The Principal Commissioner Of Income Tax, Gurgaon v. Zte Telecom India Pvt. Ltd., Gurgaon

ITA-388-2018 -1- IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH ITA-388-2018 (O&M) Date of Decision: 19.3.2019 The Principal Commissioner of Income Tax, Gurgaon Versus ....Appellant. ZTE Telecom India Pvt. Ltd., Gurgaon ...Respondent. CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.HON'BLE MRS. JUSTICE MANJARI NEHRU KAUL. PRESENT: Mr. Tajender K. Joshi, Senior Standing Counsel,for the appellant.*** AJAY KUMAR MITTAL, J. 1.This appeal has been filed by the revenue under Section 260Aof the Income Tax Act, 1961 (in short “the Act”) against the order dated19.3.2018 (Annexure A-V) passed by the Income Tax Appellate Tribunal,Delhi Bench, '1-2', New Delhi (hereinafter referred to as “the Tribunal”) inITA No. 5971/DEL/2014, for the assessment year 2007-08, claiming thefollowing substantial question of law:- “Whether the Hon'ble ITAT was correct in excludingInfosys Technologies Ltd. as a comparable relying on thedecision of the Hon'ble High Court in the case of CIT Vs.Agnity India Technologies Pvt. Ltd. when thecircumstances are totally different and when assesseeitself has taken Infosys as a comparable in its TP Study Report?” 2.Briefly stated, the facts necessary for adjudication of the instantappeal as narrated therein may be noticed. The assessee filed its return ofincome on 14.11.2007 for the assessment year 2007-08 declaring an incomeof ` 1,82,91,080/-. A reference was made to the Transfer Pricing Officer(TPO) to determine the Arm's Length Price (ALP). The TPO vide orderdated 26.10.2010 (Annexure A-I) passed under Section 92CA(3) of the Actproposed the Transfer Pricing Adjustment at ` 2,98,61,631/-. The AssessingOfficer vide draft order dated 20.12.2010 (Annexure A-II) made theaddition of ` 2,98,61,631/- on account of Transfer Pricing Adjustments and` 14,29,434/- on account of interest on service tax and TDS. Vide orderdated 9.2.2011 (Annexure A-III), the Assessing Officer framed the finalassessment under Section 143(3) of the Act at a total income of` 4,95,82,145/- including addition of ` 2,98,61,631/- on account of TransferPricing Adjustments and ` 14,29,434/- on account of interest on service taxand TDS. Feeling aggrieved by the order, Annexure A-III, the assesseefiled an appeal before the Commissioner of Income Tax (Appeals),Chandigarh [for brevity “the CIT(A)”]. The CIT(A) vide order dated19.8.2014 (Annexure A-IV) while partly allowing the appeal, reduced theaddition on Transfer Pricing Adjustment to ` 1,51,63,336/-. Stilldissatisfied, the assessee filed an appeal before the Tribunal. The Tribunalvide order dated 19.3.2018 (Annexure A-V) partly allowed the appeal of theassessee and directed the TPO to exclude Infosys Technology Ltd. from thecomparability analysis of software support systems segment of the assesseewhile determining Arm's Length Price of the international transactions.GURBACHAN SINGH2019.05.03 14:01Hence, the present appeal by the revenue.I attest to the accuracy andintegrity of this document ITA-388-2018 3.After hearing learned counsel for the appellant, we do not findany merit in the appeal. 4.The only issue that arises in this appeal is as to whether InfosysTechnologies Limited has been rightly excluded from the list ofcomparables for determining ALP? 5.No doubt, the assessee itself had selected Infosys TechnologiesLtd. as a comparable company in its transfer pricing study report and videletter dated 13.10.2010 accepted it to be so before the TPO without anycomment. However, it was challenged for the first time before the CIT(A).The assessee claimed that Infosys Technologies Ltd. was not a validcomparable to the assessee as the assessee was a pigmy as compared to thegiant Infosys Technologies Ltd. ITA-388-2018 3.After hearing learned counsel for the appellant, we do not findany merit in the appeal. 4.The only issue that arises in this appeal is as to whether InfosysTechnologies Limited has been rightly excluded from the list ofcomparables for determining ALP? 5.No doubt, the assessee itself had selected Infosys TechnologiesLtd. as a comparable company in its transfer pricing study report and videletter dated 13.10.2010 accepted it to be so before the TPO without anycomment. However, it was challenged for the first time before the CIT(A).The assessee claimed that Infosys Technologies Ltd. was not a validcomparable to the assessee as the assessee was a pigmy as compared to thegiant Infosys Technologies Ltd. 6.The Tribunal while accepting the plea of the assessee hadrecorded that the assessee is providing services of commissioning ofsoftware embedded in the equipment supplied by M/s ZTE Telecom to itscustomers in India. The services provided by the assessee also includeslocalization and customization and is engaged in providing low endsoftware services. The requirements of and specifications provided by theAE(s) that ZTE India Pvt. Ltd. provides software support services. Thus,neither it is engaged in end to end development of a product nor does it ownany products. The assessee diagnosis and correct the software and furtherupdates for the bugs in those software. It also performed routinemaintenance for the software whereas the Infosys Technologies Ltd.operates at full fledged risk and perform the services of application design,software engineering and the technology lapse. The assessee was not eventhe developer of the software but merely providing software supportGURBACHAN SINGH2019.05.03 14:01I attest to the accuracy andintegrity of this document ITA-388-2018 -4- services. Accordingly, it was concluded that the Infosys Technologies Ltd.could not be treated to be a comparable in the present case for assessingALP and, thus, it directed the TPO to exclude Infosys Technologies Ltd.from the comparability analysis of software support systems segment of theassessee while determining Arm's length price of international transactions.The relevant findings recorded by the Tribunal read thus:- “9.Now we straightway come to the issue of whetherthe Infosys analysis for the software support servicessegment or not is the limited issue before us. It isimportant to note that assessee himself has selectedInfosys Technologies Ltd. as a comparable company inits transfer pricing study report. That shows that at thetime of preparation of transfer pricing study reportassessee find himself that Infosys is having the similarFAR as compared to the assessee. Before the ld.Transfer Pricing Officer the updated margins were alsoprovided of this company and no objections were taken.This fact is evident from the letter of Transfer PricingOfficer dated 31.08.2010 addressed to the assessee.Furthermore, before the Transfer Pricing Officer videletter dated 13.10.2010 has accepted the comparablewithout any comment. Therefore, it is apparent thatassessee has not challenged this comparable before theld. TPO. However, for the first time it was challengedbefore the ld CIT(A) on the above ground. Thefunctional profile of the assessee of the software support segment is that assessee is providing services ofcommissioning of software embedded in the equipmentsupplied by ZTE Corporation to its customers in India.The services performed by the appellant also includelocalization and customization of appellant is engaged inproviding low and software services like diagnosis ofsoftware, updation of software, inspection of software,routine maintenance of software etc. Thus, requirementsof and specifications provided by the AE(s) that ZTEIndia provides software support services. Thus, neitheris it engaged in end to end development of a product nordoes it own any products. The assessee diagnosis andcorrect the software and further updated for the bugs inthose software. It also performs routine maintenance forthe software. Whereas, the Infosys Technologiesoperations at full fledged risk and performs the servicesof application design, software engineering and thetechnology lapse. As per the management discussion andanalysis for the year ended on 31.03.2007 it generatesrevenue on fixed time frame. It also has revenue fromsale of use licenses for software applications. It has thesoftware development expenditure also and its primesoftware is Finacle which is used worldwide as pioneerin banking industry. The Director's report states that thisparticular software currently works in 54 countries and91 banks. The Finacle software is a modular solution to -6- the core banking and treasury, wealth management,consumer and corporate e-banking requirements ofuniversal retail and corporate banks worldwide.Furthermore, the Hon'ble High Court in CIT Vs. AgnityIndia Technologies Pvt. Ltd. 36 Taxmann.com 289 (Del)wherein, in para No.6 on the similar arguments hasapproved the order of the coordinate bench for exclusionof this company compared with a company which isengaged in the business of development of software. Inthe present case, the assessee is not even the developer ofthe software but merely providing software supportservices. In view of this respectfully following thedecision of the Hon'ble Delhi High Court we direct the ldTransfer Pricing Officer to exclude Infosys TechnologiesLtd. from the comparability analysis of software supportsystems segment of the assessee while determining Arm'slength price of international transactions. In the resultwe allow the plea of the assessee as per ground No.6 ofthe appeal and accordingly, allow that ground.” 7.Further, Delhi High Court in CIT v. Agnity India Technologies Pvt. Ltd. 36 Taxmann.com 289 (Del) had held that insimilar line of business as that of the assessee the Infosys Technologies Ltd.could not be treated to be a comparable while determining Arm's LengthPrice of International Transactions. 8.Referring to the judgment of the Apex Court in CIT v. AgnityIndia Technologies Pvt. Ltd. 2013 SCC Online Del 2521, relied upon by ITA-388-2018 the learned counsel for the revenue, in view of the factual matrix noticedhereinbefore,suffice it to observe that the said pronouncement being basedon its own facts does not advance the case of the revenue. 9.In view of the above, no error could be pointed out by learnedcounsel for the revenue in the findings recorded by the Tribunal warrantinginterference by this Court. No question of law, much less, substantialquestion of law arises in the appeal. Consequently, finding no merit in theappeal, the same is hereby dismissed. (AJAY KUMAR MITTAL) JUDGE March 19, 2019(MANJARI NEHRU KAUL)gbsJUDGE Whether Speaking/ReasonedYesWhether ReportableYes