VARIAN MEDICAL SYSTEMS (INDIA) SOFTWARE P. LTD, MUMBAI V. ASST CIT 11(3)(1), MUMBAI

ITA 1709/MUM/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 8364 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2011-2012
• Appeal Filed On: 22-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VODAL RAJ SINGH
• Assessee Lawyers: F V IRANI
• Keywords: Related party transaction; Transfer pricing; International transaction; Set aside
• Section: 143(3); 10B; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J, MUMBAI BEFORE & SHRI SHAMIM YAHYA (A.M.) & SHRI PAWAN SI NGH (JM) ITA NO. 1709/MUM/2016(ASSESSMENT YEAR : 2011-12) VARIAN MEDICAL SYSTEMS (INDIA) SOFTWARE PVT LTD, UNIT NO.33, KALPATARU SQUARE, OFF ANDHERI KURLA ROAD, ANDHERI (E), MUMBAI-59 PAN : AACCCC9720C VS ASST.COMMISSIONER OF INCOME-TAX 11(3)(1), MUMBAI-20 APPELLANT RESPONDEDNT APPELLANT BY SHRI F.V. IRANI ADVOCATE RE SPONDENT BY S HRI VODAL RAJ SINGH CIT - DR DATE OF HEARING 06-02-2020 DATE OF PRONOUNCEMENT 21-04-2020 O R D E R PER PAWAN SINGH, JM : 1. THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE ASS ESSMENT ORDER DATED 27-01-2016 PASSED U/S 143(3) R.W.S. 144C(13), PASSE D IN PURSUANCE OF DIRECTION OF DRP DATED 24-12-2015 FOR ASSESSMENT YE AR 2011-12. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL :- BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, VARIAN MEDICAL SYSTEMS INDIA SOFTWARE PRIVATE LIMITED (HER EINAFTER REFERRED TO AS 'THE APPELLANT') RESPECTFULLY CRAVES LEAVE TO PREFE R AN APPEAL AGAINST THE ORDER PASSED BY DIE ASST. COMMISSIONER OF INCOME TA X 11 (3)(1), MUMBAI ('LEARNED AO') DATED 27 JANUARY 2016, RECEIV ED ON 29 JANUARY 2016, UNDER SECTION 143(3) R.W.S. 144C(13) OF THE I NCOME-TAX ACT, 1961 ('THE ACT') ON THE FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF DIE CAS E AND IN LAW, THE LEARNED TRANSFER PRICING OFFICER ('LEARNED TPO) AND CONSEQU ENTLY THE LEARNED AO 2 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD ON THE DIRECTIONS OF DIE HON'BLE DISPUTE RESOLUTION PANEL ('DRP') HAS ERRED IN COMPUTING THE ARM'S LENGTH PRICE OF INTERNATIONA L TRANSACTION AND CONFIRMING THE ADJUSTMENT OF RS. 2,05,78,185 TO THE APPELLANT'S TOTAL INCOME BASED ON THE PROVISIONS OF CHAPTER X OF THE ACT AND THEREFORE, TO DIE EXTENT OF ADDITIONS/DISALLOWANCES MADE BY DIE LEARNED AO, DIE ORDER OF DIE LEARNED AO IS BAD IN LAW AND NEEDS TO BE ANNULLED. 2. NO MOTIVE TO AVOID TAX AVOID TAX AS IT IS A STPL UNIT 2.1 ON FACTS AND IN DIE CIRCUMSTANCES OF DIE CASE A ND IN LAW, THE APPELLANT IS A STPI UNIT REGISTERED WIDI DIE SOFTWARE TECHNOLOGY PARKS OF INDIA CLAIMING TAX HOLIDAY UNDER SECTION 10A OF DIE ACT, HENCE DIERE IS NO MOTIVE TO AVOID TAX. 2.2 ON FACTS AND IN THE CIRCUMSTANCES OF DI E CASE AND IN LAW, APPELLANT HAS NO MOTIVE TO AVOID TAX AS IT IS AN STPI UNIT EN TIDED TO INCOME-TAX HOLIDAY UNDER SECTION IDA OF DIE ACT AND THEREFORE TRANSFER PRICING PROVISIONS UNDER CHAPTER X OF THE ACT OUGHT NOT TO BE INVOKED. 3. CHERRY PICKING OF COMPANIES BY THE LEARNED TPO A ND INAPPROPRIATE REJECTION OF THE SEARCH PROCESS ADOPTED BY THE APPE LLANT 3.1 ON DIE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE LEARNED TPO AS WELL AS THE HON'BLE DRP ERRED IN REJ ECTION OF METIIODICAL AND SCIENTIFIC SEARCH PROCESS UNDERTAKEN BY DIE APP ELLANT. 3.2 ON FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE HON'BLE DRP ERRED IN UPHOLDING / CONFIRMING THE ACT ION OF THE LEARNED TPO IN CHERRY PICKING OF COMPANIES WITHOUT PROVIDING AN Y COGENT REASON OR WITHOUT SHARING THE SEARCH PROCESS OR ACCEPT-REJECT MATRIX OF THE COMPARABLE COMPANIES SELECTED BY HIM. 4. VIOLATION OF PROVISIONS OF RULE 10B(2) AND 10B(3 ) AND ARBITRARY REJECTION OF COMPARABLE! SELECTED BY THE APPELLANT 4.1 ON THE FACTS AND IN THE CKCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO ERRED IN AND THE HON'BLE DRP FURTHER ER RED IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO IN ADDING NEW COMP ARABLES WHICH DIFFER IN FUNCTIONS UNDERTAKEN, ASSETS EMPLOYED AND RISK A SSUMED AS COMPARED TO APPELLANT IN CONTRAVENTION OF THE PROVISIONS OF RUL E 10B(2) & (3) OF THE RULES; AND 3 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD 4.2 ON FACTS AND IN THE CKCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO AS WELL AS THE HON'BLE DRP ERRED IN REJECTING C G-VAK SOFTWARE & EXPORTS LTD. STATING THAT THE COMPANY WITH FLUCTUAT ING MARGINS SHOULD BE EXCLUDED. 5. INAPPROPRIATE REJECTION OF THE JITTERS APPLIED B Y THE APPELLANT 5.1 ON THE FACTS AND IN THE CKCUMSTANCES OF THE CASE AN D IN LAW, THE LEARNED TPO ERRED IN AND THE HON'BLE DRP FURTHER ER RED IN UPHOLDING / CONFIRMING THE ACTION OF THE TPO IN REJECTING ALL O F THE APPELLANT'S QUANTITATIVE FILTERS, TO SELECT COMPARABLE COMPANIE S; 5.2 ON FACTS AND IN THE CKCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED TPO AS WELL AS THE HON'BLE DRP ERRED IN NOT CONSIDE RING THE TURNOVER FILTER FOR THE UPPER LIMIT WHICH HAS BEEN DULY CONSIDERED BY THE APPELLANT WHILE SELECTING ITS COMPARABLES. 6. WORKING CAPITAL ADJUSTMENT 6.1 ON THE FACTS AND IN THE CKCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED TPO AS WELL AS THE HON'BLE DRP ERRED IN DENYING THE WORKING CAPITAL ADJUSTMENT WITH REGARD TO THE PROVISION OF REASONAB LE CREDIT PERIOD TO THE APPELLANT'S ASSOCIATED ENTERPRISES. THE ABOVE GROUNDS OF APPEAL ARE MUTUALLY EXCLUSIVE & WITHOUT PREJUDICE TO EACH OTHER. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPA NY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND SERVICES. THE ASSESSEE FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2011-12 ON 27- 09-2011 DECLARING TOTAL INCOME AT RS.1,08,180/-. THE ASSESSEE ALSO C LAIMED DEDUCTION U/S 10A OF RS.1,56,66,131/- FROM SOFTWARE TECHNOLOGY PA RK OF INDIA (STPI) UNIT. THE ASSESSEE, WHILE FILING RETURN OF INCOME, FURNISHED REPORT U/S 3CEB. IN THE REPORT U/S 3CEB, THE ASSES SEE REPORTED INTERNATIONAL TRANSACTION ABOUT SOFTWARE DEVELOPMEN T AND SUPPORT 4 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD SERVICES TO ITS ASSOCIATED ENTERPRISES (AE). CONSE QUENT UPON REPORTING INTERNATIONAL TRANSACTION, THE ASSESSING OFFICER MA DE REFERENCE TO TRANSFER PRICING OFFICER (TPO), FOR COMPUTATION OF ARM S LENGTH PRICE (ALP). THE TPO, WHILE CONSIDERING THE ALP DETERMIN ED BY ASSESSEE WITH REGARD TO THE INTERNATIONAL TRANSACTION WITH I TS TWO ASSOCIATE ENTERPRISES (AES), NOTED THAT THE ASSESSEE PROVIDED SOFTWARE DEVELOPMENT AND SUPPORT SERVICES FEE, VARIAN MEDICA L SERVICE SYSTEM INTERNATIONAL AG, AND VARIAN MEDICAL SYSTEM INC. US A OF RS.10.49 CRORES EACH. THE ASSESSEE BENCHMARKED ITS TRANSACT ION BY SELECTING TRANSACTION NET MARGIN METHOD (TNMM) AS MOST APPROP RIATE METHOD. THE ASSESSEE TREATED ITSELF AS TESTED PARTY. THE A SSESSEE CLAIMED ITS PROFIT LEVEL INDICATOR (PLI) AT 10.52%. THE ASSESS EE SELECTED SEVEN COMPARABLES, WHERE ARITHMETIC MEAN OF SEVEN COMPARA BLES WAS 10.97%. ACCORDINGLY, THE ASSESSEE CLAIMED THAT ITS TRANSACTION OF SOFTWARE SERVICES WITH ITS AE WAS AT ARMS LENGTH. THE TPO REJECTED 4 COMPARABLES OF ASSESSEE AND INCLUDED HIS OWN 16 COM PARABLES AND ON THE BASIS OF FOLLOWING TWENTY FINAL SET OF COMPARAB LES, WORKED OUT THE ARITHMETIC MEAN OF 20 COMPARABLES AT 23.64%:- SL.NO COMPANY OP / OC COMMENT 1 ACROPETAL TECHNOLOGIES LIMITED (SEGMENT) 36.69% ALSO SELECTED BY THE ASSESSEE 5 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD 2 AKSHAY SOFTWARE TECHNOLOGIES LTD 0.16% -DO- 3 CELSTREAM TECHNOLOGIES PVT LTD 12.26% PROPOSED BY TPO 4 EVOKE TECHNOLOGIES PVT LTD 8.11% -DO- 5 E-INFOCHIPS LIMITED 56.44% -DO- 6 E-ZEST SOLUTIONS LIMITED 34.83% -DO- 7 IGATE GLOBAL SOLUTIONS LTD 23.71% -DO- 8 INFOSYS LTD 43.53% -DO- 9 KIREETI SOFT TECHNOLOGIES LTD 3.43% -DO- 10 LARSEN & TOUBRO INFOTECH LTD 18.40% -DO- 11 MINDTREE LIMITED (SEGMENT) 10.74% -DO- 12 PERSISTENT SYSTEMS & SOLUTIONS LTD (MERGED) 22.12% -DO- 13 PERSISTENT SYSTEMS LTD 23.08% ALSO SELECTED BY ASSESSEE 14 R S SOFTWARE (INDIA) LTD 16.20% -DO- 15 SANKHYA INFOTECH LIMITED 26.20% -DO- 16 SASKEN COMMUNICATION TECHNOLOGIES LTD 24.36% -DO- 17 TATA ELXSI LTD (SEGMENT) 13.00% -DO- 18 THIRDWARE SOLUTIONS 16.19% -DO- 19 WIPRO TECHNOLOGIES LIMITED 54.42% -DO- 20 ZYLOG SYSTEMS LTD 28.74% -DO- ARITHMETIC MEAN 23.64% 3. THE TPO FURTHER NOTED THAT PLI OF OUTSIDE PARTY OF ASSESSEE IS AT 10.52% WHICH IS LESSER THAN THE ARITHMETIC MEAN OF 20 COMPARABLES, WHICH IS 23.64%. ACCORDINGLY, THE TPO WORKED OUT T HE ADJUSTMENT IN THE FOLLOWING MANNER:- OPERATING REVENUE AS PER (A) RS.21,03,30,611 OPERATING COST OF THE TESTED PARTY RS.19,03,06,531 THE ARM S LENGTH MARGIN 23.64% OF COST THE ARM S LENGTH PRICE (B) RS.23,52,94,995 6 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD THE ARM S LENGTH ADJUSTMENT (C)= (B)- (A) RS.2,13,96,384 5% OF THE SALE VALUE OF THE INTERNATIONAL TRANSACTIONS RS.1,04,95,997 4. ACCORDINGLY THE TPO SUGGESTED ADJUSTMENT OF RS.2.1 3 CRORES WITH REGARDS TO BOTH THE TRANSACTION REPORTED BY ASSESSE E WITH ITS AE. THE TPO VIDE ITS ORDER DATED 31.03.2015 RECTIFIED HIS O RDER AND SUGGESTED ADJUSTMENT WAS REVISED TO RS. 2,49,64,384/- IN PLAC E OF RS. 2,13,96,384/-. ON RECEIPT OF REPORT OF TPO, THE AO PASSED THE DRAFT ASSESSMENT ORDER. THE DRAFT ASSESSMENT ORDER WAS S ERVED UPON THE ASSESSEE ON 12-03-2015. THE ASSESSEE EXERCISED ITS OPTION FOR FILING OBJECTION BEFORE DISPUTE RESOLUTION PANEL (DRP). T HE DRP, VIDE ITS DIRECTION DATED 14-12-2015 DIRECTED TO EXCLUDE E-ZE ST SOLUTION AND SANKYA INFOTECH LTD FROM THE LIST OF COMPARABLES AN D WITH REGARD TO CORRECTNESS OF PLI (OP/OC) OF COMPARABLES DIRECTED TO TAKE CORRECT PLI OF COMPARABLE. ACCORDINGLY, AS PER THE DIRECTIO N OF DRP THE COMPUTATION OF ARMS LENGTHS PRICE ADJUSTMENT WAS WO RKED OUT AT RS. 2,05,78,185/- IN THE FINAL ASSESSMENT ORDER DATED 2 7.01.2016 PASSED UNDER SECTION 143(3) RWS 144C(13). AGGRIEVED BY TH E ADDITIONS / ADJUSTMENTS ON ALP WITH REGARD TO THE TRANSACTION W ITH ITS AE, THE ASSESSEE FILED THIS APPEAL BEFORE US. 7 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD 5. WE HAVE HEARD THE SUBMISSION OF LD.AR OF THE ASSESS EE AND THE LD. DR FOR THE REVENUE. THE LD.AR OF THE ASSESSEE SUBM ITS THAT HE HAS A VERY LIMITED SUBMISSION WITH REGARD TO THE EXCLUSIO N OF SIX COMPARABLES AND INCLUSION OF ONE COMPARABLE FOR FIN AL SET OF COMPARABLES. THE LD. AR FOR ASSESSEE SUBMITS THAT INFOSYS LTD , WIPRO TECHNOLOGY SERVICES LTD, E-INFOCHIPS LTD, ZYL OG SYSTEMS LTD, SASKEN COMMUNICATION TECHNOLOGIES LTD AND PERSISTEN T SYSTEMS LIMITED ARE NOT COMPARABLE WITH THE ASSESSEE AND SH OULD BE EXCLUDED / REJECTED FROM THE FINAL SET OF COMPARABLES. SIMILA RLY, CG VAK SOFTWARE & EXPORTS LTD EXCLUDED BY TPO WHICH IS COM PARABLE WITH THE ASSESSEE SHOULD BE EXCLUDED / INCLUDED IN FINAL SET OF COMPARABLES. 6. THE LD.AR SUBMITS THAT IN CASE SIX COMPARABLES ARE EXCLUDED AND ONE COMPARABLE (SUPRA) IS INCLUDED, THE MARGIN OF ASSES SEE WOULD BE WITHIN THE TOLERANCE LIMITS. FOR INCLUSION OF CG VAK SOFTWARE & EXPORTS LTD , THE LD.AR SUBMITS THAT THE TPO EXCLUDED / REJECTE D THIS COMPARABLE BY TAKING VIEW THAT THIS COMPANY IS A CO NSISTENT LOSS MAKING CONCERN. THE LD.AR SUBMITS THAT CG VAK SOFT WARE & EXPORTS LTD IS NOT A CONSISTENT LOSS MAKING COMPANY. THIS COMPARABLE EARNED OP / TC OF 7.14% IN FY 2010-11. THIS COMPARABLE WA S ACCEPTED BY TRIBUNAL IN THE CASE OF MOBILEUM INDIA (P) LTD IN I T(TP) NO.945 AND 2047/MUM/2016, IN NOMURA STRUCTURED FINANCE SERVICE S LTD IN ITA 8 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD NO.3728/MUM/2017 AND IN CADENCE DESIGN SYSTEM (I) L TD IN ITA NO.6315/DEL/2014. FOR EXCLUSION OF INFOSYS LTD: 7. THE LD.AR SUBMITS THAT THIS COMPANY IS ENGAGED IN D IVERSIFIED SERVICES AND OWNS HIGH BRAND VALUE. IT OWNS OR DEV ELOPS PROPRIETORY PRODUCT LIKE PINNACLE. IT INCURRED EXTENSIVE EXPEN DITURE ON R&D AND OPERATES FROM 15 DEVELOPED CENTRES, HAVING HIGH TUR NOVER. THIS COMPANY IS FULL-FLEDGED RISK OPERATING COMPANY. ON THE OTHER HAND, THE ASSESSEE IS MERELY A CAPITAL SOFTWARE SERVICE P ROVIDER. THE LD.AR SUBMITS THAT THIS COMPANY S COMPARABLE WAS REJECTED AS A GOOD COMPARABLE IN THE FOLLOWING CASES:- CINCOM SYSTEMS INDIA PVT LTD VS ACIT CIR. 3(1) ITA NO.761/DEL/2012 ALCATEL LUCENT INDIA LTD VS DCIT ITA NO. 6856/DEL /2015 PR CIT VS ALCATEL LUCENT INDIA LTD ITA 515/2017 HC ORDER AITHENT TECHNOLOGIES PVT LTD ITA NO.1286/DEL/2016 & ITA NO.1020/DEL/2017 ZYNGA GAME NETWORK INDIA PVT LTD IT(TP)A NO.360/BAN G/2016 NESS TECHNOLOGIES (INDIA) PRIVATE LTD ITA NO.696/MK UM/2016 FOR EXCLUSION OF WIPRO TECHNOLOGY SERVICES LTD 8. THE LD.AR SUBMITS THAT WIPRO TECHNOLOGY SERVICES LT D IS ENGAGED IN RENDERING INFRASTRUCTURE SERVICES, APPLICATION DEVE LOPMENT AND MAINTENANCE SERVICES OF CITI GROUP. WIPRO TECHNOLO GY SERVICES LTD ENTERED INTO AN AGREEMENT WITH CITI GROUP INC. FOR ACQUIRING OF CITI 9 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD GROUP INTEREST IN CITI TECHNOLOGY SERVICES LTD. TH IS COMPANY HAS SIGNED MOST SERVICE AGREEMENT WITH CITI GROUP INC. FOR DELIVERY OF TECHNOLOGY, INFRASTRUCTURE SERVICES AND APPLICATION DEVELOPMENT AND MAINTENANCE OF SERVICE FOR A PERIOD OF SIX YEARS. THIS COMPANY IS MANAGING TO EARN MORE THAN THE INDUSTRY AVERAGE AND HAS A VERY DIFFICULT RISK PROFILE AND, THEREFORE, IS NOT COMPA RABLE WITH THE ASSESSEE WHICH IS CAPITAL SERVICE PROVIDER. THIS COMPARABLE WAS EXCLUDED BY TRIBUNAL IN FOLLOWING CASES:- SAXO INDIA PRIVATE LTD VS ACIT ITA NO.6148/DEL/20 15, PR.CIT DELHI VS SAXO INDIA PRIVATE LTD ITA NO.682 /2016 C.M. APPL.3574-35746/2016 DELHI HIGH COURT, AITHENT TECHNOLOGIES PVT. LTD ITA NO.1286/DEL/201 7, MOBILEUM (INDIA) PVT LTD (FORMERLY KNOWN AS ROAMWAR E INDIA PVT LTD- IT(TP)A 945 & 2047MUM/2016, AITHENT TECHNOLOGIES PVT. LTD ITA NO.1286/DEL/2017 & ITA NO.1020/DEL/2017, MOBILEUM (INDIA) PVT LTD (FORMERLY KNOWN AS ROAMWAR E INDIA PVT LTD- IT(TP)A 945 & 2047MUM/2016, ST.ERICCSON INDIA PVT LTD VS ACIT,CIR.24(2) ITA 6247/DEL/12015, AIRCOM INTERNATIONAL INDIA PVT. LTD VS DY.CIT ITA NO.222/DEL/2015, NESS TECHNOLOGIES (INDIA) PRIVATE LTD ITA NO.696/MU M/2016 FOR EXCLUSION OF E-INFORCHIPS LTD 10 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD 9. THE LD.AR FOR ASSESSEE SUBMITS THAT THIS COMPANY IS ENGAGED IN MANUFACTURING OF ELECTRONIC VOTING MACHINE (EVM) AN D VPDB ELECTRONICS BOARDS. ITS INCOME COMPRISED OF SALES OF GOODS, ROYALTY, ETC. AND THE SEGMENT DATA IS NOT AVAILABLE. THUS, THIS COMPANY FAILS THE COMPARABLE FACTOR. FURTHER, THIS COMPANY IS MANAGI NG TO EARN MORE THAN THE INDUSTRY AVERAGE AND IS NOT COMPARABLE. T HIS COMPARABLE WAS REJECTED BY DELHI HIGH COURT AND VARIOUS BENCHES OF TRIBUNAL IN THE FOLLOWING CASES WITH THE COMPARABILITY OF CAPITAL S ERVICE PROVIDER:- SAXO INDIA PRIVATE LIMITED VS ACIT ITANO.6148/DEL/2 015 PR. CIT DELHI VS SAXO INDIA PRIVATE LIMITED ITA 682 /2016, C.M. APPL. 35744-35746/2016 HIGH COURT DELHI, ALCATEL LUCENT INDIA LTD VS DCIT ITANO. 6856/DEL/20 15 PR CIT VS ALCATEL LUCENT INDIA LTD ITA 515/2017 HI GH COURT OF DELHI MOBILEUM (INDIA) PVT LTD (FORMERLY KNOWN AS ROAMWAR E INDIA PVT LTD) IT(TP)A NO.945& 2047 / MUM / 2016 ST.ERICCSON INDIA PVT LTD VS ACIT,CIR.24(2) ITA 62 47/DEL/12015 ELECTRONIC IMAGING INDIA PVT. LTD VS DCIT ITA NO.1506/BANG/2016 ZYNGA GAME NETWORK INDIA PVT LTD VS ACIT (IT(TP)A NO.360/BANG/2015 NESS TECHNOLOGIES (INDIA) PRIVATE LTD ITA NO.696/MU M/2016 FOR EXCLUSION OF ZYLOG SYSTEMS LTD 10. THE LD.AR OF THE ASSESSEE SUBMITS THAT ZYLOG SYSTEM S LTD IS ENGAGED IN PROVIDING RANGE OF VARIOUS SERVICES SUCH AS MOBI LE COMPUTING, HEALTH CARE INFO TECH, ENTERPRISES COMPUTING APPLIC ATION DEVELOPMENT, ENTERPRISES COMPUTING, ENTERPRISE INTELLIGENCE SERV ICES. SEGMENTAL DATA 11 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD IS NOT PROVIDED IN THE ANNUAL REPORT OF COMPANY. T HE SHAREHOLDERS OF THIS COMPANY HAVE FILED A CASE AGAINST SYSTEM OF TH E COMPANY FOR MAKING FILES, MISLEADING AND DISTORTING DISCLOSURE. SEBI HAS DEBARRED ITS CHAIRMAN & CEO AS IT FOUND THAT THEY MADE FALSE MISLEADING AND DISTORTED DISCLOSERS. ACCORDINGLY, THIS COMPARABLE IS NOT COMPARABLE WITH THE ASSESSEE. THIS COMPARABLE WAS REJECTED BY DELHI HIGH COURT AND DELHI TRIBUNAL IN FOLLOWING CASES:- ALCATEL LUCENT INDIA LTD VS DCIT ITANO. 6856/DEL/20 15 PR CIT VS ALCATEL LUCENT INDIA LTD ITA 515/2017 HIG H COURT OF DELHI AIRCOM INTERNATIONAL INDIA PVT LTD VS DCIT ITA NO.6 856/DEL/2015 FOR EXCLUSION OF SASKEN COMMUNICATION TECHNOLOGIES LTD 11. THE LD.AR SUBMITS THAT THIS COMPANY IS ENGAGED IN A DVERTISING BUSINESS AND PROVIDES TELECOMMUNICATIONS SOFTWARE S ERVICES AND SOLUTION TO NETWORK EQUIPMENT MANUFACTURERS, MOBILE TERMINAL, HARDWARE DESIGN, IC DESIGN SERVICES AND IT INFRASTR UCTURE. THIS COMPARABLE OWNED IPS. TURNOVER OF THIS COMPANY IS R S. 349 CRORE, WHICH MORE THAN 19 TIMES OF ASSESSEE S TURNOVER WHICH IS ONLY RS. 20 CRORE. IT HAS HIGH TURNOVER COMPARABLE TO ASSESSEE. THIS COMPARABLE WAS REJECTED BY TRIBUNAL AND DELHI HIGH COURT IN TH E FOLLOWING CASES:- ALCATEL LUCENT INDIA LTD VS DCIT ITANO. 6856/DEL/20 15 PR CIT VS ALCATEL LUCENT INDIA LTD ITA 515/2017 HIG H COURT OF DELHI AITHENT TECHNOLOGIES PVT. LTD ITA NO.1286/DEL/201 7 12 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD ST.ERICCSON INDIA PVT LTD VS ACIT,CIR.24(2) ITA 624 7/DEL/12015 ELECTRONIC IMAGING INDIA PVT. LTD VS DCIT ITA NO.1506/BANG/2016 FOR EXCLUSION OF PERSISTENT SYSTEMS LTD 12. THE LD.AR OF THE ASSESSEE SUBMITS THAT THIS COMPARA BLE COMPANY HAS HUGE INTANGIBLES. IT HAS MADE INVESTMENT IN INTELL ECTUAL PROPERTY RIGHTS AND PROVIDING SOFTWARE PRODUCT. NO SEGMENTAL DATE I S AVAILABLE IN THE ANNUAL REPORT AND HAVING HUGE TURNOVER. IN SUPPORT OF HIS SUBMISSION, THE LD.AR RELIED UPON THE FOLLOWING DECISIONS:- SAXO INDIA PRIVATE LIMITED VS ACIT ITANO.6148/DEL/2 015 PR.CIT DELHI VS SAXO INDIA PRIVATE LTD ITA NO.682 /2016 C.M. APPL.3574-35746/2016 DELHI HIGH COURT ALCATEL LUCENT INDIA LTD VS DCIT ITANO. 6856/DEL/20 15 PR CIT VS ALCATEL LUCENT INDIA LTD ITA 515/2017 HIG H COURT OF DELHI AITHENT TECHNOLOGIES PVT. LTD ITA NO.1286/DEL/201 7 ST.ERICCSON INDIA PVT LTD VS ACIT,CIR.24(2) ITA 624 7/DEL/12015 AIRCOM INTERNATIONAL INDIA PVT LTD VS DY CIT ITA NO .222/DEL/2016 13. ON THE OTHER HAND, THE LD. DR FOR THE REVENUE SUBMI TS THAT THE TPO AS WELL AS THE LD.DRP, WHILE CONSIDERING THE EXCLUSION / INCLUSION OF EACH AND EVERY COMPARABLE HAS GIVEN PROPER REASONING. T HUS, HE STRONGLY RELIED UPON THE ORDER OF AO AND DRP. 14. WE HAVE CONSIDERED THE SUBMISSION OF BOTH THE PARTI ES AND HAVE PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE A LSO DELIBERATED ON THE VARIOUS CASE LAWS RELIED BY THE LD. AR FOR THE ASSESSEE. GROUND NO. 1 IS GENERAL AND NEEDS NO ADJUDICATION. GROUND NO. 2 RELATES TO STPI 13 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD UNIT AND CLAIM OF HOLIDAY PERIOD PRESCRIBED UNDER S ECTION 10A. NO SUBMISSION WAS MADE BY LD. AR FOR THE ASSESSEE, THU S, THIS GROUND OF APPEAL WAS TREATED AS NOT PRESSED AND DISMISSED. 15. GROUND NO. 3 TO 6 RELATES TO TRANSFER PRICING ADJUS TMENT. THE TPO WHILE MAKING BENCHMARKING OF ALP ACCEPTED THAT THE ASSESSEE COMPANY IS A CAPTIVE SERVICE PROVIDER PROVIDING OFF SHORE SOFTWARE DEVELOPMENT AND RELATED SUPPORT SERVICES. AS WE HAV E NOTED ABOVE, THE LD. AR OF THE ASSESSEE CONFINED HIS SUBMISSION TO T HE EXCLUSION OF SIX COMPARABLES AND INCLUSION OF SINGLE COMPARABLE. TH EREFORE, WE SHALL CONFINE OUR FINDING ONLY ON THE EXCLUSION AND INCLU SION OF DIFFERENT COMPARABLES ONLY. 13. SO FAR AS INCLUSION OF CG VAK SOFTWARE & EXPORTS LTD IS CONCERNED, WE HAVE NOTED THAT TPO REJECTED THIS COMPARABLE BY TAKING WITH IT THIS COMPANY IS CONSISTENT LOSS MAKING COMPANY. WE ARE F URTHER NOTED THAT BEFORE THE DRP THE ASSESSEE STATED THAT THIS COMPAR ABLE IS HAVING PROFIT IN THE CURRENT YEAR AT 7.14% AND CAN BE CONSIDERED AS A COMPARABLE. IT WAS ALSO STATED THAT MERELY BECAUSE A COMPANY IS IN CURRING LOSSES, IT WOULD NOT LOSE ITS STATUS AS A COMPARABLE AND THAT LOSSES AND INCIDENTAL OF BUSINESS WHICH IS AT PAR WITH THE PROFIT. HOWEVE R, THE CONTENTION OF ASSESSEE WAS NOT ACCEPTED BY DRP BY TAKING VIEW THA T THOSE COMPANIES WITH FLUCTUATING MARGINS ARE TO BE EXCLUD ED. WE HAVE NOTED 14 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD THAT THE COORDINATE BENCH OF KOLKATA TRIBUNAL IN NO MURA STRUCTURED FINANCE SERVICES PVT LTD IN ITA 284/KOL/2016 WHILE CONSIDERING THE COMPARABILITY OF THIS COMPARABLE PASS THE FOLLOWING ORDER: 11.2. CG -VAK SOFTWARE AND EXPORTS LIMITED. THE GR OUND NO. 16 RAISED BY THE ASSESSEE IS WITH REGARD TO THE COMPARABLE CHOSE N BY THE ASSESSEE BUT REJECTED BY THE LD TPO IN RESPECT OF CG-VAL SOFTWAR E AND EXPORTS LIMITED. THE LD. TPO REJECTED THIS COMPARABLE STATING THAT I T IS ENGAGED INTO MEDICAL TRANSCRIPTIONS WHICH IS DIFFERENT FROM THE ASSESSEE AND HENCE NOT FUNCTIONALLY COMPARABLE. THE LD. AR ARGUED THAT THE COMPANY IS E NGAGED IN THE BUSINESS OF SOFTWARE SERVICES AND ALSO INTO MEDICAL TRANSCRIPTI ON AND THAT FOR THE PURPOSE OF COMPARABILITY, THE ASSESSEE HAD ONLY USED THE DATE FOR SOFTWARE SEGMENT OF THE SAID COMPANY. HE REFERRED TO THE RELEVANT PAGES IN THE ANNUAL REPORT OF THE SAID COMPANY IN SUPPORT OF HIS CONTENTIONS AND PLEADED T HAT THE SAME BE INCLUDED IN THE LIST OF COMPARABLES WHILE COMPUTING THE ARM'S L ENGTH MARGIN. WE FIND THAT IN ASST YEAR 2010-11 IN ASSESSEE'S OWN CASE, THE LD TPO HAD ACCEPTED THE SAID COMPANY AS FUNCTIONALLY COMPARABLE BUT HAD FINALLY REJECTED ON THE GROUND THAT IT WAS INCURRING PERSISTENT LOSSES DURING THE SAID TIME* . IT WAS ALSO PLEADED AT THAT TIME THAT IF THE FOREX GAIN IS TREATED AS PART OF OPERATING REVENUE, THEN THE SAID COMPANY'S OPERATING MARGIN WOULD BE 5.29% FOR FINANCIAL YEAR 2008-09 WHICH ARGUMENT WAS REJECTED BY THE LD DRP IN ASST Y EAR 2010-11. WE FIND THAT THIS TRIBUNAL HAD GONE DEEP INTO THE COMPUTATION ME CHANISM OF THE OPERATING MARGINS OF THE SAID COMPANY IN ASST YEAR 2010-11 AN D HAD HELD AS UNDER:- 31. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. FROM A PERUSAL OF THE ORDER OF THE TPO IT IS CLEAR THAT THE CLAIM OF THE ASSESSEE THAT THIS COMPANY'S OPERATING PROFIT TO OPERATING COST OF THE SOFTWARE DEVELOPMENT SERVICES SEGMENT FOR AY 2009-10, IF EXP ENSES ARE ALLOCATED ON THE BASIS OF REVENUES, IS 5.29%. THIS CHART IS E XTRACTED BY THE TPO IN PAGE-50 OF HIS ORDER ( AND ALSO IN PARAGRAPH 27 OF THIS ORDER) AND EVEN THE TPO DOES NOT DISPUTE THIS PLEA OF THE ASSESSEE. THE TPO HAS HOWEVER PROCEEDED ON THE BASIS THAT FOREIGN EXCHAN GE GAIN SHOULD NOT 15 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD BE REGARDED AS PART OF THE OPERATING PROFIT. SUCH A PPROACH OF THE TPO HAS NOT BEEN ACCEPTED BY THE DRP IN ITS ORDER WHILE DEALING WITH THE COMPARABLE COMPANY KULIZA TECHNOLOGIES PVT. LTD. TH EREFORE IT APPEARS THAT THE PLEA OF THE ASSESSEE THAT THE BASI S ASSUMPTION OF THE TPO AND DRP ON THE COMPARABILITY OF THIS COMPANY TH AT IT IS A CONSISTENT LOSS MAKING COMPANY IS ERRONEOUS AND THE REFORE THEIR ORDERS ARE SET ASIDE. HOWEVER, THE QUESTION STILL REMAINS AS TO WHETHER THE ALLOCATION OF EXPENSES AND THE ATTRIBUTION OF THE F OREIGN EXCHANGE GAIN TO THE SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE COMPARABLE COMPANY CG-VAK SOFTWARE AND EXPORTS LTD., HAS NOT B EEN CONSIDERED BY THE TPO OR DRP. FURTHER IT HAS ALSO TO BE SEEN A S TO WHAT WERE THE REASONS FOR THE LOSSES IN THE CASE OF THIS COMPARAB LE COMPANY. IF ALL THESE FACTORS ARE CONSIDERED AND DUE ADJUSTMENT CAN BE GIVEN TO THE OPERATING MARGINS OF THIS COMPANY, THAN THE SAME SH OULD BE CONSIDERED AS COMPARABLE COMPANY AND ADDED TO THE LIST OF COMP ARABLES FOR DETERMINING ARITHMETIC MEAN OF PROFITS OF COMPARABL E COMPANIES. THE TPO IS DIRECTED TO CONSIDER THE COMPARABILITY OF TH IS COMPANY AFRESH IN THE LIGHT OF THE AFORESAID OBSERVATIONS AND ALSO TA KING NOTE OF DECISION RENDERED ON THIS ASPECT BY TRIBUNALS AND HON'BLE HI GH COURTS IF ANY . BOTH THE PARTIES BEFORE US FAIRLY AGREED THAT LET S IMILAR DIRECTION BE GIVEN FOR THE YEAR UNDER CONSIDERATION ALSO. ACCORDINGLY, THE GRO UND NO. 16 RAISED BY THE ASSESSEE IS REMANDED TO THE FILE OF LD TPO WITH SIM ILAR DIRECTIONS THAT WERE GIVEN FOR ASST YEAR 2010-11 BY THIS TRIBUNAL. ACCOR DINGLY, THE GROUND NO. 16 RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL P URPOSES. (* UNDER LINE BY US) 14. CONSIDERING THE DECISION OF TRIBUNAL THAT THIS COMPARABLE IS NOT CONSISTENT LOSS MAKING AS IT HAD MADE PROFIT IN THE RELEVANT ASSESSMENT YEAR, HENCE, WE DIRECT THE TPO/AO TO INCLUDE THIS C OMPARABLE IN THE FINAL SET OF COMPARABLE. 16 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD 15. INFOSYS LTD . THIS COMPARABLE COMPANY WAS ACCEPTED AS A COMPARA BLE BY TPO. AS WE HAVE NOTED OF THE LEARNED AR OF THE A SSESSEE SUBMIT THAT THIS COMPARABLE COULD NOT BE REGARDED AS A GOO D COMPARABLE BECAUSE IT HAS SUBSTANTIAL R&D INTANGIBLE PATENTS, TREMENDOUS BRAND VALUE ATTACHED TO IMAGE. IT IS A GREAT COMPANY AND HIGH TURNOVER WHICH IS AROUND 1200 TIMES OF SALES OF ASSESSEE. THE TPO REJECTED THE CONTENTION OF ASSESSEE BY TAKING WITH IT TURNOVER I S A FAVOURITE TOOL USED BY ASSESSEE FOR REJECTION OF COMPARABLE, WHICH IS NOT TENABLE AS HIGH TURNOVER MAY NOT IMPACT THE PROFITABILITY OF C OMPANY. SIMILARLY DRP ALSO TOOK THE VIEW THAT TURNOVER DOES NOT HAVE AN IMPACT ON THE MARGIN OF THE COMPANY. FURTHER, CREATION OF BRAND V ALUE IS NOT ON ACCOUNT OF MARKETING EXPENSES BUT BECAUSE OF SUPERI OR SERVICE PROVIDED BY THE COMPANY AND IT DOES NOT IMPACT PROF ITABILITY. WE HAVE NOTED THAT THE COORDINATE BENCH OF MUMBAI TRIBUNAL IN NESS TECHNOLOGIES (INDIA) PRIVATE LIMITED IT NO. 696 /MU MBAI /2016, WHILE COMPARING THE CAPTIVE SERVICE PROVIDER WITH THE INF OSYS LTD HELD AS UNDER; 9.2 ---------- WE HAVE CAREFULLY CONSIDERED THE RI VAL SUBMISSIONS. A PERTINENT POINT RAISED BY THE ASSESSEE IS TO THE EFFECT THAT ON THE BASIS OF LEVEL OF RESPECTIVE TURNOVERS, THE SAID CONCERN IS INCOMPARA BLE. IT HAS BEEN POINTED OUT THAT THE TURNOVER OF THE ASSESSEE IS TO THE TUNE OF RS.359,61,45,000/-, WHEREAS M/S. INFOSYS LIMITED HAS A TURNOVER OF ABOUT RS.25, 385.00 CRORES FOR THE YEAR 17 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD UNDER CONSIDERATION. IN THIS CONTEXT, IT WAS PUT TO THE PARTIES IN THE COURSE OF HEARING AS TO WHETHER ANY TURNOVER FILTER WAS APPLI ED EITHER BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY OR BY THE TRANSFER PRICI NG OFFICER IN THE COURSE OF THE TRANSFER PRICING PROCEEDINGS. IN RESPONSE, IT H AS BEEN STATED BEFORE US THAT NO TURNOVER FILTER WAS USED EITHER BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY OR BY THE TRANSFER PRICING OFFICER WHILE SELECTING THE COMPARABLES FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACT ION OF SOFTWARE DEVELOPMENT SERVICES. THEREFORE, IN THIS BACKGROUND , IT WOULD BE INAPPROPRIATE AT THIS STAGE TO DEVICE A NEW FILTER AND REJECT/ACCEPT A CONCERN AS COMPARABLE BECAUSE IT WOULD NOT BE FEASIBLE TO SEE AS TO WHETHER THE OTHER CONCERNS WHICH WERE A PART OF THE ACCEPT-REJECT MAT RIX QUALIFY SUCH NEW FILTER OR NOT?. WE MAY HASTEN TO ADD HERE THAT WE ARE NOT PROPOSING TO SAY THAT THE TURNOVER FILTER IS NOT A RELEVANT FILTER. THE ONLY POINT WE ARE TRYING TO MAKE IS THAT IT WOULD BE INAPPROPRIATE TO APPLY A PARTICULA R FILTER WITH RESPECT TO A PARTICULAR CONCERN WITHOUT APPLYING IT ACROSS THE E NTIRE SPECTRUM OF THE CONCERNS WHICH HAVE BEEN CONSIDERED AS COMPARABLE. THEREFORE, ON THIS ASPECT OF THE MATTER, WE DO NOT DEAL ANY FURTHER. 9.3 SO, HOWEVER, THE OTHER PLEAS OF THE ASSESSEE TO SUPPORT EXCLUSION OF THE SAID CONCERN FROM THE FINAL SET OF COMPARABLES ARE QUITE JUSTIFIED. NOTABLY, THE SAID CONCERN IS ALSO ENGAGED IN THE PRODUCTION OF S OFTWARE PRODUCTS SUCH AS 'FINACLE', 'FLYPP' AND 'INFOSYS ISMART AS IS EVIDEN T FROM THE COPY OF THE ANNUAL REPORT OF SUCH CONCERN, WHICH HAS BEEN PLACED IN TH E PAPER BOOK AT PAGES 483 TO 500. IN FACT, WE FIND THAT THE TRANSFER PRIC ING OFFICER HAS HIMSELF ACCEPTED THE FACT THAT THE SAID CONCERN IS ENGAGED IN SOFTWARE PRODUCTS. APART THEREFROM, IT IS QUITE WELL UNDERSTOOD THAT INFOSYS HAS A BRAND IMAGE WHICH IS QUITE INCOMPARABLE TO THE ASSESSEE BEFORE US, WHICH IS WHOLLY ACTING AS A CAPTIVE SERVICE PROVIDER FOR ITS ASSOCIATED ENTERPR ISES. IN THIS VIEW OF THE MATTER, IT IS QUITE EVIDENT THAT THE SAID CONCERN C ANNOT BE COMPARED TO AN ASSESSEE WHO IS UNDERTAKING PURE SOFTWARE DEVELOPME NT SERVICES AS A CAPTIVE SERVICE PROVIDER. 9.4 AT THE TIME OF HEARING, LD. REPRESENTATIVE FOR THE ASSESSEE HAD ALSO POINTED OUT THAT THE SAID CONCERN WAS EXCLUDED BY T HE DRP ITSELF IN THE CASE 18 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD OF THE ASSESSEE FOR THE EARLIER ASSESSMENT YEAR OF 2010-11 ON ACCOUNT OF ITS FUNCTIONAL PROFILE BEING DIFFERENT, AGAINST WHICH T HE DEPARTMENT HAS NOT PREFERRED ANY APPEAL TO THE TRIBUNAL. IT IS THEREFO RE, CONTENDED THAT IN THE ABSENCE OF ANY CHANGE IN FACTS, THE DRP OUGHT TO HA VE REJECTED THE SAID CONCERN IN THIS YEAR TOO. 9.5 IN OUR CONSIDERED OPINION, QUALITATIVELY SPEAKI NG, THE ACTIVITIES UNDERTAKEN BY M/S.E-INFOCHIPS LIMITED ARE NOT COMPA RABLE TO THE PURE SOFTWARE DEVELOPMENT SERVICES UNDERTAKEN BY THE ASS ESSEE AS A CAPTIVE SERVICE PROVIDER TO ITS ASSOCIATED ENTERPRISES. FAC TUALLY, IT IS ALSO EMERGING THAT THERE IS NO SEGMENTAL BREAK-UP AVAILABLE WITH RESPECT TO THE PRODUCTION AND SALE OF SOFTWARE PRODUCTS UNDERTAKEN BY THE SAI D CONCERN, WHICH IS AN ASPECT INCOMPARABLE TO THE ACTIVITIES OF THE ASSESS EE. FOR THE SAID REASONS, WE DO NOT FIND ANY JUSTIFICATION FOR INCLUSION OF THE SAID CONCERN AND THE SAME IS HEREBY DIRECTED TO BE EXCLUDED FROM THE FINAL SET O F COMPARABLES. THUS, ON THIS ASPECT ALSO ASSESSEE SUCCEEDS. 16. CONSIDERING THE AFORESAID DECISION OF TRIBUNAL, WHERE THE INFOSYS LTD WAS EXCLUDED BY TRIBUNAL FROM COMPATIBILITY ON THE GROU ND OF THAT INFOSYS LTD IS ENGAGED IN SOFTWARE PRODUCT AND HAVE HUGE TURNO VER IS NOT COMPARABLE TO THE ASSESSEE AS A CAPTIVE SERVICE PRO VIDER TO ITS ASSOCIATED ENTERPRISES, THEREFORE, WE DIRECT THE ASSESSING OFFICER TO EXCL UDE THIS COMPARABLE FROM THE FINAL SET OF COMPARABLE. 17. SO FAR AS EXCLUSION OF WIPRO TECHNOLOGY SERVICES LTD ., E INFOCHIPS LTD , SASKEN COMMUNICATION TECHNOLOGY LTD AND PERSISTENT SYSTEM LTD . THE TPO ACCEPTED THIS COMPARABLE BY TAKING VIEW T HAT HIGH TURNOVER MAY NOT IMPACT THE PROFITABILITY OF THE CO MPARABLE COMPANY. DRP WHILE CONFIRMING THE ACTION OF TPO ALSO TOOK TH E SAME VIEW. DRP 19 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD FURTHER TOOK THE VIEW THAT ACQUISITION OF CITIGROUP BY WIPRO IS IRRELEVANT TO THE FUNCTIONAL COMPARABILITY ANALYSES. BEFORE US THE LEARNED AR SUBMITTED THE SIMILAR SUBMISSION FOR EXCLUSION OF A LL THESE FOUR AS MADE FOR EXCLUSION OF INFOSYS LTD. WE HAVE NOTED THAT CO ORDINATE BENCH OF DELHI TRIBUNAL IN SAXO INDIA PRIVATE LIMITED VERSUS ACIT IN ITA NO. 6148/DELHI/2015, WHILE EXAMINING THE COMPARABILITY OF CAPTIVE SERVICE PROVIDER WITH WIPRO TECHNOLOGY SERVICES LTD, E INFOCHIPS LTD, SASKEN COMMUNICATION TECHNOLOGY LTD AND PERSISTENT SYSTEM LTD., PASSED THE FOLLOWING ORDER; ( I ) E-INFOCHIPS LIMITED : 10.1 THE TRANSFER PRICING OFFICER INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES. ON BEING CALLED UPON TO EXPLAIN AS TO WHY IT SHOULD NOT BE CONSIDERED AS A COMPARABLE, THE ASSESSEE CONTENDED THAT THERE WAS FUNCTIONAL DISSIMILARITY INASMUCH AS THIS COMPANY WAS ENGAGED IN SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES AND ALSO PRODUCTS. THE TRANSFER PRICING OFFICER OBSERVED THAT THE REVENUES OF THIS COMPANY FROM PRODUCTS WAS ONLY 15% OF TOTAL REVENUE AND HENCE THE SAME QUALIFIED TO BE ELIGIBLE FOR COMPARI SON. THE DRP DID NOT ALLOW ANY RELIEF. 10.2 AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSIN G THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ANNUAL REPORT OF THIS COMP ANY IS AVAILABLE IN THE PAPER BOOK WITH ITS PROFIT AND LOSS ACCOUNT AT PAGE 1025. SCHEDULE OF INCOME INDICATES ITS OPERATING REVENUE FROM SOFTWARE DEVELOPMENT, HA RDWARE MAINTENANCE, INFORMATION TECHNOLOGY, CONSULTANCY ETC. REVENUE FR OM HARDWARE MAINTENANCE STANDS AT RS. 3.92 CRORE, WHICH HAS BEEN CONSIDERED BY THE TRANSFER PRICING OFFICER HIMSELF AS SALE OF PRODUCTS. SUCH SALE OF P RODUCTS CONSTITUTES 15% OF TOTAL REVENUE. THERE IS NO SEGMENTAL INFORMATION AVAILABL E AS REGARDS THE REVENUE FROM SALE OF PRODUCTS AND REVENUE FROM SOFTWARE DEVELOPM ENT SEGMENT. AS THE ASSESSEE 20 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD IS SIMPLY ENGAGED IN RENDERING SOFTWARE DEVELOPMENT SERVICES AND THERE IS NO SALE OF ANY SOFTWARE PRODUCTS, THIS COMPANY, IN OUR CONS IDERED OPINION, CEASES TO BE COMPARABLE. IT IS OBVIOUS THAT FROM THE COMMON POOL OF INCOME FROM BOTH THE STREAMS OF SOFTWARE PRODUCTS AND SOFTWARE SERVICES, ONE CANNOT DEDUCE THE REVENUE FROM SOFTWARE SERVICES AND NO ONE KNOWS THE IMPACT OF REVENUE FROM PRODUCTS ON THE OVERALL KITTY OF PROFIT, WHICH MAY BE SIGNIFICANT. SINCE NO SEGMENTAL DATA OF THIS COMPANY IS AVAILABLE INDICAT ING OPERATING PROFIT FROM SOFTWARE DEVELOPMENT SERVICES, WE ORDER TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. XXXXXXXX XXXXXXXX ( V ) PERSISTENT SYSTEMS LTD. 14.1 THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMP ANY IN THE TALLY OF COMPARABLES BY ARGUING THAT IT WAS FUNCTIONALLY DIF FERENT AND THERE WAS INSUFFICIENT SEGMENTAL INFORMATION. THE TPO NEGATIV ED THIS CONTENTION AND INCLUDED THE SAME IN THE FINAL SET OF COMPARABLES. 14.2 AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSIN G THE RELEVANT MATERIAL ON RECORD, WE FIND FROM PROFIT & LOSS ACCOUNT OF THIS COMPANY, A COPY OF WHICH IS PLACED AT PAGE 1534 OF THE PAPER BOOK, THAT ITS INC OME FROM 'SALE OF SOFTWARE SERVICES AND PRODUCTS' IS AMOUNTING TO RS.6101.27 M ILLIONS. THE TPO HAS HIMSELF OBSERVED THAT THIS COMPANY DOES HAVE SOME PRODUCTS, BUT, PRODUCT REVENUE IS ONLY 7.2% AND, HENCE, THIS COMPANY IS PREDOMINANTLY A SO FTWARE SERVICE PROVIDER. THIS DISCUSSION IS CONTAINED IN PARA 21.67 OF THE TPO'S ORDER. EVEN SCHEDULE-11 TO THE PROFIT & LOSS ACCOUNT ALSO SHOWS 'SALE OF SOFTWARE SERVICES AND PRODUCTS.' THIS SHOWS THAT THIS COMPANY IS ENGAGED IN BOTH RENDERIN G SOFTWARE DEVELOPMENT SERVICES AS WELL AS SALE OF SOFTWARE PRODUCTS. ALBE IT THE PERCENTAGE OF SOFTWARE PRODUCTS IN THE TOTAL REVENUE IS LESS, AS HAS BEEN NOTED BY THE TPO, YET, WE ARE INCLINED TO TAKE IT AS NON-COMPARABLE BECAUSE THERE IS NO PRECISE INFORMATION ABOUT THE CONTRIBUTION MADE BY SUCH SMALL SALE OF S OFTWARE PRODUCTS TO THE TOTAL PROFIT OF THE COMPANY. AS NO SEGMENTAL INFORMATION IS AVAILABLE IN RESPECT OF THIS COMPANY AND THE FIGURES HAVE BEEN ADOPTED BY THE TP O AT ENTITY LEVEL, WE, THEREFORE, ORDER FOR THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES ( VI ) SASKEN COMMUNICATIONS TECHNOLOGIES LTD . 15.1 THE TPO INCLUDED THIS COMPANY IN THE SET OF COMPARA BLES DESPITE THE ASSESSEE'S OBJECTION THAT IT WAS FUNCTIONALLY DIFFE RENT AND ALSO HAD PRODUCT PORTFOLIO. 21 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD 15.2 AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIND FR OM PAGE 58 OF THE TPO'S ORDER THAT HE HAS RECOGNIZED SALE OF SOFTWARE PRODU CTS TO THE TUNE OF RS.37 CRORE AND ODD. THOUGH THE BREAK-UP OF REVENUE FROM SOFTWA RE SERVICES AND SOFTWARE PRODUCTS IS AVAILABLE, BUT, THE BREAK-UP OF OPERATI NG COSTS AND NET OPERATING REVENUES FROM THESE TWO SEGMENTS HAVE NOT BEEN GIVE N. IT IS FURTHER OBSERVED THAT THE TPO HAS TAKEN ENTITY LEVEL FIGURES FOR THE PURP OSES OF MAKING COMPARISON. SINCE SUCH ENTITY LEVEL FIGURES CONTAIN REVENUE FRO M BOTH SOFTWARE SERVICES AND SOFTWARE PRODUCTS, AS AGAINST THE ASSESSEE ONLY PRO VIDING SOFTWARE SERVICES, WE ARE DISINCLINED TO TREAT THIS COMPANY AS COMPARABLE . THE ASSESSEE'S CONTENTION IS ACCEPTED ON THIS ISSUE ( VII ) WIPRO TECHNOLOGY SERVICES LTD . 16.1 THE ASSESSEE OBJECTED TO THE INCLUSION OF THIS COMP ANY IN THE LIST OF COMPARABLES BY ARGUING THAT APART FROM THIS COMPANY BEING FUNCTIONALLY DIFFERENT AND THE AVAILABILITY OF INSUFFICIENT SEGMENTAL INFO RMATION, THERE WERE ALSO SIGNIFICANT RELATED PARTY TRANSACTIONS. THE TPO DID NOT ACCEPT THE ASSESSEE'S CONTENTION OF THE RELATED PARTY TRANSACTIONS AND PR OCEEDED TO INCLUDE IT IN THE FINAL SET OF COMPARABLES. 16.2 WE HAVE HEARD THE RIVAL SUBMISSIONS. PAGE 57 OF THE TPO'S ORDER IS REPRODUCTION OF THE ASSESSEE'S CONTENTION ABOUT THE RELATED PARTY TRANSACTIONS AS UNDER : 'WIPRO TECHNOLOGY SERVICES LIMITED (FORMERLY CITI T ECHNOLOGY SERVICES LIMITED) ('THE COMPANY') WAS INCORPORATED ON 15 SEP TEMBER, 2004. THE ENTIRE SHARE CAPITAL OF THE COMPANY WAS HELD BY CIT ICORP BANKING CORPORATION, A COMPANY INCORPORATED UNDER LAWS OF D ELAWARE, USA, UPTO 20 JANUARY, 2009. WIPRO LIMITED (WIPRO) EXECUTED AN AGREEMENT WITH CI TIGROUP INC. FOR ACQUIRING ALL OF CITIGROUP INTEREST IN THE COMPANY W.E.F. 21 JANUARY 2009. ON 21 JANUARY 2009, WIPRO SIGNED A MASTER SERVICE A GREEMENT (MSA) WITH CITIGROUP INC. FOR THE DELIVERY OF TECHNOLOGY INFRA STRUCTURE SERVICES AND APPLICATION DEVELOPMENT AND MAINTENANCE SERVICES FO R THE PERIOD OF SIX YEARS. THE MSA PROVIDES FOR THE DELIVERY OF AT LEAS T $500 MILLION IN SERVICE REVENUES OVER THE PERIOD OF THE CONTRACT. A FTER THE ACQUISITION BY WIPRO, THE NAME OF THE COMPANY WAS CHANGED TO WIPRO TECHNOLOGY SERVICES LIMITED ('WTS' OR 'THE COMPANY') ON 16 MAR CH 2009 .' 16.3 IT IS OBSERVED FROM THE ABOVE CONTENTION REPRODUCED IN THE TPO'S ORDER THAT WIPRO TECHNOLOGY SERVICES LTD., WHICH WAS EARLIER C ITI TECHNOLOGY SERVICES LTD., WAS HELD BY CITI CORP. BANKING CORPORATION, USA UPT O 20TH JANUARY, 2009. WIPRO LTD., PARENT COMPANY OF THE ASSESSEE, EXECUTED AN A GREEMENT WITH CITI GROUP INC., FOR ACQUIRING CITI TECHNOLOGY SERVICES LTD., NOW CA LLED WIPRO TECHNOLOGY SERVICES LTD. ON 21.1.2009, WIPRO LTD. SIGNED A MASTER AGREE MENT WITH CITI GROUP INC., FOR 22 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD THE DELIVERY OF TECHNOLOGY INFRASTRUCTURE SERVICES AND APPLICATION DEVELOPMENT AND MAINTENANCE SERVICES FOR THE PERIOD OF SIX YEAR S, WHICH ALSO INCLUDES THE YEAR UNDER CONSIDERATION. THIS SHOWS THAT INCOME FROM SO FTWARE DEVELOPMENT SUPPORT AND MAINTENANCE SERVICES WAS EARNED BY WIPRO TECHNO LOGY SERVICES LTD., FROM CITI GROUP INC., BY MEANS OF MASTER SERVICE AGREEMENT EN TERED INTO BETWEEN WIPRO LTD., ITS PARENT COMPANY AND CITI GROUP INC., A THI RD PERSON. 16.4 WE HAVE NOTICED ABOVE FROM THE LANGUAGE OF RULE 10B (1)(E)(II) THAT IT IS THE NET PROFIT MARGIN REALIZED FROM A COMPARABLE UNCONT ROLLED TRANSACTION, WHICH IS CONSIDERED FOR THE PURPOSES OF BENCHMARKING. THE EP ITOME OF 'COMPARABLE UNCONTROLLED TRANSACTION' IS THAT THE COMPANIES OR TRANSACTIONS IN ORDER TO FALL WITHIN THE AMBIT OF SUB-CLAUSE (II) OF RULE 10B(1)( E), SHOULD BE BOTH COMPARABLE AS WELL AS UNCONTROLLED. 'UNCONTROLLED TRANSACTION' HAS BEEN DEFINED IN RULE 10A(A) TO MEAN: 'A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIATED ENTERPRISES, WHETHER RESIDENT OR NON-RESIDENT.' THI S SHOWS THAT IN ORDER TO BE CALLED AS AN UNCONTROLLED TRANSACTION, IT IS SINE Q UA NON THAT THE SAME SHOULD BE BETWEEN THE ENTERPRISES OTHER THAN THE ASSOCIATED E NTERPRISES. SECTION 92B(2) PROVIDES THAT: 'A TRANSACTION ENTERED INTO BY AN EN TERPRISE WITH A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, FOR THE PURPOS ES OF SUB-SECTION (1), BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE R ELEVANT TRANSACTION BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUC H OTHER PERSON AND THE ASSOCIATED ENTERPRISE'. ON GOING THROUGH THE PRESCR IPTION OF SUB-SECTION (2) OF SECTION 92B, IT IS CLEARLY BORNE OUT THAT A TRANSAC TION WITH A NON-AE SHALL BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO AES IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION B ETWEEN THE THIRD PERSON AND THE AE OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN THE THIRD PERSON AND THE AE. WHEN WE CONSID ER SECTION 92B(2) IN COMBINATION WITH RULE 10A(A), IT FOLLOWS THAT THE T RANSACTION BETWEEN NON-AES SHALL BE CONSTRUED AS A TRANSACTION BETWEEN TWO AES , IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION B ETWEEN THIRD PERSON AND THE AE. IF SUCH AN AGREEMENT EXISTS, THE THIRD PERSON I S ALSO CONSIDERED AS AN AE AND THE TRANSACTION WITH SUCH THIRD PERSON BECOMES INTE RNATIONAL TRANSACTION WITHIN THE MEANING OF SECTION 92B. ONCE THERE IS A TRANSAC TION BETWEEN TWO ASSOCIATED ENTERPRISES, IT CEASES TO BE AN 'UNCONTROLLED TRANS ACTION' AND, THEREBY, GOES OUT OF RECKONING UNDER RULE 10B(1)(E)(II). 16.5 ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT WIPRO TECHNOLOGY SERVICES LTD. EARNED A REVENUE FROM MASTER SERVICES AGREEMENT WITH CITIGROUP INC. FOR THE DELIVERY OF TECHNOLOGY INFRASTRUCTURE SERVICES. THIS AGREEMENT WAS, IN FACT, EXECUTED BETWEEN THE ASSESSEE'S AE, WIPRO LTD ., AND CITIGROUP INC., A THIRD 23 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD PERSON. THIS UNFOLDS THAT THE TRANSACTION OF EARNIN G REVENUE FROM SOFTWARE DEVELOPMENT SUPPORT AND MAINTENANCE SERVICES BY WIP RO TECHNOLOGY SERVICES LTD., IS AN INTERNATIONAL TRANSACTION BECAUSE OF TH E APPLICATION OF SECTION 92B(2) I.E., THERE EXISTS A PRIOR AGREEMENT IN RELATION TO SUCH TRANSACTION BETWEEN CITIGROUP INC. (THIRD PERSON) AND WIPRO LTD. (ASSOC IATED ENTERPRISE). IN THE LIGHT OF THIS STRUCTURE OF TRANSACTION, IT CEASES TO BE UNCO NTROLLED TRANSACTION AND, HENCE, WIPRO TECHNOLOGY SERVICES LTD., DISQUALIFIES TO BEC OME A COMPARABLE UNCONTROLLED TRANSACTION FOR THE PURPOSES OF INCLUS ION IN THE FINAL LIST OF COMPARABLES UNDER RULE 10B(1)(E)(II). WE, THEREFORE , DIRECT REMOVAL OF THIS COMPANY FROM THE LIST OF COMPARABLES. 18. CONSIDERING THE DECISION OF TRIBUNAL FOR EXCLUS ION OF WIPRO TECHNOLOGY SERVICES LTD. AS IT HAD RELATED PARTY TRANSACTION. E INFOCHIPS LTD HAS PROVIDED HARDWARE MAINTENANCE AND PRODUCT, PROVIDIN G BACK OFFICER SERVICES AND HAVE SUBSTANTIAL INVENTORY. SASKEN COM MUNICATION TECHNOLOGY LTD IS ENGAGED IN SOFTWARE PRODUCT. AND PERSISTENT SYSTEM LTD HAS HUGE INTANGIBLE, MADE INVESTMENT IN INTELLE CTUAL PROPERTY RIGHT AND HUGE TURNOVER. THEREFORE, ACCEPTING THE SIMILAR VIEW WE ARE ALSO OF THE VIEW THAT THESE COMPARABLE CANNOT BE COMPARED W ITH CAPTIVE SERVICE PROVIDER. HENCE, WE DIRECT THE AO/TPO TO EXCLUDE TH ESE FOUR COMPARABLE. 19. ZYLOG SYSTEM LTD. THIS COMPARABLE WAS ACCEPTED BY THE TPO BY TAKING VIEW THAT HIGH TURNOVER DOES NOT IMPACT THE PROFITA BILITY OF THE COMPANY. BEFORE DRP THE ASSESSEE CONTENDED THAT SEBI HAS BAR RED ITS CHAIRMAN AND CEO AS SEBI IN ITS INVESTIGATION FOUND ITS PROM OTERS FOR MAKING FALSE AND DISTORTED DISCLOSERS. IT WAS ALSO CONTEND ED THAT THIS COMPANY IS 24 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD ENGAGED IN VARIOUS PRODUCT AND HAVING 42 TIMES TURN OVER COMPARED WITH THE ASSESSEE. THE LD. DRP HAS NOT GIVEN ANY SPECIF IC FINDING WHILE AFFIRMING THE ACTION OF TPO. THE COORDINATE BENCH O F DELHI TRIBUNAL IN ALCATEL LUCENT INDIA LTD (SUPRA) WHILE DISCUSSING T HE COMPARABILITY OF ZYLOG SYSTEM LTD HELD THAT THIS COMPANY IS ENGAGED IN R&D ACTIVITIES, HAS A LICENSE FEE AND DEVELOPED IN HOUSE INTANGIBLE . THUS, CANNOT BE COMPARED WITH CAPTIVE SERVICE PROVIDER. THUS, WE DI RECT THE AO/TPO TO EXCLUDE THESE FOUR COMPARABLE. 21. IN VIEW OF THE AFORESAID DISCUSSION WE DIRECT T HE TPO/AO TO INCLUDE CG VAK SOFTWARE & EXPORT LTD AND EXCLUDE INFOSYS LTD, WIPRO TECHNOLOGY SERVICES LTD., E INFOCHIPS LTD, SASKEN COMMUNICATIO N TECHNOLOGY LTD, PERSISTENT SYSTEM LTD AND ZYLOG SYSTEM LTD FROM FIN AL SET OF COMPARABLE AND RECOMPUTE THE ALP AFRESH. IN THE RESULT THE GR OUND NO. 3 TO 6 ARE ALLOWED IN THE AFORESAID TERM. IN THE RESULT THE AP PEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21.04.2020. SD/- SD/- (SHAMIM YAHYA) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIALMEMBER MUMBAI, DT : 21 ST APRIL, 2020 PK/- COPY TO : 1. APPELLANT 25 ITA 1709/MUM/2016 VARIAN MEDICAL SYSTEM(INDIA) LTD 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI