ITO, New Delhi V. M/s. Nagarro Software Pvt. Ltd., New Delhi

ITA 1608/DEL/2015

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 7848 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-01-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2009-2010
• Appeal Filed On: 19-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MAIMUN ALAN
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; International transaction
• Section: 195; 13; 2

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I-2 B ENCH, NEW DELHI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI SUDHANSHU SRIVASTAVA, JUDI CIAL MEMBER ITA NO. 1542/DEL/2015 [ASSESSMENT YEAR: 2009-10] NAGARRO SOFTWARE PVT. LTD VS. THE INCOME TAX OFFICER 19/20, PUNJABI BAGH [EAST] WARD 13(1) NEW DELHI NEW DELHI PAN: AABCN 5039 J ITA NO. 1608/DEL/2015 [ASSESSMENT YEAR: 2009-10] THE INCOME TAX OFFICER. VS. NAGARRO SOFTWARE PVT. LTD WARD 13(1) 19/20, PUNJABI BAGH [EAST] NEW DELHI NEW DELHI PAN: AABCN 5039 J [APPELLANT] [RESPONDENT] DATE OF HEARING : 15.01.2020 DATE OF PRONOUNCEMENT : 27.01.2020 ASSESSEE BY : SHRI NAGESHWAR RAO, ADV REVENUE BY : MS. MAIMUN ALAN, SR - DR 2 ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, THE ABOVE CROSS APPEALS BY THE ASSESSEE AND REVENUE ARE PREFERRED AGAINST THE ORDER OF THE LD. CIT(A) 44, NEW DELHI DATED 15.12.2014 PERTAINING TO A.Y 2009-10. SINCE BOTH T HESE APPEALS WERE HEARD TOGETHER, WE ARE DISPOSING THEM OFF BY THIS C OMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. ITA NO. 1542/DEL/2015 [ASSESSEES APPEAL] 2. THE SUBSTANTIAL GRIEVANCE OF THE ASSESSEE IS THA T THE ASSESSING OFFICER/TPO ERRED IN DETERMINING THE TOTAL INCOME O F THE ASSESSEE AT RS. 3,94,73,751/- AS AGAINST THE RETURNED INCOME OF RS. 24,61,650/-, THEREBY MAKING AN UPWARD ADJUSTMENT OF RS. 3,70,12, 100/-. 3. THE ENTIRE DISPUTE REVOLVES AROUND THE INCLUSION AND EXCLUSION OF CERTAIN COMPARABLES WHILE DETERMINING THE ARMS LEN GTH PRICE [ALP] IN RESPECT OF INTERNATIONAL TRANSACTIONS WITH AE. 3 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE APPELLANT COMPANY WAS INCORPORATED AS AN INDIAN COMPANY UNDER THE INDIAN COMPANIES ACT, 1956. THE FLAGSHIP COMPANY IS NAGAR RO INC., USA. THE HOLDING COMPANY IS INTO THE BUSINESS OF REQUIREMENT ANALYSIS, QUARTERLY PROJECT REVIEWS, CONFLICT RESOLUTION, MARKETING, SA LES AND OTHER SUPPORT SERVICES OPERATIONS ON A VERTICALLY INTEGRATED BASI S. TO AUGMENT ITS WORK PROCESS, IT HAS THE INDIA SUBSIDIARY NAGARRO S OFTWARE PVT LTD., THE APPELLANT. 5. THE APPELLANT COMPANY IS A SOFTWARE SOLUTION DEV ELOPER FOR ITS HOLDING COMPANY NAGARRO INC AND THE GERMAN ASSOCIAT ED IN THE AREAS OF PRODUCT CO-DEVELOPMENT, HEALTH CARE AND FINANCE. IT HAS A WHOLLY DEDICATED UNIT FOR THE PURPOSE. IN SHORT, THE APPE LLANT IS A CAPTIVE SERVICE PROVIDER. 6. THE APPELLANT IS IN THE BUSINESS OF CUSTOMISED S OFTWARE DEVELOPMENT ON CONTRACTUAL BASIS AND THE SPECIFICAT IONS OF THE SAME ARE PROVIDED BY NAGARRO INC. USA AND NAGARRO GMBH, GERMANY. THE DOMAIN AND VERTICAL OF SOFTWARE DEVELOPMENT WORK RE LATES TO THE DEVELOPMENT OF SOFTWARE INCLUDING CODING, PROVIDES TECHNICAL SUPPORT 4 IN TERMS OF RESEARCH AND DEVELOPMENT ON TECHNOLOGY, BEST PRACTICES, CODE REVIEWS AND SOFTWARE ARCHITECTURE. BESIDES TH IS, MANAGERIAL DEVELOPMENT WORK IN THE AREAS OF PROJECT PLANS, PRO JECT TRACKING AND EXECUTION, INTER TEAM CO-ORDINATION AND SYSTEMIZATI ON OF DELIVERABLES ARE ALSO UNDERTAKEN BY THE APPELLANT. 7. THE OPERATING PROFIT COMPUTED BY THE APPELLANT C OMPANY IS AS UNDER: SOFTWARE EXPORT 35929956 0 DOMESTIC SOFTWARE & SERVICE CHARGES 1524075 FOREX GAIN 14209872 TOTAL INCOME 37503350 7 EXDENDITURE OPERATING EXPENSES 53586514 PERSONNEL EXPENSES 230653879 ADMINISTRATION EXPENSES 17001144 DEPRECIATION 7787623 LESS: NON OPERATING 22414 TOTAL EXPENDITURE 309006746 OPERATING PROFIT 66026761 OPERATING PROFIT/TOTAL COST 21.37% 5 8. MARGIN COMPUTATION OF COMPARABLE COMPANIES USED BY THE APPELLANT IS AS UNDER: S.N NAME OF THE COMPANY OP/TC( 1 EMERGYS SOFTWARE 31.10% 2 EN POINTE TECHNOLOGIES INDIA PVT. LTD. 19.42% 3 FORTUNE INFOTECH LTD. 4.08% 4 J & B SOFTWARE (INDIA) PVT. LTD. - 9.11% 5 LEE & NEE SOFTWARE EXPORTS LTD 7.92% 6 LUCID SOFTWARE LTD. - 7 MAARS SOFT.LNTL. - 8 ONWARD TECHNOLOGIES LIMITED (20.35) 9 PERSISTENT SYSTEMS & SOLUTIONS LIMITED 31.34% 10 QUINNOX CONSULTANCY SERVICES LTD. 21.81% MEAN 4.25% 9. SINCE THE MARGIN OF THE APPELLANT COMPANY AT 21. 37% IS HIGHER THAN THE MEAN MARGIN OF COMPARABLE COMPANIES AT 4.2 5%, THE TRANSACTION WAS TAKEN AT ARMS LENGTH. 10. DURING THE COURSE OF TP ASSESSMENT PROCEEDINGS, THE TPO REJECTED THE COMPANIES WHERE THE TURNOVER WAS LESS THAN RS. 5 CRORES AND DIRECTED THE ASSESSEE TO USE CURRENT YEAR DATA WITH SAME F.Y. AND SELECTED COMPANIES WHERE THE RATIO OF SERVICE INCOM E TO TOTAL INCOME WAS AT LEAST 75% AND WHERE INCOME FROM EXPORTS IS A T LEAST 75% OF TOTAL INCOME. 6 11. BASED ON THE FILTERS, THE TPO EXAMINED THE COMP ARABLES USED BY THE ASSESSEE AS UNDER: NO. COMPANY NAME TPO'S OBSERVATION 1 AKSHAY SOFTWARE TECHNOLOGIES LTD COMPANY HAS TURNOVER OF RS 12 23 CRORES AND HAS NOT MADO ANY DISCLOSURE ABOUT RELATED PARTY TRANSACTIONS HCNCC, AS PER DISCUSSION MADE IN PARA 8 (VI) ABOVE, IT CANNOT BE TAKEN AS COMPORA BLO 2 ANCENT SOFTWARE INTERNATIONAL LTD THE COMPANY HAS SALES OF RS 0 86 CR. WHICH IS LESS THAN RS 5 CR AND HENCE FAILS THE FILTER OF SALES >5 CR. IT CANNOT BO TAKEN AS COMPARABLE. 3 AZTOCSOFT LTD IT IS NOT A CORRECT COMPARABLE. THE ASSESSEE HAD SH OWN JPETIFT R &S RPT LESS THAN 25% HOWEVER, AS PER ANNUAL REPORT WAS CALCULATED AS 34.28%. FUTTHER. THE CONSOLIDATED SAL ES WERE 1.21 TIMES THE STANDALONE SALES MARGIN ON CONSOLIDATED AND STAND A LONE LEVEL ARE 27 37% AND 28.12% HENCE, IT IS NOT BEING CONSIDERED AS COMPARABLE EVEN AT CONSOLIDATED LEVEL AS IHE TWO ENTITIES ARE HAVING W IDE VARIATIONS IN MARGINS INDICATING THAT THE CONSOLIDATED ENTITY HAS SIGNIFICANTLY DIFFERENT FUNCTIONS IN ENTITIES OTHER THAN STANDALONE AZTECSO FT LTD 4 CG VAK SOFBVARE & EXPORTS LTD THE COMPANY DOES NOT QUALIFY EMPLOYEE COST FILTER A S ITS EMPLOYEE COST IS 7.22% WHICH IS LESS THAN 25% OF TOTAL COST IT CANNO T BE TAKEN AS COMPARABLE 5 GOLDSTONE TECHNOLOGIES LTD II IS A CORRECT COMPARABLE 6 HELIOS & MOTHERSON INFORMATION TECHNOLOGIES LTD THE COMPANY DOES NOT QUALIFY FINANCIAL YEAR FILTER AS ITS FINANCIAL YEARNS DIFFERENT THAN ASSESSEC'S FINANCIAL YEAR ENDING MAR CH, 2009 IT CANNOT BE TAKEN AS COMPARABLE 7 INDIUM SOFTWARE (!) LTD THE COMPANY DOES NOT QUALIFY EXPORT SALES FILTER AS ITS EXPORT SOLOS IS 0% WHICH IS LESS THAN 75% OF SALES. IT CANNOT BE TAKEN AS COMPARABLE. 8 INFOSYS TECHNOLOGIES LTD IT IS A CORRECT COMPARABLE. 9 KPIT CUMMINS INFOSYSTEMS LTD ' IT IS A CORRECT COMPARABLE. 10 LARSEN & TURBO INFOTECH LTD IT IS A CORRECT COMPARABLE 7 11 LGS GLOBAL LTD THE COMPANY IS NOW NAMED YBRANT DIGITAL LTD PERUSAL OF ANNUAL REPORT OF THE COMPANY SHOWS:- P-39/AR- 3 5 PRODUCT DEVELOPMENT EXPENSES. THE COMPANY IS IN THE PROCESS OF LAUNCHING A LOCAL SEARCH BUSINESS YREACH. THE SOFTWARO AND SYSTEM TO MANAGE THE BUSINESS WAS LARGELY BUILT MHOUSE. THE COST OF DOING THE SAME WAS RS 12,02,17, 421 (APPROX USD 2,844,557). SINCE, THE COMPANY HAS STARTED A DIFFORONT BUSINESS OF LOCAL SEARCH BY DEVELOPING ITS OWN PRODUCT YREACH, THE COMPANY CANN OT BE SAID TO BE MERELY A SOFTWARE DEVELOPER. HENCE, IT CANNOT BE TA KEN AS A COMPARABLE. 12 MLNDTREE LTD IT IS A CORRECT COMPARABLE. 13 QUINTEGRA SOLUTIONS LTD AS PER PAGE 10 OF ANNUAL REPORL:- QUINTEGRA IS SET TO BNNG MORE FOCUS ON DEVELOPING D OMAIN EXPERTISE, IMPROVING EFFICIENCY AND PRODUCTIVITY AND CUSTOMISI NG THEIR PRODUCT TO ENHANCE CLIENT SATISFACTION. TO PERFORM HOTTER IN T HE DOMESTIC SECTOR, QUINTEGRA IS MAKING SINCERE EFFORTS TO ACKNOWLEDGE AND UNDERSTAND THE REQUIREMENTS OF INDIAN ENTERPRISES, EVOLVE INDIA- C ENTRIC PRICING MODE/S AND DEMONSTRATE GREATER- FLEXIBILITY THE COMPANY IS ADOPTING ALL OUT MEASURES TO MOOT STIFF RISE IN OPERATIONAL COST AND TO REMAIN ALIVE AMIDST THE ONGOING RECESSION. COST-EFFECTIVENESS OF ORODUC T AND SERVICES IS EXPECTED TO PLA V E PIVOTAL ROLE IN RETAINING EXIST ING BUSINESS VENTURES FURTHER, AS PER PAGE 40. DIRECTORS REPORT OF THE COMPANY. - THE COMPANY COMMENCED TO TRADE ON 1 ST SEPTEMBER, 2 003 AND ITS PRINCIPAL ACTIVITY DURING THE PENOD UNDER R EVIEW WAS THAT OF THE PROVISION OF COMPUTER SOFTWARE DEVELOPMENT A ND SUPPORT SERVICES, COMPUTER SOFTWARE PRODUCTS AND OT HER INFORMATION TECHNOLOAV RELATED SERVICES. THE COMPANY HAS COPYNGHTS OF RS 27.175.655 AS ON 31.03.2008 AND RS 21, 740,524 AS ON 31.03.2009 IN I TS FIX ED ASSETS (SCHODULO 5) IT IS DEAR FROM THE ABOVE THAT THE COMPANY HAS SEVERAL PRODUCTS WHICH IT CUSTOMIZES FO R THE CLIENTS. SINCE THIS IS A FUNCTIONALLY DIFFERENT COMPANY, THE SAME IS NOT A COMPARABLE R S SOFTWARE (1) LTD IT IS A CORRECT COMPARABLE. 8 SASKEN COMMUNICATIO N TECHNOLOGIES LTD PAGE 7 OF ANNUAL REPORT STATES THAT SASKEN IS DESI GNING AND BRINGING INTO PRE- PRODUCTION THE COMPLETE PHONE, WHICH WOULD INCLUDE THE HARDWARE COMPONENT COMPOSING DESI GN, DEVELOPMENT & TESTING OF ANTENNA, RF AND ITS ME CHANICAL ELEMENTS ALONG WITH THE SOFTWARE COMPONENT COMPRISI NG PROTOCOL STACKS, APPLICATION FRAMEWORK AND TEST LAB OFFERINGS ' PAGE 10 OF ANNUAL REPORT STATES THAT 'ON THE PRODUC TS SIDE OF THE BUSINESS, WE CONTINUE TO BUILD ON OUR SUCCESSES IN THE JAPANESE MARKET AND OUR MODELS ARE THE LATEST IN THE LINEUP OF RICH MEDIA PHONES WHICH HAVE BOON WELL RECEIVED BY THE DISCERNING AND DEMANDING JAPANESE CONSUMER.' PAGE 107 OF ANNUAL REPORT STATES THAT THE COMPANY HAS FOLLOWING SEGMENTS FOR ITS CONSOLIDATED ACCOUNTS:- TELECORN SOFTWARE SERVICES TELECOM SOFTWARE PRODUCTS NETWORK ENGINEERING SERVICES AUTOMOTIVE, UTILITIES AND INDUSTRIAL HOWEVER NO SEGMENTAL INFORMATION IS AVAILABLE FOR SIP TECHNOLOGIES & EXPORT LTD THE COMPANY HAS SALES OF RS 1 25 CR WHICH IS LESS T HAN RS. 5 CR AND HENCE FAILS THE FILTER OF SALES >5 CR THE CO MPANY ALSO DOES NOT QUALIFY EMPLOYEE COST FILTER AS ITS EMPLOY EE COST IS 19.63% WHICH IS LOSS THAN 25% OF TOTAL COST. IT CANNOT BE TAKEN AS COMPARABLE. ZYLOG SYSTEMS LTD THE COMPANY'S REVENUE IS ALSO SEGMENTED INTO ONSITE (INCLUDES ONSITE AND OFFSITE) AND OFFSHORE REVENUES AS PER PAGE 31 OF ANNUAL REPORT IN MANAGEMENT DISCU SSION: - ONSITE REVENUES ARE THOSE SERVICES, WHICH ARE PERFORMED AT CLIENT SITES AS PART OF SOFTWARE PROJECTS O/LSITE R EVENUES ARE THOSE SERVICES RENDERED FROM OUR OFFICE PREMISES LO CATED ABROAD WHILE OFFSHORE SERVICES ARE THOSE SERVICES W HICH ARE PERFORMED AT THE COMPANY'S SOFTWARE DEVELOPMENT CEN TE RS LOCATED IN INDIA THE DETAILS OF SOFT WARE SERVICES AND PRODUCTS ARE AS FOLLOWS REVENUE BY LOCATION FIGURES IN % AS AT MARCH 31 2009 2008 ONSITE 80 70 82,40 OFFSHORE 19.30 17.60 TOTAL 100,00 100.00* SINCE, ITS REVENUE ARE PREDOMINANTLY ONSITE REVENUE S UNLIKE YOU WHERE 100% REVENUES ARE OFFSITE REVENUE HENCE, IT CANNOT BO TA KEN AS COM PAR ABLE 9 12. HOWEVER, AFTER RECEIVING THE ORDER OF THE FIRST APPELLATE AUTHORITY, THE TPO GAVE APPEAL EFFECT AND FINAL LIS T OF COMPARABLES AFTER GIVING EFFECT TO LD. CIT(A)S DIRECTIONS WERE TAKEN AS UNDER: . COMPANY NAME OP/TC (W/O FX) 1. AKSHYA SOFTWARE 8.16 2. AZTECSOFT 27.37 3. CAT IT, H 34.43 4. C - . - IMT ME TECH 10.28 5 L&T INFOTECH 21.33 6. LGS GLOBAL 18.79 7. MIND TREE 27.36 8. PERSISTENT SYS 37.77 9. RS SOFTWARE (I) 10.15 10. SASKEN COMM. TECH. 51.44 11. TATA ELXSI 16.88 12 TCS 31.44 13. THINKSOFT GLOBAL SERVICES 16.56 14 THIRDWARE SOLUTIONS LTD. 37.27 AVERAGE 24.95% 13. AND ALP WAS COMPUTED AS UNDER: OPERATING COST 30,90,06,746 ARM'S LENGTH PRICE AT A MARGIN OF 24.95% 38,61,03,929 PRICE RECEIVED 36,08,23,635 105% OF INTERNATIONAL TRANSACTION 37,88,64,817 PROPOSED ADJUSTMENT U/S 92CA 2,52,80,294 10 14. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE ARG UED FOR EXCLUSION OF THE FOLLOWING FOUR COMPARABLES, NAMELY, A) CAT TECHNOLOGIES B) PERSISTENT SYSTEMS C) TCS D) THIRD WARE SOLUTIONS LTD 15. WE WILL NOW ADDRESS TO THE INCLUSION/EXCLUSION OF THESE FOUR COMPARABLES. CAT TECHNOLOGIES LTD. 16. BEFORE THE TPO, THE APPELLANT STRONGLY CONTENDE D THAT THIS COMPANY SHOULD NOT BE TAKEN AS A COMPARABLE. THE M AIN CONTENTION OF THE ASSESSEE IS THAT THIS COMPANY IS ENGAGED IN THE BUSINESS OF MEDICAL TRANSCRIPTION, TRAINING, SOFTWARE DEVELOPME NT AND CONSULTING SERVICES. ITS EARNING IS FROM VARIOUS ACTIVITIES AN D AT THE SAME TIME, NO SEGMENTAL INFORMATION IS AVAILABLE. THE LD. CIT(A) CONFIRMED THE INCLUSION OF THIS COMPANY BY HOLDING THAT THE MAJOR ITY OF INCOME IS FROM SOFTWARE DEVELOPMENT ACTIVITIES AND ITS INCOME FROM TRAINING AND MEDICAL TRANSCRIPTION IS MINIMAL. 11 17. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REI TERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. 18. WE HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE O RDERS OF THE AUTHORITIES BELOW AND HAVE PERUSED THE ANNUAL REPOR T OF THIS COMPANY WHICH IS PLACED AT PAGES 432 TO 492 OF THE PAPER BO OK. 19. THE OPERATIONAL INCOME OF THIS COMPANY IS RS. 9 .35 CRORES, WHICH INCLUDES INCOME FROM TRAINING, SOFTWARE DEVELOPMENT AND CONSULTING SERVICES AND MEDICAL TRANSACTION RECEIPTS. IN ITS AUDITED REPORT UNDER THE HEAD ACCOUNTING POLICIES AND NOTES FORMING PAR T OF THE ACCOUNT IT HAS BEEN SPECIFICALLY MENTIONED THAT SEGMENTAL R EPORT IS NOT AVAILABLE. 20. IN OUR CONSIDERED OPINION, SERVICES RENDERED SU CH AS JOB PLACEMENT PORTAL AND BPO SERVICES CANNOT BE COMPARE D WITH THE BUSINESS PROFILE OF THE ASSESSEE. WE ALSO FIND THA T THIS COMPANY HAS ALSO LAUNCHED A JOB PORTAL IN THE CURRENT F.Y. NAME LY, LOGTALENT.COM AND FURTHER PROPOSES TO LAUNCH 3-4 MORE PORTALS IN NEXT F.Y. THERE IS A SIGNIFICANT ABNORMAL GROWTH IN PROFIT OF 65.40%. 12 21. FOR THESE VERY REASONS, THE CO-ORDINATE BENCH I N THE CASE OF UNITED HEALTH GROUP INFORMATION SERVICES [P] LTD IN ITA NOS. 419 & 825/DEL/2014 HAD EXCLUDED THIS COMPANY FROM THE FIN AL SET OF COMPARABLES. THE RELEVANT FINDINGS OF THE CO-ORDI NATE BENCH READ AS UNDER: 84. BEFORE THE LD. TPO, TAXPAYER HAS SOUGHT EXCLUS ION OF CAT TECHNOLOGY ON GROUND OF FUNCTIONAL DIS-SIMILARITY B ECAUSE THE COMPANY IS EXCLUSIVELY IN THE BUSINESS OF MEDICAL T RANSCRIPTION, TRAINING, SOFTWARE DEVELOPMENT AND CONSULTING SERVI CES. PERUSAL OF ANNUAL REPORT, AVAILABLE AT PAGE 1871, ALSO SHOW S THAT CAT TECHNOLOGY IS ENGAGED IN JOB PORTAL SERVICES. 85. LD. DR CONTENDED THAT THE CAT TECHNOLOGY IS ONL Y INTO SOFTWARE DEVELOPMENT AS DISCUSSED BY THE TPO. HOWEV ER, AS PER DATA AVAILABLE IN THE ANNUAL REPORT AT PAGE 1871, I T IS CATEGORICALLY MENTIONED THAT DURING THE YEAR UNDER ASSESSMENT, THE COMPANY LAUNCHED JOB PORTAL VIZ. LOGTALENT.COM WHICH WAS INSTANT SUCCESS WITH JOB ASPIRANTS. ENCOURAGED WITH SUCCESS OF THIS PORTAL COMPANY PROPOSED TO LAUNCH 3 TO 4 PORTA L DURING THE CURRENT FINANCIAL YEAR IN THE DIFFERENT FIELDS. SO, IN THE GIVEN CIRCUMSTANCES, CONTENTION ITA NO.419/DEL/2014 MADE BY LD. SENIOR DR IS MISPLACED AND LD. DRP HAS RIGHTLY EXCL UDED CAT TECHNOLOGY FROM THE FINAL SET OF COMPARABLES. 13 22. CONSIDERING THE BUSINESS PROFILE OF THIS COMPAN Y IN LIGHT OF DECISION OF THE CO-ORDINATE BENCH [SUPRA] WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPANY FROM THE FINAL SET OF COMPARABLES. PERSISTENT SYSTEMS LTD 23. BEFORE THE TPO, THE ASSESSEE STRONGLY OBJECTED FOR INCLUSION OF THIS COMPANY BECAUSE OF SIGNIFICANT DIFFERENCE BETW EEN OP/TC NORMAL AND OP/TC WITHOUT FOREX GAIN/LOSS. 24. THE TPO DISMISSED THIS CONTENTION OF THE ASSESS EE AS HE HAS EXCLUDED THE FOREX GAIN FROM THE CALCULATION OF OP. ANOTHER REASON GIVEN BY THE TPO FOR INCLUSION OF THIS COMPANY IS T HAT THIS COMPANY PREDOMINANTLY IS A SOFTWARE SERVICE COMPANY PROVIDI NG OUTSOURCED PRODUCT DEVELOPMENT SERVICE AND FURTHER, THE REVENU ES ARE ONLY 5%. 25. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE VEH EMENTLY STATED THAT IN SO FAR AS FOREX GAIN IS CONCERNED, SAFE HAR BOUR NOTIFICATION DATED 18.09.2013 HAS BEEN HELD TO HAVE PROSPECTIVE EFFECT AS HELD BY THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF FISE RV INDIA PVT LTD ITA 14 NO. 17/2016 ORDER DATED 06.01.2016. THE LD. COUNSE L FOR THE ASSESSEE FURTHER POINTED OUT THAT INCOME OF THIS COMPANY COM PRISES OF SALE OF SOFTWARE SERVICES AND PRODUCTS AND NO SEGMENTAL ACC OUNTS ARE AVAILABLE. 26. THE LD. DR STRONGLY SUPPORTED THE ORDERS OF THE TPO. 27. WE HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE O RDERS OF THE AUTHORITIES BELOW. IN SO FAR AS WHETHER FOREX EXCHA NGE FLUCTUATION IS TO BE CONSIDERED AS OPERATING EXPENSES/INCOME ON THE B ASIS OF SAFE HARBOUR RULES IS CONCERNED, WE FIND THAT THE HON'BL E HIGH COURT OF DELHI IN THE CASE OF FISERV INDIA LTD [SUPRA] HAS C ATEGORICALLY HELD THAT THE SAID NOTIFICATION IS PROSPECTIVE AND, THEREFORE , THE SAME CANNOT BE CONSIDERED FOR A.Y UNDER CONSIDERATION. 28. A PERUSAL OF THE ANNUAL REPORT OF THIS COMPANY REVEALS THAT IT IS TRUE THAT UNDER THE HEAD INCOME SALE OF SOFTWARE S ERVICES AND PRODUCTS HAS BEEN MENTIONED AND BIFURCATION OF SOF TWARE SERVICES AND PRODUCTS GIVEN IN SCHEDULE 11 IS ONLY IN RESPECT OF OVERSEAS SALES AND DOMESTIC SALES. FURTHER, IN SCHEDULE 14 UNDER THE HEAD OPERATING 15 AND OTHER EXPENSES THERE ARE SOFTWARE SUPPORT CHA RGES, COMMISSION ON SALES TO OTHER THAN SOLE SELLING AGENTS, ADVERTI SEMENTS, SPONSORSHIP FEES AND OTHER EXPENSES. THIS SHOWS THAT THIS COMPA NY IS PAYING COMMISSION AND ALSO INCURRING EXPENDITURE ON ADVERT ISEMENT AND SPONSORSHIP. 29. IN OUR CONSIDERED OPINION, FOR WANT OF SEGMENTA L REPORTING, THIS COMPANY CANNOT BE CONSIDERED AS A GOOD COMPARABLE. FOR SIMILAR REASONS, THIS COMPANY WAS EXCLUDED BY THE CO-ORDINA TE BENCH IN THE CASE OF UNITED HEALTH GROUP INFORMATION SERVICES [P ] LTD [SUPRA]. FOR THE DISSIMILARITY IN THE FUNCTIONS AND FOR WANT OF SEGMENTAL ACCOUNTS, WE DIRECT THIS COMPANY TO BE EXCLUDED FROM THE FINA L SET OF COMPARABLES. TATA CONSULTANCY LIMITED 30. THE TPO INCLUDED THIS COMPANY FOR THE REASON TH AT OUT OF TOTAL SALES OF RS. 27,385 CRORES, RS. 1919 CRORES IS FROM BPO AND RS. 2,225/- CRORES IS FROM IT INFRASTRUCTURE SERVICES. HENCE, THESE TURNOVER FIGURES CONTRIBUTE ONLY 15% OF THE TOTAL REVENUE. THE TPO FURTHER OBSERVED THAT SALE OF EQUIPMENT AND SOFTWARE LICENSE CONSTIT UTES ONLY 3.76% AND 16 INVENTORY IS ONLY 0.13%. THE ASSESSEE HAD STRONGLY OBJECTED FOR INCLUSION OF THIS COMPANY STATING THAT ENTERPRISE S OLUTIONS, SUCH AS, ENTERPRISE RESOURCE MANAGEMENT, SUPPLY CHAIN, MANAG EMENT CUSTOMER RELATIONSHIP MANAGEMENT, IT INFRASTRUCTURE SERVICES BUSINESS PROCESSING OUTSOURCING, ITES, ENGINEERING AND INDUS TRIAL SERVICES ARE NON-COMPARABLE SERVICES WITH THAT OF THE BUSINESS P ROFILE OF THE ASSESSEE COMPANY. THE LD. COUNSEL FOR THE ASSESSE E FURTHER POINTED OUT THAT THERE IS SALE OF EQUIPMENT AND SOFTWARE LI CENCE AND FURTHER, THERE ARE SIGNIFICANT R & D ACTIVITIES. 31. THE LD. DR SUPPORTED THE FINDINGS OF THE TPO. 32. WE HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE O RDERS OF THE AUTHORITIES BELOW AND HAVE PERUSED THE ANNUAL REPOR T OF THIS COMPANY WHICH IS PLACED AT PAGES 746 TO 939 OF THE PAPER BO OK. THE DIVERSIFIED BUSINESS ACTIVITIES OF THIS COMPANY HAVE ALSO BEEN MENTIONED ABOVE. THE TOTAL TURNOVER OF THIS COMPANY IS RS. 35 CRORES WHEREAS IN THIS COMPANY EXPENDITURE OF RS. 43.92 CRORES WERE INCURR ED ON R & D ACTIVITIES. WE, FURTHER FIND THAT THIS COMPANY OWNS SIGNIFICANT INTANGIBLE ASSETS. NEEDLESS TO MENTION THAT TCS HA S SIGNIFICANT BRAND VALUE AND ITS TURNOVER IS AROUND 758 TIMES THAN THA T OF THE APPELLANT COMPANY. 17 33. FOR THESE VERY REASONS, THE COORDINATE BENCH I N THE CASE OF UNITED HEALTH GROUP INFORMATION SERVICES [P] LTD [S UPRA] HAS EXCLUDED THIS COMPANY FROM THE FINAL SET OF COMPARABLES. CO NSIDERING THE BUSINESS PROFILE OF THE ASSESSEE VIS A VIS THAT OF TCS, WE ARE OF THE CONSIDERED VIEW THAT TCS CANNOT BE TAKEN IN THE FIN AL SET OF COMPARABLES. WE, ACCORDINGLY, DIRECT FOR EXCLUSION OF THE SAME. THIRDWARE SOLUTIONS LIMITED 34. BEFORE THE TPO, THE LD. COUNSEL FOR THE ASSESSE E STRONGLY OBJECTED TO THE INCLUSION OF THIS COMPANY ON THE GR OUND THAT THIS COMPANY DERIVES REVENUE FROM VARIOUS SOURCES, SUCH AS, LICENCE, SOFTWARE SERVICES, EXPORT FROM SEZ UNIT, REVENUE FR OM SUBSCRIPTION ETC. OBJECTIONS OF THIS ASSESSEE WERE DISMISSED BY THE TPO HOLDING THAT THIS COMPANY PROVIDES SOFTWARE DEVELOPMENT SER VICES AKIN TO THAT OF THE PROFILE OF THE ASSESSEE. ANOTHER REASON GIV EN BY THE TPO IS THAT SALE OF LICENCE IS ONLY RS. 2.32 CRORES OUT OF TOTA L SALE OF RS. 77.03 CRORES THEREBY TREATING THIS COMPANY AS PREDOMINANT LY SOFTWARE SERVICES PROVIDER. THE INCLUSION OF THIS COMPANY W AS UPHELD BY THE LD. CIT(A). 18 35. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REI TERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES AND THE LD . DR STRONGLY SUPPORTED THE FINDINGS OF THE TPO. 36. WE HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE O RDERS OF THE AUTHORITIES BELOW AND HAVE CAREFULLY PERUSED THE AN NUAL REPORT OF THIS COMPANY WHICH IS PLACED AT PAGES 940 996 OF THE P APER BOOK. TOTAL SALES AS PER P & L ACCOUNT IS RS. 77 CRORES AND ITS BIFURCATION SHOWS REVENUE FROM SALE OF LICENCE , SOFTWARE SERVICES, E XPORT FROM SEZ UNIT EXPORT FROM STPL UNIT, AND REVENUE FROM SUBSCRIPTIO N. BUT NO SEGMENTAL ACCOUNTS ARE AVAILABLE. CONSIDERING THE BUSINESS PROFILE OF THIS COMPANY VIS A VIS THAT OF THE APPELLANT COMPAN Y, AND FOR WANT OF SEGMENTAL REPORTING, WE DIRECT THE ASSESSING OFFICE R/TPO TO EXCLUDE THIS COMPANY FROM THE FINAL SET OF COMPARABLES. 37. THE ASSESSEE HAS ALSO POINTED OUT SOME MARGIN C OMPUTATION ERRORS IN THE CASE OF GOLDSTONE TECHNOLOGIES LIMITE D AND SASKEN TECHNOLOGY LIMITED. THE ASSESSEE HAS FURNISHED THE CORRECTED OPERATING MARGINS OF THESE COMPARABLES WHICH IS PLA CED AT PAGES 194- 195 OF THE PAPER BOOK. 19 38. WE ARE OF THE CONSIDERED VIEW THAT THE TPO SHOU LD EXAMINE THE CORRECT MARGINS OF THESE COMPANIES AS FURNISHED BY THE ASSESSEE AND IF FOUND CORRECT, MAY DECIDE THE ISSUE AFRESH AS TO WH ETHER THESE COMPANIES ARE TO BE INCLUDED OR EXCLUDED FROM THE F INAL SET OF COMPARABLES. WITH THESE DIRECTIONS, WE RESTORE THE INCLUSION/EXCLUSION OF GOLDSTONE TECHNOLOGIES LTD AND SASKEN TECHNOLOGI ES LTD TO THE FILE OF THE TPO. 39. IN THE CASE OF CG VAK SOFTWARE & EXPORTS LTD, T HE TPO EXCLUDED THIS COMPANY BY STATING THAT THIS COMPANY DOES NOT QUALIFY EMPLOYEE COST FILTER AS EMPLOYEE COST IS 7.22% WHICH IS LESS THAN 25% OF THE TOTAL COST. HOWEVER, AS PER THE ANNUAL REPORT OF THIS CO MPANY, WE FIND THAT ITS EMPLOYEE COST IS AROUND 75.42%. THE COMPUTATIO N OF EMPLOYEE COST IS ALSO MADE AVAILABLE AT PAGE 214 OF THE PAPER BOO K. WE, ACCORDINGLY, DIRECT THE TPO TO RE-EXAMINE THE EMPLOYEE COST OF T HIS COMPANY AND IF FOUND THAT THE EMPLOYEE COST OF THIS COMPANY IS 75. 42%, THEN THE SAME SHOULD BE INCLUDED IN THE FINAL SET OF COMPARABLES. 40. IN SO FAR AS SIP TECHNOLOGY IS CONCERNED, THE R EASONS GIVEN BY THE TPO IS THAT THE SALES OF THIS COMPANY IS RS. 1.25 C RORES WHICH IS LESS 20 THAN RS. 5 CRORES AND FAILS THE FILTER OF SALES OF MORE THAN RS. 5 CRORES AND THE EMPLOYEE COST IS 19.63%. 41. IN SO FAR AS THE TURNOVER IS CONCERNED, WE FIND THAT THE APPELLANT COMPANYS TURNOVER IS ONLY RS. 35 CRORES. THEREFOR E, WE DO NOT FIND ANY REASON WHY FILTER OF MORE THAN RS. 5 CRORES HAS BEEN APPLIED BY THE TPO. IN OUR CONSIDERED OPINION, WHEN THERE IS NO F UNCTIONAL DISSIMILARITY, THEN THIS COMPANY SHOULD NOT HAVE BE EN EXCLUDED BY THE TPO. FURTHER, WE FIND THAT THE EMPLOYEE COST OF TH IS COMPANY WORKED OUT TO 38.28%. WE, ACCORDINGLY, DIRECT THE TPO TO RE-EXAMINE THE EMPLOYEE COST ONLY AND IF FOUND TO BE AT 38.25%, TH ERE SHOULD NOT BE ANY REASON FOR EXCLUSION OF THIS COMPANY FROM THE F INAL SET OF COMPARABLES. 42. WITH THE ABOVE DIRECTIONS, THE APPEAL OF THE AS SESSEE IS ALLOWED IN PART FOR STATISTICAL PURPOSES. 21 REVENUES APPEAL 43. THE ONLY GRIEVANCE OF THE REVENUE IS THAT THE L D. CIT(A) ERRED IN EXCLUDING M/S BODHTREE CONSULTING LTD AND INFOSYS L TD FROM THE FINAL SET OF COMPARABLES ADOPTED BY THE TPO. 44. BEFORE THE TPO, THE ASSESSEE HAS STRONGLY OBJEC TED FOR INCLUSION OF THIS COMPANY ON THE GROUND THAT THIS COMPANY HAS SHOWN ABNORMAL PROFIT DURING THE F.Y. UNDER CONSIDERATION IN COMPA RISON TO PROFIT SHOWN IN EARLIER YEARS AND SUBSEQUENT YEARS. THE TP O REJECTED THE CONTENTION OF THE ASSESSEE. 45. BEFORE THE LD. CIT(A), THE SAME OBJECTION WAS R AISED AND AFTER CONSIDERING THE FACTS AND SUBMISSIONS THE LD. CIT(A ) HELD AS UNDER: THE APPELLANT HAS POINTED OUT THAT THIS COMPANY IS HAVING ABNORMAL RESULTS DURING THIS YEAR. ACCORDING TO THE APPELLANT, THE MARGINS OF THIS COMPANY FOR THE EARLIER AND SUB SEQUENT YEARS ARE AS FOLLOWS: 22 FURTHER, ON CALCULATION OF THE GROWTH OF BODHTREE C ONSULTING LTD., THE APPELLANT HAS POINTED OUT THAT IT HAS A G ROWTH OF 353% IN ITS NET PROFIT FOR THE FY 2008-09 AS COMPARED TO ITS IMMEDIATE PRECEDING YEAR. THE APPELLANT HAS FURTHER STATED THAT THE COMPANY IS ENGAGED IN DIVERSIFIED BUSINESS OPER ATIONS. THE TPO HAD REJECTED THE CONTENTION OF THE APPELLAN T THAT THIS IS NOT A COMPARABLE COMPANY TO THE APPELLANT. HOWEV ER, THE REASON FOR THE EXTRAORDINARY GROWTH IN THE MARGIN O F BODHTREE CONSULTING LTD. IS A FACTOR WHICH IS NOT CONSIDERED BY THE TPO. APPELLANT HAS RELIED UPON THE DECISION OF SAP LABS INDIA PVT. LTD. (2010-TII-44-ITAT-BANG-TP) TO STATE THAT BODHT REE CONSULTING LTD. WAS EXCLUDED BECAUSE OF ITS ABNORMA L PROFIT IN THE SAME YEAR. THE EXTRAORDINARY REVENUE GROWTH IS A FACTOR WHICH NEEDS TO BE ANALYZED. THE APPLICATION OF MOST APPROPRIATE METHO D NEEDS TO BE JUDGED WITH REFERENCE TO THE CONTRACTUAL TERMS B ETWEEN THE PARTIES TO THE TRANSACTION. THE PROFIT OF THIS COMP ANY IS VERY VOLATILE. IN ABSENCE OF THE DETAILS, IT IS DIFFICUL T TO VERIFY AS TO HOW THIS COMPANY HAS EARNED SUCH EXTRAORDINARY PROF IT. THIS COMPANY NAME 2005-06 2006-07 2007- 08- 2008- 09 2009- 10 2010- 11 OP/TC MARGIN BODHTREE CONSULTING LIMITED 14.66% 33.20% 20.86% 64.04% 34.39% 29.65% 23 COMPANY HAS BEEN REJECTED AS A COMPARABLE BY THE DR P IN A LARGE NUMBER OF CASES FOR AY 2009-10. IN VIEW OF TH IS, I AM OF THE OPINION THAT THIS COMPANY IS NOT A ROBUST COMPA BLE AS THE PROFIT OF THIS COMPANY IS VERY VOLATILE AND IT SHOU LD BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. ACCORDINGLY, THE AO/TPO IS DIRECTED TO EXCLUDE BODHTREE CONSULTING LIMITED FR OM THE FINAL SET OF COMPARABLES. 46. BEFORE US, THE LD. DR COULD NOT CONTROVERT TO T HE FINDINGS OF THE LD. CIT(A) THOUGH REFERRED TO THE DECISION OF THE C OORDINATE BENCH IN THE 106 TAXMANN.COM 14. HOWEVER, THE SAID DECISION OF THE COORDINATE BENCH PERTAINS TO A.YS 2003-04 AND 2004- 05 AND THE ABNORMAL PROFIT IS SEEN IN F.Y. 2008-09. CONSIDERI NG THE ABNORMALITY IN THE PROFIT FOR THE YEAR UNDER CONSIDERATION, WE DEC LINE TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). 47. IN SO FAR AS EXCLUSION OF INFOSYS LTD IS CONCER NED, THE ASSESSEE HAS RAISED AN OBJECTION ON THE TURNOVER OF THIS COMPANY AND PLACED STRONG RELIANCE ON THE DECISION OF THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD 36 TAXMANN.CO M 289 WHEREIN IT HAS BEEN HELD THAT INFOSYS LTD IS NOT A PROPER COMP ARABLE. THE CONTENTIONS OF THE ASSESSEE WERE DISMISSED BY THE T PO WHICH WERE 24 ONCE AGAIN RAISED BEFORE THE LD. CIT(A) AND THE LD. CIT(A) WHILE EXCLUDING THIS COMPANY HELD AS UNDER: THE APPELLANT HAS OBJECTED TO THE INCLUSION OF INF OSYS IN THE FINAL SET OF COMPARABLES. THE TURNOVER OF THE APPEL LANT IN SOFTWARE DEVELOPMENT SEGMENT IS RS 36,08,23,635/-. IN THE CASE OF WILLIS PROCESSING SERVICES (I) PVT. LTD. VS DY CIT[2013] 30 TAXMANN.COM 350, THE HONBLE ITAT, MUMBAI HAS HE LD THAT THE TURNOVER CRITERIA IS NOT A VALID CRITERIA AS PE R RULE 10B(2) AND HENCE, CANNOT BE APPLIED. THE APPELLANT HAS REL IED ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CAS E OF AGNITY INDIA [2013] 36 TAXMANN.COM 289 (DELHI) WHEREIN IT HAS BEEN HELD THAT INFOSYS IS NOT A PROPER COMPARABLE ON ACC OUNT OF (I) RISK PROFILE, (II) REVENUE & OWNERSHIP OF BRANDED P RODUCTS, (III) R 85 D EXPENSES, (IV) ONSITE V. OFFSHORE OPERATIONS , (V) EXPENDITURE ON ADVERTISEMENT/SALE PROMOTION & BRAND BUILDING. RESPECTFULLY FOLLOWING THE DECISION OF TH E HON'BLE DELHI HIGH COURT IN THE AGNITY INDIA (SUPRA) THE AO /TPO IS DIRECTED TO EXCLUDE IT FROM THE FINAL SET OF COMPAR ABLES. 25 48. BEFORE US, THE LD. DR PLACED STRONG RELIANCE ON THE DECISION OF THE COORDINATE BENCH IN 106 TAXMANN.COM 14 AND PRAY ED FOR INCLUSION OF THIS COMPANY. 49. PER CONTRA, THE LD. COUNSEL FOR THE ASSESSEE RE ITERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. 50. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUT HORITIES BELOW. WE FIND THAT IN THE CASE RELIED UPON BY THE LD. DR, THE ASSESSEE ITSELF HAS INCLUDED THE COMPANIES HAVING TURNOVER OF MORE THAN RS. 14000 CRORES. SINCE IN THAT CASE THE ASSESSEE DID NOT AD HERE TO THE QUANTIFICATION FILTER, INFOSYS WAS INCLUDED. MOREO VER, WE FIND THAT, THAT ASSESSEE COMPANY WAS ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES WHEREAS THE APPELLANT IN HAND IS PURELY A CAPTIVE SERVICE PROVIDER TO ITS PARENT COMPANY. WE, THEREF ORE, DO NOT FIND ANY ERROR OR INFIRMITY IN THE FINDINGS OF THE LD. CIT(A ). THE APPEAL OF THE REVENUE IS DISMISSED. 26 51. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN IT A NO. 1542/DEL/2015 IS PARTLY ALLOWED FOR STATISTICAL PUR POSES WHEREAS THE APPEAL OF THE REVENUE IN ITA NO. 1608/DEL/2015 IS D ISMISSED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 27.01 .2020. SD/- SD/- [SUDHANSHU SRIVASTAVA ] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT ME MBER DATED: 27 JANUARY, 2020. VL/ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT ASST. REGISTRAR 4. CIT(A) ITAT, NEW DELHI 5. DR