Ita/551/2017 Of Pr. Commissioner Of Income Tax, Gurgaon v. M/S Comverse Network Systems India Pvt Ltd

ITA No.551 of 2017 (O&M) 1 IN THE HIGH COURT OF PUNJAB AND HARYANA|AT CHANDIGARH ITA No.551 of 2017 (O&M)Date of Decision : 05.02.2020 The Pr. Commissioner of Income Tax, Gurgaon ...... Appellant VerTSu M/s Comverse Network Systems India Pvt Ltd. ...... Respondent CORAM: HON'BLE MR.JUSTICEK AJAY TEWARIHON'BLE MR.JUSTICEAVNEESH JHINGAN,,, Present: Mr. Tajender K. Joshi, Sr. Standing Counsel for the appellant. © Shri Deepak Chopra, Advocate Shri Deepak Agrawal, Advocatewith Shri Rohan Khare, Advocate for the respondent ,,, AJAY TEWARI, J. (Oral) 1. The present appeal is directed against the order of the Income TaxAppellate Tribunal (ITAT’), I-2 Bench, New Delhi dated 31.05.2017 for theassessment year 2010-11. The Revenue has raised the following question of law:-| “Whether in the facts and circumstances of the case and in law,the Hon’ble ITAT was correct in excluding M/s _ e-InfochiBangalore Ltd, M/s In-finite Data Systems Pvt Ltd, M/s EngineersIndia Ltd, M/s IBI Chematur Ltd, M/s Riets Ltd (ConsultancyService Segment) and M/s TCE Consulting Engineers Ltd used asa comparable for determining the ALP in the case of the assesseecompany, since the TPO has made detailed findings by analyzingfunctionality, turnover and profile of various comparablesconsidered in his order. Further the ITAT was not justified toconsider issues pertaining to earlier years, since each year 1s aseparate assessment year and should be _ considerindependently. The comparables had been selected by the TPO byapplying suitable and relevant parameters. 2. The Respondent assessee M/s Comverse Network Systems India Pvt. Ltd. is a wholly owned subsidiary of Comverse Network Systems Inc.,USA. The assessee is engaged in the provision of sales and post-sales supportservices, software development services, professional and maintenance servicesto its Associated Enterprises (‘AEs’). — 3. For assessment year 2010-11, the Respondent assessee filed itsreturn of income on 13.10.2010, declaring an income of Rs.1,43,77,210. Thecase of the assessee was selected for scrutiny and statutory notices under section142(1) and 143(2) of the Income Tax Act, 1961 (‘Act’) along with detailedquestionnaire was issued upon assessee. In response to these noticesrepresentative of assessee attended assessment proceedings from time to timeand submitted information as called for by assessing officer. A reference undersection 92C(A)(1) of the Act was made to Transfer Pricing Officer (“TPO’)New Delhi, for determining arms length price in respect of internationaltransaction entered into by the assessee during financial year 2009-10 toassessment year under consideration. 4. Before Ld. TPO the assessee filed its documentation under Rule10D of the Income Tax Rules and other details as asked for. Ld. TPO observedthat assessee had entered into following international transactions with itsassociated enterprises (‘AE’): 5. On the basis of functional profile of the taxpayer under Software Development, Provision of professional (Customization, configuration etc.)Services and Provision of maintenance (trouble shooting) Services segment,these three international transactions were benchmarked using a single set ofcomparables which are from the Software Industry. TNMM was considered asthe ‘MAM’ & OP/OC was the PLI. The OP/OC of the taxpayer was calculatedat 10%, 9% & 7% respectively for these 3 segments against average OP/OC ofthe 18 comparables at 9.13%. Thus, the transactions were stated to be at arm’slength. Some services were also availed from the AE and for this segmentOPM of the taxpayer was calculated at 26.89% against average OPM of thecomparables at 5.58%. The taxpayer had also provided some Sales and PostSales Support Services to its AE and for this segment OP/OC of the taxpayerwas calculated at 7% against average OP/OC of the comparables at 6.58%. Thus, these transactions were stated to be at Arm’s Length. 6. The TPO, however, vide its order dated 27.01.2014 determined anadjustment of Rs.5,78,66,602 as under: Some services were also availed from the AE and for this segmentOPM of the taxpayer was calculated at 26.89% against average OPM of thecomparables at 5.58%. The taxpayer had also provided some Sales and PostSales Support Services to its AE and for this segment OP/OC of the taxpayerwas calculated at 7% against average OP/OC of the comparables at 6.58%. Thus, these transactions were stated to be at Arm’s Length. 6. The TPO, however, vide its order dated 27.01.2014 determined anadjustment of Rs.5,78,66,602 as under: a. Software Development Services Rs.3,45,49,016/- b. Technical Support Service Segment _ Rs.2,33,17,586 Total (a + b) Rs.5,78,66,602/- 7. The said adjustment was incorporated by the Assessing Officer(‘AO’) in the draft assessment order. Against the draft assessment order, theassessee filed its objections before the Dispute Resolution Panel (“(DRP’). ThDRP vide its direction dated 18.12.2014 confirmed the adjustment as made bythe TPO/AO| 8. After taking into account the adjustment to ALP, as directed by theDRP, the AO passed the Final Assessment order under section 144C read withsection 143(3) of the Act on 24.02.2015. 9. Aggrieved by such final assessment order dated 24.02.2015, theassessee preferred an appeal before the Hon’ble ITAT. The Hon’ble [TATaccepted the submissions of the assessee that the comparables chosen by theTPO were functionally dissimilar and were liable to be rejected vide its orderdated 31.05.2017.| 10. Being aggrieved by the impugned order dated 31.05.2017 of theHon’ble ITAT, the Revenue has preferred the present appeal for consideration. ll. Only one question has been proposed by the Revenue whichencompass all the comparables rejected by the Tribunal by analyzing thefunctionality, turnover and profile of the various comparables now beingimpugned before us. We propose to deal with the same sequentially as under: SOQRTWARE DEVELOPMENT SEGMEN :1Infochips Bangalore Limited 12. The TPO had adopted E-Infochips whilst stating that the saidcomparable is primarily engaged in software development services and does not ITA No.551 of 2017 (O&M) 5 provide IT enabled services. The TPO also alleged that even though the saidcompany treats IT and ITES as one industry i.e., one segment, however, theAnnual Report does not have any reference to any ITES services beingperformed by the company. The DRP had rejected the claim of the assessee forits exclusion. Before the ITAT, the assessee submitted that E-Infochips wasfunctionally dissimilar to the profile of the assessee owing to the fact that E-Infochips was engaged in hardware designing, product reengineering, productlife cycle management enterprises, IT consulting and IT enabled services.Further, it was also submitted by the assessee that the said company hadinsufficient segmental information as it reported only one segment. The finding the [TAT for its exclusion is as under: G56. On perusal of relevant material on record, we find fromannual report of this company is placed at 1-19 of the paper bookthat profit and loss account shows income from software servicesat Rs.43,04,66,481/-. Schedule 7 gives breakup of this income isas under: Incomefrom software services Rs.37, 13,85, 107 Consultancy charges Rs.5, 90,768,374 57. In the directors report this company has been characterized asto be engaged in development of software as per specificrequirement of clients. The reported segment of this comparableindicates that revenue from software development servicesincludes revenue from IT enabled services also. And more so, thiscomparable has been characterized as having both softwaredevelopment and ITES segment into overall segment designatedas software development division. G56. On perusal of relevant material on record, we find fromannual report of this company is placed at 1-19 of the paper bookthat profit and loss account shows income from software servicesat Rs.43,04,66,481/-. Schedule 7 gives breakup of this income isas under: Incomefrom software services Rs.37, 13,85, 107 Consultancy charges Rs.5, 90,768,374 57. In the directors report this company has been characterized asto be engaged in development of software as per specificrequirement of clients. The reported segment of this comparableindicates that revenue from software development servicesincludes revenue from IT enabled services also. And more so, thiscomparable has been characterized as having both softwaredevelopment and ITES segment into overall segment designatedas software development division. 58. In the facts of the present assesse, the functions are onlyrelating to software development to its AEs. No where functionalprofile indicates there has been an inclusion of IT enabledservices into software development division. Therefore, in ourconsidered opinionfunctions of this company cannot be held to becomparable with that of assessee. We, therefore, direct exclusion of this company from the list ofcomparables. 13. The counsel for the revenue relies upon the order passed by the TPO andargued that the ITAT failed to appreciate the findings and observations given bythe TPO. The ITAT has noted that in the directors report the comparablecompany has been characterized as to be engaged in development of software asper specific requirement of clients revenue from software development servicesincludes revenue from IT enabled services also. The ITAT has also noted thatno where functional profile indicates that there has been an inclusion of ITenabled services into software development division and both the companies arehaving different functional profile. Said finding of fact that the comparable isfunctionally dissimilar has not been shown to be perverse by the Revenue andthus, the comparable has rightly been excluded by the ITAT.Infinite Data Systems Private Limited 14. The TPO has selected this comparable whilst stating that the saidcompany is primarily an IT service provider and hence comparable to the profileof the assessee. The said finding was upheld by the DRP. Before the ITAT, theassessee submitted that Infinite Data Systems was functionally dissimilar to theassessee since the said company was deriving its income from technical supportand infrastructure management services. Additionally, it was submitted by theassessee that Infinite Data Systems had only one customer i.e., Fujitsu ServicesLimited. The ITAT while excluding the said comparable has observed as under: G61. We have perused documents relied upon by both sides, it isobserved that this company is engaged in a wide array ofserviceslike technical consulting, design and development of softwaremaintenance, system integration, implementation and testing willand infrastructure management services as has been mentioned atpage 36 of the paper book. It has also been mentioned thereinthat, it is not possible to give a quantitative details of sales fromthese individual sectors. Further, it is observed that this company G61. We have perused documents relied upon by both sides, it isobserved that this company is engaged in a wide array ofserviceslike technical consulting, design and development of softwaremaintenance, system integration, implementation and testing willand infrastructure management services as has been mentioned atpage 36 of the paper book. It has also been mentioned thereinthat, it is not possible to give a quantitative details of sales fromthese individual sectors. Further, it is observed that this company enters into direct contract with its customer which is not case withassessee before us. This company is also exposed to a hugecustomer risk as there is only one sole customer. This companyhas reported its segment based on location of its customer as aprimary segment for reporting. Thus, it has reported revenuebased on location of its customer,. In the case of assessee beforeus there is no risk as far as present services rendered to its AE’sare concerned. It is also been observed that assessee receives itspayments as has been agreed upon between AE and assessee eventhough workfinally done is unsuccessful or even ifany substantialrework is required to be filial product. Thus assessee before usdoes notface any business risk. This 1s it is also observed that thiscompany is into various segments for which independentinformation is not available which makes this company are notcomparable with assessee. 62. On the basis ofabove discussion we direct exclusion of thiscompanyfrom final list ofcomparables. ”’ 15. The counsel for the revenue relies upon the order passed by the TPO andargued that the ITAT failed to appreciate the findings and observations given bythe TPO. But the finding of fact recorded by the ITAT have not been shown tobe perverse and cogent reasons have been given showing the dissimilarity of thecomparable to the assessee and thus, the exclusion of the above comparablecannot be faulted with. SALES AND POST SALES SUPPORT SEGMENTEngineers India Limited 16. The TPO selected the said comparable as being functionally comparableto the profile of the assessee. The said finding was confirmed by the DRP.Before the ITAT, the assessee contended that Engineers India Limited (“EIL’)was functionally dissimilar to the profile of the assessee owing to the fact thatthe said company provided complete range of project services ranging fromconceptualization, planning, designing, engineering and construction activitiesto meet specific requirements of its clients in various fields like petroleum ITA No.551 of 2017 (O&M) 8 refining, petrochemicals, pipeline, offshore oil and gas, onshore oil and gas,terminals and storages, mining and metallurgy and infrastructure. Hence, it wassubmitted by the assessee that the said company was an end to end engineeringservice provider and that the said company spent significant amount on researchand development. The ITAT while directing its exclusion has observed asunder: G7/7. We have considered arguments of the rival submissionsadvanced by both sides. It is observed that assessee providessupport services to its AE in respect of sale of software by AE.Bugfixing is also a part ofpost sales support services, which maybe treated partly as function of technical nature, but the samecannot be compared with consultancy provided in the field ofengineering infrastructure field. We see no similarity in the kindsof services rendered by assessee vis-a-vis this company. Weaccordingly direct for the exclusion of this company from the listofcomparables. ” 17]The said finding of fact that the comparable is functionallydissimilar has not been shown to be perverse by the Revenue and thus, the ITAThas rightly concluded that the said comparable has to be excluded. IBI Chamatur Engineering and Consultancy Ltd. 17]The said finding of fact that the comparable is functionallydissimilar has not been shown to be perverse by the Revenue and thus, the ITAThas rightly concluded that the said comparable has to be excluded. IBI Chamatur Engineering and Consultancy Ltd. 18. The said comparable was chosen by the TPO as being functionallycomparable to the profile of the assessee which was confirmed by the DRP.Before the ITAT, it was submitted by the assessee that IBI Chematur was notfunctionally similar owing to the fact that it provided planning and engineeringservices for the chemical manufacturing industry. It was further submitted bythe assessee that the said company provided a wide range of services, detailedengineering, intelligent 3D plant modelling, 2D conversion services, smart plantinstrumentation inspection services, project planning and managementsupervision services. The ITAT while directing exclusion of IBI Chematur asnot being functionally comparable to the profile of the assessee has held as ITA No.551 of 2017 (O&M) 9 under:| G50. We have perused records in the light of submissionsadvanced by both the sides we agree with Ld. Counsel that thiscompany is involved in huge engineering projects; which areturnkey in nature. Such activities cannot be compared withtechnical services like bug fixing or provisions of warrantyservicers etc. rendered by assessee. From the financial report ofcompany it is observed that this company is also responsible forsetting up till performance of work undertaken for a particularchent. Therefore, in our considered view services rendered by thiscompany cannot be considered to be merely technical in nature. 19. The finding recorded by the ITAT have not been shown to beperverse and cogent reasons have been given showing the dissimilarity of thecomparable to the assessee and thus, the exclusion of the above comparablecannot be faulted with.. RITES Limited 20. The TPO selected this comparable while stating that only theconsultancy services segment has been considered which was similar to thetechnical services provided by the assessee. The said finding was confirmed bythe DRP. Before the ITAT, it was submitted by the assessee that the saidcomparable was engaged in providing concept to commissioning consultancy,design, engineering and turnkey solutions in the field of transportation,infrastructure and related technologies of the highest professional standards andhence the same ought to be rejected. Additionally, it was submitted by theassessee that the said company had been recognized as a think tank fordevelopment of national policies, priorities and strategies in the field oftransportation and infrastructure sector. The ITAT while directing its exclusionhas observed as under: GWe have perused the submissions advanced by both the sides inthe light of records placed before us. We find that only ‘Consultancy service segment” of this company has _ beenconsidered by the TPO leaving the other business segments aside.[It is also observed that this company is imparting high-endtechnical services which cannot be compared with the low-endsale andpost sale services rendered by assessee. We alsofind thatthis company is a Govt. of India Undertaking providing end toend solutions for turn-key project. In the following cases, theTribunal has held that RITES Ltd. is engaged in providingengineering segments and to end to end solutions and thereforenotfunctionally comparable with marketing support segments. | (a)Asstt. CIT v. Chemtex Global Engineers (P) Ltd., [2014] 147 ITD 488/[2013] 135 taxmann.com 351 (Mum.-Trib) (b) Dy. CIT v. MCI Com India (P) Ltd. [2012] 53 SOT 290 (URO)/25 taxmann.com 520 (Delhi) (c) Yum Restaurants (India) (P) Ltd. v. [TO [2014] 48taxmann.com 384 (Delhi)taxmann.com 384 (Delhi) (d) Nortel Networks India (P) Ltd. v. Addl. CJT [2014] 44taxmann.com 26 (Delhi-Trib.)taxmann.com 26 (Delhi-Trib.) Considering the facts discussed herein above in the light of thejudicial decisions mentioned herein above, we direct for theexclusion of this companyfrom thefinal list ofcomparables. ” (a)Asstt. CIT v. Chemtex Global Engineers (P) Ltd., [2014] 147 ITD 488/[2013] 135 taxmann.com 351 (Mum.-Trib) (b) Dy. CIT v. MCI Com India (P) Ltd. [2012] 53 SOT 290 (URO)/25 taxmann.com 520 (Delhi) (c) Yum Restaurants (India) (P) Ltd. v. [TO [2014] 48taxmann.com 384 (Delhi)taxmann.com 384 (Delhi) (d) Nortel Networks India (P) Ltd. v. Addl. CJT [2014] 44taxmann.com 26 (Delhi-Trib.)taxmann.com 26 (Delhi-Trib.) Considering the facts discussed herein above in the light of thejudicial decisions mentioned herein above, we direct for theexclusion of this companyfrom thefinal list ofcomparables. ” 21. The said finding of fact that the comparable is functionally dissimilar has not been shown to be perverse by the Revenue and thus, the comparablerightly been excluded by the ITAT. TCE Consulting Engineers Ltd. 22. The TPO has selected this comparable while stating that the said|company is engaged in various project engineering services which are in thenature of technical services and hence comparable to the profile of the assessee.The said finding was confirmed by the DRP. Before the ITAT, it was submitted by the assessee that the said company ought to be rejected owing to the fact thatit was engaged in engineering consultancy services in the nature of designengineering, procurement assistances and inspection and _ expediting,construction and supervision and commissioning support. It was further ITA No.551 of 2017 (O&M) 11 submitted by the assessee that the said company had a huge brand value andhence the same was liable to be rejected. The ITAT while directing its exclusionhad observed as under: GWe have perused the submissions advanced by in the light of therecords placed before us. The company 1s involved in activitiesbeyond engineering design. It is engaged in activities that extendfrom concept to engineering. Whereas the assessee providesservices as a captive unit to its overseas AEs. The diversifiedfunctions of this comparable company include pre-projectactivities, procurement assistance, project management,commissioning and coordination, inspection, construction andsupervision. Further, there is no segmental accounting in theannual report of the Company which provides profitability, for theengineering design segment. This, in view of our discussion andalso following the precedence in the aforesaid cases, we hold thatTCS Consulting cannot be held to be comparable company. 23. The counsel for the revenue relies upon the order passed by the TPOand argued that the ITAT failed to appreciate the findings and observationsgiven by the TPO. The finding recorded by the ITAT have not been shown to beperverse and cogent reasons have been given showing the dissimilarity of thecomparable to the assessee and thus, the exclusion of the above comparablecannot be faulted with in any manner. 24. The above findings of fact by the ITAT regarding exclusion of thecomparables are thus upheld and the same do not merit any interference.The questions of law are answered against the revenue and in favour of theassessee. Similar views have been taken by this Hon’ble Court in the case ofPCIT v Equant Solutions India Pvt. Ltd.(TA No. 419/2016), the BombayHigh Court in the case ofCIT vs. PTC Software(395 ITR 176) and in the caseot.Principal Commissioner of Income Tax Vs. Barclays Technology CentreIndia Pvt. Ltd.(409 ITR 108) and by the Karnataka High Court inPrincipalCommissioner of Income Tax vs. Softbrands India Pvt. Ltd.(406 ITR 513). 25. The appeal stands disposed of in the above terms. © 26|Since the main case has been decided, the pending Miscellaneous Application, if any, also stands disposed of, (AJAY TEWARI )JUDGE 05.02.2020pooja sharma-l ( AVNEESH JHINGAN)JUDGE Whether speaking/reasonedWhether Reportable | Yes/NoYes/No