INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I-1": NEW DELHI
BEFORE SHRI H. S. SIDHU, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA No. 4191/Del/2018
(Assessment Year: 2014-15)
Agilent Technologies Vs. ACIT,
(International) Pvt. Ltd, Circle-I(I),
Plot No. CP-11, Sector-8, IMT Gurgaon
Manesar, Gurgaon,
PAN: AADCA4115C
(Appellant) (Respondent)
Assessee by : Shri Kamal Sahini, Adv
Shri Anshul Sharma, CA
Revenue by: Shri Sandeep Kr. Mishra, Sr. DR
Date of Hearing 12/02/2019
Date of pronouncement 06/05/2019
ORDER
PER PRASHANT MAHARISHI, A. M.
1. This appeal is filed by Agilent (International) Private Limited (Assessee,
Appellant) against the order of The Asst Commissioner of Income Tax, Circle
I (1), Gurgaon [ the ld AO ] dated 26/4/2018 passed u/s 143 (3) read with
section 144C of The Income Tax Act (The Act) in pursuance of the directions
of Dispute Resolution Panel 1, New Delhi (The Learned DRP ) u/s 144C (5) of
the act dated 16/3/2018 on objections filed by the assessee in draft
assessment order dated 26/12/2017 wherein vide order under section 92CA
(3) of the Act dated 23/10/2017 The Deputy Commissioner Of Income Tax,
Transfer Pricing 1 (3) (1), New Delhi (the learned TPO) proposed an
adjustment on account of determination of arm's-length price ( ALP) of the
international transactions (IT) of provision of software development services,
provision of ITeS and interest on receivable of INR 103068942/ was
incorporated. The returned income of the assessee of INR 403452480/ was
assessed at INR 506521422/
2. The assessee has raised the following grounds of appeal:-
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"1. That the Ld. AO erred in proposing to assess the income of the
Assessee at INR 50,65,21,420 as against the returned income declared
by the Assessee at INR 40,34,52,480 by making an addition of INR
10,30.68,942 by holding that the Assessee's international transaction
does not satisfy the arm's length principle envisaged under the Act.
2. That the Ld. AO/ Learned Deputy Commissioner of Income Tax,
Transfer Pricing Officer 1 (3)( 1) ("Ld. TPO") erred on facts and in law in
enhancing the income of the Assessee by INR 1,70,08,093/- pertaining
to provision of Contract Software Development ("IT") services and INR
8,60,59,465 pertaining to provision of Information Technologies
Enabled Services ("ITES") to its Associated Enterprises ("AEs") that do
not satisfy the arm's length principle envisaged under the Act and in
doing so, have grossly erred in:
2.1. erroneously rejecting the ALP as determined by the Assessee in
the Transfer Pricing ("TP") documentation maintained by it in
terms of section 92D of the Act read with Rule 10D of the Income-
tax Rules, 1962 ("Rules");
2.2. disregarding multiple year/ prior years' data as used by the
Assessee in the TP documentation and holding that current year
[i.e. Financial Year ("FY") 2013-14] data for comparable
companies should be used despite the fact that the same was not
necessarily available to the Assessee at the time of preparing its
TP documentation;
2.3. conducting a fresh comparability analysis based on the
application of erroneous additional/ revised filters in determining
the ALP for the Assessee and rejecting the filters applied by the
Assessee in its TP documentation;
2.4. committing factual/ computational errors while calculating the
operating margins of companies selected as comparable in the
DRP directions;
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2.5. excluding certain comparable companies on arbitrary/ frivolous
grounds;
2.6. erroneously including certain functionally dissimilar companies
that are full-fledged risk taking entrepreneurs and high profit
making companies;
2.7. disregarding comparability adjustments (i.e. risk adjustment) in
determining the arm's length profit margin; and
2.8. disregarding judicial pronouncements in India while undertaking
the TP adjustment.
3. The Ld. AO/ Ld. TPO erred in enhancing the income of the Assessee by
INR 1,384/- by imputing notional interest on outstanding receivables
from the AEs on an ad hoc basis. In doing so, the Ld. AO/ Ld. TPO has
grossly erred in:
3.1. selecting an ad hoc credit period and interest rate while computing the
addition;
3.2. re-characterization of overdue receivable amount as a deemed loan and
treating it as a separate international transaction;
3.3. arm's length price determination for outstanding receivables is
subsumed within the arm's length price determination of the principal
international transaction itself; and
3.4. completely disregarding the detailed submissions explaining that such
adjustments are not mandated under the facts and circumstances of
the case.
4. The Ld. AO erred in proposing to initiate penalty proceedings under
section 271(1)(c) of the Act. The above grounds are without prejudice to
each other."
3. Brief facts shows that the assessee filed its return of income on 26/11/2014
declaring an income of INR 403452480/. The learned assessing officer
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noted that the assessee has entered into 7 different international
transactions as under.
Serial nature of transactions amount
number
Provision of ITeS 2084634357
1
Provision of software development 424154453
2
services
Purchase of fixed assets 4470279
3
Cost of reimbursement paid 24907654
4
Cost of reimbursement paid on account 722944
5
of repairs and maintenance
Cost of reimbursement received 58127705
6
receivable
Interest on loan 774141
7
4. Therefore, the learned assessing officer referred the matter to the learned
transfer pricing officer for determination of arm's-length price of these
transactions.
5. The provisions of software development services of INR 4 24154453/ was
benchmarked by the assessee by adopting the transactional Net margin
method [ TNMM] as the most appropriate method [ MAM] by selecting 8
comparable having mean of the profit level indicator [PLI] of operating
profit/operating cost [OP/OC] was 13.35% and the PLI of the assessee
company of the segment was arrived at 14.53 percent and therefore the
assessee stated that the about transaction is at arm's-length.
6. With respect to the ITeS services the assessee benchmarked the
international transaction by adopting Transactional Net Margin Method and
selected 11 comparables whose arithmetic mean of profit level indicator of
operating profit to total cost [OP/OC] was 9.42% whereas the appeal of the
assessee was arrived at 13.59% and therefore it was stated that the
provision of ITeS services is at arm's-length.
7. On examination of the benchmarking methodology adopted by the assessee
of software development services, The learned transfer pricing officer stated
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that transfer pricing study report of the assessee and stated that the
search process of the assessee was flawed because of the inappropriate
filters and therefore he conducted fresh search. He also adopted several
filters, selected various comparable, computed their margin and after
affording assessee and opportunity of hearing and objecting to the various
aspects of the computation of the LP, finally selected 8 comparable
companies who is profit level indicator of operating profit to operating cost
was 21.30% and computed the ALP on the operational cost of 371818412/
by applying the above margin at INR 4 51015734 applying PLI of 21.30
percentage against prize received of 424154453/ and computed an
adjustment of INR 2 6861281/.
8. On examination of methodology of the provision of services under the ITeS
segment, the learned transfer pricing officer noted that search process
carried out by the assessee was flawed because of certain inappropriate
filters and therefore he conducted a fresh search, selected new comparables,
computed their margin, granted an opportunity of hearing and objecting to
the various issues in computation of ALP and then finally selected 6
comparables whose profit level indicator of operating profit to operating cost
was found to be 17.62 percentage. On the total operating cost of
1897250934/ .he computed by applying the above PLI the arm's-length
price of rupees 2231546549 whereas the actual transaction value was
2129929626/ and computed the shortfall of INR 1 01616923/.
9. There was other adjustment made by the learned transfer pricing officer on
account of the interest adjustment on outstanding balances of the advance
receivable from associated enterprise which has been confirmed by the DRP
for a very small amount. Therefore that is in dispute in this appeal as per
ground no 3.
10. An objection before the learned dispute resolution panel was filed by the
assessee and the learned dispute resolution panel granted certain relief to
the assessee and thereafter based on above the adjustment in provision of
software development services adjustment was made of INR 17008093/,
in provision of ITeS services of INR 8 6059465/. Consequently the
assessment order u/s 143 (3) read with section 144C of the Act was passed
incorporating the above two adjustment. Interest on overdue on receivable
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of rupees 1384/ was made. Consequently 3 adjustment on account of
arm's-length price of the international transaction was made which are
contested before us.
11. Ground number 1 of the appeal is general in nature and in fact supports
ground number 2 and therefore they are taken together for the disposal.
12. The ground number 2 relates to the transfer pricing adjustment made by
the learned TPO on the basis of the direction of the Ld DRP in
determination of arm's-length price by the TPO wherein an adjustment of
INR 17008093 pertaining to the contract software development activities of
the assessee and INR 86059465/ pertaining to the provision of information
technologies enable services [ ITes] have been made.
13. Adverting to ground number 2 the learned authorised representative said
stated that assessee is challenging only the inclusion of Infosys BPO Ltd
and micro-genetic systems Ltd, comparable is in ITeS segment. In software
development segment the assessee challenges inclusion of Infosys
technologies Ltd, persistent systems Ltd.
14. We first come to the ITeS segment of the assessee. The undisputed
functional profile reported by the assessee in the transfer pricing study
report of the same is as under:-
"It is responsible for rendering ITeS according to predetermined
terms and condition of Agilent technologies incorporation
including maintenance of appropriate documentation relating to
the same. The services include knowledge management for
engineering design, design chain solutions, part information
support, CAD design support, internal financial transaction
processing including sales accounting processing and vendors
payable processing and professional services for customizing
and integrating solutions wireless customers, buying wireless
network solutions business among other services. It is further
responsible for ensuring that the requisite quality performance
standards prescribed by the holding company are met with
rendering services. The re work may have to be done by
assessee in case of a failure. However such re work cost is also
adds to a markup and recovered from the holding company. It
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further undertakes recruitment, hiring and training process and
is responsible for day-to-day supervision and control of its
employees. In nutshell, these services include finance backup
office support in the nature of internal financial transaction
processing, sales accounting processing and vendor payable
accounting. It also includes IT support and network
management in the nature of providing knowledge management
for engineering design, network management for wireless
network solutions et cetera it has a team comprising of 1061
employees."
15. Coming to the First comparable challenged by the assessee is Infosys BPO
Ltd, the learned authorised representative submitted that learned TPO
included the Infosys BPO Ltd as a comparable company as it satisfied all
the filters, found functionally comparable. Before the learned transfer
pricing officer, it was contested that the above comparable is a giant
company with huge turnover and high brand building expenditure and
therefore it is not a comparable company. Before us it was also contended
that Infosys BPO Ltd is backed by the Infosys group which is one of the
largest group in the IT segment. He further submitted that the turnover of
the assessee is only INR 2,129,900,000 whereas the turnover of the Infosys
BPO Ltd is 2323,00,00,000 and further there is no brand expenditure
incurred by the assessee whereas the assessee that the Infosys BPO Ltd
comparable company has incurred the brand expenditure of INR
50,000,000 and has a goodwill of 19,00,00,000 which is absent in the case
of the assessee company. He therefore submitted that there is usually
difference between the scale of the business of these two companies which
is 10 times bigger on the basis of the turnover then the assessee company.
He further referred to the several decisions of the coordinate benches as well
as the honourable jurisdictional High Court in case of H & S software
development and knowledge management centre private limited in ITA
number 912 2017 wherein it has been held that Infosys BPO Ltd is the
corporate entity having a significant brand presence for profits and large
corporate size which could not be compared to the assesse's transactions.
He further referred to the decision of the coordinate bench which also has
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held that Infosys BPO Ltd is deriving leveraged from the client of Infosys
technologies Ltd for cross selling the BPO services of the company. And
further because of the size of comparable company compared with the size
of that assessee .i.e. more than 20 times should be excluded. In the end
the learned authorised representative also stated that assessee's transaction
would be at arm's-length on the exclusion of the aforementioned
comparable. Therefore his main contention was that that Infosys BPO Ltd
deserves to be excluded on the issue of size and scale and the brand of
Infosys which makes it functionally dissimilar to the assessee.
16. The learned departmental representative vehemently supported the order of
the learned TPO/DRP. He referred to page number 31 of the order of the
learned transfer pricing officer and stated that annual report of Infosys BPO
does not mention anything regarding the brand driving its profitability. He
further stated that brand can only drive the revenue but may not affect the
profitability of a company. Even otherwise he submitted that the brand
building and marketing expenses are only INR 70,000,000 which is only
0.28% of the total revenue of the comparable company and therefore same
cannot be excluded. In view of this he submitted that Infosys BPO has
rightly been included by the learned transfer pricing officer and confirmed
by the learned dispute resolution panel.
17. We have carefully considered the rival contention and perused the orders of
the lower authorities wherein the reasons given for inclusion of the above
comparable company for the purpose of benchmarking of the arm's-length
price of the international transaction of the ITeS segment of the assessee.
The assessee has also placed before us the annual report of Infosys BPO Ltd
for 2013 14. On looking at the annual report itself it is clear that the
company has an imprint of Infosys brand all over it. In the companies
overview at page number 4 of the annual accounts as mentioned that this
company is the business process outsourcing subsidiary of Infosys and is
engaged as outsourcing service provider. In the management discussion
and analysis placed at page number 14 of the annual report, it is stated
that Infosys BPO provides business process management services to
organizations that outsource their business processes and Infosys BPO is
majority owned and controlled subsidiary of Infosys Ltd. Rich industry
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experience held the company to understand the evolving needs of the clients
better and provided them with the ability to offer appropriate solution across
different industry verticals and horizontals , quickly. Further in paragraph
number 1 it is stated that the company is committed to providing best- in -
class services to both horizontal and vertical focus areas. The horizontal
solutions comprises of sourcing and procurement, customer services,
finance and accounting, legal process outsourcing, sales and fulfillment,
analytics, business platform, business transformation services, human
resources outsourcing, technology solution optimization. While vertical
solution included financial services and insurance, manufacturing, energy
utilities, communication and services, retail, consumer packaged goods,
logistics and life sciences. On looking at the horizontal services, which
comparable company provides it is apparent that on this ground itself the
same is not comparable with the assessee company. On looking at page
number 64 of the annual accounts, it is apparent that comparable
company has contributed INR 50,000,000 towards brand building and
advertisement expenditure. Admittedly the company does not have any
goodwill which can impact the profitability of the price of the business of it
services because the goodwill is recorded on amalgamation in the nature of
purchase only. This is mentioned at page number 51 in para number 1.5 of
the annual report and corroborated by page number 58 of the fixed assets
schedule in paragraph number 2.6 of the report. Based on the above
analysis, it is apparent that Infosys BPO Ltd has a huge brand backing of
the Infosys group behind it which can definitely impact the revenue as well
as the profitability of the comparable company, therefore in absence of any
such assets available to the assessee company, Infosys BPO Ltd is required
to be excluded from the comparability analysis of ITeS segment.
Accordingly we direct the learned TPO/AO to exclude the above comparable
and then compute the arm's-length price of the ITeS segment of the
assessee.
18. As assessee has submitted that if Infosys BPO Ltd is excluded from the
comparability analysis, assessee's transaction of this segment would be at
arm's length. Hence all other aspects of the computation of the arm's-
length price of that segment are left open.
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19. Now we come to the software development segment of the assessee. The
undisputed functional profile reported by the assessee in the transfer
pricing study report of the same is as under:-
"Assessee is also engaged in development of modules as well as
part of modules for software being used by its overseas group
entities in their products. It also undertakes testing of modules
developed by it . It performs maintenance support services
which includes bug fixing, carrying on maintenance and
support services on software used on products developed by its
group entities. The total team comprises of 121 employees that
are mostly engineers. It is responsible for rendering services
according to predetermined terms and conditions of the service
receiver and does not undertake any marketing or business
development functions. It performs software development
services on behalf of the company to further develop and
improve the products and intangible property developed by the
group. Local software development team manages the day-to-
day software development activities and follows business group
strategy direction and decision. It does not own any intellectual
property right associated with the software development efforts.
It undertakes contract software development based on the
framework provided by the receiver. This framework comprises
of product portfolio objectives, target markets, target customers,
competition, ideal solutions and technological partnerships. It
undertakes recording and documentation function with respect
to the software modules that it develops. It receives technical
assistance from the holding company during the coating and
documentation functions. The holding company supervisors
and managers the coating and documentation function being
performed by the assessee. It is responsible for day-to-day
project management and deliverable of the model of the
software being developed. It has to closely interact with its
associated enterprises. The design and development function is
undertaken by the assessee pertaining to a particular model
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based on the specifications provided. It is responsible for the
quality of the work undertaken by 8 and 6 to ensure that the
work performed complies with the quality standards set by the
group. It also undertakes unit testing on the software modules
developed by it and prepares test reports which are reviewed by
the receiver on a need basis it also perform system testing."
20. The assessee has contested that two compatible companies included by the
learned transfer pricing officer and requires to be excluded because of their
peculiar functional and the said profile namely Infosys technologies Ltd and
persistent systems Ltd.
21. The learned authorised representative submitted that the lower authorities
have rejected the argument of the assessee that Infosys is not a comparable
company as it is a huge company with very high turnover and it has
brand associated with it which impacts the profitability of comparable
company. He further stated that it is a product development company and
incurs huge expenditure on marketing. He referred to the turnover of the
Infosys Ltd of Rs. 4434 1,00,00,000 whereas the turnover of the assessee is
only Rs. 42,41,00,000, the employee cost of the assessee is only INR
258,100,000 compared to the same of the comparable company of INR 2
4350 crores. He further stated that the brand expenditure of the assessee is
nil where the Infosys Ltd has incurred a brand expenditure of INR
770,000,000. He further stated that in assessee's own case for assessment
year 2011 12 the Infosys technologies Ltd has been removed from the
comparability analysis.
22. The learned authorised representative further referred to the several judicial
precedents where the Infosys Ltd has been excluded on the issue of the
brand owned by that comparable company.
23. The learned departmental representative vehemently supported the order of
the learned assessing officer/TPO/DRP. However he could not distinguish
that in assessee's own case for assessment year 1112 when the same
comparable has been excluded and when there is no change in the facts and
circumstances of the case of the assessee or the functional profile of these 2
companies.
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24. We have carefully considered the rival contention and perused the orders of
the lower authorities. We have also perused annual report of the Infosys for
2013 14 which has been furnished by the assessee before us. It is
apparent that in the assessee's own case for assessment year 2011 12 in
ITA number 477/del/2016 in para number 7.4 of the order of the
coordinate bench wherein the Infosys technologies Ltd has been excluded
from the comparability analysis following the decision of the honourable
jurisdictional High Court. Therefore respectfully following the decision of the
coordinate bench in assessee's own case we also direct the learned
AO/transfer pricing officer to exclude Infosys technologies Ltd from the
comparability analysis of software development segment.
25. The next comparable data challenge before us is the inclusion of persistent
systems Ltd included by the learned transfer pricing officer for which which
assessee prays for the exclusion. However the assessee has submitted that
if the Infosys Ltd has been excluded from the final list of the comparability
analysis the ground of the assessee for the exclusion of this comparable will
become academic in nature in respect of software development segment. As
we have already directed the learned AO/TPO to exclude the Infosys Ltd
from the comparability analysis, we leave the ground of contest of the
assessee for exclusion of persistent systems Ltd open.
26. Accordingly ground number 2 of the appeal of the assessee is allowed with
above directions.
27. The ground number 3 of the appeal is with respect to the adjustment on
account of the receivables. Originally the learned transfer pricing officer has
made an adjustment of INR 3681330/ on account of the interest receivable
from associated enterprise which has been reduced by the learned dispute
resolution panel directing the learned TPO to consider that period of 60 days
is to be considered as a reasonable outstanding. In absence of any
agreement with the neither associated enterprises nor invoices stating the
terms of the payment and the credit period could be adduced by the
assessee. Consequently the learned transfer pricing officer proposed an
adjustment of only rupees 1384/ on this account.
28. The learned authorised representative contested that working capital
adjustment takes into account the impact of outstanding receivable on the
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profitability and accordingly no separate adjustment is warranted on
account of outstanding receivable. He further stated that working capital
adjustment was allowed by the learned dispute resolution panel according
accordingly he stated that there cannot be any adjustment of the
outstanding receivable.
29. The learned departmental representative vehemently contested the
argument of the assessee and submitted that learned dispute resolution
panel has granted the reasonable amount of the period and therefore
beyond 60 days time if there is an outstanding with the associated
enterprise, the interest cost should be computed.
30. We are carefully considered the rival contention and perused the orders of
the lower authorities. It is a fact that the assessee has been granted a
working capital adjustment by the DRP. When the working capital
adjustment has been granted it definitely takes into account the impact of
outstanding receivable on the profitability and therefore there is no separate
adjustment is warranted on account of overdue outstanding advances.
Accordingly we direct the learned transfer pricing officer to Rs. 1384/ on
this account. Accordingly ground number 3 of the appeal of the assessee is
allowed.
31. Accordingly appeal of the assessee is allowed.
Order pronounced in the open court on 06th May 2019
-Sd/- -Sd/-
(H.S.SIDHU) (PRASHANT MAHARISHI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 06/05/2019
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
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