Agnity India Technologies Pvt. Ltd., Noida V. DCIT, New Delhi

ITA 955/DEL/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 4406 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 16-08-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 16-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: H S CHOUDHARY
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 92C; 143(3); 92D; 10B; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.955/DEL./2015 (ASSESSMENT YEAR : 2010-11) M/S. AGNITY INDIA TECHNOLOGIES PVT.LTD., VS. DCIT, C 42, SECTOR 58, CIRCLE 1 (2), NOIDA. NEW DELHI. (PAN : AABCB2399B) (APPELLANT) (RESPONDENT) ASSESSEE BY : MS. ANANYA KAPOOR, ADVOCATE REVENUE BY : SHRI H.S. CHOUDHARY, CIT DR DATE OF HEARING : 16.08.2017 DATE OF ORDER : 20.09.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. AGNITY INDIA TECHNOLOGIES PVT. LTD. (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILI NG THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 24.12.2014, PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASS ED BY THE LD. DRP/TPO UNDER SECTION 143 (3) READ WITH SECTION 144 C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2010-11 ON THE GROUNDS INTER ALIA THAT :- ITA NO.955/DEL/2015 2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW; 1. THE ASSESSMENT ORDER PASSED BY THE LD. AO IN PARTIAL PURSUANCE TO THE DIRECTIONS ISSUED BY THE HON'BLE DRP IS A VITIATED ORDER AS THE HON'BLE DRP ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING OF THE TRANSFER PRICING ('TP') ADDITIONS MADE BY THE LD. AO / LD. ADDITIONAL COMMISSIONER OF INCOME TAX, TRANSFER PRICING OFFICER, NOIDA (LD. TPO). 1.1. THAT THE ASSESSMENT ORDER PASSED BY THE LD. AO IS BAD IN LAW IN AS MUCH AS THE SAME WAS PASSED IN COMPLETE DISREGARD TO THE SCHEME OF THE ACT WHIC H MANDATES THE AO TO INCORPORATE THE DIRECTIONS OF TH E DRP IN THE FINAL ORDER 2. THE LD. AO / LD. TPO AND THE HON'BLE DRP ERRED IN IGNORING THE FACT THAT THE REFERENCE MADE BY THE LD.AO SUFFERS FROM JURISDICTIONAL ERROR AS THE LD. AO DID NOT RECORD ANY REASONS IN THE DRAFT ASSESSMENT ORDER BASED ON WHICH IT WAS CONCLUDED THAT IT WAS 'NECESSARY OR EXPEDIENT' TO REFER THE MATTER TO THE LD. TPO FOR COMPUTATION OF THE ARM'S LENGTH PRICE (,ALP'), AS IS REQUIRED UNDER SECTION 92CA(1) OF THE ACT. 3. THE LD. AO / LD. TPO AND THE HON'BLE DRP ERRED IN NOT APPRECIATING THAT NONE OF THE CONDITIO NS SET OUT IN SECTION 92C(3) OF THE ACT ARE SATISFIED IN THE PRESENT CASE. 4. THE LEARNED ASSESSING OFFICER ('LD. AO') HAS ERRED IN FACTS AND CIRCUMSTANCES OF CASE AND IN LAW BY PASSING AN ORDER FOR ASSESSMENT YEAR 2010-11 WHICH IS BAD-IN-LAW. 5. THE LD. AO/LD. TPO AND THE HON'BLE DRP ERRED ON FACTS AND IN LAW IN PARTIALLY CONFIRMING T HE ADJUSTMENT OF RS.11,587,357 IN THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 ('THE ACT'), BY HOLDING THAT THE INTERNATIONAL RELATED PARTY TRANSACTION OF THE APPELLANT WITH ITA NO.955/DEL/2015 3 RESPECT TO THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES DO NOT SATISFY THE ARM'S LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. IN DOING SO THE LD. AO/HON'BLE DRP HAS ERRED: 5.1 BY DISREGARDING THE ECONOMIC ANALYSIS CONDUCTED BY THE APPELLANT TO DETERMINE THE ARM'S LENGTH PRICE (,ALP') OF THE INTERNATIONAL TRANSACTI ON PERTAINING TO SOFTWARE DEVELOPMENT SERVICES IN COMPLIANCE WITH SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME-TAX RULES, 1962 (RULES') IN THE TRANSFER PRICING ('TP') DOCUMENTATION; 5.2 BY DISREGARDING MULTIPLE YEAR/ PRIOR YEARS' DATA AS USED BY THE APPELLANT IN THE TP DOCUMENTATION AND HOLDING THAT CURRENT YEAR (I.E. FY 2009-10) DATA FOR COMPARABLE COMPANIES SHOULD BE USED DESPITE THE FACT THAT THE SAME WAS NOT NECESSARILY AVAILABLE TO THE APPELLANT AT THE TIME OF PREPARING ITS TP DOCUMENTATION; 5.3 BY REJECTING COMPARABILITY ANALYSIS IN THE TP DOCUMENTATION/FRESH SEARCH AND IN CONDUCTING A FRESH COMPARABILITY ANALYSIS BASED ON APPLICATION O F THE FOLLOWING ADDITIONAL! ARBITRARY FILTERS IN DETERMINING THE ALP FOR SOFTWARE DEVELOPMENT SERVICES; REJECTION OF COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE CURRENT YEAR (I.E. FY 2009- 10); REJECTION OF COMPANIES HAVING OPERATING INCOME FROM IT SERVICES TO SALES LESS THAN 75% REJECTION OF COMPANIES WITH RESEARCH & DEVELOPMENT EXPENSES TO SALES MORE THAN 3% APPLYING SALES FILTER OF RS. 5 CRORES FOR SELECTING COMPARABLE COMPANIES NOT FULLY ACCEPTING THE APPLICATION OF THE FILTER OF NET WORTH LESS THAN ZERO ITA NO.955/DEL/2015 4 REJECTION OF COMPANIES WITH ADVERTISING, MARKETING AND DISTRIBUTION EXPENSES TO SALES MORE THAN 3% 5.4 BY INCLUDING HIGH PROFIT MAKING COMPANIES IN THE FINAL COMPARABLES SET FOR BENCHMARKING A LOW RISK CAPTIVE UNIT SUCH AS THE APPELLANT, THUS DEMONSTRATING AN INTENTION TO ARRIVE AT A PRE- FORMULATED OPINION WITHOUT COMPLETE AND ADEQUATE APPLICATION OF MIND WITH A SINGLE-MINDED INTENTION OF MAKING AN ADDITION TO THE RETURNED INCOME OF THE APPELLANT; 5.5 BY INCLUDING CERTAIN COMPANIES IN THE FINAL SET OF COMPARABLES WHICH ARE NOT COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED; 5.6 BY EXCLUDING CERTAIN COMPANIES ON ARBITRARY/ FRIVOLOUS GROUNDS EVEN THOUGH THEY ARE COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED; 5.7 BY IGNORING THE BUSINESS/ COMMERCIAL REALITY THAT SINCE THE APPELLANT (VIS-A-VIS ITS E SERVICES) IS REMUNERATED ON AN ARM'S LENGTH COST PLUS BASIS, UNDERTAKES MINIMAL BUSINESS RISKS AS AGAINST COMPARABLE COMPANIES THAT ARE FULL-FLEDGED RISK TAKING ENTREPRENEURS, AND BY NOT ALLOWING A RISK ADJUSTMENT TO THE APPELLANT ON ACCOUNT OF THIS FACT ; AND 5.8 BY DISREGARDING JUDICIAL PRONOUNCEMENTS IN INDIA WHILE COMPUTING AN ADJUSTMENT TO THE TRANSFER PRICE OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE APPELLANT. 5.9 THE LD. AO HAS ERRED BY NOT LIMITING THE AMOUNT OF ADJUSTMENT TO THE LOWER END OF THE ARITHMETIC MEAN AS ENVISAGED UNDER SECOND PROVISO TO SECTION 92C SUB SECTION 2 OF THE ACT. ITA NO.955/DEL/2015 5 6. THAT THE LEARNED AO, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, HAS ERRED IN LEVYING AN INTEREST U/ S 234A, B C & D OF THE ACT. 7. IGNORING THE FACT THAT THE APPELLANT IS ENTITLED TO TAX HOLIDAY UNDER SECTION 10B OF THE ACT ON ITS OF DERIVING A TAX ADVANTAGE BY MANIPULATING TRANSFER PRICES OF ITS INTERNATIONAL TRANSACTIONS. 8. THAT GIVEN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DRP HAS GROSSLY ERRED IN CONFIRMING THE ACTION OF THE LD. AO OF INITIATIN G PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : AGNITY INDIA IS A 100% SU BSIDIARY OF BAYPACKETS INC. USA WHICH WAS ACQUIRED BY AGNITY IN C. USA, THE INDIAN SOFTWARE DEVELOPMENT FACILITY OF BAYPACKETS USA CHANGED ITS NAME FROM GENBAND TECHNOLOGIES PVT. LTD. TO AGN ITY INDIA PVT. LTD.. DURING THE YEAR UNDER ASSESSMENT, THE ASSESS EE CONTINUED TO OPERATE AS A CONTRACT SOFTWARE DEVELOPMENT SERVICE PROVIDER FOR OVERSEAS GROUP COMPANIES WHICH DEVELOPS SOFTWARE PR IMARILY FOR TELECOM INDUSTRY. AGNITY INDIA IS PRIMARILY INVOLV ED IN THE LAST THREE STAGES I.E. CODING, TESTING AND POST-PRODUCTI ON SUPPORT. THESE ACTIVITIES ARE EITHER WHOLLY OR PARTLY SUB-CONTRACT ED BY GROUP COMPANIES TO AGNITY INDIA. IT ALSO HELPS GROUP COM PANIES IN THE CUSTOMIZATION OF SOFTWARE AS PER THEIR CLIENTS REQ UIREMENTS. ITA NO.955/DEL/2015 6 3. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER E NTERED INTO INTERNATIONAL TRANSACTIONS AS UNDER :- S.NO. DESCRIPTION OF THE TRANSACTIONS AMOUNT (IN RUPEES) 1. PROVISION OF SOFTWARE DEVELOPMENT SERVICES 15,42,52,086 4. ASSESSEE IN ITS TP STUDY TO BENCHMARK ITS INTERN ATIONAL TRANSACTIONS SELECTED 16 COMPANIES AS COMPARABLES B UT IN THE FRESH SEARCH BEFORE TPO, THE ASSESSEE SELECTED 14 COMPARA BLES. TPO FINALLY SELECTED 14 COMPARABLES HAVING AVERAGE OPER ATING PROFIT / OPERATING COST (OP/OC) AT 26.42% WITHOUT WORKING CA PITAL ADJUSTMENT AND COMPUTED ARMS LENGTH PRICE AS UNDER :- OPERATIONAL COST 133,182,977 ARMS LENGTH PRICE AT A MARGIN OF 26.42% 168,369,920 PRICE RECEIVED 154,252,086 105% OF THE PRICE RECEIVED 161,964,690 PROPOSED ADJUSTMENT U/S 92CA 14,117,834 5. ASSESSEE CARRIED THE MATTER BY WAY OF FILING OBJ ECTIONS BEFORE THE LD. DRP. AFTER DIRECTIONS ISSUED BY THE LD. DRP, THE LD. TPO TAKEN 10 COMPARABLES HAVING AVERAGE OP/OC OF 24 .52%. ON THE BASIS OF DIRECTION ISSUED BY LD. DRP/TPO, THE A O MADE ADJUSTMENT AT ARMS LENGTH PRICE AT A MARGIN OF 24.5 2% AT RS.16,58,39,443/- IN ADDITION TO THE PRICE RECEIVED FROM THE ASSESSEE AND THEREBY MADE CUMULATIVE ADJUSTMENT TO THE TUNE OF ITA NO.955/DEL/2015 7 RS.1,15,87,357/- U/S 92CA. FEELING AGGRIEVED, THE A SSESSEE HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PR ESENT APPEAL. 6. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 7. UNDISPUTEDLY, TNMM USED BY THE ASSESSEE FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION AS MOST APPROPRIATE METHOD IS ACCEPTED BY THE LD. TPO. 8. UNDISPUTEDLY, AFTER THE DIRECTIONS ISSUED BY THE LD. DRP, THERE REMAINS 10 COMPARABLES TO CALCULATE THE MARGI N FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS, WHICH ARE AS UNDER:- S.NO. COMPANY NAME ADJUSTED PBIT/ COST (%) 1 AKSHAY SOFTWARE TECHNOLOGIES LTD. 3.78 2 EVOKE TECHNOLOGIES 23.6 3 LGS GLOBAL LTD. 12.19 4 LARSEN & TUBRO INFOTECH LTD. 24.12 5 PERSISTENT SY STEMS LTD. 33.96 6 SASKEN COMMUNICATION TECHNOLOGIES LTD. 23.68 7 THINKSOFT GLOBAL SERVICES LTD. 18.47 8 WIPRO TECHNOLOGIES LTD. 74.66 9 MINDTREE LTD (IT) SERVICES 13.88 10 TATA ELEXI LTD. 16.84 AVERAGE 24.52 9. POST DIRECTIONS ISSUED BY LD. DRP MARGIN OF THE COMPARABLES CAME TO BE 24.52% QUA SOFTWARE DEVELOPMENT SERVICES VIS--VIS ITA NO.955/DEL/2015 8 MARGIN OF THE TAXPAYER AT 15.82%, THE AO MADE RECOM PUTATION FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE AS UNDER :- OPERATIONAL COST 133,182,977 ARMS LENGTH PRICE AT A MARGIN OF 24.52% 165,939,443 PRICE RECEIVED 154,252,086 105% OF THE PRICE RECEIVED 161,964,690 PROPOSED ADJUSTMENT U/S 92CA 11,587,357 10. SO, THE AO MADE TP ADJUSTMENT OF RS.1,15,87,357 /- AS AGAINST EARLIER ADJUSTMENT MADE BY THE TPO AT RS.1, 41,17,834/-. 11. AT THE VERY OUTSET, LD. AR FOR THE ASSESSEE CHA LLENGING THE IMPUGNED ORDER PASSED BY LD. AO/TPO/DRP CUT SHORT H ER ARGUMENTS BY SEEKING EXCLUSION OF ONLY WIPRO TECHNOLOGIES LTD. FINALLY SELECTED AS COMPARABLE BY THE TPO/DRP HAVIN G OP/OC AT 74.66%. 12. ASSESSEE CHALLENGED THE INCLUSION OF WIPRO TECH NOLOGIES LTD. AS A COMPARABLE ON THE GROUNDS INTER ALIA THAT WIPRO TECHNOLOGIES LTD. IS HAVING A SIGNIFICANT BRAND NAM E; THAT DURING FY 2009-10 THE COMPARABLE COMPANY UNDERGONE BUSINES S RESTRUCTURING/EXTRA ORDINARY CIRCUMSTANCES; THAT CO MPARABLE COMPANY HAS EARNED ABNORMALLY HIGH MARGIN / VOLATIL E PROFIT MARGIN DURING FY 2009-10; THAT THE COMPARABLE COMPA NY IS HAVING HIGH TURNOVER; THAT THE ASSESSEE COMPANY HAS FAILED TO QUALIFY ITA NO.955/DEL/2015 9 RELATED PARTY TRANSACTIONS (RPT) APPLIED BY TPO AS IT PROVIDES TRANSACTIONS TO CITI GROUP AND CONSEQUENTLY FALLS W ITHIN THE DOMAIN OF SECTION 92B(2) OF THE ACT (DEEMED INTERNATIONAL TRANSACTIONS) AND RELIED UPON CASES CITED AS OPEN SOLUTIONS SOFTWARE SERVICES PVT. LTD. VS. DCIT ITA NO.7078/DEL/2014 DATED 17. 04.2017, M/S. CASH EDGE INDIA (PVT.) LTD. VS. ITO IN ITA NO. 64/DEL/2015 DATED 23.09.2015, PR.CIT VS. M/S. CASH EDGE INDIA P VT. LTD. OF HONBLE DELHI HIGH COURT DATED 04.05.2016 AND SAXO INDIA PVT. LTD. VS. ACIT IN ITA NO.6148/DEL/2015 DATED 05.02.2 016 . 13. HOWEVER, ON THE OTHER HAND, THE LD. DR FOR THE REVENUE TO REPEL THE ARGUMENTS ADDRESSED BY THE LD. AR FOR THE ASSESSEE CONTENDED THAT WHEN THE ENTIRE INCOME OF THE COMPAR ABLE COMPANY HAS EARNED FROM ACQUISITION OF THE CITI GROUP, BRAN D NAME IS NOT GOING TO EFFECT THE PROFITABILITY; THAT UNDISPUTEDL Y WIPRO TECHNOLOGIES LTD. HAS ACQUIRED CITI TECHNOLOGY SERV ICES LIMITED DURING THE YEAR UNDER ASSESSMENT W.E.F. 21.01.2009 AS PER MASTER SERVICE AGREEMENT (MSA) WHICH PROFITS FOR THE DELIV ERY OF AT LEAST $ 5 MILLION IN SERVICE REVENUES OVER THE PERIOD OF CONTRACT AND THE SERVICES WERE IN THE NATURE OF SOFTWARE DEVELOPMENT SERVICES. 14. SO FAR AS OBJECTIONS/CONTENTIONS RAISED BY ASSE SSEE AGAINST RETENTION OF WIPRO TECHNOLOGIES LTD. AS A COMPARABL E ON GROUND OF BUSINESS RESTRUCTURING / EXTRA ORDINARY CIRCUMSTANC ES IS CONCERNED, ITA NO.955/DEL/2015 10 TPO HAS MERELY OBSERVED THAT THE ASSESSEE HAS NOT D EMONSTRATED HOW BUSINESS RESTRUCTURING AND EXTRA ORDINARY CIRCU MSTANCES HAS EFFECTED PRICING AND PROFITABILITY OF THE COMPANY. 15. UNDISPUTEDLY, BY VIRTUE OF THE MASTER SERVICE A GREEMENT (MSA), WIPRO TECHNOLOGIES LTD. ACQUIRED ALL CITI GR OUP INTERESTS W.E.F. 01.01.2009. IT IS ALSO NOT IN DISPUTE THAT MSA PROVIDES FOR THE DELIVERY OF AT LEAST $ 500 MILLION IN SERVICE R EVENUE OVER THE PERIOD OF SIX YEARS CONTRACT. WHEN WE EXAMINE THE CONTENTIONS RAISED BY THE LD. AR FOR THE ASSESSEE IN THE LIGHT OF THE AFORESAID UNDISPUTED FACTS, WIPRO TECHNOLOGIES LTD. IS NOT A SUITABLE COMPARABLE. IDENTICAL ISSUE HAS COME UP BEFORE COO RDINATE BENCH OF THE TRIBUNAL IN OPEN SOLUTIONS SOFTWARE SERVICES PVT. LTD. AND SAXO INDIA PVT. LTD. (SUPRA). 16. THIS ISSUE HAS ALSO COME FOR DETERMINATION BEFO RE COORDINATE BENCH OF THE TRIBUNAL IN CASE CITED AS OPEN SOLUTIONS SOFTWARE SERVICES PVT. LTD., AVAILABLE AT PAGES 1 TO 16 OF THE PAPER BOOK. UNDISPUTEDLY, OPEN SOLUTIONS SOFTWARE SERVICES PVT. LTD. IS ENGAGED IN BUSINESS OF PROVIDING SOFTWARE DEVELOPME NT, RESEARCH AND OTHER RELATED SERVICES TO ITS PARENT COMPANY AN D ENTERED INTO INTERNATIONAL TRANSACTIONS FOR PROVIDING SOFTWARE D EVELOPMENT, RESEARCH RELATED SERVICES TO THE TUNE OF RS.38,40,8 8,682/- DURING AY 2010-11. WIPRO TECHNOLOGIES LIMITED COME UP AS A ITA NO.955/DEL/2015 11 COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANS ACTIONS WHICH HAS BEEN ORDERED TO BE EXCLUDED BY THE COORDINATE B ENCH BY MAKING FOLLOWING OBSERVATIONS:- 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDERS AS WELL AS THE MATERIAL REFERRED TO AND RELI ED UPON BEFORE US. ONE OF THE MAIN GROUND FOR EXCLUSIO N OF THIS COMPANY IS THAT IT FAILS THE CRITERIA OF 25 % OF RPT FILTER FOR THE REASON THAT ITS ENTIRE REVENUE I S ON ACCOUNT OF RELATED PARTY TRANSACTIONS. AS POINTED O UT BY THE LD. COUNSEL PRIOR TO 20.01.2009, WIPRO TECHNOLOGY SERVICES LTD.' WAS PART OF CITY GROUP AN D WAS KNOWN AS 'CITY TECHNOLOGY SERVICES LTD.' (CTS) WHICH PROVIDED SERVICES TO THE CITI GROUP. WITH EFF ECT FROM 20.01.2009, WIPRO LTD. ACQUIRED THE ENTIRE 100% HOLDING OF 'CITI TECHNOLOGY SERVICES LTD' WHIC H WAS SUBSEQUENTLY RENAMED AS 'WIPRO TECHNOLOGY SERVICES LTD.' AS A PRE-ARRANGEMENT, WIPRO LTD MADE AN AGREEMENT WITH CITI GROUP INC. FOR ACQUIRING OF A CITY GROUP INTEREST IN CTS AND SIGNED MASTER SERVIC E AGREEMENT WITH CITI GROUP INC., FOR THE DELIVERY OF SIMILAR TECHNOLOGY, INFRASTRUCTURE, SERVICES AND APPLICATION, DEVELOPMENT AND MAINTENANCE SERVICE FO R THE PERIOD OF 6 YEARS, WHICH WAS PROVIDED BY ERSTWHILE CTS. THE MSA PROVIDED THAT AT LEAST $500 MILLION IN SERVICE REVENUES OVER THE PERIOD OF CONT RACT SHOULD BE PAID. THIS PREARRANGEMENT BETWEEN THE CIT I GROUP AND WIPRO LTD. WOULD MAKE THE SUBSEQUENT RENDITION OF SERVICES BY THIS COMPANY TO THE CITI GROUP FALL WITHIN THE MEANING OF DEEMED INTERNATION AL TRANSACTION AS DEFINED U/S 928(2) WHICH READS AS UNDER. S.92B(2): 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 RELATION TO THE RELEVANT TRANSACTION BETWEEN SUCH OTHER ITA NO.955/DEL/2015 12 PERSON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE.' THE AFORESAID PROVISION CLEARLY ENVISAGES THAT, IF A TRANSACTION HAS BEEN ENTERED INTO BY AN ENTERPRISE WITH UNRELATED PARTY, THEN FOR THE PURPOSE OF SECTION 92B(1) IT IS DEEMED TO BE TRANSACTION ENTERED INTO BETWEEN RELATED PARTIES (TWO A.ES) IF THERE EXISTS PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION BETWEEN THIRD PARTY AND THE A.E. IN OTHER WORDS, AS PER TERMS OF SECTION 92B(2), EVEN IF THE TRANSACTIO N IS BETWEEN UNRELATED PARTY AND AN ENTERPRISE, THEN, IT WOULD BE DEEMED TO BE AN INTERNATIONAL TRANSACTION IF THERE WAS ANY PRIOR AGREEMENT BETWEEN THE RELATED PARTIES ON THE BASIS OF WHICH PRESENT TRANSACTION I S BEING UNDERTAKEN. HERE IN THE PRESENT CASE IT IS TH E PRECISELY THE SAME SITUATION, BECAUSE THERE WAS A P RIOR AGREEMENT BETWEEN THE CITY GROUP AND CITY TECHNOLOGY SERVICES LTD. WHO WERE RELATED PARTY, TH AT IS, AT THAT TIME THE TRANSACTION WAS BETWEEN TWO A. ES, HENCE RELATED PARTY TRANSACTION. LATER ON, WHEN ONE OF THE A.E. WAS ACQUIRED BY AN UNRELATED PARTY, I.E., WIPRO LTD., THEN ALSO IF ANY REVENUE IS RECEIVED FR OM CITI GROUP ON ACCOUNT OF SUCH PRIOR AGREEMENT OR PR E- ARRANGEMENT, THEN IT IS DEEMED TO BE AN INTERNATION AL TRANSACTION AND ONCE THAT IS SO THEN DUE TO RPT FIL TER THIS COMPANY WOULD FAIL THE TEST OF SUCH A FILTER, BECAUSE ADMITTEDLY ENTIRE REVENUE OF THIS COMPANY I S ON ACCOUNT OF RPT. THUS, WE AGREE WITH THE CONTENTIONS OF THE LD.COUNSEL THAT THIS COMPANY CANNOT BE TAKEN AS A COMPARABLE FOR BENCH MARKING ASSESSEE'S MARGIN. 17. SIMILARLY, COORDINATE BENCH OF THE TRIBUNAL IN SAXO INDIA PVT. LTD. (SUPRA), AVAILABLE AT PAGES 56 TO 92 OF THE PAPER B OOK, WHILE EXAMINING SUITABILITY OF WIPRO TECHNOLOGIES L TD. FOR BENCHMARKING THE INTERNATIONAL TRANSACTION WITH AND SAXO INDIA ITA NO.955/DEL/2015 13 PVT. LTD. (SUPRA) UNDISPUTEDLY ENGAGED IN THE BUSINESS OF DES IGN AND DEVELOPMENT OF CUSTOMIZED SOFTWARE APPLICATION, THE SAME WAS ORDERED TO BE EXCLUDED BY RETURNING FOLLOWING FINDI NGS :- 16.3. IT IS OBSERVED FROM THE ABOVE CONTENTION REPRODUCED IN THE TPO'S ORDER THAT WIPRO TECHNOLOGY SERVICES LTD., WHICH WAS EARLIER CITI TECHNOLOGY SE RVICES LTD., WAS HELD BY CITI CORP. BANKING CORPORATION, U SA UPTO 20TH JANUARY, 2009. WIPRO LTD., PARENT COMPANY OF THE ASSESSEE, EXECUTED AN AGREEMENT WITH CITI GROUP INC., FOR ACQUIRING CITI TECHNOLOGY SERVICES LTD., NOW CALLED WIPRO TECHNOLOGY SERVICES LTD. ON 21.1.2009, WIPRO LTD. SIGNED A MASTER AGREEMENT WITH CITI GROU P INC., FOR THE DELIVERY OF TECHNOLOGY INFRASTRUCTURE SERVICES AND APPLICATION DEVELOPMENT AND MAINTENANC E SERVICES FOR THE PERIOD OF SIX YEARS, WHICH ALSO IN CLUDES THE YEAR UNDER CONSIDERATION. THIS SHOWS THAT INCOM E FROM SOFTWARE DEVELOPMENT SUPPORT AND MAINTENANCE SERVICES WAS EARNED BY WIPRO TECHNOLOGY SERVICES LT D., FROM CITI GROUP INC., BY MEANS OF MASTER SERVICE AGREEMENT ENTERED INTO BETWEEN WIPRO LTD., ITS PARE NT COMPANY AND CITI GROUP INC., A THIRD PERSON. 16.4. WE HAVE NOTICED ABOVE FROM THE LANGUAGE OF RULE 10B(1)(E)(II) THAT IT IS THE NET PROFIT MAR GIN REALIZED FROM A COMPARABLE UNCONTROLLED TRANSACTION , WHICH IS CONSIDERED FOR THE PURPOSES OF BENCHMARKIN G. THE EPITOME OF 'COMPARABLE UNCONTROLLED TRANSACTION ' IS THAT THE COMPANIES OR TRANSACTIONS IN ORDER TO FALL WITHIN THE AMBIT OF SUB- CLAUSE (II) OF RULE 10B(1)(E), SH OULD BE BOTH COMPARABLE AS WELL AS UNCONTROLLED. 'UNCONTROL LED TRANSACTION' HAS BEEN DEFINED IN RULE 10A(A) TO MEA N: 'A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIAT ED ENTERPRISES, WHETHER RESIDENT OR NON-RESIDENT.' THI S SHOWS THAT IN ORDER TO BE CALLED AS AN UNCONTROLLED TRANSACTION, IT IS SINE QUA NON THAT THE SAME SHOUL D BE BETWEEN THE ENTERPRISES OTHER THAN THE ASSOCIATED ENTERPRISES. SECTION 92B(2) PROVIDES THAT: 'A TRANS ACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER T HAN AN ASSOCIATED ENTERPRISE SHALL, FOR THE PURPOSES OF SU B- SECTION (1), BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION' BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERP RISE, ITA NO.955/DEL/2015 14 OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERM INED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE'. (ON GOING THROUGH THE PRESCRIPTION OF SUB-SECTION (2) OF SECTION 92B, IT IS CLEARLY BORNE OUT THAT A TRANSACTION WITH A NON-AE SHALL BE DEEMED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO AES IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO TH E RELEVANT TRANSACTION BETWEEN THE THIRD PERSON AND T HE AE OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN THE THIRD PERSON AN D THE AE. WHEN WE CONSIDER SECTION 92B(2) IN COMBINATION WITH RULE 10A(A), IT FOLLOWS THAT THE TRANSACTION BETWEEN NON-AES SHALL BE CONSTRUED AS A TRANSACTION BETWEEN TWO AES, IF THERE EXISTS A PRIO R AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION B ETWEEN THIRD PERSON AND THE AE. IF SUCH AN AGREEMENT EXIST S, THE THIRD PERSON IS ALSO CONSIDERED AS AN AE AND TH E TRANSACTION WITH SUCH THIRD PERSON BECOMES INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SEC TION 92B. ONCE THERE IS A TRANSACTION BETWEEN TWO ASSOCI ATED ENTERPRISES, IT CEASES TO BE AN 'UNCONTROLLED TRANS ACTION' AND, THEREBY, GOES OUT OF RECKONING UNDER RULE 10B(L)(E)(II). 16.5. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT WIPRO TECHNOLOGY SERVICES LTD. EARNED A REVENUE FROM MASTER SERVICES AGREEMENT WITH CITIGRO UP INC. FOR THE DELIVERY OF TECHNOLOGY INFRASTRUCTURE SERVICES. THIS AGREEMENT WAS, IN FACT, EXECUTED BET WEEN THE ASSESSEE'S AE, WIPRO LTD., AND CITIGROUP INC., A THIRD PERSON. THIS UNFOLDS THAT THE TRANSACTION OF EARNIN G REVENUE FROM SOFTWARE DEVELOPMENT SUPPORT AND MAINTENANCE SERVICES BY WIPRO TECHNOLOGY SERVICES LTD., IS AN INTERNATIONAL TRANSACTION BECAUSE OF TH E APPLICATION OF SECTION 92B(2) I.E., THERE EXISTS A PRIOR AGREEMENT IN RELATION TO SUCH TRANSACTION BETWEEN CITIGROUP INC. (THIRD PERSON) AND WIPRO LTD. (ASSOC IATED ENTERPRISE). IN THE LIGHT OF THIS STRUCTURE OF TRAN SACTION, IT CEASES TO BE UNCONTROLLED TRANSACTION AND, HENCE, W IPRO TECHNOLOGY SERVICES LTD., DISQUALIFIES TO BECOME A COMPARABLE UNCONTROLLED TRANSACTION FOR THE PURPOSE S OF INCLUSION IN THE FINAL LIST OF COMPARABLES UNDER RU LE 10B(L)(E)(II). WE, THEREFORE, DIRECT REMOVAL OF THI S COMPANY FROM THE LIST OF COMPARABLES. ITA NO.955/DEL/2015 15 18. NOT ONLY THIS, WIPRO TECHNOLOGIES LTD. IS A GIA NT COMPANY HAVING WORLD WIDE BRAND DOMAIN VIS--VIS ASSESSEE C OMPANY. COORDINATE BENCH OF THE TRIBUNAL IN CASE OF EQUANT SOLUTIONS INDIA PVT. LTD. VS. DCIT IN ITA NO.1202/DEL/2015 DA TED 17.05.2016 (AVAILABLE AT PAGES 127 TO 157 OF THE PAPER BOOK) EXAMINED THE SUITABILITY OF WIPRO TECHNOLOGIES LTD . VIS--VIS EQUANT SOLUTIONS INDIA PVT. LTD. WHICH IS ALSO INT O SOFTWARE DEVELOPMENT SERVICES AND ORDERED TO EXCLUDE THE SAM E FOR RELATED PARTY TRANSACTIONS WITH CITI TECHNOLOGY SERVICES LT D. AND HAS ALSO BEEN ORDERED TO BE EXCLUDED ON THE GROUND THAT BRAN D VALUE OF THIS COMPARABLE EFFECTS THE PROFITABILITY. 19. FURTHERMORE BECAUSE OF HIGHLY ABNORMAL MARGIN A ND VOLATILE PROFIT MARGIN, WIPRO TECHNOLOGIES LTD. DOES NOT QUA LIFY AS A VALID COMPARABLE AS IS EVIDENT FORM FOLLOWING TABLE :- 2009-10 2010-11 2011-12 OP/TC MARGIN 73.77% 52.55% 80.81% 20. THE CONTENTIONS RAISED BY LD. DR TO RETAIN WIPR O TECHNOLOGIES LIMITED AS A COMPARABLE FOR BENCHMARKI NG THE INTERNATIONAL TRANSACTION ARE NOT TENABLE, HAVING B EEN ALREADY REPLIED WITH BY THE COORDINATE BENCH OF THE TRIBUNA L IN NUMEROUS CASES. ITA NO.955/DEL/2015 16 21. EVEN OTHERWISE, WHEN WE COMPARE THE TURNOVER OF WIPRO TECHNOLOGIES LTD. VIS--VIS ASSESSEE COMPANY THERE IS HUGE DIFFERENCE BECAUSE IN AY 2009-10 WIPRO TECHNOLOGIES LTD. HAS A TURNOVER OF RS.400 CRORES AS AGAINST TURNOVER OF TH E ASSESSEE AT RS.15.42 CRORES. SO, WE ARE OF THE CONSIDERED VIEW THAT HIGH TURNOVER IS DUE TO BRAND NAME OF THIS COMPARABLE CO MPANY AND AS SUCH IS NOT A VALID COMPARABLE. 22. SO, IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE AN D FOLLOWING THE DECISIONS RENDERED BY COORDINATE BENCH OF THE T RIBUNAL IN OPEN SOLUTIONS SOFTWARE SERVICES PVT. LTD. AND SAXO INDIA PVT. LTD. (SUPRA), WIPRO TECHNOLOGIES LIMITED IS NOT A SUITAB LE COMPARABLE, HENCE ORDERED TO BE EXCLUDED FOR BENCHM ARKING THE INTERNATIONAL TRANSACTION. 23. RESULTANTLY, THE APPEAL FILED BY THE ASSESSEE I S ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 20 TH DAY OF SEPTEMBER, 2017. SD/- SD/- (B.P. JAIN) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 20 TH DAY OF SEPTEMBER, 2017 TS ITA NO.955/DEL/2015 17 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.