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Global Logic India Pvt. Ltd., G-52, Vardhman Corporate Plaza, Netaji Subhas Place, New Delhi. Vs.DCIT, Circle 12(1), New Delhi.
June, 05th 2015
      IN THE INCOME TAX APPELLATE TRIBUNAL
           DELHI BENCHES : I : NEW DELHI

  BEFORE SHRI R.S. SYAL, AM AND SHRI C.M. GARG, JM

                         ITA No.122/Del/2013
                      Assessment Year : 2008-09
Global Logic India Pvt. Ltd.,        Vs. DCIT,
G-52, Vardhman Corporate Plaza,            Circle 12(1),
Netaji Subhas Place,                       New Delhi.
New Delhi.

PAN : AABCI2526F
  (Appellant)                                    (Respondent)


            Assessee By       :   Shri Ajay Vohra, Sr. Advocate,
                                  Shri Neeraj Jain, Advocate, Sh.
                                  Abhishek Agarwal CA &
                                  Sh. Ashutosh Gupta, CA
            Department By     :   Shri Gunjan Prasad, CIT, DR &
                                  Sh. Gaurav Dudeja, Senior DR.
         Date of Hearing             :    03.06.2015
         Date of Pronouncement       :    04.06.2015


                               ORDER
PER R.S. SYAL, AM:
     This appeal by the assessee is directed against the order passed by

the Assessing Officer (AO) under section 143(3) read with section 144C
                                                           ITA No.122/Del/2013


of the Income-tax Act, 1961 (hereinafter also called `the Act') in relation

to the assessment year 2008-09.

2.   The only issue in this appeal is a challenge to the addition on

account of transfer pricing adjustment amounting to Rs.12,82,48,777/-.

3.   Succinctly, the assessee is an Indian company, a wholly owned

subsidiary of Global Logic, US. It is engaged mainly in the provision of

software development services to its overseas group companies. The

assessee reported two international transactions as per its Audit Report

in Form No.3CEB. The entire controversy in this appeal is restricted to

the international transaction of `Provision of software development

services' with the transacted value of Rs.158,09,04,878/-. The other

international transaction of `Reimbursement of expenses' has been

accepted by the authorities to be at arm's length price (ALP). On a

reference made by the AO to the Transfer Pricing Officer (TPO) for the

determination of the ALP, the latter noticed that the assessee employed

Transactional Net Margin Method (TNMM) to demonstrate that the

international transaction of `Provision of software development services'

                                     2
                                                         ITA No.122/Del/2013


was at ALP.     The assessee chose Profit Level Indicator (PLI) of

Operating Profit/Total Cost (OP/TC).        The assessee selected 23

companies as comparable. The mean margin of such comparables, on

the basis of current/multiple-years data was computed at 14.84%. As the

assessee's OP/TC stood at 12.47%, it was claimed that the international

transactions were at ALP.     The TPO shortlisted 19 companies as

comparable and computed the arithmetical mean of their PLI at 24.82%,

after allowing working capital adjustment of 1.38%. In such calculation,

the TPO used current year data alone. By applying arm's length margin

at 24.82%, the TPO worked out the amount of transfer pricing

adjustment at Rs.18,95,48,030/-.       The assessee remained partly

successful before the Dispute Resolution Panel (DRP), which reduced

the amount of addition on account of transfer pricing adjustment to

Rs.12,82,48,777/- as against Rs.18.95 crore proposed by the TPO. The

AO made addition of Rs.12.82 crore and odd in the final assessment

order passed on 19.10.2012. The assessee is aggrieved against this

addition made towards transfer pricing adjustment.



                                   3
                                                           ITA No.122/Del/2013


4.   We have heard the rival submissions and perused the relevant

material on record. The assessee has accepted all the aspects of the

transfer pricing analysis carried out by the TPO except the inclusion of

the following companies in the list of comparables:-

     i. Avani Cincom Technologies
     ii. Infosys Ltd.
     iii. Kals Information Systems Ltd. (Seg.)
     iv. Persistent Systems Ltd.
     v. Tata Elxsi (Seg.)
     vi. Wipro Ltd (Seg.)





5.   In order to analyse the comparability or otherwise of the above

referred companies, it is necessary to consider the functional profile of

the assessee under this international transaction. The TPO has recorded

on page 2 of his order that the assessee `is engaged in the provision of

software development services to its overseas group company'. Apart

from that, there is no description of the nature of activity carried out by

the assessee in the TPO's order. On adverting to the Transfer pricing

study report, a copy of which is available on pages 40 onwards of the

                                     4
                                                                  ITA No.122/Del/2013


paper book, we find some further elaboration of the nature of activity

done under the international transaction of `Provision of software

development services.' Page 21 of the TP study report indicates that the

assessee renders software development services to its associated

enterprises (AEs) and gets remunerated on a cost plus mark-up basis for

these services. There is a narration of        `Functions performed' in para

4.02.2 of the TP study report qua the international transaction of

`Provision of software development services'. It can be observed that

the functions performed by the assessee under this segment are

Provisions of Services, Testing & Quality control, Project management,

Administrative Support and, to a limited extent, the Marketing functions.

The following functions have been reported to have been done by the

assessee under the above referred sub-heads:-

       "Marketing Function
      GlobalLogic Inc and GIPL's marketing staff initiates contact directly
      with a potential client. Thereafter, GlobalLogic Inc prepares and
      submits a proposal to the client, irrespective of whether the client lead
      is provided by GIPL or GlobalLogic Inc., giving the scope and the
      technical aspects of the project. Bid costs are borne by GlobalLogic
      Inc.



                                        5
                                                                 ITA No.122/Del/2013


      Hence, though primary responsibility for identification of customers
      and marketing the GlobalLogic Groups' services lies with
      GlobalLogic Inc., GIPL also undertakes marketing function to the
      extent of identification of client leads.
      Provision of Services
      GIPL is responsible for development of software under the projects
      sub-contracted to it by GlobalLogic Inc, GIPL employs the resources
      required for development of software, both in respect of on-site or off-
      shore projects. However GlobalLogic Inc, retains overall project
      management responsibility for the entire contract with the end-
      customer. This includes all financial responsibility for the work as
      well as billing.
      Testing & Quality Control
      The last step involves testing the software that has been developed.
      GIPL has the responsibility of testing the software. GIPL has quality
      control departments which adopts the quality control procedures at par
      with the industry. This department is inter alia involved in process
      improvisations, making of new processes, quality audits, customer
      surveys, etc.
      Project Management
      GIPL is responsible for ensuring timely delivery of the software
      developed by it under the contract. However, GlobalLogic Inc is
      ultimately responsible to deliver the software to the client.
      Administrative Support
      With respect to personnel rendering onsite and off shore services,
      GIPL is responsible for provisions of administrative support which
      includes functions such as arranging work permits/visas, foreign
      exchange, payment of allowances, etc."



6.   An overview of the above activities carried out by the assessee

divulges that it is mainly responsible for the development of software

                                        6
                                                            ITA No.122/Del/2013


under the projects sub-contracted to it by GlobalLogic Inc. Such

developed software are to be tested by the assessee. The Testing

department of the assessee, apart from testing the software developed by

it, also undertakes process improvisations, making of new processes,

quality audits. After developing and testing a software, the assessee is

required to ensure that such developed software are timely delivered.

Apart from rendering the above software development and maintenance

services, the assessee is also providing `Marketing support' service, for

which it has separate `marketing staff'. Such marketing staff directly

contacts with potential customers along with GlobalLogic Inc. Other

than that, the assessee is also providing `Administrative support'

services to its AEs which include arranging work permits/visas, foreign

exchange, payment of allowances, etc. Thus it is manifest that going by

the TP Study report for the year under consideration, the assessee not

only provided software development and maintenance services but also

Marketing and Administrative support services to its AEs.




                                    7
                                                         ITA No.122/Del/2013


7.   When we peruse the Agreement dated 10.11.2006 effective from

1.4.2006 between the assessee and GlobalLogic Inc. under which the

assessee was assigned the task of rendering `Software Development and

other Allied Services', it transpires that Clause 1 of the Agreement

containing - `Scope of Work' ­ stipulates that the assessee shall carry

out Software Development; Maintenance and Repair Work; Technical

Testing and Analysis; QA; IT and IT enabled Services. This is stated to

be the only Agreement under which the services under consideration

were rendered. It can be seen that to some extent, there is an apparent

conflict between the Agreement and the Transfer Pricing Study report

inasmuch as the latter, apart from the aforesaid services set out in the

Agreement, also refers to the rendering of Marketing Function and

Administrative Support services, which do not figure in the Agreement.

As the TPO has treated the entire amount under this international

transaction as consideration for rendering `Software development

services' and benchmarked it accordingly, without separately taking

cognizance of any Marketing and Administrative services, we leave this

issue here only and do not propose to start everything afresh by setting
                                   8
                                                             ITA No.122/Del/2013


up an altogether new case. It is for the TPO to analyze the functions

performed in proper perspective and in the light of the material available

on record and then reach a positive conclusion about the nature of

activity carried out by the assessee in an international transaction.

8. With the above understanding of the nature of software development

and maintenance functions carried out by the assessee, we will examine

whether or not the above six companies are comparable. Before that, it is

pertinent to mention that for the immediately preceding assessment year,

namely, 2007-08, the TPO chose certain companies as comparable for

the similar international transaction of `Provision            of software

development services'. The appeal filed by the assessee for such year in

ITA No.580/Del/2011 has since been disposed of by the tribunal vide its

order dated 22.1.2015, a copy of which is available on record. It can be

noticed from such Tribunal order that the TPO treated similar

international transaction, as has also been transacted for the instant year,

as `Provision of software development services'. Such services have

been provided to the AEs, both in the preceding year as well as the


                                     9
                                                            ITA No.122/Del/2013


current year, in terms of the common Agreement effective from

1.4.2006. The crux of the matter is that the nature of services rendered

by the assessee in the current year under the extant international

transaction are similar to those rendered in the preceding year.

Avani Cincom Technologies

9.   The TPO included this company in the list of comparables by

noticing that as per the information available in the public domain, it is a

software development and consulting company. After seeking certain

information from the company u/s 133(6) of the Act, the TPO prima

facie formed the view about the comparability of this company. On

being called upon to show cause as to why this company be not

considered as comparable, the assessee submitted that data of this

company for the year in question was not available in the public domain

and, also it was functionally different. Rejecting the assessee's

contention, the TPO treated this company as comparable. The assessee

remained unsuccessful before the DRP as well.




                                     10
                                                           ITA No.122/Del/2013


10. We have heard the rival submissions and perused the relevant

material on record. It is observed that this company was considered as

comparable by the TPO in the preceding year as well. The Tribunal in

its order has held it to be not comparable. The relevant discussion has

been made in paras 9 and 10 of the order. It has been noticed in the

order that though this company is a pure software development service

provider, it is also utilizing its own software in rendering such services.

Relying on the order passed by the Tribunal in the case of Motorola

Solutions India Pvt. Ltd. VS. ACIT (2015) 152 ITD 0158 (Delhi), the

Tribunal ordered for the exclusion of this company from the list of

comparables. In reaching this conclusion, the Tribunal also observed

that apart from rendering software development services, this company

was also engaged in the sale of software products and the accounts

maintained by it were at entity level without there being any segregation

of revenue from software development segment. Adverting to the facts

of the instant year, it is observed that the assessee specifically argued

before the TPO that the data for the instant year was not available which

objection was also repeated before the DRP, but, without any success.
                                    11
                                                          ITA No.122/Del/2013


Be that as it may, the fact that this company is also engaged into

software products, apart from rendering software development services,

has not been controverted by the ld. DR with any cogent material.

Respectfully following the view taken by the Tribunal in the assessee's

own case for the immediately preceding year, we order for the exclusion

of this company from the list of comparables.

Infosys Technologies Ltd.

11. The TPO noticed that this company was finding place in the

accept/reject matrix but was rejected in the TP documentation by

claiming that it failed functional area comparability. The TPO found

this company to be into software development services qualifying all the

filters applied by him. The assessee raised certain objections against the

inclusion of this company, but without any success. The TPO computed

operating profit margin of this company at 40.41% and included it in the

final list of comparables. The assessee is aggrieved against the inclusion

of this company in the ultimate set of comparables.




                                    12
                                                         ITA No.122/Del/2013


12. We have considered the rival submissions and perused the relevant

material on record.   It can be seen that the TPO has included this

company in the list of comparables by rejecting the assessee's

contention about the brand of this company helping in earning huge

profits and also the brand-related products swelling the ultimate profit

rate of this company.    We find that the assessee is a captive unit

rendering services to its AE alone without acquiring any intellectual

property rights in the work done by it in the development of software.

The Hon'ble Delhi High Court in CIT vs. Agnity India Technologies (P)

Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys

Ltd., in terms of risk profile, nature of services, number of employees,

ownership of branded products and brand related profits, etc. in

comparison with such factors prevailing in the case of Agnity India

Technologies Pvt. Ltd., being, a captive unit providing software

development services without having any IP rights in the work done by

it. After making comparison of various factors as enumerated above, the

Hon'ble Delhi High Court held Infosys Ltd. to be incomparable with

Agnity India Technologies Pvt. Ltd. The facts of the instant case are
                                   13
                                                         ITA No.122/Del/2013





more or less similar inasmuch as the extant assessee is also a captive

service provider with a limited number of employees at its disposal and

also not owning any branded products with no expenditure on R&D etc.

When we consider all the above factors in a holistic manner, there

remains absolutely no doubt in our mind that Infosys Technologies Ltd.

is incomparable with the assessee company. Respectfully following the

judgment of the Hon'ble jurisdictional High Court in Agnity India

(supra), we hold that Infosys Technologies Ltd., cannot be treated as

comparable with the assessee company. This company is, therefore,

directed to be excluded from the list of comparables.

KALS Information Systems Ltd. (seg.)

13. The assessee rejected this company in its TP documents by

considering it as `functionally different.' The TPO, on the basis of

certain information collected u/s 133(6) from the company, observed

that its business activity was into two segments, namely, (i) Software

development services; and (ii) Training.       By considering the data

available before him, the TPO included the `Software development

                                   14
                                                          ITA No.122/Del/2013


services' segment into the list of comparables. The assessee is aggrieved

the inclusion of this company on segmental level.

14. We have heard the rival submissions and perused the relevant

material on record. We have also gone through the Annual report of this

company which is available on pages 349 onwards of the paper book. It

can be observed from page 358 of the paper book that the segmental

information pertains to `Application software' and `Training'. Under

the `Application software' segment, the company has also included its

income from software products. Note 1 to the Financial statements on

page 357 of the paper book evidently provides that : `The company is

engaged in development of Software and Software products since its

inception.' Note 2(b) on page 357 of the paper book also states that :

`The company derives its revenues primarily from software services and

software products.' Since this company is into the business of software

products and also software development and has merged the revenue

from both the streams under the overall segment of `Application

software', which has been taken by the TPO for inclusion in the final set


                                   15
                                                          ITA No.122/Del/2013


of comparables, this company loses the tag of comparability vis-a-vis the

assessee company which is exclusively engaged in providing software

development services on a contract basis to its AEs as a captive unit. It

is manifest that under the circumstances prevailing in the case of this

company, the impact of the profit from the sale/licence of software

products on the overall profitability of the `Application software'

segment cannot be segregated. To what extent the overall profits of this

company have been influenced by the revenues from software products,

cannot be precisely ascertained.         In view of the aforegoing

distinguishing facts, this company ceases to be comparable. We order

for the exclusion of this company from the list of comparables.

Persistent Systems Ltd.

15. This company was originally selected by the assessee in its TP

study. However, it was contended before the TPO that it is a product

company and because of lack of segmental data, the same cannot be

considered as comparable.     The TPO, after seeking information u/s

133(6) of the Act from this company, observed that 96% of its total

                                   16
                                                         ITA No.122/Del/2013


operating revenues from `Software development services' are from

software development services. He ignored the figure of revenue from

product licences at Rs.28.29 crore and proceeded to consider this

company as comparable at entity level. The assessee is aggrieved before

us.

16. We have heard the rival submissions and perused the relevant

material on record.   It is noticed that this company has been excluded

from the list of comparables by the Tribunal in its order for the

immediately preceding year in the assessee's own case by relying on

extraordinary events, such as, merger or acquisition, etc. There are no

such extraordinary events in the current year. However, we find from

the Annual report of this company, that it is a software product company

which is apparent from page 383 of the Paper book. It has been

mentioned that it : `is different from most of the outsourcing firms

because we are focused exclusively on the software product

development.' The same thing has been mentioned on page 388 of the

paper book that Persistent Systems Ltd. : `is predominantly engaged in


                                   17
                                                          ITA No.122/Del/2013


outsourced Software Product Development services for independent

Software Vendors.' When we peruse page 389 of the paper book, it

becomes manifest that apart from earning revenue from licensing of

products, it has also earned revenue from Royalty which is recognized

on sale of products in accordance with the terms of the relevant

agreement.   The ld. AR contended that revenue from Royalty was

considered by this company as part of revenue from `Software

development services' segment, which has not been controverted by the

ld. DR with any cogent material. The Bangalore Bench of the Tribunal

in 3DPLM Software Solutions Ltd. Vs. DCIT (ITA No.1303/Bang./2012

vide its order dated 28.11.2013, for the identical assessment year, i.e.,

2008-09, has held Persistent Systems Ltd., to be a company engaged in

product development and product design services and hence functionally

different from a software development services provider. Similar view

has been taken in FCG Software Services (India) (P) Ltd. Vs. ITO (ITA

No.1242/Bang./2012) vide its order, a copy of which is available on

record.   Again, in LG Soft India (P) Ltd. Vs. DCIT (2014) 48

taxmann.com 237 (Bangalore-Trib.) this company has been held to be
                                   18
                                                         ITA No.122/Del/2013


functionally different from a software development service provider

company. In view of the above discussion and relying on so many

precedents favouring the elimination of this company, we are of the

considered opinion that Persistent Systems Ltd., cannot be considered as

comparable with the assessee company. The same is, therefore, directed

to be excluded.

Tata Elxsi (Seg.)

17. This company was rejected by the assessee in its TP documents by

claiming it to be `functionally different'. The TPO observed from the

Annual report of this company that it has two segments, namely,

`Software development and services segment' and `Systems integration

and support segment.' Noticing the segmental details, the TPO

considered `Software development and service segment' as comparable.

The assessee's objections against the incomparability were set aside.

The assessee remained unsuccessful before the DRP as well.

18. After considering the rival submissions and perusing the relevant

material on record, we find that the TPO has adopted `Software

                                   19
                                                        ITA No.122/Del/2013


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 with the assessee company, which is simply

providing software related services. The Tribunal in Toluna India Pvt.

Ltd. VS. ACIT (2014) 151 ITD 177 (Delhi) and Motorola Solutions

India Pvt. Ltd. (supra), both of which were rendering software

development services, has treated this company as functionally not

comparable.    Similar view has been taken by the Tribunal in the

assessee's own case for the immediately preceding assessment year.

We, therefore, order for the exclusion of this company from the list of

comparables.

Wipro Ltd. (Seg.)




                                  20
                                                           ITA No.122/Del/2013


19. The TPO included this company in the list of comparables by

overruling the assessee's objections about the super normal profits

earned by this company; very high turnover; owning significant IPRS in

the form of patents; and engaged in R& D activity. The assessee failed

to persuade the DRP to fall in line with its reasoning for the exclusion of

this company from the final set of comparables. That is how, the

assessee is before us.

20. We have heard the rival submissions and perused the relevant

material on record. It is noticed that the TPO has taken `Software

development' segment of this company on standalone basis. We agree

with the TPO that super normal profits or very high turnover cannot be

criterion for treating an otherwise functionally comparable company as

incomparable.    However, the fact remains that this company own

significant IPRS in the form of patents which are obviously used in the

rendering of software development services. Apart from that fact, this

company is engaged in R&D activity.          Per contra, the assessee in

question is only a captive software development service provider not


                                    21
                                                         ITA No.122/Del/2013


owning any IPRS. Owning or not owning IPRS in the form of patents in

software developed by a company has an important bearing on the profit

earned by it from the `Software development services' segment. A

company which does not own any IPRS and carries on the activity of

rendering software development services at its own cannot be compared

with a company which provides software development services by using

its own IPRS in the form of patents of software.           Under such

circumstances, we hold that this company cannot be considered as

comparable at segment level. The same is ex consequenti directed to

expelled from the set of comparables.




21. The ld. AR submitted that if the above six companies are removed

from the final list of comparables, then, there will remain no scope for

any addition on account of TP adjustment and there will be no need to

assail other points.   We find that all the above companies have been

excluded by the Tribunal in the assessee's own case for the immediately

preceding year,    in Toluna India Pvt. Ltd. (supra) and/or Motorola

Solutions India Pvt. Ltd.(supra).    Under such circumstances, we set


                                    22
                                                            ITA No.122/Del/2013


aside the impugned order and send the matter back to the AO/TPO for a

fresh computation of ALP of the international transaction undertaken by

the assessee in conformity with our above decision. Needless to say, the

assessee will be afforded a reasonable opportunity of being heard in such

fresh adjudication.

22. No other issue was argued by the ld. AR.

23. In the result, the appeal is allowed for statistical purposes.

          The order pronounced in the open court on 04.06.2015.



                 Sd/-                                    Sd/-
     [C.M. GARG]                                  [R.S. SYAL]
  JUDICIAL MEMBER                             ACCOUNTANT MEMBER


Dated, 4th June, 2015
dk
Copy forwarded to:
     1.   Appellant
     2.   Respondent
     3.   CIT
     4.   CIT (A)
     5.   DR, ITAT

                                                           AR, ITAT, NEW DELHI.

                                      23

 
 
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