ORDER
R.S. Syal, Accountant Member - This appeal by the assessee is directed against the final assessment order dated 26.10.2015 passed by the Assessing Officer (AO) under sections 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2011-12.
2. The only assail in this appeal is to the addition on account of transfer pricing adjustment amounting to Rs. 7,76,66,682/-.
3. Succinctly, the assessee company, earlier called Saxo IT India Private Ltd., is a part of Initto Group which teamed up with Saxo Bank. It is engaged in the business of design and development of customized software applications. Apart from that, it also provided technical support services during the relevant year to some unrelated enterprises in India. The assessee reported four international transactions including "Provision of Software Development" with transacted value of Rs. 20,72,25,235/-, which is disputed in the instant appeal. There is no quarrel on the other three international transactions. The assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method for demonstrating that the international transaction of Provision of Software development was at Arm's Length Price (ALP). The assessee's profit margin from this transaction was shown at 22.63% as against the mean margin of five comparables chosen by the assessee at 17.91%. On a reference made by the Assessing Officer for determining the ALP of the international transactions, the Transfer Pricing Officer (TPO) observed that the overall Profit Level Indicator (PLI) of Operating Profit to Operating Cost (OP/OC) as per the assessee's Profit and loss account was (-) 15.34%, whereas it had shown profit margin from the international transaction at 22.63%. The Transfer Pricing Officer noticed from the Transfer pricing study report that the comparability adjustment was carried out to arrive at such PLI at 22.63%. On perusal of the details filed by the assessee, it was seen that the expenditure on Personnel cost was allocated on the basis of man-days utilized vis-à-vis the man days available. Similarly, adjustments were found to have been carried out by the assessee in respect of other operating expenses including depreciation. The TPO noticed that the assessee claimed capacity utilization adjustment by considering full bench capacity at 300, whereas actually utilized bench capacity was only 115. He observed that the number of employees actually working ranged from 59 in April, 2010 to 213 in March, 2011. The TPO did not concur with the assessee's calculation of profit at 22.83% by holding that full bench capacity could not be considered at 300 for the entire year as was claimed by the assessee. He further required the assessee to show that the comparables were operating at 100% capacity utilization level, as was its basis for calculating capacity utilization adjustment in its profit margin. In response, the assessee made general submissions that the comparables were incorporated long ago and were well established vis-à-vis the assessee. However, no specific details of the capacity utilization of comparables were given by the assessee. In this backdrop of facts, the Transfer Pricing Officer refused to allow any comparability adjustment as claimed by the assessee. He computed PLI of software export segment, being the international transaction in question, as under:—
| Particulars | Amount |
| Software exports | 207225235 |
| Add: | |
| Misc. Income | 102495 |
| Operating Income | 207327730 |
| Expenditure | |
| Personnel Cost | 156849561 |
| Add: | |
| Operating expenditure | 78341959 |
| Depreciation | 2158188 |
| Operating Expenditure | 237349708 |
| Operating Profit | -30021978 |
| OP/OC (%) | -12.65 |
4. Thereafter, he took up five comparable companies cited by the assessee in its Transfer pricing study report with their weighted average profit of last three years at 17.91%. The Transfer Pricing Officer restricted the comparison to the current year data of comparables and also made further additions to such a list of comparables, which after the directions given by the Dispute Resolution Panel (DRP), stood at 18. It is on this basis, that the addition of transfer pricing adjustment amounting to Rs. 7.76 crore was made, which is the subject matter of the instant appeal.
5. The assessee has challenged the transfer pricing adjustment broadly on two counts, viz., calculation of its Profit level indicator (OP/OC) and inclusion of certain comparables.
I. CALCULATION OF ASSESSEE'S PLI (OP/OC)
6.1. It has been noticed above that the assessee's Profit and loss account showed overall OP/OC at (-)15.43%, whereas the assessee computed its OP/OC from the international transaction of 'Provision of the software development' at 22.63%. The TPO worked out such PLI at (-)12.65%. It is this calculation made by the Transfer Pricing Officer, which has been challenged before us on the sole issue of non- granting of capacity utilization adjustment. Apart from that, the ld. AR did not advance argument on any other aspect of the calculation of the assessee's PLI.
6.2 Before proceeding further, we want to clarify that the ld. AR has not disputed the above extracted calculation made by the TPO of the Profit level indicator at (-)12.65% from the international transaction of 'Provision of software development', in so far as the adoption of figures is concerned. In other words, the learned Authorized Representative has accepted that the figures taken by the Transfer Pricing Officer for calculation of the OP/OC at (-)12.65% are based on the actual relevant figures from the assessee's Profit and loss account. It is clear from the assessee's calculation of operating costs relating to the services rendered to the AE and non-AEs, a copy of which is available on page 324 of the Paper book, that out of total Operating revenue of Rs.21.78 crore, revenue from AE is to the tune of Rs.20.81 crore. This shows that major portion of the assessee's revenue is from international transactions only.
6.3 The only issue assailed and argued by the learned Authorized Representative is against not granting of capacity utilization adjustment in the calculation of the assessee's profit level indicator. The learned Authorized Representative contended that the Transfer Pricing Officer ought to have allowed adjustment on account of the assessee's under utilization of capacity from the calculation of its profit margin. Sounding a contra note, the learned Departmental Representative argued that the TP provisions do not permit allowing of any adjustment from the calculation of profit level indicator of the tested party. He argued that adjustment, if any, can be made only in computation of profit margin of the comparables. Thus, the foremost question for our consideration is whether capacity adjustment, or for that matter, any other adjustment on account of dissimilarity between the assessee and comparables, is warranted in the assessee's calculation of profit level indicator or that of comparables.
6.4 Chapter-X of the Act contains special provisions relating to avoidance of tax. Section 92, which is the first section of this Chapter, provides for computation of income from an international transaction having regard to arm's length price. Sub-section (1) of the section provides that : "Any income arising from an international transaction shall be computed having regard to the arm's length price'. Section 92C of the Act enshrines provisions relating to computation of arm's length price. Sub-section (1) of the section states that the arm's length price in relation to an international transaction shall be determined by any of the methods listed herein which include, inter alia, the transactional net margin method. Sub-section (2) of section 92C provides that the most appropriate method referred in sub-section (1) shall be applied for the determination of ALP 'in the manner as may be prescribed'. Calculation of ALP under the TNMM has been prescribed under Rule 10B(1)(e) of the Income-tax Rules, 1962, which states that for the purposes of section 92C(2), the ALP in relation to the international transaction shall be determined as under :—
'(e) transactional net margin method, by which,—
6.5 A bare perusal of sub-clause (i) of Rule 10B(1)(e) brings out that the net profit margin realized by the enterprise from an international transaction is to be computed in relation to a particular base. Sub-clause (ii) provides that the net profit margin realized by the enterprise from the comparable uncontrolled transaction is computed having regard to the same base. Sub-clause (iii) provides that the net profit margin realized by a comparable company, determined as per sub-clause (ii) above, 'is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions,.... which could materially affect the amount of net profit margin in the open market.' It is this adjusted net profit margin of the unrelated transactions or of the comparable companies, as determined under sub-clause (iii), which is used as benchmark for the purposes of making comparison with the net profit margin realized by the assessee from its international transaction as per sub-clause (i). Sub-clause (iv) states that the net profit margin realized by the enterprise, as referred in sub clause (i), is established to be the same as a net profit margin referred in sub-clause (iii) of the comparables. Sub-clause (v) states that the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to international transaction. On going through the above sub-clauses of Rule 10B(1)(e), it becomes patent that as per the first step, the net profit margin 'realized' by the enterprise from an international transaction is to be computed. Use of the word 'realized' in the provision richly indicates that it is the calculation of actual operating profit margin of the assessee earned from international transaction, which is not any adjusted figure. Similar position can be traced from the language of sub-clause (iv), where again reference has been made to profit margin 'realized' by the assessee from the international transaction. When we consider sub-clauses (ii) and (iii), it turns out that, firstly, the net operating margin actually realized from the comparable uncontrolled transaction is computed, which is determined in the same way as that of the assessee as per clause (i), that is, actual figures without making any adjustment. Then sub-clause (iii) talks of adjusting the actually realized margin of comparables to bring the same at par with the international transaction undertaken by the assessee, so as to iron out the effects of differences between the international transaction and comparable uncontrolled transactions. On going through all the sub-clauses of Rule 10B(1)(e), the natural corollary which follows is that the net profit margin realized by the assessee from its international transaction is taken as such and the adjustments, if any, due to differences between the international transaction and comparable uncontrolled transactions, are given effect to in the profit margin of comparables. The viewpoint canvassed by the learned Authorized Representative that adjustment due to difference between comparables and the assessee should be carried out in the profit margin of the assessee is, ergo, devoid of merit and contrary to the legal provisions, which is hereby repelled.
6.6 The learned Authorized Representative tried to convince us on his point of view of allowing capacity adjustment in the profit margin of the assessee, by pressing into service Sub-rule (3) of Rule 10B, which reads as under :—
'(3) An uncontrolled transaction shall be comparable to an international transaction if—
6.7 A cursory look at this sub-rule indicates that an uncontrolled transaction shall be comparable to an international transaction, if either there are no differences between the international transaction and the comparable uncontrolled transaction or if such differences exist, then a reasonably accurate adjustment can be made to eliminate the material effects of such differences. A plain reading of Sub-rule (3) of Rule 10B brings to the fore that this sub-rule is meant only for ascertaining whether or not a probable comparable uncontrolled transaction is fit for being treated as actual comparable. This is only an entry level judgmental provision for ascertaining the comparability of an otherwise broadly comparable uncontrolled transaction. In other words, if the broader comparable uncontrolled transaction is similar to the international transaction or if there are differences between the two, which are capable of adjustment, then such broadly comparable uncontrolled transactions gains entry in to the final list of comparables to be considered for the purposes of sub-clause (ii) of rule 10B(1)(e). If, on the other hand, there are differences between the two, which are not capable of adjustment, then such otherwise broadly comparable uncontrolled transaction goes out of the reckoning and does not gain entry in the final tally of comparables for the purposes of computing ALP of the international transaction as per the mandate of rule 10B(1)(e). In other words, role of Sub-rule (3) to Rule 10B is only to filter out comparable uncontrolled transactions qualifying for inclusion in the determination of the ALP under Rule 10B(1). Mechanism for determining ALP under the TNMM has been enshrined in Rule 10B(1)(e) alone which clearly provides for making adjustments on account of differences between uncontrolled transaction and international transaction in the profit margin of comparables. Sub-rule (3) is neither a machinery provision in itself nor a part of the machinery for calculating arm's length price of an international transaction, which falls exclusively and in the sole domain of sub-rule (1). If we accept the contention of the learned Authorized Representative that rule 10B(3)(ii) is to be construed as a provision for allowing adjustment on account of differences between uncontrolled transaction and international transactions from the profit margin of the assessee, then we will have to read Sub-rule (3) as a part of machinery for calculating ALP under Rule 10B(1)(e), which has no statutory sanction. Thus, it follows from a conjoint reading of rule 10B(1)(e) with rule 10B(3), that whereas later rule is only meant for deciding the inclusion or otherwise of a probable comparable in the final list of comparables, the former rule determines the ALP of the international transaction under the prescribed method on the basis of such a list of comparables. We, therefore, jettison the assessee's contention that the adjustment on account of difference between capacity utilization of comparable companies and the assessee should be adjusted in the profit margin of the assessee. Two contrary decisions, pointed out by the ld. AR, are based on different and peculiar facts, which have no application to the instant case. Our view is fortified by several orders passed by the Delhi benches of the tribunal on this issue including Dy. CIT v. Claas India (P.) Ltd. [2015] 62 taxmann.com 173 (to which one of us, namely, the AM is a party). Ex consequenti, it is held that capacity adjustment, or for that matter any other adjustment, can be legally made only in the profit margin of the comparables, if otherwise factually warranted.
7.1 The foregoing discussion brings us to the next issue of granting adjustment on account of difference in the capacity utilization, which is otherwise an important factor, and in principle, the same needs to be adjusted by increasing or reducing fixed operating costs and fixed part of semi-variable operating costs of comparables by seeing their capacity utilization vis-à-vis that of the assessee. However, adverting to the facts of the instant case, we find that capacity adjustment as claimed by the assessee, is totally unjustified.
7.2 The assessee calculated its profit margin at 22.63% on the basis of working given at page 324 of the paper book. When we peruse this calculation, it becomes vivid that out of total operating expenses of Rs. 25.72 crore, the assessee has not accounted for operating expenses to the tune of Rs. 8.65 crore anywhere, either in the calculation of operating profit margin from the AE or non-AE transactions. On a specific query, the learned Authorized Representative submitted that this cost of Rs. 8.65 crore represents operating expenses of idle capacity which has been considered by the assessee as a third segment with no corresponding revenue. We are hard pressed to concur with such a contention for the obvious reason that the actual costs incurred by the assessee have to be accounted for in the calculation to which they pertain, that is, either AE or non-AE transactions. It is totally absurd to create a separate segment of idle capacity with no revenue and allocate a larger chunk of costs to the same without adjusting it against AE or non-AE segments. We have noticed supra from the language of rule 10B(1)(e)(i) that it talks of finding out profit margin 'realized', which can be computed by considering all the operating costs incurred. It does not permit ignoring any operating cost actually incurred. By doing so, the assessee has devised a unique method for converting its loss from the AE segment into profit, by artificially excluding huge operating costs actually incurred from the consideration zone, thereby projecting a rosy picture of profit from its international transactions so as to demonstrate that the same is at ALP. This course of action adopted by the assessee is legally unacceptable.
7.3 Further, the assessee has calculated capacity adjustment by considering full bench capacity for the entire year at 300 employees. On a specific query as to what this 'full bench capacity' represents, the learned Authorized Representative submitted that these are the number of seats on which some work can be possibly done notwithstanding the actual number of employees working on them. When we consider the number of employees actually employed by the assessee, it comes out that for the months of April to September, 2010, it was between 58 to 98; from October, 2010 to February, 2011, it was between 106 to 181; and for March, 2011, it was 213. It is beyond our comprehension as to how the assessee is calculating capacity adjustment with full capacity at 300, when actual number of employees is far less, and the question of their being sitting idle is only secondary.
7.4 That apart, any adjustment including capacity adjustment, is always permissible in terms of Rule 10B(1)(e)(iii). In order to be governed by this Rule, it is for the assessee to show that the comparables had particular capacity utilization as against the assessee's capacity utilization at a different level. Suppose, there are 15 comparables and the assessee's capacity utilization during the year is 80%. In order to claim any capacity adjustment, it is for the assessee to show that each of such comparables had their respective capacity utilization of less than 80% so as to call for any favorable adjustment. If one of the comparables, say A, has capacity utilization of 50%, then the profit margin of such comparables is required to be adjusted with the differential capacity adjustment of 30% (80% - 50%). If another comparable, say B, has capacity utilization of 70%, then the profit margin of B is required to be adjusted with the differential of 10% (80% - 70%). If still another comparable, say C, has capacity utilization of 90%, its profit margin is required to be adjusted adversely by (-)10%, being the difference between 80%, that is, the capacity utilization of the assessee and 90%, that is, the capacity utilization of C. It is always the assessee who has to prepare its transfer pricing study report and consider comparables with the respective profit margins duly adjusted to take care of differences between the international transaction and comparable uncontrolled transactions. Then the matter comes up before the TPO to vet the correctness of the assessee's claim. Thus it is apparent that onus to claim any capacity adjustment is always on the assessee, which can be discharged by demonstrating different capacity utilization levels. It is trite law that the burden of proof is always on the one who claims so. It is only when the assessee brings on record some evidence, either from the Annual report of its comparable companies or from any other reliable data, to the effect that there existed differences in the utilization of capacity of such comparables vis-à-vis the assessee, that any adjustment can be allowed in the profit margin of the respective comparables. Contention of the ld. AR casting burden on the Revenue to show that in each comparable case capacity utilization was less than 100%, as a condition precedent for denying the claim of capacity adjustment, is akin to putting cart in front of horse, which is manifestly impermissible. In the present case, the assessee has taken a stand that capacity adjustment be allowed on the assumption of all the comparables operating at 100% capacity level, which is not evidenced from any material on record. On a pertinent query, the learned Authorized Representative candidly admitted that no such data was available to vouch such a claim. In the absence of any reliable data to support the difference between the capacity utilization levels of the assessee and the comparables, we are helpless in granting any such adjustment.
8. Summing up, we hold that neither there is any warrant for adjusting the assessee's profit margin with capacity adjustment, nor such adjustment, in the facts and circumstances of the present case, can be allowed in the profit margin of comparables. We, therefore, dismiss this ground of appeal.
II. INCLUSIOIN OF COMPARABLES
9.1 We have briefly observed that the assessee selected five companies as comparable and after the direction given by the DRP, the final list as drawn by the Transfer Pricing Officer, stood reduced to 18 comparables. The assessee has agitated inclusion of 10 companies from such a list of comparables which we will examine in seriatim herein below.
9.2 Before venturing to consider the comparability or otherwise of these companies assailed in the extant appeal, it is desirable to first understand the nature of work carried out by the assessee for its AE under the international transaction of 'Provision of Software Development'. The Transfer Pricing Officer has mentioned at page 2 of his order that the assessee is engaged in the business of design and development of customized software applications for its AE. The assessee's audit report in Form no. 3CEB also provides the description of the nature of business as provision of software development. The assessee provided such services pursuant to agreement dated 19.01.2009 with Initto -A/S Denmark, whose copy is available at pages 377 onwards of the paper book. This Agreement states that the assessee is engaged in the business of providing certain software and consulting services and solutions to Buyer (i.e. its AE). Definition of 'Software services' rendered by the assessee to its AE given in this Agreement means and includes services towards software development, software support, software project management services, development of new application, maintenance or upgrading or rework on any existing software projects/appliances, customer support etc. or any other services provided through its software developers. Remuneration to the assessee has been set out under Article 3 read with Appendix 1, which shows that the assessee is entitled to a monthly fixed amount in addition to hourly rate for the actual man-hours used in rendering specific services. The Agreement provides that the : 'Software, which the Service Provider (i.e. the assessee) conceives or reduces to practice whether alone or with others during the course of its performance under this Agreement, shall be the exclusive property of Buyer (i.e. its AE)'. Next para 12.2 of the Agreement provides that : 'The software shall be deemed Buyer's proprietary information and shall not be disclosed to anyone outside of Buyer, or used by Service provider or others without the prior, written consent of Buyer'. These clauses of the Agreement adequately indicate that the assessee is simply engaged in software development and software support services including development of new applications and maintenance or up-gradation of such applications etc. for a particular sum and the work done by it in the shape of newly developed software or applications becomes exclusive property of its foreign AE, which the assessee cannot use, interfere with or sell to others. Its role is simply to develop and maintain the software and after doing the needful assign it to its AE for a defined consideration. No intellectual property rights in the work done by the assessee vest in it. The ld. AR contended that the assessee is mainly developing software and solutions to be used in banking business. However, he could not correlate such a contention with any material on record. With the above brief introduction of the assessee's nature of work, now we will examine the disputed companies as to their comparability or otherwise.
(i) E-Infochips Limited:
10.1 The Transfer Pricing Officer included this company in the list of comparables. On being called upon to explain as to why it should not be considered as a comparable, the assessee contended that there was functional dissimilarity inasmuch as this company was engaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenues of this company from Products was only 15% of total revenue and hence the same qualified to be eligible for comparison. The DRP did not allow any relief.
10.2 After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at Rs. 3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that from the common pool of income from both the streams of software products and software services, one cannot deduce the revenue from software services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from software development services, we order to exclude this company from the list of comparables.
(ii) E-Zest Solutions
11.1 The Transfer Pricing Officer considered this company as comparable by observing that it provided similar services as were being provided by the assessee. He reproduced the relevant portion from the Annual report of this company indicating that it was engaged in providing software development services. The assessee remained unsuccessful before the DRP.
11.2 We have heard the rival submissions and perused the relevant material on record. The only basis which has been challenged by the learned Authorized Representative seeking exclusion of this company is its functional dissimilarity. We have gone through the Annual report of this company which is available in the paper book. Its Profit and loss account specifies 'Income from operations'. It is further borne out that it is providing end-to-end development, software project development services. As the assessee is also engaged in the customised software development, we find this company to be functionally similar. The same is, therefore, retained in the list of comparables.
(iii) L&T Infotech Ltd.
12.1 The assessee argued against the inclusion of this company in the list of comparables before the Transfer Pricing Officer by contending that it was functionally different and there was insufficient segmental information. Apart from that, it was also argued that it was exceptional year of its operations and there were significant intangible assets possessed by it. The Transfer Pricing Officer did not accept this contention and included the same in the list of comparables.
12.2 Having regard to the rival submissions and perusal of the relevant material on record, we find from the Annual report of this company, which is available in the third paper book that its Profit and loss account shows "Revenue - Revenue software development services and products". Profit and loss account of this company having a list of software development expenses contains an item 'Cost of bought-out items for re-sale' with a value of Rs. 25.55 crore. Apart from that, the balance-sheet of this company shows certain 'Software' in its Schedule of fixed assets under the head 'Intangible assets'. The above facts conclusively prove that this company is also engaged in the sale of Products apart from rendering software development services. Adopting the same reasons as given for the exclusion of E-infochips Ltd., we order for the exclusion of this company as well.
(iv) Persistent Systems and Solutions Ltd.
13.1 The assessee contended that this company was dealing in software products along with software development services and its revenue from licensing of software products was included in total revenue. The TPO observed from the Annual report of this company that it was providing support in software development, consultancy and system integration services. He, therefore, considered it as comparable. The assessee is aggrieved.
13.2 We have heard the rival submissions and perused the relevant material on record. The Annual Report of this company has been placed in the second paper book, from which it is lucid that this company is engaged only in providing software development and consultancy services, which is similar to those rendered by the assessee. When confronted, the ld. AR did not raise any objection to the inclusion of this company in the final set of comparables. We, therefore, uphold the impugned order in treating this company as comparable.
(v) Persistent Systems Ltd.
14.1 The assessee objected to the inclusion of this company in the tally of comparables by arguing that it was functionally different and there was insufficient segmental information. The TPO negatived this contention and included the same in the final set of comparables.
14.2 After considering the rival submissions and perusing the relevant material on record, we find from Profit & Loss Account of this company, a copy of which is placed at page 1534 of the paper book, that its income from 'Sale of software services and Products' is amounting to Rs.6101.27 millions. The TPO has himself observed that this company does have some products, but, product revenue is only 7.2% and, hence, this company is predominantly a software service provider. This discussion is contained in para 21.67 of the TPO's order. Even Schedule-11 to the Profit & Loss Account also shows 'Sale of software services and Products.' This shows that this company is engaged in both rendering software development services as well as sale of software products. Albeit the percentage of software products in the total revenue is less, as has been noted by the TPO, yet, we are inclined to take it as non-comparable because there is no precise information about the contribution made by such small sale of software products to the total profit of the company. As no segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, we, therefore, order for the exclusion of this company from the list of comparables.
(vi) Sasken Communications Technologies Ltd.
15.1 The TPO included this company in the set of comparables despite the assessee's objection that it was functionally different and also had Product portfolio.
15.2 After considering the rival submissions, we find from page 58 of the TPO's order that he has recognized sale of software products to the tune of Rs.37 crore and odd. Though the break-up of revenue from software services and software products is available, but, the break-up of operating costs and net operating revenues from these two segments have not been given. It is further observed that the TPO has taken entity level figures for the purposes of making comparison. Since such entity level figures contain revenue from both software services and software products, as against the assessee only providing software services, we are disinclined to treat this company as comparable. The assessee's contention is accepted on this issue.
(vii) Wipro Technology Services Ltd.
16.1 The assessee objected to the inclusion of this company in the list of comparables by arguing that apart from this company being functionally different and the availability of insufficient segmental information, there were also significant related party transactions. The TPO did not accept the assessee's contention of the related party transactions and proceeded to include it in the final set of comparables.
16.2 We have heard the rival submissions. Page 57 of the TPO's order is reproduction of the assessee's contention about the related party transactions as under :—
"Wipro Technology Services Limited (formerly Citi Technology Services Limited) ('the Company') was incorporated on 15 September, 2004. The entire share capital of the Company was held by Citicorp Banking Corporation, a company incorporated under laws of Delaware, USA, upto 20 January, 2009.
Wipro Limited (Wipro) executed an agreement with Citigroup Inc. for acquiring all of Citigroup interest in the Company w.e.f. 21 January 2009. On 21 January 2009, Wipro signed a master service agreement (MSA) with Citigroup Inc. for the delivery of technology infrastructure services and application development and maintenance services for the period of six years. The MSA provides for the delivery of at least $500 million in service revenues over the period of the contract. After the acquisition by Wipro, the name of the Company was changed to Wipro Technology Services Limited ('WTS' or 'the Company') on 16 March 2009."
16.3 It is observed from the above contention reproduced in the TPO's order that Wipro Technology Services Ltd., which was earlier Citi Technology Services Ltd., was held by Citi Corp. Banking Corporation, USA upto 20th January, 2009. Wipro Ltd., parent company of the assessee, executed an agreement with Citi Group Inc., for acquiring Citi Technology Services Ltd., now called Wipro Technology Services Ltd. On 21.1.2009, Wipro Ltd. signed a master agreement with Citi Group Inc., for the delivery of technology Infrastructure Services and application development and maintenance services for the period of six years, which also includes the year under consideration. This shows that income from software development support and maintenance services was earned by Wipro Technology Services Ltd., from Citi Group Inc., by means of master service agreement entered into between Wipro Ltd., its parent company and Citi Group Inc., a third person.
16.4 We have noticed above from the language of Rule 10B(1)(e)(ii) that it is the net profit margin realized from a comparable uncontrolled transaction, which is considered for the purposes of benchmarking. The epitome of 'comparable uncontrolled transaction' is that the companies or transactions in order to fall within the ambit of sub-clause (ii) of rule 10B(1)(e), should be both comparable as well as uncontrolled. 'Uncontrolled transaction' has been defined in Rule 10A(a) to mean: 'a transaction between enterprises other than associated enterprises, whether resident or non-resident.' This shows that in order to be called as an uncontrolled transaction, it is sine qua non that the same should be between the enterprises other than the associated enterprises. Section 92B(2) provides that: 'A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise'. On going through the prescription of sub-section (2) of section 92B, it is clearly borne out that a transaction with a non-AE shall be deemed to be a transaction entered into between two AEs if there exists a prior agreement in relation to the relevant transaction between the third person and the AE or the terms of the relevant transaction are determined in substance between the third person and the AE. When we consider section 92B(2) in combination with Rule 10A(a), it follows that the transaction between non-AEs shall be construed as a transaction between two AEs, if there exists a prior agreement in relation to the relevant transaction between third person and the AE. If such an agreement exists, the third person is also considered as an AE and the transaction with such third person becomes international transaction within the meaning of section 92B. Once there is a transaction between two associated enterprises, it ceases to be an 'uncontrolled transaction' and, thereby, goes out of reckoning under Rule 10B(1)(e)(ii).
16.5 Adverting to the facts of the instant case, we find that Wipro Technology Services Ltd. earned a revenue from Master services agreement with Citigroup Inc. for the delivery of technology infrastructure services. This agreement was, in fact, executed between the assessee's AE, Wipro Ltd., and Citigroup Inc., a third person. This unfolds that the transaction of earning revenue from software development support and maintenance services by Wipro Technology Services Ltd., is an international transaction because of the application of section 92B(2) i.e., there exists a prior agreement in relation to such transaction between Citigroup Inc. (third person) and Wipro Ltd. (associated enterprise). In the light of this structure of transaction, it ceases to be uncontrolled transaction and, hence, Wipro Technology Services Ltd., disqualifies to become a comparable uncontrolled transaction for the purposes of inclusion in the final list of comparables under Rule 10B(1)(e)(ii). We, therefore, direct removal of this company from the list of comparables.
(viii) Acropetal Technologies Ltd. (Seg.)
17.1 The TPO considered this company as comparable on segmental level. The assessee's contentions in this regard were rejected.
17.2 After considering the rival submissions and perusing the relevant material on record, we find from the Annual accounts of this company, a copy of which is available at page 892 of the paper book, that it has a separate segment of software development covering 'Enterprise solutions' and 'IT infrastructure solutions'. The nature of activity done by this company under these segments is broadly similar to that conducted by the assessee. Since the TPO has considered only the segmental figures of this company for the purposes of inclusion in the list of comparables, we find no reason to accept the assessee's contention for its expulsion from the set of comparables. The impugned order is, therefore, upheld on this score.
(ix) Sankhya Infotech Ltd. (Seg.)
18.1 The TPO rejected the assessee's contention about the functional dissimilarities of the software development segment of this company and included the same in the final tally of comparables. The assessee is aggrieved against such inclusion.
18.2 We have heard the rival submissions and perused the relevant material on record. Annual accounts of this company are available in the paper book. It can be seen that this company has revenues from software development and Products. The ld. AR's contention that this company was doing huge research and development and, hence, the same should be excluded, does not merit acceptance because the research and development activity is restricted to the Product segment as is apparent from page 1198 of the paper book which states that: 'the company has in-house research and development centre involved in developmental activities for new 'products' in the fields of simulations and training.' Once this contention of the assessee is rejected and revenue from software products is excluded to the only inclusion of revenue from software development services segment which is akin to that of assessee, we feel no difficulty in considering this company as comparable on segmental level. The impugned order is upheld.
(x) Zylog Systems Ltd.
19.1 The TPO considered this company as comparable by noting in his order that the assessee's objections to its inclusion were unsustainable.
19.2 We have heard the rival submissions and perused the relevant material available on record. The ld. AR submitted that the TPO did not confront the assessee with the inclusion of Zylog Systems Ltd. in the set of comparables and it was a shock to see from his order that this company was included without a notice to the assessee. In order to support this contention, the ld. AR invited our attention towards page 9 of the TPO's order containing list of 19 companies on which the assessee's objections were sought for the purposes of their inclusion in the list of comparables. Name of Zylog Systems Ltd. is absent from such list.
19.3 Without going into the merits of comparability, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of AO/TPO for deciding the inclusion or otherwise of Zylog Systems Ltd. in the final set of comparables afresh after entertaining objections from the assessee.
20. In the ultimate analysis, we set aside the impugned order and remit the matter of computation of ALP of the international transaction of 'Provision of software development' to the AO/TPO to be done in conformity with the discussion made above in this order. Needless to say, the assessee will be allowed a reasonable opportunity of hearing.
21. In the result, the appeal is partly allowed for statistical purposes.
pooja
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