Principal Global Services Private ... vs Assessee

Principal Global Services Pvt. Ltd., Level 6 & 7, Tower VI, Cybercity, Magarpatta City, Hadapsar, Pune - 411 013. PAN : AADCP7369P .... Appellant

Vs.

Dy. Commissioner of Income Tax, Circle- 1(2), Pune. .... Respondent

Appellant by : Mr. Kanchan Kaushal & Mr. Roshan Lunawat Respondent by : Mrs. M.S. Verma, CIT & Mr. B. G. Reddy, CIT Date of hearing : 13-03-2015 Date of pronouncement : 10-04-2015

ORDER

PER G. S. PANNU, AM

The captioned appeal has been preferred by the assessee pertaining to

the assessment year 2009-10, which is directed against the order of the

Dy. Commissioner of Income Tax, Circle 1(2), Pune (in short 'the Assessing

Officer') passed u/s 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961

(in short "the Act") dated 07.01.2014, passed in conformity with the directions

given by the Dispute Resolution Panel, Pune (in short 'the DRP') dated

31.12.2013.

2. In this appeal, the Grounds of Appeal raised by the assessee read as

under: -

"1. The Ld. Assessing Officer ('AO') pursuant to the directions of the Ld. Dispute Resolution Panel ('DRP') erred in rejecting the benchmarking approach adopted/contemporaneous documentation maintained by the appellant and thereby making a transfer pricing adjustment of Rs. 93,951,619 to the income of the appellant by holding that the international transaction, 2 ITA No.280/PN/2014

pertaining to provision of Information Technology ('IT or software services') and IT enabled back office support services ("ITES Services or back office support services') to the associated enterprise ('AE'), are not at arm's length under the Income-tax Act, 1961 ('the Act').

2. On the facts and in the circumstances of the case, the Ld. DRP/AO erred in modifying the benchmarking analysis, as conducted by the appellant using Transactional Net Margin Method ('TNMM') for benchmarking its international transactions pertaining to provision of IT and ITES services to the AE, and thereby modifying the set of comparables. In doing so, the Ld. DRP/AO specifically erred in:

a) Eliminating companies that would otherwise be comparables, but for the fact that they are loss making;

b) Including the companies which are not functionally comparable to the IT and ITES services rendered by the appellant in final set of comparables on an adhoc basis, thereby resorting to cherry picking of comparables;

c) Rejecting companies functionally similar to that of the appellant's business operations of provision of IT and ITES services from final set of comparables (identified based on the fresh search conducted by the appellant on a without prejudice basis).

3. The Ld. DRP/AO erred in considering the single year data for the comparables i.e. data for FY 2008-09 only and disregarding multiple year data which was considered by the appellant in accordance with the provisions of Rule 10B(4) of the Income-tax Rule, 1962 ("Rules").

4. The Ld. DRP / AO erred in not allowing an adjustment for the difference between the level of risk borne/assets employed by the comparables and the appellant as provided by the appellant, without providing any cogent reasons, and disregarding the provisions of Rules 10B (3) read with Rule 10C of the Rules. In doing so, the Ld. DRP / AO erred by:

(i) failing to capture that the appellant is a routine captive service provider as against the comparable companies selected by the Ld. TPO which include entrepreneurial companies and hence an adjustment is necessary;

(ii) disregarding the provisions of Rules 10B(3) read with Rule 10C of the Rules.

5. The Ld. AO while passing the assessment order has erred by not following the DRP directions for disposing off the rectification application filed by the appellant for rectifying certain mistakes in the transfer pricing order.

6. The Ld. AO while passing the assessment order has erred in computing the tax computation by not considering the advance tax and tax deducted at source amounts. Further, on a without prejudice basis, the AO has also erred in the tax computation by not considering the credit of minimum alternate tax ('MAT') available to the appellant."

3. In this case, although the assessee company has raised multiple

Grounds of Appeal but the substantive dispute is with regard to an addition of

Rs.9,39,51,619/- made by the Assessing Officer on account of determination 3 ITA No.280/PN/2014

of arm's length price of the international transactions entered by the assessee

with its associated enterprises.

4. Briefly put, the relevant facts are that the appellant is a company

incorporated under the provisions of the Companies Act, 1956 and is, inter-

alia, engaged in the business of providing software solutions and back office

operations exclusively to its associated enterprises abroad. For the

assessment year under consideration, it filed a return of income declaring total

income of Rs.2,33,171/-, which was subject to a scrutiny assessment. The

international transactions entered by the assessee with its associated

enterprises related to Provision of software services and Provision of back

office support services amounting to Rs.45,26,17,038/- and Rs.18.82.13.428/-

respectively. On a reference made by the Assessing Officer, the Transfer

Pricing Officer (TPO) passed an order u/s 92CA(3) of the Act dated

28.01.2013 determining the arm's length price of the aforesaid international

transactions at a figure higher than their stated values by a sum of

Rs.9,39,51,619/-. After the Assessing Officer passed a draft assessment

order u/s 143(3) r.w.s. 144C(1) of the Act dated 26.03.2013 proposing the

above addition to the returned income, assessee preferred to raise objections

before the Dispute Resolution Panel (DRP) who vide its order dated

31.12.2013 primarily rejected the pleas of the assessee and upheld the

determination of arm's length price of the international transactions as done by

the TPO. As a consequence, the Assessing Officer has passed an

assessment order u/s 143(3) r.w.s. 144C(13) of the Act dated 07.01.2014

whereby adjustment of Rs.6,70,55,721/- and Rs.2,68,95,897/- has been made

to the stated values of the international transactions of Provision of software

services and Provisions of back office support services respectively rendered

by the assessee to its associated enterprises. The aforesaid addition made to

the returned income is the subject-matter of dispute before us. 4 ITA No.280/PN/2014

5. At the time of hearing, the Ld. Representative for the assessee had

confined his arguments substantively with respect to the above noted Ground

of Appeal No.2 whereby inclusion and exclusion of certain concerns from the

final set of comparables adopted by the TPO is sought to be challenged.

6. In order to appreciate the rival contentions, the following discussion is

relevant. The appellant company is a 100% Export Oriented Unit (EOU)

registered with the Software Technology Parks of India (STPI) and its income

derived from such activities is eligible for deduction u/s 10A of the Act.

Primarily, assessee is engaged in Provision of software services and back

office support services to its parent associated enterprises, namely, the

Principal Financial Group (in short "PFG"). Pertinently, assessee is providing

such services only to its associated enterprises and therefore it can be

understood as a captive service provider. Further, assessee is being

remunerated by its associated enterprises on a cost plus markup basis. As a

consequence, it is to be understood that the assessee is a captive service

provider which is operating within assured return on costs incurred by it. In

order to appreciate the services being rendered by the assessee to its

associated enterprises, which reflect 'international transactions' within the

meaning of section 92B of the Act, it is appropriate to observe that PFG is a

global financial services leader which offers wide range of financial products

and services, such as retirement and investor services, insurance, asset

management and financial services through financial services company. PFG

is not engaged in developing and selling software products and such like

services i.e. software development services required to undertake its core

business area of financial products and services are outsourced to the

assessee company. The software development services rendered by the

assessee comprised of application development and quality assurance

services which have been categorized as Provision of software services and 5 ITA No.280/PN/2014

for the year under consideration, assessee has been remunerated for such

services at Rs.45,26,17,038/-. The second stream of 'international

transactions' entered with the associated enterprises relate to the

administrative support services provided by the assessee for various service

divisions of PFG e.g. investor services division, health services division and

individual life insurance, underwriting operations division, etc.. Such services

has been categorized as Provision of back office support services for which

assessee has been remunerated during the year under consideration at

Rs.18,82,13,428/-.

7. Both the aforesaid category of international transactions entered by the

assessee with its associated enterprises were subject-matter of determination

of the arm's length price by the TPO in its order dated 28.01.2013 (supra).

The TPO has differed with the assertions of the assessee that the stated value

of the international transactions are an arm's length price. Instead, as per the

TPO in both segments, adjustments are required to be made having regard to

the arm's length price determined on an application of the Transactional Net

Margin (TNM) Method. Notably, in the Transfer Pricing Study carried out by

the assessee, TNM Method was selected as the most appropriate method in

order to be benchmark the international transactions of Provision of software

services and Provision of back office support services undertaken by the

assessee with its associated enterprises. In so far as the application of the

TNM Method in order to determine the arm's length price is concerned, there

is no difference between the assessee and the Revenue.

8. However, the TPO has primarily differed with the assessee on adoption

of certain concerns as comparables and in considering single year financial

data of the comparables relevant to the year under consideration as against 6 ITA No.280/PN/2014

the approach of the assessee in its Transfer Pricing Study to consider multiple

year's data of the comparables concerns.

9. In so far as the segment relating to the Provision of software services is

concerned, the Profit Level Indicator (PLI) was computed by the assessee at

15.66% based on the formula Operating Profit/Total Cost (OP/TC). On the

basis of the comparables selected in the Transfer Pricing Study the arithmetic

mean of the PLI of the comparables was taken at 14.48% and on this basis

assessee had asserted before the TPO that its international transactions of

Provision of software services to the associated enterprises was at an arm's

length price.

10. After rejecting certain comparables concerns selected in the Transfer

Pricing Study and introducing certain new concerns as comparables and

considering the single year financial data of the comparables, the TPO

computed the arithmetic mean PLI i.e. OP/TC of the comparables at 32.79%.

The final set of comparables and the corresponding PLI taken by the TPO is

as under :-

Sr.No. Company OP/TC using single year data for FY 2008-09 1. Mindtree Consulting Ltd. 27.60% 2. Akshay Software Technologies Ltd. 8.23% 3. F C S Software Solutions Ltd. 15.61% 4. L G S Global Ltd. 18.88% 5. Compucom Software Ltd. (Software 42.09% Segment) 6. Transworld Infotech Ltd. (Sterling 46.73% International Enterprises Ltd.) 7. KALS Information Systems Ltd. 42.36% (Application Software Segment) 8. ICSA (India) Ltd. (ESS Segment) 60.78% ARITHMETIC MEAN 32.79%

11. In this manner, by adopting the aforesaid final set of comparables, the

TPO compared the assessee's PLI of 15.66% in the segment of Provision of

software services with the arithmetic mean PLI of the comparables at 32.79% 7 ITA No.280/PN/2014

and accordingly computed an adjustment of Rs.6,70,55,721/- which was

required to be made to the stated value in order to determine the arm's length

price of the transactions relating to the Provision of software services to the

associated enterprises.

12. On this aspect, the Ld. Representative for the assessee has made

three-fold arguments. Firstly, it is contended that the following concerns,

namely, (i) Compucom Software Ltd. (Software Segment); (ii) Transworld

Infotech Ltd. (Sterling International Enterprises Ltd.); (iii) KALS Information

Systems Ltd. (Application Software Segment); and, (iv) ICSA (India) Ltd. (ESS

Segment) are liable to be excluded from the final set of comparables.

Secondly, it is sought to be made out that the TPO has erred in adopting the

margin of 27.60% in the case of Mindtree Consulting Ltd. inasmuch as

according to the assessee, only the margin relating to the IT services segment

of the said concern is to be adopted which comes to 5.27%. Thirdly, it is also

sought to be pointed out that the TPO erred in not including Techprocess

Solutions Ltd. (Software Segment) and Thinksoft Global Services Ltd. in the

final set of comparables.

13. In this background, the rival contentions have been heard with respect

to the addition relating to the international transactions of Provision of software

services to the associated enterprises.

14. Regarding the KALS Information Systems Ltd. (Application Software

Segment), the case setup by the assessee is that the said concern is

functionally not comparable with the activity of Provision of software services

rendered by the assessee. According to the assessee, the said concern is

engaged in developing software products as well as Provision of software

development services whereas assessee is only engaged in providing 8 ITA No.280/PN/2014

software development services. At the time of hearing, the Ld. Representative

for the assessee referred to the copy of Annual Report of the said concern,

wherein as per Schedule No.18 relating to Notes to the financial statements, it

is stated that the said concern was not only engaged in development of

software services but also in development of software products and also

engaged in running a training centre for software professionals on online

projects. Further, it has been submitted before the lower authorities as well as

before us that the website of the said concern also makes out various software

products developed by the said concern. It was pointed out that the TPO in

the assessee's own case for assessment year 2007-08 as also for

assessment year 2010-11 in his orders passed u/s 92CA(3) of the Act dated

28.01.2013 and 29.01.2014 respectively excluded the said concern from the

final set of comparables. It was also pointed out that under identical

circumstances, the Pune Bench of the Tribunal in the case of PTC Software

(India) Private Limited vs. DCIT vide ITA No.336/PN/2014 dated 31.10.2014

for assessment year 2009-10 has held that the said concern was not

comparable to an assessee which was engaged in Provision of only software

development services.

15. On the other hand, the Ld. Departmental Representative appearing for

the Revenue has primarily relied upon the stand of the TPO as contained in

para 10 of the impugned order. As per the TPO, the application software

segment of the said concern was also undertaking software development

services and therefore it was liable to be included as a comparable.

16. We have carefully considered the rival submissions. We find that the

point made out by the assessee for exclusion of KALS Information Systems

Ltd. (Application Software Segment) is on a sound footing inasmuch as the

said concern is functionally distinct from the activities of Provision of software 9 ITA No.280/PN/2014

services rendered by the assessee. Ostensibly, for the very same

assessment year in the case of PTC Software (India) Private Limited (supra),

the Pune Bench of the Tribunal found that the said concern was functionally

different from a concern which was undertaking pure software development

services. The relevant discussion in the order of the Tribunal dated

31.10.2014 (supra) is as under :-

"27. The assessee is aggrieved by the inclusion of item at Sr No.5 KALS Information Systems Ltd. (seg). It is the case of the assessee that the said company was included by the TPO in its study relating to assessment year 2007-08 and the Tribunal in assessee's own case in ITA No.1605/PN/2011 relating to assessment year 2007-08 vide order dated 30.04.2013 had held the said company to be not functionally comparable with the assessee. The relevant finding of the Tribunal vide para 19 is as under:

"19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern (KALS Information Systems Ltd.) has not been found to be functionally comparable with the assessee in the immediately preceding assessment year and in the present year also, on the basis of the Annual Report, referred to in the written submissions addressed to the lower authorities, the assessee has correctly asserted out that the said concern was inter alia engaged in sale of software products, which was quite distinct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services."

28. In the year under consideration also, the said company KALS Information Systems Ltd. is engaged in the sale of software products, which is apparent from the financial statements and notes to accounts filed by the assessee at pages 479 to 489 of the Paper Book. The said company being not functionally comparable in view of the factual aspects referred to by the assessee and in view of finding of the Tribunal in assessee's own case for assessment year 2007-08, we hold that the application of software segment of the said concern was not comparable to the assessee's segment of IT services."

17. Notably, the Tribunal had followed its earlier decision in the case of

PTC Software (India) Pvt. Ltd. for assessment year 2007-08 dated

30.04.2013. Evidently, the IT services segment of PTC Software (India) Pvt. 10 ITA No.280/PN/2014

Ltd. (supra) was engaged in rendering software development services which

did not include development of any software products as was being done by

KALS Information Systems Ltd. (Application Software Segment). Ostensibly,

in the case of the appellant also in the course of rendering of Provision of

software services to the associated enterprises, there is no development of

software products, which is different from the situation in the case of KALS

Information Systems Ltd. (Application Software Segment); and, therefore

following the aforesaid precedents, the said concern is liable to excluded from

the final set of comparables. Moreover, we have also perused the orders

passed by the TPO u/s 92CA(3) for assessment year 2007-08 (supra) as also

for assessment year 2010-11 (supra) wherein the plea of the assessee for

exclusion of KALS Information Systems Ltd. (Application Software Segment)

has been accepted. For all the aforesaid reasons, we uphold the plea of the

assessee for exclusion of KALS Information Systems Ltd. (Application

Software Segment) from the final set of comparables. We direct accordingly.

18. The second point made out by the assessee is for exclusion of

Transworld Infotech Ltd. (earlier known as Sterling International Enterprises

Ltd.) from the final set of comparables. The TPO vide his discussion in para

10(8) included the said concern in the final set of comparables and rejected

assessee's plea for its exclusion. The short point made out by the assessee

before us is to the effect that the said concern was not includible in the final

set of comparables for the reason that the assessee's financial year under

consideration is 01.04.2008 to 31.03.2009 whereas the relevant data of the

said concern is of a different financial period being from 01.07.2008 to

30.06.2009. It was therefore pointed out that since the data of the said

concern did not correspond to the financial year of the assessee, the said

concern cannot be construed to be a good comparable. We find that factually

the aforesaid position is not in dispute. Moreover, rule 10B(4) of the Income 11 ITA No.280/PN/2014

Tax Rules, 1962 (in short "the Rules") provides that the data to be used in

analyzing the comparability of an uncontrolled transaction with the

international transaction shall be the data relating to the financial year in which

the international transaction has been entered into. Ostensibly, in the present

situation, the financial data adopted of Transworld Infotech Ltd. does not relate

to the financial year in which the international transactions in question have

been carried out by the assessee. We, therefore, are in agreement with the

submissions of the assessee that the said concern is excludible from the final

set of comparables. We hold so.

19. The next point made out before us is with respect to the action of the

TPO in including ICSA (India) Ltd. (ESS Segment) as a comparable in the final

set of comparables. The stand of the assessee before the lower authorities as

well as before us is to the effect that the said concern is functionally not

comparable to assessee's activity of rendering of Provision of software

services to its associated enterprises. Secondly, it has also been pointed out

that the said concern has significantly high Research and Development

expenses and on this point also the said concern is liable to be excluded.

Thirdly, it is submitted that the TPO in assessment year 2010-11 accepted

assessee's plea that the said concern was not comparable to the assessee's

activity of rendering of Provision of software services to the associated

enterprises.

20. The Ld. CIT-DR has primarily referred to the discussion made by the

TPO in para 10(7) of the impugned order to say that the said concern was

having two distinct segments as per its Annual Report, and the segment

considered for the comparability analysis by the TPO was software services

segment which did not include product development activity. Therefore, the

segment considered for comparability analysis is similar in function to 12 ITA No.280/PN/2014

assessee's activity of Provision of software services to its associated

enterprises.

21. We have carefully considered the rival submissions. Firstly, we may

refer to the decision of the Pune Bench of the Tribunal in the case of PTC

Software (India) Pvt. Ltd. dated 30.04.2013 (supra) wherein the inclusion of

ICSA (India) Ltd. (ESS Segment) in the final set of comparables was in

dispute. In the case of PTC Software (India) Pvt. Ltd. (supra) assessee had

made out a case that the Research and Development (R&D) expenditure

incurred by the said concern was in excess of the quantitative filter of R&D

expenses applied during the Transfer Pricing proceedings. This aspect of the

matter was upheld by the Tribunal and therefore in-principle we find no

reasons to disagree with assessee's plea to evaluate the exclusion or

inclusion of the said concern based on the level of R&D expenses incurred.

On this point, it is pointed out that in so far as the ICSA (India) Ltd. (ESS

Segment) is concerned, it is carrying on significant R&D activities and the ratio

of expenditure of R&D to sales is almost 3% (i.e. Rs.1983.79 lacs /

Rs.66350.72 lacs). The aforesaid position was canvassed by the assessee

before the lower authorities as is evident from page 86 of the appeal Paper

Book which is a copy of the submissions made before the DRP. In

comparison assessee's segment relating to Provision of software services

does not entail any Research and Development activities and in-fact it is

engaged in merely providing software services to PFG as per the

specifications provided. In our considered opinion, having regard to the

precedents as also the ostensible difference in level of expenditure incurred on

Research and Development expenses, in our view, ICSA (India) Ltd. (ESS

Segment) cannot be considered as a good comparable so as to justify its

inclusion for the purposes of the comparability analysis. Another aspect which

has been made out by the assessee is that the ESS Segment of ICSA (India) 13 ITA No.280/PN/2014

Ltd. is also, inter-alia, engaged in providing embedded software solutions i.e.

hardware products along with the software solutions and does not merely

provide standalone software services to its associated enterprises. In this

context, the Ld. Representative for the assessee had referred to pages 69 to

161 of the Paper Book wherein is placed a copy of the Annual Report of the

said concern. The business profile of the said concern which is emerging from

a perusal of the Annual Report of the Paper Book does support assessee's

plea that the activities carried out by ICSA (India) Ltd. (ESS Segment) are not

purely software services but, inter-alia, also include embedded software

solutions, i.e. hardware products along with embedded software products. On

this aspect also we find that the assessee has justifiable case for seeking

exclusion of the said concern from the final set of comparables. We have also

perused the order passed by the TPO u/s 92CA(3) of the Act for assessment

year 2010-11 dated 29.01.2014 (supra) wherein the stand of the assessee for

exclusion of the said concern from the final set of comparables stands

accepted, a copy of the said order is placed at pages 637 to 668 of the Paper

Book. Furthermore, the Ld. Representative for the assessee at the time of

hearing furnished a detailed Tabulation containing the Accept-Reject matrix

undertaken by the assessee in its Transfer Pricing Study for assessment year

2010-11 wherein the said concern was excluded on the grounds of functional

dissimilarity. Ostensibly, such a stand of the assessee has been accepted by

the TPO in assessment year 2010-11. In this background of the matter, in our

view, we find merit in the assessee's plea for exclusion of the said concern

from the final set of comparables in the present year too. We hold so.

22. The next point made out by the assessee is for exclusion of Compucom

Software Ltd. (Software Segment) from the final set of comparables. In this

context, the plea of the assessee is that the said concern is not only engaged

in rendering software development services but also sale of software products, 14 ITA No.280/PN/2014

end-to-end mobile solutions, IT infrastructure services, etc. and in support a

reference has been made to pages 162 to 213 of the Paper Book wherein is

placed a copy of the Annual Report pertaining to financial period under

consideration. Secondly, it is pointed out that assessee's plea for exclusion of

the said concern, was accepted by the TPO in assessment year 2007-08 as

well as in assessment year 2010-11 and in this regard, reference has been

made to the orders passed by the TPO u/s 92CA(3) of the Act dated

28.01.2013 (supra) and 29.01.2014 (supra), copies of which have been placed

in the Paper Book at pages 603 to 636 and 637 to 668 respectively.

23. On the other hand, the Ld. CIT-DR has defended the inclusion of

Compucom Software Ltd. (Software Segment) in the final set of comparables

on the ground that the product description of the said concern was computer

software and therefore it was a good comparable. It was submitted by the Ld.

CIT-DR that while applying the TNM Method only a broad comparability is

required to be ensured and not a very strict level of comparability is required to

be made out. Therefore, according to her, the TPO was justified in including

the said concern in the final set of comparables.

24. We have carefully considered rival submissions on this aspect. A

perusal of the assessee's submissions before the DRP on this aspect, which

are placed at pages 181 to 183 of the appeal Paper Book reveals that the

appellant made out a case that the said concern was engaged in diversified

activities, such as software services (including software product development),

learning solutions, wind power generation and Treasury, etc.. Assessee also

pointed out that the said concern was majorly rendering services to the

Government bodies as was evident from the extract of the Annual Report filed

for relevant period. Even with regard to the software services segment, which

has been adopted by the TPO to be comparable with assessee's activities, it 15 ITA No.280/PN/2014

was pointed out that the said segment was involved in Infrastructure

Development, IT Infrastructure Solutions, Mobile Solutions and Development

& Sale of products, etc.. For all the above reasons, the case of the assessee

was that the said concern's software services segment was not comparable to

the rendering of software services undertaken by the assessee for its

associated enterprises.

25. The aforesaid points were made out by the assessee before the lower

authorities and we find that there is no arguments put-forth by the lower

authorities to repudiate the same. No doubt the application of the TNM

Method requires broad functional similarities, and a concern can be said to be

functionally comparable with the tested party if it is engaged in similar activity.

However, in the present case, it is required to be appreciated that M/s

Compucom Software Ltd. (Software Segment) is engaged in a wide spectrum

of activities noted earlier and its customer profile includes Government bodies,

etc. whereas the assessee is a captive software service provider rendering

pure software development services to its associated enterprises as per the

specifications provided. It has also been pointed out by the assessee that the

software services segment of Compucom Software Ltd. is, inter-alia, engaged

in development of software products also which is qualitative different from

what is being undertaken by the assessee. Therefore, in the absence of any

credible discussion emerging from the order of the lower authorities as to in

what manner the functional profile of the said concern in the software segment

is similar to assessee's tested activity, we are inclined to uphold assessee's

plea that the software segment of Compucom Software Ltd. is not comparable

to assessee's segment of Provision of software services to its associated

enterprises. We accordingly direct the lower authorities to exclude the said

concern from the final set of comparables.

16 ITA No.280/PN/2014

26. With respect to the dispute in the software services segment, another

point made out by the assessee was that the margin of Mindtree Consulting

Ltd. considered by the TPO at 27.60% was wrong. In this context, the Ld.

Representative for the assessee pointed out that before the TPO, assessee

had asserted that only the IT services segment of the said concern be

considered as a comparable and not the entire entity and therefore the margin

relatable to the IT services segment of the said concern at 5.52% be alone

considered for the purposes of the comparability analysis. The Ld.

Representative submitted that the TPO has considered the margin at the entity

level and not the segmental level, which was required to be done.

27. In this context, the Ld. CIT-DR referred to the discussion made by the

TPO in para 10(5) of the impugned order to justify non-adoption of segmental

profits for the purposes of comparability analysis. According to the Ld. CIT-

DR, the said concern was engaged in the activity of computer software and

even the R&D services were nothing but to support development services

therefore the margin of the said concern at the entity level reflected profits

from software development services only and thus the TPO was justified in

adopting the margins at the entity level for the purposes of comparability.

28. We have carefully considered the rival submissions. In the context of

the controversy before us, we have perused the Annual Report of the said

concern, a copy of which is placed at pages 214 to 267 of the Paper Book. At

page 263 of the Paper Book in para 15 of the Schedule to the Annual financial

statement, the said concern has enumerated its segmental reporting. As per

the Annual Report, the said concern is having two business segments viz. IT

services and R&D services. The segmental profits relating to R&D services

and IT services have been separately enumerated therein. The plea of the

assessee is that the margin relating to the IT services segment alone be 17 ITA No.280/PN/2014

considered comparable to assessee's activities of Provision of software

services and not the margin relatable to the R&D services segment of the said

concern. It has been emphasized that the activities of the R&D services

segment are nowhere comparable to assessee's activities since assessee

does not render such services and rather it is providing software development

services on the basis of the specifications provided by the associated

enterprises. In our considered opinion, the aforesaid functional difference

pointed out by the assessee vis-à-vis the R&D services segment of the said

concern are germane and relevant to decide about the inclusion of the said

concern for the comparability analysis. Therefore, we direct the lower

authorities to exclude the margins relatable to the R&D services segment of

the said concern and consider only the margin relatable to the IT services

segment alone to benchmark assessee's activity of Provision of software

services to its associated enterprises. Thus, on this aspect also assessee

succeeds.

29. Apart from the aforesaid, there is no other plea raised by the assessee

with regard to the determination of arm's length price of international

transactions relating to Provision of software services to the associated

enterprises. Therefore, we direct the Assessing Officer to re-compute the

arm's length price of international transaction of Provision of software services

in the light of our aforesaid discussion.

30. Now, we may take-up the dispute relating to the determination of arm's

length price with regard to the international transactions of Provision of back

office support services rendered by the assessee to its associated enterprises

for stated value of Rs.18,82,13,428/-. On this aspect also, the TPO disagreed

with assessee's assertion that the stated value of the international transactions

are at an arm's length price. The TPO selected the following final set of 18 ITA No.280/PN/2014

comparables for the purposes of determining the arm's length price of

international transactions pertaining to back office support services :-

Sr.No. Company OP/TC using single year data for FY 2008-09 1. Cosmic Global Ltd. 40.61% 2. Infosys BPO Ltd. 24.31% 3. Nittany Outsourcing Services Pvt. Ltd. 33.31% ARITHMETIC MEAN 33.58%

31. Relying on the above set of comparables and their arithmetic mean PLI

of 33.58%, TPO compared it with assessee's margin of 16.88% and

proceeded to determine an adjustment of Rs.2,68,95,897/- in order to compute

the arm's length price of the international transaction relating to the back office

support services.

32. On this aspect, the first point made out by the assessee is to exclude

Infosys BPO Ltd. from the final set of comparables. The plea of the assessee

is that the said concern was a giant in its area of operation and possessed

brand value of Infosys Technology Ltd. whereas assessee was a captive

service provider with no significant intangibles or brand value. The Ld.

Representative pointed out that Infosys BPO Ltd. has undertaken brand

building exercise over a period of time by incurring huge expenditure and that

the said concern possessed a huge asset base and therefore it was

functionally dissimilar to assessee's activity of rendering of back office support

services to its associated enterprises. In this context, the Ld. Representative

has placed reliance on the judgement of the Hon'ble Delhi High Court in the

case of CIT vs. Agnity India Technologies Pvt. Ltd. (2013) 219 taxmann.com

26 (Del).

33. The Ld. CIT-DR has reiterated that the activity of back office support

services rendered by the assessee is similar to the activity carried out by 19 ITA No.280/PN/2014

Infosys BPO Ltd. and therefore the said concern be not be excluded from the

final set of comparables.

34. We have carefully considered the rival submissions. In the case of

Agnity India Technologies Pvt. Ltd. (supra), the Hon'ble High Court noted that

M/s Infosys Technologies Ltd. was a concern with a turnover of Rs.9028

crores whereas the assessee before it i.e. Agnity India Technologies Pvt. Ltd.

was having a turnover of Rs.16.09 crores. The Hon'ble High Court also noted

the difference in spending on advertisement, sales promotion and Research &

Development by Infosys Technology Ltd. and Agnity India Technologies Pvt.

Ltd.. Whereas Infosys Technologies Ltd. was spending substantial sums on

advertisement, sales, promotions, brand, building and R&D activity, and

Agnity India Technologies Pvt. Ltd.'s spending on such activities was NIL.

Agnity India Technologies Pvt. Ltd. was a captive service provider for its

associated enterprises, which was not the case of Infosys Technologies Ltd..

Under these circumstances, the Hon'ble Delhi High Court approved the

decision of the Tribunal which held that Infosys Technologies Ltd. could not be

compared with M/s Agnity India Technologies Pvt. Ltd. having regard to the

financial data, etc. of the two concerns. Considering the aforesaid parity of

reasoning, it has to be appreciated in the present case that the activities

undertaken by Infosys BPO Ltd. cannot be qualitatively compared with the

activities being carried out by the assessee in its back office support services

segment. Undoubtedly, Infosys BPO Ltd. owns significant intangibles and

eminent brand value whereas in the case of the assessee before us there is

no such situation. The turnover achieved by Infosys BPO Ltd. is many times

higher in comparison to the assessee; the said concern is a giant in

comparison to the assessee. In our view, the presence of the aforesaid

factors justify assessee's assertion that the said concern be excluded from the

list of comparables. We hold so.

20 ITA No.280/PN/2014

35. The second point made out by the assessee is that the TPO erred in

including Cosmic Global Ltd. in the final set of comparables. In this context,

the plea of the assessee before the lower authorities as well as before us is

that the said concern was sub-contracting most of its work whereas assessee

was undertaking its activities by itself. It was pointed out that the said concern

was sub-contracting majority of its translation services work to third party

vendors and had made significant payments which were almost 62% of the

total cost, whereas assessee was undertaking its activities on its own. In this

context, reliance has been placed on the decision of the Mumbai Bench of the

Tribunal in the case of ACIT vs. Maersk Global Service Centre (India) (P.) Ltd.,

(2011) 16 taxmann.com 47 (Mum.) as also the decision of the Pune of the

Tribunal in the case of PTC Software (India) Pvt. Ltd. dated 30.04.2013

(supra).

36. On the other hand, the Ld CIT-DR referred to the discussion made by

the TPO in para 11(1) of the order by pointing out that the said concern was a

part of the search conducted by the assessee also. Therefore, according to

her, the said concern cannot be excluded at the present stage.

37. In our considered opinion, the point made out by the Ld. CIT-DR that

the assessee had initially selected the said concern as comparable cannot be

the sole basis to reject assessee plea for exclusion of the said concern if the

assessee is otherwise able to justify it on facts. Quite clearly, the difference in

the business model undertaken by the assessee vis-à-vis the said concern

cannot be denied. In the case of Maersk Globarl Service Centre (India) (P.)

Ltd. (supra) , the Mumbai Bench of the Tribunal noted that a concern which

was outsourcing most of its work could not be construed to be a good

comparable with an assessee who was carrying out the work by itself. To the

similar effect is also the decision of the Bangalore Bench of the Tribunal in the 21 ITA No.280/PN/2014

case of 24/7 Customer.Com Pvt. Ltd. vs. DCIT vide ITA No.227/Bang/2010

dated 09.11.2012. The decision of the Pune Bench of the Tribunal in the case

of PTC Software (India) Pvt. Ltd. dated 30.04.2013 (supra) is also to the

similar effect. Therefore, in our considered opinion, having regard to the

difference in the business model brought out by the assessee, M/s Cosmic

Global Services Ltd. is liable to the excluded from the final set of comparables.

We hold so.

38. With regard to rendering of back office support services segment,

assessee has also submitted that (i) Omega Healthcare Management

Services Pvt. Ltd.; (ii) In House Productions Ltd.; and, (iii) Galaxy Commercial

Ltd. (BPO Segment) have been wrongly excluded by the TPO from the final

set of comparables.

39. With respect to the M/s Omega Healthcare Management Services Pvt.

Ltd., we find that the TPO excluded the said concern on the ground that the

information with regard to the said concern was not available in public domain.

For the said reason, the financial data with regard to the said concern was not

considered by the TPO in the comparability analysis.

40. The Ld. Representative for the assessee asserted at the time of hearing

that the TPO was wrong in stating that the Annual Report of the said concern

was not available in the public domain whereas assessee had duly furnished a

copy of the Annual Report of the said concern pertaining to financial year

under consideration. In this context, reference has been made to pages 475

to 494 of the Paper Book wherein is placed a copy of the Annual Report of the

said concern for the relevant period. By referring to page 477 of the Paper

Book which deals the business operations of the said concern it is pointed out 22 ITA No.280/PN/2014

that the said concern was engaged in rendering back office support services

and therefore it was a good comparable.

41. In this context, we have considered the submissions made by the

assessee before the DRP also which are emerging from page 116 of the

appeal Paper Book. Even before the DRP, assessee had asserted that the

Annual Report of the said concern was duly submitted to the TPO and

therefore it could not be said that the financial data of the said concern was

not available in public domain. The activities rendered by the said concern

have also been detailed in the submissions before the DRP and it was

asserted that the said concern is functionally comparable to assessee's

activities of providing back office support services to the associated

enterprises. Thus, assessee justified the inclusion of the said concern in the

final set of comparables. In our considered opinion, the assertions made by

the assessee before the lower authorities and as well as before us are borne

out of the material on record. In-fact, in the face of the detailed submissions

made by the assessee before the lower authorities, there is no repudiation

emerging from the orders of the authorities below. Therefore, in the absence

of any adverse finding that the activities of the said concern are not

comparable to assessee's activity of rendering back office support services to

its associated enterprises, we deem it fit and proper to direct the lower

authorities to include the said concern in the final set of comparables as was

contended by the assessee in the course of the Transfer Pricing proceedings.

42. The next point made out by the assessee is for inclusion of M/s In

House Productions Ltd. (Healthcare Division) in the final set of comparables.

The TPO rejected the said concern on the ground that the Notes to Accounts

in the Annual Report of the said concern revealed that a fire had destroyed a

major portion of the account books. Therefore, according to the TPO, the 23 ITA No.280/PN/2014

integrity of the financial data reflected in the Annual Accounts was in question.

The same stand has been reiterated by the Ld. CIT-DR before us in order to

justify the exclusion of the said concern from the final set of comparables.

43. On the other hand, the Ld. Representative for the assessee vehemently

pointed out that the Auditor's Report of the said concern does not reveal any

adverse finding or qualification with regard to the unreliability of the financial

data. It was therefore contended that the TPO has misdirected himself in

questioning the integrity of the financial data reflected in the Annual Report of

the said concern.

44. We have carefully considered the rival submissions. Having regard to

the discussion in the order of the TPO, we find that the only reason advanced

by the TPO to reject the said concern was his perception that the financial

data of the said concern was not reliable. The perception of the TPO is based

on the fact that a fire destroyed major portion of the account books of the

concern. The point made out by the assessee is that the audited financial

statements have not been adversely commented by the statutory auditors of

the said concern with regard to the reliability of the data. The said stand of the

assessee cannot be brushed aside lightly. On the other hand, the TPO has

not advanced any credible basis which could demonstrate unreliability of the

financial data. In our considered opinion, it would meet the ends of justice if

the TPO is called upon to re-visit the controversy with regard to the inclusion

of In House Productions Ltd. afresh having regard to the submissions and the

material which the assessee may put-forth before him. Accordingly, we deem

it fit and proper to restore the matter back to the file of the TPO, who shall

carry out an exercise afresh with respect to the inclusion or otherwise of the

said concern on the basis of the submissions and the material which the

assessee may setup before him. Needless to mention, the Assessing 24 ITA No.280/PN/2014

Officer/TPO shall allow the assessee a reasonable opportunity of being heard

before passing an order afresh on this aspect. Thus, on this point assessee

succeeds for statistical purposes.

45. The last point made out by the assessee is for inclusion of Galaxy

Commercial Ltd. (BPO Segment)in the final set of comparables. The TPO

rejected the said concern from the final set of comparables on the ground that

it was a consistently loss-making concern. Before us also, the Ld. CIT-DR has

reiterated the point made out by the TPO in order to exclude the said concern

from the final set of comparables.

46. The Ld. Representative for the appellant pointed out that the BPO

segment of the said concern was not a consistent loss-maker. In-fact, by

referring to the profitability margins of the BPO segment for the immediately

preceding assessment year 2008-09, it is sought to be made out that it had a

positive margin.

47. We have considered the plea setup by the assessee and prima-facie it

appears that in the immediately preceding assessment year the said concern

had a positive margin. Nevertheless, in order to examine as to whether it is a

consistent loss-making or not, a trend over more than one year is required to

be evaluated. For the said purpose, we deem it fit and proper to restore the

matter back to the file of the TPO, who shall examine the financial results of

the said concern for two years prior and subsequent to the assessment year

under consideration so as to formulate a belief as to whether or not it is a

consistently loss-making concern. If the Assessing Officer/TPO comes to

conclude, having regard to the aforesaid trend analysis that it is a consistently

loss-making unit then the same is liable to be excluded otherwise the said

concern cannot be excluded merely because in the year under consideration it 25 ITA No.280/PN/2014

has suffered a loss. For the aforesaid purpose, we deem it fit and proper to

restore the matter back to the file of the TPO, who shall allow a reasonable

opportunity the assessee of being heard and thereafter pass an order afresh

as per law on this aspect.

48. With regard to the determination of arm's length price in relation to the

Provision of back office support services, no other argument has been set-up

before us and therefore we direct the Assessing Officer/TPO to re-compute

the arm's length price in relation to the international transactions of Provision

of back office support services in compliance with our aforesaid decision.

Thus, in so far as the Ground of Appeal Nos.1 and 2 are concerned, assessee

partly succeeds.

49. In so far as the Ground of Appeal Nos.3, 4 and 5 are concerned, the

same are not pressed at the time of hearing and according the same are

dismissed as "Not Pressed".

50. The only Ground remaining is Ground of Appeal No.6 wherein the plea

of the assessee is that while passing assessment order the Assessing Officer

erred in computing the tax liability by not considering the advance tax and the

amount of tax deducted at source. Alternatively, it was pointed out that the

Assessing Officer erred in tax computation by not considering the credit of

MAT available to the assessee.

51. On this aspect, the Ld. Representative pointed out that the assessee

has already moved a rectification application before the Assessing Officer

which was pending for disposal. The Ld. CIT-DR has no objection for the

matter to be restored back to the file of the Assessing Officer with directions to 26 ITA No.280/PN/2014

consider the plea of the assessee on merits and pass an appropriate order as

per law. Thus, on this aspect assessee succeeds for statistical purposes.

52. In the result, the appeal of the assessee is partly allowed.

Order pronounced on 10 th April, 2015.

Sd/- Sd/- (SUSHMA CHOWLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Pune, Dated: 10 th April, 2015. Sujeet

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The DRP, Pune; 4) The DIT (International Taxation), Pune; 5) The DR "A" Bench, I.T.A.T., Pune; 6) Guard File. By Order //True Copy// Assistant Registrar I.T.A.T., Pune