Giesecke & Devrient (India) Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 2544/DEL/2014

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 0264 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 11 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-03-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 27-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 25-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction
• Section: 143(3); 234B; 40(a)(ia)

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL, DELHI BENCH I-2, NEW DELHI BEFORE : SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA NO. 2544/DEL/2014 ASSESSMENT YEAR: 2009-10 GIESECKE & DEVRIENT (INDIA) PRIVATE LTD, PLOT NO. 57, SECTOR-44, GURGAON PAN- AABCG 4223D (APPELLANT) VS. DCIT, CIRCLE 12(1), NEW DELHI. (RESPONDENT) APPELLANT BY SH. DEEPAK CHOPRA, ADV. SH. HARPREET SINGH AJMAINI, ADV. SH. ROHAN KHARE, ADV. RESPONDENT BY SH. H.K. CHOUDHARY, CIT/DR ORDER PER L.P. SAHU, A.M.: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E FINAL ASSESSMENT ORDER DATED 31.03.2009 PASSED UNDER SECTION 143(3) R.W.S 144C OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) FOR THE ASSESSMENT YEAR 2009-10 ON THE FOLLOWING GROUNDS : TRANSFER PRICING [RS. 80,430,576] 1. ON FACTS AND IN LAW, THE ORDER UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE ACT PASSED BY THE LD. AO IS VOID-AB-INITIO AND INFRUCTUOUS AND IS LIABLE TO BE QUASHED AS THE SAID ORDER IS IN VIOLATION OF SECTIO N 144C(10), (13), (5) OF THE ACT, IN SO FAR, AS IT IS CONTRADICTORY TO AND IGNORANT OF T HE DIRECTIONS ISSUED BY THE HONBLE DRP. SIM CARD ASSEMBLY SEGMENT [RS. 69,819,061] DATE OF HEARING 08.01.2019 DATE OF PRONOUNCEMENT 29.03.2019 ITA NO. 2544/DEL/2014 2 2. ON FACTS AND IN LAW, THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(1), NEW DELHI (LD. AO) [ALONG WITH THE ADDITIONAL COM MISSIONER OF INCOME TAX, TRANSFER PRICING OFFICER - 1(2), NEW DELHI (THE LD. TPO) - UNDER REFERENCE FROM THE LD. AO] ERRED IN DETERMINING AND THE HONBLE DISPUTE RESOLUTION PANEL (HONBLE DRP) ERRED IN PARTLY CONFIRMING TH E ADDITION OF RS. 69,819,061 TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF THE DIFFERENCE IN ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS PERTAINING TO SIM CARD ASSEMBLY SEGMENT OF THE APPELLANT. 3. WITHOUT PREJUDICE TO GROUND 1, ON THE FACTS AND IN LAW, THE ORDER OF THE LD. AO IS ERRONEOUS TO THE EXTENT OF NOT INCORPORATING THE BINDING DIRECTIONS OF THE HONBLE DRP THAT THE ADJUSTMENT SHOULD BE RESTRICTED ONLY T O THE TRANSACTIONS WITH THE AES WHICH RESULTS IN RELIEF OF RS. 33,095,760, WHILE FI NALIZING THE ORDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT. 4. ON THE FACTS AND IN LAW, THE LD. TPO, LD. AO AND HONBLE DRP ERRED IN COMPUTING THE PROFIT MARGIN OF WHOLE SIM CARD SEGME NT THEREBY CONTRAVENING THE PROVISIONS OF RULE 10B( 1 )(E)(I) OF THE RULES WHIC H NECESSITATE THE COMPUTATION OF NET PROFIT MARGIN REALISED BY THE APPELLANT ONLY FR OM ITS INTERNATIONAL TRANSACTIONS WITH THE AES. 5. ON FACTS AND IN LAW, THE LD. TPO, LD. AO AND THE HONBLE DRP ERRED IN APPLYING THE PROFIT MARGIN OF COMPARABLE COMPANIES TO THAT OF THE APPELLANT WITHOUT TAKING INTO ACCOUNT ECONOMIC & COMMERCIAL R EASONS AND FACTUAL DATA TO SUPPORT THE LOSSES INCURRED IN THE SIM CARD ASSEMBL Y SEGMENT. 6. ON THE FACTS AND IN LAW, THE LD. TPO, THE LD. AO AND THE HONBLE DRP GROSSLY ERRED IN NOT ALLOWING APPROPRIATE ADJUSTMENTS IN AC CORDANCE WITH THE PROVISIONS OF RULE 10B(L)(E)(III) AND 10B(3) OF THE RULES TO ACCO UNT FOR DIFFERENCE IN WORKING CAPITAL EMPLOYED BETWEEN THE APPELLANT AND THE COMP ARABLE COMPANIES SELECTED BY THE LD. TPO. SOFTWARE DEVELOPMENT SEGMENT [RS. 10,611,515] 7. ON FACTS AND IN LAW, THE LD. TPO, LD. AO ERRED IN DETERMINING AND THE HONBLE DRP ERRED IN PARTLY CONFIRMING THE ADDITION OF RS. 10,611,515 TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF THE DIFFERENCE IN THE A RMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS PERTAINING TO SOFTWARE DEVELOPMENT SEG MENT. ITA NO. 2544/DEL/2014 3 8. WITHOUT PREJUDICE TO GROUND 1, ON THE FACTS AND IN LAW, THE ORDER OF THE LD. AO IS ERRONEOUS TO THE EXTENT OF NOT INCORPORATING THE BINDING DIRECTIONS OF THE HONBLE DRP THAT THE WORKING CAPITAL ADJUSTMENT UNDER RULE 10B(L)(E) FOR THE PURPOSE OF DETERMINATION OF THE ALP AND THE CORRECTED MARGINS OF THE COMPARABLES SHOULD BE CONSIDERED WHICH RESULTS IN RELIEF OF RS. 2,158,799 WHILE FINALIZING THE ORDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT. 9. ON FACTS AND IN LAW, THE LD. AO/ LD. TPO ERRED IN VIOLATING THE PROVISIONS OF RULE 10B(2) OF THE RULES BY REJECTING CERTAIN COMPA RABLE COMPANIES IDENTIFIED BY THE APPELLANT IN ITS TP DOCUMENTATION USING ARBITRA RY REASONS/ FILTERS. 10. ON FACTS AND IN LAW, THE LD. AO/ LD. TPO ERRED I N VIOLATING THE PROVISIONS OF RULE 10B(2) BY INTRODUCING NEW COMPANIES WITHOUT CO NSIDERING THE DIFFERENCES IN THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED BY SUCH COMPANIES VIS- A-VIS THE APPELLANT, THEREBY RESORTING TO CHERRY PI CKING OF COMPARABLES. 10.1 INFOSYS TECHNOLOGIES LTD. (FUNCTIONALLY NOT COMPARAB LE TO THE APPELLANT) 10.2 SONATA SOFTWARE LIMITED (FAILING FILTER OF RELATED PARTY TRANSACTIONS TO TOTAL SALES APPLIED BY THE LD. TPO) 10.3 KALS INFORMATION SYSTEMS LIMITED (FAILING FILTER OF EMPLOYEE COST TO TOTAL SALES APPLIED BY THE LD. TPO AND FUNCTIONALLY NOT COMPARAB LE TO THE APPELLANT) 10.4 BODHTREE CONSULTING LTD. (FUNCTIONALLY NOT COMPARAB LE TO THE APPELLANT AND A SUPER NORMAL PROFIT MAKING COMPANY) 10.5 COMP-U-LEAM INDIA LTD. (FUNCTIONALLY NOT COMPARABLE TO THE APPELLANT) 11. ON THE FACTS AND IN LAW, THE LD. TPO AND LD. AO ERRED IN NOT ALLOWING A RISK ADJUSTMENT TO THE APPELLANT, THEREBY CONTRAVENING T HE PROVISIONS OF RULE 10B( 1 )(E)(III) OF THE RULES. USE OF MULTIPLE YEAR DATA 12. ON FACTS AND IN LAW THE LD. TPO, LD. AO AND THE HONBLE DRP ERRED IN USING THE DATA FOR THE CURRENT YEAR (I.E. FINANCIAL YEAR 2008-09) WHICH WAS NOT CONTEMPORANEOUS AND WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF PREPARING THE TP DOCUMENTATION BY THE APPELLANT, THEREBY GROSSLY MISINTERPRETING THE REQUIREMENT OF CONTEMPORANEOUS DATA IN THE RULES TO NECESSARILY IMPLY CURRENT YEAR DATA, THEREBY BREACH ING THE PRINCIPLES OF NATURAL ITA NO. 2544/DEL/2014 4 JUSTICE AND IMPOSSIBILITY OF PERFORMANCE. 13. ON FACTS AND IN LAW, THE LD. AO ERRED IN DETER MINING AND THE HONBLE DRP ERRED IN CONFIRMING THE ADJUSTMENT OF RS. 3,475 ,925 TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF DISALLOWANCE OF PAYMENT OF EXPORT COMMISSION UNDER SECTION 40(A)(IA) OF THE ACT. 14. ON FACTS AND IN LAW, THE LD. AO AND THE HONBLE DRP ERRED IN CONCLUDING THAT THE PAYMENT OF EXPORT COMMISSION BY THE APPELL ANT CAN BE TREATED AS ROYALTY/ FEES FOR TECHNICAL SERVICES UNDER SECTION 9(1) OF THE ACT. 15. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. AO ERRED IN LEVYING INTEREST UNDER SECTION 234B AND 234D OF THE ACT. 16. ON FACTS AND IN LAW, THE LD. AO AND THE HONBLE DRP ERRED ON FACT AND IN LAW IN INITIATING PENALTY UNDER SECTION 271(1 )( C) OF THE ACT. THE APPELLANT VIDE ITS LETTER DATED 17.09.2018 HAS RAISED ADDITIONAL GROUNDS WHICH ARE AS UNDER:- GROUND 5.1: THAT THE TPO/AO/DRP ERRED IN CONFIRMING KARNATAKA HYBRID MICRO DEVICES LTD. AS A COMPARABLE WITHOUT APPRECIATING T HAT THE SAID COMPARABLE DOES NOT FULFILL THE FAR TEST. GROUND 5.2: WITHOUT PREJUDICE, EVEN OTHERWISE THE S AID COMPARABLE WAS LIABLE TO BE REJECTED SINCE THE TPO HIMSELF IN THE PRECEDING AS W ELL AS SUBSEQUENT YEARS HAS REJECTED THE SAME AS NOT BEING FUNCTIONALLY COMPARA BLE TO THE ASSESSEE. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE APPELLANT, GIESECKE & DEVRIENT INDIA PVT. LTD. IS A COMPANY REGISTERED UNDER THE COMPANI ES ACT,1956 AND WAS INCORPORATED IN 2001 AS A 100 PERCENT SUBSIDIARY OF G&D GMBH WITH ITS CORPORATE OFFICE AT GURGAON. FOR THE YEAR UNDER CON SIDERATION THE APPELLANT WAS ENGAGED IN THE BUSINESS OF TRADING CURRENCY VERIFIC ATION AND PROCESSING SYSTEMS ('CVPS'), ASSEMBLING AND DISTRIBUTION OF SIM CARDS TO THE TELECOMMUNICATION SERVICE PROVIDERS AND IN PROVISION OF SOFTWARE DEVE LOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISES ('AE'). DURING THE IMPUGNED YEAR I.E. AY 2009-10 THE ITA NO. 2544/DEL/2014 5 APPELLANT FILED ITS RETURN DECLARING AN INCOME OF R S.14,69,61,812/-. SINCE THE APPELLANT HAD ENTERED INTO VARIOUS INTERNATIONAL TR ANSACTIONS, A REFERENCE WAS MADE TO THE TRANSFER PRICING OFFICER ('TPO') FOR DE TERMINATION OF THE ARM'S LENGTH PRICE OF THE SAID TRANSACTIONS. DETAILS OF THE INTE RNATIONAL TRANSACTIONS UNDERTAKEN BY THE APPELLANT DURING THE YEAR ARE AS FOLLOWS:- S. NO. NATURE OF TRANSACTION AMOUNT (IN INR) 1. IMPORT OF CVPS MACHINES AND SPARE PARTS (DISTRIBUTION FUNCTION) 35,97,90,683/ - 2. IMPORT OF RAW MATERIAL FOR SIM CARD (ASSEMBLY FUNCTION) 24,92,08,505/ - 3. SOFTWARE DEVELOPMENT 12,92,00,387/ - 4. SALE OF SIM CARDS 16,91,24,839/ - 5. PURCHASE OF FIXED ASSETS 23,82,038/ - 6. PROVISION OF INSTALLATION SERVICES 20,12,946/ - 7. SERVICE EXPENSES 1,74,11,881/ - 8. COMMISSION EXPENSES 70,98,795/ - 9. INTEREST ON EXTERNAL COMMERCIAL BORROWING 85,73,598/ - 10. REPAIRS AND MAINTENANCE 25,09,155/ - 11. OTHER EXPENSES 3,48,70,716/ - 12. REIMBURSEMENT OF EXPENSES 72,39,704/ - 13. RECEIPT OF SOFTWARE SERVICES 27,74,401/ - 14. SERVICE CHARGES 3,61,03,750/ - 15. GURANTEE FEE PAID 25,94,083/ - 16. RECOVERY OF EXPENSES 28,03,221/ - THE TPO FOR THE ABOVE MENTIONED TRANSACTIONS PICKED UP THE TRANSACTIONS OF ASSEMBLY OF SIM CARD SEGMENT AND THE SOFTWARE DEVEL OPMENT SEGMENT PROPOSING TO MAKE ADJUSTMENTS TO THE SAME. FOR THE SOFTWARE DEVELOPMENT SEGMENT THE APPELLANT DECLARED AN OP/OC OF 13.14% AND SELECTED 24 COMPARABLES WITH AN AVERAGE OP/OC OF 14.23%. HENCE THE TRANSACTION WAS CLAIMED TO BE AT ARM'S LENGTH. THE TPO DURING THE TRANSFER PRICING PROCEED INGS PROCEEDED TO REJECT 15 OF THE 24 COMPARABLES SELECTED BY THE APPELLANT IN ITS TP STUDY AND HENCE ACCEPTED ITA NO. 2544/DEL/2014 6 ONLY 9 COMPARABLES FROM THE LIST. FURTHER, THE TPO ADDED 6 ADDITIONAL COMPARABLES TO THE LIST AND THE AVERAGE OP/OC OF TH E FINAL 15 COMPARABLES WAS WORKED OUT AT 22.43% THEREBY PROPOSING AN ADJUSTMEN T OF RS.1,06,11,515/-. 2.1 IN THE SIM CARD SEGMENT THE APPELLANT DECLARED ITS OP/OC OF 17.40% WHILST SELECTING 5 COMPARABLES WITH AN AVERAGE OP/O C OF 1.75% . IT WAS SUBMITTED BEFORE THE TPO THAT THE LOSS WAS OWING TO VARIOUS CIRCUMSTANCES SUCH AS INITIAL YEARS OF OPERATION, HIGH COMPETITION IN THE MARKET, UNDER UTILISATION OF CAPACITIES ETC. THE TPO ACCEPTED THE BENCHMARKING ANALYSIS OF THE APPELLANT AS IT IS. HOWEVER, HE REFUSED TO GIVE ADJUSTMENT WITH RES PECT TO LOW SALES REALIZATION DUE TO FALLING PRICES, STIFF MARKET COMPETITION LED TO DECREASE IN PRICES OF CHIPS, UNDER UTILIZATION OF CAPACITIES AND REGULATORY HURD LES AND ALSO PROPORTIONATE ADJUSTMENT BETWEEN AE AND NON-AE TRANSACTIONS AND D ETERMINED THE ADJUSTMENT BEING THE DIFFERENCE BETWEEN THE MARGIN OF THE APPE LLANT AS OPPOSED TO THE COMPARABLES AT RS.6,98,19,061/-. 2.2 THE AO VIDE ITS DRAFT ORDER DATED 21.02.2013 CO NFIRMED THE ADDITIONS AS PROPOSED BY THE TPO. ADDITIONALLY, THE AO OBSERVED THAT THE APPELLANT DURING THE IMPUGNED YEAR HAD MADE COMMISSION PAYMENTS TO ITS A E NAMELY GIESECKE & DEVRIENT EGYPT SERVICES LLC ('G&D EGYPT'). THE APPE LLANT SUBMITTED BEFORE THE AO THAT THE SAID PAYMENTS WERE IN THE NATURE OF COM MISSION FOR FORWARDING OF ORDERS AND SINCE THE SERVICES WERE RENDERED OUTSIDE INDIA, BEING NON MANAGERIAL/TECHNICAL/CONSULTANCY IN NATURE, THE APP ELLANT WAS NOT LIABLE TO DEDUCT TAX AT SOURCE AND HENCE NO DISALLOWANCE U/S 40( A)(I) OF THE INCOME TAX ACT, 1961 WAS WARRANTED. THE AO HOWEVER DISREGARDIN G THE SUBMISSIONS OF THE ITA NO. 2544/DEL/2014 7 APPELLANT, HELD THAT THE PAYMENT OF COMMISSION WAS IN THE NATURE OF 'FEE FOR TECHNICAL SERVICES' U/S. 9(1)(VII) OF THE ACT AND H ENCE MADE A DISALLOWANCE OF INR 34,75,925/- U/S. 40(A)(I) OF THE ACT. HENCE THE INC OME OF THE APPELLANT WAS ASSESSED AS FOLLOWS:- S. NO. PARTICULARS AMOUNT (IN INR) 1. INCOME AS DECLARED BY THE ASSESSEE 14,69,61,812/ - 2. ADDITIONS : - 3. TR ANSFER PRICING ADJUSTMENT . BY THE TPO 8,04,30,576/ - 4. ADDITION ON ACCOUNT OF EXPORT COMMISSION 34,75,925/ - 5. TOTAL INCOME 23,08,68,313/ - 6. ROUNDED OFF 23,08,68,310/ - 2.3 AGGRIEVED WITH THE DRAFT ASSESSMENT ORDER, THE APPELLANT PREFERRED TO FILE OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL ('DR P'). THE DRP VIDE ITS DIRECTIONS DATED 24.12.2013 GAVE PARTIAL RELIEF TO THE APPELLANT AS FOLLOWS:- (I). CONTENTIONS AGAINST EXCLUSION OF COMPARABLES I N THE SOFTWARE SEGMENT WERE REJECTED. (II). PLEA FOR WORKING CAPITAL ADJUSTMENT WAS GRAN TED (III). PLEA REGARDING CORRECTION OF MARGINS WAS ACC EDED TO (IV). CAPACITY ADJUSTMENT FOR THE SIM CARD SEGMENT WAS REJECTED. (V). PROPORTIONATE ADJUSTMENT IN THE SIM CARD SEGM ENT ALLOWED (VI). CORPORATE TAX ADDITION U/S 40(A)(I) WAS CONFI RMED. 2.4 THE AO PASSED THE FINAL ASSESSMENT ORDER DATED 16.01.2014 CONFIRMING THE ADDITIONS AS MADE IN THE DRAFT ORDER DATED 21.02.20 13 IN COMPLETE DISREGARD TO THE DRP DIRECTIONS DATED 24.12.2013. THE TPO THERE AFTER PASSED AN APPEAL EFFECT ORDER DATED 27.02.2014 WHEREBY THE ADJUSTMENTS IN T HE TP SEGMENTS WERE RECALCULATED AS UNDER:- S. NO. DESCRIPTIONS ADJUSTMENT (IN INR) ITA NO. 2544/DEL/2014 8 1. SOFTWARE DEVELOPMENT SERVICES 1,26,56,171/ - 2. SIM CARD ASSEMBLY S E GMENT 3,51,35,021/ - 3. TOTAL RS. 4,77,91,192/ - AGGRIEVED WITH THE FINAL ASSESSMENT ORDER DATED 16. 01.2014 THE APPELLANT PREFERRED AN APPEAL BEFORE THE TRIBUNAL. 2.5. THEREAFTER, THE APPELLANT FILED A RECTIFICATIO N APPLICATION BEFORE THE TPO POINTING OUT CERTAIN CALCULATION ERRORS IN THE MARG INS OF THE FINAL SET OF COMPARABLES FOR THE SOFTWARE DEVELOPMENT SEGMENT. THE TPO VIDE ITS ORDER DATED 22.06.2015 ACCEDED TO THE APPELLANT'S REQUEST AND RECOMPUTED THE MARGINS AS FOLLOWS THEREBY REDUCING THE ADJUSTMENT TO RS.87 ,93,902/- S. N O . DESCRIPTIONS MARGIN (OP/OC) % 1. AKSHAY SOFTWARE TECHNOLOGIES LIMITED 12.90 2. BODHTREE CONSULTING LTD 67.81 3. COMP - U - LEARN TECH LTD 22.28 4 INFOSYS LTD. 39.27 5 KALS INFORMATION SYSTEMS LTD. 32.35 6 LGS GLOBAL LTD 15.70 7 LARSEN & TOUBRO INFOTECH LTD 17.92 8 MINDTREE LTD. 4.25 9 PERSISTENT SYSTEM LIMITED 16.83 10 RS SOFTWARE INDIA LTD. 11.06 11 SASKEN COMMUNICATION TECHNOLOGIES LTD. 15.90 12 SONATA SOFTWARE LIMITED 29.83 13 TATA ELEXI LTD. 20.29 14 THIRDWARE SOLUTION LTD. 21.04 15 VGL SOFTECH LTD. - 14.72 AVERAGE 20.85 FINALLY, THE AO RECOMPUTED THE ALP OF SOFTWARE DEVE LOPMENT SEGMENT AS UNDER : S. N O . PARTICULARS AMOUNT (INR) 1. OPERATIONAL COST 11,41,86,424 2. ARMS LENGTH PRICE AT MARGIN OF 20.85% 13,79,94,290 ITA NO. 2544/DEL/2014 9 3. PRICE RECEIVED 12,92,00,388 4. 105% OF PRICE RECEIVED 13,56,60,407 5. ADJUSTMENT U/S. 92CA 87,93,902 THUS, TOTAL ADJUSTMENT MADE BY THE AO IN BOTH THE S EGMENTS STOOD AS UNDER, WHICH HAVE BEEN CHALLENGED BY THE ASSESSEE IN THIS APPEAL : S. N O . DESCRIPTION ADJUSTMENT 1. SOFTWARE DEVELOPMENT SERVICES 87,93,902 2. SIM CARD ASSEMBLY SEGMENT 3,51,35,021 TOTAL 4,39,28,923 3. THE APPELLANT IS CHALLENGING INCLUSION OF 5 COMP ARABLES BY TPO OUT OF THE ABOVE MENTIONED 15 COMPARABLES NAMELY BODHTREE CONS ULTING LTD., COMP-U- LEARN TECH LTD., INFOSYS LTD., KALS INFORMATION SYS TEMS LTD. AND SONATA SOFTWARE LTD. ON THE FOLLOWING WRITTEN SUBMISSIONS MADE BEFO RE US : BODHTREE CONSULTING LIMITED {'BODHTREE'} 11.1. BODHTREE WAS REJECTED BY THE APPELLANT IN ITS TP STUDY AS NOT BEING FUNCTIONALLY COMPARABLE TO THE FUNCTIONAL PROFILE OF THE APPELLA NT. THE TPO HOWEVER DISREGARDED THE CONTENTIONS OF THE APPELLANT AND HELD THAT BODHTREE WAS PRIMARILY INTO SOFTWARE DEVELOPMENT, HENCE ADDED THE SAME TO THE FINAL LIST OF COMPARABLES. (REFER PG. 23 TO 24 OF TPO ORDER). THE SAID COMPARABLE WAS OBJECTED TO BEFORE THE DRP (REFER PG. 82 TO 85 OF OBJECTIONS), HOWEVER, THE DRP REJECTED THE APPELLANT'S CONTENTIO NS FOR EXCLUSION OF BODHTREE. (REFER PG.14 OF DRP DIRECTIONS). THE APPELLANT IS CHALLENGING THE EXCLUSION OF BODHT REE AS A COMPARABLE ON THE FOLLOWING POINTS :- 20.1 FUNCTIONALLY DIFFERENT - IT IS RESPECTFULLY S UBMITTED THAT BODHTREE IS AN END TO END SERVICE PROVIDER WHICH PROVIDES IT CONSULTING AND P RODUCT ENGINEERING SERVICES INCLUDING BUSINESS ACTIVITIES LIKE DATA WAREHOUSING AND DATA MANAGEMENT. IT HAS ONLY ONE SEGMENT NAMELY SOFTWARE DEVELOPMENT, HOWEVER, U NDER ONE UMBRELLA IT IS PROVIDING OPEN AND END TO END WEB SOLUTIONS, OFF SHORING DATA MANAGEMENT, DATA WAREHOUSING, SOFTWARE CONSULTANCY, DESIGN AND DEVELOPMENT OF SOL UTIONS WHILST UTILISING THE LATEST TECHNOLOGY. (REFER PG. 12 OF ANNUAL REPORT). ITA NO. 2544/DEL/2014 10 20.2 INSUFFICIENT SEGMENTAL DETAILS - BODHTREE DEA LS IN WIDE ARRAY OF SERVICES AND PRODUCTS THERE IS NO SEGMENTAL DATA OF REVENUE OR C OSTS BETWEEN THE SAID SERVICES. (REFER PG. 28 OF THE ANNUAL REPORT) 20.3 ABNORMAL GROWTH - ADDITIONALLY, BODHTREE DURI NG THE IMPUGNED YEAR HAD AN ABNORMAL GROWTH OF 67% IN COMPARISON TO THE PRECEDI NG YEAR. (REFER PG. 1 OF THE ANNUAL REPORT) 20.4 BODHTREE FOLLOWS A DIFFERENT REVENUE RECOGNIT ION MODEL AS COMPARED TO THE APPELLANT. 20.5 ADDITIONALLY, IT IS PERTINENT TO MENTION THAT THE SAID COMPARABLE HAS BEEN REJECTED AS NOT BEING FUNCTIONALLY COMPARABLE TO THE APPELLA NT IN THE APPELLANT'S OWN CASE FOR THE PRECEDING YEAR I.E. AY 2008-09 BY THIS HON'BLE TRIB UNAL VIDE ITS ORDER DATED 23.08.2018. HENCE, THERE BEING NO CHANGE IN THE PROFILE OF BODH TREE BETWEEN AY 2008-09 AND 2009- 10, THE SAID COMPARABLE IS LIABLE TO BE REJECTED.(R EFER PG. 15 TO 20 OF THE TRIBUNAL ORDER) 21. THE APPELLANT WOULD ALSO LIKE TO PLACE RELIANCE ON THE CO-ORDINATE BENCH'S DECISION IN THE CASE OF CADENCE DESIGN SYSTEMS (INDIA) PVT. LTD . V DCIT, ITA NO. 2074/DEL12014 (FOR THE SAME ASSESSMENT YEAR, I.E., AY 2009-10) WHEREIN THIS HON'BLE TRIBUNAL HAS CATEGORICALLY HELD THAT BODHTREE BEING AN END TO EN D SERVICE PROVIDER DEALING IN SOFTWARE PRODUCTS AS WELL, CANNOT BE HELD TO BE FUNCTIONALLY COMPARABLE TO A CAPTIVE SOFTWARE DEVELOPMENT COMPANY. THE RELEVANT EXTRACT OF THE FI NDINGS OF TRIBUNAL IN THE CASE OF CADENCE DESIGN (SUPRA) IS REPRODUCED HEREUNDER FOR READY REFERENCE: '6.4 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDER AS WELL AS THE MATERIAL REFERRED TO BEFORE US. AS DISCUSSED EARLIER, THE ASSESSEE UNDER THE PROVISION OF SOFTWARE RESEARCH A ND DEVELOPMENT SERVICES CARRIES OUT R&D SERVICES FOR ITS AE FOR THE DEVELOPMENT OF SOFT WARE PRODUCTS TO ITS CDS UTILIZING R&D TECHNOLOGY OF CDS ONLY. CDS SPECIFIES R&D SERVICES TO BE PERFORMED; PRODUCTS TO BE DEVELOPED OR USED; TIME LINE FOR COMPLETION AND SPE CIFIC RESULT TO BE ACHIEVED. THE ENTIRE CONCEPTUALIZING OF THE MARKETING STRATEGY FOR SALES OF ITS PRODUCTS AND SERVICES, SECURING OF ORDERS OF ITS PRODUCTS ARE DONE BY CDS AND NOT BY T HE ASSESSEE. THE ASSESSEE COMPANY IS PURELY A 'CAPTIVE SERVICE PROVIDER' AND DOES NOT UN DERTAKE ANY KIND OF MARKETING OR DEVELOPMENT FUNCTIONS. CONCEPTUALIZATION OF SERVICE S AND DETERMINATION OF EXACT SCOPE OF WORK, WHICH IS TO BE PERFORMED BY THE ASSESSEE, IS R ESPONSIBILITY OF CDS. EVEN THE QUALITY CONTROL, TESTING OF THE PRODUCTS IS ALL DONE BY CDS . NOW, IF WE ANALYZE THE FUNCTIONS OF THE ASSESSEE, WHICH IS PURELY R&D BEING A CAPTIVE UNIT V IS-A-VIS THE FUNCTIONS OF BODHTREE, WE FIND THAT THIS COMPANY IS INTO IT CONSULTING AND PR ODUCT ENGINEERING SERVICE AND HAS A WIDE ARRAY OF BUSINESS ACTIVITIES LIKE DATA WAREHOUSING A ND DATA MANAGEMENT. IT HAS ONLY ONE SEGMENT NAMELY, SOFTWARE DEVELOPMENT AND BEING A SOF TWARE SOLUTION COMPANY, IT IS ENGAGED IN PROVIDING OPEN AND END-TO-END WEB SOLUTI ONS, OFF SHORES DATA MANAGEMENT AND DATA CONSULTANCY DESIGN AND DEVELOPMENT SOLUTION. S UCH FUNCTIONS, THOUGH MAY BE SAID TO BE CARRIED OUT BY THE AE I.E. CADENCE, BUT IT CANNOT BE SAID THAT SIMILAR FUNCTIONS HAVE BEEN PERFORMED BY THE ASSESSEE. EVEN ON THE RISK ANALYSI S, THE COMPARABILITY FAILS AS ASSESSEE IS PURELY RISK MITIGATED COMPANY AS DISCUSSED ABOVE. WE FIND THAT THERE ARE CATENA OF DECISIONS OF VARIOUS BENCHES OF THE TRIBUNAL LIKE IN CASE OF CISCO SYSTEMS INDIA (P.) LTD. V. ITA NO. 2544/DEL/2014 11 DY. CIT [20I4} 66 SOT 82150 TAXMANN.COM 280 (BANG.) , WHEREIN IT WAS HELD THAT THIS COMPANY IS RENDERING SOFTWARE BUSINESS OF DEVELOPING SOFTWARE PRODUCTS AND IS PROVIDING OPEN AND END-TO-END WEB SOLUTION, SOFTWARE CONSULTAN CY AND DESIGN AND DEVELOPMENT OF SOFTWARE AND THE SAME CANNOT BE HELD TO BE COMPARABLE WITH THE COMPANIES, WHICH ARE PURELY INTO SOFTWARE DEVELOPMENT SERVICES AND NOT I NTO SOFTWARE PRODUCTS. APART FROM THAT, IN THE CASE OF FISERV INDIA (P.) LTD. (SUPRA), THIS COMPARABLE HAS BEEN EXCLUDED AFTER CONSIDERING VARIOUS DECISIONS OF THE TRIBUNAL. COMIN G TO THE ARGUMENTS OF THE LD. SR. D.R. THAT DURING THE COURSE OF SEARCH ANALYSIS, THE ASSE SSEE TOO HAS CHOSEN THE COMPANIES BY ADOPTING SEARCH CRITERIA OF COMPANY INTO 'SOFTWARE PRODUCTS' AND THEREFORE, THE ASSESSEE NOW IS PRECLUDED FROM MAKING A DISTINCTION THAT SOF TWARE PRODUCT COMPANIES SHOULD BE EXCLUDED. IN OUR OPINION, SUCH A CONTENTION OF THE LD. SR. DR CANNOT BE ACCEPTED, BECAUSE SELECTION OF COMPARABLES BY USING ANY SEARCH CRITER IA IS ONE OF THE PROCESS OF SHORTLISTING THE COMPANIES BY APPLYING VARIOUS QUANTITATIVE AND QUALITATIVE FILTERS IN THE WIDE ARRAY OF COMPANIES IN THE DATA. ONCE IN THE SEARCH PROCESS, CERTAIN COMPANIES ARE THROWN IN THE SEARCH RESULT, THEN IT IS INCUMBENT THAT DEEP FAR AN ALYSIS IS TO BE DONE SO AS TO CARRY OUT PROPER COMPARABILITY ANALYSIS WITH THE TESTED PARTY SO AS TO BENCHMARK AND ARRIVE AT A PROPER ARM'S LENGTH PRICE. IF AT THE FUNCTIONAL LEV EL, IT IS SHOWN THAT FUNCTIONS PERFORMED BY THE ASSESSEE IS ENTIRELY DIFFERENT FROM THE FUNCTIO NS CARRIED OUT BY THE COMPARABLE COMPANIES, OR IT DOES 8 FOUND COMPARABLE EITHER UNDE R RISK ANALYSIS OR ASSETS DEPLOYED, THEN SUCH COMPARABLE COMPANIES SHOULD NOT BE EXCLUDED FROM COMPARABILITY ANALYSIS. ACCORDINGLY, WE HOLD THAT BODHTREE CANNOT BE INCLUDE D AS COMPARABLE FOR BENCHMARKING THE ASSESSEE 'S MARGIN. ' 22. RELIANCE IS ALSO PLACED ON THE FOLLOWING DECISI ONS FOR THE SAME ASSESSMENT YEAR (AY 2009-10) WHEREIN BODHTREE HAS BEEN EXCLUDED AS NOT BEING FUNCTIONALLY COMPARABLE TO A CAPTIVE SOFTWARE DEVELOPER. I. FINSERV INDIA PVT. LTD. V ITA, [2015] 60 TAXMANN .COM 48 (DELHI-TRIB) II GE CONVERTAM EDC PVT. LTD. V ACIT, [2017] 79 TAX MANN.COM 408 (CHENNAI- TRIB) III. OSI SYSTEMS PVT. LTD. V DCIT, [2016] 66 TAXMAN N.COM 109 (HYDERABAD-TRIB) IV. SYNCHERON TECHNOLOGIES PVT. LTD. V JCIT, [2016] 71 TAXMANN.COM 245 (PUNE- TRIB) 23. HENCE, IT IS PRAYED THAT IN VIEW OF THE ABOVE A RGUMENTS, BODHTREE CANNOT BE TAKEN AS A COMPARABLE AND IS LIABLE TO BE REJECTED. 4. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT BOD HTREE CONSULTING LTD. IS A SUITABLE COMPARABLE WHICH HAS BEEN RIGHTLY SELECTED BY THE TPO. FROM THE ANNUAL REPORT OF THE ABOVE COMPANY, IT IS CLEAR THAT THE C OMPANY IS ENGAGED ONLY IN THE SOFTWARE DEVELOPMENT SERVICES. IN THE NOTES TO ACCO UNTS, THE AUDITOR HAS CATEGORICALLY MENTIONED AT SL. NO.5 UNDER THE HEAD SEGMENT INFORMATION THAT THERE IS ONLY ONE SEGMENT, I.E., SOFTWARE DEVELOPME NT SERVICES. THE PROFIT AND LOSS ITA NO. 2544/DEL/2014 12 ACCOUNT SHOWS THAT THE COMPANY HAS SHOWN REVENUE FR OM SALES ONLY. INVITING OUR ATTENTION TO THE DECISION OF TRIBUNAL IN THE CASE O F ASSESSEE FOR ASSESSMENT YEAR 2008-09, THE LD. DR SUBMITTED THAT THE TRIBUNAL THO UGH EXCLUDED THE ABOVE COMPARABLE FROM THE FINAL SET OF COMPARABLES, BUT H AS ALSO REFERRED TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF SAXO INDIA (ITA NO. 682/2016, WHEREIN IT HAS BEEN CATEGORICALLY OBSERVED THAT A C OMPANY ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICE CANNOT BE REGARDED AS A FIT COMPARABLE TO THE COMPANY ENGAGED IN PROVIDING BOTH SOFTWARE DEVELOPM ENT AND SOFTWARE PRODUCT SERVICES. IN THE PRESENT CASE, THE ASSESSEE AS WELL AS BODHTREE CONSULTING LTD. (BODHTREE) ARE FOUND ENGAGED ONLY IN ONE SEGMENT, I .E., SOFTWARE DEVELOPMENT SERVICES. NOWHERE IN THE ANNUAL REPORT OR DIRECTOR S REPORT OF M/S. BODHTREE, IS IT MENTIONED THAT THE COMPANY IS IN THE DEVELOPMENT OF PRODUCTS. THE CONFUSION HAS ARISEN ONLY ON ACCOUNT OF THE NARRATION MENTIONED I N THE REVENUE SEGMENT WHICH HAS BEEN DESCRIBED AS LOCAL SALES AND EXPORT SALES. THE SALE HERE DENOTES INCOME FROM SOFTWARE DEVELOPMENT SERVICES. FURTHER, THERE IS NO OPENING AND CLOSING STOCK INVENTORY OF ANY PRODUCT IN THE FINAL ACCOUNT S OF THE COMPARABLE, NAMELY, BODHTREE. FURTHER, LD. DR SUBMITTED THAT IN THE PRE SENT CASE, ASSESSEE IS ALSO ENGAGED IN COMPLEX SOFTWARE DEVELOPMENT SERVICES WH ICH INCLUDES WEB SERVICES, E-BUSINESS, COMMUNICATION INFRASTRUCTURE (PAGE 357 OF THE PAPER BOOK). FURTHER, ASSESSEE SUPPORTS IN THE ENTIRE GAMUT OF GOVERNMENT SOLUTION BUSINESS UNIT, WHICH INCLUDES CAPTURING DATA FOR ID SPECIFIC IDENT IFYING CHARACTERISTICS TO DELIVERY OF PERSONALIZED CARDS AS PER PAGE 390 OF T HE PAPER BOOK WHICH IS BASICALLY ENTIRE GAMUT OF IT SERVICES AND IT SCRUTI NY SYSTEMS. FURTHER, IN THE TP STUDY, THERE IS NO SEPARATION OF ROLE OF ASSESSEE A ND ITS AE FOR DISCHARGING OVERALL FUNCTION. STILL FURTHER, AS PER PAGE 110 OF THE PAP ER BOOK, WHICH IS PART OF THE TRANSFER PRICING STUDY, THERE IS NO SEPARATE ROLE O F THE ASSESSEE MENTIONED UNDER THE HEAD SOFTWARE DEVELOPMENT SERVICES SO AS TO ASC ERTAIN WHAT SPECIFIC SERVICES ITA NO. 2544/DEL/2014 13 ARE PERFORMED BY THE ASSESSEE IN THE OVERALL FUNCTI ONS OF THE GROUP. THEREFORE, THIS COMPARABLE HAS RIGHTLY BEEN INCLUDED BY THE TP O. 5. AFTER HEARING BOTH THE SIDES AND PERUSING THE EN TIRE MATERIALS AVAILABLE ON RECORD, WE OBSERVE THAT THE SEGMENT-WISE AND PRODUC T-WISE PERFORMANCE OF BODHTREE AS MENTIONED IN DIRECTORS REPORT IS AS UN DER : BODHTREE HAS ONLY ONE SEGMENT, NAMELY, SOFTWARE DE VELOPMENT. BEING A SOFTWARE SOLUTIONS COMPANY, IT IS ENGAGED IN PROVID ING OPEN AND END-TO-END WEB SOLUTIONS, OFFSHORING DATA MANAGEMENT, DATA WAR EHOUSING, SOFTWARE CONSULTANCY, DESIGN AND DEVELOPMENT OF SOLUTIONS, U SING THE LATEST TECHNOLOGIES. ON PERUSAL OF PROFIT AND LOSS ACCOUNT OF BODHTREE, THE REVENUE IS GENERATING ONLY FROM SALES WHICH IS BASICALLY SERVICE INCOME IN ABS ENCE OF ANY SUPPORTING FIGURES IN RESPECT OF SEPARATE SOFTWARE PRODUCT. FURTHER, T HERE IS NO OPENING AND CLOSING FIGURES FOR ANY SOFTWARE PRODUCT/PURCHASE OF SOFTWA RE PRODUCT. IN THE ENTIRE ANNUAL REPORT AND DIRECTORS REPORT, THERE IS NO ME NTION OF DEVELOPMENT OF PRODUCT BY THIS COMPANY. IN THE DIRECTORS REPORT A NNEXURE-3 PAGE NO. 12, IT IS STATED THAT THERE IS ONLY ONE SEGMENT, NAMELY, SOFT WARE DEVELOPMENT AND THE COMPANY IS ONLY A SOFTWARE SOLUTION COMPANY AND IS ENGAGED IN PROVIDING OPEN AND END-TO-END WEB SOLUTIONS. THIS STATEMENT FURTHE R SUPPORTS THAT THE COMPANY IS NOT ENGAGED IN DEVELOPING SEPARATE SOFTWARE PROD UCT BUT ONLY IN PROVIDING SOFTWARE DEVELOPMENT SERVICES AND SOLUTIONS. 5. AS FAR AS VERACITY OF SOFTWARE SERVICES PROVIDED BY BODHTREE, THE TRANSFER PRICING STUDY ALONGWITH ANNEXURES HAVE BEEN PERUSED . TRANSFER PRICING MEMORANDUM IS CONTAINED FROM PAGE 100 TO 330 OF THE PAPER BOOK AS PER ANNEXURES OF THE PAPER BOOK. ON PAGE NO. 110 UNDER THE SOFTWARE DEVELOPMENT ITA NO. 2544/DEL/2014 14 SEGMENT (PARA 1.3), THERE IS NO SPECIFIC FUNCTION M ENTIONED IN THE SAID SEGMENT PERFORMED BY THE ASSESSEE VIS A VIS THE GROUP FUNCT IONS. FOR THE SAKE OF CLARITY, THE FUNCTIONS UNDER THE SOFTWARE DEVELOPMENT SERVICES A S CONTAINED IN PARA 1.3 ARE REPRODUCED AS UNDER : 1.3. SOFTWARE DEVELOPMENT DURING FY 2008-09, G&D INDIA HAS PROVIDED SOFTWARE DEVELOPMENT SERVICES TO G&D GMBH, GIESECKE & DEVRIENT AMERICA INC. (G&D AMERICA) AN D GIESECKE & DEVRIENT ASIA PTE. LTD. (G&D ASIA). WE COMPARED THE NET COST-PLUS MARK-UP (NCP MARGIN ) THAT G&D INDIA DERIVED FROM ITS SOFTWARE DEVELOPMENT FUNCTION WITH THE ARMS-LENGTH RESULTS ACHIEVED BY INDEPENDENT COMPANIES THAT PERFORM SIMILAR SOFTWARE DEVELOPMENT FUNCTIONS TO THOSE OF G&D INDIA. THE THREE-YEAR WEIGHTED AVERAGE NCP MARGIN EARNED BY BRO ADLY COMPARABLE INDEPENDENT COMPANIES RANGE FROM (-) 1.77 PERCENT TO 28.52 PERC ENT WITH AN ARITHMETICAL MEAN OF 14.23 PERCENT. FURTHER, ON PAGES 164 & 165 OF THE PAPER BOOK PARA 4.3.1, THE FUNCTIONS UNDER THE SOFTWARE DEVELOPMENT ARE REPRODUCED AS UNDER : 4.3. SOFTWARE DEVELOPMENT 4.3.1. FUNCTIONS G&D INDIA RENDERS SOFTWARE DEVELOPMENT SERVICES TO G&D GMBH WHEREIN IT DEVELOPS APPLICATIONS SOFTWARE(S) FOR G&D GMBH. IN THIS REGA RD, G&D INDIA HAS ENTERED INTO A SOFTWARE DEVELOPMENT AGREEMENT EFFECTIVE FROM DEC EMBER 12, 2005. G&D INDIA IS PRIMARILY ENGAGED IN THE FOLLOWING SO FTWARE BUSINESS: DEVELOPMENT OF SOFTWARE FOR THE SMARTCARD MODULE, W HICH IS SOLD TO G&D GMBH. THE CHIP SET MODULE SOFTWARE IS DEVELOPED AS PER THE GE NERAL REQUIREMENTS OF THE MARKETS AND IS PRIMARILY DEVELOPED FOR G&D GMBH. ABOUT 90 P ERCENT OF THE TOTAL DEVELOPMENT ACTIVITY RELATES TO THE DEVELOPMENT OF SOFTWARE USE D AS A PART OF THE SMARTCARD MODULE AND IS SOLD AS A PART OF THE SMARTCARD. THE SOFTWAR E DEVELOPMENT PROCESS FOR THE DEVELOPMENT OF THE CHIP SET MODULE IS FURTHER EXPLA INED THE FOLLOWING PARTS. DEVELOPMENT OF APPLICATION SOFTWARE AS PER THE SPEC IFIC REQUIREMENTS OF THE CLIENTS OF G&D GROUP. THE SERVICES ARE OFFERED TO G&D GMBH AND GIESECKE & DEVRIENT ASIA PTE. LTD. ALSO, THESE SERVICES ARE PROVIDED TO THE SIM C ARD ASSEMBLY DIVISION OF G&D INDIA. THIS ACCOUNTS FOR ABOUT 10 PERCENT OF THE TOTAL REV ENUE.