M/s. Fiserv India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 6737/DEL/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91259 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-06-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 09-04-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 11-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Bonafide belief; Wholly owned subsidiary
• Section: 143(3); 92D; 234B

Judgement Text

1 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I: NEW DELHI BEFORE SHRI S V MEHROTRA ACCOUNTANT MEMBER AND SHRI A. T. VARKEY, JUDICIAL MEMBER ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 M/S FISERV INDIA PVT LTD, REGUS ELEGANCE, LEVEL - 2, ELEGANCE JASOLA DISTT, CENTRE, OLD MUTHRA ROAD, NEW DELHI VS. DCIT, CIRCLE - 11(1), NEW DELHI, C. R., BUILDING, IP ESTATE, NEW DELHI (APPELLANT) (RESPONDENT) DATE OF HEARING 09.04 .2015 DATE OF PRONOUNCEMENT 2 6 . 06.2015 O R D E R PER A. T. VARKEY, JUDICIAL MEMBER 1 THIS APPEAL, AT THE INSTANCE OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 14.11.2014 U/S 143(3) READ WITH SECTION 144C OF THE INCOME TAX ACT, 1961 (HEREIN AFTER THE ACT) IN PURSUA NCE TO DIRECTIONS OF DRP DATED 23.9.2014 FOR THE ASSESSMENT YEAR 2010 - 11. 2 IN THIS APPEAL, THE FOLLOWING GROUNDS HAVE BEEN RAISED BY THE APPELLANTS: 1. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, FINAL ASSESSMENT ORDER DATED 14.11.2014 PASSED BY THE ASSESSING OFFICER (AO) IS IN COMPLETE DISREGARD OF THE PROVISIONS OF SECT ION 144C(13) OF THE INCOME TAX ACT, 1961 (THE ACT) INASMUCH THAT THE AO FAILED TO PASS THE SAID ORDER IN CONFORMITY WITH THE BINDING AND MANDATORY DIRECTIONS ISSUED BY APPELLANT BY: SH SACHIT JOLL Y , ADV & MS G A RGI BHATT ADV , RESPONDENT BY : SH JUDY JAMES , STADING CONSEL. DR 2 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 THE DISPUTE RESOLUTION PANEL (DRP) AND CONSEQUENTLY THE ORDER DATED 14.11.2014 IS NO N - EST, ILLEGAL AND BAD IN LAW. 1.1 THAT THE AO ERRED IN PASSING THE ORDER DATED 14.11.2014 WITHOUT WAITING FOR THE TRANSFER PRICING OFFICER (TPO) TO PASS AN ORDER GIVING EFFECT TO THE DIRECTIONS OF THE DRP ON AN ERRONEOUS ASSUMPTION THAT THE LIMITATION FOR PASSING THE FINAL ASSESSMENT ORDER WAS ELAPSING. 1.2 THAT THE AO ERRED IN MAKING AN ADDITION OF RS.28,59,06,323/ - TO THE INCOME OF THE APPELLANT IN RESPECT OF INTERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES RENDERED BY THE A PPELLANT TO ITS PARENT COMPANY, VIZ., FISERV GLOBAL SERVICES INC., USA. WITHOUT APPRECIATING THAT THE DRP HAS ALLOWED SUBSTANTIAL RELIEF TO THE APPELLANT IN RESPECT OF THE AFORESAID ISSUE. 2. WITHOUT PREJUDICE TO THE AFORESAID, THE AO ERRED IN ASSESSING T HE TOTAL INCOME OF THE APPELLANT AT RS.28,74,75,770/ - AS AGAINST INCOME OF RS.15,69,443/ - RETURNED BY THE APPELLANT AFTER MAKING TRANSFER PRICING ADDITION OF RS.28,59,06,323/ - IN RESPECT OF INTERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES RENDERED BY THE APPELLANT TO ITS PARENT COMPANY, VIZ., FISERV GLOBAL SERVICES INC., USA. 3. THAT ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO ERRED IN MAKING A REFERENCE TO THE TPO UNDER SECTION 92CA OF THE ACT WITHOUT RECORDING R EASONS ON THE BASIS WHICH THE AO CONSIDERED IT NECESSARY OR EXPEDIENT TO REFER THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE (AE). 4. THAT ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO AND DRP ERRED IN PARTLY CONFIRMING THE ACTION OF THE TPO IN MAKING AN ADDITION TO THE INCOME OF THE APPELLANT WITHOUT APPRECIATING THAT THE APPELLANT HAD COMPUTED ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTION ENTERED INTO BY THE APPELLANT WITH ITS AS SOCIATED ENTERPRISE (AE) USING THE MOST APPROPRIATE METHOD (I.E. THE TRANSACTIONAL NET MARGIN METHOD), MAINTAINED ALL THE INFORMATION AND DOCUMENTATION REQUIRED UNDER SECTION 92D OF THE ACT, USED INFORMATION/DATA AVAILABLE IN THE DATABASE (PROWESS DATABA SE AND CAPITALINE DATABASE) AT THE TIME OF FILING THE INCOME TAX RETURN ON A BONAFIDE BELIEF THAT THE DATA IN THE DATABASE IS RELIABLE AND CORRECT AND FURNISH THE TRANSFER PRICING STUDY (TP STUDY). 5. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IMPLIEDLY REJECTING THE TRANSFER PRICING STUDY OF THE APPELLANT AND IN CONDUCTING A FRESH BENCHMARKING ANALYSIS ON THE BASIS OF CONJECTURES AND SURMISES. 6. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO AND DRP ERRED IN CONFIRMIN G THE ACTION OF THE TPO IN APPLYING THE FOLLOWING FILTERS: A. USE OF ONLY CURRENT YEAR (I.E. FY 2009 - 10) DATA FOR COMPARABILITY DESPITE THE FACT THAT AT THE TIME OF COMPARISON DONE BY THE APPELLANT, THE COMPLETE DATA FOR THE FY 2009 - 10 WAS NOT AVAILABLE IN THE PUBLIC DOMAIN, B. REJECTING COMPANIES WITH TURNOVER BELOW RS.5 CRORES WITHOUT APPLYING AN UPPER FILTER OF RS.500 CRORES 3 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 C. REJECTING COMPANIES WHOSE REVENUES FROM SERVICES IS LESS THAN 75% OF THE TOTAL OPERATING REVENUES WITHOUT APPRECIATING THAT THE SAID FILTER HAS NO EFFECT ON COMPARABILITY ANALYSIS, D. REJECTING COMPANIES WHERE REVENUE FROM RELATED PARTY TRANSACTIONS EXCEEDS 25% OF THE TOTAL REVENUE WITHOUT APPRECIATING THAT COMPANIES WITH ANY RELATED PARTY TRANSACTIONS SHOULD HAVE BEEN EXCLUDED O R ELSE COMPANIES WITH REVENUE FROM RPT OF MORE THAN 10 - 15% TO SALES SHOULD HAVE BEEN EXCLUDED, E. REJECTING COMPANIES WITH EMPLOYEE COST LESS THAN 25% OF TOTAL OPERATING COST, WITHOUT APPRECIATING THAT SUCH A FILTER IS NOT DECISIVE FOR TRACING OUT SERVICE COMPANIES SINCE THERE IS NO COMPULSION ON COMPANIES TO NECESSARILY KEEP PERSONNEL ON THEIR ROLLS F. REJECTING COMPANIES WITH DIFFERENT FINANCIAL YEAR WITHOUT ASSIGNING ANY COGENT REASONS FOR APPLYING THE SAID FILTER, 7. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IN REJECTING THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT WITHOUT PROVIDING ANY COGENT AND/OR SUFFICIENT REASONING. 8. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IN SEL ECTING THE FOLLOWING COMPANIES WHICH WERE NOT FUNCTIONALLY COMPARABLE TO THE APPELLANT FOR THE PURPOSES OF BENCHMARKING THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE APPELLANT: A) E - INFOCHIPS BANGALORE LTD. B) INFOSYS LTD. C) PERSISTENT SYSTEMS LTD. 9 . THAT THE AO AND DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IN SELECTING E - INFOCHIPS BANGALORE LTD. AS A COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE APPELLANT WITH ITS AE WITHOUT APPRECIATING THAT THE SAID COMPANY HAD FLUCTUATING MARGINS OVER THE YEARS AND THAT COMPLETE FINANCIAL DATA OF THE SAID COMPANY WAS NOT AVAILABLE IN THE PUBLIC DOMAIN. 10. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IN SELECTING PERSISTENT SYSTEMS LTD. AS A COMPARABLE FOR BEN CHMARKING THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE APPELLANT WITH ITS AE WITHOUT APPRECIATING THAT THE COMPANY HAD RPT OF MORE THAN 15% OF THE TOTAL OPERATING INCOME. 11. THAT THE DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IN TREATING FOREIGN EXCHANGE GAIN/LOSS AND HEDGING COSTS/PREMIUM AS A NON - OPERATING INCOME/EXPENSE. 12. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IN NOT ALLOWING RISK ADJUSTMENT CLAIMED BY APPELLANT IN TERMS OF RULE 10B(1)(E) READ WITH RULE 10B(3) OF THE INCOME TAX RULES, 1962. 13. THAT THE TPO AND THE DRP ERRED IN PROPOSING AN ADJUSTMENT TO THE ARMS LENGTH PRICE COMPUTED BY THE APPELLANT WITHOUT APPRECIATING THAT SINCE THE APPELLANT WAS ELIGIBLE TO CLAIM DEDUCTION UNDER SECTION 10A OF THE ACT IN RESPECT OF INCOME FROM THE INTERNATIONAL TRANSACTION ENTERED INTO BETWEEN THE APPELLANT AND ITS AE, THERE WAS NO MOTIVE TO SHIFT PROFITS 4 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 OUTSIDE INDIA BY MANIPULATING THE PRICES CHARGED IN INTERNATIONAL TRANSACTIONS, WHICH IS PRE - REQUISITE TO MAKE ANY ADJUSTMENT U NDER THE PROVISIONS OF CHAPTER X OF THE ACT. 14. THAT THE DRP ERRED IN LAW IN CONFIRMING THE ACTION OF THE AO/TPO IN MECHANICALLY INITIATING PENALTY PROCEEDING UNDER SECTION 271(1)(C) OF THE ACT BY HOLDING THAT PENALTY UNDER SECTION 271(1)(C) IS CONSEQUEN TIAL IN NATURE. 15. THE AO ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN CHARGING INTEREST UNDER SECTION 234B AND 234D OF THE ACT AND COMPUTING INTEREST UNDER SECTION 234B IN VIOLATION OF THE PROVISIONS OF THE ACT. 3 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY WAS INCORPORATED ON 30 TH MAY 2002 UNDER THE COMPANIES ACT, 1956 AS A WHOLLY OWNED SUBSIDIARY OF RESULTS INTERNATIONAL SYSTEMS INC., USA. FURTHER, RESULTS INTERNATIONAL SYSTEMS INC., USA IS A 100% SUBSIDIARY OF FISERV INC., USA. 4 DURING THE RELEVANT ASSESSMENT YEAR, FISERV INDI A RENDERED SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES TO ITS AE VIS. FISERV GLOBAL SERVICES INC., USA. FOR THIS IT WAS COMPENSATED BASED ON THE TERMS OF THE MASTER SERVICE AGREEMENT ENTERED BETWEEN BOTH THE ENTITIES ON COST PLUS 15%. AS PER THE TRANSFER PRICING (TP) DOCUMENT FURNISHED FOR THE AY 20 1 0 - 1 1 , THE TAXPAYER COMPANY HAS ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) NATURE OF TRANSACTION VALUE OF INTERNATIONAL SOFTWARE DEVELOPMENT SERVICES 230,23,08,481 RECRUITMENT EXPENSES 2,66,52,931 5 THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS REPRESENTING SOFTWARE DEVELOPMENT SERVICES PROVIDED TO THE ASSOCIATED ENTERPRISES (AE) IS DETERMINED BY APPLYING TRANSACTIONAL NET MARGIN METHOD (T NMM), WHICH IS STATED TO BE THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THE OPERATING PROFIT TO TOTAL COST (OP / T C) RATIO IS TAKEN AS THE PROFIT LEVEL INDICATOR (PLI) IN THE TNMM ANALYSIS. THE PLI OF THE COMPANY IS ARRIVED AT 14.64% ON COST ; WHEREAS THE AVERAGE PLI OF THE COMPARABLES IS ARRIVED AT 12.13% AS PER THE ANALYSIS IN THE TP DOCUMENT. IT IS FURTHER SEEN THAT AVERAGE PROFIT LEVEL INDICATOR (PLI) WAS DIRECTED ON THE BASIS OF 1 2 COMPARABLES SELECTED BY THE TAX PAYERS. TH E MEAN MARGIN OF THE COMPARABLES SELECTED BY THE ASSESSEE AS STATED 5 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 ABOVE WAS 12.13 % AND SINCE THE PROFIT MARGIN OF THE ASSESSEE WAS WITHIN +/= 5% RANGE OF THE MEAN MARGIN OF THE COMPARABLES, NO TRANSFER PRICING ADJUSTMENT WAS OFFERED IN THE RETURN OF INCO ME. THE RESULTS AS SUBMITTED BY THE TAX PAYER CAN BE SUMMARIZED AS UNDER: PARTICULARS SOFTWARE OPERATING REVENUES 230,36,63,123 OPERATING EXPENSES 200,94,04,644 OPERATING PROFIT 29,42,58,479 OP/TC 14.64 % METHOD USED TNMM PLI OP/TC NO OF COMPARABLES 12 MEAN OF MARGIN OF COMPARABLES (ADJUSTED) 12.13% 6 THE TPO VIDE AN ORDER DATED 10.1.2014 REJECTED THE TRANSFER PRICING STUDY OF THE ASSESSEE AND SUBSTITUTED A FRESH PROCESS AND MODIFIED THE FILTERS AND COMPARABLE SELECTED BY THE ASSESSEE. THEREAFTER THE TPO SELECTED A LIST OF 1 3 COMPARABLES AND PROPOSED AN ADJUSTMENT OF RS. 28,59,06,323 / - BY COMPUTING THE MEAN PROFIT LEVEL INDICATOR (PLI) OF THE COMPARABLE COMPANIES AT 25. 94% AS AGAINST PLI OF 14.64% OF THE ASSESSEE. THEREAFTER DISPUTE RESOLUTION PANE L (DRP) VIDE ORDER DATED 23.9.2014 , UPHELD THE ADJUSTMENT MADE BY THE TPO, SUBJECT TO THE CLAIM OF WORKING CAPITAL ADJUSTMENT AS PER THE OECD METHODOLOGY AND DIRECTED TO RE - COMPUTE THE OPERATING MARGIN OF THE ASSESSEE AS WELL AS COMPARABLE COMPANIES AS PER THE GUIDELINES PROVIDED BY SAFE HARBOR NOTIFICATION DATED 18.09.2013. AS PER THE SAID DIRECTIONS, REVISED FIN AL LIST OF THE COMPARABLE COMPANIES IS AS UNDER - SL. NO. COMPARABLE ADJUSTED OP/OC 1. AKSHAY SOFTWARE TEDCH LTD. 0.87% 2. COM_U - LEARN TECH. LTD. 13.05% 3. E - INFOCHIPS BANGALORE LTD. 66.23% 4. INFOSYS LIMITED 45.41% 5. L&T INFOTECH LTD. 20.40% 6. I.G.S. GLOBAL LTD. 14.38% 7. MINDTREE LIMITED (SEGMENT) 13.49% 8. PERSISTENT SYSTEMS LIMITED 29.16% 9. QUINTEGRA SOLUTIONS LTD. - 17.49% 6 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 10. R S SOFTWARE (INDIA) LTD. 12.37% 11. SASKEN COMMUNICATION TECH LTD. 18.80% 12. TATA ELEXI LTD. 21.46% 13. THINKSOFT GLOBAL SERVICES LTD. 15.66% AVERAGE 19.52% 7 AS A RESULT OF THE ABOVE, THE FINAL ASSESSMENT WAS COMPLETED VIDE ORDER DATED 14.11.2014 PASSED U/S 143(3) R.W.S. 144C OF THE IT ACT, 1961 (THE ACT) SUBSEQUENTLY RECTIFIED VIDE ORDER DATED 10.12.2014 ASSESSING THE TOTAL INCOME OF THE ASSESSEE AT RS. 15,84,89,040 / - AFTER MAKING A TRANSFER PRICING ADDITION OF RS. 15,69,19,599 / - WHICH HAS BEEN CO MPUTED AS UNDER: - OPERATIONAL COST 200,91,38,005 ARMS LENGTH PRICE AT A MARGIN OF 19.52% 240,13,22,939 PRICE RECEIVED 224,44,03,340 105% OF INTERNATIONAL TRANSACTION 235,66,23,507 ADJUSTMENT U/S 92CA 15,69,19,599 8 DURING THE COURSE OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ALL HIS CONTENTIONS VIS - - VIS GROUND S RAISED IN THE MEMO OF APPEAL BE CONFINED TO THE EXCLUSION OF THE FOLLOWING COMPARABLES FROM THE LIST WHICH WAS FINALLY SELECTED BY THE DRP: A) E - INFOCHIPS BANGALORE LTD. B) INFOSYS LTD. C) PERSISTENT SYSTEMS LTD.; AND TREATMENT OF FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AS OPERATING ITEM 9 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. TAKING UP THE EACH OF THE COMPARABLES CONTESTED AND DISPUT ED BY THE APPELLANT IN THIS APPEAL. E - INFOCHIPS BANGALORE LTD. 10. THE DRP REPELLED THE OBJECTION OF THE ASSESSEE AS UNDER: THE TAXPAYER PRIMARILY WANTS THIS COMPARABLE TO BE EXCLUDED ON ACCOUNT OF FUNCTION NOT COMPARABLE 7 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 SHIFT OF FOCUS FROM SOFTWARE SERVICES FROM THE PERUSAL OF ANNUAL REPORT IT IS SEEN THAT UNDER SOFTWARE SERVICES THE MAIN ACTIVITIES ARE PRODUCT LIFECYCLE MANAGEMENT, APPLICATION DEVELOPMENT AND INTEGRATION, ENTERPRISE IT CONSULTING AND IMPLEMENTATION. IT IS ALSO INVOLVED IN TURNKEY PRODUCT DEVELOPMENT, HARDWARE & SOFTWARE DESIGN (BOARD DESIGN, BSP, RTOS, CODECS/STACKS) SUSTENANCE ENGINEERING SERVICES, AND PRODUCT REENGINEERING. AS PER P - 54/AR: - INCOME FROM SOFTWARE SERVICES 43,04,66,481/ - SOFTWARE DEVELOPMENT EXPENSES 20,66,74,788/ - IT CAN BE SEEN FROM THE ABOVE MAIN INCOME IS FROM SOFTWARE DEVELOPMENT SERVICES HENCE IT WILL BE USED AS A COMPARABLE. 10. 1 BEFORE US THE LEARNED COUNSEL SUBMITTED AS UNDER FUNCTIONALLY DIFFERENT - DEALS IN PRODUCTS SOFTWARE SERVICES AND CO NSULTANCY SERVICES THE COMPANY HAS FLUCTUATING MARGINS AND THE INCREASE IN PROFITS DURING THE RELEVANT PREVIOUS YEAR IS ONLY ON ACCOUNT OF INCREASE IN INCOME FROM CONSULTANCY CHARGES THE COMPANY NOW FOCUSES ON CONSULTANCY SERVICES AND NOT THE SOFTWARE DEVELOPMENT SERVICES FURTHER, COMPLETE DATA RELATING TO THIS COMPANY IS MISSING. 10.2 WE HAVE CONSIDERED RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON THE RECORD. THE COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT E - INFOCHIPS BANGALORE LTD. IS INVOLVED IN PR OVIDING A VARIED RANGE OF SERVICES AS MENTIONED BELOW: A) SOFTWARE B) FIRMWARE C) HARDWARE D) FPGA (FIELD PROGRAMMABLE GATE ARRAY) E) ASIC (APPLICATION SPECIFIC INTEGRATED CIRCUIT) F) QA & TESTING 10. 3 IT WAS FURTHER SUBMITTED THAT THE SAID COMPANY PROVIDES COMPLEX PRODUCT DEVELOPMENT SERVICES AND IS THEREFORE NOT COMPARABLE WITH THE APPELLANT COMPANY. IT WAS SUBMITTED THAT CONSULTANCY CHARGES SUBSTANTIAL PART OF REVENUE AND IN ABSENCE OF SEGMENTAL INFO RMATION THE SAID COMPANY CANNOT BE CONSIDERED AS COMPARABLE. IT WAS SUBMITTED THAT THE DRP SPECIFIC OBJECTION VIZ - 8 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 A - VIZ THE FINDING OF THE TPO THAT CONSULTANCY CHARGES ARE PART OF SOFTWARE DEVELOPMENT SERVICES AND NOT TOWARDS INFORMATION TECHNOLOGY ENABLE TO SERVICES. 10. 4 HAVING CONSIDERED THE ABOVE OBJECTION WE ARE IN AGREEMENT WITH SUBMISSION OF THE LEARNED COUNSEL THAT M/S E - INFOCHIPS BANGALORE LTD. IS NOT A VALID COMPARABLE AS IT IS E NGAGED IN PRODUCT DEVELOPMENT. HOWEVER WE FIND THAT THE SAID COMPAR ABLE WAS CONSIDERED BY THE COORDINATE BENCH IN THE CASE OF M/S ELECTRONICS ARTS GAMES VS. ACIT ITA NO. 265/HYD/2015 A.Y. 2010 - 11 DATED 29.4.2015 HAS HELD AS UNDER: - 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIAL ON REC ORD. THE LIMITED CONTENTION RAISED BY THE LEARNED COUNSEL FOR THE ASSESSEE IS THAT THE ENTITY M/S. E - INFOCHIPS BANGALORE LTD. TAKEN BY THE ASSESSING OFFICER/TPO AS COMPARABLE SHOULD BE EXCLUDED FROM THE LIST OF FINAL COMPARABLES FOR THE PURPOSES OF TRANSFE R PRICING ANALYSIS ON THE GROUND OF FUNCTIONAL DIFFERENCES AS WELL AS ON THE GROUND OF INSUFFICIENT INFORMATION AVAILABLE IN RESPECT OF THE SAID ENTITY IN PUBLIC DOMAIN. IN ORDER TO SUPPORT AND SUBSTANTIATE HIS CONTENTION OF FUNCTIONAL DISSIMILARITY, THE L EARNED COUNSEL FOR THE ASSESSEE HAS HEAVILY RELIED ON THE CONTENTS OF THE WEBSITE WWW.EINFOCHIP.COM., THE PRINT OUT OF RELEVANT PORTION OF WHICH IS PLACED ON RECORD BEFORE US. ON THE BASIS OF THE SAID CONTENTS, HE HAS MADE AN ATTEMPT TO POINT OUT THAT M/S. E - INFOCHIPS BANGALORE LTD. IS FUNCTIONALLY DIFFERENT FORM THE ASSESSEE COMPANY IN AS MUCH AS THE SAID COMPANY IS MAINLY INTO DEVELOPMENT OF NEW PRODUCTS WHEREAS THE ASSESSEE COMPANY IS MAINLY PROVIDING SOFTWARE DEVELOPMENT SERVICES. AFTER HAVING GONE THRO UGH THE WEBSITE WWW.EINFOCHIP.COM., WE HOWEVER FIND THAT THE SAME IS IN RESPECT OF THE ENTIRE GROUP OF E - INFOCHIPS, OF WHICH M/S. E - INFOCHIPS BANGALORE LTD. IS ONLY A PART. THE FUNCTIONAL PROFILE GIVEN ON THE SAID WEBSITE THUS IS THAT OF THE ENTIRE GROUP A ND NOT JUST OF THE M/S. E - INFOCHIPS BANGALORE LTD. THE CONTENT OF THE SAID WEBSITE IN OUR OPINION, THEREFORE, CANNOT BE RELIED UPON TO ASCERTAIN THE FUNCTIONAL PROFILE OF M/S. E - INFOCHIPS BANGALORE LTD., ESPECIALLY WHEN THE NATURE OF FUNCTIONS/SERVICES GIV EN THERE ARE MATERIALLY DIFFERENT FROM THE FUNCTIONS/SERVICES STATED TO BE RENDERED BY M/S. E - INFOCHIPS BANGALORE LTD. IN ITS ANNUAL REPORT. EVEN THE DETAILS OF SERVICES STATED TO BE RENDERED BY M/S. E - INFOCHIPS BANGALORE LTD. AT DIFFERENT PLACES IN ITS A NNUAL REPORT ARE VERY SKETCHY AND IT IS VERY DIFFICULT TO ASCERTAIN FROM THE SAME, EXACT NATURE OF SERVICES RENDERED BY THE SAID ENTITY. 14. IT IS ALSO PERTINENT TO NOTE HERE THAT A DETAILED SUBMISSION WAS MADE BY THE ASSESSEE BEFORE THE DRP IN SUPPORT OF ITS CASE FOR EXCLUSION OF M/S. E - INFOCHIPS BANGALORE LTD. FROM THE LIST OF FINAL COMPARABLES ON THE GROUND OF FUNCTIONAL DIFFERENCES AS W ELL AS INSUFFICIENT DATA/INFORMATION AVAILABLE IN THE PUBLIC DOMAIN. A PERUSAL OF THE ORDER OF THE DRP HOWEVER, SHOWS THAT 9 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 NO FINDING/OBSERVATION HAS BEEN RECORDED BY THEM ON THESE VITAL ASPECTS OF THE MATTER. IT IS ALSO WORTHWHILE TO NOTE HERE THAT OUT OF THE 16 COMPARABLES FINALLY SELECTED, PROFIT MARGIN(OP/OC) OF 15 ENTITIES TAKEN AS COMPARABLES IS IN THE RANGE OF 3% TO 32% WHEREAS THE PROFIT MARGIN OF M/S. E - INFOCHIPS BANGALORE LTD. IS 72.32%. THE PROFIT MARGIN SHOWN BY M/S. E - INFOCHIPS BANGALORE LTD. T HUS IS ABNORMALLY HIGH AND ALTHOUGH THE SAID ENTITY CANNOT BE EXCLUDED FROM THE LIST OF FINAL COMPARABLES MERELY ON THE GROUND OF HIGH OR ABNORMAL PROFITS, AS HELD BY THE SPECIAL BENCH OF ITAT IN THE CASE OF MAERSK GLOBAL SERVICE CENTRE (INDIA) PRIVATE LIM ITED IN ITA NO.7466/MUM/12 DATED 7.3.2014, IT SHOULD TRIGGER FURTHER INVESTIGATION IN ORDER TO ESTABLISH WHETHER IT CAN BE TAKEN AS COMPARABLE OR NOT. AS FURTHER HELD BY THE SPECIAL BENCH IN THE CASE OF MAERSK GLOBAL CENTRES (INDIA) P. LTD., SUCH INVESTIGA TIONS SHOULD BE TO ASCERTAIN AS TO WHETHER EARNING OF SUPER PROFITS REFLECTS NORMAL BUSINESS CONDITION OR WHETHER IT IS THE RESULT OF SOME ABNORMAL CONDITION PREVAILING IN THE RELEVANT YEAR. THE PROFIT MARGIN OF SUCH ENTITY IN THE IMMEDIATELY PRECEDING YEA R(S) MAY ALSO BE TAKEN INTO CONSIDERATION AND THE FAR ANALYSIS IN SUCH CASES MAY BE REVIEWED TO ENSURE THAT THE POTENTIAL COMPARABLE EARNING HIGHER PROFIT SATISFIES THE COMPARABILITY CONDITION. SINCE THIS EXERCISE HAS NOT BEEN DONE EITHER BY THE AO/TPO OR THE DRP IN THE PRESENT CASE, WE ARE OF THE VIEW THAT THE MATTER SHOULD GO BACK TO THE ASSESSING OFFICER/TPO FOR FRESH CONSIDERATION. THIS, IN OUR OPINION, WILL ALSO TAKE CARE OF THE GRIEVANCE OF THE ASSESSEE RELATING TO THE LACK OF SUFFICIENT INFORMATION I N RESPECT OF M/S. E - INFOCHIPS BANGALORE LTD. AVAILABLE IN THE PUBLIC DOMAIN IN AS MUCH AS THE TPO CAN OBTAIN SUCH INFORMATION IN THE FORM OF RELEVANT SCHEDULES OF THE PROFIT & LOSS ACCOUNT OF THE SAID ENTITY AS WELL AS THE SEGMENTAL DETAILS, IF ANY, DIRECT LY FROM THE SAID ENTITY. WE THEREFORE, SET ASIDE THE IMPUGNED ORDER OF THE ASSESSING OFFICER AS WELL AS THE DIRECTION GIVEN BY THE DRP ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER/TPO FOR DECIDING THE SAME AFRESH IN THE LIGHT O F THE OBSERVATIONS ALREADY MADE BY US, AFTER GIVING THE ASSESSEE PROPER AND SUFFICIENT OPPORTUNITY OF BEING HEARD. GROUND NO.2 OF THE ASSESSEE'S APPEAL IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES.. 10. 5 HAVING REGARD TO THE ABOVE DECISION WE ALSO SET - ASIDE THE ORDERS OF TPO/DRP FOR DENOVA EXAMINATION AFTER PROVIDING REASONABLE OPPORTUNITY TO THE TAXPAYER INFOSYS LTD .: 11. BEFORE THE TPO THE ASSESSEE OBJECTED TO THE USE OF THIS COMPARABLE ON THE GROUND THAT THIS COMPARABLE IS HAVING HUGE PREMIUM BECA USE OF ITS BRAND VALUE, WHICH IS NOT IN THE CASE WITH THE ASSESSEE AND TURNOVER OF THE COMPARABLE IS ALSO VERY HUGE AS COMPARED TO ASSESSEE. THE TPO REJECTED THE OBJECTION AND 10 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 INCLUDED INFOSYS AS A COMPARABLE. THE ASSESSEES APPEAL BEFORE THE DRP WAS DEAL T BY DRP AT P AGE S . 208 - 209 AS UNDER: THE TAXPAYER PRIMARILY WANTS THIS COMPARABLE TO BE EXCLUDED ON ACCOUNT OF FUNCTIONALLY DISSIMILAR HIGH TURNOVER PRESENCE OF SIGNIFICANT BRANDS INTANGIBLES A) ON GOING THROUGH THE ANNUAL REPORT IS SEEN THAT THE COMPANY IS INVOLVED IN THE PROVISION OF CONSULTANCY SERVICES, IT SERVICE, ENGINEERING SERVICE, BPO SERVICES. THE COMPANY HAS DIVERSIFIED OPERATIONS. IT IS SEEN THAT ALL THE SERVICES MENTIONED ABOVE ARE VARIOUS TYPES OF SOFTWARE DEVELOPMENT SERVICES. FURTHER, A S PER PAGE - 30/AR: - THE GROWTH IN SOFTWARE SERVICES AND PRODUCT REVENUES IS DUE TO AN A LL - ROUND GROWTH IN VARIOUS SEGMENTS OF THE BUSINESS MIX AND IS MAINLY DUE TO GROWTH IN BUSINESS VOLUMES. DETAILS OF THE SAME ARE AS FOLLOWS: INCOME (IN RS. CRORE) 2010 2009 SOFTWARE SERVICES 20,215 19,416 SOFTWARE PRODUCTS 925 848 TOTAL 21,140 20,264 IT IS SEEN THAT MAJORITY OF THE INCOME IS FROM SOFTWARE SERVICES. TAXPAYER HAS ALSO ARGUED THAT ITS SERVICES ARE DIFFERENT FROM THAT OF TAXPAYER. THERE IS NO DENIAL OF THE FACT THAT INFOSYS SELLS SOFTWARE PRODUCTS FOR BANKING IN THE NAME OF FINACLE. BUT AS PER P - 27/AR, THE REVENUES FROM SOFTWARE PRODUCTS ARE OF ONY RS. 925 CRORES OUT OF ITS OPERATING REVENUES OF RS. 21,140 CRORES. THUS THE REVENUE FROM SOFTWA RE PRODUCTS CONSTITUTES ONLY 4.38% OF OPERATING REVENUES FOR THE FY 2009 - 10. SO MORE THAN 95% OF ITS REVENUES ARE FROM SOFTWARE DEVELOPMENT SERVICES AND THUS QUALIFY THE TPOS FILTER OF MORE THAN 75% REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. 11. 1 TH E LD COUNSEL REFERRED TO FOLLOWING DISTINGUISHING PARAMETERS TO SUBMIT THAT M/S. INFOSYS LTD. IS NOT COMPARABLE WITH THE APPELLANT: DIVERSIFIED BUSINESS V. SOFTWARE DEVELOPMENT SERVICE TURNOVER OF RS. 21,140 CRORES VS. RS. 230.36 CRORES SIGNIFICANT INTANGIBLES OF MORE THAN RS. 1 LAC CRORES VS. NIL ONSITE (48.7) AND OFFSHORE (51.3) VS. ONLY SERVICES FROM INDIA SALES, ADVERTISEMENT AND BRAND BUILDING EXPENSES OF OVER RS. 75 CRORES VS. NIL R&D EXPENDITURE OF RS. 437 CRORES V. NIL. 11. 2 HE H AS REFERRED TO FOLLOWING DECISION: A) AGINITY TECHNOLOGIES ITA NO. 3856/D/2010 11 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 B) CIT V. AGINITY TECHNOLOGIES 262 CT R 291 (DEL) C) ATRENTA (INDIA) PVT. LTD. D) TOLUNA INDIA PVT. LTD. VS. ACIT (FORMERLY GREENFIELD ONLINE (P) LTD. 166 TTJ 128 (DEL) 11. 3 ON THE OTHER HAND THE LD DR RELIED ON FINDINGS OF DRP. 11. 4 WE HAVE CONSIDERED RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON THE RECORD. IN THE CASE OF AGNITY TECHNOLOGIES, ITA NO.3856/DEL/2010, A COORDINATE BENCH HAS HELD AS UNDER: - IT IS ARGUED THAT THE CASE OF THE ASSESSEE IS NOT COMPARABLE WITH INFOSYS TECHNOLOGIES LTD., THE REASON BEING THAT THE LATTER IS GIANT IN THE AREA OF DEVELOPMENT OF SOFTWARE AND IT ASSUMES ALL RISKS, LEADING TO HIGHER PROFIT. ON THE OTHER HAND, THE ASSESSEE IS A CAPTIVE UNI T OF ITS PARENT COMPANY IN THE USA AND IT ASSUMES ONLY LIMITED CURRENCY RISK. HAVING CONSIDERED THESE POINTS, WE ARE OF THE VIEW THAT THE CASE OF AFORESAID INFOSYS AND THE ASSESSEE ARE NOT COMPARABLE AT ALL AS SEEN FROM THE FINANCIAL DATA ETC. OF THE TWO C OMPANIES MENTIONED EARLIER IN THIS ORDER. THEREFORE, WE ARE OF THE VIEW THAT THIS CASE IS REQUIRED TO BE EXCLUDED 11. 5 THE AFORESAID ORDER WAS UPHELD BY THE HONBLE DELHI HIGH COURT AFTER TAKING NOTE OF THE CHART AS GIVEN BELOW: BASIC PARTICULAR INFOSYS TECHNOLOGIES LTD. ASSESSEE RISK PROFILE OPERATE AS FULL - FLEDGED RISK TAKING ENTREPRENEURS OPERATE AT MINIMAL RISKS AS THE 100 PERCENT SERVICES ARE PROVIDED TO AES NATURE OF SERVICES DIVERSIFIED - CONSULTING, APPLICATION DESIGN, DEVELOPMENT, RE - ENGINEERING AND MAINTENANCE SYSTEM INTEGRATION, PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT, ETC. (REFER PAGE 117 OF THE PAPER BOOK) CONTRACT SOFTWARE DEVELOPMENT SERVICES TURNOVER 20,264 CRORES 209.83 CRORES 12 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 OWNERSHIP BRANDED/PROP RIETARY PRODUCTS DEVELOPS/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSYS MCONNECT. ALSO THE COMPANY DERIVES SUBSTANTIAL PORTION OF ITS PROPRIETARY PRODUCTS (INCLUDING ITS FLAGSHIP BANKING PRODUCT SUITE FINACLE) ONSITE VS. OFFISHORE AS MUCH AS HALF OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY INFOSYS ARE ONSITE (I.E. SERVICES PERFORMED AT THE CUSTOMERS LOCATION OVERSEAS). AND OFFSHORE (50.20 PER CENT) REFER P. 117 OF THE PAPER BOOK) THAN HALF OF ITS SERVICE, INCOME FR OM ONSITE SERVICES THE APPELLANT PROVIDES ONLY OFFSHORE SERVICES (I.E. REMOTELY FROM INDIA) EXPENDITURE ON ADVERTISING/SAL ES PROMOTION AND BRAND BUILDING RS. 80 CRORES RS. NIL (AS THE 1 - PERCENT SERVICES ARE PROVIDED TO AES) EXPENDITURE ON RESEARCH AND DE VELOPMENT RS. 236 CRORES RS. NIL OTHER 100 PER CENT OFFSHORE (FROM INDIA) 11. 6 ON THE BASIS OF THE ABOVE CHART, THE HONBLE HIGH COURT AFFIRMED THE CONCLUSION THAT A CAPTIVE UNIT OF A COMPARABLE COMPANY WHICH ASSUMED ONLY A LIMITED RISK, CANNOT BE COM PARED WITH A GIANT COMPANY IN THE AREA OF DEVELOPMENT OF SOFTWARE WHO ASSUMES ALL TYPES OF RISKS LEADING TO HIGHER PROFITS. THE FACTS OF THE APPELLANT ARE AKIN AND THEREFORE, DO NOT WARRANT ANY DIFFERENT CONCLUSION. THE APPELLANT IS ALSO CAPTIVE SERVICE PR OVIDER TO ITS AE AND AS SUCH, M/S. INFOSYS LTD. IS NOT A VALID COMPARABLE WITH THE APPELLANT. 13 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 M/S PERSISTENT SYSTEMS LTD.: 1 2 . THE DRP REPELLED THE OBJECTION OF THE ASSESSEE AS UNDER: THE TAXPAYER PRIMARILY WANTS THIS COMPARABLE TO BE EXCLUDED ON ACCOUNT OF FUNCTIONALLY DIFFERENT SIGNIFICANT RPT>10% SIGNIFICANTLY HIGH TURNOVER THE TAXPAYER SUBMITTED THAT THE COMPANY IS INVOLVED IN DIVERSIFIED ACTIVITIES LIKE TESTING, PROFESSIONAL SERVICES AND CUSTOMER SUPPORT (SOURCE PAGE 76 OF ANNUAL REPORT MARCH 2010) HOWEVER, AS PER P - 82/AR INCOME THE COMPANY IS ENGAGED IN PROVIDING OUTSOURCED PRODUCT DEVELOPMENT SERVICES TO INDEPENDENT SOFTWARE VENDORS (ISVS) AND ENTERPRISES. THE COMPANY DERIVES A SIGNIFICANT PORTION OF ITS REVENUES FROM EXPORT OF SOFTWARE SERV ICES AND PRODUCTS. IT CAN BE SEEN FROM THE ABOVE THIS COMPANY IS ENGAGED IN SOFTWARE DEVELOPMENT SERVICES HENCE IT IS GOOD COMPARABLE AS MENTIONED ABOVE THAT IN A SERVICE INDUSTRY THERE IS NO DIRECT CO RELATION BETWEEN PROFITABILITY AND HIGH TURNOVER. FUR THER AS DISCUSSED ABOVE THE RPT FILTER OF 25% IS HELD TO BE A VALID FILTER HENCE THE TAXPAYERS OBJECTION IN THIS REGARD IS REJECTED. 1 2 . 1 BEFORE US THE LEARNED COUNSEL SUBMITTED AS UNDER: FUNCTIONALLY DIFFERENT AND SEGMENTAL DATA NO AVAILABLE .[ANNUAL REPORT PG. 99 & PG. 108] EVEN AS PER THE DR P , THE COMPANY DERIVES IS SUBSTANTIAL REVENUES FROM SERVICES AND PRODUCTS AND NOT JUST FROM SERVICES DIVERSIFIED BUSINESS VS. SOFTWARE DEVELOPMENT SERVICES TURNOVER OF RS. 5,000 CRORES AS COMPARED TO NIL OF THE APPELLANT [ANNUAL REPORT - PG. 106] COMMISSION TO AGENTS ON SALES RS. 30.31 CRORES WHICH DEMONSTRATES THAT THE COMPANY HAS SUBSTANTIAL INCOME FROM SALES [ANNUAL REPORT - PG. 107] 1 2 . 2 WE HAVE CONSIDERED THE RIVAL SUBMISSION AND PERUSED THE MATERIAL ON RECORD. THE COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT P ERSISTENT SYSTEMS LTD. IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE AS THE COMPANY IS INTO SOFTWARE DEVELOPMENT SERVICES AS WELL AS SOFTWARE PRODUCTS UNLIKE THE ASSESSEE WHO IS A CAPTIVE SERVICE PROVIDER. M OREOVER, N O SEGMENTAL DETAILS ARE AVAILABLE IN THE 14 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 ANNUAL REPORT . IT CAN BE THUS DERIVED THAT THE PRICES MAY HAVE BEEN INFLUENCED. THE RATIONALE OF APPLYING A RELATED PARTY FILTER IS DEFENDED. 1 2 . 3 THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. CSR INDIA PVT. LTD. IN TP NO. 1119/BANG/2011 HAS HELD AS UNDER: (I) TURNOVER FILTER 3.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. THE TPO HAD, WHILE SELECTING THE ABOVE 26 COMPARABLES, APPLIED A LOWER TURNOVER FILTER OF RS.1 CRORE BUT PREFERRED NOT TO APPLY ANY UPPER TURNOVER LIMIT. THE SIZE OF THE COMPARABLE IS AN IMPORTANT FACTOR IN COMPARABILITY. THE ICAI TP GUIDANCE NOTE HAS OBSERVED THAT THE TRANSACTION ENTERED INTO BY A RS.1000 CRORES COMPANY CANNOT BE COMPARED WIT H THE TRANSACTION ENTERED INTO BY A RS.10 CRORES COMPANY AND THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND RELATED ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. THE TPOS RANGE HAD RESULTED IN SELECTION OF COMPANIES AS COMPARABLE SUCH A S INFOSYS WHICH WAS 277 TIMES BIGGER THAN THAT OF THE ASSESSEE. THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT ITA NO.1231/BANG/2010 RELYING ON DUN AND BRADSTREETS ANALYSIS HAD HELD THAT TUR NOVER RANGE OF RS.1 CRORE TO 200 CRORES IS APPROPRIATE. THE SAID PROPOSITION HAS FOLLOWED BY THE EARLIER BENCHES OF THIS TRIBUNAL IN THE FOLLOWING CASES: (I) M/S. KODIAK NETWORKS (I) PVT. LTD V. ACIT ITA NO.1413/BANG/2010; (II) M/S GENESIS MICROCHIP (I) PVT. LTD. DCIT ITA NO.1254/BANG/2010; (III) ELECTRONIC FOR IMAGING INDIA PVT. LTD ITA NO.1171/BANG/2010; & (IV) M/S. TRILOGY E - BUSINESS SOFTWARE INDIA PRIVATE LTD. V. DCIT ITA NO.1054/BANG/2011 DATED 23.11.2012. 3.3.1 IN THE CASE OF M/S.GENISYS INTEG RATING SYSTEMS (INDIA) PVT. LTD. V. DCIT (SUPRA), RELYING ON DUN AND BRADSTREET, HAS OBSERVED AS UNDER: 9. .WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH ARE MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN THE PRICE AND ALSO ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAV E THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARE LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOUL D ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNO VER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE 15 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200 C RORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. 3.3.2 THE ABOVE VIEW HAS BEEN FOLLOWED IN THE RECENT ORDER OF THE TRIBUNAL IN THE CASE OF TRILOGY E BUSINESS (SUPRA). THE RELEVANT FINDINGS OF THE TRIBUNAL ARE EXTRACTED A S UNDER: 20. IN THIS REGARD WE FIND THAT THE PROVISIONS OF LAW POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CLEARLY LAY DOWN THE PRINCIPLE THAT THE TURNOVER FILTER IS AN IMPORTANT CRITERIA IN CHOOSING THE COMPARABLES. THE ASSESSEES TURNOVER IS RS.47,46,66,638. IT WOULD THEREFORE FALL WITHIN THE CATEGORY OF COMPANIES IN THE RANGE OF TURNOVER BETWEEN 1 CRORE AND 200 CRORES (AS LAID DOWN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (IND IA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010) . THUS, COMPANIES HAVING TURNOVER OF MORE THAN 200 CRORES HAVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES AS LAID DOWN IN SEVERAL DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE. APPLYING THOSE TES TS, THE FOLLOWING COMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY THE TPO VIZ. TURNOVER RS. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 CRORES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PE RSISTENT SYSTEMS LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 343.57 CRORES (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES.. IN VIEW OF THE ABOVE SAID REASONING AND THE ORDERS OF THE BENCHES OF BANGALORE TRIBUNAL CITED SUPRA, THE FOLLOWING 8 COMPANIES WILL HAVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES SELECTED BY THE TPO, NAMELY: FLEXTRONICS SOFTWARE SYSTEMS LIMITED; IGATE GLOBAL SOLUTIONS LIMITED; MINDTREE LIMITED; P ERSISTENT SYSTEMS LIMITED; SASKEN COMMUNICATION TECHNOLOGIES LIMITED; TATA ELXSI LIMITED; WIPRO LIMITED; & INFOSYS TECHNOLOGIES LIMITED. IT IS ORDERED ACCORDINGLY. 12. 4 FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL AND THE JUDGMENT OF HONBLE HIGH COURT OF DELHI IN THE CASE OF CIT V. AGINITY TECHNOLOGIES (SUPRA) WE HOLD THAT PERSISTENT SYSTEMS LTD. SHOULD NOT BE REGARDED AS A COMPARABLE . 1 3 THE NEXT ISSUE RELATES TO TREATMENT OF FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AS OPERATING ITEM. DURING THE COURSE OF HEARING, THE LEARNED COUNSEL SUBMITTED THAT THE FOREIGN EXCHANGE LOSS CANNOT BE ACCEPTED FOR THE PURPOSE OF CALCULATION OF THE MARGIN AND IN SUPPORT, HE RELIED UPON THE FOLLOWING DECISIONS: A) SAP LABS INDIA PVT. LTD. V. ACIT (2010) 6 ITR (TRIB) 81 DATED 30.08.2010 WHEREIN ITAT HELD THAT FOREIGN EXCHANGE FLUCTUATIONS ARE AN INTEGRAL 16 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 PART OF THE SALE PROCEEDS OF THE ASSESSEE CARRYING ON EXPORT BUSINESS AND THUS COULD NOT BE EXCLUDED FROM THE COMP UTATION OF THE OPERATING MARGIN OF THE ASSESSEE. B) FOUR SOFT V. DCIT (2012) 16 ITR (TRIB) 73 (HYD): C) CAPITAL IQ INFORMATION SYSTEMS (I) P. LTD. V. DCIT 25 ITR (TRIB) 185 (HYD) DATED 23.11.2012: RELIED ON SAP LABS DECISION, THAT FOREIGN EXCHANGE FLUCTU ATIONS ARE AN INTEGRAL PART OF THE SALE PROCEEDS OF THE ASSESSEE CARRYING ON EXPORT BUSINESS.. FURTHER, THIS ORDER OF CAPITAL IQ HAS BEEN AFFIRMED BY THE HONBLE ANDHRA PRADESH HIGH COURT VIDE AN ORDER DATED 05.06.2014 IN ITA NO. 305/2014 WHEREIN THE HIGH COURT DECLINED TO INTERFERE WITH THE ORDER OF THE ITAT ON AN APPEAL FILED BY THE REVENUE. D) RUSABH DIAMONDS V. ACIT: (2013) 155 TTJ (MUM) 386: ITAT HELD THAT FORWARD CONTRACTS FOR HEDGING OF FOREIGN CURRENCY EXPOSURE ON EXPORT AND IMPORT OF DIAMONDS WITH AES HAD NEXUS WITH EXPORT AND IMPORT ACTIVITY E) CURAM SOFTWARE INTERNATIONAL (P) LTD. V. ITO: [2014] 149 ITD 458 F) CISCO SYSTEMS (INDIA) PVT. LTD. V. DCIT (TS - 246 - ITAT - 2014(BANG) - TP] 1 4 HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE FIND THAT THE ISSUE IS NO LONGER RES - INTEGRA AND STANDS CONCLUDED BY THE DECISION OF THE COORDINATE BENCH IN THE CASE OF WESTFALIA SEPARATOR INDIA PVT. LTD. VS. ACIT ITA NO. 4446/D/02 FOR ASSESSMENT YEAR 2003 - 04 WHEREIN IT HAS BEEN HELD AS UNDER: WE HAVE HEARD THE RIVAL SUBM ISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE FOREX GAIN OR LOSS IS THE DIFFERENCE BETWEEN THE PRICE AT WHICH AN IMPORT OR EXPORT TRANSACTION WAS RECORDED IN THE BOOKS OF ACCOUNT ON THE BASIS OF RATE OF FOREIGN EXCHANGE THEN PREVAILING AND THE A MOUNT ACTUALLY PAID OR RECEIVED AT THE RATE OF FOREIGN EXCHANGE PREVAILING AT THE TIME OF ACTUAL PAYMENT OR RECEIPT. SINCE SUCH FOREX LOSS OR GAIN IS A DIRECT OUTCOME OF THE PURCHASE OR SALE TRANSACTION, IT PARTAKES OF THE SAME CHARACTER AS THAT OF THE TRA NSACTION TO WHICH IT RELATES. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. PRAKASH I. SHAH (2008) 115 ITD 167 (MUM) (SB) HAS HELD THAT FOREIGN EXCHANGE FLUCTUATION GAIN IS A PART OF EXPORT TURNOVER. THOUGH SUCH DECISION WAS RENDERED IN THE CON TEXT OF SECTION 80HHC, BUT THE SAME LOGIC APPLIES GENERALLY AS WELL. THE ESSENCE OF THE MATTER IS THAT ANY GAIN OR LOSS ARISING OUT OF CHANGE IN FOREIGN CURRENCY 17 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 RATE IN RESPECT OF TRANSACTION FOR IMPORT OR EXPORT OF GOODS IS NOTHING, BUT INHERENT PART OF THE PRICE OF IMPORT OR THE VALUE OF EXPORT. THE HON'BLE SUPREME COURT IN SUTLEJ COTTON MILLS LTD. VS. CIT 116 ITR 1 (SC) HAS HELD THAT : 'WHERE PROFIT OR LOSS ARISES TO AN ASSSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATION ITA NOS.4446 & 4447/DEL/2007 IN THE VALUE OF FOREIGN CURRENCY HELD BY IT, ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE TRADING PROFIT OR LOSS IF THE FOREIGN CURRENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS PART OF CIRCULATIN G CAPITAL EMBARKED IN THE BUSINESS'. WHEN WE READ THE RATIO OF THE CASE OF SUTLEJ COTTON (SC)(SUPRA) IN JUXTAPOSITION TO THAT OF THE SPECIAL BENCH IN CASE OF PRAKASH I SHAH (SUPRA), THERE REMAINS NO DOUBT THAT FOREX GAIN OR LOSS FROM A TRADING TRANSACTION IS NOT ONLY AN ITEM OF REVENUE NATURE, BUT IS, IN FACT, A PART OF THE PRICE OF IMPORT OR VALUE OF EXPORT TRANSACTION, AS THE CASE MAY BE. OPERATING EXPENSE IS ORDINARILY AN EXPENSE THAT A BUSINESS INCURS AS A RESULT OF PERFORMING ITS NORMAL BUSINESS OPERAT IONS. AS THE BUSINESS OF 'ASSEMBLY' DONE BY THE ASSESSEE UNDER THIS SEGMENT IS NOT POSSIBLE WITHOUT PURCHASES AND FOREX GAIN IS IN RELATION TO SUCH PURCHASE TRANSACTIONS, WE HAVE NO HESITATION IN HOLDING THAT IT IS AN ITEM OF OPERATING COST. 16 WE FIND THAT THE AFORESAID BASIS THAT FOREIGN EXCHANGE GAIN/LOSS SHOULD BE TREATED AS NON - OPERATING ITEM IS BASED ON THE NOTIFICATION OF CBDT ISSUED ON 18.9.2018 ON SAFE HARBOUR. HOWEVER, SUCH A CONTENTION HAS BEEN REJECTED IN THE AFORESAID ORDER OF THE COORDINATE BENCH WHEREIN IT WAS HELD AS UNDER: 4.8. THE LD. AR RELIED ON RULE 10T(J) TO CONTEND THAT LOSS ARISING ON ACCOUNT OF FOREIGN CURRENCY FLUCTUATIONS CANNOT BE INCLUDED IN THE OPERATING EXPENSE. WE ARE NOT PERSUADED TO GIVE ANY MILEAGE TO THE LD. AR ON THIS COUNT FOR THE SIMPLE REASON THAT RULE 10T IS A PART OF SAFE HARBOR RULES NOTIFIED ON 18.09.2013 WHICH ARE NOT APPLICABLE TO THE ASSESSMENT YEAR UNDER CONSIDERATION. 15 IN LIGHT OF THE ABOVE, WE DIRECT THE AO/TPO TO TREAT THE FOREIGN EXCHANGE GAIN/LOSS A S AN OPERATING ITEM. AS SUCH, THE GROUND RAISED BY THE APPELLANT IS ALLOWED. 16 HAVING REGARD TO THE ABOVE, WE DIRECT THE ASSESSING OFFICER/TRANSFER PRICING OFFICER TO COMPUTE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASS ESSEE WITH ITS ASSOCIATED ENTERPRISE KEEPING IN VIEW THE OBSERVATIONS MADE BY US IN THE PRECEDING PARAGRAPHS. 18 OF 1 8 ITA NO. 6737/DEL/2014 ASST. YEAR 2010 - 2011 19 . IN THE RESULT APPEAL IS ALLOWED IN TERMS OF THE DIRECTION S ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 2 6 /06/ 2015. - S D / - - S D / - (S. V. MEHROTRA ) (A.T.VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 2 6 /06/2015 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI