M/s. Motherson Sumi Infotech & Designs Ltd., New Delhi V. DCIT, New Delhi

ITA 1751/DEL/2015

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 7276 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 27-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Set aside
• Section: 92D; 10B; 144C; 64; 13; 92CA; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) (THROUGH VIDEO CONFERENCE ) BEFORE SHRI N.K.BILLAIYA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1751/DEL./2015 (ASSESSMENT YEAR : 2010-11) M/S MOTHERSON SUMI INFOTECH VS. DCIT & DESIGNS LIMITED CIRCLE-17(1), ROOM NO. 317-B F-7, B-1, MOHAN COOPERATIVE C.R.BUILDING, I. P.ESTATE INDUSTRIAL ESTATE, MOTHURA ROAD NEW DELHI- 110044 NEW DELHI-110002 (PAN : AACCM3199B) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAVI SHARMA, SH. ANUBHAV RASTOG I, ADV. REVENUE BY : SHRI SURENDRA PAL, CIT-DR DATE OF HEARING : 25.08.2020 DATE OF ORDER : 31.08.2020 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER THE APPELLANT, M/S. MOTHERSON SUMI INFOTECH & DESIG NS LIMITED (MIND) (HEREINAFTER REFERRED TO AS THE TAX PAYER) BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE I MPUGNED ORDER DATED 14.11.2014 PASSED BY THE ASSESSING OFFICER (A O) IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TP O UNDER ITA NO.1751/DEL/2015 2 SECTION 254/143 (3) READ WITH SECTION 144C OF THE I NCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2010-11 ON THE GROUNDS INTER ALIA THAT :- THAT ON THE FACTS AND CIRCUMSTANCES OF THE CAS E, AND IN LAW; 1. THE ASSESSMENT ORDER PASSED BY THE LEARNED ASSESSIN G OFFICER (LD. AO) PURSUANT TO THE DIRECTIONS OF LEARNED DI SPUTE RESOLUTION PANEL (LD. DRP) IS BAD IN LAW AND VOID AB-INITIO. 2. THE LD. AO (FOLLOWING THE DIRECTIONS OF THE LD. DR P), ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ADDITION OF RS. 3,24,37,885/- TO THE INCOME OF THE APPELLANT PROPOS ED BY THE TRANSFER PRICING OFFICER (LD. TPO) BY HOLDING THAT ITS INT ERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF SOFTWARE DE VELOPMENT SERVICES DO NOT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE INCOME- TAX ACT, 1961 (THE ACT') AND IN DOING SO, THE LD. DRP AND THE LD. AO HAS GROSSLY ERRED IN AGREEING WITH AND UPHOLDING TH E LD. TPOS ACTION OF: 2.1 NOT APPRECIATING THAT NONE OF THE CONDITIONS SET O UT IN SECTION 920(3) OF THE ACT ARE SATISFIED IN THE PRESENT CASE ; 2.2 IGNORING THE FACT THAT THE APPELLANT IS ENTITLED T O TAX HOLIDAY UNDER SECTION 10B OF THE ACT ON ITS PROFITS AND THE REFORE WOULD NOT HAVE ANY UNTOWARD MOTIVE OF DERIVING A TA X ADVANTAGE BY MANIPULATING TRANSFER PRICES OF ITS IN TERNATIONAL TRANSACTIONS; 2.3 DISREGARDING THE ARMS LENGTH PRICE (ALP), AS DET ERMINED BY THE APPELLANT IN THE TRANSFER PRICING (TP) DOCUME NTATION MAINTAINED BY IT IN TERMS OF SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME-TAX RULES, 1962 (RULES) AS WELL AS FRESH SEARCH; AND IN PARTICULAR MODIFYING/ REJECTING THE FILTERS APPLIED BY THE APPELLANT; 2.4 DISREGARDING MULTIPLE YEAR/ PRIOR YEARS DATA AS US ED BY THE APPELLANT IN THE TP DOCUMENTATION AND HOLDING THAT CURRENT YEAR [I.E. FINANCIAL YEAR (FT) 2009-10] DATA FOR COMPAR ABLE COMPANIES SHOULD BE USED; 2.5 REJECTING COMPARABILITY ANALYSIS UNDERTAKEN BY THE APPELLANT IN THE TP DOCUMENTATION/ FRESH SEARCH AND CONDUCTIN G A FRESH COMPARABILITY ANALYSIS BASED ON APPLICATION OF ADDI TIONAL/ REVISED FILTERS, OR DISREGARDING APPELLANTS FILTERS IN DET ERMINING THE ALP FOR THE INTERNATIONAL TRANSACTIONS; 2.6 INCLUDING COMPANIES HAVING HIGH MARGIN / VOLATILE O PERATING PROFIT MARGINS IN THE FINAL COMPARABLES SET FOR BE NCHMARKING A ITA NO.1751/DEL/2015 3 LOW RISK SERVICE PROVIDER SUCH AS THE APPELLANT; 2.7 INCLUDING CERTAIN COMPANIES IN THE FINAL SET OF COM PARABLES THAT ARE NOT COMPARABLE TO THE APPELLANT IN TERMS O F FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED; 2.8 RESORTING TO ARBITRARY REJECTION OF LOW-PROFIT/ LOS S MAKING COMPANIES AND COMPANIES WITH DIMINISHED REVENUES BA SED ON ERRONEOUS AND INCONSISTENT REASONS; 2.9 EXCLUDING CERTAIN COMPANIES ON ARBITRARY/ FRIVOLOUS GROUNDS EVEN THOUGH THEY ARE COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSU MED; 2.10 BY COMMITTING A NUMBER OF FACTUAL /COMPUTATIONAL ERRORS IN SELECTION/ REJECTION OF PROPOSED COMPARAB LES AND/ OR IN THE OPERATING PROFIT MARGINS OF THE COMPARABLES; 2.11 IGNORING THE BUSINESS/ COMMERCIAL REALITY THAT THE APPELLANT UNDERTAKES LIMITED BUSINESS RISKS AS AGAI NST COMPARABLE COMPANIES THAT ARE FULL-FLEDGED RISK TAK ING ENTREPRENEURS, AND BY NOT ALLOWING A RISK ADJUSTMEN T TO THE APPELLANT ON ACCOUNT OF THIS FACT; 2.12 BY DENYING THE BENEFIT OF A WORKING CAPITAL ADJUSTMENT WHILE COMPUTING THE ALP AND THEREBY DISREGARDING THE LAW, INTERNATIONAL GUIDANCE AND JU DICIAL PRECEDENTS IN THIS REGARD; 2.13 BY MAKING THE TP ADDITION TO THE ENTIRE VALUE OF TRANSACTIONS ENTERED INTO BY THE APPELLANT IN ITS E XPORT SEGMENT AND NOT ONLY TO THE VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT (I.E. PR OPORTIONATE ADJUSTMENTS) AND IGNORING ESTABLISHED JURISPRUDENCE IN THIS REGARD; 2.14 DISREGARDING JUDICIAL PRONOUNCEMENTS IN INDIA IN UNDERTAKING THE TP ADJUSTMENT; 3. ON A WITHOUT PREJUDICE BASIS TO THE OTHER GROUNDS, THE LD. AO / DRP HAS ERRED IN FACTS AND IN LAW, IN IGNORING THE ALTERNATIVE BENCHMARKING ANALYSIS CONDUCTED BY THE APPELLANT CO NSIDERING INTERNAL COMPARABLE UNCONTROLLED PRICE (CUP) METH OD TO DETERMINE THE ARMS LENGTH PRICE OF THE SOFTWARE DE VELOPMENT SERVICES PROVIDED BY THE APPELLANT; 4. ON A WITHOUT PREJUDICE BASIS TO THE OTHER GROUNDS, THE APPELLANT CRAVES TO SUBMIT ALTERNATIVE BENCHMARKING ANALYSIS CONSIDERING INTERNAL TRANSACTIONAL NET MARGIN METHO D (TNMM) TO DETERMINE THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE APPELLANT; 5. THE LD. DRP ERRED IN DISREGARDING THE DETAILED ARGUMENTS/ SUBMISSIONS PUT FORTH BY THE APPELLANT D URING THE ITA NO.1751/DEL/2015 4 COURSE OF THE DRP/ ASSESSMENT PROCEEDINGS WHILE PAS SING ITS DIRECTION UNDER SECTION 144C OF THE ACT; 6. THE LD. AO HAS GROSSLY ERRED BY PROPOSING TO COMPU TE INTEREST UNDER SECTION 234A, 234B, 234C AND 234D OF THE ACT; 7. THE LD. AO HAS GROSSLY ERRED IN INITIATING PENALTY UNDER SECTION 27L(L)(C) OF THE ACT MECHANICALLY AND WITHO UT RECORDING ANY SATISFACTION FOR ITS INITIATION. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTH ER. THE APPELLANT CRAVES LEAVE TO ALTER, AMEND OR WITHD RAW ALL OR ANY OF THE GROUNDS HEREIN OR ADD ANY FURTHER GROUNDS AS MAY BE CONSIDERED NECESSARY EITHER BEFORE OR DURING THE HEARING. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : (M/S. MOTHERSON SUMI INFO TECH & DESIGNS LTD. (MIND) TAXPAYER IS A JOINT VENTURE BET WEEN SUMITOMO WIRING SYSTEMS LTD., JAPAN AND MOTHERSON G ROUP, INDIA. TAXPAYER IS INTO PROVIDING CUSTOMIZED BUSINE SS SOLUTIONS AND SOFTWARE SERVICES TO ITS ASSOCIATED ENTERPRISES (AE). CUSTOMISED BUSINESS SOLUTIONS ARE PROVIDED IN THE A REAS OF ERP, BAR-CODING SOLUTIONS, SUPPLY CHAIN MANAGEMENT (SCM) , BUSINESS INTELLIGENCE, WORKFLOW AUTOMATION, DEVICE INTERFACE SOLUTIONS AND NETWORK MANAGEMENT. MIND HAS BEEN CATERING TO MANUF ACTURING AUTOMOTIVE, BANKING INDUSTRIES AND THE GOVERNMENT S ECTOR. 3. DURING YEAR UNDER ASSESSMENT, TAXPAYER ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTER PRISES (AE) REPORTED IN FORM NO. 3 CEB AS UNDER :- S. NO. INTERNATIONAL TRANSACTION AMOUNT (IN RS.) 1. SERVICES RENDERED 28,25,40,187 2. SERVICES RECEIVED 14,92,933 ITA NO.1751/DEL/2015 5 3. REIMBURSEMENT PAID 38,85,945 4. REIMBURSEMENT RECEIVED 3,44,606 5. PAYMENT OF INTEREST ON LOAN 6,98,01 1 TOTAL 28,89,61,682 4. TAXPAYER IN ITS TRANSFER PRICING (TP) STUDY FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION QUA SOFT WARE DEVELOPMENT SERVICES (SDS) USED TRANSACTIONAL NET M ARGIN METHOD (TNMM) WITH OPERATING PROFIT (OP) / TOTAL C OST (TC) AS PROFIT LEVEL INDICATOR (PLI) CHOSEN 16 COMPARABLES AND COMPUTED THEIR MARGIN AT 13.18% AS AGAINST TAXPAYERS OWN OP /TC MARGIN OF 12.99% AND FOUND ITS INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH. 5. HOWEVER, LD. TRANSFER PRICING OFFICER (TPO) IN I TS TP ANALYSIS ADOPTED FRESH SEARCH BY APPLYING VARIOUS Q UANTITATIVE AND QUALITATIVE FILTERS FINALLY SELECTED 19 COMPARABLES AND COMPUTED THEIR AVERAGE AT 24.40% AND THEREBY PROPOSED ALP AD JUSTMENT OF RS. 3,24,37,885. 6. TAXPAYER CARRIED THE MATTER BEFORE LD. DRP BY WA Y OF FILING OBJECTIONS WHO HAS CONFIRMED THE PROPOSED ADDITIONS MADE BY THE TPO. FEELING AGGRIEVED THE TAXPAYER HAS COME UP BEF ORE 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 ITA NO.1751/DEL/2015 6 ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 8. UNDISPUTEDLY, TNMM WITH OP/TC AS THE PROFIT LEVE L INDICATOR (PLI) AS MOST APPROPRIATED METHOD (MAM) USED BY THE TAXPAYER TO BENCHMARK ITS INTERNATIONAL TRANSACTION QUA SOFTWARE DEVELOPMENT SERVICES HAS BEEN ACCEPTED BY THE LD. T PO / DRP. LD. TPO / DRP PROPOSED / CONFIRMED THE ADJUSTMENT O F RS. 3,24,37,885/- AFTER APPLYING TNMM WITH OP/TC AS THE MOST APPROPRIATED METHOD CHOSEN 19 COMPARABLES WITH AVER AGE OF 24.40%. FINAL COMPARABLES ARE AS UNDER :- SL. NO. NAME OF THE COMPANY OP/TC 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. -1.07% 2. CTIL LTD. 18.11% 3. E-INFOCHIPS 71.38% 4. EVOKE TECH 18.56% 5. E-ZEST SOLUTIONS 18.66% 6. INFINITE DATA SYSTEM PRIVATE LIMITED 88.25% 7. INFOSYS LIMITED 45.47% 8. LARSEN & TOUBRO INFOTECH LTD. 19.06% 9. MINDTREE LTD. (SEGMENT) 13.92% 10. PERSISTENT SYSTEM LIMITED 29.02% 11. PERSISTENT SYSTEMS & SOLUTIONS LTD. 11.37% 12. QUINTEGRA SOLUTIONS LTD. -8.20% 13. R S SOFTWARE (INDIA) LTD. 10.18% 14. SASKEN COMMUNICATION TECHNOLOGIES LTD. 17.54% 15. SONATA SOFTWARE 35.87% 16. TATA ELXSI (SEGMENT) 20.29% 17. THINKSOFT GLOBAL SERVICES LTD. 17.35% 18. ZYLOG SYSTEMS LIMITED 25.07% 19. LGS GLOBAL LIMITED 12.78% AVERAGE 24.40% ITA NO.1751/DEL/2015 7 9. CONSEQUENTLY LD. TPO COMPUTED THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS AS UNDER :- OPERATIONAL COST 28,43,98,071 ARMS LENGTH PRICE AT A MARGIN OF 24.40% 35,37,91,200 PRICE RECEIVED 32,13,53,315 PROPOSED ADJUSTMENT U/S 92CA 3,24,37,885 10. LD. AR FOR THE TAXPAYER CHALLENGING THE IMPUGNE D ORDER PASSED BY LD. TPO / DRP CONTENDED THAT NOW THE ONLY DISPUTE LEFT TO BE DECIDED IS ARBITRARY SELECTION OF SOME COMPA RABLES BY TPO / DRP AND HAS SOUGHT EXCLUSION OF 7 COMPARABLES NAMEL Y E- INFOCHIPS BANGALORE LTD. ; E-ZEST SOLUTIONS LTD. ; INFINITE DATA SYSTEM PRIVATE LIMITED; INFOSYS LIMITED; SASKEN COM MUNICATION TECHNOLOGIES LTD.; SONATA SOFTWARE LTD. AND ZYLOG SYSTEMS LTD. WE WOULD DISCUSS THE SUITABILITY OF AFORESAID COMPA RABLES VIS--VIS TAXPAYER, WHICH A ROUTINE SOFTWARE DEVELOPMENT SERV ICE PROVIDER WORKING ON COST PLUS MODEL, ONE BY ONE. E-INFOCHIPS BANGALORE LTD. 11. TAXPAYER SOUGHT EXCLUSION OF E-INFOCHIPS ON GRO UNDS OF FUNCTIONAL DISSIMILARITY AND NON-AVAILABILITY OF IT S SEGMENTAL FINANCIAL. 12. PERUSAL OF THE ANNUAL REPORT OF E-INFOCHIPS AVA ILABLE AT PAGE 147 OF THE ANNUAL REPORTS COMPENDIUM (ARC) SHOWS TH AT E- INFOCHIPS IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPM ENT AND ITA NO.1751/DEL/2015 8 I.T.ENABLED SERVICES WHICH IS CONSIDERED THE ONLY R EPORTABLE BUSINESS SEGMENT AS PER ACCOUNTING STANDARD-AS 17 SEGMENT REPORTING ISSUED BY MANDATORY ACCOUNTING STANDARDS PRESCRIBED IN COMPANIES (ACCOUNTING STANDARD) RULES, 2006 AND THE RELEVANT PROVISIONS OF COMPANIES ACT, 1956. BUT SEGMENTAL FI NANCIALS ARE NOT AVAILABLE. SINCE, TAXPAYER IS A ROUTINE SOFTWAR E DEVELOPMENT SERVICE PROVIDER WORKING ON COST PLUS MODEL CANNOT BE COMPARED WITH E-INFOCHIPS WHICH IS ENGAGED IN BOTH SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES. 13. COORDINATE BENCH OF TRIBUNAL IN CASE OF AGILENT TECHNOLOGIES (INTERNATIONAL (P.) LTD. VS. INCOME TA X OFFICER, FOUND E-INFOCHIPS NOT A SUITABLE COMPARABLE VIS--V IS ROUTINE SOFTWARE DEVELOPMENT SERVICE PROVIDER ON GROUND OF NON- AVAILABILITY OF SEGMENTAL FINANCIALS FOR BOTH THE SEGMENTS. 14. SO, IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE ARE OF THE CONSIDERED VIEW THAT E-INFOCHIPS IS NOT A SUITABLE COMPARABLES VIS- -VIS TAXPAYER, HENCE, ORDER TO BE EXCLUDED. E-ZEST SOLUTIONS LTD. 15. TAXPAYER SOUGHT EXCLUSION OF E-ZEST SOLUTIONS F ROM THE FINAL SET OF COMPARABLE FOR BENCHMARKING INTERNATIONAL TRANSACTION ON GROUNDS OF FUNCTIONAL DISSIMILARITY AS E-ZEST IS A PRODUCT ENGINEERING AND SOFTWARE DEVELOPMENT COMPANY AND HA S BEEN ITA NO.1751/DEL/2015 9 EXCLUDED BY THE TRIBUNAL IN TAXPAYERS OWN CASE IN AY 2007-08 AND 2011-12. 16. UNDISPUTEDLY THERE IS NO CHANGE IN THE BUSINESS MODEL AND FAR OF THE TAXPAYER DURING THE YEAR UNDER ASSESSME NT SINCE 2007- 08. PERUSAL OF ANNUAL REPORT AVAILABLE AT PAGE 452 AND 453 OF ANNUAL COMPENDIUM REPORT (ARC) SHOWS THAT E-ZEST IS A PRODUCT ENGINEERING AND SOFTWARE DEVELOPMENT COMPANY WHEREA S TAXPAYER IS A CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER TO ITS AE. 17. LD. DR FOR THE REVENUE RELIED UPON THE ORDER PA SSED BY THE TPO AND DREW OUR ATTENTION TOWARDS PARA 10.6 AND CO NTENDED THAT TPO HAS EXAMINED FAR OF THE COMPANY AND FOUND IT A SUITABLE COMPARABLE. BUT, WE ARE OF THE CONSIDERED VIEW THAT WHEN FUNCTIONAL DISSIMILARITY ARE APPARENT BETWEEN E-Z EST SOLUTIONS VIS--VIS TAXPAYER AS DISCUSSED IN THE PRECEDING PA RA COMPREHENSIVE EXERCISE CARRIED OUT BY THE LD. TPO I S A FUTILE EXERCISE. 18. COORDINATE BENCH OF TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2011-12 EXCLUDED E-ZEST SOLUTIONS LTD. VIDE ORDE R DATED 30.10.2019 PASSED IN ITA NO. 5801/DEL/2011 ON GROUN D OF ITS DIVERSIFIED ACTIVITIES WITHOUT HAVING ANY SEGMENTA L INFORMATION ON RECORD. IN VIEW OF THE MATTER, WE ORDER TO EXCLUDE E-ZEST SOLUTIONS LTD. FROM THE FINAL SET OF COMPARABLES. ITA NO.1751/DEL/2015 10 INFINITE DATA SYSTEM PRIVATE LIMITED (INFINITE) 19. TAXPAYER SOUGHT EXCLUSION OF INFINITE DATA SYST EM PVT. LTD. ON GROUND OF FUNCTIONAL DISSIMILARITY AND NON-AVAIL ABILITY OF SEGMENTAL FINANCIAL. PERUSAL OF THE ANNUAL REPORT OF INFINITE DATA SYSTEM PVT. LTD. AVAILABLE AT PAGE 60 AND 64 OF THE ARC PAPER BOOK GOES TO PROVE THAT INFINITE IS PRIMARILY A SER VICE COMPANY ENGAGED IN TECHNICAL CONSULTING, DESIGN & DEVELOPME NT OF SOFTWARE, MAINTENANCE, SYSTEMS INTEGRATION, IMPLEME NTATION, TESTING AND INFRASTRUCTURE MANAGEMENT SERVICES, HE NCE, IT IS NOT POSSIBLE TO GIVE THE QUANTITATIVE DETAILS OF SALES AND CERTAIN INFORMATION AS REQUIRED UNDER PARAGRAPHS 3, 4C AND 4D OF PART II OF SCHEDULE VI TO THE COMPANIES ACT, 1956. SINCE ITS SEGMENTAL REPORTING SHOWS THAT ITS REVENUE PRIMARILY COME FRO M TECHNICAL SUPPORT AND INFRASTRUCTURE MANAGEMENT SERVICES BUT NO SEGMENTED DATA IS AVAILABLE. 20. SUITABILITY OF INFINITE AS A COMPARABLE VIS--V IS ROUTINE SOFTWARE DEVELOPMENT SERVICE PROVIDER HAS BEEN EXAM INED BY THE TRIBUNAL IN CASE OF LIME LABS (I) (P.) LTD. VS. INCOME TAX OFFICER AND FOUND THE SAME NOT A SUITABLE COMPARABLES IN AY 2010-11 ON GROUND OF FUNCTIONAL DISSIMILARITY AND ON GROUND OF SUPER NORMAL PROFIT TO THE TUNE OF 1496% BY RETURNING FOLLOWING FINDING :- ITA NO.1751/DEL/2015 11 15. FURTHERMORE, IT IS BROUGHT ON RECORD BY THE TA XPAYER THAT THE PROFITABILITY OF INFINITE IS INCREASED BY 1496% AS COMPARED TO THE PRECEDING YEAR DESPITE THE FACT THAT FOR COMPUT ATION OF OP/OC, FOREIGN EXCHANGE LOSS HAS BEEN EXCLUDED FROM OC. SO, WE ARE OF THE CONSIDERED VIEW THAT SUPER-NORMAL PRO FIT TO THE TUNE OF 1496% CERTAINLY AFFECTS OP/OC BUT, IN THIS CASE, EVEN FOREIGN EXCHANGE LOSS HAS BEEN EXCLUDED FROM THE OC BY THE TPO AND AS SUCH, IT MAKES THE INFINITE NOT A VALID COMPARABLE VIS--VIS THE TAXPAYER. SO, WE ARE OF THE CONSIDERED VIEW THAT BE CAUSE OF FUNCTIONAL DISSIMILARITY OF INFINITE VIS--VIS THE TAXPAYER AND EARNING SUPER-NORMAL PROFIT BY 1496% AS COMPARED TO PRECEDING YEARS MAKES INFINITE AS INVALID COMPARABLE. SO, WE DIRECT THE AO/TPO TO EXCLUDE INFINITE FROM THE FINAL SET OF CO MPARABLES. 21. SO, IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE , WE ARE OF THE CONSIDERED VIEW THAT INFINITE IS NOT A SUITABLE COM PARABLE VIS--VIS TAXPAYER, HENCE, ORDER TO BE EXCLUDED FROM THE FINA L SET OF COMPARABLES. INFOSYS LIMITED (INFOSYS) 22. TAXPAYER SOUGHT EXCLUSION OF INFOSYS AS A COMP ARABLE ON THE GROUND THAT INFOSYS DEALS IN BOTH PRODUCT AND SERVI CES AND THAT INFOSYS INCURRED HUGE RESEARCH AND DEVELOPMENT EXPE NSES AND HAVING HUGE BRAND VALUE. IT IS BROUGHT ON RECORD BY THE LD. AR THAT INFOSYS HAS BEEN EXCLUDED AS A COMPARABLE BY THE TR IBUNAL IN TAXPAYERS OWN CASE IN AY 2007-08 AND 2011-12. IN A Y 2011-12 INFOSYS WAS ALSO EXCLUDED BY LD. DRP IN ASSESSEES OWN CASE. 23. LD. DR FOR THE REVENUE RELIED ON ORDER PASSED B Y TPO AND DREW OUR ATTENTION TOWARDS PARA 10.2 WHEREIN HE HA S DISCUSSED ALL THE OBJECTIONS RAISED BY THE TAXPAYER REGARDING BRA ND PROFITS, ITA NO.1751/DEL/2015 12 SIGNIFICANT INTANGIBLES, PRODUCT DEVELOPMENT SALES AND MARKETING EXPENSES AND SIGNIFICANT R AND D EXPENSES. 24. WE ARE OF THE CONSIDERED VIEW THAT INFOSYS AS A COMPARABLE HAS BEEN FOUND TO BE NOT A SUITABLE COMPARABLE HAVI NG HUGE BRAND VALUE AND SIGNIFICANT EXPENSES ON R & D VIS--VIS CAPTIVE SOFTWARE DEVELOPMENT SERVICE PROVIDER IN NUMBER OF JUDGEMENT . COORDINATE BENCH OF TRIBUNAL IN ASSESSEES OWN CASE IN A.Y. 20 07-08 AND 2011-12 EXCLUDED INFOSYS BY RELYING UPON DECISION R ENDERED BY HONBLE DELHI HIGH COURT IN CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. BY THE HON;BLE HIGH COURT OF DELHI IN ITA NO. 1204/2011 BY RETURNING FOLLOWING FINDINGS :- 24. THE ANNUAL REPORT OF THIS COMPANY IS PLACED AT PAGES 346 TO 615 OF THE PAPER BOOK. INFOSYS TECHNOLOGIES LIMI TED HAS SUBSTANTIAL INTANGIBLE ASSETS AND IS A GIANT COMPAN Y WITH A SUBSTANTIAL BRAND VALUE. INFOSYS OWNS PRODUCTS/IPR. THE TURNOVER OF THIS COMPANY IS APPROXIMATELY 700 TIMES THAN THE TURNOVER OF THE APPELLANT COMPANY AND HAS SUBSTANTI AL INVESTMENT IN INTANGIBLES. BEING A GIANT COMPANY, T HIS COMPANY HAS BEEN EXCLUDED IN THE CASE OF AGNITY INDIA TECHN OLOGIES PVT LIMITED BY THE HON'BLE HIGH COURT OF DELHI IN ITA N O. 1204/2011. 25. SO, KEEPING IN VIEW THE FUNCTIONALITY AND HUGE BRAND VALUE AND SIGNIFICANT EXPENDITURE ON R & D WE FIND INFOSY S NOT A SUITABLE COMPARABLE VIS--VIS TAXPAYER, HENCE, ORDER TO BE EXCLUDED. SONATA SOFTWARE LTD. ITA NO.1751/DEL/2015 13 26. TAXPAYER SOUGHT EXCLUSION OF SONATA ON T HE GROUND THAT IT FAILS TPOS RELATED PARTY (RPT) /SALES FILTER OF 25%. SINCE THE RPT/SALES OF SONNATA IS 59.35%, THUS APPARENTLY FAI LS TPOS FILTER OF 25%, THIS COMPARABLE IS REMITTED BACK TO THE LD. TP O TO DECIDE AFRESH AFTER PROVIDING OPPORTUNITY OF BEING HEARD T O THE TAXPAYER. SASKEN COMMUNICATION TECHNOLOGIES LTD. 27. TAXPAYER SOUGHT EXCLUSION OF SASKEN ON GROUND O F FUNCTIONAL DISSIMILARITY AS WELL AS ON GROUND OF EXTRAORDINAR Y CIRCUMSTANCES. 28. PERUSAL OF ANNUAL REPORT AT PAGE 307 AND 310 O F THE ANNUAL REPORT COMPENDIUM SHOWS THAT SASKEN COMMUNICATION TECHNOLOGIES LIMITED IS A PROVIDER OF TELECOMMUNICA TION SOFTWARE SERVICES AND SOLUTIONS TO NETWORK EQUIPMENT MANUFAC TURERS, MOBILE TERMINAL VENDORS AND SEMICONDUCTOR COMPANIES AROUND THE WORLD. SASKEN DELIVERS END-TO-END SOLUTIONS THAT ENABLE RI CHER CONTENT DELIVERY ON NEXT GENERATION NETWORKS. ANNUAL REPO RT ALSO SHOWS THAT SASKEN HAS UNDERTAKEN BUSINESS RESTRUCTURING D URING THE YEAR UNDER ASSESSMENT BY MAKING INVESTMENT IN THE SUBSID IARIES AND JOINT VENTURES. 29. SINCE FUNCTIONAL PROFILE OF SASKEN IS DIFFERENT VIS--VIS TAXPAYER AND HAS WENT INTO BUSINESS RESTRUCTURING A FFECTING PROFITABILITY. IT IS NOT A SUITABLE COMPARABLE. ITA NO.1751/DEL/2015 14 30. IN ASSESSEES OWN CASE FOR AY 2007-08 AND 2011- 12, SASKEN WAS ORDER TO BE EXCLUDED AS A COMPARABLE. IN A.Y. 2011-12, SASKEN HAS BEEN ORDERED TO BE EXCLUDED BY THE COORD INATE BENCH OF TRIBUNAL IN TAXPAYERS OWN CASE BY RETURNING FOLLOW ING FINDINGS :- 21. ON HEARING THE RIVAL CONTENTIONS, WE ARE OF TH E VIEW THAT FIRST STEP WHICH HAS TO BE SEEN IS FUNCTIONAL COMPA RABILITY. THE CONCERNS ARE PROVIDING VARIETY OF SERVICES AND APPL ICATION OF SERVICE FILTER OF 75% WOULD COME IN THE NEXT RUNG O F COMPARABILITY. M/S SASKEN COMMUNICATION TECHNOLOGIE S LIMITED WAS DEVELOPING MOBILE ENTERPRISE APPLICATIO NS AND SOLUTIONS ACROSS VARIOUS MOBILE PLATFORMS INCLUDING IOS, ANDROID, BLACKBERRY, RIM AND SYMBIAM PLATFORM; WHIC H ARE CLEARLY MENTIONED IN THE ANNUAL REPORT OF THE SAID CONCERN. THE ASSESSEE ON THE OTHER HAND WAS ONLY PROVIDING SOFTW ARE DEVELOPMENT SERVICES TO ITS AE. HENCE THE CONCERN S ASKEN COMMUNICATION TECHNOLOGIES LIMITED IS NOT FUNCTIONA LLY COMPARABLES TO THE ASSESSEE AND SAME NEEDS TO BE EX CLUDED FROM THE FINAL LIST OF COMPARABLE. ACCORDINGLY, WE HOLD SO. 31. SO, IN VIEW OF THE DISCUSSION MADE IN PRECEDIN G PARA, WE ARE OF THE CONSIDERED VIEW THAT SASKEN IS NOT A SUI TABLE COMPARABLE ON GROUND OF FUNCTIONAL DISSIMILARITY AND BUSINESS RESTRUCTURING. ZYLOG SYSTEMS LTD. 32. TAXPAYER SOUGHT TO EXCLUDE ZYLOG ON GROUND OF F UNCTIONAL DISSIMILARITY AS WELL AS ON GROUND OF BUSINESS REST RUCTURING. PERUSAL OF ANNUAL REPORT AT PAGE 433 SHOWS THAT ZYLOG HAS I NCOME FROM SOFTWARE DEVELOPMENT SERVICES AND PRODUCTS. ANNUAL REPORT AT PAGE 412 SHOWS THAT ZYLOG IS MAKING A SOFTWARE SOLUTIO N FROM CONCEPT TO REALITY IS A COMPLEX AND ARDUOUS PROCESS. AT ZSL . WE CONTINUE TO OFFER VALUE TO OUR CUSTOMERS AND MARKET PLACE TH ROUGH VALUE ITA NO.1751/DEL/2015 15 ADDED RESEARCH & DEVELOPMENT, PRODUCT ENGINEERING, AND END-TO- END PRODUCT LIFECYCLE MANAGEMENT (PLM) SOLUTIONS FR OM CONCEPTUALIZATION, PROTOTYPING, DEVELOPMENT, INTEGR ATION WITH ENTERPRISE APPLICATIONS, MIGRATION, PORTING, PERFOR MANCE TURNING, APPLICATION UPGRADE, TESTING AND MAINTENANCE. 33. SUITABILITY OF ZYLOG HAS BEEN EXAMINED BY THE C OORDINATE BENCH OF TRIBUNAL IN CASE OF LIME LAB (I) (P.) LTD. VS. ITO , ITA NO. 1703/DEL/2015, AY 2010-11 AND ORDERED TO EXCLUDE ZYLOG ON GROUND OF EXTRA ORDINARY EVENT IN FY 2009-10 BY RET URNING FOLLOWING FINDINGS :- 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 FIN ANCIAL YEARS 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 EXTRAORDINARY EVENT HAS CERTAINLY AFFECTED THE PROF ITABILITY OF THE COMPANY AND AS SUCH CANNOT BE A VALID COMPARABL E. 34. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE ARE OF THE CONSIDERED VIEW THAT ZYLOG IS NOT A VALID COMPARABL E VIS--VIS TAXPAYER HENCE, ORDER TO BE EXCLUDED. ITA NO.1751/DEL/2015 16 GRANT OF WORKING CAPITAL ADJUSTMENT 35. LD. TPO / DRP HAVE DENIED THE BENEFIT OF WORKIN G CAPITAL ADJUSTMENT WHILE COMPUTING THE ALP ON THE GROUND TH AT THE ASSESSEE HAS NOT DEMONSTRATED THAT THERE IS A DIFFE RENCE IN LEVELS OF WORKING CAPITAL EMPLOYED BY THE TAXPAYERS VIS--VI S COMPARABLES. TP STUDY REFERRED TO BY THE TAXPAYER FOR BENCHMARKI NG ITS INTERNATIONAL TRANSACTION SHOWS THAT THE COMPLETE D ETAIL HAS BEEN PROVIDED TO GRANT WORKING CAPITAL ADJUSTMENT. SO, I N VIEW OF THE MATTER, WE ARE OF THE CONSIDERED VIEW THAT THE MATT ER IS REQUIRED TO BE RECONSIDERED BY THE TPO BY PROVIDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. MOREOVER WORKING CAPITAL ADJ USTMENT HAS BEEN GRANTED TO THE TAXPAYER IN THE EARLIER YEARS A ND SINCE THEN THERE IS NO CHANGE IN THE BUSINESS MODEL OF THE ASS ESSEE. SO, THIS ISSUE IS REMITTED BACK TO THE LD. TPO. 36. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, APPEA L FILED BY THE TAXPAYER IS ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN OPEN COURT ON 31 ST AUGUST, 2020 SD/- SD/- (N.K.BILLAIYA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: THE 31 ST DAY OF AUGUST , 2020 *BINITA* ITA NO.1751/DEL/2015 17 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI. DATE OF DICTATION 28 .08.2020 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 31 .08.2020 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER 31.08.2020 DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/PS 31.08.2020 DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 31.08.2020 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS 31.08.2020 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT .08.2020 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .08.2020 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER