M/S FIS Solutions Software (India) Private Limited, Pune V. Assistant Commissioner of Income Tax, Circle- 1(1), PMT Building , 2nd floor, Swargate, Pune, Pune

ITA 583/PUN/2022

• Counselvise Citation: [2023] 102 COUNSELVISE.COM (IT) 0705 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 15-10-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 21-07-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: VAIBHAV RAJAM
• Keywords: Transfer pricing
• Section: 143(3)

Judgement Text

आयकर अपीलीय अधिकरण “सी” न्यायपीठ पुणे में । IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER आयकर अपील सं. / ITA No.583/PUN/2022 धििाारण वर्ा / Assessment Year : 2018-19 M/s. FIS Solutions Software (India) Private Limited, Upper Ground Floor to 7 th Floor, Westend Center One, Survey No. 169/1, Sector II, Aundh, Pune – 411007 PAN : AALCS0619K ......अपीलार्थी / Appellant बिाम / V/s. Assistant Commissioner of Income Tax, Circle – 1(1), Pune ......प्रत्यर्थी / Respondent Assessee by : Shri Darpan Kirpalani & Shri Vaibhav Rajam Revenue by : Shri M.M. Chate सुनवाई की तारीख / Date of Hearing : 16-10-2023 घोषणा की तारीख / Date of Pronouncement : 18-10-2023 आदेश / ORDER PER S.S. VISWANETHRA RAVI, JM : This appeal by the assessee against the final assessment order dated 28-05-2022 passed by the Assistant Commissioner of Income Tax, Circle- 1(1), Pune u/s. 143(3) r.w.s. 144C(13) of the Act for assessment year 2018- 19. 2. Ground No. 1 raised by the assessee is general in nature, hence, requires no adjudication. 2 ITA No.583/PUN/2022, A.Y. 2018-19 3. Ground No. 2 raised by the assessee challenging transfer pricing adjustment relating to comparables selected by the AO and seeking exclusion of the same. 4. We note that the assessee is an Indian Company and subsidiary of FIS SG Systems PhilippinesInc. The assessee is engaged in providing information technology enabled services and undertaken international transaction under information technology enabled and software support (Coding) services to an extent of Rs.129,66,89,279/-. The assessee adopted TNMM. It was submitted that the assessee rendered its services to its AE and received charges for the same. Further, the assessee worked its PLI by taking OP/OC at 14.33%. The assessee arrived such PLI by taking the comparables which are at pages 5 and 6 of the TPO’s order. The TPO rejected the comparables selected by the assessee i.e. Siligate Solutions Ltd., Digicall Global Pvt. Ltd., R Systems International Ltd., One Touch Solutions (India) Pvt. Ltd., Sundaram Business Services Ltd. and accepted only Datamatics Business Solutions Ltd. Further, by adding another 9 comparables arrived at PLI at 26.56% as against 14.33% by the assessee. Further, the assessee also requested the TPO to include Global Healthcare Billing Pvt. Ltd. and Microland Ltd. and accordingly adding the same. The AO finalized final set of comparables of 11 which are at pages 52 and 53 of the TPO’s order. The ld. AR submits that the assessee objecting the inclusion of CES Ltd., Access Healthcare Services Pvt. Ltd., Domex E-Data Pvt. Ltd. and MPS Ltd. According to the ld. AR that the DRP by following the earlier orders upheld the inclusion of CES Ltd., Access Healthcare Services Pvt. Ltd., Domex E-Data Pvt. Ltd. and MPS Ltd. 5. The ld. AR drew our attention to the order of this Tribunal in assessee’s own case for A.Y. 2014-15 at page 1 of the paper book and 3 ITA No.583/PUN/2022, A.Y. 2018-19 argued that this Tribunal considered the comparable of MPS Ltd. in A.Y. 2014-15 and by examining annual report, held the said company is not comparable in the absence of any segmental information relating to ITES and directed the TPO to exclude the same from the final list of comparables. The relevant portion at paras 4 and 5 is reproduced here-in- below for ready reference : “4. We have heard both the sides through Virtual Court and gone through the relevant material on record. In order to decide the comparability or otherwise of the company, it is sine qua non to first understand the functional profile of the assessee under the transaction. There is no dispute as to the nature of business carried on by the assessee as the TPO has accepted in his show cause notice as reproduced at page 3 of his order that “the assessee is engaged in the business of IT enabled service (ITeS)”. On a pertinent query, the ld. AR submitted that no formal agreement was entered into between the assessee and its Associated Enterprise (AE) for rendering the ITES. Such services were rendered pursuant to a Purchase order, a copy of which has been placed at page 1 of the paper book. This Purchase order is effective from 01-04-2012 and is valid till 31-03-2014, thereby covering the year under consideration. As per the terms and conditions, it has been provided that the assessee shall “provide us Software Development services and other IT Enabled services as per our requirement.” From the above, it is clear that the assessee rendered Software Development services and other IT enabled services. 5. We have gone through the Annual report of MPS Limited, whose copy has been provided at page 102 onwards of the paper book. It has been provided in the Director’s report under the head `Opportunities and Threats’ that: “MPS Limited has developed on end-to-end cloud-based publishing platform, MPS DigiCore, which addresses the need for an integrated workflow that publishers have started to ask for. As such, MPS Limited has a first-mover advantage in exploiting the market and establishing itself as the premier technology solutions provider for publishers . . . . . . . . Similar other solutions are being developed at MPS Limited as R&D based on the market requirements.” A copy of its Profit and loss account is available at page 135 of the paper book, which shows Revenue from Operations at Rs.18,829.21 lakh. Note no. 2.7 of its Financial Statements with the caption `Revenue recognition’ reads : “Revenue is recognized on delivery of projects or as per terms specified in contracts/purchase orders received from customers. Revenues for web-site design and development are recognized based on the percentage of completion of the project. Revenues from web-site housing are recognized ratably over the year for which the site is hosted.” On going through the above, it is palpable that this company is engaged in software products as well, which fact gets further fortified from its balance sheet which shows the figure of inventory at Rs.782.79 lakh. Segmental information of this company has been given under Note 29.1 reading: “The Company operates in one business segment of providing publishing solutions viz., typesetting and data digitalization services and is considered to constitute a single segment in the context of primary segment reporting as prescribed by Accounting Standard 17 – Segment Reporting”. Assimilating the afore-referred facts, it is amply borne out that MPS Limited is not only engaged in rendering ITES but is also into Software Products business. In the absence of any segmental information relating to ITES, this company loses comparability with the assessee company, which is engaged in rendering only ITES. We, therefore, direct to exclude this company from the list of comparables.” 4 ITA No.583/PUN/2022, A.Y. 2018-19 6. On an examination of the above, we note that the Co-ordinate Bench of this Tribunal examined the annual report of MPS Ltd. and by going through the Director’s report and profit and loss account, held the MPS Ltd. is engaged in software products also like typesetting and data digitalization services etc. Further, the Co-ordinate Bench held that there was no segmental information relating to ITES services and in the absence of such information held the same is not comparable to that of assessee’s functions. We find the facts and circumstances for A.Y. 2014-15 and in the year under consideration is similar and identical and by following the same, we direct the TPO to exclude the MPS Ltd. as comparable company. 7. In respect of Domex E-Data Pvt. Ltd., the ld. AR drew our attention to the order of this Tribunal in the case of Katerra Technology Services in ITA No. 629/PUN/2022 for A.Y. 2018-19 which is at page 128 of the paper book. It was argued that the said company is into software development activity with the usage of very high end software, hardware and is not comparable with the functions of the assessee as it is engaged in various activities involving products innovation and renovation which are dissimilar to the ITES. The Co-ordinate Bench held the same is not comparable by placing reliance in the case of Schlumberger India Technology Centre (P) Ltd. reported in 142 taxmann.com 243 (Pune – Trib.). The relevant portion at para 6 is reproduced here-in-below for ready reference : “6. We have heard the submissions of the parties and analyze the facts and circumstances in this case and have given considerable thought to these submissions made before the Bench. 6.1 Admittedly, the assessee is doing ITeS functions and as explained by the ld.counsel for the assessee, it is mainly doing drawings etc. for architectural and interior designing which is outsourced to it by the AE, i.e. the US entity and for the work done by the assessee in India, receives service income from AE. In the ITeS segment, the TPO had included comparables and the assessee before us has submitted that out of these comparables, if Domex e- Data Pvt. Ltd. is excluded, then the assessee would fall within the comparable range and there would be no transfer pricing adjustment and the 5 ITA No.583/PUN/2022, A.Y. 2018-19 other grounds would therefore become academic. We observe from the annual report of Katerra India which is the Katerra Technology Services LLP that it is engaged in the business of ITeS in the field of architectural and interior designing. We have also observed from the functional analysis of Katerra India, the detailed functions performed by Katerra India vis-à-vis the AE i.e. Katerra Inc, the US entity. The services rendered by Katerra India in the ITeS segment comprises of the outsources work provided to it by the US entity and Katerra India performs such drawings etc. regarding interior designs and sends the same work done to the AE and the service income is charged by the assessee in lieu of services rendered to the AE. It is therefore, predominantly ITeS functions. We observe from the annual report of Domex e-Data Pvt. Ltd. that in the column of „technology absorption‟ it is mentioned that this company has made efforts towards technology absorption meaning thereby, the software development activity is carried out with the usage of very high end software, hardware and the company always uses latest available technology in development of software. Further, in the column „awards and recognition‟, it is mentioned that this company is a trusted company for the quality of its products innovation and renovation of products that are based on strong consumer insights and ability to engage with consumers across the county. Therefore, it is evident that Domex e-Data Pvt. Ltd. is a company engaged in the various activities including software development activity using high end software, hardware and is also involved in products innovation and renovation, so these activities are absolutely dissimilar with ITeS functions performed by the assessee before us. This company i.e. Domex e-Data Pvt. Ltd., as per its annual report, is engaged in diversified activities including software development KPO & BPO services and, hence, its functionally dissimilar to the functions of ITeS carried out by the assessee. We observe that both the TPO and ld.DRP had held that since Domex e-Data Pvt. Ltd. is doing e-commerce activity, therefore it is similar to ITeS, hence, was held comparable with that of the assessee. However they have not dealt with or given their findings regarding various other functions performed by Domex e-Data Pvt. Ltd. namely software development KPO & BPO, product renovation etc. which are also evident in the annual report. We further find that for the same A.Y. 2018-19, Domex e-Data Pvt. Ltd. was excluded from the final list of comparables for benchmarking international transaction in ITeS segment. 6.2 In the case of M/s. Altair Engineering India Pvt. Ltd. v. ACIT [IT(TP) No.1025/Bang/2022, dated 09/01/2023], the coordinate Bench of ITAT, Bangalore at paras 34 & 35 has held as under:- “34. In so far as comparability of Domex e-Data Pvt. Ltd. is concerned, the argument was that this company is engaged in providing KPO and therefore cannot be compared with an ITeS such as the assessee. On this objection, the DRP again held that ITeS and KPO have to be regarded as one and the same. Learned counsel has pointed out that in the following decisions, Tribunal has taken the view that companies rendering KPO services cannot be as a comparable company with an ITeS company. Transperfect Solutions India Pvt. Ltd. v. ACIT [TS-497- ITAT2022 (PUN)-TP] AY 2016-17 Schlumberger India Technology Centre (P) Ltd. v. DCIT [TS-473- TAT-2022(PUN)-TP] AY 2016-17 Credence Resource Management (P.) Ltd. v. ACIT [2022] 138 taxmann.com 543 (Pune – Trib.) for AY 2016-17 35. In the light of the aforesaid decisions, we are of the view that Domex E-Data Pvt. Ltd., should be excluded from the list of comparable companies. 6 ITA No.583/PUN/2022, A.Y. 2018-19 In the aforesaid decision, the Tribunal has relied on another decision of Pune Bench in the case of Schlumberger India Technology Centre (P) Ltd. v. DCIT [2022] 142 taxmann.com 243 (Pune – Trib.) wherein again while benchmarking international transaction in the ITeS segment, Domex e-Data Pvt. Ltd. was excluded from the final set of comparables. In this decision, the Pune Tribunal relied on logical principle following from the decision in the case of M/s. Tasty Bite Eatables Ltd. v. ACIT in ITA No.1823/PUN/2018, dated 03/06/2021 of the Hon'ble Delhi High Court, wherein it has been held that if two companies performing ITeS, ought to be considered as comparable, then the specific business of the said two companies has to be analyzed and then decided upon whether they are at all comparable or not. Reverting to the facts of the present case, both the TPO and the ld. DRP have held that since Domex e-Data Pvt. Ltd. is doing e-commerce activity, therefore, its functions are akin to the ITeS functions performed by the assessee, but the revenue authorities have not brought out specifically if Domex e-Data Pvt. Ltd. has to be retained while benchmarking international transaction in the ITeS segment, then what and how exactly the functions are similar with ITeS functions performed by the assessee. Further, we have also observed from the annual report that Domex e-Data Pvt. Ltd. is also into software development product renovation etc. and, therefore, this company is doing various activities and is different from the functions performed by the assessee before us. When the revenue authorities have not specifically examined and brought out why a particular company in the ITeS segment is specifically similar with that of the functions performed by the assessee and when the reason for inclusion of such comparable has not been analyzed with regard to the specific business, in such case, we are of the considered view in the given set of facts and circumstances and even considering the decision of coordinate benches, this company i.e. Domex e-Data Pvt. Ltd. is functionally dissimilar with that of the assessee company. We therefore, direct the AO/TPO to exclude Domex e-Data Pvt. Ltd. from the final set of comparables.” 8. On an examination of the above, we note that by going through the annual report of the said Domex E-Data Pvt. Ltd., we note that the said company is engaged into software development with the usage of very high end software, hardware, wherein, in the case of assessee is engaged only in ITES. By considering the same, the Co-ordinate Bench held the functions carried out by the said company are dissimilar to the functions of the assessee. Therefore, following the same, we hold that the Domex E-Data Pvt. Ltd. is not comparable and directed the TPO to exclude the same to the final list of comparables. 9. In respect of CES Ltd., the ld. AR vehemently argued that the CES Ltd. is engaged in rendering KPO services also, apart from the ITES. The said comparable came up for consideration before this Tribunal in the case 7 ITA No.583/PUN/2022, A.Y. 2018-19 of Transperfect Solutions India Pvt. Ltd. in ITA No. 331/PUN/2021 for A.Y. 2016-17 which is at page 188 of the paper book, considering another decision of this Tribunal in the case of Credence Resource Management Pvt. Ltd. in ITA No. 133/PUN/2021, held the said company is not comparable as it is involved both the BPO and KPO services. The relevant portion at paras 8.1 and 8.2 is reproduced as under for ready reference : “8.1 This comparable was also chosen by the TPO. The assessee’s objection that this company was engaged in rendering KPO services as well was not approved by the TPO, who went with its inclusion. 8.2 The Annual report of this company shows that it is engaged in both the IT and IT enabled services. As the company has segmental accounts, the TPO has considered only IT enabled services segment for the purposes of comparability. However, what is important to note in the instant context is that the assessee is rendering only translation services etc., which fall within the overall domain of the BPO services. As against this, CES Limited is engaged in providing both BPO and KPO services as has been reported by it to the Registrar of companies in the requisite form. The Pune Benches of the Tribunal in Credence Resource Management Pvt. Ltd. Vs. ACIT (ITA No.133/PUN/2021) vide its order dated 18-06-2021 has noted that CES Limited is rendering both BPO and KPO services, discussing this issue at page 19 of the order. In view of the fact that the assessee is engaged in rendering only BPO services, CES Limited providing both BPO and KPO services, cannot therefore be held as comparable. We, therefore, direct to delete this company from the list of comparables.” 10. On an examination of above, we note that admittedly, the assessee is into ITES and CES Ltd. is into KPO/BPO which is evident from its annual report at page 997 and 1025 of the paper book. Therefore, following the order of this Tribunal in the case of Transperfect Solutions India Pvt. Ltd. (supra), we hold the CES Ltd. is not comparable and we direct the TPO to exclude the said company from the final list of comparables. 11. The ld. AR submits that if these three companies are excluded from the final list of comparables, the assessee would fall within the specified comparable range and no consideration would arise in examining the other comparables. Therefore, examination of other comparables and ground Nos. 3 to 8 would become academic requiring no adjudication. Thus, we MPS Ltd., Domex E-Data Pvt. Ltd. and CES Ltd. are not comparables and 8 ITA No.583/PUN/2022, A.Y. 2018-19 direct the TPO to exclude these companies from the final set of comparables. 12. In ground No. 9 of the appeal the assessee has assailed the initiation of penalty levied u/s. 270(A) of the Act. The ground No. 9 of the appeal is pre-mature at this stage. Accordingly, the same is dismissed as such. 13. In the result, the appeal of assessee is allowed. Order pronounced in the open court on 18 th October, 2023. Sd/- Sd/- (R.S. Syal) (S.S. Viswanethra Ravi) VICE PRESIDENT JUDICIAL MEMBER पुणे / Pune; दिनाांक / Dated : 18 th October, 2023. रदव आदेश की प्रधिधलधप अग्रेधर्ि / Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant. 2. प्रत्यर्थी / The Respondent. 3. The Pr. CIT concerned, Pune. 4. दवभागीय प्रदतदनदि, आयकर अपीलीय अदिकरण, “सी” बेंच, पुणे / DR, ITAT, “C” Bench, Pune. 5. गार्ड फ़ाइल / Guard File. //सत्यादपत प्रदत// True Copy// आिेशानुसार / BY ORDER, वररष्ठ दनजी सदचव / Sr. Private Secretary आयकर अपीलीय अदिकरण ,पुणे / ITAT, Pune