Lime Labs (I) Pvt. Ltd., New Delhi V. ITO, New Delhi

ITA 1703/DEL/2015

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9638 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 8 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 26-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANDEEP MISHRA SENIOR
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE HONBLE VICE PRESIDENT, SHRI N.K. SAINI AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1703/DEL./2015 (ASSESSMENT YEAR : 2010--11) M/S. LIME LABS (I) PVT. LTD., VS. ITO, WARD 15 (3) , 27, FIRST FLOOR, BABAR LANE, NEW DELHI. BENGALI MARKET, NEW DELHI 110 001. (PAN : AABCL2898P) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VED JAIN, ADVOCATE SHRI RISHABH JAIN, CA MS. SURBHI GOYAL, CA REVENUE BY : SHRI SANDEEP MISHRA, SENIOR DR DATE OF HEARING : 31.10.2018 DATE OF ORDER : 12.12.2018 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. LIME LABS (I) PVT. LTD., (HEREI NAFTER REFERRED TO AS THE TAXPAYER) BY FILING THE PRESEN T APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 19.01.2015 PASSE D BY THE AO IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TP O UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE INCOM E-TAX ACT, 1961 ITA NO.1703/DEL/2015 2 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2010- 11 ON THE GROUNDS INTER ALIA THAT :- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E ORDER PASSED BY THE LEARNED ASSESSING OFFICER UNDER SECTI ON 143(3) READ WITH SECTION 144C OF THE ACT IS BAD BOT H IN THE EYE OF LAW AND ON FACTS. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED ASSESSING OFFICER HAS ERRED BOTH ON FACTS A ND IN LAW IN ASSESSING THE INCOME AT RS.92,06,510/- AS AGAINS T INCOME OF RS.61,681/- DECLARED BY THE ASSESSEE. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED ASSESSING OFFICER HAS ERRED BOTH ON FACTS A ND IN LAW IN MAKING AN ADDITION OF RS.91,44,831/- AS DIFFEREN CE IN ARM'S LENGTH PRICE. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED DRP HAS ERRED BOTH ON FACTS AND IN LAW IN I NCLUDING THE FOLLOWING COMPARABLES, DESPITE THE APPELLANT CO MPANY BRINGING SUFFICIENT MATERIAL AND EVIDENCES ON RECOR D TO THE EFFECT THAT LINE OF ACTIVITIES OF THESE COM PARABLE S IS TOTALLY DIFFERENT FROM THAT OF LINE OF ACTIVITIES OF THE AS SESSEE COMPANY: I) INFINITE DATA SYSTEM PRIVATE LIMITED II) INFOSYS LIMITED III) PERSISTENT SYSTEMS LIMITED IV) SONATA SOFTWARE V) TATA ELXSI VI) ZYLOG SYSTEMS LIMITED VII) THIRDWARE SOLUTIONS LIMITED 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED DRP HAS ERRED IN REJECTING THE CONTENTION O F THE ASSESSEE THAT THE INCLUSION OF INFOSYS LIMITED AND SONATA SOFTWARE IS BAD IN LAW AS THE SAME ARE NOT COMPARAB LE WITH THE ASSESSEE. 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED ASSESSING OFFICER HAS ERRED BOTH ON FACTS A ND IN LAW IN APPLYING ARM'S LENGTH PRICE FOR DETERMINATION OF INCOME OF THE APPELLANT BASED ON THE DATA OF COMPARABLES W HICH ARE NOT COMPARABLE WITH THE LEVEL OF OPERATION OF THE A PPELLANT. ITA NO.1703/DEL/2015 3 7. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED DRP HAS ERRED, BOTH ON FACTS AND IN LAW IN REJECTING THE CONTENTION OF THE ASSESSEE THAT THE EXCEPTIONAL COMPARABLES SHOULD BE EXCLUDED WHILE DETERMINING TH E ARMS' LENGTH PRICE. 8. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED TPO HAS ERRED IN EXCLUDING THE FOLLOWING CO M PARABLES SELECTED BY THE ASSESSEE HAVING EXACT THE SAME LINE OF ACTIVITIES AS THAT OF THE ASSESSEE:- I) LGS GLOBAL LIMITED II) HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. III) SILVERLINE TECHNOLOGIES LIMITED IV) AARMAN SOFTWARE PVT. LTD. V) SAGARSOFT (INDIA) LTD. VI) R SYSTEMS INTERNATIONAL VII) COMPULINK SYSTEMS LTD. 9. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED ASSESSING OFFICER HAS ERRED BOTH ON FACTS A ND IN LAW IN ARBITRARILY REJECTING THE COMPARABLES GIVEN BY T HE APPELLANT FOR DETERMINATION OF ARM'S LENGTH PRICE. 10. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED DRP AND THE AO HAS ERRED BOTH ON FACTS AND IN LAW IN REJECTING THE CONTENTION OF THE APPELLANT THAT T HE ID. TPO HAS ERRED BOTH ON FACTS AND IN LAW IN NOT APPLYING THE COMPARABILITY CRITERION/FILTERS UNIFORMLY. 11 (I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED DRP HAS ERRED BOTH ON FACTS AND IN LAW IN H OLDING THE APPROACH OF THE ASSESSEE, IN ITS TP STUDY OF TA KING MULTIPLE YEARS' DATA, BEING WRONG, DESPITE HOLDING THE TNMM METHOD USED BY IT AS AN APPROPRIATE METHOD. (II) THAT THE ABOVE HAS BEEN HELD DESPITE THE FAC T THAT THE EARLIER YEARS' DATA IN THIS CASE HAS AN IM PACT ON THE PROFITS IN THE CURRENT FINANCIAL YEAR OF THE ASSESS EE. (III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED DRP HAS ERRED BOTH ON FACTS AND IN LAW IN U SING THE DATA OF THE COM PARABLES EVEN AFTER THE DATE OF TP STUDY DONE BY THE ASSESSEE. ITA NO.1703/DEL/2015 4 (IV) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED DRP HAS ERRED BOTH ON FACTS AND IN LAW IN U SING THE DATA OF THE COM PARABLES ONLY PERTAINING TO THE CUR RENT YEAR. 12. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED DRP HAS ERRED BOTH ON FACTS AND IN LAW IN R EJECTING THE CALCULATION OF THE ASSESSEE FOR MAKING APPROPRI ATE ADJUSTMENT TO ACCOUNT FOR VARYING RISK PROFILES AND DIFFERENCE IN WORKING CAPITAL OF THE ASSESSEE VIS-A -VIS COM PARABLES. 13. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED DRP HAS ERRED BOTH ON FACTS AND IN LAW IN R EJECTING THE CONTENTION OF THE ASSESSEE THAT THE BENEFIT OF ARMS' LENGTH RANGE OF +/- 5% BE GIVEN IN VIEW OF PROVISO TO SECTION 92C(2) OF THE ACT. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : M/S. LIME LABS (I) PVT. L TD., THE TAXPAYERS 99.99% SHARES WERE HELD BY LIME LABS IND IA HOLDINGS A LLC, USA WHEREAS BALANCE 0.01% SHARES WERE HELD B Y LIME LABS INDIA HOLDINGS B LLC, USA. THE TAXPAYER IS IN VOLVED INTO PROVIDING SOFTWARE DEVELOPMENT SUPPORT SERVICES FOR THE LIME DOMAINS, LIME WIRE AND LIME EXCHANGE LINES OF BUSIN ESS AS PER SPECIFICATIONS PROVIDED BY THE ASSOCIATED ENTERPRIS ES (AES). THE TAXPAYER IS PROVIDING AES WITH PROTOTYPE SOFTWARE F OR QUALITY TESTING AND APPROVAL. ON THE BASIS OF AES INPUT, THE TAXPAYER UNDERTAKES REQUISITE CHANGES / RE-WORK AS REQUIRED. 3. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER E NTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS AE AS UNDER :- ITA NO.1703/DEL/2015 5 S.NO. DESCRIPTION OF TRANSACTION METHOD VALUE (IN RS.) 1 PROVISION OF SOFTWARE DEVELOPMENT SERVICES TNMM 9,36,97,282/- 2 PROVISION OF IT ENABLED SERVICES (ITES) TNMM 3,89,48,274/- 4. THE TAXPAYER PROVIDES SOFTWARE DEVELOPMENT SUPPO RT SERVICES AND INFORMATION TECHNOLOGY ENABLED SERVICE S (ITES) TO ITS AE. TO BENCHMARK ITS INTERNATIONAL TRANSACTION , THE TAXPAYER APPLIED TNMM AS THE MOST APPROPRIATE METHOD (MAM) W ITH OPERATING PROFIT / OPERATING COST (OP/OC) AS THE PR OFIT LEVEL INDICATOR (PLI). THE TAXPAYER IN ORDER TO BENCHMAR K ITS INTERNATIONAL TRANSACTIONS SELECTED 12 COMPARABLES, OUT OF WHICH THE LD. TPO REJECTED 7 COMPARABLES AND THEREAFTER 7 MORE COMPARABLES WERE INCLUDED BY THE LD. TPO. THE TAX PAYER COMPUTED ITS PLI AT 14.6% AS AGAINST PLI OF COMPARA BLE AT 12.12% AND FOUND ITS TRANSACTIONS AT ARMS LENGTH. THE LD. DRP CONFIRMED ALL THE COMPARABLES CHOSEN BY THE TPO. 5. LD. TPO WITHOUT DISPUTING THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MAM WITH OP/OC AS THE PLI INTR ODUCED 7 NEW COMPARABLES WITH AVERAGE PLI AT 25.79% AS AGA INST PLI OF TAXPAYER AT 14.6% AND THEREBY MADE AN ADJUSTMENT OF RS.91.44,831/-. ITA NO.1703/DEL/2015 6 6. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP BY FILING OBJECTIONS WHO HAS DISPOSED OF THE OBJECTIONS. FEE LING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 7. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 8. UNDISPUTEDLY, TNMM AS THE MAM WITH OP/OC AS THE PLI APPLIED BY THE TAXPAYER TO BENCHMARK ITS INTERNATIO NAL TRANSACTIONS HAS BEEN ACCEPTED BY THE LD. TPO, WHO HAS SELECTED 5 COMPARABLES OUT OF 12 COMPARABLES CHOSEN BY THE TAXPAYER AND IN TRODUCED 7 NEW COMPARABLES WHICH ARE AS UNDER :- S.NO. NAME OF THE COMPANY OP/OC 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. -1.07% 2. INFINITE DATA SYSTEM PRIVATE LIMITED 88.25% 3. INFOSYS LIMITED 45.47% 4. MINDTREE LTD. (SEGMENT) 13.92% 5. PERSISTENT SYSTEMS LIMITED 29.02% 6. QUINTEGRA SOLUTIONS LTD. -8.20% 7. R S SOFTWARE (INDIA) LTD. 10.18% 8. SONATA SOFTWARE 35.87% 9. TATA ELEXI (SEGMENT) 20.29% 10 . THINKSOFT GLOBAL SERVICES LTD. 17.35% 11 . THIRDWARE SOLUTIONS LIMITED 33.43% 12 . ZYLOG SYSTEMS LIMITED 25.07% AVERAGE 25.79% ITA NO.1703/DEL/2015 7 9. LD. TPO, BY COMPUTING THE AVERAGE PLI OF OP/OC A T 25.79% AS AGAINST 14.6% OF THE TAXPAYER COMPUTED TH E ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION QUA SOFTW ARE SERVICES RENDERED BY THE ASSESSEE AS UNDER :- OPERATING COST 8,17,56,986 ARMS LENGTH PRICE AT A MARGIN OF 125.79% 10,28,42,113/- PRICE RECEIVED 9,36,97,282/- SHORTFALL BEING ADJUSTMENT U/S 92CA 91,44,831/- 10. THE LD. TPO THEREBY ENHANCED THE INCOME OF THE TAXPAYER BY RS.91,44,831/- I.E. ON ACCOUNT OF DIFFERENCE OF ADJ USTMENT U/S 92CA OF THE ACT. 11. THE LD. AR FOR THE TAXPAYER IN ORDER TO CUT SHO RT THE CONTROVERSY CONTENDED THAT 7 COMPARABLES, NAMELY, (I) INFINITE DATA SYSTEM PRIVATE LIMITED, (II) INFOSYS LIMITED, (III) PERSISTENT SYSTEMS LIMITED, (IV) SONATA SOFTWARE, (V) TATA ELE XI, (VI) ZYLOG SYSTEMS LIMITED AND (VII) THIRDWARE SOLUTIONS LIMIT ED INTRODUCED BY THE LD. TPO ARE NOT VALID COMPARABLES TO BENCHMA RK THE INTERNATIONAL TRANSACTIONS AND CONSEQUENTLY SOUGHT EXCLUSION THEREOF. 12. WE WOULD EXAMINE THE COMPARABILITY OF EACH OF T HE AFORESAID 7 COMPARABLES ONE BY ONE AS UNDER. ITA NO.1703/DEL/2015 8 INFINITE DATA SYSTEMS PRIVATE LTD. (INFINITE) 13. THIS IS TPOS COMPARABLE. THE TAXPAYER SOUGHT EXCLUSION OF INFINITE ON TWO GROUNDS ONE, IT IS FUNCTIONALL Y DIFFERENT; AND TWO, INFINITE IS EARNING ABNORMAL PROFIT TO THE TUN E OF 1496%. PERUSAL OF ANNUAL REPORT OF INFINITE, AVAILABLE AT PAGE 56 OF THE PAPER BOOK, SHOWS THAT INFINITE IS A GLOBAL SERVICE PROVIDER OF APPLICATION MANAGEMENT OUTSOURCING, REMOTE INFRASTR UCTURE MANAGEMENT SERVICES, R&D AND INTELLECTUAL PROPERTY LEVERAGED SOLUTIONS AND RELATED IT SERVICES. FURTHERMORE, WH EN WE EXAMINE REVENUE RECOGNITION OF INFINITE IT SHOWS THAT PRIMA RILY IT DERIVES ITS REVENUE FROM TECHNICAL SUPPORT AND INFRASTRUCTURE M ANAGEMENT SERVICES WHEREAS THE TAXPAYER IS DRIVING ITS REVENU E FROM SOFTWARE DEVELOPMENT SUPPORT SERVICES. INFINITE IS ALSO INT O RENDERING TECHNICAL CONSULTATION, DESIGN & DEVELOPMENT OF SOF TWARE, MAINTENANCE SYSTEM INTEGRATION, IMPLEMENTATION, TES TING & INFRASTRUCTURE, MANAGEMENT SERVICES AND ITS SEGMENT AL INFORMATION IS NOT AVAILABLE, WHEREAS THE TAXPAYER IS INTO PROV IDING ROUTINE SOFTWARE DEVELOPMENT SUPPORT SERVICES TO ITS AE. 14. THE TAXPAYER PLACED RELIANCE ON DECISION RENDER ED BY COORDINATE BENCH OF THE TRIBUNAL IN DCIT VS. EXCHANGING TECHNOLOGY SERVICES INDIA LTD. (ITA NO.121/DEL/2015 ) WHEREIN INFINITE WAS ORDERED TO BE EXCLUDED BEING NOT A VAL ID COMPARABLE ITA NO.1703/DEL/2015 9 VIS--VIS EXCHANGING TECHNOLOGY WHICH WAS A ROUTINE SOFTWARE DEVELOPMENT SUPPORT SERVICES PROVIDER. 15. FURTHERMORE, IT IS BROUGHT ON RECORD BY THE TAX PAYER THAT THE PROFITABILITY OF INFINITE IS INCREASED BY 1496% AS COMPARED TO THE PRECEDING YEAR DESPITE THE FACT THAT FOR COMPUTATIO N OF OP/OC, FOREIGN EXCHANGE LOSS HAS BEEN EXCLUDED FROM OC. S O, WE ARE OF THE CONSIDERED VIEW THAT SUPER-NORMAL PROFIT TO THE TUNE OF 1496% CERTAINLY AFFECTS OP/OC BUT, IN THIS CASE, EVEN FOR EIGN EXCHANGE LOSS HAS BEEN EXCLUDED FROM THE OC BY THE TPO AND A S SUCH, IT MAKES THE INFINITE NOT A VALID COMPARABLE VIS--VIS THE TAXPAYER. SO, WE ARE OF THE CONSIDERED VIEW THAT BECAUSE OF F UNCTIONAL DISSIMILARITY OF INFINITE VIS--VIS THE TAXPAYER AN D EARNING SUPER- NORMAL PROFIT BY 1496% AS COMPARED TO PRECEDING YEA RS MAKES INFINITE AS INVALID COMPARABLE. SO, WE DIRECT THE AO/ TPO TO EXCLUDE INFINITE FROM THE FINAL SET OF COMPARABLES. INFOSYS LIMTIED (INFOSYS) 16. THIS IS AGAIN TPOS COMPARABLE. THE TAXPAYER R AISED OBJECTION BEFORE THE TPO FOR ITS INCLUSION IN THE F INAL SET OF COMPARABLES ON THE GROUNDS INTER ALIA THAT INFOSYS IS NOT ONLY AN ESTABLISHED PLAYER BUT A GIANT IN ITS FIELD; THAT I T HAS ABNORMALLY HIGH TURNOVER HAVING ITS OWN BRAND VALUE; THAT IT I S A FULL-FLEDGED ITA NO.1703/DEL/2015 10 RISK ENTREPRENEUR; THAT IT IS INCURRING SUBSTANTIAL AMOUNT ON R&D ACTIVITIES. 17. WHEN WE EXAMINE THE FUNCTIONAL PROFILE OF INFOS YS IN ITS ANNUAL REPORT, AVAILABLE AT PAGES 208 OF THE PAPER BOOK, IT SHOWS THAT THE INFOSYS PROVIDES END-TO-END BUSINESS SOLUT IONS THAT LEVERAGE CUTTING EDGE TECHNOLOGY, THEREBY ENABLING CLIENTS TO ENHANCE BUSINESS PERFORMANCE. THE COMPANY PROVIDES SOLUTIONS THAT SPAN THE ENTIRE SOFTWARE LIFECYCLE ENCOMPASSIN G TECHNICAL CONSULTING, DESIGN, DEVELOPMENT, RE-ENGINEERING, MA INTENANCE, SYSTEMS INTEGRATION, PACKAGE EVALUATION AND IMPLEME NTATION, TESTING AND INFRASTRUCTURE MANAGEMENT SERVICES. IN ADDITION, THE COMPANY OFFERS SOFTWARE PRODUCTS FOR THE BANKING IN DUSTRY. FURTHERMORE, INFOSYS SPENT 2.1% OF THE TOTAL REVENU E ON ITS R&D EXPENDITURE DURING THE YEAR UNDER ASSESSMENT AS IS EVIDENT FROM PAGES 187 & 188 OF THE PAPER BOOK. MOREOVER, INFOS YS IS HAVING HUGE INTANGIBLE ASSETS, IT BEING A BRAND IN ITSEL F. 18. COMPARABILITY OF INFOSYS VIS--VIS ROUTINE SOFT WARE DEVELOPMENT AND SUPPORT SERVICES PROVIDER HAS BEEN EXAMINED BY HONBLE DELHI HIGH COURT IN CASE CITED AS CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (ITA 1204/2011) AFFIRMED THE FINDINGS OF THE TRIBUNAL THAT INFOSYS IS NOT A VALID COMPARABLE AND REFERRED TO PARA 3.3 OF THE ORDER OF THE TRIBUNAL WHICH IS AS U NDER :- ITA NO.1703/DEL/2015 11 BASIC PARTICULAR INFOSYS TECHNOLOGIES LTD. AGNITY I NDIA RISK PROFILE OPERATE AS FULL-FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISKS AS THE 100% SERVICES ARE PROVIDED TO AES NATURE OF SERVICES DIVERSIFIED-CONSULTING, APPLICATION DESIGN, DEVELOPMENT, RE- ENGINEERING AND MAINTENANCE SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT, ETC. (REFER PAGE 117 OF THE PAPER BOOK) CONTRACT SOFTWARE DEVELOPMENT SERVICES. REVENUE RS.9, 028 CRORES RS.16.09 CRORES OWNERSHIP OF BRANDED/ PROPRIETARY PRODUCTS DEVELOPS/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSYS MCONNECT, ALSO, THE COMPANY DERIVES SUBSTANTIAL PORTION OF I TS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE ) ONSITE VS. OFFSHORE AS MUCH AS HALF OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY INFOSYS ARE ONSITE (I.E., SERVICES PERFORMED AT THE CUSTOMERS LOCATION OVERSEAS). AND OFFSHORE (50.20%) (REFER PAGE 117 OF THE PAPER BOOK) THAN HALF OF ITS SERVICE, INCOME FROM ONSITE SERVICES. THE APPELLANT PROVIDES ONLY OFFSHORE SERVICES (I.E., REMOTELY FROM INDIA) EXPENDITURE ON ADVERTISING/SALES PROMOTION AND BRAND BUILDING RS.61 CRORES RS. NIL (AS THE 100% SERVICES ARE PROVIDE TO AES) ITA NO.1703/DEL/2015 12 EXPENDITURE ON RESEARCH & DEVELOPMENT RS. 102 CRORES RS. NIL OTHER 100% OFFSHORE (FROM INDIA) 6. LEARNED COUNSEL FOR THE REVENUE HAS SUBMITTED TH AT THE TRIBUNAL AFTER RECORDING THE AFORESAID TABLE HAS NO T AFFIRMED OR GIVEN ANY FINDING ON THE DIFFERENCES. THIS IS PARTL Y CORRECT AS THE TRIBUNAL HAS STATED THAT INFOSYS TECHNOLOGIES LTD. SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES FOR THE REASO N LATTER WAS A GIANT COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWAR E AND IT ASSUMED ALL RISKS LEADING TO HIGHER PROFITS, WHEREA S THE RESPONDENT-ASSESSEE WAS A CAPTIVE UNIT OF THE PAREN T COMPANY AND ASSUMED ONLY A LIMITED RISK. IT HAS ALSO STATE D THAT INFOSYS TECHNOLOGIES LTD. CANNOT BE COMPARED WITH THE RESPO NDENT- ASSESSEE AS SEEN FROM THE FINANCIAL DATA ETC. TO TH E TWO COMPANIES MENTIONED EARLIER IN THE ORDER I.E. THE CHART. IN THE GROUNDS OF APPEAL THE REVENUE HAS NOT BEEN ABLE TO CONTROVERT OR DENY THE DATA AND DIFFERENCES MENTIONED IN THE TABULATED FOR M. THE CHART HAS NOT BEEN CONTROVERTED. 19. KEEPING IN VIEW THE FUNCTIONAL DISSIMILARITY BE TWEEN INFOSYS VIS--VIS THE TAXPAYER AND THE FACT THAT INFOSYS IS INCURRING HUGE EXPENDITURE TO THE TUNE OF 2.1% OF ITS TOTAL REVENU E ON ITS R&D ACTIVITIES LEADING TO THE CREATION OF SIGNIFICANT I NTANGIBLE PROPERTY AND THE FACT THAT INFOSYS IS A BRAND IN ITSELF AND THE FACT THAT IT ASSUMES ENTREPRENEURIAL RISK AND IT ALSO DEALS IN S OFTWARE PRODUCT AND FOLLOWING THE DECISION RENDERED BY HONBLE DELH I HIGH COURT IN CIT VS. AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA), IT CANNOT BE TAKEN AS A VALID COMPARABLE. SO, WE DIRECT THE AO/ TPO TO EXCLUDE INFINITE FROM THE FINAL SET OF COMPARABLES. ITA NO.1703/DEL/2015 13 PERSISTENT SYSTEMS LIMTIED (PERSISTENT) 20. THIS IS AGAIN TPOS COMPARABLE WHICH HAS BEEN C HALLENGED FOR EXCLUSION BY THE TAXPAYER ON THE GROUND OF FUNC TIONAL DISSIMILARITY. PERUSAL OF THE ANNUAL REPORT, AVAIL ABLE AT PAGE 412 OF THE PAPER BOOK, GOES TO PROVE THAT PERSISTENT IS IN TO PROVIDING OUTSOURCED SOFTWARE PRODUCT DEVELOPMENT SERVICES CO VERING FULL LIFECYCLE OF PRODUCT TO ITS CUSTOMERS WHEREAS NO SE GMENTAL FINANCIALS ARE AVAILABLE. PERUSAL OF THE ANNUAL RE PORT AT PAGE 368 OF THE PAPER BOOK FURTHER GOES TO PROVE THAT PERSISTEN T HAS EARNED REVENUE FROM SALE OF SOFTWARE SERVICES AND PRODUCT WHEREAS THE TAXPAYER IS INTO PROVIDING SOFTWARE SERVICES ONLY. FURTHERMORE, PERUSAL OF SCHEDULE XIV FORMING PART OF THE PROFIT & LOSS ACCOUNT, AVAILABLE AT PAGE 369 OF THE PAPER BOOK, SHOWS THAT IT HAS PAID COMMISSION ON SALES TO OTHER THAN SOLE SELLING AGEN TS TO THE TUNE OF RS.3.3 CRORES AND THIS FACT PROVES THAT PERSISTENT HAS SUBSTANTIAL INCOME FROM SALES. 21. COMPARABILITY OF PERSISTENT HAS BEEN EXAMINED B Y COORDINATE BENCH OF THE TRIBUNAL IN NUMEROUS CASES VIZ. (I) MENTOR GRAPHICS (INDIA) PVT. LTD. VS. DCIT 2018 (5) TMI158 4-ITAT DELHI; (II) NEC TECHNOLOGIES INDIA LTD. VS. DCIT ITA NO.1102/DEL/2015 ITAT, DELHI; (III) OPEN SOLUTION S SOFTWARE SERVICES PVT. LTD. VS. DCIT ITA NO.7078/DEL/2014 ITAT, ITA NO.1703/DEL/2015 14 DELHI; (IV) DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. IT(TP) A.NO.212/BANG/2015 ITAT, BANGALORE; AND EQ UANT SOLUTIONS INDIA PVT. LTD. VS. DCIT ITA NO.1202/DE L/2015 ITAT, DELHI. 22. HONBLE DELHI HIGH COURT HAS ALSO AFFIRMED THE FINDINGS RETURNED BY THE COORDINATE BENCH OF THE TRIBUNAL IN CASE CITED AS PCIT VS. CASHEDGE INDIA PVT. LTD. ITA NO.279/2016 AND ORDERED TO EXCLUDE THE SAME AS A VALID COMPARABLE V IS--VIS ROUTINE SOFTWARE SERVICE PROVIDER BY RETURNING FOLLOWING FI NDINGS :- 6. AS FAR AS THE FIRST COMPANY, I.E., PERSISTENT S YSTEMS LTD. IS CONCERNED, THE MATERIAL ON RECORD -AS FOUND BY THE ITAT - SHOWS THAT THIS COMPANY WAS INVOLVED IN SOFTWARE DEVELOPM ENT, SOFTWARE PRODUCTS AND MARKETING. FURTHERMORE AND PE RHAPS MORE IMPORTANTLY PUBLISHED SEGMENTAL DATA WAS NOT A VAILABLE. IN THESE CIRCUMSTANCES, HAVING REGARD TO THE SPECIFICI TY OF THE TRANSFER PRICING RULES UNDER RULE 10 (B) TO 10 (E) OF THE INCOME TAX RULES, THE DATA OF THE SAID FIRM, I.E., PERSIST ENT SYSTEMS LTD. COULD NOT HAVE BEEN INCLUDED. 23. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT PERSISTENT IS NOT A VALID COMP ARABLE VIS--VIS TAXPAYER. SO, WE DIRECT THE AO/ TPO TO EXCLUDE INF INITE FROM THE FINAL SET OF COMPARABLES. SONATA SOFTWARE LTD. (SONATA) 24. THIS IS AGAIN TPOS COMPARABLE WHO HAS CHOSEN T HE SAME ON THE GROUND THAT IT IS ALSO A SOFTWARE DEVELOPMENT S ERVICES PROVIDER. THE TAXPAYER SOUGHT TO EXCLUDE THE SAME ON GROUND O F FUNCTIONAL ITA NO.1703/DEL/2015 15 DISSIMILARITY AS WELL AS ON GROUND OF SUBSTANTIAL R ELATED PARTY TRANSACTIONS (RPT). WHEN WE EXAMINE FUNCTIONAL PRO FILE OF SONATA, AVAILABLE AT PAGE 742 OF THE PAPER BOOK, IT GOES TO PROVE THAT SONATA IS PRIMARILY ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCT AND IT ALSO PROVIDES INFORMATION TECHNOLOGY (IT) SOLUTIONS, IT CONSULTING, DEVELOPMENT SERVICES GLOB ALLY, ENHANCING COMPETITIVE ADVANTAGE OF ITS CUSTOMERS. THE COMPAN Y ALSO PROVIDES BOTH ONSITE AS WELL AS OFFSHORE SERVICES I N THE AREA OF RP CUSTOMIZATION CONVERSION AND MIGRATION PROJECTS, DA TA WAREHOUSING, BUSINESS INTELLIGENCE, WEB DEVELOPMENT , INFRASTRUCTURE MANAGEMENT AMONGST OTHERS. 25. FURTHERMORE, WHEN WE EXAMINE RELATED PARTY TRAN SACTIONS OF SONATA, AVAILABLE AT PAGE 726 OF THE PAPER BOOK, IT GOES TO PROVE THAT ITS RPT AS PERCENTAGE OF SALES IS 53.83% WHERE AS TPO HIMSELF HAS APPLIED THE FILTERS TO EXCLUDE THE COMPANIES WI TH MORE THAN 25% OF RPT FROM THE FINAL SET OF COMPARABLES. SO, KEEPING IN VIEW THE FUNCTIONAL DISSIMILARITY AS WELL AS SUBSTA NTIAL RELATED PARTY TRANSACTIONS, SONATA CANNOT BE A VALID COMPAR ABLE VIS--VIS TAXPAYER, HENCE ORDERED TO BE EXCLUDED. TATA ELXSI 26. THIS IS AGAIN TPOS COMPARABLE, WHICH THE TAX PA YER HAS SOUGHT TO EXCLUDE ON GROUND OF FUNCTIONAL DISSIMIL ARITIES. THE LD. ITA NO.1703/DEL/2015 16 TPO RETAINED THIS COMPARABLE DESPITE OBJECTIONS RAI SED BY THE TAX PAYER THAT IT IS ENGAGED IN THE PROVISION OF ANIMAT ION, HARDWARE DESIGNING ETC. HOWEVER, TPO BY TAKING INTO CONSIDER ATION THE SEGMENT REPORTING OBSERVED THAT TATA ELXSIS OPERAT ION PREDOMINANTLY RELATE TO PROVIDING SYSTEMS INTEGRATI ON AND SOFTWARE DEVELOPMENTS SERVICES IN THE INFORMATION TECHNOLOGY FIELD. 27. HOWEVER, PERUSAL OF ANNUAL REPORT OF TATA ELXS I AVAILABLE AT PAGE 116 TO 118 OF THE PAPER BOOK UNDER THE HEAD M ANAGEMENT DISCUSSION AND ANALYSIS (MDA) STATEMENT, SHOWS THA T SOFTWARE DEVELOPMENT AND SERVICES IS BROKEN UP INTO THREE DI STINCT BUSINESS GROUPS VIZ. PRODUCTIVE DESIGN SERVICES (PDS) INNOVA TION, DESIGN, ENGINEERING AND VISUAL COMPUTING LABS. SO FROM THE ANNUAL REPORT- IT IS PROVED THAT TATA ELXSI IS FUNCTIONING INTO SP ECIALIZED DOMAIN OF SOFTWARE PRODUCTS / SERVICES, THUS, FUNCTIONALLY DISSIMILAR VIS-- VIS THE TAX PAYER. 28. COMPARABILITY OF TATA ELXSI HAS BEEN EXAMINED B Y THE CO- ORDINATE BENCH OF THE TRIBUNAL IN CASE CITED AS M/S. NEC TECHNOLOGIES INDIA LTD. (FORMERLY KNOWN AS NEC HCL SYSTEMS TECHNOLOGIES LTD. VS. DCIT AND TATA ELXSI IS HELD TO BE NOT A SUITABLE COMPARABLES FOR BENCHMARKING INTERNATIONAL TRANSACTIONS VIS--VIS A ROUTINE SOFTWARE DEVELOPMENT SERVICES PROVIDER BY RECORDING FOLLOWING FINDINGS : ITA NO.1703/DEL/2015 17 27. SO KEEPING IN VIEW THE FACT THAT TATA BEING EN GAGED IN PRODUCT DESIGN SERVICES, INNOVATION DESIGN ENGINEER ING SERVICES AND VISUAL COMPUTING LABS AND HAS SPECIALI ZED AND NICHE DOMAIN OF SOFTWARE PRODUCTS/SERVICES AND BY F OLLOWING THE DECISION RENDERED BY THE TRIBUNAL IN TOLUNA IND IA PVT. LTD. AND TELCORDIA TECHNOLOGIES INDIA PVT. LTD. (SU PRA), WE FIND TATA AS NOT A SUITABLE COMPARABLE FOR BENCHMAR KING THE INTERNATIONAL TRANSACTION. 29. SO IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE AN D BY FOLLOWING DECISION RENDERED BY CO-ORDINATE BENCH OF TRIBUNAL IN M/S. NEC TECHNOLOGIES INDIA LTD. (SUPRA,) TOLUNA IN DIA PVT. LTD. AND TELCORDIA TECHNOLOGIES INDIA PVT. LTD. (SUPRA) TATA ELXSI IS BEING FUNCTIONALLY DISSIMILAR VIS--VIS TAX PAYE R IS ORDERED TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE FOR BENC HMARKING THE INTERNATIONAL TRANSACTIONS. ZYLOG SYSTEMS LIMITED (ZYLOG) 30. THIS IS AGAIN A TPOS COMPARABLE WHICH THE TAXP AYER HAS SOUGHT TO EXCLUDE ON GROUND OF EXTRAORDINARY EVENT THAT IT HAS ACQUIRED DIRECTLY M/S. MATRIX PRIMUS PARTNERS INC., USA, M/S. ALGORITHM SOLUTIONS PRIVATE LIMITED, INDIA AND ACQU IRED M/S BRAINHUNTERS INC. CANADA. 31. PERUSAL OF THE ANNUAL REPORT AVAILABLE AT PAGE 457 GOES TO PROVE THAT ZYLOG HAS ACQUIRED DIRECTLY M/S. MATRIX PRIMUS PARTNERS INC. USA, M/S. ALGORITHM SOLUTIONS PRIVATE LIMITED, INDIA AND ACQUIRED M/S. BRAINHUNTERS INC., CANADA, THROUGH OUR WOS ZYLOG SYSTEMS (CANADA) LTD., DURING THE FINANC IAL YEARS ITA NO.1703/DEL/2015 18 2009-10 RELEVANT FOR YEAR UNDER ASSESSMENT IN CASE OF THE TAX PAYER. 32. FURTHERMORE THE ZYLOG HAS INVESTED IN ACQUIRING THIS BUSINESS AN AMOUNT OF RS. 62,12,04,848/- AND HAS AD OPTED THE POLICY OF AMORTIZING THIS AMOUNT OVER A PERIOD OF 5 YEARS. THUS, THE COMPANY HAS AMORTIZED A SUM OF RS. 10,72,97,170/- IN THE YEAR UNDER ASSESSMENT. SO THE ACQUISITION BEING AN EXTRA ORDINARY EVENT HAS CERTAINLY AFFECTED THE PROFITABILITY OF THE COM PANY AND AS SUCH CANNOT BE A VALID COMPARABLE. 33. COORDINATE BENCH OF TRIBUNAL IN CASE CITED AS EQUANT SOLUTIONS INDIA PVT. LTD. V. DCIT (ITA NO. 1202/DEL /2015) HAS EXAMINED COMPARABILITY OF ZYLOG VIS--VIS SOFTWARE DEVELOPMENTS SUPPORTS SERVICE PROVIDER AND HELD THE SAME TO BE N OT AN INVALID COMPARABLE ON THE GROUND THAT IT HAS UNDERGONE INTO THE BUSINESS OF RESTRUCTURING WHERE IT IS CLEAR DUGOUT FAIR FLEX MA TRIX. MOREOVER ZYLOG IS ALSO HAVING SIGNIFICANT INTANGIBLES AND AL SO CARRYING OUT RESEARCH AND DEVELOPMENT ACTIVITIES CREATING SIGNIF ICANT INTANGIBLES. 34. SO KEEPING IN VIEW THE FACT THAT THE ZYLOG HAS UNDERGONE INTO BUSINESS RESTRUCTURING DUE TO ACQUISITION, WHI CH IS AN EXTRAORDINARY EVENT, THE SAME CANNOT BE A VALID COM PARABLE HENCE ORDER TO BE EXCLUDED FROM THE FINAL SET OF COMPARAB LE. ITA NO.1703/DEL/2015 19 THIRDWARE SOLUTIONS LTD. (THIRDWARE) 35. THIS IS AGAIN A TPOS COMPARABLE WHICH THE TAX PAYER HAS SOUGHT TO EXCLUDE ON GROUND OF FUNCTIONAL DISSIMILA RITY. THE TPO RETAINED THIS COMPARABLE DESPITE OBJECTIONS RAISED BY THE TAX PAYER ON THE GROUND THAT SOFTWARE DEVELOPMENT, IMPLEMENTA TION AND SUPPORT SERVICES ARE SUB-SEGMENTS OF SOFTWARE DEVEL OPMENT SERVICES ONLY. 36. IT IS THE CASE OF THE TAX PAYER THAT THIRDWARE IS INTO PROVIDING SOFTWARE PRODUCT DEVELOPMENT IMPLEMENTATION AND CON SULTING BASED ON ERP AND BUSINESS INTELLIGENCES AND RELIED UPON DECISION RENDERED BY CO-ORDINATE BENCH OF TRIBUNAL IN CASE C ITED AS OPEN SOLUTIONS SOFTWARE SERVICES PVT. LTD. VS. DCIT [ITA NO. 7078/DEL/2014, WHEREBY CO-ORDINATE BENCH OF THE TRIBUNAL HAS ORDERED TO EXCLUDE THIRDWARE AS A COMPARABLE VIS-- VIS ROUTINE SOFTWARE DEVELOPMENT AND SUPPORTS SERVICES PROVIDER BY RETURNING FOLLOWING FINDINGS :- 11. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF RELEVANT MATERIAL REFERRED TO BEFORE US, WE FIND THAT UNDER THE HEAD 'SALES' THE FOLLOWING ITEM S HAVE BEEN DISCLOSED:- A) EXPORTS FROM SEZ UNITS- RS. 47,58,40,447/- B) EXPORTS FROM STPI UNIT- RS. 11,20,90,633/- C) REVENUE FROM SUBSCRIPTION - RS. 1,53,13,736/- D) SALE OF LICENCES- RS. 1,51,38,618/- E) SALE OF SOFTWARE SERVICES - RS. 5,72,23,072/- RS. 67,56,06,505/- ITA NO.1703/DEL/2015 20 FROM THE ABOVE IT IS NOT CLEAR AS TO WHAT CONSTITUT ES THE SALE OF EXPORTS, WHETHER IT IS PRODUCT OR SOFTWARE DEVELOPMENT SERVICES. REVENUE FROM SUBSCRIPTION AND SALE OF LICENCE ALSO INDICATE THAT THERE IS INCOME FROM PRODUCTS ALSO WHICH WOULD INDICATE DIFFERENT BUSINE SS MODEL AND CONSEQUENTLY THE PROFIT MARGIN. WITHOUT ANY ITA 7078/DEL/2014 A.Y. 2010-11 M/S OPEN SOLUTIONS SERVICES PVT.LTD. PROPER SEGMENTAL INFORMATION REGARDING REVENUES FROM SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS, IT WOULD BE VERY DIFFICULT TO ACCEPT THAT THE PROPER COMPARABILITY A NALYSIS CAN BE CARRIED OUT WITH THE ASSESSEE WHICH IS PUREL Y PROVIDING SOFTWARE DEVELOPMENT SERVICES. APART FROM ABOVE IT IS NOTICED THAT IN THE CASE OF FISERVE, TH IS COMPARABLE COMPANY HAS BEEN EXCLUDED PRECISELY ON THE SAME GROUND AND THE SAID ORDER OF THE TRIBUNAL STANDS AFFIRMED BY THE HON'BLE HIGH COURT ALSO. ACCORDINGLY, WE DIRECT THE TPO TO EXCLUDE THE SAID COMPARABLE FROM THE LIST OF COMPARABLES. 37. SO IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE AND FOLLOWING THE DECISION RENDERED BY CO-ORDINATE BENCH OF TRIBU NAL IN OPEN SOLUTIONS SOFTWARE SERVICES PVT. LTD. VS. DCIT (SUPRA). WE ARE OF THE CONSIDERED VIEW THAT THIRDWARE IS ALSO INTO DEV ELOPMENT AND SALE OF SOFTWARE PRODUCTS WHEREAS THE TAX PAYER IS PURELY INTO PROVIDING SOFTWARE DEVELOPMENT SERVICES. MOREOVER C OMPLETE SEGMENTAL FINANCIALS ARE ALSO NOT AVAILABLE. SO KEE PING IN VIEW THE FACT THAT THE THIRDWARE IS HAVING A DIFFERENT BUSIN ESS MODEL CANNOT BE A VALID COMPARABLES VIS--VIS TAX PAYER WHO IS A ROUTINE SOFTWARE DEVELOPMENT SERVICES PROVIDER, HENCE ORDER ED TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. ITA NO.1703/DEL/2015 21 38. KEEPING IN VIEW THE FACT THAT THE AO/TPO IS TO MAKE A FRESH COMPARABILITY ANALYSIS FROM THE FINAL LIST OF COMPA RABLES TO BENCHMARKING THE INTERNATIONAL TRANSACTION UNDER TA KEN BY THE TAX PAYER. 39. CONSEQUENTLY, APPEAL FILED BY THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 12 TH DAY OF DECEMBER, 2018. SD/- SD/- (N.K. SAINI) (KULDIP SINGH) VICE PRESIDENT JUDICIAL MEMBER DATED THE 12 TH DAY OF DECEMBER, 2018 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A). 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.