M/s. Global Logic India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 122/DEL/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91066 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 4 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-06-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 01-06-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 07-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GUNJAN P RASAD; GAURAV DUDEJA SENIOR D
• Assessee Lawyers: ASHUTOSH GUPTA
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND S HRI C.M. GARG, JM ITA NO. 122 /DEL/20 1 3 ASSESSMENT YEAR : 200 8 - 09 GLOBAL LOGIC INDIA PVT. LTD., G - 52, VARDHMAN CORPORATE PLAZA, NETAJI SUBHAS PLACE, NEW DELHI. PAN : AABCI2526F VS. DCIT, CIRCLE 12(1) , NEW DELHI. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI AJAY VOHRA, SR. ADVOCATE , SHRI NEERAJ JAIN, ADVOCATE , SH. ABHISHEK AGARWAL CA & SH. ASHUTOSH GUPTA, CA DEPARTMENT BY : S HRI GUNJAN PRASAD, CIT, DR & SH. GAURAV DUDEJA , SENIOR DR. DATE OF HEARING : 03.06.2015 DATE OF PRONOUNCEMENT : 04 .06.2015 ORDER PER R.S. SYAL, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE ASSESSING OFFICER (AO) U NDER SECTION 143(3) READ WITH SECTION 144C ITA NO.122/DEL/2013 2 OF THE INCOME - TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT ) IN RELATION TO THE ASSESSMENT YEAR 200 8 - 09 . 2. THE ONLY ISSUE IN THIS APPEAL IS A CHALLENGE TO THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOU NTING TO RS.1 2, 8 2 ,48, 777 / - . 3. SUCCINCTLY, THE ASSESSEE IS AN INDIAN COMPANY, A WHOLLY OWNED SUBSIDIARY OF GLOBAL LOGIC, US. IT IS ENGAGED MAINLY IN THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO ITS OVERSEAS GROUP COMPANIES. THE ASSESSEE REPORTED TWO INTERNATIONAL TRANSACTIONS AS PER ITS AUDIT REPORT IN FORM NO.3CEB. THE ENTIRE CONTROVERSY IN THIS APPEAL IS RESTRICTED TO THE INTERNATIONAL TRANSACTION OF P ROVISION OF SOFTWARE DEVELOPMENT SERVICES WITH THE TRANSACTED VALUE OF RS.158,09,04,878 / - . THE OTHER INTERNATIONAL TRANSACTION OF `R EIMBURSEMENT OF EXPENSES HAS BEEN ACCEPTED BY THE AUTHORITIES TO BE AT ARM S LENGTH PRICE (ALP). ON A REFERENCE MADE BY THE AO TO THE TRANSFER PRICING OFFICER (TPO) FOR THE DETERMINATION OF THE ALP , THE LATTER NOTICED THAT THE ASSESSEE EMPLOYED TRANSACTIONAL NET MARGIN METHOD (TNMM) TO DEMONSTRATE THAT TH E INTERNATIONAL TRANSACTION OF `P ROVISION OF SOFTWARE DEVELOPMENT SERVICES ITA NO.122/DEL/2013 3 WAS AT ALP. THE ASSESSEE CHOSE P ROFIT L EVEL I NDICATOR (PLI) OF O PERATING P ROFIT/ T OTAL C OST (OP/TC). THE ASSESSEE SELECTED 23 COMPANIES AS COMPARABLE . THE MEAN MARGIN OF SUCH COMPARABLES , ON THE BASIS OF CURRENT/ MULTIPLE - YEAR S DATA WAS COMPUTED AT 14.84%. AS THE ASSESSEE S OP/TC STOOD AT 12.47%, I T WAS CLAIMED THAT T HE INTERNATIONAL TRANSACTIONS WERE AT ALP. THE TPO SHORTLISTED 19 COMPANIES AS COMPARABLE AND COMPUTED THE ARITHMETICAL MEAN OF THEIR PLI AT 24.82% , AFTER ALLOWING WORKING CAPITAL ADJUSTMENT OF 1.38% . IN SUCH CALCULATION, THE TPO USED CURRENT YEAR DATA ALO NE. BY APPLYING ARM S LENGTH MARGIN AT 24.82%, THE TPO WORKED OUT THE AMOUNT OF TRANSFER PRICING ADJUSTMENT AT RS.18,95,48,030/ - . THE ASSESSEE REMAINED PARTLY SUCCESSFUL BEFORE THE DISPUTE RESOLUTION PANEL (DRP) , WHICH REDUCED THE AMOUNT OF ADDITION ON A CCOUNT OF TRANSFER PRICING ADJUSTMENT TO RS.12,82,48,777/ - AS AGAINST RS.18.95 CRORE PROPOSED BY THE TPO. THE AO MADE ADDITION O F RS.12.82 CRORE AND ODD IN THE FINAL ASSESSMENT ORDER PASSED ON 19.10.2012. THE ASSESSEE IS AGGRIEVED AGAINST THIS ADDITION M ADE TOWARDS TRANSFER PRICING ADJUSTMENT. ITA NO.122/DEL/2013 4 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS ACCEPTED ALL THE ASPECTS OF THE TRANSFER PRICING ANALYSIS CARRIED OUT BY THE TPO EXCEPT THE INCLUSION OF THE FOL LOWING COMPANIES IN THE LIST OF COMPARABLES: - I. AVANI CINCOM TECHNOLOGIES II. INFOSYS LTD. III. KALS INFORMATION SYSTEMS LTD. (SEG.) IV. PERSISTENT SYSTEMS LTD. V. TATA ELXSI (SEG.) VI. WIPRO LTD (SEG.) 5. IN ORDER TO ANALYSE THE COMPARABILITY OR OTHERWISE OF THE ABOVE REFERRED COMPANIES, IT IS NECESSARY TO CONSIDER THE FUNCTIONAL PROFILE OF THE ASSESSEE UNDER THIS INTERNATIONAL TRANSACTION. THE TPO HAS RECORDED ON PAGE 2 OF HIS ORDER THAT THE ASSESSEE ` IS ENGAGED IN THE PROV ISION OF SOFTWARE DEVELOPMENT SERVICES TO ITS OVERSEAS GROUP COMPANY . APART FROM THAT, THERE IS NO DESCRIPTION OF THE NATURE OF ACTIVITY CARRIED OUT BY THE ASSESSEE IN THE TPO S ORDER. ON ADVERT ING TO THE T RANSFER PRICING STUDY REPORT, A COPY OF WHICH I S AVAILABLE ON PAGES 40 ONWARDS OF THE ITA NO.122/DEL/2013 5 PAPER BOOK, WE FIND SOME FURTHER ELABORATION OF THE NATURE OF ACTIVITY DONE UNDER THE INTERNATIONAL TRANSACTION OF P ROVISION OF SOFTWARE DEVELOPMENT SERVICES. P AGE 21 OF THE TP STUDY REPORT INDICATES THAT THE ASSES SEE RENDERS SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISES (AES) AND GETS REMUNERATED ON A COST PLUS MARK - UP BASIS FOR THESE SERVICES . THERE IS A NARRATION OF `F UNCTIONS PERFORMED IN PARA 4.02.2 OF THE TP STUDY REPORT QUA THE INTERNATIONAL TRANSACTION OF `P ROVISION OF SOFTWARE DEVELOPMENT SERVICES . IT CAN BE OBSERVED THAT THE FUNCTIONS PERFORMED BY THE ASSESSEE UNDER THIS SEGMENT ARE P ROVISIONS OF S ERVICES, T ESTING & Q UALITY CONTROL, P ROJECT M ANAGEMENT, A DMINISTRATIVE S UP PORT AND, TO A LIMITED EXTENT, THE M ARKETING FUNCTIONS. THE FOLLOWING FUNCTIONS HAVE BEEN REPORTED TO HAVE BEEN DONE BY THE ASSESSEE UNDER THE ABOVE REFERRED SUB - HEADS: - MARKETING FUNCTION GLOBALLOGIC INC AND GIPL S MARKETING STAFF INITIATES CONTACT DIRECTLY WITH A POTENTIAL CLIENT . THEREAFTER, GLOBALLOGIC INC PREPARES AND SUBMITS A PROPOSAL TO THE CLIENT, IRRESPECTIVE OF WHETHER THE CLIENT LEAD IS PROVIDED BY GIPL OR GLOBALLOGIC INC. , GIVING THE SCOPE AND THE TECHNICAL ASPECTS OF THE PROJECT. BID C OSTS ARE BORNE BY GLOBALLOGIC INC. ITA NO.122/DEL/2013 6 HENCE, THOUGH PRIMARY RESPONSIBILITY FOR IDENTIFICATION OF CUSTOMERS AND MARKETING THE GLOBALLOGIC GROUPS SERVICES LIES WITH GLOBALLOGIC INC., GIPL ALSO UNDERTAKES MARKETING FUNCTION TO THE EXTENT OF IDENTIFICATION OF CL IENT LEADS. PROVISION OF SERVICES GIPL IS RESPONSIBLE FOR DEVELOPMENT OF SOFTWARE UNDER THE PROJECTS SUB - CONTRACTED TO IT BY GLOBALLOGIC INC , GIPL EMPLOYS THE RESOURCES REQUIRED FOR DEVELOPMENT OF SOFTWARE, BOTH IN RESPECT OF ON - SITE OR OFF - SHORE PROJECTS. HOWEVER GLOBALLOGIC INC, RETAINS OVERALL PROJECT MANAGEMENT RESPONSIBILITY FOR THE ENTIRE CONTRACT WITH THE END - CUSTOMER. THIS INCLUDES ALL FIN ANCIAL RESPONSIBILITY FOR THE WORK A S WELL AS BILLING. TESTING & QUALITY CONTROL THE LAST STEP INVOLVES TESTING THE SOFTWARE THAT HAS BEEN DEVELOPED . GIPL HAS THE RESPONSIBILITY OF TESTING THE SOFTWARE. GIPL HAS QUALITY CONTROL DEPARTMENTS WHICH ADOPTS T HE QUALITY CONTROL PROCEDURES AT PAR WITH THE INDUSTRY. THIS DEPARTMENT IS INTER ALIA INVOLVED IN PROCESS IMPROVISATIONS, MAKING OF NEW PROCESSES, QUALITY AUDITS, CUSTOMER SURVEYS, ETC . PROJECT MANAGEMENT GIPL IS RESPONSIBLE FOR ENSURING TIMELY DELIVERY O F THE SOFTWARE DEVELOPED BY IT UNDER THE CONTRACT. HOWEVER, GLOBALLOGIC INC IS ULTIMATELY RESPONSIBLE TO DELIVER THE SOFTWARE TO THE CLIENT. ADMINISTRATIVE SUPPORT WITH RESPECT TO PERSONNEL RENDERING ONSITE AND OFF SHORE SERVICES, GIPL IS RESPONSIBLE FOR PROVISIONS OF ADMINISTRATIVE SUPPORT WHICH INCLUDES FUNCTIONS SUCH AS ARRANGING WORK PERMITS/VISAS, FOREIGN EXCHANGE, PAYMENT OF ALLOWANCES, ETC . 6. AN OVERVIEW OF THE ABOVE ACTIVITIES CARRIED OUT BY THE ASSESSEE DIVU LGES THAT IT IS MAINLY RESPONSIBLE FOR THE DEVELOPMENT OF SOFTWARE ITA NO.122/DEL/2013 7 UND ER THE PROJECTS SUB - CONTRACTED TO IT BY GLOBALLOGIC INC . SUCH DEVELOPED SOFTWARE ARE TO BE TESTED BY THE ASSESSEE. THE TESTING DEPARTMENT OF THE ASSESSEE, APART FROM TESTING THE SOFTWARE DEVELOPED BY IT, ALSO UNDERTAKES PR OCESS IMPROVISATIONS, MAKING OF NEW PROCESSES, QUALITY AUDITS . AFTER DEVELOPING AND TESTING A SOFTWARE, THE ASSESSEE IS REQUIRED TO ENSUR E THAT SUCH DEVELOPED SOFTWARE ARE TIMELY DELIVERED. APART FROM RENDERING THE ABOVE SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES, THE ASSESSEE IS ALSO PROVIDING `M ARKETING SUPPORT SERVICE, FOR WHICH IT HAS SEPARATE `MARKETING STAFF . SUCH MARKETING STAFF DIRECTLY CONTACTS WITH POTENTIAL CUSTOMERS ALONG WITH GLOBALLOGIC INC. OTHER THAN THAT, THE ASSESSEE IS ALSO PROVIDING ` ADMINISTRATIVE SUPPORT SERVICES TO ITS AES WHICH INCLUDE ARRANGING WORK PERMITS/VISAS, FOREIGN EXCHANGE, PAYMENT OF ALLOWANCES, ETC. THUS IT IS MANIFEST THAT GOING BY THE TP STUDY REPORT FOR THE YEAR UNDER CONSIDERATION , THE ASSESSEE NOT ONLY PROVID ED SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES BUT ALSO MARKETING AND ADMINISTRATIVE SUPPORT SERVICES TO ITS AES . ITA NO.122/DEL/2013 8 7 . WHEN WE PERUSE THE A GREEMENT DATED 10.11.2006 EFFECTIVE FROM 1.4.2006 BE TWEEN THE ASSESSEE AND GLOBALLOGIC INC. UNDER WHICH THE ASSESSEE WAS ASSIGNED THE TASK OF RENDERING `S OFTWARE D EVELOPMENT AND OTHER ALLIED S ER VICES , IT TRANSPIRES THAT CLAUSE 1 OF THE AGREEMENT CONTAIN ING - ` SCOPE OF WORK STIPULATES THAT THE ASSESSEE SHALL CARRY OUT SOFTWARE DEVELOPMENT; MAINTENANCE AND REPAIR WORK; TECHNICAL TESTING AND ANALYSIS; QA; IT AND IT ENABLED SERVICES. THIS IS STATED TO BE THE ONLY AGREEMENT UNDER WHICH THE SERVICES UNDER CONSIDERATION WERE RENDERED. IT CAN BE SEEN T HAT TO SOME EXTENT, THERE IS AN APPARENT CONFLICT BETWEEN THE AGREEMENT AND THE TRANSFER PRICING STUDY REPORT INASMUCH AS THE LATTER , APART FROM THE AFORE SAID SERVICES SET OUT IN THE AGREEMENT , ALSO REFERS TO THE RENDERING OF MARKETING FUNCTION AND ADMINIS TRATIVE SUPPORT SERVICES, WHICH DO NOT FIGURE IN T HE AGREEMENT. AS THE TPO HAS TREATED THE ENTIRE AMOUNT UNDER THIS INTERNATIONAL TRANSACTION AS CONSIDERATION FOR RENDERING `SOFTWARE DEVELOPMENT SERVICES AND BENCHMARKED IT ACCORDINGLY , WITHOUT SEPARATELY TAKING COGNIZANCE OF ANY MARKETING AND ADMINISTRATIVE SERVICES , WE LEAVE THIS ISSUE HERE ONLY AND DO NOT PROPOSE TO START EVERYTHING AFRESH BY SETTING ITA NO.122/DEL/2013 9 UP A N ALTOGETHER NEW CASE. IT IS FOR THE TPO TO ANALYZE THE FUNCTIONS PERFORMED IN PR OPER PERSPECTIVE AND IN THE LIGHT OF THE MATERIAL AVAILABLE ON RECORD AND THEN REACH A POSITIVE CONCLUSION ABOUT THE NATURE OF ACTIVITY CARRIED OUT BY THE ASSESSEE IN AN INTERNATIONAL TRANSACTION. 8. WITH THE ABOVE UNDERSTANDING OF THE NATURE OF SOFTWAR E DEVELOPMENT AND MAINTENANCE FUNCTIONS CARRIED OUT BY THE ASSESSEE , WE WILL EXAMINE WHETHER OR NOT THE ABOVE SIX COMPANIES ARE COMPARABLE . BEFORE THAT, I T IS PERTINENT TO MENTION THAT FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, NAMELY, 2007 - 08, THE TPO CHOSE CERTAIN COMPANIES AS COMPARABLE FOR THE SIMILAR INTERNATIONAL TRANSACTI O N OF `PROVISION OF SOFTWARE DEVELOPMENT SERVICES . T HE APPEAL FILED BY THE ASSESSEE FOR SUCH YEAR IN ITA NO.580/DEL/2011 HAS SINCE BEEN DISPOSED OF BY THE TRIBUNAL VIDE ITS ORDER DATED 22.1.2015 , A COPY OF WHICH IS AVAILABLE ON RECORD. IT CAN BE NOTICED FROM SUCH TRIBUNAL ORDER THAT THE TPO TREATED SIMILAR INTERNATIONAL TRANSACTION , AS HAS ALSO BEEN TRANSACTED FOR THE INSTANT YEAR , AS `P ROVISION OF SOFTWARE DEVELOPMENT SERVICES . SUCH SERVICES HAVE BEEN PROVIDED TO THE AES, BOTH IN THE PRECEDING YEAR AS WELL AS THE ITA NO.122/DEL/2013 10 CURRENT YEAR , IN TERMS OF THE COMMON A GREEMENT EFFECTIVE FROM 1.4.2006. THE CRUX OF THE MATTER IS THAT THE NATURE OF SERVICES RENDERED BY THE ASSESSEE IN THE CURRENT YEAR UNDER TH E EXTANT INTERNATIONAL T RANSACTION ARE SIMILAR TO THOSE RENDERED IN THE PRECEDING YEAR. AVANI CINCOM TECHNOLOGIES 9 . THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES BY NOTICING THAT AS PER THE INFORMATION AVAILABLE IN THE PUBLIC DOMAIN, IT IS A SOFTWARE DEVELOPMENT AND CONSULTING COMPANY. AFTER SEEKING CERTAIN INFORMATION FROM THE COMPANY U/S 133(6) OF THE ACT, THE TPO PRIMA FACIE FORMED THE VIEW ABOUT THE COMPARABILITY OF THIS COMPANY . ON BEING CALLED UPON TO SHOW CAUSE AS TO WHY THIS COMPANY BE NOT CONSIDERED AS COMPARABLE, THE ASSESSEE SUBMITTED THAT DATA OF THIS COMPANY FOR THE YEAR IN QUESTION WAS NOT AVAIL ABLE IN THE PUBLIC DOMAIN AND, ALSO IT WAS FUNCTIONALLY DIFFERENT . REJECTING THE ASSESSEE S CONTENTION, THE TPO TREATED THIS COMPANY AS COMPARABLE. THE ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE DRP AS WELL. ITA NO.122/DEL/2013 11 10 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PE RUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THIS COMPANY WAS CONSIDERED AS COMPARABLE BY THE TPO IN THE PRECEDING YEAR AS WELL. THE TRIBUNAL IN ITS ORDER HAS HELD I T TO BE NOT COMPARABLE. THE RELEVANT DISCUSSION HAS BEEN MADE IN PARAS 9 A ND 10 OF THE ORDER. IT HAS BEEN NOTICED IN THE ORDER THAT THOUGH THIS COMPANY IS A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER, I T IS ALSO UTILIZING ITS OWN SOFTWARE IN RENDERING SUCH SERVICES. RELYING ON THE ORDER PASSED BY THE TRIBUNAL IN THE CASE OF MOTOROLA SOLUTIONS INDIA PVT. LTD. VS. ACIT (2015) 152 ITD 0158 (DELHI) , THE TRIBUNAL ORDERED FOR THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. IN REACHING THIS CONCLUSION, THE TRIBUNAL ALSO OBSERVED THAT APART FROM RENDERING SOFTWARE DEVEL OPMENT SERVICES, THIS COMPANY WAS ALSO E NGAGED IN THE SALE OF SOFTWARE PRODUCTS AND THE ACCOUNTS MAINTAINED BY IT WERE AT ENTITY LEVEL WITHOUT THERE BEING ANY SEGREGATION O F REVENUE FROM SOFTWARE DEVELOPMENT SEGMENT. ADVERTING TO THE FACTS O F THE INSTANT YEAR, IT IS OBSERVED THAT THE ASSESSEE SPECIFICALLY ARGUED BEFORE THE TPO THAT THE DATA FOR THE INSTANT YEAR WAS NOT AVAILABLE WHICH OBJECTION WAS ALSO REPEATED BEFORE THE DRP, BUT, WITHOUT ANY SUCCESS. ITA NO.122/DEL/2013 12 BE THAT AS IT MAY, THE FACT THAT THIS COMPANY IS ALS O ENGAGED INTO SOFTWARE PRODUCTS, APART FROM RENDERING SOFTWARE DEVELOPMENT SERVICES , HAS NOT BEEN CONTROVERTED BY THE LD. DR WITH ANY COGENT MATERIAL. RESPECTFULLY FOLLOWING THE VIEW TAKEN BY THE TRIBUNAL IN THE ASSESSEE S OWN CASE FOR THE IMMEDIATELY PR ECEDING YEAR, WE ORDER FOR THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. INFOSYS TECHNOLOGIES LTD . 11 . THE TPO NOTICED THAT THIS COMPANY WAS FINDING PLACE IN THE ACCEPT/REJECT MATRIX BUT WAS REJECTED IN THE TP DOCUMENTATION BY CLAIMING THAT I T FAILED FUNCTIONAL AREA COMPARABILITY. THE TPO FOUND THIS COMPANY TO BE INTO SOFTWARE DEVELOPMENT SERVICES QUALIFYING ALL THE FILTERS APPLIED BY HIM. THE ASSESSEE RAISED CERTAIN OBJECTIONS AGAINST THE INCLUSION OF THIS COMPANY, BUT WITHOUT ANY SUCCESS. THE TPO COMPUTED OPERATING PROFIT MARGIN OF THIS COMPANY AT 40.4 1 % AND INCLUDED IT IN THE FINAL LIST OF COMPARABLES. THE ASSESSEE IS AGGRIEVED AGAINST THE INCLUSION OF THIS COMPANY IN THE ULTIMATE SET OF COMPARABLES. ITA NO.122/DEL/2013 13 12 . WE HAVE CONSIDERED THE RIVAL SUBM ISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT CAN BE SEEN THAT THE TPO HAS INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES BY REJECTING THE ASSESSEE S CONTENTION ABOUT THE BRAND OF THIS COMPANY HELPING IN EARNING HUGE PROFITS AND ALSO THE BRAND - RELATED PRO DUCTS SWELLING THE ULTIMATE PROFIT RATE OF THIS COMPANY. WE FIND THAT THE ASSESSEE IS A CAPTIVE UNIT RENDERING SERVICES TO ITS AE ALONE WITHOUT ACQUIRING ANY INTELLECTUAL PROPERTY RIGHTS IN THE WORK DONE BY IT IN THE DEVELOPMENT OF SOFTWARE. THE HON BLE DELHI HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES (P) LTD. (2013) 219 TAXMANN 2 6 (DEL) CONSIDERED THE GIANTNESS OF INFOSYS LTD., IN TERMS OF RISK PROFILE, NATURE OF SERVICES, NUMBER OF EMPLOYEES, OWNERSHIP OF BRANDED PRODUCTS AND BRAND RELATED PROFITS, ETC. IN COMPARISON WITH SUCH FACTORS PREVAILING IN THE CASE OF AGNITY INDIA TECHNO LOGIES PVT. LTD., BEING, A CAPTIVE UNIT PROVIDING SOFTWARE DEVELOPMENT SERVICES WITHOUT HAVING ANY IP RIGHTS IN THE WORK DONE BY IT. AFTER MAKING COMPARISON OF VARIOUS FACTORS AS ENUMERATED ABOVE, THE HON BLE DELHI HIGH COURT HELD INFOSYS LTD. T O BE INCOM PARABLE WITH AGNITY INDIA TECHNOLOGIES PVT. LTD. THE FACTS OF THE INSTANT CASE ARE ITA NO.122/DEL/2013 14 MORE OR LESS SIMILAR INASMUCH AS THE EXTANT ASSESSEE IS ALSO A CAPTIVE SERVICE PROVIDER WITH A LIMITED NUMBER OF EMPLOYEES AT ITS DISPOSAL AND ALSO NOT OWNING ANY BRANDED PR ODUCTS WITH NO EXPENDITURE ON R&D ETC. WHEN WE CONSIDER ALL THE ABOVE FACTORS IN A HOLISTIC MANNER, THERE REMAINS ABSOLUTELY NO DOUBT IN OUR MIND THAT INFOSYS TECHNOLOGIES LTD. I S INCOMPARABLE WITH THE ASSESSEE COMPANY. RESPECTFULLY FOLLOWING THE JUDGME NT OF THE HON BLE JURISDICTIONAL HIGH COURT IN AGNITY INDIA (SUPRA) , WE HOLD THAT INFOSYS TECHNOLOGIES LTD., CANNOT BE TREATED AS COMPARABLE WITH THE ASSESSEE COMPANY. THIS COMPANY IS, THEREFORE, DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. K ALS INFORMATION SYSTEMS LTD. (SEG.) 13 . THE ASSESSEE REJECTED THIS COMPANY IN ITS TP DOCUMENTS BY CONSIDERING IT AS FUNCTIONALLY DIFFERENT. THE TPO, ON THE BASIS OF CERTAIN INFORMATION C O LLE CTE D U/S 133(6) FROM THE COMPA N Y , OBSERVED THAT IT S BUSINESS ACTIVITY WAS INTO TWO SEGMENTS, NAMELY, (I) S OFTWARE DEVELOPMENT SERVICES; AND (II) T RAINING. BY CONSIDERING THE DATA AVAILABLE BEFORE HIM, THE TPO INCLUDED THE S OFTWARE DEVE LOPMENT ITA NO.122/DEL/2013 15 SERVICES SEGMENT INTO THE LIST OF COMPARABLES. THE ASSESSEE IS AGGRIEVE D THE INCLUSION OF THIS COMPANY ON SEGMENTAL LEVEL . 14 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE HAVE ALSO GONE THROUGH THE A NNUAL REPORT OF THIS COMPANY WHICH IS AVAILABLE ON PAGES 349 ONWARDS OF THE PAPER BOOK. IT CAN BE OBSERVED FROM PAGE 358 OF THE PAPER BOOK THAT THE SE GMENTAL INFORMATION PERTAINS TO `A PPLICATION SOFTWARE AND `T RAINING . UNDER THE `A PPLICATION SOFTWARE SEGMENT, THE COMPANY HAS ALSO INCLUDED ITS INCOME FROM SOFTWARE PRODUCTS. NOTE 1 TO TH E F INANCIAL STATEMENTS ON PAGE 357 OF THE PAPER BOOK EVIDENTLY PROVIDES THAT : T HE COMPANY IS ENGAGED IN DEVELOPMENT OF S OFTWARE AND S OFTWARE PRODUCTS SINCE ITS INCEPTION. NOTE 2(B) ON PAGE 357 OF THE PAPER BOOK ALSO STATES THAT : T HE COMPANY DERIVES ITS REVENUES PRIMARILY FROM SOFTWARE SERVICES AND SOFTWARE PRODUCTS. SINCE TH IS COMPANY IS INTO THE BUSINESS OF SOFTWARE PRODUCTS AND ALSO SOFTWARE DEVELOPMENT AND HAS MERGED THE REVENUE FROM BOTH THE STREAMS UNDER THE OVERALL SEGMENT OF A PPLICATION SOFT WARE , WHICH HAS BEEN TAKEN BY THE TPO FOR INCLUSION IN THE FINAL SET ITA NO.122/DEL/2013 16 OF COMPARABLES, THIS COMPANY LOSES THE TAG OF COMPARABILITY VIS - A - VIS THE ASSESSEE COMPANY WHICH IS EXCLUSIVELY ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES ON A CONTRACT BASIS TO ITS AES AS A CAPTIVE UNIT. IT IS MANIFEST THAT UNDER THE CIRCUMSTANCES PREVAILING IN THE CASE OF THIS COMPA N Y, T HE IMPACT O F THE PROFIT FROM THE SALE/LICENCE OF SOFTWARE PRODUCTS ON THE OVERALL PROFITABILITY OF THE A PPLICATION SOFTWARE SEGMENT CANNOT BE SEGREGATED . TO WHAT EXTENT THE OVERALL PROFITS OF THIS COMPANY HAVE BEEN INFLUENCED BY THE REVENUES FROM SOFTWARE PRODUCTS, CANNOT BE PRECISELY ASCERTAINED. IN VIEW OF THE AFOREGOING DISTINGUISHING FACTS, THIS COMPANY CEASES TO BE COMPARABLE. WE ORDER FOR THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. PERSISTENT SYSTEMS LTD . 15 . THIS COMPANY WAS ORIGINALLY SELECTED BY THE ASSESSEE IN ITS TP STUDY. HOWEVER, IT WAS CONTENDED BEFORE THE TPO THAT IT IS A PRODUCT COMPANY AND BECAUSE OF LACK OF SEGMENTAL DATA, THE SAME CANNOT BE CONSIDERED AS COMPARABLE. THE TPO, AFTER SEEKING INFORMATION U/S 133(6) OF THE ACT FROM THIS COMPANY, OBSERVED THAT 96% OF ITS TOTAL ITA NO.122/DEL/2013 17 OPERATING REVENUES FROM S OFTWARE DEVELOPMENT SERVICES ARE FROM SOFTWARE DEVELOPMENT SERVICES. HE IGNORED THE FIGURE OF REVENUE FROM PRODUCT LICENCES AT RS.28.29 CRORE AND PROCEEDED TO CONSIDER THIS COMPANY AS COMPARABLE AT ENTITY LEVEL. THE ASSESSEE IS AGGRIEVED BEFORE US. 16 . W E HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THIS COMPANY H AS BEEN EXCLUDED FROM THE LIST OF COMPARABLES BY THE TRIBUNAL IN ITS ORDER FOR THE IMMEDIATELY PRECEDING YEAR IN THE ASSESSEE S OWN CASE BY R ELYING ON EXTRAORDINARY EVENTS , SUCH AS , MERGER OR ACQUISITION, ETC. THERE ARE NO SUCH EXTRAORDINARY EVENTS IN THE CURRENT YEAR. HOWEVER, WE FIND FROM THE A NNUAL REPORT OF THIS COMPANY , THAT IT IS A SOFTWARE PRODUCT COMPANY WHICH IS APPARENT FROM PAGE 38 3 OF THE PAPER BOOK. IT HAS BEEN MENTIONED THAT IT : `I S DIFFERENT FROM MOST OF THE OUTSOURCING FIRMS BECAUSE WE ARE FOCUSED EXCLUSIVELY ON THE SOFTWARE PRODUCT DEVELOPMENT. THE SAME THING HAS BEEN MENTIONED ON PAGE 388 OF THE PAPER BO OK THAT PERSISTENT S YSTEMS LTD. : IS PREDOMINANTLY ENGAGED IN ITA NO.122/DEL/2013 18 OUTSOURCED S OFTWARE P RODUCT D EVELOPMENT SERVICES FOR INDEPENDENT S OFTWARE V ENDORS. WHEN WE PERUSE PAGE 389 OF THE PAPER BOOK, IT BECOMES MANIFEST THAT APART FROM EARNING REVENUE FROM LICENSING OF PRODUCTS, I T HAS ALSO EARNED REVENUE FROM R OYALTY WHICH IS RECOGNIZED ON SALE OF PRODUCTS IN ACCORDANCE WITH THE TERMS OF THE RELEVANT AGREEMENT. THE LD. AR CONTENDED THAT REVENUE FROM R OYALTY WAS CONSIDERED BY THIS COMPANY AS PART OF REVENUE FROM `S OFTWARE DEVELOPME NT SERVICES SEGMENT , WHICH HAS NOT BEEN CONTROVERTED BY THE LD. DR WITH ANY COGENT MATERIAL. THE BANGALORE BENCH OF THE TRIBUNAL IN 3 DPLM SOFTWARE SOLUTIONS LTD. VS. DCIT (IT A NO.1303/BANG./20 1 2 VIDE ITS ORDER DATED 28.11.2013, FOR THE IDENTICAL ASSESSME NT YEAR, I.E., 2008 - 09, HAS HELD PERSISTENT SYSTEMS LTD., TO BE A COMPANY ENGAGED IN PRODUCT DEVELOPMENT AND PRODUCT DESIGN SERVICES AND HENCE FUNCTIONALLY DIFFERENT FROM A SOFTWARE DEVELOPMENT SERVICES PROVIDER. SIMILAR VIEW HAS BEEN TAKEN IN FCG SOFTWAR E SERVICES (INDIA) (P) LTD. VS. ITO (ITA NO.1242/BANG./2012) VIDE ITS ORDER, A COPY OF WHICH IS AVAILABLE ON RECORD. AGAIN, IN LG SOFT INDIA (P) LTD. VS. DCIT (2014) 48 T AXMANN.COM 237 (BANGALORE - TRIB.) THIS COMPANY HAS BEEN HELD TO BE ITA NO.122/DEL/2013 19 FUNCTIONALLY DIFFERENT FROM A SOFTWARE DEVELOPMENT SERVICE PROVIDER COMPANY. IN VIEW OF THE ABOVE DISCUSSION AND RELYING ON SO MANY PRECEDENTS FAVOURING THE ELIMINATION OF THIS COMPANY , WE ARE OF THE CONSIDERED OPINION THAT PERSISTENT SYSTEMS LTD., CANNO T BE CONSIDERED AS COMPARABLE WITH THE ASSESSEE COMPANY. THE SAME IS, THEREFORE, DIRECTED TO BE EXCLUDED. TATA ELXSI (SEG.) 17 . THIS COMPANY WAS REJECTED BY THE ASSESSEE IN ITS TP DOCUMENTS BY CLAIMING IT TO BE ` FUNCTIONALLY DIFFERENT . THE TPO OBSERVED FROM THE A NNUAL REPORT OF THIS COMPANY THAT IT HAS TWO SEGMENTS, NAMELY, S OFTWARE DEVELOPMENT AND SERVICES SEGMENT AND S YSTEMS INTEGRATION AND SUPPORT SEGMENT. NOTICING THE SEGMENTAL DETAILS, THE TPO CONSIDERED `S OFTWARE DEVELOPMENT AND SERVICE SEGMENT AS COMPARABLE. THE ASSESSEE S OBJECTIONS AGAINST THE INCOMPARABILITY WERE SET ASIDE. THE ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE DRP AS WELL . 18 . AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THA T THE TPO HAS ADOPTED SOFTWARE ITA NO.122/DEL/2013 20 DEVELOPMENT AND SERVICES SEGMENT WHICH, IN TURN, CONSISTS OF THREE SUB - SEGMENTS, NAMELY, E MBEDDED PRODUCT DESIGN SERVICES (DESIGN AND DEVELOPMENT OF HARDWARE AND SOFTWARE), I NDUSTRIAL DESIGN AND ENGINEERING (MECHANICAL DES IGN WITH A FOCUS ON INDUSTRIAL DESIGN) AND ANIMATION AND VISUAL EFFECTS. SINCE THIS COMPANY OFFERS INTEGRATED HARDWARE AND PACKAGED SOFTWARE SOLUTIONS, THE SAME CANNOT BE CONSIDERED AS COMPARABLE WITH THE ASSESSEE COMPANY , WHICH IS SIMPLY PROVIDING SOFTW ARE RELATED SERVICES. THE TRIBUNAL IN TOLUNA INDIA PVT. LTD. VS. ACIT (2014) 151 ITD 177 (DELHI) AND MOTOROLA SOLUTIONS INDIA PVT. LTD. (SUPRA) , BOTH OF WHICH WERE RENDERING SOFTWARE DEVELOPMENT SERVICES, HAS TREATED THIS COMPANY AS FUNCTIONALLY NOT COMPARABLE. SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE ASSESSEE S OWN CASE FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. WE, THEREFORE, ORDER FOR THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. WIPRO LTD. (SEG.) ITA NO.122/DEL/2013 21 1 9 . THE TPO INCLU DED THIS COMPANY IN THE LIST OF COMPARABLES BY OVERRULING THE ASSESSEE S OBJECTIONS ABOUT THE SUPER NORMAL PROFITS EARNED BY THIS COMPANY; VERY HIGH TURNOVER; OWNING SIGNIFICANT IPRS IN THE FORM OF PATENTS; AND ENGAGED IN R& D ACTIVITY. THE ASSESSEE FAILE D TO PERSUADE THE DRP TO FALL IN LINE WITH ITS REASONING FOR THE EXCLUSION OF THIS COMPANY FROM THE F I NAL SET OF COMPARABLES. THAT IS HOW, THE ASSESSEE IS BEFORE US. 20 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE TPO HAS TAKEN SOFTWARE DEVELOPMENT SEGMENT OF THIS COMPANY ON STANDALONE BASIS. WE AGREE WITH THE TPO THAT SUPER NORMAL PROFITS OR VERY HIGH TURNOVE R CANNOT BE CRITERION FOR TREATING A N OTHERWISE FUNCTIONALLY COMPARABLE COMPANY AS INCOMPARABLE. HOWEVER, THE FACT REMAINS THAT THIS COMPANY OWN SIGNIFICANT IPRS IN THE FORM OF PATENTS WHICH ARE OBVIOUSLY USED IN THE RENDERING OF SOFTWARE DEVELOPMENT SERV ICES. APART FROM THAT FACT, THIS COMPANY IS ENGAGED IN R&D ACTIVITY. PER CONTRA, T HE ASSESSEE IN QUESTION IS ONLY A CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER NOT ITA NO.122/DEL/2013 22 OWNING ANY IPRS. OWNING OR NOT OWNING IPRS IN THE FORM OF PATENTS IN SOFTWARE DEVELOPED BY A COMPANY HAS AN IMPORTANT BEARING ON THE PROFIT EARNED BY IT FROM THE SOFTWARE DEVELOPMENT SERVICES SEGMENT. A COMPANY WHICH DOES NOT OWN ANY IPRS AND CARRIES ON THE ACTIVITY OF RENDERING SOFTWARE DEVELOPMENT SERVICES AT ITS OWN CANNOT BE COMPARED W ITH A COMPANY WHICH PROVIDE S SOFTWARE DEVELOPMENT SERVICES BY USING ITS OWN IPRS IN THE FORM OF PATENTS OF SOFTWARE . UNDER SUCH CIRCUMSTANCES, WE HOLD THAT THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE AT SEGMENT LEVEL. THE SAME IS EX CONSEQUENTI DIRECTED TO EXPELLED FROM THE SET OF COMPARABLES. 21 . THE LD. AR SUBMITTED THAT IF THE ABOVE SIX COMPANIES ARE REMOVED FROM THE FINAL LIST OF COMPARABLES, THEN, THERE WILL REMAIN NO SCOPE FOR AN Y ADDITION ON ACCOUNT OF TP ADJUSTMENT AND THERE WILL BE NO NE ED TO ASSAIL OTHER POINTS. WE FIND THAT ALL THE ABOVE COMPANIES HAVE BEEN EXCLUDED BY THE TRIBUNAL IN THE ASSESSEE S OWN CASE FOR THE IMMEDIATELY PRECEDING YEAR , IN TOLUNA INDIA PVT. LTD. (SUPRA) A ND/OR MOTOROLA SOLUTIONS INDIA PVT. LTD. (SUPRA). UNDER SUCH CIRCUMSTANCES, WE SET ITA NO.122/DEL/2013 23 ASIDE THE IMPUGNED ORDER AND SEND THE MATTER BACK TO THE AO/TPO FOR A FRESH COMPUTATION OF ALP OF THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE IN CONFORMITY WITH OUR ABOVE DECISION . NEEDLESS TO SAY, THE ASSESSEE WIL L BE AFFORDED A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH ADJUDICATION. 22 . NO OTHER ISSUE WAS ARGUED BY THE LD. AR. 2 3 . IN THE RESULT, THE APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRO NOUNCED IN THE OPEN COURT ON 0 4 .0 6 .201 5 . S D / - S D / - [ C.M. GARG ] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 4 T H JUNE, 201 5 DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.