced herein below from pages 2557 to 2559 of the paper book. The same read as under.
"21. So far as exclusion of TCS e-Serve Ltd. is concerned, we find this issue had came up before the Tribunal in assessee's own case in the immediately preceding assessment year. The Tribunal in ITA No.345/Del/2016 order dated 26.10.2016 for assessment year 2011-12 had directed to the exclusion of TCS e- Serve Ltd. from the list of comparables by observing as under :-
"18. We have considered the submissions of both the parties. It is not disputed that TCSe-Service was engaged, inter alia, in software development services and the segmental details between ITEs and SDS were not there in the annual report. Moreover, from the annual report it is evident that its brand value also was considerable, which added to it profitability substantially. As compared to this, assessee was rendering only human resource services to its AE, on which profit margin derived by it was quite reasonable. Further, we find that in the case of Actis Global Services Pvt. Ltd. (ITA no. 6175/Del/2015 for AY 2011-12, ITAT observed in regard to TCS-E-Serve Ltd., as under:
"22. Before us, the td. A; submitted that this company is engaged in services like software testing, verification and validation and data centre management services which falls under software development services, different from low end, low risk ITES segment. He further ... should be excluded.
24. We have carefully considered the rival submissions and also referred to page No. 247 of the paper book filed before us wherein relevant extracts from annual reports shows that it includes technical services like software testing, verification and validation of software at the time of implementation and data center management activities. It is engaged in BPO segment to the banking and financial service industries. Therefore, it is apparent that the assessee is engaged in BPO services. The coordinate Bench in the case of Equant Solutions India Pvt. Ltd. vs. CIT in ITA No. 120210el./2015 for A. Y. 2010-11 has held that it has IT(TP)A No. 383/Bang/2017 Page 18 of 20 used intangibles and use of data brand. Vide Para No. 24 of that order, it was held to be excluded compared to low risk ITES company like Appellant. Further, the decision of the coordinate Bench in the case of Ameriprise India Pvt. Ltd. has considered in ITA No. 701410el.l2014 at Para No. 12 has excluded this company as under:
12. TCS e-Serve Ltd.
12.1 The assessee objected ... Thus, the entity level figures render this company as unfit for comparison. Following the above reasons also taken note in the case of TCS e-Serve International Limited, we order for the elimination of this company from the final set of comparables. "
Therefore, following the decision of the coordinate Bench, we direct exclusion of TCS E-Serve Limited from the final list of comparables. "
19. Further, in the case of FIL India Business Services Pvt. Ltd. (ITA no. 6867/Del/2014) for AY 2010-11, Tribunal has observed in regard to TCS E-serve Ltd., segment as under:
"56. We have considered the rival submissions and perused the material available on record. This comparable has been directed to be excluded in the case of Equant Solutions India Pvt. Ltd. (supra). The business profile of Equant Solutions India Pvt. Ltd. (supra), inter alia, comprised of rendering IT enabled network management and other back office support services, which included remote monitoring and maintenance of Equant global network platforms and services, coordination, remote configuration and implementation of quality customer networking solutions. The assessee primarily undertakes to provide services for European and the Indian asset management company based in Mumbai. The assessee is primarily catering to the retail site (individual investor) to Fidelity Group business.
Thus, broadly the functions performed by assessee are similar to that of Equant Solutions India Pvt. Ltd. (supra) and, therefore, this company deserves to be excluded. We find that functions performed by TCS-e-Serve Ltd. included rendering of technical services like software testing etc., which required skilled persons. As far as the objection regarding related party transaction is concerned, we are in agreement with the reasoning given by ORP that since this company was taken over by TCS group, therefore, there was no question of any separate details being given about related party transaction. However, keeping in view the various factors, pointed out by Id. counsel for the assessee, which we have noted earlier, this company cannot be taken as a comparable to the tested party."
IT(TP)A No. 383/Bang/2017 Page 19 of 20
20. Therefore, we are in agreement with the submission of ld. counsel that TCS e- Serve Ltd. is to be excluded while computing the average margin of comparables. We direct accordingly."
22. Respectfully following the decision of the order of the Tribunal in assessee's own case in the immediately preceding assessment year and in absence of any distinguishable features brought to our notice by ld. DR, we direct the TPO/Assessing Officer to exclude the TCS e-Serve Ltd. from the list of comparables while computing the average margin of the comparables. We hold and direct accordingly."
14. From the above paras reproduced from this Tribunal order, it is seen that the Tribunal has decided this issue in favour of the assessee by following the Tribunal order in the case of the same assessee for Assessment Year 2011-12 with a further finding that there was no distinguishable features brought to the notice of Tribunal by ld. DR of revenue in the present year. Hence by respectfully following this Tribunal order, we direct the AO/TPO to exclude TCS e-Serve Ltd. from the final list of comparables for ITES segment. In this manner, ground nos. 11 and 13 are allowed whereas ground no. 12 is allowed for statistical purposes.
15. In the result, the appeal filed by the assessee is partly allowed in the terms indicated above.
Order pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/-
(N.V. VASUDEVAN) (ARUN KUMAR GARODIA)
Judicial Member Accountant Member
Bangalore,
Dated, the 06th April, 2018.
/MS/
IT(TP)A No. 383/Bang/2017
Page 20 of 20
Copy to:
1. Appellant 4. CIT(A)
2. Respondent 5. DR, ITAT, Bangalore
3. CIT 6. Guard file
By order
Senior Private Secretary,
Income Tax Appellate Tribunal,
Bangalore.