Case Law Details

Case Name : Infogain India Pvt Ltd Vs DCIT (ITAT Delhi)
Appeal Number : ITA No. 5870/DEL/2011
Date of Judgement/Order : 17/03/2020
Related Assessment Year : 2007-08
Courts : All ITAT (7327) ITAT Delhi (1716)

Infogain India Pvt Ltd Vs DCIT (ITAT Delhi)

Conclusion: Comparison of activities undertaken /functions performed was important for determining the comparability between controlled and uncontrolled transactions/entity. It would not be opposite to ignore functional dissimilarity only for the reasons that its impact may be reduced on account of using arithmetical mean of the profit level indicator. The principle governing the identification of comparable transactions would be the same, irrespective of whichever transfer pricing method is adopted.

Held: Assessee-company was established as a back-end software services company and worked mainly for its parent Infogain, USA. During the year under consideration, it reported international transactions, as mentioned in the 92CE Report. Assessee-company selected a set of 44 comparables with an average profit margin @ 11.94% and since the margin shown by assessee-company was 13.77%, the international transactions were reported to be at arm’s length. TPO examined the TP report of assessee-company and found that assessee had not gone into the verticals/horizontals within the software industry in its comparability study. After rejecting the comparables of the assessee, 21 companies had been proposed as comparables by TPO. Assessee vehemently stated that the TPO had used the comparables which were either giant companies having high brand value or were functionally dissimilar and many comparables had extra ordinary items during the year in the form of merger and acquisition. Hence they should not be taken as good comparables. It was held that In so far as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the  transfer pricing method adopted. In other  words,  the comparable transactions/entities must be selected on the basis  of similarity with the controlled transaction  entity.  Comparability of controlled and uncontrolled transactions has to be judged, inter alia, with reference to comparability factors as indicated under rule 10B(2) of the Income Tax Rules, 1962. Comparability analysis by the transactional net margin method may be less sensitive to certain dissimilarities between the  tested party and the comparables. However, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable arm’s length price. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in profit level indicator must trigger further investigations/analysis. Consideration for a transaction would reflect the functions performed, the significant activities undertaken, the assets or resources used/consumed, the risks assumed. Thus, comparison of activities undertaken /functions performed was important for determining the comparability between controlled and uncontrolled transactions/entity. It would not be opposite to ignore functional dissimilarity only for the reasons that its impact may be reduced on account of using arithmetical mean of the profit level indicator. The principle governing the identification of comparable transactions would be the same, irrespective of whichever transfer pricing method is adopted.·The usage of several terms such as debt syndication, debt financing, IPO advisory, corporate restructuring, mergers, acquisitions etc, appearing in the annual reports of the comparable to hold that assessee and the said comparables performed  similar did not by itself make the functions similar in nature.  There was a difference between giving advice on these matters and actually undertaking the said services. A similar illustration, in the context of litigation, would be the difference between giving advice on what to argue in Court and actually arguing the matter in the Court. This difference  needs to be borne in mind and the mere appearance of similar sounding words does not by itself constitute similar functions. Thus, it required a deeper analysis to determine as to whether they were in fact comparables to be retained for the purpose of fixing the ALP.  The matter was restored to CIT (A) in view of above principles.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal by the assessee is preferred against the order dated 31.10.2011 framed u/s 143(3) r.w.s 144C of the Income tax Act, 1961 [hereinafter referred to as ‘The Act’ for short] pertaining to assessment year 2007-08.

2. The grievance of the assessee is two fold :-

“1. TP adjustment of Rs. 5,92,11,870/-, and

2. Corporate tax adjustment pursuant to denial of deduction u/s 10B of the Act amounting to Rs. 7,54,85,392/-.

3. We will first address to the Corporate Tax Adjustment on account of denial of deduction u/s 10B of the Act.

4. The under lying facts in this issue are that the assessee had been claiming deduction u/s 80HHE of the Act upto to Assessment Year 1998-99 i.e. upto the 7th year from the establishment of the company. Sub-section 1B of the Act was introduced by the Finance Act, 2000 to section 80HHE of the Act w.e.f 1.4.2001 and simultaneously, provisions of section 10A of the Act were amended to the effect that deduction would be available for 10 Assessment Years. The new  undertakings  had an option not to claim deduction u/s 10A of the Act. Since the deduction was optional, the assessee claimed deduction u/s 80HHE of the Act and opted for not claiming deduction u/s 10A of the assessee Act. In view of the  introduction of section (1B) to section 80HHE  of  the Act, the assessee switched over to deduction u/s 10B/10A of the Act.

5. The Assessing Officer was of the firm belief that the switch over of the assessee has been done with a specific motive to claim excess deduction and avoid payment of taxes. The Assessing Officer formed a belief that the claim of the assessee was not bonafide or genuine but had been made merely with an intention to defraud the revenue. The Assessing Officer found that for similar reasons, deduction had been disallowed in A.Ys 2005-06 and 2006-07 and taking a leaf out of the said A.Ys, the Assessing Officer disallowed the claim of deduction u/s 10B of the Act

6. The assessee raised objections before the DRP, but the same were dismissed.

7. While denying the claim of deduction, the DRP observed that the quarrel between the assessee and the Revenue was in the past also and in Y 2005-06, the Revenue is in appeal before the Tribunal and for A.Y 2006-07, the assessee is in appeal before the Tribunal.

8. Before us, the ld. counsel for the assessee drew our attention to the orders of the Tribunal for Assessment Year 2005-06 and 2006- 07 and pointed out that the Tribunal has allowed the claim of deduction to the assessee.

9. Per contra, the ld. DR strongly supported the findings of the DRP.

10. We find force in the contentions of the ld. counsel for the assessee. The claim of deduction was considered by the Tribunal in ITA No. 2339/DEL/2010 for Assessment Year 2005-06. The relevant findings of the co-ordinate bench read as under:

“8. On careful consideration of rival contentions and careful perusal of record and citations submitted before us, we observe that the revenue has not disputed this point that the assessee got approval as 100% EOU as per approval dated 27.01.1997. We further observe that in the impugned order, the Commissioner of Income Tax(A) has held that the Assessing Officer was completely in error in holding that since the assessee started its business in AY 1992-93, then the prescribed period of 10 years for the purpose of exemption u/s 10B of the Act had come to an end by AY 2001-02. We also  observe that the said section  10B envisages setting up of export oriented undertaking which is altogether different and distinct from setting up of a normal commercial activity unit. The Assessing Officer has not controverted the fact that the assessee company established 100% EOU in FY 1997-98 for exporting of computer software and this fact has found place in the assessment order para 4.1 and 4.2. In view of above and in the light of decisions of Hon’ble High Court of Delhi in the case of Legato Systems India Pvt. Ltd. and decisions of Hon’ble Punjab & Haryana High Court in the case of Excel Softech Ltd. (supra), we are of the firm opinion that the Commissioner of Income Tax(A) rightly granted relief to the assessee by directing the Assessing Officer to grant exemption u/s 10B of the Act for the assessee. We are unable to find any perversity, ambiguity, perversity or any other valid reason to interfere with the findings of the Commissioner of Income Tax(A). Per contra, we clearly observe that the Assessing Officer ignored this fact that the assessee’s 100% EOU was established in AY 1997- 98 related to AY 1998-99. The Assessing Officer denied exemption on surmises and conjectures by taking hyper technical approach. Since the assessee was entitled to exemption u/s 10B of the Act, then the period cannot be said to be exhausted in the year under consideration, hence we uphold the findings of the Commissioner of Income Tax(A) in the impugned order. Accordingly, ground no.2 of the revenue is dismissed.”

11. Similar issue was considered by the Tribunal in Assessment Year 2006-07 in ITA No. 5720/DEL/2010. The relevant findings of the Tribunal read as under:

“3. We have heard rival argument of both the  parties  and careful perused the record placed before us. At the outset Ld. Counsel of the Assessee filed a copy of decision of ITAT Delhi ‘C’ Bench in ITA No. 2339/Del/2010 for the Assessment Year 2005-06 dated 29/11/2013 and submitted that the issue of allowability of deduction u/s 10B of the Act has been decided in favour of the Assessee in Assessee’s own case for immediately preceding assessment year to the year under consideration in  this appeal. The Ld. Counsel of the  Assessee  drawn  our attention towards Paragraph No. 7 & 8 wherein the CIT(A) concluded its findings and observations by directing the  Assessing Officer to grant exemption u/s 10B of the Act to the Assessee and ITAT ‘C’ Bench, Delhi upholded the findings of the CIT(A) by holding that the Assessee was entitled to exemption u/s 10B of the Act then the period of exemption started from Assessment Year 1998-99 and cannot be said to be exhausted in the year under consideration in the present appeal i.e 2006-07. The relevant paragraph of ITAT order read as under:-

“7. Further, the CIT(A) has concluded its findings and observations by directing the Assessing Officer to grant exemption u/s 10B of the Act to the assesssee with following operative para of the impugned order:-

“In the case of the assessee, neither the period of five years nor the block period of eight years expired when the amendment replacing the word ‘ten’ for ‘five’ was introduced by IT (Second amendment) Act, 1998 w.e.f 1/4/1999. Since the assessee was entitled to exemption in the year in which amendment became effective & operative, the assessee will be entitled to the extended period of exemption because the period of five years had not exhausted up to assessment year 1999-2000. Since the right of the assessee was continuing in the year of amendment and was not lost on the date when the amendment came into existence, the view taken by the Ld. CIT(A) cannot be upheld.

So far as the objections of the Ld. CIT(A) regarding conduct of the assessee firm in not claiming the exemption in earlier year is concerned, the approach of the Ld. CIT(A) raising this objection, cannot be legally justified because if the assessee is entitled to any benefit under any statutory provision then the past conduct cannot be relevant particularly when reference to such conduct is not made in the Act. The eligibility of the assessee has to be seen in the year in which the claim is preferred and if in earlier years the assessee waived his right then he cannot be stopped in claiming the benefit in the subsequent years.

The Ld. CIT(A) has also observed that the assessee did not file declaration exercising option prior to the due date for filing of return but filed it along with the return and, therefore, the assessee is disqualified from claiming exemption on this ground also. We do not find any force in such objection because this objection is merely of super technical nature. In view of the above, we are liable to concur with the fining of the Ld. CIT(A) and set aside the same. Consequently, we allow the ground of appeal taken by the assessee and direct that the assessee shall be entitled to claim exemption u/s 10B in the assessment year under consideration.”

8. On careful consideration of rival contentions and careful perusal of record and citations submitted before us, we observe that the revenue has not disputed this point that the assesssee got approval as 100% EOU as per approval dated 27/1/1997. We further observe that in the impugned order, the Commissioner of Income Tax (A) has held that the Assessing Officer was completely in error in holding that since the assessee started its business in A.Y 1992-93 then the prescribed period of 10 years for the purpose of exemption u/s 10B of the Act had come to an end by A.Y 2001-02. We also observe that the said Section 10B of the Act had come to an end by A.Y 2001-02. We also observe that the said Section 10B envisages setting up of export oriented undertaking which is altogether different and distinct from setting up of a normal commercial activity unit. The Assessing Officer has not controverted the fact that the assessee company established 100% EOU in F.Y 1997-98 for exporting of computer software and this fact has found place in the assessment order para 4.1 and 4.2. In view of above and in the light of decisions of Hon’ble High Court of Delhi in the case of Legato Systems India Pvt. Ltd and decisions of Hon’ble Punjab & Haryana High Court in the case of Excel Softech Ltd, (supra), we are of the firm opinion that the Commissioner of Income Tax (A) rightly granted relief to the assessee by directing the Assessing Officer to grant exemption u/s 10B of the Act for the assessee. We are unable to find any perversity, ambiguity, perversity or any other valid reason o interfere with the findings of the Commissioner of Income Tax (A). Per contra, we clearly observe that the Assessing Officer ignored this fact that the assessee’s 100% EOU was established in A.Y 1997-98 related to A.Y 1998-99. The Assessing Officer denied exemption on surmises and conjectures by taking hyper technical approach. Since the assessee was entitled to exemption u/s 10B of the Act, then the period cannot be said to be exhausted in the year under consideration, hence we uphold that the findings of the Commissioner of Income Tax (A) in the impugned order. Accordingly, Ground No. 2 of the Revenue is dismissed.”

4. Respectfully following the above judgment  of  ITAT  ‘C’ Bench, Delhi in Assessee’s own case for the immediate preceding year to the year under consideration in this appeal, we hold that the issue is squarely covered in favour of the Assessee by this order. Hence, we hold that the authorities below were not justified in rejecting the claim of the Assessee for deduction   u/s 10B of the Act. For the year under consideration i.e Assessment Year 2006-07. In view of above main Ground  No. 1  to 1.6 of the Assessee are allowed.”

12. We further find that the quarrel travelled upto  the Hon’ble  High Court of Delhi and the Hon’ble High Court in ITA No. 488/2014 and 487/2014 dismissed the appeal of the Revenue. The relevant findings of the Hon’ble High Court read as under:

“3. It is not disputed that the above issue stands covered in favour of the Assessee and against the Revenue by the decisions of this Court in Commissioner of Income Tax v. Infra Soft Technologies Limited (decision dated 21st October 2010 in ITA No. 708 of 2008) and Commissioner of Income Tax v. Interra Software India Limited (2011) 238 CTR (Del) 23. In both decisions the deduction claimed was under Section 10A  of the Act which is in pari materia Section 10B of the Act.

4. These appeals are accordingly dismissed.”

13. As no distinguishing decision has been brought to our notice by  the Revenue, respectfully following the findings of the co-ordinate  bench and Hon’ble High Court, we direct the Assessing Officer to allow the claim of deduction u/s 10B of the Act. Addition of Rs. 7,54,85,392/- is directed to be deleted. Ground No. 2 with all its sub grounds is allowed.

14. We will now address to the Transfer Pricing adjustments.

15. The underlying facts in issue are that the appellant company was established as a back-end software services company and works mainly for its parent Infogain, USA. The appellant company is also registered under the STP Scheme and has been claiming tax u/s 10B of the Act.

16. During the year under consideration, international transactions, as mentioned in the 92CE Report are as under:

Particulars Amount
Operating income 524,895,463
Operating cost 461,781,432
Operating profit 63,114,031
OP/TC 13.77%

17. The appellant furnished the TP Study Report alongwith documents maintained in this regard. The salient features of the TP report are as under:

“1. The taxpayer company has been selected as the tested party

2. The taxpayer company has been characterized providing software development services to its associated enterprises.

3. TNMM was selected as the most appropriate method.

4. The search for uncontrolled comparables was done using Prowess and Capitaline Database.

5. The taxpayer considered companies whose year ends on dates other than March 31.

6. The comparability analysis was done based on the data available in the Prowess/Capitaline The published financial statements of the companies were examined wherever available. It is not clear in how many companies detailed analysis was done by the tax payer.”

18. The appellant used the search of the databases, which yielded a set of 44 comparables with an average profit margin @ 11.94% and since the margin shown by the appellant was 13.77%, the international transactions were reported to be at arm’s length.

19. The TPO examined the TP report of the appellant and found that the assessee has not gone into the verticals/horizontals within the software industry in its comparability study. The TPO further excluded those companies whose data was not available for F.Y. 2006-07. The TPO further selected those companies whose revenues from software development and relates services are more than 75% of the operating revenues for F.Y. 2006-07.

20. The TPO analyzed the comparables chosen by the assessee in its TP report. The specific reasons for rejection of the appellant’s comparables, as reported by the TPO are as under:

Name of the Company Remarks of this office
1 Akshay Software Tech.Ltd The company is a predominantly onsite company. However, the Annual Report does not contain the information on onsite revenue. Notice u/s 133(6) was issued to the company to submit the onsite revenue details. As per the information received from the company, it fails onsite revenue filter as its entire export revenues are from onsite activities. Thus the company is not considered as a comparable. The copy of notice u/s 133(6) and reply are enclosed herewith as a soft copy.
2 ASM Technologies Ltd The company has RPT of 107.57% on sales and hence the company is not considered as a comparable
3 Aztecsoft Ltd The company has RPT of 29.96% on sales and hence the company is not considered as a comparable
4 Blue Star Infotech Ltd The company has RPT of 75.53% on sales and hence the company is not considered as a comparable
5 Bodhtree Consulting Ltd. Acceptable as a comparable as it qualifies all the filters applied by the TPO. The company submitted segmental pertaining to software development services and data cleansing services (ITES). The company’s software development segment is considered as a comparable
6 BT Technet.Ltd The company has export turnover of only 0.64% on sales and hence the company is not considered as a comparable
7 CMC Ltd The company has export turnover of only 14.05% on sales. The company has RPT of 59.58% on sales and hence the company is not considered as a comparable
8 Computech International Ltd Notice u/s 133(6) was issued to the company. As per the information submitted by the company, the company is dealing in customization of software products of third party to suit the requirements of customers. Thus the company is functionally; different and is not considered comparable
9 Essel Software & Services Ltd The Financial details of the company is not avaitable for the year ending 31.03.2007. Moreover as per the/reply received .
from the company, it has stated clearly that it generates its predominant revenues from e-commerce website. Thus the
10 Exensys Software Solutions Ltd The company is a software product company and hence rejected as a comparable
11 F C S Software Solutions Ltd The company has RPT of 28.10% on sales and hence the company is not considered as a comparable
12 Geometric Software Solutions Co.Ltd Acceptable as a comparable.
13 Goldstone Technologies Ltd The company was asked to clarify on export earnings as well as onsite revenues. As per the information available in the Annual Report, the exports (in terms of foreign exchange earnings)
14 Helios & Matheson Information Technology Ltd Acceptable as a comparable
15 I C S A (India) Ltd The company has export turnover of only 14.62% on sales and hence the company is not considered as a comparable
16 Infotech Enterprises Ltd. The company has RPT of 56.89% on sales and hence the company is not considered as a comparable
17 Intertec Communications Ltd The company has RPT of 100% on sales and hence the company is not considered as a comparable
18 KALS Information Systems Ltd Acceptable as a comparable
19 KP1T Cummins Infosystems Ltd The company has RPT of 106.40% on sales and hence the company is not considered as a comparable
20 Lanco Global Systems Ltd Acceptable as a comparable.
21 Maars Software International Ltd The company is not into software development services. The company also fails onsite revenue Filter and hence not considered as a comparable.
22 Mascon Global Ltd The company has RPT of 73.62% on sales and hence the company is not considered as a comparable
23 Melstar Information Technologies Ltd The company has declining revenues and thus is not considered as a comparable. As per the information submitted by the company, the company fails 75% onsite revenue filter (The company generated 89% of its export revenues from onsite activities)
24 Nav-Parva Technologies Pvt. Ltd The financial details of the said company is not available for the F.Y 2006-07 and hence the company is not considered as a comparable
25 Orient Information

Tehcnology Ltd

The company fails Onsite revenue filter of the TPO and hence stands rejected
26 P S I Data Systems Ltd The company has RPT of 27.66% on sales and hence the company is not considered as a comparable
27 Powersoft Global Solutions Ltd The company does not have any export turnover and hence the company is not considered as a comparable
28 R.S.Software(India) Ltd Acceptable as a comparable
29 R Systems International Ltd Acceptable as a comparable
30 Ramco Systems Ltd The company has RPT of 63.82% on sales and hence the company is not considered as a comparable
31 Saksoft Ltd. The company has RPT of 58.40% on ,-Sales and hence the, company is not considered as a comparable
32 SQL Star International Ltd The company has export turnover of only 10.48% on sales and hence the company is not considered as a comparable
33 Sasken Communication Tech. Ltd Acceptable as a comparable
34 Shree Tulsi Online.com Ltd.l The financial data of the said company is not available for the financial year 2006-07. The company was asked u/s 133(6) to
35 Sonata Software Ltd. The company has RPT of 29.96% on sales and hence the company is not considered as a comparable
36 Subex Azure Ltd. The company has RPT of 55.70% on sales and hence the company is not considered as a comparable
37 Synergy Log-In Sytems Ltd.(now known as Globsyn Infotech) As per information received from the company, the company fails Onsite revenue filter of the TPO and hence not considered as a comparable.
38 Synetario Technologies Ltd. The company does not any export turnover and hence the company is rejected
39 Tata Elxsi Ltd. Acceptable as a comparable
40 V & K Softtech Ltd. The company does not any export turnover and hence the company is rejected
41 VMF Soft Tech Ltd. Based on the information received from the company u/s 133(6), it is seen that the company is functioning on job work
42 Varna Industries Ltd. The company has export turnover of only 19.18% on sales and hence the company is not considered as a comparable
43 Vishesh Infotecnics Ltd. The company has export turnover of only 2.69% on sales and hence the company is not considered as a comparable
44 Visualsoft Technologies Ltd. As per the information received, the company fails onsite revenue filter of the TPO and hence not considered as a comparable.

21. After rejecting the comparables of the assessee, as mentioned hereinabove, the following 21 companies have been proposed as comparables by the TPO:

Si No Name of the company
1 Avani Cimcon Technologies Ltd
2 Bodhtrec Consulting Ltd
3 Datamatics Ltd
4 Flextronics Software Systems Ltd
5 Geometric Ltd
6 iGatc Global Solutions Ltd
7 Infosys Technologies Ltd
8 Kals Information Systems Ltd
9 Lucid Software Ltd
10 Mediasoft Solutions Pvt. Ltd
11 Megasoft Ltd
12 Mindtree Ltd
13 Persistent Systems Ltd
14 Quintegra Solutions Ltd
15 R S Software (India) Ltd
16 R Systems International Ltd
17 SIP Technologies & Exports Ltd
18 Sasken Communication Technologies
19 TVS Infotech Ltd
20 Tata Elxsi Ltd
21 Wipro Ltd

22. The Assessing Officer finally computed the ALP and made adjustments as under:

“19. Computation of Arms Length Price:

The arithmetic mean of the Profit Level indicators is taken as the arms length margin. Based on this, the arms length price of the software development services rendered by the taxpayer to its

AE(s) is computed as under: Arithmctic, mean PLI      : 25.00%
Less: Working capital adjustment (Annexure-C)           : (-1.49%)
Adj. Arithmetic mean PLI                                                  : 26.49%

Arm’s Length Price:

Operating Cost Rs.461, 781,432/-
Arms Length 26.49% of the Operating Cost
Arms Length Rs.584,107,333 /-

20. Price Received vis-a-vis the Arms Length Price:

The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under:

Arms Length Price @ 126.49% of operating cost Rs.584,107,333
Price charged in the international Rs.524,895,463
Shortfall being adjustment u/s 92CA Rs.59,211,870

23. Objections before the DRP were of no avail.

24. Before us, the ld. counsel for the assessee vehemently stated that the TPO has used the comparables which are either giant companies having high brand value like Infosys Technologies Ltd. and WIPRO Ltd or are functionally dissimilar and many comparables have extra ordinary items during the year in the form of merger and acquisition. Hence they should not be taken as good comparables.

25. Per contra, the ld. DR strongly supported the findings of the TPO and read the relevant portion of the TP order and pointed out that the appellant is also a giant company and belongs to Chris Capital Group. It is the say of the ld. DR that Infogain is itself a big brand value and mergers and acquisitions is an ongoing process and the appellant itself has acquired Blue Star Infotech Ltd and Synetario Technology and therefore, the MBA cannot be a basis for excluding the comparables.

26. In her rejoinder, the ld. counsel for the assessee pointed out that acquisition of Chris Capital Group took place in 2015 and the same is with M & A of Blue Star Infotech Limited and Synetario Technology. It is the say of the counsel for the assessee that anything that happened after a decade cannot influence the international transaction for the year under consideration.

27. We have given thoughtful consideration to the orders of the authorities below. Before proceeding further, let us understand the business profile of the assessee which is as under:

“Software Services

Associated enterprises are in the business of  carrying  out  software development projects for their clients on a contractual basis. Work in respect of these projects is outsourced in full or in part to Infogain India at the discretion of associated  enterprises,  in accordance with terms of the Service Agreement.

The software services provided by Infogain India, broadly falls in the following 5 categories:

Customer Relationship Management;

Application Management;
Product Engineering;
Enterprise Integration; and « Business Intelligence.

T Related Staffing Services

Infogain India provides IT related staffing services to associated enterprises through their Resourcing Group (RG). RG identifies candidates either front its non employees or from outside, in accordance with specifications provided by associated enterprises and thereafter facilitates hiring of such candid a’eg by associated enterprises Adds.v,ia!!y. Infogain India may at times equip  recruited personnel witli additional skill sets at the instance of associated enterprises. RG also handles the internal/ local requirements of lnfogain India.

Even though the recruitment services provided by lnfogain India have increased during the financial year 2006-07, they still constitute less than 1 percent of the entire revenue and almost the entire revenue has been earned from software services.

28. Keeping in mind the aforementioned business profile of the assessee, we will now consider the exclusion of the comparables as contended by the ld. counsel for the assessee before us.

1. Infosys Technologies Ltd and WIPRO Ltd

29. The Annual Report of both these companies, which are available on record, show that these companies are high brand value having intangibles whereas the assessee does not have any intangibles. Infosys Technologies Ltd is functionally dissimilar as it offers software products to banking industry and there are no segmental details. Wipro Ltd is engaged in providing a variety of services, such as, IT services, product engineering services, technology infrastructure services, BPO services, consulting services, etc.  Infosys has significant R & D activities and is also engaged in  CSR activities, knowledge management and research and knowledge absorption. WIPRO also has significant R & activities.

30. For similar reasons, the Hon’ble High Court of Delhi in the case of M/s Oracle [OFSS] BPO Services Pvt Ltd ITA 124/2018 has excluded such giant companies. The relevant findings of the Hon’ble High Court read as under:

“As to the exclusion of M/s Wipro Limited, here too, the Court  is of the opinion that the brand value of an entity has a  significant role in its ability to garner profits and negotiate contracts. Thus, while considering the comparables,  the  likelihood of profits derived or attributable to the brand having regard to the consistency of the quality of services that  an entity is able to offer would be relevant; although functionally, the two entities may be similar in terms of the services or products they offer, brand does play its own role in price or cost determination. If this singular aspect is kept in mind, the ITAT’s approach cannot be faulted with.”

31. The Special Leave Petition filed by the Revenue was dismissed by the Hon’ble Supreme Court vide order dated 30.11.2018 in SLP [Civil] Diary No. 32469/2018.

32. Once again, the Hon’ble High Court of Delhi in the case of M/s Avaya India Pvt Ltd ITA No. 532/2019 order dated 24.07.2019 has held as under:

“18. On the aspect of exclusion of comparables that have a high economic upscale viz., Infosys, TCS and Wipro, particular reference may be made to the decision of this Court in PCIT v. BC Management Services Pvt. Ltd. (supra) where a particular reference was made to TCS E-serve as under:

“13. …The third comparable that the AO/TPO excluded is TCS E-serve. The ITAT observed that though there is a close functional similarity between that entity and the assessee, however, there is a close connection between TCS E-serve and TATA Consultancy Service Ltd. which was high brand value: that distinguished it and marked it out for exclusion. The ITAT recorded that the brand value associated with TCS Consultancy reflected impacted TCS E-serve profitability in a very positive manner. This inference too in the opinion of Court, cannot be termed as unreasonable. The rationale for exclusion is therefore upheld.”

19. The same decision also noted that one reason for exclusion was the “unavailability of the segmental data” for the above comparable.

20. In M/s. Oracle (OFSS) BPO Services Pvt. Ltd. (decision dated 5th February 2018 in ITA 124 of 2018) while upholding the exclusion of M/s.Wipro Ltd. from the list of comparables it was noted that the ITAT took into account the Related Party Transactions („RPT‟).The filter adopted was to exclude comparables with unrelated party transactions equal to or in excess of 75% of their The ITAT did that on the basis that Wipro Ltd. had a significant brand presence in the market and could, therefore, not be deemed to be a comparable entity. This Court explained the RPT filter as under:

“The RPT filter, is relevant and fits in with the overall scheme of a transfer pricing study which is premised primarily on comparing light entities having similar if not identical functions. Therefore, if a particular entity predominantly has transactions with its associate enterprise – in excess of a certain threshold percentage, its profit making capacity may resulted in a distorted picture, either way.”

21. A reference may next be made to the decision in The Principal Commissioner of Income Tax-3 v. Evalueserve Sez (Gurgaon) Pvt. Ltd. (supra) where a reference is made to the earlier decision to the BC Management Services Pvt. Ltd. (supra). This decision dealt with the exclusion of three specific comparables, which have also involved in the present case namely M/s.TCS E-Serve Ltd., M/s.TCS E-Serve International Ltd. and M/s. Infosys BPO Ltd. This Court upheld the exclusion of all three comparables and in particular since the entities had “a high brand value and therefore were able to command greater profits; besides they operated on economic upscale.”

33. In light of the aforementioned judicial decisions of the Hon’ble Supreme Court and Hon’ble High Courts, we direct the Assessing Officer/TPO to exclude Infosys Technologies Ltd and WIPRO from the final set of comparables.

TATA Elxsi Ltd

34. We find that the TPO has taken the software development and services segment for comparison. However, we find from the Annual Report of this company that this segment is bifurcated into three sub-segments:-

– Embedded product design services

– industrial design and engineering services

– Visual computing

35. In our considered opinion, these services are not comparable to the assessee. For similar reasons, the co-ordinate bench in the case of Global Logic India Pvt Ltd in ITA No. 5809/DEL/2011 has excluded this company from the final set of comparables. The relevant findings read as under:

“28. The TPO  considered this company as comparable despite  the assessee’s objections.

29. We find that this company has two main segments, namely, Software development and services and System integration services. The TPO has adopted ‘Software development and services’ segment which, in turn, consists of three sub- segments, namely, Embedded product  design  services  (design and development of hardware and software), Industrial design  and engineering (mechanical design with a focus on industrial design) and Animation and Visual Effects. Since this company offers integrated hardware and packaged software  solutions,  the same cannot be considered as comparable to the assessee company which is simply providing  software  related  services. The Tribunal in the case of Toluna India Pvt. Ltd., and Motorola Solutions India Pvt. Ltd., has treated this company as not comparable. We also order accordingly.”

36. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables.

Megasoft Ltd

37. The Annual report of this company shows that this year was of extraordinary events as there have been acquisitions in this year. The Annual Report further shows that there was amalgamation of Visualsoft Technologies Ltd. Moreover, we find that 35% of the revenue is from sale of software products and there are no  segmental

38. The co-ordinate bench in the case of Tata McGraw Hill Education Pvt Ltd ITA No. 5857/DEL/2011, for similar reasons, has directed for exclusion of this company from the final set of comparables. The relevant findings read as under:

“15.1. The TPO included this company in the list of comparables. The ld. AR argued for its removal on the basis of certain acquisitions done by this company during the year.

15.2. After considering the rival submissions and perusing the relevant material on record, we find from the Notes to Accounts in the Annual report of this company that there was, in fact, amalgamation of Visualsoft Technologies Ltd. Note no. 25 with  the caption ‘Amalgamation of Visualsoft Technologies Ltd. with the Company’ reads that: “The prior year comparatives include effect of amalgamation of Visualsoft Technologies Ltd. (‘Visualsoft’) with the company w.e.f.

ITA No.5857/Del/2011 1st October, 2006.  The  assets, liabilities, rights and obligations of Visualsoft have been  recorded at their respective fair values under the purchase method of accounting for amalgamation.” 15.3.  The  Mumbai Bench of the Tribunal in Petro-Aroldite (P) Ltd Vs. DCIT, (2013) 154 TTJ (Mum.) 176 has held that a company cannot be considered as comparable because of  exceptional  financial results due to mergers/ demergers etc. Similar view has been taken by the Delhi Benches of the Tribunal in several cases including Toluna India Pvt. Ltd. Vs. ACIT (ITA No. 564/D/2013). It is patent that the mergers/demergers largely influence the profitability of a company during the year of happening of such event, which makes it incomparable. As there have been acquisitions by Megasoft Ltd., during the year in question and   the financial results of the erstwhile company stand included in the overall profitability of this company, respectfully following the precedents, we hold that this company cannot be considered as a comparable.”

39. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables.

Persistent Systems

40. The Annual Report of this company shows that there have been acquisitions in this year pursuant to the sanction from the Hon’ble Bombay High Court for amalgamation of Control/Net India Pvt Ltd effective from 1.4.2006, pursuant to which all the assets, liabilities and losses of control/net are merged with the assets, liabilities and reserves of the company. Further, we find that this company is engaged in the sale of software products which makes it functionally dissimilar. For similar reasons, the co-ordinate bench in the case of Tata McGrawI Hill Education Pvt Ltd [supra], has directed for exclusion of this company from the final set of comparables. The relevant findings read as under:

“16.1. Here again, we find that there have been certain acquisitions which is evident from the Annual report of this company, that is available on page 781 of the paper book.  Note  no. 6 states that : `The company received sanction from the Bombay High Court, Mumbai and Bombay High Court, Goa Bench for amalgamation of ControlNet (India) Pvt. Ltd. (ControlNet) effective from April 1, 2006. Pursuant to this, all assets, liabilities and losses of ControlNet are merged with the assets, liabilities and reserves of the Company with effect from April 1, 2006 by following “pooling of interest method” as prescribed in Accounting Standard 14 (AS-14) as issued by the Institute of Chartered Accountants of India.’ Thus, the acquisition  took  place in this company during the relevant to the assessment year under consideration. Following the reasons given above while discussing the case of Megasoft Ltd., we order for the exclusion of this company from the list of comparables.”

41. Respectfully following the same, we direct the Assessing Officer/TPO to exclude this company from the final set of comparables.

Sasken Communication Technologies Ltd

42. The Annual report of this company shows that this company is engaged in the sale of software products and technology licensing and business of software services with no segmental results which make this company functionally dissimilar. For similar reasons, the co-ordinate bench in the case of Tata McGraw Hill Education Pvt Ltd [supra]  has  directed  for  exclusion  of this company. The relevant findings read as under:

“17.1. Here again, we find that the financial results of this company stand distorted due to certain acquisitions made by it during the relevant year. It is evident from the Annual report of this company, which is available on page 868 and  924  of the paper book. It has been categorically mentioned in its Annual report that during the year this company acquired Botnia Hitech Oy, Finland and its two wholly owned subsidiaries. It has also  been stated in the same para that during the year the company also successfully completed three mergers, namely, Sasken Network Systems Ltd., and Integrated Softtech Solutions Pvt. Ltd., the two Indian based wholly owned subsidiaries which merged with the assessee. It also transpires from this Annual report that the companies getting merged with the assessee company also provided software services focused on telecom operating systems. Thus, it is abundantly patent that the segmental results taken by the TPO of this company have been influenced by the mergers and acquisitions taken  place  during the year, thereby making such financial results as incomparable. Following ITA No.5857/Del/2011 the reason given above, we order for the exclusion of this company from the list of comparables.”

43. Considering the business profile of this company, in the light of judicial decisions referred to hereinabove, we direct for exclusion of this company from the final set of comparables.

Celestial Labs Ltd

44. The Annual report of this company shows that this company is into manufacturing and supply of medicines and is also engaged in biopharma and biotech manufacturing and customized IT solutions, manufacture of drugs, clinical trials and contract research activities. This company is also into cloning and purification and industrial biotechnology area and manufacturing enzymes, alpha amylase and alkaline protease. For these reasons, the co-ordinate bench in the case of Tata McGraw Hill Education Pvt Ltd [supra] has directed for exclusion of this company from the final set of comparables. The relevant findings read as under:

9.1. The TPO observed that this company is engaged in the provision of software development services. Notice u/s  133(6) of the Act was issued. As per the reply received from the company, the TPO noted that: “It is mainly a software development company” qualifying all the filters. He, therefore, included this company in the list of comparables.

9.2. Having heard the rival submissions and perused the relevant material on record, it is observed that this company is not only engaged in providing software development services, but also into the software products. It is noticeable from the  TPO’s order page 73 that the assessee ITA No.5857/Del/2011  objected to the inclusion of this company by stating that it developed a new drug design tool ‘Çelsuite’ to drug discovery in finding the lead molecules for drug discovery and protected the IPR by filing under the Copyright/Patent Act. It can be noticed from the Annual report of the company, which is available in the paper book, that there is a reference to the development of a denovo drug design tool ‘Celsuite’, which is a revenue generating activity. When we examine the turnover of this company  with  the narration given on page 24 of the Annual report, it can be seen that the same comprises: “Bio-informatics services, data warehousing and manning, software development, products and services.” It is manifest from the Annual report of this company that the same cannot be considered as comparable  on  entity level when it has dealt not only with software products, but has also engaged itself into software development and also rendering services. In comparison with that, the assessee company  is  simply providing software non- development services to its AEs. As such, this company cannot be considered as comparable. We, therefore, direct to remove the name of this company from the list of comparables.”

45. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables.

Flextronics Software Systems Ltd

46. The Annual Report of this company shows that this company is an end-to-end provider of communication products, services and solutions to network equipment providers, handset manufacturers, service providers and business process outsourcing sectors. This company also supplies both products and services to its customers and is engaged in selling products which makes it functionally dissimilar from the assessee. For these reasons, the co-ordinate  bench in the case of Tata McGraw Hill Education Pvt Ltd [supra] has directed for exclusion of this company from the final set of comparables. The relevant findings read as under:

“Flextronics Software Systems Ltd. (Seg.) 10.1. The  TPO included this company with operating profit ratio of 25.31%, in the list of comparables despite the assessee’s contention that it is  a  software  products  company  as  well  as  a  service provider.

10.2. After considering the rival submissions and perusing the relevant material on record, it can be seen from the Annual report  of  this  company that it is an end-to-end provider of communication products, services and solutions to network equipment providers, handset manufacturers, service providers and business process outsourcing sectors. From  the  Notes  to the financial statements of this company, it can be  observed that: “The activities of the company include development of package software, providing software consulting services and other ancillary products and services, primarily for use in the telecommunications industry.” In view of the fact that it is a software products company and is also providing software development services, even the segmental results of software development services cannot be equated with the activities undertaken by the assessee for its ITA No.5857/Del/2011 AEs. We, therefore, order to exclude this company from the list of comparables.”

47. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables.

Thirdware Solutions Ltd

48. The Annual Report of this company shows that this company derives revenue from various sources such as sale of license, software services, export from SEZ unit, revenue from subscription, etc. which makes this company functionally dissimilar from the appellant company. Though this company is engaged in diversified business including software products but no segmental information is available in the Annual Report. The co-ordinate bench, for similar reasons mentioned hereinabove, has directed for exclusion of this company. The relevant findings read as under:

“Ld. AR contended that this company cannot be compared with  the assessee company because the company is functionally dissimilar and derives revenue from various sources such as sale of license, software services, export from SEZ unit,  revenue from subscription etc. Further, ld. AR submitted that this company is engaged in diversified business including software products and no standalone financial data is available for FY 2006-07. Therefore, the ld. AR submitted that this comparable may be excluded.

On the other hand, the ld. DR could not controvert the  fact that the said comparable is not engaged in sale of license of software products as pointed out by the ld. AR.

We have heard both the parties and perused the material available on record. A perusal of the annual report of Thirdware Solutions Ltd. reveals that the said company has made income from sale of licence to the tune of more than Rs.1 crore, which means the company is into production of software products which apparently cannot be a comparable to  assessee  dealing with contract software development and not into sale of any product. Therefore, we direct TPO/AO to exclude this company from the list of comparables.”

49. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables.

KALS Infomation Systems Ltd

50. The Annual Report of this company shows that this company is engaged in training and software products since its The Annual report shows that STPI Unit engaged in development of software and software products and a training centre engaged in training of software professionals on online projects, which makes this company functionally dissimilar from the appellant company. For similar reasons, the co-ordinate bench in the case of Tata McGraw Hill Education Pvt Ltd [supra] has directed for exclusion of this company from the final set of comparables. The relevant findings read as under:

“13.1. The TPO included this company in the list of comparables  by observing that its operations were in software products, software services and training. Information u/s 133(6) of the  Act was called from this company, which has been reproduced on page 94 of the TPO’s order. From such submissions, the TPO inferred that the software products constituted only 3% of its revenues and training constituted only 8.56%, thereby leaving around 88% of the total revenues to the software services. That is how, the assessee’s objections were  repelled  and  this company was considered as comparable.

13.2. After considering the rival submissions and perusing the relevant material on record, we find that the entire premise of the TPO’s inclusion of this company in the list of comparables is that the software products constitute only 3% of its revenue. This inference has been drawn on the basis of the information supplied by this company stating:

“the use of readymade object laboratories is  only  to the tune of about (0.33 to 3) % in the year 2005-06 and 2006-07. ” We fail to comprehend as to how the above line conveys that the software  products’  revenue stands at 3%. What has been written is that the company’s use the readymade object laboratories  is  only to the tune of maximum 3%. By no imagination this can be construed as revenues from software products. When we peruse the Annual report of this company, which is available in the paper book, it can be seen that there is no such mention of software product’s revenue limited to 3%. On the contrary, it has been mentioned in the Notes to the financial statement that:  “the  company is engaged in development of software and software products since its inception.” The company consisting of STPI unit engaged software products and  in development of software is also undertaking training activity of software professionals on online projects.  Not only the revenues of the segment  considered  by the TPO also include the revenue from software products, but also from training imparted on commercial basis. When we consider the assessee’s functional profile, the only irresistible conclusion which can be drawn is that it is not a ITA No.5857/Del/2011 comparable company. Accordingly, this company is ordered to be expunged from the set of comparables.

51. We, accordingly, direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables.

E-zest Solutions Ltd

52. The Annual Report of this company shows that it is rendering product development services and high end technical services which come under the category of KPO For similar reasons, the co-ordinate bench in the case of Meritor LVS India [P] Ltd ITA No. 1231/Bang/011 has directed for exclusion of this company from the final set of comparables. The relevant findings read as under:

“ 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters.

14. 2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the IT(TP)A.1231/Bang/2011 Page – 13 ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in ‘e-Business Consulting Services’, consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing (‘KPO’) services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not  contain  detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company’s website which should be considered while evaluating the company’s functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and  relied  on  the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables.

14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the

14.4 We have heard the rival submissions and perused and carefullyconsidered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is  into software development services, this company i.e. e-Zest  Solutions Ltd., is rendering product development services  and high end technical services which come under the category  of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I- Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable  to  software development services and are therefore not IT(TP)A.1231/Bang/2011 Page – 14 comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e- Zest Solutions Ltd. be omitted from the set of comparables for the  period  under  consideration  in  the  case  on  hand.  The A.O./TPO is accordingly directed.”

53. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables.

Avani Cimcon Technologies Ltd

54. The Annual Report of this company shows that this company derives revenue from both software development services and sale of software products [D Exchange] without any segmental details which makes this company functionally dissimilar. For similar reasons, the co-ordinate bench in the case of Global Logic India Pvt Ltd [supra] has excluded this company from the final set of   The  relevant findings read as under:

“9. The TPO observed on page 89 of his  order  that  this  company is also a software development and consulting company. In his opinion, all the filters applied by him were fulfilled and, as such, this company was liable to be considered as comparable.  The assessee objected to the inclusion of this company before the DRP by contending that not only the turnover of  this  company was much lower, but also the profits were extremely high. Rejecting the assessee’s contentions, the DRP upheld the TPO’s view on the inclusion of this company in the final set of comparables.

10. It can be seen from the Annual accounts of this company, a copy of which is available on record, that albeit it is a pure software development service provider, but, is utilizing its own softwares in rendering such services. The Tribunal in Motorola Solutions India Pvt. Ltd., has held this company to be incomparable by accepting the assessee’s contention that  the high operating margins of this company were on account of difference in its asset base. It is further relevant to note that this company, apart from rendering software development services, is also engaged into the sale of software products and the accounts maintained by it are on entity level without there being any segregation for software  development  segment.  As the TPO has considered the entity level figures of this company for making a comparison with the assessee company, such a  course of action cannot be permitted because of the inclusion of profit from sale of software products into the overall profitability of this company. Neither separate profits are available, nor there is any measure provided for segregating profit on sale of software products from the overall profit of  this company for finding out a comparable segment similar with that of the assessee company. As the profits of the software development portion cannot be ascertained, we hold that it  cannot be considered as comparable on entity level. We, therefore, order for the exclusion of this company  from  the final set of comparables.”

55. Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables.

Helios Matheson Information Technology Ltd

56. The Annual Report of this company shows that revenue is from software sales and services. This company is engaged in ITES BPO services, offshore delivery, project management services, public sector services, maritime practices and executive education information systems. No segmental details are available. There  being  revenue from software sales and services, makes this company functionally dissimilar from that of the assessee. For similar reasons, the co- ordinate bench in the case of Global Logic India Pvt Ltd [supra] has excluded this company from the final set of    The  relevant findings read as under:

“15. The TPO considered this company as comparable  by observing that it was into the software development services.  The assessee’s objections were repelled.

16. We find from the Annual accounts of this company that it  is engaged in rendering ITES BPO services, application management services, offshore delivery, project management services, public sector services, maritime practices  and  executive education information system, etc. The above description of the nature of works carried out by this company manifests that the character of services provided by the assessee company cannot at all be considered as comparable with this company. Similar view has been taken by the Tribunal in the case of  Toluna  India  Pvt. Ltd. (supra).    Following the same, we direct it to be considered as not comparable.”

57.  Respectfully following the same, we direct the Assessing Officer/TPO for exclusion of this company from the final set of comparables.

Ishir Infotech Ltd

58. The Annual Report of this company shows that this company is engaged in outsourcing work and is having heavy outsourcing activities as well as having different business model. The Hon’ble High Court of Delhi in the case of Rampgreen Solutions Pvt Ltd 377 ITR 533 has held that a company cannot be taken as a comparable which has a different business model. The relevant findings of the Hon’ble High Court read  as under:

“38. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal’s expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing  that  outsourcing was common in ITeS industry and the same would   not have a bearing on profitability. Plainly, a business model  where services are rendered by employing own employees and using one’s own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity.”

59. In light of the above, we direct the Assessing Officer/TPO to exclude this company from the final set of comparables.

60. It would not be out of place to mention here that the claim of revenue that broad functionality is sufficient to find the comparable entity though the TNMM method allows broad flexibility tolerance in the selection of comparables does not hold any water in the light of  the observations of the Hon’ble High Court of Delhi in the case of Avenue Asia Advisors Pvt Ltd 398 ITR 120 wherein the Hon’ble High Court has held as under:

“19. The first and the foremost issue that arises in this case is with respect to the applicability of tests laid down in Rampgreen Solutions (supra), which was rendered on 10th  August,  2015.  This decision has clearly laid down the various principles on the basis of which determination of comparables needs to be undertaken while fixing the ALP and the margin that needs to be assigned. This Court had specifically rejected the proposition that broad functionality is sufficient to find the comparable entity though the TNMM method allows broad flexibility tolerance in the selection of comparables.  This  proposition having been rejected, the Court in Rampgreen Solutions (supra) held as under:

“43. In our view, the aforesaid approach would not be apposite.  In so far as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the  transfer pricing method adopted. In other  words,  the comparable transactions/entities must be selected on the basis  of similarity with the controlled transaction  entity.  Comparability of controlled and uncontrolled transactions has to be judged, inter alia, with reference to comparability factors as indicated under rule 10B(2) of the Income Tax Rules, 1962. Comparability analysis by the transactional net margin method may be less sensitive to certain dissimilarities between the  tested party and the comparables. However, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable arm’s length price. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in profit level indicator must trigger further investigations/analysis.

44. Consideration for a transaction would reflect the functions performed, the significant activities undertaken, the assets or resources used/consumed, the risks assumed. Thus, comparison of activities undertaken /functions performed is important for determining the comparability between controlled and uncontrolled transactions/entity. It would not be apposite to ignore functional dissimilarity only for the reasons that its impact may be reduced on account of using arithmetical mean of the profit level indicator.”

The principle governing the identification of comparable transactions would be the same, irrespective of whichever transfer pricing method is adopted.·

20. A perusal of the above decision reveals that the following steps ought to be undertaken in identification of comparable transactions/entities.

Comparable transactions must be selected on the basis of a similarity with the controlled transaction/entity.

Rule 10B (2) of the Income Tax Rules, 1962 ought to be borne in mind while choosing the factors of comparability in respect of uncontrolled transactions.·

Wide deviation in the Profit Level Indicator (‘PLI’) would  require further investigation/analysis. Even while adopting the TNMM method, the standard for selection of the comparable transactions/entitles cannot be diluted.

For comparison of transactions, factors such as the nature of capital, resources used, the risks assumed, etc. ought to be considered.·

Broadly, therefore, the dictum by this Court was that though in the TNMM method there is sufficient tolerance, mere broad functionality is by itself insufficient.

Question (i)

21. In the backdrop of the principles laid down in Rampgreen Solutions (supra) and the analysis of the ITAT’s order with respect to each of the comparables disputed by the Assessee, is as follows:

(i) Sumedha Fiscal Services Limited – In the case of Sumedha, the ITAT clearly acknowledged that if it had handled management of rights issues and the revenue from such service was substantial, then the services provided by Sumedha would    be dissimilar to that of the However, having held so, the ITAT restored the matter to the TPO to again examine whether the revenue of Sumedha was substantial from handling the said services of rights issues and with a direction to exclude it if the TPO found  it in the affirmative. Such an approach of  the ITAT is not in accordance with the principles laid down in Rampgreen Solutions (supra). The ITAT’s findings acknowledge that Sumedha may not be  functionally similar  to  the Assessee, as admittedly, the Assessee does not render services relating to rights issues. Starting the entire exercise of comparability analysis from the stage of the TPO would result in an unending cycle of proceedings especially when the relevant material in the form of annual reports etc. was available on the record.  The ITAT ought to itself have determined  whether Sumedha is  to  be retained at all in view of its own findings. Remanding the issue to the TPO was an incorrect approach.

(ii) Brescon Advisors Limited – In the case of Brescon, the ITAT analysed the annual reports and noticed that the income of Brescon is from fee based financial services, from debt resolution and debt syndication. Brescon also earned revenue  from sale of investments. The ITAT has equated `Advisory services related to debt financing’ with `financial services from debt resolution and debt syndication’. These two are not  identical services. Whereas the former is advisory in nature, the latter is executory in nature. While there could be some overlap between the former and latter, the matter requires deeper analysis and examination.

(iii) Ladderup Corporation Limited – The ITAT noticed that Ladderup had shown operational income from financial and management consultancy services as also fee based activities such as ‘Debt Syndication, IPO Advisory, Private Equity Placement, Merger and Acquisitions, Corporate  Restructuring  and a host of other corporate advisory services.’ The ITAT, thereafter, simply held that Ladderup had similar functions as that of the Assessee and was a comparable that deserved to be retained.

22. Broadly, it appears that the ITAT has gone on the usage of several terms such as debt syndication, debt financing, IPO advisory, corporate restructuring, mergers, acquisitions etc, appearing in the annual reports of the comparable to hold that the Assessee and the said comparables perform  similar    The  analysis  at  such  a  broad  level,  based  upon  the appearance of such similar terminologies, does not by itself make the functions similar in nature.

23. The argument of the Assessee appears to be that while the Assessee was merely advising on these issues and providing advisory services to its AE, these three comparables appear to be actually involved in the providing of services relating to debt restructuring, debt financing, issuance of IPOs, mergers and de- mergers, etc. There is a difference between giving advice on these matters and actually undertaking the said services. A similar illustration, in the context of litigation, would be the difference between giving advice on what to argue in Court and actually arguing the matter in the Court. This difference  needs to be borne in mind and the mere appearance of similar sounding words does not by itself constitute similar functions. Further, as laid down in Rampgreen Solutions (supra), all these three companies demonstrated a wide deviation in the percentage of margins. Thus, it requires a deeper analysis to determine as to whether they were in fact comparables to be retained for the purpose of fixing the ALP.

24. Insofar as the argument of Mr. Chaudhary regarding the trend of Assessees to challenge the inclusion of comparables which show a higher percentage margin, is concerned, the same cannot be faulted with in as much as every Assessee is entitled to make submissions as to the selection of comparables and choose what is advantageous to it. So long as the same can stand the test of legal scrutiny, it cannot be held that such challenges are not maintainable.

25. In this backdrop, when sub-advisory agreement dated 1st July, 2006 along with the addendum thereto, is examined, the services of the Assessee cannot be termed as that of merchant banking though there may be some overlap in the advisory segment of the services provided by merchant bankers. In view of the services rendered by the Assessee, Question (i) is answered in the negative i.e. in favour of the Assessee and  against the Revenue.

Question (ii)

26. In view of the above discussion on the various comparables, the findings of the ITAT in respect of Sumedha, Brescon and Ladderup are set aside. We have been informed by the learned counsel for the parties that subsequent to the order of the ITAT, the TPO passed an order which resulted in a final assessment order being passed by the AO. The matter is currently pending in appeal, by the Assessee, before the  CIT (A). All those consequential orders would not survive in view of the present order.

27. In order to not brook any further delay, this matter may be placed before the CIT (A) to consider as to whether  these  three companies can be held to be comparables in the light of observations made in Rampgreen Solutions (supra) and in this order. The CIT (A) would, thereafter, pass a comprehensive  order and determine the ALP for the international transactions. Question (ii) is answered in the affirmative i.e. in favour of the Assessee and against the Revenue.

61. Ground No. 1 with all its sub grounds is allowed.

62. In the result, the appeal of the assessee in ITA 5870/DEL/2011 is allowed.

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