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

ITA 700/DEL/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 7709 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 6 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 09-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; Share purchase agreement; Opportunity of being heard; International transaction; Bonafide belief; Question of law; Set aside
• Section: 92D; 234B; 133(6); 201; 43; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: I-1, NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER ITA NO.700/DEL./2016 ASSESSMENT YEAR: 2011-12 M/S. FISERV INDIA PVT. LTD., REGUS ELEGANCE, LEVEL-2, ELEGANCE JASOLA DISTRICT CENTRE, OLD MATHURA ROAD, NEW DELHI VS. ACIT, CIRCLE-9(1), C.R. BUILDING, I.P. ESTATE, NEW DELHI PAN :AACCR0787L (APPELLANT) (RESPONDENT) ORDER PER O.P. KANT, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST FIN AL ASSESSMENT ORDER DATED 30/10/2015 PASSED BY THE ASS ISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-9, NEW DELHI [IN SHORT THE LD. ASSESSING OFFICER (AO)], PURSUANT TO THE DIREC TION DATED 31/08/2015 OF THE LEARNED DISPUTE RESOLUTION PANEL- I, NEW DELHI [IN SHORT THE LD. DRP]. THE GROUNDS RAISED BY THE ASSESSEE ARE REPRODUCED AS UNDER: 1. THAT THE AO ERRED IN ASSESSING THE TOTAL INCOME OF THE APPELLANT AT RS.22,20,27,590/- AS AGAINST INCOME OF RS.1,90,2 7,743/- APPELLANT BY SHRI SACHIT JOLLY, ADV. SHRI AAYUSH NAGPAL, ADV. RESPONDENT BY SHRI SURENDERPAL, CIT(DR) DATE OF HEARING 23.07.2020 DATE OF PRONOUNCEMENT 31.08.2020 2 ITA NO. 700/DEL./2016 RETURNED BY THE APPELLANT AFTER MAKING TRANSFER PRI CING ADDITION OF RS.20,29,99,837/- IN RESPECT OF INTERNATIONAL TRANS ACTION OF SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE APPEL LANT TO ITS PARENT COMPANY, VIZ., FISERV GLOBAL SERVICES INC., USA. 2. THAT THE TPO AND THE DRP ERRED IN PROPOSING AN A DJUSTMENT TO THE ARMS LENGTH PRICE COMPUTED BY THE APPELLANT WITHOU T APPRECIATING THAT SINCE THE APPELLANT WAS ELIGIBLE TO CLAIM DEDUCTION UNDER SECTION 10A OF THE ACT IN RESPECT O F INCOME FROM THE INTERNATIONAL TRANSACTION ENTERED INTO BETWEEN THE APPELLANT AND ITS AE, THERE WAS NO MOTIVE TO SHIFT PROFITS OU TSIDE INDIA BY MANIPULATING THE PRICES CHARGED IN INTERNATIONAL TR ANSACTIONS, WHICH IS A PRE-REQUISITE TO MAKE ANY ADJUSTMENT UND ER THE PROVISIONS OF CHAPTER X OF THE ACT. 3. THAT THE AO ERRED IN MAKING A REFERENCE TO THE T PO WITHOUT RECORDING REASONS ON THE BASIS WHICH THE AO CONSIDE RED IT 'NECESSARY OR EXPEDIENT' TO REFER THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED E NTERPRISE ('AE'). 4. THAT ON FACTS AND IN CIRCUMSTANCES OF THE CASE A ND IN LAW, THE AO AND DRP ERRED IN PARTLY CONFIRMING THE ACTION OF TH E TPO IN MAKING AN ADDITION TO THE INCOME OF THE APPELLANT W ITHOUT APPRECIATING THAT THE APPELLANT HAD COMPUTED ARM'S LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTION ENTERED INT O BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE ('AE') USI NG THE MOST APPROPRIATE METHOD (I.E. THE TRANSACTIONAL NET MARG IN METHOD), MAINTAINED ALL THE INFORMATION AND DOCUMENTATION RE QUIRED UNDER SECTION 92D OF THE ACT, USED INFORMATION/DATA AVAIL ABLE IN THE DATABASE (PROWESS DATABASE 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 FU RNISH THE TRANSFER PRICING STUDY ('TP STUDY). 5. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACTI ON OF THE TPO IMPLIEDLY REJECTING THE TRANSFER PRICING STUDY OF T HE 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 CONFIRMING THE ACTION OF THE TPO I N APPLYING THE FOLLOWING FILTERS: A. USE OF ONLY CURRENT YEAR (I.E. FY 2010-11) DATA FOR COMPARABILITY DESPITE THE FACT THAT AT THE TIME OF COMPARISON DONE BY THE APPELLANT, THE COMPLETE DATA FOR THE FY 2010- 11 WAS NOT AVAILABLE IN THE PUBLIC DOMAIN, B. REJECTING COMPANIES WITH TURNOVER BELOW RS.5 CR ORES WITHOUT APPLYING AN UPPER FILTER OF RS. 500 CRORES 3 ITA NO. 700/DEL./2016 C. REJECTING COMPANIES WHOSE REVENUES FROM SERVICE S IS LESS THAN 75% OF THE TOTAL OPERATING REVENUES WITHOUT APPRECIATING THAT THE SAID FILTER HAS NO EFFECT ON COMPARABILITY ANALYSIS, D. REJECTING COMPANIES WITH EXPORT SALES OF LESS T HAN 75% OF TOTAL SALES, E. REJECTING COMPANIES WITH PERSISTENT LOSSES IN T HE LAST THREE YEARS, F. REJECTING COMPANIES WHERE REVENUE FROM RELATED PARTY TRANSACTIONS EXCEEDS 25% OF THE TOTAL REVENUE WITHO UT APPRECIATING THAT COMPANIES WITH ANY RELATED PARTY TRANSACTIONS SHOULD HAVE BEEN EXCLUDED OR ELSE COMP ANIES WITH REVENUE FROM RPT OF MORE THAN 10-15% TO SALES SHOULD HAVE BEEN EXCLUDED, G. REJECTING COMPANIES WITH EMPLOYEE COST LESS THA N 25% OF TOTAL OPERATING COST, WITHOUT APPRECIATING THAT SUC H A FILTER IS NOT DECISIVE FOR TRACING OUT SERVICE COMPANIES S INCE THERE IS NO COMPULSION ON COMPANIES TO NECESSARILY KEEP PERSONNEL ON THEIR ROLLS H. REJECTING COMPANIES WITH DIFFERENT FINANCIAL YE AR WITHOUT ASSIGNING ANY COGENT REASONS FOR APPLYING THE SAID FILTER, 7. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACTI ON OF THE TPO IN REJECTING THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT WITHOUT PROVIDING ANY COGENT AND/OR SUFFICIENT REAS ONING. 8. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACTI ON OF THE TPO IN SELECTING THE FOLLOWING COMPANIES WHICH WERE NOT FU NCTIONALLY COMPARABLE TO THE APPELLANT FOR THE PURPOSES OF BEN CHMARKING THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE APPEL LANT: A) E-INFOCHIPS LTD. B) E-ZEST SOLUTIONS LTD. C) INFOSYS LTD. D) LARSEN & TOUBRO INFOTECH LTD. E) PERSISTENT SYSTEMS LTD. F) PERSISTENT SYSTEMS & SOLUTIONS LTD. G) SASKEN COMMUNICATION TECHNOLOGIES LTD. H) WIPRO TECHNOLOGY SERVICES LTD. I) ZYLOG SYSTEMS LTD. 9. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACT ION OF THE TPO IN SELECTING E-INFOCHIPS BANGALORE LTD. AS A COMPARABL E 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. 4 ITA NO. 700/DEL./2016 10. THAT THE AO AND DRP ERRED IN CONFIRMING THE AC TION OF THE TPO IN SELECTING WIPRO TECHNOLOGY SERVICES LTD. (WTS] WITH OUT APPRECIATING THAT THE ENTIRE INCOME OF WTS WAS DERI VED FROM RENDERING SERVICES TO THE CITIGROUP UNDER A FIXED C ONTRACT EXECUTED IN LIEU OF ACQUISITION OF WTS BY WIPRO LTD. FROM TH E CITIGROUP AND, THEREFORE, FAILED THE RPT FILTER AND EXTRAORDINARY EVENT FILTER APPLIED BY THE TPO. 11. THAT THE DRP ERRED IN CONFIRMING THE ACTION OF THE TPO IN TREATING FOREIGN EXCHANGE GAIN/LOSS AND HEDGING COSTS/PREMIU M AS A NON- OPERATING INCOME/EXPENSE. 12. THAT THE AO AND DRP ERRED IN CONFIRMING THE ACT ION OF THE TPO IN NOT ALLOWING RISK ADJUSTMENT CLAIMED BY APPELLANT I N TERMS OF RULE 10B(L)(E) READ WITH RULE 10B(3) OF THE INCOME TAX RULES, 1962. 13. THAT THE DRP ERRED IN LAW IN CONFIRMING THE A CTION OF THE AO/TPO IN MECHANICALLY INITIATING PENALTY PROCEEDING UNDER SECTION 271(L)(C) OF THE ACT BY HOLDING THAT PENALTY UNDER SECTION 271(L)(C) IS CONSEQUENTIAL IN NATURE. 14. 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. THE ABOVE GROUNDS ARE IN ALTERNATIVE AND WITHOUT PR EJUDICE TO EACH OTHER, AND THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER OR VARY FROM THE ABOVE GROUNDS OF THE APPEAL BEFORE OR AT THE TIME OF HEARING. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSE SSEE COMPANY IS INCORPORATED IN INDIA UNDER THE COMPANIE S ACT, 1956 ON 31/05/2002 AS A WHOLLY-OWNED SUBSIDIARY OF RESU LTS INTERNATIONAL SYSTEM INC, USA, WHICH IN TURN IS 10 0% SUBSIDIARY OF FISERV INC, USA. THE COMPANY IS EN GAGED IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT AND MAIN TENANCE SERVICES MAINLY TO ITS ASSOCIATED ENTERPRISES (AES) THROUGH ITS TWO UNITS LOCATED IN SOFTWARE TECHNOLOGY PARK SCHEME (S TPI) AT NOIDA AND PUNE. FOR THE YEAR UNDER CONSIDERATION, THE ASS ESSEE FILED ITS 5 ITA NO. 700/DEL./2016 RETURN OF INCOME ON 30/11/2011, DECLARING TOTAL INC OME OF 1,90,27,743/- AFTER CLAIMING DEDUCTION UNDER SECTIO N 10A OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT). THE RETU RN FILED BY THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT. THE ASSESSING OFFICER ISSUED STATUTORY NOTICES, WHICH WERE DULY C OMPLIED. DURING THE SCRUTINY PROCEEDINGS, THE ASSESSING OFFI CER OBSERVED INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSES SEE WITH ITS ASSOCIATED ENTERPRISES. THE LEARNED AO REFERRED THE MATTER OF DETERMINATION OF THE ARMS-LENGTH PRICE OF THE SAID INTERNATIONAL TRANSACTIONS TO THE LEARNED TRANSFER PRICING OFFICE R (TPO). 2.1 THE LEARNED TPO OBSERVED THAT AS PER THE SERVICE AG REEMENT BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISES , IT HAS BEEN COMPENSATED ON COST +15%. THE INTERNATIONAL TRANSAC TIONS CARRIED OUT BY THE ASSESSEE ARE REPRODUCED AS UNDER : SL. NO. NAME OF TRANSACTION METHOD SELECTED ARMS LENGTH PRICE AS PER TAXPAYER (I) SOFTWARE DEVELOPMENT SERVICES TNMM RS.2,790,704,920 (II) REIMBURSEMENT OF EXPENSES N.A. RS.62,696,974 2.2 THE ASSESSEE HAS USED TRANSACTIONAL NET MARGIN MET HOD (TNMM) FOR DETERMINING ARMS-LENGTH PRICE OF THE IN TERNATIONAL TRANSACTION AND OPERATION PROFIT/OPERATING COST (OP /OC) AS THE PROFIT LEVEL INDICATOR (PLI). THE ASSESSEE SELECTED A SET OF 13 COMPARABLE COMPANIES WITH AVERAGE MARGIN OF 13.66% USING MULTIPLE YEAR DATA. THE ASSESSEE WORKED OUT ITS OWN MARGIN AT 16.01%. ACCORDING TO THE ASSESSEE, THE PLI OF THE A SSESSEE BEING HIGHER THAN THE AVERAGE PLI OF THE COMPARABLE COMPA NIES, THE INTERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESS EE WAS AT 6 ITA NO. 700/DEL./2016 ARMS-LENGTH. THE LEARNED TPO, HOWEVER, APPROVED TH REE COMPANIES OUT OF THE 13 COMPANIES SELECTED BY THE A SSESSEE AND REJECTED THE BALANCE ON THE GROUND THAT SAME FAILED VARIOUS FILTERS APPLIED FOR SHORT LISTING COMPARABLE COMPANIES. THE LEARNED TPO CARRIED OUT HIS OWN SEARCH OF THE COMPARABLE COMPAN IES AND ADDED 16 MORE COMPANIES TO THE SET OF THE COMPARABL E COMPANIES. THE AVERAGE PLI OF THE 19 COMPANIES WAS WORKED OUT TO 22.68% AND AFTER APPLYING THE MARGIN OVER THE OP ERATIONAL COST, THE LEARNED TPO IN HIS ORDER DATED 16/01/2015 PROPOSED AN ADJUSTMENT OF 20,29,99,837/- TO THE VALUE OF THE INTERNATIONAL TRANSACTION. THE ASSESSING OFFICER ISSUED DRAFT ASS ESSMENT ORDER ON 27/02/2015, AFTER INCORPORATING TRANSFER PRICING ADJUSTMENT OF 20,29,99,837/- AND OTHER ADDITION FOR DISALLOWANCE OF CREDIT CARD EXPENSES. AGGRIEVED WITH THE ADDITIONS PROPOSE D BY THE ASSESSING OFFICER, THE ASSESSEE FILED OBJECTIONS BE FORE THE LEARNED DRP. 2.3 THE LEARNED DRP AFTER CONSIDERING OBJECTION OF THE ASSESSEE ISSUED FOLLOWING DIRECTIONS: 1. TO CHECK THE EMPLOYEE COST OF M/S. LGS GLOBAL L TD. AND TO INCLUDE IN THE FINAL LIST OF COMPARABLES COMPANIES IF IT PASSES THE EMPLOYEE COST FILTER. 2. TO COMPUTE THE MARGIN COMPUTATION AS PER SAFE HA RBOUR RULES AND PROVIDE THE COPY OF COMPUTATION OF PROFIT MARGIN OF BOTH TAXPAYER AND THE COMPARABLES ALONGWITH THE ORDER. 2.4 THE LEARNED TPO GIVEN EFFECT TO THE DIRECTION OF T HE LEARNED DRP, WHEREIN HE MAINTAINED THE TRANSFER PRICING ADJ USTMENT AS PROPOSED IN THE DRAFT ASSESSMENT ORDER. PURSUANT TO THE DIRECTION OF THE LEARNED DRP, THE ASSESSING OFFICER PASSED TH E IMPUGNED 7 ITA NO. 700/DEL./2016 FINAL ASSESSMENT ORDER. AGGRIEVED WITH THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBU NAL RAISING THE GROUNDS AS REPRODUCED ABOVE. 3. BEFORE US, BOTH THE PARTIES HAVE APPEARED THROUGH VIDEOCONFERENCING. THE ASSESSEE FILED PAPER-BOOKS A ND OTHER DOCUMENTS ELECTRONICALLY. BEFORE US, THE LEARNED CO UNSEL OF THE ASSESSEE SUBMITTED THAT ASSESSEE IS INTERESTED ONLY IN CHALLENGING THE GROUND NO. 8 OF THE APPEAL WHEREIN 8 COMPANIES INCLUDED BY THE LEARNED TPO IN THE SET OF THE COMPARABLES ARE S OUGHT TO BE EXCLUDED. HE FURTHER SUBMITTED THAT EVEN IF THE COM PANIES, NAMELY, E-INFO CHIPS LTD., E-ZEST SOLUTIONS LTD., I NFOSYS LTD. AND WIPRO TECHNOLOGY SERVICES LTD. ARE EXCLUDED FROM TH E FINAL SET OF THE COMPARABLE, THE AVERAGE PLI OF THE COMPARABLES COMPANIES WILL BE IN THE RANGE OF PLI OF THE ASSESSEE AND NO TRANSFER PRICING ADJUSTMENT MIGHT BE REQUIRED. 4. WE HAVE HEARD BOTH THE PARTIES ON THE ISSUE OF INCLUSION/EXCLUSION OF THE EIGHT COMPARABLES. BEFOR E WE PROCEED TO ADJUDICATE INCLUSION/EXCLUSION OF COMPANIES FROM THE SET OF THE COMPARABLES, IT IS MOST RELEVANT TO SUMMARIZE THE FUNCTIONS, ASSETS AND RISK (FAR) ANALYSIS OF THE ASSESSEE I.E. PROFIT OF THE ASSESSEE, WHICH THE ASSESSEE HAS REPORTED IN ITS TR ANSFER PRICING STUDY FILED BEFORE THE LEARNED TPO. PROFILE OF THE ASSESSEE: 5. (I) IN SCHEDULE-G TO THE PROFIT AND LOSS ACCOUNT ON PAGE 12 OF THE PAPER-BOOK (VOLUME-I) REVENUE OF RS.271,60,67,008/- HAS BEEN SHOWN FROM SOFTWARE SERVICES. 8 ITA NO. 700/DEL./2016 (II) IN NOTES TO FINANCIAL STATEMENTS (SCHEDULE -M) ON PAGE 15 OF THE PAPER-BOOK (VOLUME -I), THE BACKGROUND CLAUSE READS THAT THE COMPANY WAS INCORPORATED TO PROVIDE SOFTWARE DEVELOPMENT SERVICES, CONVERSION, DATA ENTRY AND IMPLEMENTATION OF THE SOFTWARE. (III) ON PAGE 23 OF THE PAPER-BOOK (VOLUME-I), CLAUSE 8 OF NOTICE TO THE FINANCIAL STATEMENTS (SCHEDULE-M), SEGMENT REPORTING HAS BEEN PROVIDED AS UNDER: SEGMENT REPORTING THE COMPANY PROVIDES SOFTWARE DEVELOPMENT SERVICES, CONVERSION, DATA ENTRY AND IMPLEMENTATION OF SOFTWA RE AND IT ENABLES SERVICES. THE DISCLOSURES AS REQUIRED UN DER ACCOUNTING STANDARD 17 ON SEGMENT REPORTING HAS NOT BEEN PROVIDED AS THE COMPANY DEALS IN ONE BUEINSS SEGMEN T AND IN ONE GEOGRAPHIC AREA. THUS, THE ASSESSEE PROVIDES SOFTWARE DEVELOPMENT SERVICES AND IT ENABLED SERVICES ALSO. (IV) THE PROFILE OF THE ASSESSEE HAS BEEN REPORTED IN THE TRANSFER PRICING STUDY (PAGE 33 OF THE PAPER-BOOK VOULME-1), WHICH READS THAT THE ASSESSEE HAS BEEN ESTABLISHED TO RENDER SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES, DATA ANALYTICS/GLOBAL ANALYSI S TO FISERV GLOBAL SERVICES INC AND THE ASSESSEE IS A PROPERTY AND CASUALTIES INSURANCE (P &C) EXPERT FOR (A) OUTSOURCING FOR INFORMATION SYSTEMS (B) MANAGEMENT OF NEW OR REPLACEMENT SYSTEMS AND (C) PROJECT DEVELOPMENT AND MANAGEMENT. (V) THE ASSESSEE HAS PROVIDED VARIOUS STEPS OF T HE FUNCTIONS CARRIED FOR PROVIDING SERVICES TO THE AES ON 9 ITA NO. 700/DEL./2016 PAGE 54 OF THE PAPER-BOOK VOLUME 1, WHICH IS PART O F THE TRANSFER PRICING STUDY. THE FUNCTIONS PERFORMED BY THE ASSESSEE INCLUDE PROJECT PLAN, ANALYSIS, DESIGN , BUILD AND TESTING, STAFFING AND RECRUITMENT, PERSON AL MANAGEMENT AND ADMINISTRATION ETC. (VI) ON PAGE 55 OF THE PAPER-BOOK (VOLUME-1), IT HA S AGAIN BEEN REITERATED THAT THE ASSESSEE RENDERS SOFTWARE DEVELOPMENT AND MAINTENANCE SERVICES TO ASSOCIATED ENTERPRISES ON PROJECT BASIS. 6. IN VIEW OF THE ABOVE DETAILS PROVIDED ABOUT THE AS SESSEE IN THE TRANSFER PRICING STUDY, WE CAN CHARACTERIZE THE ASSESSEE AS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT AND IT E NABLED SERVICES OR SAY ENGAGED IN PROVIDING SOFTWARE SER VICES. 7. IN BACKGROUND OF THE PROFILE OF THE ASSESSE, NOW W E PROCEED TO ADJUDICATE INCLUSION/EXCLUSION OF THE COMPANIES AS UNDER: E-INFOCHIPS LTD. 8. THE LD. COUNSEL OBJECTED INCLUSION OF THE COMPANY ON TWO GROUNDS. FIRSTLY, ABSENCE OF SEGMENT PROFITABILITY AND SECONDLY, THE COMPANY FAILED TO MEET THE FILTER OF SERVICE RE VENUE MORE THAN 75%. THE LEARNED COUNSEL REFERRED TO PAGE 155 OF AP B: VOLUME-I (PAGE 41 OF ANNUAL REPORT OF THE COMPANY) AND SUBMI TTED THAT THE COMPANY IN ADDITION TO DEVELOPMENT AND MAINTENA NCE OF THE COMPUTER SOFTWARE, WAS ENGAGED IN SOFTWARE DEVELOPM ENT CONSULTING AND IN MANUFACTURING OF EVM AND VDB EL ECTRONIC BOARD (HARDWARE DIVISION). HE ALSO REFERRED TO OTHE R PAGES OF THE ANNUAL REPORT TO EMPHASISE THAT THE COMPANY WAS ENG AGED IN 10 ITA NO. 700/DEL./2016 PURCHASE AND SALE OF THE HARDWARE. FURTHER, HE REFE RRED THAT THE LEARNED TPO HAS APPLIED FILTER OF SERVICE INCOME MO RE THAN 75% FOR SELECTION OF THE COMPARABLE COMPANIES, BUT THE INSTANT COMPANY HAS SHOWN REVENUE FROM SOFTWARE DEVELOPMENT AMOUNTING TO 19,21,09,661/- OUT OF THE TOTAL REVENUE OF 26,03,84,251/-, WHICH CONSTITUTE 73.77% AND THUS, T HE COMPANY FAILS THE FILTER APPLIED BY THE LEARNED TPO. THE LE ARNED COUNSEL SUBMITTED THAT THE LEARNED DRP HAS COMBINED REVENUE FROM THE OTHER SERVICES TO HOLD THAT THE COMPANY SATISFY THE FILTER OF SERVICE INCOME MORE THAN 75%. IN VIEW OF THE ABOVE ARGUMENT S, THE LEARNED COUNSEL SOUGHT TO EXCLUDE THIS COMPANY FROM FINAL SET OF COMPARABLES. 8.1 THE LEARNED DR, ON THE OTHER HAND, RELIED ON THE OR DER OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE COMPAN Y IS PRIMARILY IN SOFTWARE DEVELOPMENT WHICH IS EVIDENT FROM VARIOUS PAGES OF THE ANNUAL REPORT OF THE COMPANY. HE REFER RED TO PAGE 36 OF THE ANNUAL REPORT (PAGE 150 OF THE PAPER-BOOK VOL UME-1) INDICATING INFORMATION ABOUT THE PRIMARY SEGMENT, W HICH MANIFEST THAT THE COMPANY IS PRIMARILY ENGAGED IN S OFTWARE DEVELOPMENT AND IT ENABLED SERVICES. ON THE ISSUE O F HARDWARE DIVISION, HE SUBMITTED THAT REVENUE FROM THE HARDWA RE DIVISION IS LESS THAN 15% AND THEREFORE THE ASSESSEE SATISFY TH E FILTER OF SERVICE INCOME APPLIED BY THE LEARNED TPO. 8.2 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES. ON PERUSAL OF THE ORDER OF THE LEARNED DRP WE FIND THAT LEARNED D RP HAS UPHELD THE FILTER OF THE REJECTION OF THE COMPANIES WITH S ERVICE INCOME LESS THAN 75%. THE LD DRP HAS OBSERVED THAT THIS FI LTER HAS BEEN 11 ITA NO. 700/DEL./2016 UPHELD IN THE CASE OF THE ASSESSEE BY THE TRIBUNAL IN ASSESSMENT YEAR 2010-11 IN ORDER DATED 26/06/2015. 8.3 FURTHER, THE LEARNED DRP HAS REPRODUCED A TABLE OF INCOME FROM SOFTWARE SERVICES AND COMPUTER HARDWARE AND A CCORDING TO WHICH, REVENUE FROM SOFTWARE SERVICES CONSTITUTE 85 % OF THE TOTAL RECEIPT OF RS.26,03,84,251/- (I.E. RS.22,11,35,689 + 3,92,48,562). FOR READY REFERENCE, SAID TABLE IS REPRODUCED AS UN DER: 01/04/2010 TO 31/03/2011 DETAILS OF PRINCIPAL PRODUCTS AND SERVICES. UNLESS OTHERWISE SPECIFIED, ALL MONETARY VALUES ARE IN INR 1. 2. ITC NUMBER OF PRODUCT N.A. N.A. DESCRIPTION OF PRODUCT OF SERVICES SOFTWARE SERVICES COMPUTER HARDWARE` UNIT OF MEASUREMENT OF PRINCIPAL PRODUCT OR SERVICES N.A. N.A. TURNOVER OF PRINCIPAL PRODUCT OR SERVICES 22,11,35,689 3,92,48,562 8.4 THE OBJECTION OF THE LEARNED COUNSEL IS THAT LEARN ED DRP CONSIDERED SOFTWARE SERVICES OTHER THAN THE SOFTWAR E DEVELOPMENT FOR ARRIVING AT FIGURE OF 85%, WHEREAS THE ASSESSEE IS ENGAGED IN PROVIDING PURELY SOFTWARE DEVELOPMENT SERVICES. THE LEARNED TPO HAS EXTRACTED SCHEDULE OF THE INCOME HAVING DETAIL OF REVENUE IN THE ORDER. FOR READY REFERENCE SAID TABLE IS REPROD UCED AS UNDER: 01/04/2010 TO 31/03/2011 01/04/2009 TO 31/03/2010 OPERATING REVENUE NET (ABSTRACT) OPERATING REVENUE GROSS(ABSTRACT) REVENUE SERVICE GROSS (ABSTRACT) REVENUE INFORMATION TECHNOLOGY SERVICES (ABSTRACT) REVENUE SOFTWARE DEVELOPMENT 19,21,09,661 10,54,19, 554 REVENUE HARDWARE MAINTENANCE 3,92,48,562 2,32,44,55 9 REVENUE INFORMATION TECHNOLOGY 2,90,26,023 42,60,34 4 12 ITA NO. 700/DEL./2016 COUNSELTANCY REVENUE INFORMATION TECHNOLOGY SERVICES 26,03,84,251 13,29,250 REVENUE SERVICES GROSS 26,03,84,251 13,29,250 OPERATING REVENUE GROSS 26,03,84,251 13,29,250 OPERATING REVENUE NET 26,03,84,251 13,29,250 8.5 ON PERUSAL OF THE CHART, IT IS EVIDENT THAT REVENU E FROM HARDWARE MAINTENANCE IS OF 3,92,48,562/- AND BALANCE IS FROM SOFTWARE DEVELOPMENT AND OTHER IT ENABLED SERVICES. THE FUNCTION OF THE ASSESSEE UNDER COMPARISON ARE ALSO SOFTWARE DEVELOPMENT AND IT ENABLED SERVICES AND THIS CONTENTION OF THE LEARNED COUNSEL THAT ASSESSEE IS ENGAGED ONLY IN PROVIDING SOFTWARE DEVELOPMENT SERVICES IS NOT CORRECT. IN THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE REVENUE IS SHOWN FROM THE SOFTWARE SERVICES AND THUS WE DO NOT FIND ANY ERROR IN THE FINDING OF THE LEARNED DRP THAT SERVICE REVENUE OF THE COMPANY IS MORE 85% OF THE TOTAL REVENUE AND IT SATISFIES THE FILTER OF SERVICE INCO ME MORE THAN 75%, THEREFORE THE PROFIT RESULTS OF THE COMPANY A RE ELIGIBLE FOR COMPARISON WITH THE SOFTWARE SERVICES OF THE ASSESS EE. HOWEVER, DETAILS OF MARGIN ON HARDWARE SALES IS NOT AVAILABL E AND IF THE MARGIN ON HARDWARE IS TOO HIGH AS COMPARED TO SOFTW ARE SERVICES, THE COMPANY MAY NOT BE SUITABLE FOR COMPARISON. DUE TO LACK OF SUFFICIENT INFORMATION IN RESPECT OF THE COMPANY AV AILABLE IN THE PUBLIC DOMAIN, IN THE INTEREST OF SUBSTANTIAL JUSTI CE, WE FEEL APPROPRIATE TO RESTORE THE ISSUE OF COMPARISON TO T HE LD AO/TPO WITH THE DIRECTION TO THE TPO TO OBTAIN SUCH INFORM ATION IN THE FORM OF RELEVANT SCHEDULES OF THE PROFIT & LOSS ACC OUNT OF THE SAID ENTITY AS WELL AS THE SEGMENTAL DETAILS OF THE HARD WARE DIVISION, IF ANY, DIRECTLY FROM THE SAID ENTITY AND THEN DECIDE THE ISSUE OF COMPARABILITY. WE, THEREFORE, SET ASIDE THE FINDING OF LEARNED TPO 13 ITA NO. 700/DEL./2016 FOR INCLUDING THE COMPANY INTO SET OF COMPARABLES A S WELL AS THE DIRECTION GIVEN BY THE DRP ON THIS ISSUE AND RESTOR E THE MATTER TO THE FILE OF THE ASSESSING OFFICER/TPO FOR DECIDING THE SAME AFRESH IN THE LIGHT OF THE OBSERVATIONS ALREADY MADE BY US , AFTER GIVING THE ASSESSEE A PROPER AND SUFFICIENT OPPORTUNITY OF BEING HEARD. E-ZEST SOLUTIONS LIMITED. 9. THE LD. TPO INCLUDED THE COMPANY INTO SET OF COMPAR ABLES ON THE GROUND THAT THE COMPANY IS PRIMARILY ENGAGED IN SOFTWARE DEVELOPMENT SERVICES. HE REFERRED TO INFORMATION PU RSUANT TO THE SCHEDULE VI OF THE COMPANIES ACT, 1956 AND OBSERVED THAT INFORMATION RELATED TO STOCK WAS NOT APPLICABLE IN THE CASE OF THE ASSESSEE. BEFORE THE LEARNED DRP THE ASSESSEE OBJEC TED INCLUSION OF THE COMPANY ON THE GROUND OF FUNCTIONAL DISSIMIL ARITY, DEALING IN SOFTWARE PRODUCT CONCEPTUALIZATION, RESEARCH AND DEVELOPMENT AND DEVELOPMENT OF THE SOFTWARE PRODUCTS. THE LEARN ED DRP REFERRED TO THE ANNUAL REPORT OF THE COMPANY TO HIG HLIGHT THAT SOFTWARE PRODUCT DEVELOPMENT INCLUDED PRODUCT DESIG N AND DEVELOPMENT AND PRODUCT MAINTENANCE AND SUPPORT ETC . THE LEARNED DRP OBSERVED FROM THE ANNUAL REPORT THAT GE NERIC NAME OF THE PRINCIPAL PRODUCT OF THE COMPANY WAS COMPUTE R SOFTWARE DEVELOPMENT. 9.1 BEFORE US THE LEARNED COUNSEL OF THE ASSESSEE REIT ERATED THE SUBMISSIONS MADE BEFORE THE LEARNED DRP AND SUBMITT ED THAT COMPANY IS AN SEI-CMMI LEVEL -3 & ISO 9001-2008 CER TIFIED PRODUCT ENGINEERING AND SOFTWARE DEVELOPMENT COMPAN Y. HE SUBMITTED THAT COMPANY CONCEPTUALIZE ITS SOFTWARE A S PER THE 14 ITA NO. 700/DEL./2016 REQUIREMENT OF CLIENTS OR ITS OWN AS AGAINST THE AS SESSEE WHO IS PURELY ENGAGED IN SOFTWARE DEVELOPMENT ON THE INSTR UCTION OF ITS ASSOCIATED ENTERPRISES AND NO FUNCTION OF CONCEPTU ALIZATION ARE BEING CARRIED OUT BY THE ASSESSEE. THE LEARNED COUN SEL ALSO REFERRED TO PROFIT AND LOSS ACCOUNT OF THE COMPANY AND SUBMITTED THAT THERE IS INCREASE IN THE STOCK OF 1,26,03,745/- DURING THE YEAR, WHICH INDICATE THAT COMPANY WAS DEALING IN ST OCK AND NO SEPARATE SEGMENT OF TRADING IS AVAILABLE IN ANNUAL ACCOUNTS OF THE COMPANY AND THEREFORE THE COMPANY NEED TO BE EX CLUDED ON THIS GROUND ALSO. 9.2 THE LEARNED DR, ON THE OTHER HAND, RELIED ON THE A UTHORITIES BELOW. HE REFERRED TO FUNCTIONAL ANALYSIS OF THE AS SESSEE AVAILABLE ON PAGE 54 OF THE PAPER-BOOK AND SUBMITTED THAT ASS ESSEE IS ENGAGED IN PROJECT PLANNING, WHICH INCLUDE DEVELOP MENT AND MAINTENANCE OF THE PROJECT PLAN FOR THE CLIENT. HE ALSO EMPHASIZED THE ANALYSIS PHASE OF THE FUNCTION OF THE ASSESSE E, UNDER WHICH DOCUMENTS ARE SENT TO THE CLIENT FOR APPROVAL. HE S UBMITTED THAT EVEN THE ACCEPTANCE TEST IS DONE UNDER APPROVAL FRO M THE CLIENT AND THE ASSOCIATED ENTERPRISES. ACCORDING TO HIM, I N VIEW OF THE FUNCTIONS CARRIED OUT BY THE ASSESSEE, THE CONTENTI ON OF THE LEARNED COUNSEL THAT SOFTWARE DEVELOPMENT IS NOT CO NCEPTUALIZED BY THE ASSESSEE, IS NOT CORRECT. 9.3 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES ON T HE ISSUE IN DISPUTE AND PERUSED THE RELEVANT MATERIAL ON REC ORD. AS FAR AS ISSUE OF FUNCTIONAL DISSIMILARITY ON THE GROUND OF CONCEPTUALIZATION OF THE SOFTWARE IS CONCERNED, WE DO NOT AGREE WITH THE ARGUMENT OF THE LEARNED COUNSEL OF THE ASS ESSEE. ON PAGE 55 OF THE PAPER BOOK, THE ASSESSEE HAS PROVIDE D DETAIL OF 15 ITA NO. 700/DEL./2016 VARIOUS PHASES OF THE ACTIVITIES UNDER THE FUNCTION S OF THE SOFTWARE DEVELOPMENT AS UNDER: FISERV INDIA RENDERS SOFTWARE DEVELOPMENT AND MAIN TENANCE SERVICES TO ASSOCIATED ENTERPRISES ON PROJECT BASIS . THE PROJECTS ENTAIL REQUIREMENT STUDY, ANALYSIS AND DESIGN OF TH E SYSTEM, CODING AND TESTING OF THE PRODUCT. FISERV INDIA EMPLOYEES ARE TECHNICALLY QUALIFIED PR OFESSIONALS IN THEIR RESPECTIVE AREA OF OPERATIONS. EACH PROJECT E NTAILS THE FOLLOWING PHASES: PROJECT PLAN THE PROJECT MANAGER (FISERV INDIA) IS RESPONSIBLE F OR DEVELOPING AND MAINTAINING THE PROJECT PLAN. THE PROJECT PLAN IS U PDATED AND RE- RELEASED AS AND WHEN DEEMED NECESSARY. ANALYSIS THE PROJECT MANAGER (FISERV INDIA) IS RESPONSIBLE F OR THE INITIAL DEVELOPMENT AND ONGOING MAINTENANCE OF THE SYSTEM R EQUIREMENT SPECIFICATIONS FOR EACH PHASE OF DELIVERY. THE SYSTEM REQUIREMENT SPECIFICATION IS AGREED TO A ND SIGNED OFF BY THE CLIENT AND AE PRIOR TO THE COMMENCEMENT OF THE DESIGN OF THE DESIGN PHASE. THE SYSTEM REQUIREMENT SPECIFICATION IS UPDATED FRO M TIME TO TIME AS DEEMED NECESSARY BY THE PROJECT MANAGER (FISERV INDIA). THE DOCUMENT IS RE- RELEASED AND SENT TO THE CLIENT FOR APPROVAL. DESIGN THE PROCESS OF SYSTEM DESIGN IS THE RESPONSIBILITY OF THE PROJECT MANAGER (FISERV INDIA). APPROPRIATELY SKILLED RESOU RCES ARE ALLOCATED TO THE DESIGN TASKS. AS THERE IS ALSO AN ELEMENT OF ANALYSIS IN EACH PHASE, CONTINUED ACCESS TO CLIENT USER REPRESENTATI VES IS NECESSARY DURING THE SYSTEM DESIGN PHASE. BUILD & TEST] BUILD & TEST THE DEVELOPERS ASSIGNED TO THE PROJECT ARE RESPONSI BLE FOR THE CONSTRUCTION OF SOFTWARE COMPONENTS ACCORDING TO TH E DESIGN SPECIFICATION AND THE REQUIREMENTS. SOFTWARE DEVELO PMENT IS DONE ACCORDING TO THE RELEVANT DEVELOPMENT STANDARDS.] 16 ITA NO. 700/DEL./2016 THE TEST MANAGER (FISERV INDIA) IS RESPONSIBLE FOR DEVELOPING TEST SPECIFICATIONS FOR THE SYSTEM. ACCEPTANCE TEST SIGNOFF SIGNOFF OF THE ACCEPTANCE TESTING WILL BE BY THE PR OJECT MANAGER (FISERV INDIA) FROM THE CLIENT AND AE. RELEASE AN INITIAL RELEASE OF THE SYSTEM IS DONE TO THE CLI ENT FOR THE PURPOSE OF THE USER ACCEPTANCE TESTING. ANY ISSUE REPORTED DURING THIS PHASE IS HANDLED EITHER BY THE REQUIREMENTS CHANGE PROCES S OR BY THE PROBLEM TRACKING PROCESS. SUBSEQUENT RELEASES IS DO NE TO INCORPORATE DEFECT FIXED AND APPROVED REQUIREMENT C HANGES. 9.4 IN VIEW OF THE ABOVE, PHASES OF THE CYCLE OF THE S OFTWARE DEVELOPMENT CARRIED OUT BY THE ASSESSEE, IT IS EVID ENT THAT THE ASSESSEE IS ALSO ENGAGED IN CONCEPTUALIZATION OF TH E SOFTWARE FOR THE CLIENTS OF THE ASSOCIATED ENTERPRISES, AND THUS CONTENTION OF THE LEARNED COUNSEL OF FUNCTIONAL DISSIMILARITY ON THIS GROUND REJECTED. HOWEVER, REGARDING THE TRADING OF THE STO CK BY THE ASSESSEE, THERE IS APPARENTLY CONTRADICTORY INFORMA TION IN THE ANNUAL REPORT OF THE COMPANY. ACCORDING TO PAGE 225 OF THE PAPER-BOOK VOLUME 1, THE QUANTITATIVE DETAILS IN RE SPECT OF OPENING STOCK, PURCHASE, SALES AND CLOSING STOCK IS NOT APPLICABLE AS THE COMPANY IS ENGAGED IN PROVIDING COMPUTER SOF TWARE DEVELOPMENT RELATED SERVICES ONLY, WHEREAS IN THE P ROFIT AND LOSS ACCOUNT AVAILABLE ON PAGE 2 TO 13 OF THE PAPER BOOK , THERE IS INCREASE IN THE STOCK OF 1,26,03,745/-. THUS, ALTHOUGH THE COMPANY IS FUNCTIONALLY SIMILAR TO THE ASSESSEE BUT IN VIEW OF THE FIGURE OF INCREASE IN THE STOCK GIVES RISE TO THE P OSSIBILITY OF TRADING SEGMENT. AS COMPLETE INFORMATION IS NOT AVA ILABLE IN PUBLIC DOMAIN, IN OUR OPINION, THE LEARNED TPO CAN COLLECT THE 17 ITA NO. 700/DEL./2016 RELEVANT INFORMATION FROM THE COMPANY USING THE AUT HORITY UNDER SECTION 133(6) OF THE ACT AND IF HE FINDS THAT TRAD ING SEGMENT EXIST AND NO SEPARATE RESULTS ARE AVAILABLE FOR THE SOFTW ARE DEVELOPMENT SEGMENT, THEN HE SHALL EXCLUDE THE COMP ANY FROM THE SET OF THE COMPARABLES. ACCORDINGLY, WE RESTORE THE ISSUE OF THE COMPARABILITY OF THE COMPANY TO THE FILE OF THE LEARNED AO/TPO FOR DECIDING AFRESH AFTER PROVIDING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. INFOSYS LTD . 10. BEFORE THE LEARNED TPO, THE ASSESSEE OBJECTED INCL USION OF THIS COMPANY ON THE GROUND THAT THE COMPANY WAS ENG AGED IN DEVELOPING PRODUCTS, INCOME FROM SALE OF THE SOFTWA RE PRODUCTS, SALES BEING BRAND DRIVEN, AND HIGH SCALE OF OPERATI ONS/TURNOVER. THE LEARNED TPO REJECTED ALL THESE ARGUMENTS OF THE ASSESSEE. ACCORDING TO HIM, THE COMPANY IS PRIMARILY SOFTWARE DEVELOPMENT COMPANY, SALE OF PRODUCTS BEING MINISCULE (4.98%), NO IMPACT OF THE BRAND OF THE PROFITABILITY, AND NO IMPACT OF TH E TURNOVER ON THE PROFITABILITY. ACCORDING TO HIM BUSINESS MODEL USING SOFTWARE DEVELOPMENT SECTOR IN INDIA, THE OPERATIONAL SIZE I S NOT HAVING ANY IMPACT ON THE PROFIT MARGIN AS FOR PROVIDING SO FTWARE DEVELOPMENT SERVICES, TEAMS OF SOFTWARE EMPLOYEES ARE FORMED, WHICH REMAIN SAME IN ALL THE COMPANIES AND ONLY DIF FERENCE IS THAT IN CASE OF THE GIANT COMPANIES THE TEAMS WILL BE MORE THAN THE TAXPAYER, FOR RENDERING THE SOFTWARE DEVELOPMEN T SERVICES. THE LEARNED DRP UPHELD THE FINDING OF THE LEARNED T PO. 18 ITA NO. 700/DEL./2016 10.1 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE SU BMITTED TO EXCLUDE THE COMPANY ON THE GROUND OF SEGMENT RES ULT FOR THE SOFTWARE SERVICES NOT AVAILABLE, DIFFERENT FUNCTION AL PROFILE AND DIFFERENT SCALE OF THE OPERATIONS. THE LEARNED COUN SEL SUBMITTED THAT THE COMPANY HAS BEEN REJECTED BY THE HONBLE D ELHI HIGH COURT IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEA R 2009-10 AND 2010-11. ACCORDING TO HIM, NOT BEING SUBSTANTIA L CHANGE IN THE FUNCTIONING OF THE ASSESSEE AS WELL AS THE COMP ANY IN THE YEAR UNDER CONSIDERATION AS COMPARED TO ASSESSMENT YEAR 2010-11, THE COMPANY NEED TO BE REJECTED FOLLOWING THE DECIS ION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF ASSESSEE IT SELF. 10.2 THE LEARNED DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE LOWER AUTHORITIES. 10.3 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES ON THE ISSUE IN DISPUTE AND PERUSED THE RELEVANT MATERIAL ON REC ORD. THE TRIBUNAL IN ITA NO.6737/DEL./2014 FOR ASSESSMENT YE AR 2010-11 ON THE ISSUE OF THE COMPARABILITY OF M/S. INFOSYS L TD HAS OBSERVED AS UNDER: 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 UN DER:- 'IT IS ARGUED THAT THE CASE OF THE ASSESSEE IS NOT COMPARABLE WITH INFOSYS TECHNOLOGIES LTD., THE REASON BEING TH AT THE LATTER IS GIANT IN THE AREA OF DEVELOPMENT OF SOFTWARE AND IT ASSUMES ALL RISKS, LEADING TO HIGHER PROFIT. ON THE OTHER H AND, THE ASSESSEE IS A CAPTIVE UNIT OF ITS PARENT COMPANY IN THE USA AND IT ASSUMES ONLY LIMITED CURRENCY RISK. HAVING C ONSIDERED THESE POINTS, WE ARE OF THE VIEW THAT THE CASE OF A FORESAID INFOSYS AND THE ASSESSEE ARE NOT COMPARABLE AT ALL AS SEEN FROM THE FINANCIAL DATA ETC. OF THE TWO COMPANIES M ENTIONED EARLIER IN THIS ORDER. THEREFORE, WE ARE OF THE VIE W THAT THIS CASE IS REQUIRED TO BE EXCLUDED' 19 ITA NO. 700/DEL./2016 11.5 THE AFORESAID ORDER WAS UPHELD BY THE HON'BLE 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) C ONTRACT SOFTWARE DEVELOPMENT SERVICES TURNOVER 20,264 CRORES 209.83 CRORES OWNERSHIP BRANDED/PROP RIETARY PRODUCTS DEVELOPS/OWNS PROPRIETARY PRODUCTS LIKE FINACLE, INFOSYS ACTICE DESK, INFOSYS IPROWE, INFOSYS MCONNECT. ALSO THE COMPANY DERIVES SUBSTANTIA L 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 CUSTOMER'S LOCATION OV ERSEAS). AND OFFSHORE (50.20 PER CENT) REFER P. 117 OF THE PAPER BOOK) THAN HALF OF ITS SERVICE, INCOME FROM 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 DEVELOPMENT RS. 236 CRORES RS. NIL OTHER 100 PER CENT OFFSHORE (FROM INDIA) 11.6 ON THE BASIS OF THE ABOVE CHART, THE HON'BLE H IGH COURT AFFIRMED THE CONCLUSION THAT A CAPTIVE UNIT OF A CO MPARABLE COMPANY WHICH ASSUMED ONLY A LIMITED RISK, CANNOT BE COMPAR ED 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 CO NCLUSION. THE APPELLANT IS ALSO CAPTIVE SERVICE PROVIDER TO ITS A E AND AS SUCH, M/S. INFOSYS LTD. IS NOT A VALID COMPARABLE WITH THE APP ELLAN T. 20 ITA NO. 700/DEL./2016 10.4 THE HONBLE DELHI HIGH COURT IN ITA NO. 602/2016 & CM NO.30032/2016 IN CASE OF ASSESSEE, ON THE ISSUE OF THE COMPARABILITY OF M/S. INFOSYS HAS OBSERVED AS UNDER : LEARNED COUNSEL APPEARING ON THE ADVANCE NOTICE UR GES THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SOFTWARE DEV ELOPMENT. HE SUPPORTS THE CONCLUSIONS OF THE ITAT WITH RESPECT T O THE EXCLUSION OF TWO COMPARABLES IN QUESTION AND HIGHLIGHTS THAT M/S INFOSYS LTD. IS ENGAGED NOT MERELY IN SOFTWARE DEVELOPMENT BOTH OFF SITE AND ONSITE AND THAT IT RECEIVES THE SUBSTANTIAL REVENUES ON AC COUNT OF ONSITE SOFTWARE FINANCIAL DEVELOPMENT THE ACTIVITY WHICH THE ASSESSEE DOES NOT CARRY OUT. IT IS ALSO SUBMITTED THAT BESID ES THIS, THE OTHER DISTINGUISHING FACTOR VIS-A-VIS THAT M/S INFOSYS LT D. IS THAT CONCERN ALSO OWNS BRAND INTANGIBLES- AN ADVANTAGE WHICH THE ASSESSEE DOES NOT POSSESS. LASTLY, THE ASSESSEE IS CAPTIVE AS OPPOSED TO STATU S OF M/S INFOSYS LTD. WITH RESPECT TO M/S PERSISTENT TECHNOLOGIES, I T IS POINTED OUT THAT IN A PREVIOUS ORDER IN ITA NO. 279/2016 DATED 04.05.2016 ( PRINCIPLE COMMISSIONER OF INCOME TAX VS. M/S CASHEDG E INDIA PVT. LTD) HELD THAT HAVING REGARD TO THE RULES I.E. RULE 10 B TO 10 E OF INCOME TAX RULES, THE DATA OF M/S PERSISTENT SYS TEMS LTD- COULD NOT HAVE BEEN INCLUDED. HERE, IT IS URGED THAT THE ASSESSEE IS ALSO A MEMBER OF THE CASHEDGE INDIA GROUP AND IS ENGAGED I N SAME AND IDENTICAL BUSINESS. THE AY ALSO COINCIDES WITH THAT OF ASSESSEE I.E. AY 2010-2011. FOR THESE REASONS, WE ARE OF THE OPIN ION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES ON THE FIRST ISS UE URGED. 10.5 WE FIND THAT THE TRIBUNAL HAS REJECTED THE COMPAN Y MAINLY ON THE GROUND OF GIANT COMPANY VIS--VIS THE ASSESS EE BEING A CAPTIVE SERVICE PROVIDE. SINCE THIS GROUND OF THE R EJECTION IS VALID IN THE YEAR UNDER CONSIDERATION ALSO, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL (SUPRA) AND DECISION OF HO NBLE DELHI HIGH COURT (SUPRA), WE DIRECT THE LEARNED AO/TPO TO EXCLUDE THIS COMPANY FROM THE FINAL SET OF THE COMPARABLES. 21 ITA NO. 700/DEL./2016 LARSEN AND TOUBRO INFOTECH LTD. 11. BEFORE THE LEARNED TPO, THE ASSESSEE SOUGHT TO EXC LUDE THIS COMPANY MAINLY ON THE GROUND THAT COMPANY IS NOT FU NCTIONALLY COMPARABLE AS IT WAS ENGAGED IN SOFTWARE DEVELOPMEN T AS WELL AS PRODUCT SALES DURING THE RELEVANT YEAR. THE LEARNED TPO HOWEVER REJECTED THIS CONTENTION OF THE ASSESSEE ON THE GRO UND THAT 93.56% OF THE REVENUE OF THE COMPANY CAME FROM EXPO RT OF THE SOFTWARE DEVELOPMENT ONLY. HE ALSO REJECTED THE CON TENTION OF THE ASSESSEE OF PRESENCE OF THE INTANGIBLES, HOLDING TH AT OWNERSHIP OF THE FEW PROPRIETARY SOFTWARE PRODUCTS AND INTANGIBL ES ARE NOT AFFECTING THE FUNCTION OF THE COMPANY. HE ALSO REJE CTED THE CONTENTION OF THE ASSESSEE OF ACQUISITION OF THE TR ANSFER AGENCY BUSINESS AND INTANGIBLE AS ACCORDING TO HIM THOSE A RE NOT AFFECTING THE FUNCTION OF THE COMPANY. THE ARGUMENT OF THE HIGH TURNOVER OF THE COMPANY WAS ALSO REJECTED BY THE LE ARNED TPO. THE LEARNED DRP UPHELD THE FINDING OF THE LEARNED T PO. 11.1 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE REF ERRED TO PROFIT AND LOSS ACCOUNT OF THE ASSESSEE REPRODUCED BY THE LEARNED TPO ON PAGE 36 OF HIS ORDER AND SUBMITTED THAT REVE NUE HAS BEEN SHOWN FROM SOFTWARE DEVELOPMENT SERVICES AND PRODUC TS AND NO SEPARATE SEGMENT FOR THE SOFTWARE DEVELOPMENT SERVI CES IS AVAILABLE. HE ALSO REFERRED TO PAGE 528 OF THE PAPE R-BOOK VOLUME- 2 WHICH PROVIDES THE RELATED PARTY SCHEDULE AND UND ER WHICH NATURE OF THAT FIRST TRANSACTION IS SALE OF THE SER VICE/PRODUCTS. HE REFERRED TO PAGE 520 OF THE PAPER-BOOK-2 AND SUBMIT TED THAT SEGMENTAL INFORMATION IS AVAILABLE IN RESPECT OF TH E INDUSTRIES AND NOT ON THE SERVICES. HE REFERRED TO PAGE 470 OF THE PAPER-BOOK 22 ITA NO. 700/DEL./2016 VOLUME 2 AND SUBMITTED THAT THE COMPANY IS ENGAGED IN DEVELOPMENT AND STRENGTHENING OF THE BRAND AND THUS IT SHOULD BE EXCLUDED ON THIS GROUND ALSO. 11.2 THE LEARNED DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE LOWER AUTHORITIES AND SUBMITTED THAT ARGUMENT O F STRENGTHENING OF THE BRAND DOES NOT STAND ON ITS LE GS AS THE AE OF THE ASSESSEE I.E. FISER USA IS HAVING VERY BIG BRAN D VALUE AND THEREFORE IT ALSO FETCHES HIGHER MARGINS FOR RENDER ING SERVICES TO ITS CLIENTS. 11.3 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES ON THE ISSUE IN DISPUTE AND PERUSED THE RELEVANT MATERIAL ON REC ORD. ON PERUSAL OF THE PROFIT AND LOSS ACCOUNT OF THE COMPA NY REPRODUCED BY THE LEARNED TPO ON PAGE 36 OF HIS ORDER, IT IS E VIDENT THAT THE REVENUE OF RS.2331,81,22,096/- HAS BEEN SHOWN FROM SOFTWARE DEVELOPMENT SERVICES AND PRODUCTS AND THERE IS NO S EPARATE SEGMENT OF THE SOFTWARE DEVELOPMENT SERVICES AVAILA BLE IN THE ANNUAL REPORT OF THE COMPANY. IN SUCH A HUGE TURNOV ER, THE COMPOSITION OF REVENUE FROM THE SOFTWARE DEVELOPMEN T SERVICES AND FROM SALE OF THE SOFTWARE PRODUCTS IS NOT SEPAR ATELY AVAILABLE IN THE ANNUAL REPORT. IN SUCH CIRCUMSTANCES, THE CO MPANY CANNOT BE TERMED AS FUNCTIONALLY SIMILAR AT ENTITY LEVEL W ITH THE ASSESSEE, WHO WAS ENGAGED IN PROVIDING SOFTWARE SERVICES TO I TS ASSOCIATED ENTERPRISES. IN VIEW OF THE FUNCTIONAL DISSIMILARIT Y, WE DIRECT THE LEARNED AO/TPO TO EXCLUDE THIS COMPANY FROM THE FIN AL SET OF THE COMPARABLES. 23 ITA NO. 700/DEL./2016 PERSISTENT SYSTEMS & SOLUTIONS LTD. 12. THE ASSESSEE OBJECTED INCLUSION OF THE COMPANY INT O SET OF THE COMPARABLES ON THE GROUND OF COMPANY ENGAGED IN DEVELOPMENT OF THE NEW PRODUCT FOR WHICH IT UNDERTA KES RESEARCH AND DEVELOPMENT ACTIVITY, UNLIKE THE ASSESSEE WHO I S A CAPTIVE SERVICE PROVIDER. THE LEARNED TPO AND THE LEARNED D RP REJECTED THE CONTENTION OF THE ASSESSEE AND HELD THAT THE WH OLE OF THE REVENUE OF THE COMPANY IS FROM EXPORT OF THE SOFTWA RE DEVELOPMENT SERVICES. 12.1 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE RE FERRED TO PAGE 763 AND 764 OF THE PAPER-BOOK AND SUBMITTED TH AT REVENUE RECOGNITION PROVIDED METHOD OF RECOGNITION FROM LIC ENSING OF THE PRODUCT, ROYALTY ON SALE OF PRODUCT, REVENUE FROM M AINTENANCE CONTRACT. ACCORDING TO THE LEARNED COUNSEL, THE COM PANY IS ENGAGED IN DEVELOPMENT OF THE SOFTWARE PRODUCTS IN VIEW OF THE REVENUE RECOGNITION PROVIDED IN THE NOTES TO THE AC COUNT, AND THEREFORE IT NEED TO BE EXCLUDED FROM THE SET OF TH E COMPARABLES. 12.2 THE LEARNED DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE LOWER AUTHORITIES. 12.3 WE HAVE HEARD RIVAL ARGUMENTS OF THE PARTIES AND P ERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT SCHED ULE OF INCOME TO THE PROFIT AND LOSS ACCOUNT IS AVAILABLE ON PAGE 786 OF THE PAPER-BOOK, WHICH IS REPRODUCED AS UNDER: 01/04/2010 01/04/2009 TO TO 31/03/2011 31/03/2010 OPERATING REVENUE, NET [ABSTRACT) OPERATING REVENUE, GROSS (ABSTRACT) 24 ITA NO. 700/DEL./2016 REVENUE SERVICES, GROSS [ABSTRACT) REVENUE INFORMATION TECHNOLOGY SERVICES [ABSTRACT] REVENUE SOFTWARE DEVELOPMENT 18,94,90,457 6,67,28,828 REVENUE INFORMATION TECHNOLOGY SERVICES 18,94,90,457 6,67,28,828 REVENUE SERVICES, GROSS 18,94,90,457 6,67,28,828 OPERATING REVENUE, GROSS 18,94,90,457 6,67,28,828 OPERATING REVENUE, NET 18,94,90,457 6.67,28.828 OTHER INCOME [ABSTRACT] RECEIPT INCOME INVESTMENTS [ABSTRACT] RECEIPT INCOME CURRENT INVESTMENTS [ABSTRACT) RECEIPTS DIVIDEND CURRENT INVESTMENTS [ABSTRACT] RECEIPT DIVIDEND CURRENT MUTUAL FUNDS 4,18,608 2,29,840 RECEIPTS DIVIDEND CURRENT INVESTMENTS 4,18,608 2,'29,840 RECEIPT INCOME CURRENT INVESTMENTS 4,18,608 2,29,840 RECEIPT INCOME INVESTMENTS 4,18,608 2,29,840 OTHER INCOME 4,18,608 2,29,840 12.4 ON PERUSAL OF THE ABOVE, IT IS EVIDENT THAT REVE NUE HAS BEEN SHOWN FROM THE SOFTWARE SERVICES ONLY AND NO REVENU E HAS BEEN SHOWN FROM SALE OF THE PRODUCTS OR FROM ROYALTY ETC . MERELY MENTION OF THE METHOD OF THE RECOGNITION OF THE REV ENUE IN THE NOTES TO THE ACCOUNT, CANNOT INDICATE REVENUE HAS B EEN EARNED FROM SALE OF THE PRODUCTS OR FROM THE ROYALTY. NO O THER INFORMATION HAS BEEN POINTED OUT BY THE LEARNED CO UNSEL TO SUPPORT HIS CONTENTION THAT THE COMPANY IS ENGAGED IN SALE OF THE PRODUCTS. NO SUCH INFORMATION IN RESPECT OF SALE OF PRODUCTS OR INCOME FROM ROYALTY IS AVAILABLE IN THE PUBLIC DOMA IN, THEREFORE IN THE INTEREST OF THE JUSTICE, WE FEEL IT APPROPRIATE TO RESTORE THIS MATTER TO THE LEARNED AO/TPO WITH THE DIRECTION TO GATHER INFORMATION USING AUTHORITY UNDER SECTION 133(6) OF THE ACT AND IF HE FINDS PRESENCE OF SUBSTANTIAL INCOME FROM SALE O F THE PRODUCTS OR ROYALTY AND INCOME FROM SOFTWARE DEVELOPMENT SER VICES CANNOT BE SEGMENTED, THEN THE COMPANY SHALL BE EXCLUDED FR OM THE SET OF THE COMPARABLE. THE ASSESSEE SHALL BE AFFORDED ADEQ UATE OPPORTUNITY OF BEING HEARD. 25 ITA NO. 700/DEL./2016 PERSISTENT SYSTEMS LTD. 13. THE LEARNED TPO HELD THE COMPANY AS FUNCTIONALLY S IMILAR AND REJECTED THE OBJECTION OF THE ASSESSEE OF THE D IFFERENT BUSINESS MODEL, INTANGIBLE AND INTELLECTUAL PROPERTY ETC. BE FORE THE LEARNED DRP, THE ASSESSEE SOUGHT EXCLUSION OF THE COMPANY O N THE GROUND OF FUNCTIONAL DIFFERENCE, SIGNIFICANTLY HIGH TURNOVER AND SIGNIFICANT RELATED PARTY TRANSACTIONS (> 10%). THE LEARNED DRP OBSERVED THAT TRIBUNAL IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2010-11 HAS EXCLUDED THE COMPANY ON THE GROUND OF HIGH TURNOVER. BUT THE LEARNED DRP REFERRED TO THE DECIS ION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CHRYS CAPIT AL INVESTMENT ADVISORS (INDIA) LTD (SUPRA) AND RAMPGREEN SOLUTION S PVT. LTD (SUPRA) AND HELD THAT HIGH PROFIT ONLY CANNOT BE A GROUND FOR EXCLUSION OF THE COMPANY AS A COMPARABLE. THE LEARN ED DRP OBSERVED THAT REVENUE FROM LICENSING ROYALTY WAS ME RELY 5% AND THIS COMPANY IS PRIMARILY A SOFTWARE SERVICE COMPAN Y PROVIDING DEVELOPMENT SERVICES AS PER THE REQUIREMENT OF ITS CLIENTS AND, THEREFORE, IT WAS FUNCTIONALLY COMPARABLE TO THE AS SESSEE. 13.1 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE SU BMITTED THAT THE COMPANY HAS BEEN REJECTED BY THE HONBLE D ELHI HIGH COURT AND THE TRIBUNAL IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2010-11. THE LEARNED COUNSEL FURTHER REFERRED TO PAGE 553 OF THE PAPER BOOK AND SUBMITTED THAT THE COMPANY WAS F OCUSED ON SOFTWARE PRODUCT DEVELOPMENT. HE ALSO REFERRED TO P AGE 571 OF THE PAPER BOOK AND SUBMITTED THAT COMPANY HAS INCURRED RESEARCH AND DEVELOPMENT EXPENDITURE DURING THE YEAR. HE ALS O REFERRED TO PAY 656 OF THE PAPER BOOK TO DEMONSTRATE THAT THE C OMPANY HAS 26 ITA NO. 700/DEL./2016 EARNED REVENUE FROM SALE OF THE SOFTWARE SERVICES A ND THE PRODUCTS. IN VIEW OF THE ARGUMENTS, HE SUBMITTED TO EXCLUDE THIS COMPANY FROM THE SET OF THE COMPARABLES. 13.2 THE LEARNED DR ON THE OTHER HAND RELIED ON THE OR DER OF THE LOWER AUTHORITIES. 13.3 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES AND P ERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT IN AS SESSMENT YEAR 2010-11, THE COMPANY WAS REJECTED BY THE TRIBUNAL O N THE GROUND OF HIGH TURNOVER, BUT IN VIEW OF THE DECISIO N OF THE HONBLE DELHI HIGH COURT CITED BY THE LEARNED DRP IN THEIR ORDER, WE AGREE WITH THE FINDING OF THE LEARNED DRP THAT HIGH TURNOVER CANNOT BE A GROUND FOR REJECTION OF THE COMPANY AS COMPARABLE IF IT IS OTHERWISE FUNCTIONALLY SIMILAR TO THE TAXPAYE R. FURTHER, HONBLE DELHI HIGH COURT IN THE ASSESSMENT YEAR 201 0-11 REJECTED THE COMPANY MAINLY ON THE GROUND THAT PUBL ISHED DATA WAS NOT AVAILABLE IN THE CASE OF THE COMPANY. BUT I N THE YEAR UNDER CONSIDERATION THERE ARE NO SUCH CIRCUMSTANCES AND THE ASSESSEE HAS FILED ANNUAL REPORT ON PAGE 541 TO 732 OF THE PAPER- BOOK. ON PERUSAL OF PAGE 656 OF THE PAPER-BOOK, WE FIND THAT REVENUE FROM SALE OF SOFTWARE SERVICES AND PRODUCT HAS BEEN SHOWN THAT 6,101.27 MILLION. THERE IS NO SEPARATE BIFURCATION OF THE REVENUE FROM THE SOFTWARE SERVICES AND THEREFOR E IN ABSENCE OF SEGMENTAL DATA OF SOFTWARE SERVICES, THE COMPANY CA NNOT BE INCLUDED AS A COMPARABLE AT ENTITY LEVEL. ACCORDING LY, ON THE GROUND OF THE FUNCTIONAL DISSIMILARITY OF THE ENTIT Y LEVEL, WE DIRECT THE LEARNED AO/TPO TO EXCLUDE THE COMPANY FROM THE FINAL SET OF THE COMPARABLES. 27 ITA NO. 700/DEL./2016 WIPRO TECHNOLOGY SERVICES LTD. 14. THE ASSESSEE OBJECTED INCLUSION OF THIS COMPARABLE ON THE GROUND OF THE EXTRAORDINARY EVENT AND LACK OF INFOR MATION OF SOFTWARE DEVELOPMENT SEGMENT. THE LEARNED TPO REFER RED TO ANNUAL REPORT OF THE COMPANY AND HELD THAT COMPANY WAS ENGAGED IN ACTIVITIES OF PROVIDING SOFTWARE RELATED SUPPORT SERVICES, PRIMARILY INFORMATION TECHNOLOGY SOFTWARE SOLUTIONS/MAINTENANCE AND TECHNOLOGY INFRASTRUCTURE SUPPORT SERVICES, WHICH ARE SIMILAR TO THE SERVICES RENDERE D BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES. THE LEARNED TPO DID NOT GIVE HIS FINDING ON THE OBJECTION OF THE ASSESSEE T HAT TRANSACTION OF RENDERING SERVICES BY THE COMPANY TO THE CITI GR OUP FALLS UNDER THE DEEMED INTERNATIONAL TRANSACTION AS PER SECTION 92B(2) OF THE ACT. THE LEARNED DRP HELD THE COMPANY AS FUNCTIONAL LY SIMILAR TO THE ASSESSEE AND REJECTED THE CONTENTION OF HUGE TU RNOVER AND SUPERNORMAL PROFIT, BUT GAVE NO FINDING ON THE OBJE CTION OF THE ASSESSEE RELATED TO DEEMED INTERNATIONAL TRANSACTIO N U/S 92B(2) OF THE ACT. 14.1 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE HA S CHALLENGED INCLUSION OF THE COMPANY ON THE GROUND O F THE NO SEGMENTAL RESULT FOR THE SOFTWARE DEVELOPMENT SERVI CES AS WELL AS ON THE GROUND OF THE CONTROLLED/TAINTED TRANSACTION S. HE REFERRED TO PAGE 954 OF THE PAPER BOOK VOLUME 3 AND SUBMITTE D THAT COMPANY IS ENGAGED IN PROVIDING SOFTWARE RELATED SU PPORT SERVICES, PRIMARILY INFORMATION TECHNOLOGY SOFTWARE SOLUTIONS/MAINTENANCE AND TECHNOLOGY INFRASTRUCTURE SUPPORT SERVICES TO CITIGROUP ENTITIES, WHICH HAS BEEN CONS IDERED AS ONE 28 ITA NO. 700/DEL./2016 SEGMENT AND THERE ARE NO SEPARATE REPORTABLE SEGMEN T AS REQUIRED UNDER THE ACCOUNTING STANDARD 17 ON SEGME NT REPORTING. ON THE ISSUE OF THE CONTROLLED/TAINTED TRANSACTION, THE LEARNED COUNSEL REFERRED TO PAGE 945 OF THE PAPER-B OOK VOLUME 3 AND SUBMITTED THAT THIS COMPANY WAS INCORPORATED AS CITI TECHNOLOGY SERVICES LTD. A SUBSIDIARY OF THE CITIG ROUP BANKING CORPORATION AND UNDER A SHARE PURCHASE AGREEMENT ON 21/01/2009, ALL THE SHARES OF THE COMPANY WERE PURC HASED BY THE WIPRO LTD, WHICH IS THE HOLDING COMPANY OF THE WIPRO TECHNOLOGY SERVICES. HE SUBMITTED THAT IN FOLLOWING DECISION OF THE TRIBUNAL, THE COMPANY HAS BEEN REJECTED AS A COMPAR ABLE IN VIEW OF THE TRANSACTION OF THE COMPANY WITH THE CITIGROU P HELD AS TAINTED TRANSACTION: I. PR. CIT VS. CASHEDGE INDIA PVT. LTD., ITA 279/2016, PAGE 3 PARA 6 II. ELEMENT K INDIA PVT. LTD. VS. ITO (AY 2011-12) ITA N O. 6001/DEL/2015, PAGES 13 TO 16 PARA 3 III. NAVISITE INDIA PVT. LTD. VS. ITO (AY 2011-12) ITA NO. 1054/DEL/2016, PAGED 12 TO 15- PARA 12 TO 13.5 IV. AIRCOM INTERNATIONAL (INDIA) PVT. LTD. VS. DCIT (AY 2011-12) ITA NO.222/DEL./2016- PAGES 7 TO12 PARA 11 TO 16 V. MICROSOFT INDIA (R&D) PVT. LTD. VS. DCIT (AY 2011-12 ) ITA NO. 691/DEL./2016 PAGES 47 TO 51 PARA 45 TO 47 VI. ST- ERICCSON INDIA PVT. LTD. VS. ACIT (AY 2011-12) I TA NO. 6247/DEL./2015- PAGES 28 TO 30 PARA 46 TO 47 VII. BECHTEL INDIA PVT. LTD. VS. DCIT (AY 2011-12 ) ITA N O. 6779/DEL./2015, PAGES 43 TO 45 PARA 63 TO 65 14.2 THE LEARNED DR, ON THE OTHER HAND, RELIED ON THE OR DER OF THE LOWER AUTHORITIES. 14.3 WE HAVE HEARD RIVAL SUBMISSION AND PERUSED THE REL EVANT MATERIAL ON RECORD. AS FAR AS THE FUNCTION OF THE C OMPANY IS 29 ITA NO. 700/DEL./2016 CONCERNED, IN OUR OPINION THE ASSESSEE HAS ALSO REN DERED SIMILAR SERVICES OF THE SOFTWARE DEVELOPMENT AND MAINTENANC E INCLUDING INFORMATION TECHNOLOGY RELATED SERVICES TO ITS ASSO CIATED ENTERPRISES AND, THEREFORE, IT IS FUNCTIONALLY SIMI LAR TO THE COMPANY. BUT AS FAR AS THE TRANSACTION OF THE COMPA NY WITH CITIGROUP COMPANY HELD AS TAINTED/CONTROLLED TRANSA CTIONS AND EXCLUSION OF THE COMPANY ON THIS GROUND, IN THE CAS E OF ELEMENT K INDIA PRIVATE LIMITED (SUPRA), THE TRIBUNAL HAS GIVEN THE DETAILED FINDING TO REJECT THE COMPANY ON THE GROUN D OF TRANSACTIONS COVERED UNDER '3. WIPRO TECHNOLOGY SOLUTIONS LTD: THIS COMPARABLE HAS BEEN INCLUDED BY LD.TPO. LD. CO UNSEL OBJECTED FOR INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLE S BY ARGUING THAT APART FROM THIS COMPANY BEING FUNCTIONALLY DIFFERENT AND AVAIL ABILITY OF INSUFFICIENT SEGMENTAL INFORMATION, THERE WERE ALSO SIGNIFICANT RELATED PARTY TRANSACTIONS. LD.TPO DID NOT ACCEPT ASSESSEE'S CONTENTION OF RELA TED PARTY TRANSACTIONS AND PROCEEDED TO INCLUDE IT IN THE FINAL SET OF COMPARA BLES. ON THE CONTRARY, LD. DR SUBMITTED THAT THERE IS NO RELATED PARTY TRANSACTION DURING THE YEAR UNDER CONSIDERATION. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH SIDES I N THE LIGHT OF RECORDS PLACED BEFORE US. LD. COUNSEL SUBMITTED THAT WIPRO TECHNOLOGY SERVICE S LIMITED (FORMERLY CITI TECHNOLOGY SERVICES LIMITED) ('THE COMPANY') WAS IN CORPORATED ON 15 SEPTEMBER, 2004. THE ENTIRE SHARE CAPITAL OF THE CO MPANY WAS HELD BY CITICORP BANKING CORPORATION, A COMPANY INCORPORATE D UNDER LAWS OF DELAWARE, USA, UPTO 20 JANUARY, 2009. IT WAS SUBMITTED THAT WIPRO LIMITED (WIPRO) EXECUTE D AGREEMENT WITH CITIGROUP INC. FOR ACQUIRING ALL OF CITIGROUP INTER EST IN THE ITA NO. 6001/DEL/2015 ELEMENT K INDIA PVT. LTD. COMPANY W.E .F. 21 JANUARY 2009. ON 21 JANUARY 2009, WIPRO SIGNED MASTER SERVICE AGR EEMENT (MSA) WITH CITIGROUP INC. FOR DELIVERY OF TECHNOLOGY INFRASTRU CTURE SERVICES, APPLICATION DEVELOPMENT AND MAINTENANCE SERVICES AFTER ACQUISIT ION BY WIPRO, NAME OF COMPANY WAS CHANGED TO WIPRO TECHNOLOGY SERVICES LI MITED ('WTS' OR 'THE COMPANY') ON 16 MARCH 2009.' 30 ITA NO. 700/DEL./2016 IT IS OBSERVED FROM THE ABOVE THAT, WIPRO TECHNOLOG Y SERVICES LTD., WHICH WAS EARLIER CITI TECHNOLOGY SERVICES LTD., WAS HELD BY CITI CORP. BANKING CORPORATION, USA UPTO 20TH JANUARY, 2009. WIPRO LTD ., PARENT COMPANY OF WHICH EXECUTED AGREEMENT WITH CITI GROUP INC., FOR ACQUIRING CITI TECHNOLOGY SERVICES LTD., NOW CALLED WIPRO TECHNOLOGY SERVICES LTD. ON 21.1.2009, WIPRO LTD. SIGNED MASTER AGREEMENT WITH CITI GROUP INC., FOR THE DELIVERY OF TECHNOLOGY INFRASTRUCTURE SERVICES AND APPLICATION DEVELOPMENT AND MAINTENANCE SERVICES FOR THE PERIOD OF SIX YEARS, W HICH ALSO INCLUDES THE YEAR UNDER CONSIDERATION. THIS SHOWS THAT INCOME FROM SO FTWARE DEVELOPMENT SUPPORT AND MAINTENANCE SERVICES WAS EARNED BY WIPR O TECHNOLOGY SERVICES LTD., FROM CITI GROUP INC., BY MEANS OF MASTER SERV ICE AGREEMENT ENTERED INTO BETWEEN WIPRO LTD., ITS PARENT COMPANY AND CITI GRO UP INC., A THIRD PERSON. IT IS OBSERVED THAT THE ISSUES RAISED BY LD. CIT DR IN RESPECT OF COMPARABILITY OF THIS COMPARABLE HAS BEEN DEALT WITH BY COORDINAT E BENCH OF DELHI TRIBUNAL IN SAXO INDIA PVT.LTD VS. ACIT (SUPRA) AS UNDER: 'WE HAVE NOTICED ABOVE FROM THE LANGUAGE OF RULE 10 B(1)(E)(II) THAT IT IS THE NET PROFIT MARGIN REALIZED FROM A COMPARABLE UNCONTROLLED TRANSACTION, WHICH IS CONSIDERED FOR THE PURPOSES O F BENCHMARKING. THE ITA NO. 6001/DEL/2015 ELEMENT K INDIA PVT. LTD. EPITOME OF `COMPARABLE UNCONTROLLED TRANSACTION' IS THAT THE C OMPANIES OR TRANSACTIONS IN ORDER TO FALL WITHIN THE AMBIT OF S UB-CLAUSE (II) OF RULE 10B(1)(E), SHOULD BE BOTH COMPARABLE AS WELL AS UNC ONTROLLED. `UNCONTROLLED TRANSACTION' HAS BEEN DEFINED IN RULE 10A(A) TO MEAN: 'A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIAT ED ENTERPRISES, WHETHER RESIDENT OR NON-RESIDENT.' THIS SHOWS THAT IN ORDER TO BE CALLED AS AN UNCONTROLLED TRANSACTION, IT IS NECESSARY THA T THE SAME SHOULD BE BETWEEN ENTERPRISES, OTHER THAN ASSOCIATED ENTERPRI SES. SECTION 92B(2) PROVIDES THAT: 'A TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, FOR THE PURPOSES OF SUB-SECTION (1), BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE EXISTS A PRIOR AGREEMENT IN R ELATION TO THE RELEVANT TRANSACTION BETWEEN SUCH OTHER PERSON AND THE ASSOC IATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERM INED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERP RISE'. ON GOING THROUGH SUB-SECTION (2) OF SECTION 92B, IT IS CLEAR LY BORNE OUT THAT A TRANSACTION WITH NON-AE SHALL BE DEEMED TO BE A TRA NSACTION ENTERED INTO BETWEEN TWO AES, IF THERE EXISTS A PRIOR AGREE MENT IN RELATION TO THE RELEVANT TRANSACTION BETWEEN THIRD PERSON AND T HE AE, OR THE TERMS OF RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN THE THIRD PERSON AND AE. WHEN WE CONSIDER SECTION 92B(2) IN C OMBINATION WITH RULE 10A(A), IT FOLLOWS THAT TRANSACTION BETWEEN NO N- AES SHALL BE CONSTRUED AS A TRANSACTION BETWEEN TWO AES, IF THER E EXISTS A PRIOR AGREEMENT IN RELATION TO RELEVANT TRANSACTION BETWE EN THIRD PERSON AND 31 ITA NO. 700/DEL./2016 AE. IF SUCH AN AGREEMENT EXISTS, THIRD PERSON IS AL SO CONSIDERED AS AN AE, AND TRANSACTION WITH SUCH THIRD PERSON BECOMES INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SECTION 92B. ONCE THERE IS A TRANSACTION BETWEEN TWO ASSOCIATED ENTERPRISES, IT CEASES TO BE AN 'UNCONTROLLED TRANSACTION' AND, THEREBY, GOES OUT O F RECKONING UNDER RULE 10B(1)(E)(II). ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT WIPRO TECHNOLOGY SERVICES LTD. EARNED REVENUE FROM MASTER SERVICES AGREEMENT WITH CITIGROUP INC. FOR THE DELIVERY OF T ECHNOLOGY INFRASTRUCTURE SERVICES. THIS AGREEMENT WAS, IN FAC T, EXECUTED BETWEEN THE ASSESSEE'S AE, WIPRO LTD., AND CITIGROUP INC., A THIRD PERSON. THIS UNFOLDS THAT THE TRANSACTION OF EARNING REVENUE FRO M SOFTWARE DEVELOPMENT SUPPORT AND MAINTENANCE SERVICES BY WIP RO TECHNOLOGY SERVICES LTD., IS AN INTERNATIONAL TRANSACTION BECA USE OF THE APPLICATION OF SECTION 92B(2) I.E., THERE EXISTS A PRIOR AGREEM ENT IN RELATION TO SUCH TRANSACTION BETWEEN CITIGROUP INC. (THIRD PERSON) A ND WIPRO LTD. (ASSOCIATED ENTERPRISE). IN THE LIGHT OF THIS STRUC TURE OF TRANSACTION, IT CEASES TO BE UNCONTROLLED TRANSACTION AND, HENCE, W IPRO TECHNOLOGY SERVICES LTD., ITA NO. 6001/DEL/2015 ELEMENT K INDI A PVT. LTD. DISQUALIFIES TO BECOME A COMPARABLE UNCONTROLLED TR ANSACTION FOR THE PURPOSES OF INCLUSION IN THE FINAL LIST OF COMPARAB LES UNDER RULE 10B(1)(E)(II). WE, THEREFORE, DIRECT REMOVAL OF THI S COMPANY FROM THE LIST OF COMPARABLES.' RESPECTFULLY FOLLOWING THE SAME WE ALSO DIRECT REMO VAL OF THIS COMPANY FROM THE LIST OF COMPARABLES. 14.4 THE HONBLE DELHI HIGH COURT IN THE CASE OF PCIT VS CASHEDGE INDIA PRIVATE LIMITED (SUPRA) HAS HELD AS UNDER: 6. AS FAR AS THE FIRST COMPANY, I.E., PERSISTENT S YSTEMS LTD. IS CONCERNED, THE MATERIAL ON RECORD - AS FOUND BY THE ITAT - SHOWS THAT THIS COMPANY WAS INVOLVED IN SOFTWARE DEVELOPM ENT, SOFTWARE PRODUCTS AND MARKETING. FURTHERMORE AND PERHAPS MOR E IMPORTANTLY PUBLISHED SEGMENTAL DATA WAS NOT AVAILABLE. IN THES E CIRCUMSTANCES, HAVING REGARD TO THE SPECIFICITY OF THE TRANSFER PRICING RULES UNDER RULE 10 (B) TO 10 (E) OF THE IN COME TAX RULES, THE DATA OF THE SAID FIRM, I.E., PERSISTENT SYSTEMS LTD . COULD NOT HAVE BEEN INCLUDED. LIKEWISE AS FAR AS THE WIPRO TECHNOL OGY SERVICES GOES, IT WAS PART OF THE CITI GROUP AND WAS DURING THE FINANCIAL YEAR IN QUESTION ACQUIRED ON 21.01.2009 BY THE WIPRO LTD . AS A SUBSIDIARY. AS A PART OF THE ARRANGEMENT, THE EXIST ING CONTRACTS PERTAINING TO THE WORK OF THE CITI GROUP CONTINUED TO BE WITH THE NEWLY CREATED ENTITY, I.E., WIPRO TECHNOLOGY SERVIC ES. EQUALLY 32 ITA NO. 700/DEL./2016 IMPORTANTLY, IS THAT THERE WAS NO PUBLISHED SEGMENT ED DATA AS FAR AS SOFTWARE DEVELOPMENT OR ITS FINANCES WERE CONCER NED WITH RESPECT TO WIPRO TECHNOLOGY SERVICES. IN THESE CIRC UMSTANCES, THE FINDINGS OF THE ITAT ARE PURELY FACTUAL AND CANNOT BE GONE INTO AS NO SUBSTANTIAL QUESTION OF LAW ARISES FOR CONSIDERATIO N. 14.5 RESPECTFULLY, FOLLOWING THE FINDING OF THE TRIBUNA L (SUPRA) AND THE HONBLE HIGH COURT (SUPRA), THE COMPANY IS DIRECTED TO BE EXCLUDED FROM THE SET OF THE FINAL COMPARABLES. ZYLOG SYSTEMS LTD . 15. BEFORE THE LEARNED TPO, THE ASSESSEE OBJECTED INCL USION OF THE COMPANY ON THE GROUND OF COMPANY ENGAGED IN SOF TWARE DEVELOPMENT AS WELL AS SALE OF THE PRODUCT AND NO S EPARATE SEGMENT AVAILABLE FOR SOFTWARE DEVELOPMENT. THE ASS ESSEE ALSO SOUGHT REJECTION ON THE GROUND THAT DRP IN FINANCIA L YEAR 2009- 10 HAS REJECTED THIS COMPANY AS COMPARABLE. HOWEVER , THE LEARNED TPO HELD THIS COMPANY TO BE FUNCTIONALLY CO MPARABLE, IN VIEW OF THE DECISION OF THE DELHI TRIBUNAL IN THE C ASE OF INTERRA INFORMATION TECHNOLOGIES INDIA P. LTD VERSUS DCIT ( 2012) 27 TAXMANN.COM 1 WHEREIN IT IS HELD THAT WHILE ADJUDIC ATING TRANSFER PRICING CASES, THERE IS NO BINDING LEGAL PRECEDENCE . BEFORE THE LEARNED DRP THE ASSESSEE SOUGHT EXCLUSION OF THIS C OMPANY ON THE GROUND OF THE FUNCTIONAL DIFFERENCE AND SIGNIFI CANT INTANGIBLES. HOWEVER THE LEARNED DRP ACCEPTED THE COMPANY AS VAL ID COMPARABLE IN VIEW OF THE FUNCTIONAL SIMILARITY. 15. BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE SUB MITTED THAT THE COMPANY IS ENGAGED IN PROVISION OF THE VAR IOUS BUSINESS ACTIVITIES AND NO SEGMENTAL RESULT FOR SOFTWARE DEV ELOPMENT SERVICES IS AVAILABLE. HE REFERRED TO ANNUAL REPORT OF THE COMPANY 33 ITA NO. 700/DEL./2016 FOR FINANCIAL YEAR 2010-11. HE REFERRED TO PAGE 102 2 AND 1051 OF THE PAPER BOOK VOLUME 3 AND SUBMITTED THAT THE COMP ANY EARNS IT REVENUE FROM SOFTWARE DEVELOPMENT SERVICES AND P RODUCTS. HE ALSO REFERRED TO PAGE 1061 OF THE PAPER BOOK AND SU BMITTED THAT COMPANY DERIVES ITS REVENUE PRIMARILY FROM SOFTWARE DEVELOPMENT SERVICES, CONSULTANCY SERVICES, PROJECTS AND E-GOVE RNANCE PROJECTS. HE FURTHER SUBMITTED THAT COMPANY DOES NO T MEET THE 75% SOFTWARE DEVELOPMENT SERVICES TO REVENUE FILTER ADOPTED BY THE LEARNED TPO. HE REFERRED TO PAGE 1024 OF THE PA PER BOOK AND SUBMITTED THAT CONTRIBUTION OF THE REVENUE FROM SOF TWARE DEVELOPMENT IS ONLY 21.6%. HE SOUGHT TO EXCLUDE THI S COMPANY ON THESE GROUNDS. 15.1 THE LEARNED DR, ON THE OTHER HAND, RELIED ON THE O RDER OF THE LOWER AUTHORITIES. 15.2 WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES AND PERUSED THE RELEVANT MATERIAL ON RECORD. ON PERUSAL OF THE PROFIT AND LOSS ACCOUNT OF THE COMPANY WHICH IS AVAILABLE ON PAGE 1 051 OF THE PAPER-BOOK, WE FIND THAT THE REVENUE OF 899,11,06,874/- HAS BEEN SHOWN FROM SOFTWARE DEVELOPMENT SERVICES AND T HE PRODUCTS AND NO SEPARATE REVENUE OR SEGMENTAL RESUL T FOR SOFTWARE DEVELOPMENT SERVICES HAVE BEEN REPORTED IN THE ANNUAL REPORT. IN ABSENCE OF ANY SEPARATE SEGMENTAL RESULT OF SOFTWARE DEVELOPMENT SERVICES AVAILABLE IN PUBLIC DOMAIN, WE REJECT THE COMPANY AS COMPARABLE ON FUNCTIONAL DISSIMILARITY A T ENTITY LEVEL. ACCORDINGLY, WE DIRECT THE LD. AO/TPO TO EXCLUDE TH IS COMPANY FROM THE SET OF THE FINAL COMPARABLES. 34 ITA NO. 700/DEL./2016 16. THE GROUND NO. 8, 9 AND 10 OF THE APPEAL RELATED T O THE INCLUSION/EXCLUSION OF COMPARABLES ARE ACCORDINGLY ALLOWED PARTLY FOR THE STATISTICAL PURPOSES. 17. NO OTHER GROUNDS HAVE BEEN ARGUED OR PRESSED BEFOR E US BY THE LEARNED COUNSEL OF THE ASSESSEE, ACCORDINGLY RE MAINING GROUNDS ARE DISMISSED AS INFRUCTUOUS. 18. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED PARTLY FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST AUGUST, 2020. SD/- SD/- (AMIT SHUKLA) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 31 ST AUGUST, 2020. RK/- (D.T.D.S.) COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI