M/S. COMPUTER SCIENCES CORPORATION INDIA PRIVATE LIMITED, Indore V. THE ASST. COMMISSIONER OF INCOME TAX-2(1), Indore

ITA 179/IND/2016

AI Insights

The case involves multiple appeals by M/s. Computer Sciences Corporation against the orders of the Assistant Commissioner of Income Tax and the Deputy Commissioner of Income Tax concerning transfer pricing adjustments and disallowances under Section 14A of the Income Tax Act. The primary issues revolved around the determination of the Arm's Length Price (ALP) for international transactions and the appropriateness of certain comparable companies used in the transfer pricing study. The Tribunal examined the adjustments made by the TPO and the subsequent orders by the Assessing Officer, focusing on the methodology used in selecting comparables and the adjustments for depreciation and foreign exchange gains.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 129701 (ITAT-INDORE)
• Duration Of Justice: 7 year(s) 1 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-04-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 07-02-2023
• Assessment Year: 2011-2012
• Appeal Filed On: 24-02-2016
• Other Referred Cases: Exl Service.com India Private Limited vs. ACIT, Inductis India Pvt. Ltd vs. ACIT, ACI Worldwide Solutions Private Limited, Egain Communication (P) Limited vs. ACIT, Ramgreen Solutions (P.) Ltd vs. CIT, Saxo India (P) Ltd vs. ACIT, Alcatel-Lucent India Ltd vs DCIT, Evonik Degussa India Private Limited vs. ACIT, Mphasis Limited vs ACIT, Trianz Holdings Private Limited vs. DCIT, Novell Software Development (India) Private Limited vs. DCIT, Symphony Services Pune Private Limited vs. ITO, DCIT vs. Amber Point Technology India Private Limited, Qualcomm India (P) Ltd vs ACIT, American Express India Pvt. Ltd vs DCIT, SAP Labs India Private Limited vs ACIT, Teva India Limited vs DCIT, Sapient Corporation Private Limited vs. DCIT, Quarks Systems Private Limited vs. DCIT, Mercer Consulting (India) (P.) Ltd. vs DCIT, Baxter India (P.) Ltd. vs ACIT, CIT vs. Infosys Technologies Ltd., CIT vs. Encore Software Limited, PCIT vs. Oil Industry Development Board, PCIT vs. Chettinad Logistics Private Limited, PCIT vs. Ameriprise India Pvt. Ltd., PCIT vs. Finserv, PCIT vs. Saxo India (P) Ltd., PCIT vs. IL & FS, PCIT vs. McKinsey Knowledge Centre India Pvt. Ltd., PCIT vs. Oracle (OFSS) BPO Services (P) Ltd., PCIT vs. B C Management, PCIT vs. Allscripts India (P) Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Depreciation; Transfer pricing; Principle of natural justice; International transaction; Rule of consistency; Earning of tax free income; Services rendered outside India; Application of stay; Rule 8D
• Section: 143(3); 244A; 92F; 234B; 14A; 133(6); 143(2); 48; 72; 13; 22

Judgement Text

ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 1 of 29 IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH, INDORE BEFORE MS. SUCHITRA KAMBLE, JUDICIAL MEMBER AND SHRI BHAGIRATH MAL BIYANI, ACCOUNTANT MEMBER (Conducted through Virtual Court) ITA No.179/Ind/2016 Assessment Year: 2011-2012 M/s. Computer Sciences Corporation vs. The Asstt. Commissioner of India Private Limited, Income Tax – 2(1), 19A, Electronic Complex, Indore. Aatmaram Choudhary Marg, Near Readymade Complex, Pardeshipura, Indore – 452 010. [PAN – AABCC 5820 A] ITA No.292/Ind/2017 Assessment Year: 2012-13 M/s. Computer Sciences Corporation vs. The Asstt. Commissioner of India Private Limited, Income Tax, Circle – 2(1), 7 th Floor, Block-1B, DLF IT Park, Indore. Shivaji Garden, Moonlight Stop, Nandanbakkam Post-Ramapuram, Chennai, Tamilnadu – 600 089. [PAN – AABCC 5820 A] ITA No.319/Ind/2018 Assessment Year: 2013-14 M/s. Computer Sciences Corporation vs. The Dy. Commissioner of India Private Limited, Income Tax, Circle – 2(1), 7 th Floor, Block-1B, DLF IT Park, Indore. Shivaji Garden, Moonlight Stop, Nandanbakkam Post-Ramapuram, Chennai, Tamilnadu – 600 089. [PAN – AABCC 5820 A] S.A. No.46/Ind/2021 (Arising out of ITA No.179/Ind/2016) Assessment Year: 2011-2012 M/s. Computer Sciences Corporation vs. The Asstt. Commissioner of India Private Limited, Income Tax – 2(1), 19A, Electronic Complex, Indore. Aatmaram Choudhary Marg, Near Readymade Complex, Pardeshipura, ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 2 of 29 Indore – 452 010. [PAN – AABCC 5820 A] (Appellant) (Respondent) Assessee by : Shri Vishal Kalra, Advocate Revenue by : Shri P.K. Mishra, CIT DR Date of hearing : 08.02.2023 Date of pronouncement : 10.04.2023 O R D E R PER SUCHITRA KAMBLE, JUDICIAL MEMBER : These three appeals, pertaining to the same assessee, are filed by the assessee against three different orders dated 05.02.2016 passed by the ACIT, Circle - 2(1), Indore for the Assessment Year 2011-12, order dated 14.12.2016 passed by the CIT(A)-III, Indore for the Assessment Year 2012-13 & order dated 15.01.2018 passed by the CIT(A)-I, Indore for the Assessment Year 2013-14 respectively. The assessee has also filed Stay Application in ITA No.179/Ind/2016 against the order passed by the ACIT, Circle-2(1), Indore for the Assessment Year 2011-12. 2. The grounds of appeal are as under:- ITA No.179/Ind/2016 for A.Y,. 2011-12 “Based on the facts and circumstances of the case, the appellant respectfully submits that the learned Assessing Officer (‘ld AO’) erred in determining the total income of the appellant at Rs.383,49,26,920/- as against the returned income of Rs.156,44,35,848/- filed by the appellant. The grounds of the appellant against the action of the ld. AO are as follows : 1. on the facts and circumstances of the case and in law the assessment order passed by the ld AO under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 (’he Act’) dated February 5, 2016 is without jurisdiction and is bad in law. 2. on the facts and circumstances of the case and in law the directions issued by the Dispute Resolution Panel (DRP) dated December 22, 2015 is without jurisdiction and is bad in law. The directions passed by the DRP are in violation of section 144C(8) of the Act. 3. on the facts and circumstances of the case and in law the assessment order passed by the ld AO dated February 5, 2016 is based in law and is in violation of Section 144C(13) of the Act. Transfer Pricing related grounds: ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 3 of 29 (The appellant in relation to the international transaction with the associated enterprise in the USA has filed an application with US Competent Authority invoking the Mutual Agreement procedure (MAP) under article 27 of the India- US Double Taxation Avoidance Agreement. In the event the MAP is settled by the competent authorities and agreed by the appellant, the grounds stated below in relation to the international transaction with USA would stand withdrawn). 4. on the facts and circumstances of the case and in law the ld AO/DRP/Transfer Pricing Officer (TPO) has erred in law and on facts in proposing an adjustment of Rs.220,97,90,410/- to the Arm’s Length Price (ALP) determined by the appellant in respect of the international transactions in connection with provision of software development services undertaken by the appellant with its Associated Enterprises (AE). In doing so, the ld. AO/DRP/TPO has erred in law and in facts as follows :- 4.1 Disregarding the functions, assets and risks analysis undertaken by the appellant. 4.2 Rejecting the economic analysis undertaken by the appellant and not computing the ALP in respect of the international transactions as determined by the appellant without providing any cogent reasons. 4.3 Ignoring the provisions of the Rule 10B(4) of the Income Tax Rules, 1962 (‘the Rules’) which authoress abusage of multiple year data of comparable companies for the purpose of determination of the ALP under section 92F of the Act. 4.4 Rejecting the comparable companies identified by the appellant in its transfer pricing study. 4.5 conducting fresh search by rejecting the objections raised by the appellant in relation to selection/rejection/modification of filters or inconsistency in application of filter/s. 4.6 using information obtained under section 133(6) of the Act. 4.7 Considering companies as comparable to the appellant despite such companies failing test of comparability or failure of TPO’s own filer. 4.8 In computing the operating margins of the appellant and comparable companies with certain factual errors and ignoring of certain items which ought to have been considered as operating or non-operating items, as the case may be. 4.9 not granting working capital adjustment and risk adjustment as claimed by the appellant. 4.10 failing to grant the benefit of +/- 5 percent range as envisaged by the provisions of section 92C(2) of the Act. ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 4 of 29 Corporate Tax related grounds 5. On the facts and in the circumstances of the case and in law, the ld AO/DRP has erred in disallowing an expense of Rs.6,07,00,658/- under Section 14A of the act read with Rule 8D of the Rules. 6. On the reacts and circumstances of the case and in law, the ld AO has erred in withdrawing the interest under section 234B of the Act. 7. on the facts and circumstances or the case and in law, the ld. AO has erred in levying interest under section 234D of the Act. 8. on the facts and circumstances of the case and in law, the ld. AO has erred in withdrawing the interest under section 244A of the act. It is prayed and the appellant claims relief that it be held that the aforesaid adjustments are bad in law and the ld. AO be directed to delete the adjustments. Each of the above grounds is independent and without prejudice to the other grounds preferred by the appellant.” ITA No.292/Ind/2017 for A.Y. 2012-13 “1. That on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals)-III, Indore [’the CIT(A)’] has erred in upholding the disallowance of Rs.6,48,60,628/- made under Section 14A of the Income Tax Act, 1961 (’the Act’) and with Rule 8D of Income Tax Rules, 1962 (’the Rules’) 2. That on the facts and circumstances of the case and in law, satisfaction recorded under section 14A(2) of the Act was improper and otherwise bad in law and as such, no disallowance under section 14A was called for. 3. That on the facts and circumstances of the case and in law, except for salary of treasury team personnel, which was suo-moto disallowed in entirety, no expenditure was incurred to earn exempt income. 4. That on the facts and circumstances of the case and in law, the CIT(A) in sustaining the disallowance of Rs.6,48,60,628/- did not appreciate that: (i) administrative expenses debited to the profit and loss account had no bearing to the earning of dividend and non current investment. (ii) non-current investment of Rs.825.90 Crores was strategic investment in subsidiary companies and was not for earning any dividend. Subsidiary companies were merged with CSC India w.e.f. 01.04.2015 and during financial years 2009-10 to 2014-15, no dividend was earned from subsidiaries. Accordingly, non- current investment was not required to be taken into account in ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 5 of 29 computing the disallowance under section 14A read with Rule 8D of the Rules.” ITA No.319/Ind/2018 for A.Y. 2013-14 “1. That on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals)-I, Indore [’the CIT(A)’] has erred in upholding the disallowance of Rs.6,54,95,133/- made under Section 14A of the Income Tax Act, 1961 (’the Act’) read with Rule 8D of Income Tax Rules, 1962 (’the Rules’) 2. That on the facts and circumstances of the case and in law, satisfaction recorded under section 14A(2) of the Act was improper and otherwise bad in law and as such, no disallowance under section 14A was called for. 3. That on the facts and circumstances of the case and in law, except for salary of treasury team personnel, which was suo-moto disallowed in entirety, no expenditure was incurred to earn exempt income. 4. That on the facts and circumstances of the case and in law, the CIT(A) in sustaining the disallowance of Rs. 6,54,95,133/- did not appreciate that: (i) administrative expenses debited to the profit and loss account had no bearing to the earning of dividend and non current investment. (ii) non-current investment of Rs.1417.46 Crores was strategic investment in subsidiary companies and was not for earning any dividend. Subsidiary companies were merged with CSC India w.e.f. 01.04.2015 and during financial years 2009-10 to 2014-15, no dividend was earned from subsidiaries. Accordingly, non- current investment was not required to be taken into account in computing the disallowance under section 14A read with Rule 8D of the Rules.” 3. Firstly we are taking ITA No.179/Ind/2016 for Assessment Year 2011-12. The assessee company is engaged in the business of software development and exports. The assessee is an Indian entity of Computer Science Corporation which is a group of Multinational Companies. The original return of income was filed on 30.11.2011 declaring total income at Rs.155,73,24,897/-. The case was selected for scrutiny and notice under Section 143(2) of the Income Tax Act, 1961 was issued to the assessee on 01.08.2012 which was duly served to the assessee. The case was referred to the Transfer Pricing Officer (TPO) as the Assessing Officer noticed that the assessee has entered into international transactions with it’s associated concerns. The TPO vide order dated 01.01.2015 under Section 92CA(3) made an upward adjustment of Rs.212,56,79,027/- on account of software services. After receipt of the order of the ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 6 of 29 TPO the draft Assessment Order was passed on 20.03.2015 thereby proposing total addition of Rs.218,63,79,685/-. The addition of Rs.212,56,79,027/- was made on account of the upward adjustment for software services by the TPO and addition of Rs.6,07,00,658/- was made for disallowance under Section 14A of the Act as per Rule 8D. The assessee filed objection against the draft Assessment Oder. The Dispute Resolution Panel (DRP) passed order under Section 144C(5) of the Act on 22.12.2015 directing the Assessing Officer to modify the Assessment Order as per the directions given under Section 144C(5) of the Act. In the directions, the AO observed that the DRP had upheld the disallowance of Rs.6,07,00,658/- made under Section 14A as per rule 8D. Also for upward adjustment of Rs.212,56,79,027/- on account of software services. The DRP confirmed the same. The Assessing Officer vide Assessment Order dated 05.02.2016 made addition of Rs.220,97,90,410/- towards upward adjustment on account of provision of Software Services and addition of Rs.6,07,00,658/- which is disallowed under Section 14A read with Rule 8D. 4. Being aggrieved by the Assessment Order, the assessee filed appeal before us. 5. The Ld. AR submitted that the assessee company was incorporated in India on 13.09.1996. The assessee provides software development and maintenance services from STPI and SEZ registered units. The primary activities of the assessee relate to provision of software development services. For the services rendered, the assessee is compensated with a mark-up of 11% on cost. The Ld. AR further submitted that during the previous year the assessee entered into international transactions with its Associated Enterprise and maintained prescribed documents relating to such transactions. The assessee adopted Transactional Net Margin Method as most appropriate method with OP/TC as the Profit Level Indicator. The assessee conducted methodical search of Prowess and Capitaline databases for selection of comparable companies. The assessee selected 22 companies for which financial data for previous three years (i.e. Financial Years 2008-09, 2009-10 & 2010-11), which is the relevant Assessment Year, was considered. The weighted average of OP/TC of comparable companies for Financial Years 2008-09 to 2010-11 was 10.59% after risk and working capital adjustment as against 11.91% (which was revised to 14.85%, after depreciation adjustment) margin of the assessee. Since OP/TC margin of the assessee was greater than mean margin of the comparable companies, it was concluded that international transactions of the assessee were at arm’s length. The ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 7 of 29 Ld. AR further submitted that vide notice dated 31.10.2014 rejected some of the comparable companies and introduced some new comparable companies after conducting fresh search. The final tally of the comparable companies selected by the TPO for computing ALP is that 22 companies are comparable companies selected by the assessee company in TP study, 10 comparable companies accepted by the TPO from the TP study, and 11 fresh comparable companies introduced by the TPO. Thus, total comparable companies selected for determination of ALP was 21. The TPO on the basis of the selected comp[arable companies determined the OP/TC of the comparable companies at 21.49% and recomputed assessee’s margin by excluding foreign exchange at 11.68% (and without granting depreciation adjustment). The TPO made an adjustment of Rs.212,56,79,027/- and incorporated by the Assessing Officer in the draft assessment order dated 20.03.2015. The Assessing Officer assessed the income of the assessee at Rs.375,08,15,533/- as against the returned income of Rs.156,44,35,848/-. The assessee filed objections before the Dispute Resolution Panel against the draft assessment order passed by the Assessing Officer. The Dispute Resolution Panel upheld the order of the Assessing Officer/Transfer Pricing Officer with certain directions to revise the computation of the margin of the comparable companies. 6. The Ld. AR submitted that Ground no.1 is general in nature. Ground nos.2 & 3 are not pressed. Ground no.4 & 4.1 are general in nature. 7. Ground nos.1, 4 & 4.1 are general in nature and hence dismissed. 8. As relates to the Ground nos.2 & 3, the same are not pressed by the assessee and hence dismissed. 9. As regards to Ground no.4.2 related to rejecting economic analysis undertaken by the assessee, most specifically that of depreciation adjustment, the Ld. AR submitted that the assessee before the DRP by way of an additional ground claimed adjustment on account of depreciation vis-à-vis comparable companies. The assessee depreciates its fixed assets at a rate higher than the rates prescribed under Schedule-XIV of the Companies Act, 1956. However, most of the comparable companies considered by the TPO follow rates as prescribed under Companies Act, following straight-line method. Thus, the comparable companies were charging ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 8 of 29 depreciation at a rate lower than the assessee. The assessee sought adjustment because of the difference in the rates of depreciation charged by the assessee vis-à- vis the comparable companies. The Ld. AR submitted that the detailed workings of depreciation adjustment was submitted before the DRP but the DRP denied depreciation adjustment stating that the aspect has been discussed in other grounds of objection. Thus, the DRP has not passed speaking directions in this regard. The Ld. AR relied upon the decision of Delhi Tribunal in the case or Exl Service.com India Private Limited vs. ACIT (ITA No.1939/Del/2008) and Inductis India Pvt. Ltd vs. ACIT (ITA No.1203/Del/2017). The Ld. AR also relied upon the decision of Bangalore Bench of the Tribunal in the case of ACI Worldwide Solutions Private Limited (TS-176- ITAT-2015(Bang)-TP). The Ld. AR also relied upon the decision of Pune Bench of the Tribunal in the case of Egain Communication (P) Limited (2009) 118 ITD 243 (Pune). Thus, the Ld. AR submitted that it is an established jurisprudence that the margins of the comparable companies should be adjusted on account of difference in depreciation between the assessee and the comparable companies. 10. The Ld. DR submitted that the Assessing Officer as well as the Transfer Pricing Officer has followed the well searched formula and the data that simple year should have been taken into account. The Ld. DR submitted that the TPO has taken cognisance of the depreciation adjustment and relied upon the order of the TPO and the Assessing Officer. 11. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee has taken additional ground before the DRP while filing the objection to the draft Assessment Order thereby making adjustment on account of depreciation vis-a-vis the comparable companies. This aspect was not taken into account by the DRP and the DRP simplicitor stated that this aspect is discussed in other ground of objection but there were no speaking directions in this regard. The Ld. DR also could not point out that the DRP has taken into account this additional ground. The depreciation adjustment on account of comparable companies has to be taken into account as the assessee depreciates its fixed assets at a rate higher than the rate prescribed under Schedule-XIV of the Companies Act, 1956. Thus, this needs verification and, therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer/TPO for proper verification and adjudication. Needless to say the assessee be given ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 9 of 29 opportunity of hearing by following the principles of natural justice. Ground no.4.2 is partly allowed for statistical purpose. 12. As regards to ground no.4.3, the same is not pressed and hence dismissed. 13. Now coming to the ground of appeal no.4.4 to 4.7, the same are related to exclusion of comparable companies that of seven companies and inclusion of four comparables. 14. Firstly we will take up exclusion of comparable companies sought by the assessee. 14.1. E-lnfochips Limited: The Ld. AR submitted that E-lnfochips is a product engineering and software R&D services company. It is engaged in manufacturing and designing of chips, owns IP, developed through dedicated R&D expenditure incurred for product and hardware designing. In fact, there was disclosure to significant accounting policies in the said comparable as the Company is engaged in the development and maintenance of computer software and software development consulting and also manufacturing EVM and VDB Electronic Board (Hardware Division). The production and sales of software cannot be expressed in any generic unit. Hence it is not possible to give the quantitative details of sales and certain other information as required under paragraph 3, 4C and 4D of part-11 of Schedule VI to the Companies Act, 1956. The Ld. AR further submitted that this company is engaged in different functions apart from rendition of software development services as listed below: • Manufacturing of electronic chips; • Software Development; • Hardware Maintenance; • Information Technology Consultancy; • Receivables management; and • Software development and implementation The Ld. AR further pointed out page 730 of the Paper book, para 13 (a) & (b) relating to certain details pertaining to units manufactured and raw material consumed with details of import and indigenously procured raw material which clearly shows that the company is also carrying manufacturing operations. The Ld. AR relied upon the decision of the Hon’ble Delhi High Court in the case of Ramgreen Solutions (P.) Ltd ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 10 of 29 vs. CIT: [2015] 377 ITR 533 (Delhi), wherein the Court has held that functional similarity is of utmost importance while accepting or rejecting a comparable company. The Ld. AR further submitted that there is no segmental details available for this comparable. The Ld. AR pointed out that Annual Report of the company for FY 2010- 11 does not disclose segment wise profitability data for the purpose of comparability of the relevant segment with assessee. In view of the above a company with diversified functions cannot be compared to the assessee especially in the absence of segmental data. The Ld. AR relied upon the following decisions: - Pr. CIT vs. Saxo India (P) Ltd. [2017] 397 ITR 160 (Delhi) - Saxo India (P) Ltd vs. ACIT [2016] 176 TTJ 540 (Delhi - Trib.) - Alcatel-Lucent India Ltd vs DCIT [ITA No 6856/Del/2015] - Evonik Degussa India P Limited vs. ACIT (ITA No 7653/Mum/2011) The Ld. AR further pointed out that there is abnormally fluctuating margin related to this comparable. The company has a volatile margin trend for a period of over three years. Since FAR profile of Company is different from FAR profile of assessee. Therefore, the Ld. AR submitted that E-lnfochips cannot be considered for the purpose of comparability with the assessee as it has inconsistent returns tabulated below: The Ld. AR relied upon following decisions regarding abnormally fluctuating margin and supernormal profit: - PCIT vs. Allscripts India (P) Ltd. [2016] 241 Taxman 545 (Guj) - Cummins Turbo Technologies Ltd, UK vs. DDIT ITA Nos.161 & 269/PN/2013 - American Express India Pvt. Ltd. Vs. DCIT [2017] 83 taxmann.com 345 (Delhi - Trib.) - SAP Labs India Private Limited vs. ACIT: (ITA No 398 & 418/Bangalore/2010) - Adobe Systems Software India Private Limited vs. ACIT: (ITA No. 5043/Del/2010). - Teva India Limited vs DCIT (ITA No 6107/Mum/2009) - Sapient Corporation Private Limited vs. DCIT: (ITA No. 5263/Del/2010) - Quarks Systems Private Limited vs. DCIT: (ITA No. 100/Chd/2009) The Ld. AR further submitted that the TPO in assessee’s TP assessment proceedings in AY 2010-11 rejected E-infochips as a comparable by treating income from hardware maintenance as income from sale of products. The Ld. AR relied upon the decision of Brintons Carpets Asia Private Limited: (ITA No.1296/Pune/2010) on consistency in approach of TPO. The Ld. AR further submitted that the TPO in the report dated Company Name F.Y. 2008- 09 F.Y. 2009- 10 F.Y. 2010-11 OP/TC E-Infochips Limited -14% 5% 57% ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 11 of 29 January 16, 2019, at page 9, has merely reiterated the observations in the TPO order. In fact, the TPO himself has accepted in the remand report that the hardware sales during the year is 15.07% and whereas in the last year it was 18%. However, he has stated that the contention of the assessee is not acceptable. The Ld. AR further pointed out that on this ground only the comparable was rejected in AY 2010-11 by the TPO and in this year the TPO has stated that the contentions of the assessee is not acceptable, which is contrary to the principle of consistency. 14.2. The Ld. DR submitted that in respect of E-Infochips Limited, the DRP has rightly included the same as it is a comparable company. The Ld. DR relied upon the order of the TPO/AO and directions of the DRP. 14.3. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the E-Infochips Limited is a product engineering and software research & development service company. The portfolio of the E- Infochips Limited is totally different as the product based company cannot be the criteria for including the same as it is not the proper comparable with the assessee company. There are no segmental details available for this comparable. There are abnormally fluctuating margin related to this comparable. Besides this, the TPO has accepted in the remand report that the hardware sales during the year is 15.07% and whereas in the last year it was 18% and therefore, rejected this comparable in A.Y. 2010-11. Thus, all these aspect held this company as non- comparable to the assessee company. Hence, the TPO/AO directed to exclude E- Infochips Limited from the comparable companies list. 14.4. E-zest Solutions Limited: The Ld. AR submitted that E-zest Solutions Ltd. is engaged in providing product engineering services. It also undertakes ITeS – BPO/KPO services, thus functionally not comparable. This company is functionally not comparable with the assessee as it has a broad portfolio of services and is engaged in the diversified activities. The various products and services rendered by Company are listed below: - Product Design and Development - Product Feature Enhancement - Product Platform Migration - Software Product Testing - Product Maintenance and Support ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 12 of 29 - Product Release and license Management - SAAS/SOA Services - Web 2.0 Services The company is maintaining inventories, which also proves that it is a software product company. The TPO in the remand report dated January 16, 2019, at page 9, has stated that E-zest Solutions Limited is actually not only a product development company, but is also rendering software product development services. Therefore, the contention of the assessee is incorrect to say that E-zest Solutions Limited is a software product company. In this regard, the TPO has relied on the information received under section 133(6) that the company is not having any revenue from sale of products during the subject year. In relation to the above allegations of the TPO, the Ld. AR submitted that from pages 767 to 770 of the paper-book, it is quite apparent that E-zest Solutions Limited is not just providing software development services but is also doing end to end product engineering and product development services, SAAS and other host of services, which are completely different from the assessee. Even assuming that during the year under consideration that there is no software product sale, even then the services rendered are functionally not comparable (as stated supra) to the assessee. Thus, is not functionally comparable to the functions performed by the assessee. Further, even if during the year the company has not reported any revenue from software sales, it is still maintaining software product inventory, which clearly shows that it is a product company as well. The Ld. AR relied upon the following decisions where the company has been rejected on the basis that it is a product engineering company and it cannot be compared with software development services: - Cadence Design Systems India Private Limited vs. ACIT: ITA No. 6315/Del/2015 - Hewlett Packard India Software Operation Private Limited vs. DCIT: IT(TP)A No. 1304/Bang/2011 - Symantec Software & Services India Private Limited vs. DCIT: ITA No. 614/Meds/2016 - Mphasis Limited vs ACIT: IT(TP)A No. 14/Bang/2012 - Trianz Holdings Private Limited vs. DCIT: IT(TP)A No. 1568/Bang/2012 - Novell Software Development (India) Private Limited vs. DCIT: IT(TP)A No.1287/Bang/2011 ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 13 of 29 - Symphony Services Pune Private Limited vs. ITO: [2014] 65 SOT 30 (Pune Tribunal) - DCIT vs. Amber Point Technology India Private Limited: ITA No. 756/Pune/2014 (Pune Trib) 14.5. The Ld. DR relied upon the directions of the DRP and the order of TPO/AO. 14.6. We have heard both the parties and perused all the relevant material available on record. E-zest Solutions Limited is engaged in the diversified activities and providing product engineering services and, therefore, it cannot be treated as comparable to assessee company. Besides this, it also undertakes ITes-BPO/KPO services. There were no segmental details available for this company. Therefore, we direct the TPO/AO to exclude this company from the list of comparables. 14.7. iGate Global Solutions Limited : Services provided by the Company are in the nature of Engineering Design services which are completely different from software development services and are not functionally comparable. There is no segmental information available as the company is engaged in different functions, thus, the said company cannot be taken as a comparable. The TPO in the report dated January 16, 2019 at page 10 has stated that the extra ordinary events does not make any difference regarding the profitability of the company. Further, as regards insufficient data is concerned it has been submitted that the Annual Report of the company is available in the public domain and, thus, there is sufficient information to carry out the comparability analysis. He has further submitted that this company was considered as comparable in the AY 2010-11. The Ld. AR submitted that iGate has been excluded from the comparable list by the Tribunal vide order dated April 12, 2019 in ITA No. 160/lnd/2015 for A.Y. 2010-11. In view of the same, all the above contentions of the TPO that the said company is functionally comparable does not hold good. The Ld. AR relied upon the following decisions, wherein in the absence of segmental the company has been rejected: - Dialogic Networks (India) (P) Ltd. vs. DCIT: [2017] 78 taxmann.com 349 (Mumbai -Trib.). - Evalueserve SEZ (Gurgaon) (P) Ltd. vs. ACIT: [2017] 58 ITR(T) 234 (Delhi - Trib.) 14.8. The Ld. DR relied upon the directions of the DRP and order of the TPO/AO. ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 14 of 29 14.9. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that iGate Global Solutions Limited is in the nature of engineering design services which are completely different from software development services. There are no segmental information available for the particular year before us. In fact, in assessee’s own case for A.Y. 2010-11 this comparable was excluded and hence this is not a valid comparable. We direct the TPO/AO to exclude iGate Global Solutions Limited from the comparable list. 14.10 Lucid Software Limited: Lucid software is engaged in development of software products and rendition of software services. It has created software platforms, which are sold to customers. This company is functionally different and therefore cannot be compared with assessee. The Ld. AR submitted that Lucid Software Limited is providing software development services by using in-house developed software products (intangible) In view of the same, Lucid Software Limited (a) is a software product company, (b) even the software services that are being provided by Lucid Software Limited are provided by using-in-house developed software. The Ld. AR further submitted that the said company has developed its own software product for rendition of software services and has also incurred expenditure of Rs.83,80,045/- on research development on yearly basis. Thus, the Ld. AR submitted that it is clearly evident that the said company is functionally not comparable to the assessee. The Ld. AR relied upon the following decisions relating to the comparable regarding software product company: - 3DPLM Software Solutions Limited: (TS-359-ITAT-2013 (Bang)- TP) - Citrix R&D India Pvt. Ltd vs. ITO: TS-242-ITAT-2017(Bang)-TP - ACIT vs. Curam Software International P Ltd IT(TP)A 499 & CO.136/Bang/2015 The Ld. AR submitted that no segmental result is available and company is engaged in dissimilar functions, the said company cannot be used as a comparable. The company has fluctuating margins for a period of three years. Company Name F.Y. 2009-10 F.Y. 2010-11 F.Y. 2011-12 OP/TC Lucid Software Ltd. -25.78% 41.85% 12.04% Since FAR profile of the Company is different from FAR profile of assessee the same ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 15 of 29 cannot be considered for the purpose of comparability, especially, when the margins are also fluctuating and the assessee earns a consistent steady returns for its activities. The TPO in the remand report dated January 16, 2019 has stated that the sale of software in the subject year is only 4,95,000/- which is 1.64% of the total turnover, therefore, the same will not affect the overall margin of the company. In this regard, the Ld. AR submitted that it is not the quantum of software product sold which makes the company functional or non-functional but it is per se the functional activities which would impact the comparability between the two entities. Further, the TPO in the report has not appreciated that Lucid owns considerable intangible and is spending considerable amount on research and development on yearly basis. Thus, Lucid is functionally not comparable as it owns intangibles, does research and development for developing new software products and is selling software products. The Ld. AR relied upon the following decisions relating to the comparable regarding fluctuating margin: - FCG Software Services (India) Private Limited: IT(TP)A No.1242/ Bangalore/2012) - CIT vs. Allscripts India (P) Ltd: [2016] 241 Taxman 545 (Gujarat) - Cummins Turbo Technologies Ltd., UK vs. DDIT: ITANos.161 & 269/PN/2013. - American Express India Pvt. Ltd. vs DCIT: [2017] 83 taxmann.com 345 (Delhi Trib ) - SAP Labs India Private Limited vs ACIT: (ITA No. 398 & 418/Bangalore/2010) - Adobe Systems Software India Pvt Ltd vs ACIT: (ITA No. 5043/ Del/2010) - Teva India Limited vs. DCIT: (ITA No. 6107/Mum/2009) - Sapient Corporation Pvt. Ltd. vs. DCIT: (ITA No.5263/Del/2010) - Quarks Systems Pvt. Ltd. vs. DCIT: (ITA No.100/Chd/2009) 14.11. The Ld. DR relied upon the directions of the DRP and order of the TPO/AO. 14.12. We have heard both the parties and perused all the relevant material available on record. This comparable Lucid Software Limited is engaged in development of software products and the assessee is not dealing in software product. Thus, functionally this comparable is not a valid comparable. Besides this, no segmental research are available for the current Assessment Year in respect of Lucid Software Limited. There is an observation that the company has fluctuating margins for a period of three years. Therefore, this comparable is not justifiable. We direct the TPO/AO to exclude this comparable from the final list of comparables. 14.13. Persistent Systems Limited: This comparable company is functionally ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 16 of 29 dissimilar. The company is engaged in rendering outsourced product development services and product design services as against software development services Further the Company maintains its own intellectual property which has created a significant non-linear revenue stream for the company. The company has been involved in merger/ demerger activities during the F.Y. 2010-11. This unusual event is helping the Company in its operations and has an impact on the profitability of the Company. The IP Led business of the company is growing steadily and providing the non-linear growth. In the financial year 2009-10, 7 2% of the revenues came from IP, which grew to 8.8% in the financial year 20'0-11 (subject AY). Company’s strategy for IP business is to proactively identify and develop solutions that augment customers' product roadmap, thereby extending solution in a way that is strategic and monetarily significant for both organization. The IP developed is also aligned to strategic growth areas - Cloud. Mobility Bl & Analytics Collaboration, Telecom and Life Sciences. Some of the IPs developed are also aligned directly to the customer. Around five percent of Persistent’s employee base is dedicated to research and IP development and continuously tracking technology disruptions in the marketing. There were no segmental information is available. The TPO in the remand report dated January 16, 2019 has not made any adverse comments in relation to Persistent Systems Limited. The Ld. AR relied upon the following judicial precedents wherein the above stated comparable has been rejected: Functionally different: - Saxo India (P) Ltd. vs. ACIT: [2016] 176 TTJ 540 (Delhi - Trib.) - Dialogic Networks (India) (P) Ltd. vs. DCIT: [2017] 78 taxmann.com 349 (Mumbai - Trib.) - Mphasis Limited vs. ACIT: IT(TP)A No.14/Bang / 2012 - Trianz Holdings Private Limited vs. DCIT: IT(TP)A No.1568/Bang/2012 Income from sale of software: - Alcatel-Lucent India Ltd. vs. DCIT: [ITA No.6856/Del/2015] - Intoto Software India Private Limited (ITA No.1196 & 1197/Hyd) - FCG Software Services (India) Private Limited (IT(TP)A No.1242/ Bangalore/2012) Extra-ordinary events: The Ld. AR relied upon the following decisions wherein it has been held that in case of an extraordinary event like merger/amalgamation during the relevant year; the company should not be selected as comparable: ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 17 of 29 - Symphony Market Solutions Private Limited vs. ITO: (IT(TP)A No. 1316/Bang/2012) - NTT Data India Enterprise Application Services Pvt. Ltd. vs. ACIT: (ITA No. 1612/Hyd/2010) - Petro Araldite Private Limited vs. DCIT (ITA No.6217/Mum/2012 14.14. The Ld. DR relied upon the direction of the DRP and the order of the TPO/AO. 14.15. We have heard both the parties and perused all the relevant material available on record. Persistent System Limited is engaged in rendering outsourced product development services and product design services but the assessee company is primarily relates to provision of software development service. Thus, there is dissimilar function in this comparable. Persistent System Limited was involved in merger/demerger activities during the F.Y. 2010-11 and thus this is unusual event which will set out as non-comparable company. Besides that, income from sale of software product and IP business was not bifurcated and no segmental information is available. Therefore, we direct the TPO/AO to exclude this comparable from the final list of comparables. 14.16. Sankhya Infotech Limited: The company is engaged in design and development, installation and maintenance of simulators and systems for varied customers such as defence, aerospace, automobile and security etc. The company is engaged in the field of simulation operations, which are functionally different from software development services rendered by the assessee. The Ld. AR relied upon the following judicial precedents wherein the company has been held to be functionally dissimilar to software development company: - Alcatel-Lucent India Ltd. vs. DCIT: [ITA No. 6856/Del/2015] - ITO vs. Sunquest information Systems (India) P Ltd. IT(TP)A No.1032/ Bang/ 2011 - ITO vs. Colt Technology Services India P. Ltd: ITA No.6091/Del/2011 The Ld. AR further submitted that there is no segmental available regarding software development service. The TPO in the report dated January 16, 2019 has stated that the assessee is wrongly contesting functional comparability of the comparable. The assessee has based its objections based on end user of the software without ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 18 of 29 appreciating that the company is not developing any software products. It has been further stated that the segmental revenue from product training is Rs.9.6 crores and the same has not been taken into consideration. The Ld. AR submitted that the TPO has erred in stating in the report that the segmental are available, it is clearly coming that no segmental are available and the segmental that are appearing in the Annual Report are related to services and product. Further, under the service segment there are different activities which are not comparable to the assessee, therefore, functionally the said company is not comparable to the assessee. The Ld. AR further submitted that this comparable undertakes R&D and owns intangibles. The company is engaged in designing and installation of simulation technology and has invested considerable resources in R&D for creation of niche solutions. For doing the work it owns significant intangibles. At page 1174 of the Paper book of the Directors report it has been reported that it h as secured contract for supply o : simulation and virtual training suite and it has successfully execute Silicon suite products for the Indian Army. The Ld. AR relied upon the following decisions wherein it has been held that companies owning intangibles cannot be accepted as comparable: - Omniglobe Information Technologies (India) (P ) Ltd. vs. ITO: ITA No. 1003/Del/2016 for AY 2010-11 - Alcatel-Lucent India Ltd. vs. DCIT: [ITA No 6856/Del/2015] - ITO vs. Sunquest information Systems (India) P ltd: IT(TP) A No. 1032/Bang/2011 - ITO vs. Colt Technology Services India P. Ltd. ITA No.6091/Del/2 011 - Clear 2 Pay India (P.) Ltd vs. ITO [IT Appeal Nos.594, 2744 & 2788 (DELHI) of 2017] - Colt Technology Services India (P ) Ltd [IT Appeal No. 609 (Delhi) of 2011] - Bechtel India (P.) Ltd. vs. DCIT: [ITA No 6779/Del/2019] - Saxo India (P) Ltd. vs. ACIT: [2016] 176 TTJ 540 (Delhi - Trib.) - Shipnet Software Solutions India (P) Ltd. [IT Appeal No.3404/MDS/2016 14.17. The Ld. DR relied upon the directions of the DRP and the order of the TPO/AO. 14.18. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that Sankhya Infotech Limited is engaged in the field of simulation operations which are functionally different from software development business. There are no segmental available regarding software related to this comparable. This comparable company undertakes R&D and owns intangibles which makes it dissimilar from the assessee’s portfolio. Therefore, we direct the TPO/AO to exclude this comparable from the final list of comparables. ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 19 of 29 14.19. Wipro Technology Services Limited: The Ld. AR submitted that this comparable company is functionally different. The company is engaged in providing software related support services primarily, information technology software solutions/maintenance and technology infrastructure support services to Citigroup entities. The services provided include: - Software application development, integration, maintenance & support - It develops software depending on the needs of the clients such as an upgrade or patch. It also tests the software and assists in installation per the requirements of the clients. - Technology infrastructure operations - It renders support services towards system engineering, network and firewall management, log reviews, information security administrators etc. The Ld. AR submitted that the company before change of management and name was part of the Citigroup and was known as Citi Technology Pvt. Ltd. Wipro Technology Ltd. acquired the above mentioned company from Citigroup Inc with a master service agreement that Citigroup will provide business of $600 million to the Wipro Technology Services. Therefore, in terms of section 92B(2) of the Act the transaction has become international transaction and does not pass the related party/sales filter of 25% applied by TPO and hence should be rejected from the final comparable set. The Ld. AR relied upon the following decisions wherein the company has been rejected on account of high related party transaction on above facts: - Pr. CIT vs Saxo India (P) Ltd.: [2017] 397 ITR 160 (Delhi) - Saxo India (P) Ltd. Vs. ACIT: [2016] 176 TTJ 540 (Delhi - Trib.) - Agilent Technologies (International) (P) Ltd. Vs. ITO: [2018] 91 taxmasn.com 59 (Delhi - Trib) The Ld. AR submitted that the company has fluctuating margins for a period of over three years. Since FAR profile of company is different from FAR profile of assessee the same cannot be considered for the purposes of comparability, especially, when the margins are also fluctuating and the assessee earns a consistent steady returns for its activities. The Ld. AR relied upon the following case laws: - FCG Software Services (India) Pvt Ltd: (IT(TP) A No.1242/ Bangalore/2012) - PCIT vs. Allscripts India (P) Ltd: [2016] 241 Taxman 545 (Gujarat) - Cummins Turbo Technologies Ltd. Vs. DDIT: ITA Nos.161 & 269 PN/2013 - American Express India Pvt. Ltd. Vs. DCIT: [2017] 83 taxmann.com 345 (Delhi - Trib) The Ld. AR submitted that there is presence of Brand in this comparable company. ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 20 of 29 The Ld. AR relied upon the following decisions wherein companies which are having substantial brand presence (in the present case Wipro) are not comparable to the company which are not enjoying such brand presence: - Pr. CIT vs. Oracle (OFSS) BPO Services (P) Ltd. [2018] 303 CT 284 (Del). The SLP filed by the Revenue against the order of the Hon’ble High Court has also been dismissed vide order dated 30.11.2018 in SLP Civil Diary No. 32469/2018. - Pr. CIT vs B C Management: 1064 of 2017 (Del HC) The TPO in the report dated January 16, 2019, has merely commented that the revenue from software sales is quite miniscule as compared to software services revenue; therefore, this contention of the assessee is not tenable. The TPO has further stated that the contention is of the assessee that the said company is earning super normal profit is also not acceptable because PLI margin of 40.56% on cost cannot treated as Super Normal. The Ld. AR submitted that the TPO has however, failed to appreciate that the company cannot be compared, not just because of super normal profits, but also bees use of (a) brand presence, (b) high related party transaction and (c) fluctuating margins as demonstrated hereinabove. 14.20. The Ld. DR relied upon the directions of the DRP and the order of the TPO/AO. 14.21. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that Wipro Technology Services Limited is engaged in providing software related support services, software application development, integration, maintenance & support as well as technology infrastructure operations. These services are totally different than the provisions of software development services. In the relevant A.Y., Wipro Technology Services Limited, related party transaction was conducted and there was change of management. There was fluctuating margins for a period of over three years and, therefore, the FAR analysis was not justifiable for comparing the assessee’s company. The brand Wipro Technology Services Limited has substantial presence and, therefore, it is earning super normal profit compare to that of assessee company. Therefore, this company is not a valid comparable. Thus, we direct the TPO/AO to exclude this comparable. 15. Now coming to the inclusion of comparables companies :- ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 21 of 29 15.1 Maveric Systems Limited: The Ld. AR submitted that the company is engaged in the business of software development and testing services. The services are comparable to the assessee and it satisfies all filters applied by the TPO. The Ld. AR submitted that the TPO in the impugned year has not disputed the functional comparability of the comparable. The reason given for exclusion is that in the present year due to government policies in UK the company has incurred business losses. The TPO has accepted the said comparable both in AY 2012-13 as well as AY 2013-14 and has made no TP adjustment. The Ld. AR submitted that the performance due to government policy is not an unusual event. The Ld. AR submitted that the company in the Director's report has stated about company's business performance in various geographies. While the company did not perform well in the European market as the business was adversely affected by government policies, it has performed well in Middle East region and in Asia Pacific region. The Ld. AR further pointed out that the assesse also provides services to several Associated Enterprises situated in the European region. In fact, it has rendered services specifically to its UK based Associated Enterprises. Under the circumstances, business of the assessee will also be affected the same way as the business of the comparable. In view of the above since the market in which the assessee as well the comparable operate is similar and any adverse effects of government policies affects business for tie comparable as well as the assesseet alike, it cannot be said that any fall in business due to government policies is an extraordinary event peculiar to the above mentioned comparable company. 15.2. The Ld. DR submitted that this comparable was not justifiable as the profile of Maveric Systems Limited also includes testing services which is totally different from the assessee’s profile. 15.3. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note it is persistently loss making company and the performances was due to government policies but this comparable company was excluded in A.Y. 2010-11. In the present A.Y., the TPO has not disputed the functional comparability of this company and the TPO has accepted this comparable in A.Y. 2012-13 and 2013-14. The contention of the Ld. DR that this company includes testing services, but that will not impact the main function of the said comparable company. From the annual report of this comparable, it is pertinent to note that this ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 22 of 29 comparable company is in the same field to that of assessee company and merely excluding the said comparable in A.Y. 2010-11 for persistent loss was not applicable in the present A.Y. as loss was not in the Indian entity but related to government policies in U.K. Therefore, we direct the TPO/AO to include this company after due verification for the final comparable list. 15.4. Thinksoft Global Services Limited: The Ld. AR submitted that Thinksoft Global Services Ltd. is a software service provider primarily delivering software validation and verification services. These services are similar to assessee's software services and validation and verification is part of software development process. The TPO has alleged the said company has a high RPT/sales ratio, which is factually incorrect. The company in the annual report in the related party disclosures has actually disclosed director's remuneration as a related party transaction. The same amount is also reported as remuneration to director's. S. No. Particulars Reference Amount in INR 1 Income from services rendered Page 48 of Annual repot 2,85,81,327 2 Payment of rent 4,46,400 3 Expenses for services rendered 11,81,22,488 4 Total Related party transactions transactions (A) 14,71,50,215 5 Total operating income (B) 61,89,54,542 6 Percentage of related party transactions to turnover (A)/(B) 23.77% For the purpose of computation of RPT/sales ratio, Director's remuneration cannot be considered as a related party transaction. The Ld. AR further submitted that aII the companies pay director’s remuneration and the Companies Act regulates it. The rationale to exclude companies with high RPT is that high-related party transactions may affect the financials However, Director's remuneration cannot be held to be in the same league as other related party transactions with Associated Enterprises as it is already regulated by statute and in fact, it is not even reported as related party transaction by most enterprises. The Ld. AR submitted that the TPO has not disputed the functional profile of the company, it has only been rejected on the ground that it has high RPT, which, in view of the above submissions has been shown to be incorrect. ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 23 of 29 15.5. The Ld. DR submitted that this comparable company should not be included as it is primarily delivering software validation and software services. 15.6. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the TPO has not disputed final portfolio and only rejected on the basis of high RPT but from the perusal of annual report the observation of the TPO appears to be factually incorrect. Therefore, we direct the TPO/AO to verify the same and if all the filters are applied, then include this comparable in the final list of comparable. 15.7. R System International Limited : R Systems International Ltd. has two segments firstly Software Development segment and customisation services and secondly Business Process Outsourcing. The Ld. AR submitted that the Assessee has chosen Software development and customization services segment as held to be comparable to the Assessee who is engaged in the business of software development, maintenance and enhancement services (customization etc.). Segmental quarter wise audited financial details are available for the said company in the public domain and the correct margin for the financial year April 2010 to March 2011, can be computed the information available. The Ld. AR submitted that it is settled position by the courts with respect to R Systems International Ltd that if quarter-wise data is available to compute segmental margins of the financial year then the said comparable should be included in the list of comparable. The Ld. AR further submitted that the TPO has not disputed the functional profile of the company, it has only been rejected as a comparable on the ground that it reports financials for a different financial year, which in view of the courts cannot be held to be the reason for rejection of this company as a comparable. The Ld. AR relied upon the following decisions wherein inclusion of R Systems has been upheld: - Mercer Consulting (India) (P.) Ltd. vs DCIT: [2014] 150 ITD 1 (Delhi - Trib.) - affirmed by Punjab & Haryana High Court in [2017 390 ITR 615 - Business Process Outsourcing (India) Pvt. Ltd. vs ACIT: ITA No. 238/Bang/2016 - Baxter India (P.) Ltd. vs ACIT: [2017] 85 taxmann.com 285 (Delhi - Trib.) - Exevo India (P.) Ltd. Vs. ITO: [2016] 72 taxmann.com 339 (Delhi - Trib.) - CIT vs McKinsey Knowledge Centre India Pvt. Ltd.: (ITA 217/Del/2014) 15.8. The Ld. DR submitted that this company has 2 segments i.e. Software Development Segment & Customisation Services and Business Process Outsourcing. ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 24 of 29 The Ld. DR submitted that assessee has excluded certain comparable on the basis of TPO and hence this comparable should not be included. 15.9. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that though R System International Limited has two segments, the segmental quarter-wise audited financial details are available wherein these two segments have been bifurcated. It appears that the Software development and customization services are identical to the assessee’s functions relating to this company. Therefore, we direct the TPO/AO to verify the said aspect and if all the criteria are applicable, then include the same in the final list of comparable. 15.10. Kulzia Technologies Limited : Kuliza Technologies Ltd is engaged in the business of rendering software services. The company satisfies all the filters adopted by the TPO. The said comparable company has been included by the TPO in the previous A.Y. 2010-11 when it had earned a profit however, for the impugned year since the company has incurred losses the TPO has rejected company under the garb of having abnormal profit pattern. Both profit and losses are part of the business and if in one year a company has incurred losses does not mean it has an abnormal profit pattern. The Ld. AR submitted that it is not the case that the company has incurred any abnormal costs, neither is it a persistent loss making company. The Ld. AR further submitted that it has earned a healthy margin of 30.75% and 14.72% for the past two AYs, i.e., 2010-11 and 2009-10, respectively. Therefore, the Ld. AR submitted that the said company should be included in the list of comparable companies. The Ld. AR submitted that the coordinate Benches of the Tribunal have clearly held that at least three years' data must be considered for a company to be considered as a persistent loss making and declared as incomparable. The Ld. AR relied upon the following cases wherein comparables have been excluded on the basis of persistent loss making, if the comparable is making losses for the preceding three years: - Exxon Mobil Co India (P) Ltd. vs. DCIT [2011] 46 SOT 294 (Mum (URO) - TCL Holdings (P) Ltd. vs. ACIT [2013] 59 SOT 68 (Mum) - Qualcomm India (P) Ltd. vs. ACIT bearing ITA No.5239/Del/2010 - Cummins Turbo Technologies Ltd. vs. DDIT bearing ITA No.118/ Pune/2011 - Apotex Research P. Ltd. Vs. DCIT bearing ITA No. 918/Bang/2011 15.11. The Ld. DR submitted that this company has incurred abnormal costs and, therefore, one of the filters is not satisfied. ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 25 of 29 15.12. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that for A.Y. 2011-12 this comparable company has incurred losses and, therefore, there was abnormal profit pattern. Filters taken by the TPO has not been satisfied by this comparable and, therefore, rightly rejected by the TPO. This comparable, therefore, should not be included in final list of comparables. 16. As regards to ground nos.4.8 & 4.9 related to Foreign Exchange Gain which is considered non-operating in nature and working capital adjustment, the Ld. AR submitted that the assessee in its TP study computed its margin i.e. operating profit to total cost considering the foreign exchange gain as part of operating profits as the same has arisen solely on account of export of services, being core operations of the assessee. The Ld. AR submitted that the TPO without considering the foreign exchange gain of Rs.3,31,37,000/- arising on account of export of software services, computed the margin of the assessee at 11.68 as against 14.32. The Ld. AR submitted that the operation margin as per audited accounts, as per assessee and as per the TPO are tabulated as under :- Particulars As per CSC India As per final assessment order Methodology TNMM Revenue (Turnover) 24,07,60,96,000 24,07,60,96,000 Other Income: Add: Miscellaneous income 1,09,30,000 1,09,30,000 Add: Exchange gain 3,31,37,000 X Add: Liabilities written back 1,58,20,000 X Operating Revenue 24,13,59,83,000 24,08,70,26,000 Expenses as per financials (As upheld by the DRP) 21,56,70,22,000 21,56,70,22,000 Less: excess depreciation 55,20,47,792 X Total expenses 21,01,49,74,208 21,56,70,22,000 Operating Profit 3,12,10,08,792 25,20,00,4000 Margin considered (OP/OC) 14.85% 11.68% ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 26 of 29 17. This approach of the TPO has been affirmed by the DRP. Consequently, the assessee’s operating profit to operating cost ratio has been calculated at 11.68%, without considering foreign exchange gain of Rs.3,31,37,000/- which forms part of operating income and depreciation adjustment claimed by the assessee. The Ld. AR submitted that the entire foreign exchange gain has accrued to the assessee during the relevant financial year and the same was solely because of the export proceeds in convertible foreign exchange and had direct nexus with the exports of the assessee. Thus, the foreign exchange gain must be considered as operating income for the purpose of computing the margins, being inextricably linked with the core business operations. i.e. provision of software development services. The Ld. AR further submitted that in assessee’s case own case for the A.Y. 2010-11 the aspect of foreign exchange gain or loss whether to be considered operative was decided in ITA No.160/Ind/2015. Ld. AR relied upon the decision of Delhi High Court in the case of PCIT vs. Ameriprise India Pvt. Ltd. (ITA No.206/2016) and PCIT vs. Finserv. 17/2016 as well as PCIT vs. Cashedge India Pvt. Ltd. (ITA No.279/2016). The Ld. AR also relied upon the decision of Hon’ble High Court in the case of CIT vs. Infosys Technologies Ltd., 349 ITR 606 ITR and CIT vs. Encore Software Limited (ITA No.1142/2006). 18. As regards working capital adjustment, the Ld. AR submitted that the TPO gave the working capital adjustment, however, the margins of the comparable companies were incorrectly computed. Pursuant to directions issued by the DRP, the assessee gave updated working capital computation alongwith submissions for giving effect to the DRP Directions. The TPO has not considered the assessee’s computation and has retained the incorrectly computed margins after giving working capital adjustment. The Ld. AR submitted that directions may be issued to the TPO to verify the same and compute the ALP of the international transaction basis the corrected margins. 19. The Ld. DR relied upon the order of the TPO/AO and directions of the DRP. 20. We have heard both the parties and perused all the relevant material available on record. In respect of foreign exchange gain which is considered as non-operating in nature, it is justified by the assessee that it has a major impact while taking into account export of software services. The tabulation form given by the assessee in paragraph no.16 needs to be verified and, therefore, we direct the TPO/AO to verify ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 27 of 29 the same and as per the directions given in A.Y. 2010-11, the matter may be remanded back to the file of the TPO/AO for taking into account foreign exchange gain/loss in respect of non-operating/operating margins. Needless to say the assessee be given opportunity of hearing by following the principles of natural justice. As regards to working capital adjustment also, after taking into consideration inclusion and exclusion of losses hereinabove as well as the updated working capital computation alongwith submissions given by the assessee to the TPO/AO for giving effect to the DRP Directions, the same may be taken into account and verify the same. Ground nos. 4.8 & 4.9 are partly allowed for statistical purposes. 21. Ground no.4.10 is consequential and hence not adjudicated at this juncture. 22. As regards to Ground no.5 related to disallowance under Section 14A of the Act, the Ld. AR submitted that the assessee has identified expenditure of Rs.20,37,506/-, representing salary cost of two employees, related to long term investment in subsidiary and current investments in non-trading in various mutual funds. The Ld. AR submitted that the expenditure was in respect of treasury operation and managing such investments which was incurred for earning the exempt income. The Ld. AR further submitted that as per tax audit report the amount was Rs.20,37,506/- only as the salary expenses of those employees. The Ld AR further submitted that the nexus of expenditure sought to be disallowed without earning of exempt income and, therefore, relied upon the CBDT Circular No.14 dated 11.11.2001, clarifying the provisions of Finance Bill 2001. The Ld. AR relied upon the decision of Hon’ble Apex Court in the case of CIT vs. Calcutta Agency Limited, 19 ITR 191, CIT vs. Walfort Share and Stock Brokers (P) Limited, 326 ITR 1. The assessee has made suo moto disallowance of Rs.20,37,506/- at the time of purchase and sale of mutual fund. The Ld. AR submitted that the Assessing Officer has not recorded satisfaction regarding incorrectness of the assessee’s claim on the basis of objective analysis and cogent reasons. The Ld. AR relied upon the decision of Hon’ble Delhi High Court in the case of HT Media Limited vs. Pr. CIT, 399 ITR 596 and CIT vs. Taikisha Engineering India Limited, 370 ITR 338 as well as Joint Investments (P) Limited, 372 ITR 694. The Ld. AR further submitted that without prejudice to the above submissions, no disallowance was required to be made under Section 14A read with Rule 8D as the investment of Rs.18,65,61,000/- was held in subsidiary Fortune Infotech Limited and no new investment was made nor has any existing investment ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 28 of 29 been disinvested in the relevant year. The assessee in A.Y. 2011-12 has earned no exempt income. The exempt dividend income has only been earned on current investments, which are held in mutual funds. The Ld. AR relied upon the decision of Hon’ble Apex Court in the case of PCIT vs. Oil Industry Development Board, 262 Taxman 102 and PCIT vs. Chettinad Logistics Private Limited, 257 Taxman 2. The Ld. AR also relied upon the decision of Hon’ble Delhi High Court in the case Cheminvest Limited vs. CIT, 378 ITR 33 and PCIT vs.IL & FS, 399 ITR 483. 23. The Ld. DR submitted that for earning investment of Rs.18,65,61,000/- the assessee has suo moto disallowed such amount of Rs.20,37,506/-. In fact, the current investments were Rs.14,11,59,91,000/- and for such exorbitant investment the assesses has not invoked the disallowance under 14A read with Rule 8D. Therefore, the Assessing Officer has rightly made disallowance/addition in respect of Section 14A read with Rule 8D. 24. We have heard both the parties and perused all the relevant material available on record. Though the assessee has stated that the long term investment was in subsidiary and the correct investment related to non-trade is in respect of mutual funds. The aspect of exempt income has not been properly demonstrated by the assessee and, therefore, suo moto disallowance of Rs.3,20,35,506/- was not justifiable at this juncture. This aspect needs to be verified and, therefore, it is remanded back to the file of the Assessing Officer for substantial verification though the contention of the assessee that the expenditure incurred on two employees handling treasury functions was the only expenditure in relation to earning of dividend income or any other substantial expenditure was incurred. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Therefore, ground no.5 is partly allowed for statistical purpose. 25. Ground nos.6 to 8 are consequential, hence not adjudicated at this juncture. 26. Therefore, ITA No.179/Ind/2016 filed by the Assessee for A.Y. 2011-12 is partly allowed or statistical purpose. 27. As regards to Stay Application No.46/Ind/2021 in ITA No.179/Ind/2016, the same is also disposed of. ITA Nos.179/Ind/2016, 292/Ind/2017, 319/Ind/2018 & SA No.46/Ind/2021 A.Ys. 2011-12, 2012-13 & 2013-14 Page 29 of 29 28. In respect of appeal being ITA No.292/Ind/2017 for A.Y. 2012-13 and appeal being ITA No.319/Ind/2018 for 2013-14, there are only one issue related to Section 14A disallowance and the same is identical to that of Ground no.5 of appeal being ITA No.179/Ind/2016 for A.Y. 2011-12. No distinguishing facts were pointed out by the Ld. DR except the amounts in each years. Therefore, the same is also remanded back for proper adjudication and verification to the file of the Assessing Officer as per law. Needless to say, the assessee be given opportunity of following principles of natural justice. Hence, both the appeals are partly allowed for statistical purpose. 29. In the result, all the three appeals are partly allowed for statistical purpose and the Stay Application is also disposed of. Order pronounced as per Rule 34(4) of the Income Tax Appellate Tribunal Rules, 1963 on this 10 th day of April, 2023. Sd/- Sd/- (BHAGIRATH MAL BIYANI) (SUCHITRA KAMBLE) Accountant Member Judicial Member Indore, the 10 th April, 2023 PBN/* Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Assistant Registrar Income Tax Appellate Tribunal Indore Bench, Indore