Deputy Commissioner of Income Tax Circle-1(1)(1), Bangalore V. M/s Altisource Business Solutions India Pvt Ltd , Bangalore

ITA 164/BANG/2018

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 2063 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-06-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 15-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Retrospective amendment; TDS
• Section: 6; 143(3); 10AA; 234B; 144C; 143(2); 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No. 162/Bang/2018 Assessment Year : 2012-13 M/s. Altisource Business Solutions Pvt. Ltd., Pritech Park, 3 rd and 5 th Floors of wing A & 4 th Floor of Wing B, Block No. 12, Pritech Park, Survey No. 51-64/4, Bellandur Village, Sarjapur Marathahalli Outer Ring Road, Bangalore – 560 103. PAN: AAACO9467A Vs. The Deputy Commissioner of Income Tax, Circle – 1 (1)(2), Bangalore. APPELLANT RESPONDENT & IT(TP)A No. 164/Bang/2018 Assessment Year : 2012-13 (By Revenue) Assessee by : Shri K.R. Vasudevan, Advocate Revenue by : Smt. Susan Dolores George CIT (OSD) Date of Hearing : 30-05-2022 Date of Pronouncement : 29-06-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present cross appeals filed by the assessee and the revenue against order dated 31.08.2017 passed by the Ld.CIT(A)-1, Bangalore for A.Y. 2012-13 on following grounds of appeal: Page 2 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 Assessee has filed revised grounds of appeal which are as under: “The grounds hereinafter taken by the Appellant are without prejudice to one another. I. Transfer Pricing 1. The learned CIT (A) has erred in law and facts, by upholding adjustment made by the learned Assessing Officer ("AO") / Transfer Pricing Officer ("TPO") to the arm's length price of the international transactions of the software development services and IT enabled services rendered by the Appellant to its Associated Enterprises ("AEs"); 2. The learned CIT (A) has erred in law and facts, by not accepting the Appellant's plea in entirety and upholding the action of the learned AO/TPO of rejection of transfer pricing documentation ["TP Documentation"] including economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income tax Rules, 1962 ("the Rules") by erroneously invoking provision of section 92C(3)(a) and (c) of the Act without providing cogent reasons; 3. The learned CIT(A) has erred in law and facts, by upholding the action of the learned TPO/A0 of disregarding certain comparable companies selected by the Appellant in the TP Documentation and instead conducted fresh search and thereby erroneously selected additional comparable companies for determination of the arm's length price in connection with the impugned international transactions and holding that the international transactions entered into by the Appellant are not at arm's length; 4. The learned CIT(A) has erred in law and facts, by upholding action of the learned AO/TPO of rejecting the use of multiple year data adopted by the Appellant for determining the arm's length price of the international transactions; 5. The learned CIT(A) has erred in law and facts by upholding the action of the learned AO/TPO of accepting/rejecting companies which are comparable to the Appellant's operations by applying the following quantitative and qualitative filters: a. The learned CIT(A) has erred, in law and in facts, by not accepting the Appellant's plea that companies should not be rejected using software development services less than Page 3 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 75% of the total operating revenue as a comparability criterion; b. The learned CIT (A) has erred in law and in facts, by not accepting the Appellant's plea that the companies should not be rejected using employee cost greater than 25% of the turnover as a comparability criterion; c. The learned CIT (A) has erred in law and facts by not accepting the Appellant's plea that the companies should not be rejected using export sales less than 75% of the sales, instead of 25% of the total sales, leading to a narrow comparable set. d. The learned CIT (A) has erred in law and facts by not accepting the Appellant's plea that the companies should not be rejected using related party transactions filter of greater than 25% of the sales without giving any cogent reason for doing so. e. The learned CIT (A) /learned TPO/ AO erred in not applying the upper limit on the sales turnover filter while selecting the comparable companies, despite of the fact that the lower limit on the sales turnover filter was applied for comparability analysis. f. The learned AO/learned TPO/learned CIT (A) erred in applying different financial year ending filter while selecting the comparable companies. 6. The learned CIT(A) has erred in law and facts by upholding the action of the learned AO/TPO of accepting the contentions of the TPO by not considering provision of doubtful debts as operating in nature for the purpose of computation of margin of the comparable companies; 7. The learned CIT (A) has erred in law and facts, in computation of working capital adjustment; 8. Software Development Services: 8.1 The learned AO/ learned TPO/ Hon'ble CIT(A) erred in accepting companies that ought to have been rejected as comparable for software development services: a. Larsen & Toubro Infotech Limited b. Persistent Systems Limited 8.2 The learned AO/learned TPO/Hon'ble CIT(A) has grossly erred in rejecting the following companies that ought to have been included as comparables for software development services: a. Akshay Software Technologies Ltd b. CAT Technologies Limited c. Helios and Matheson Information Technology Ltd. Page 4 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 d. Maveric Systems Ltd. e. Silverline Technologies Ltd. f. Cherrytec Intellisolve Pvt. Ltd. g. Techsoft Engineering Projects Ltd. h. Kals Information Systems Ltd. i. Evoke Technologies Pvt. Ltd. 9. IT Enabled Services: 9.1 The learned AO/learned TPO/Hon'ble CIT(A) has grossly erred in rejecting the following companies that ought to have been included as comparables for IT Enabled services: a. ICRA Online Limited b. Techprocess Solutions Limited c. Cameo Corporate Services Private Limited d. Crystal Voxx Limited 9.2 The learned AO/ learned TPO/ Hon'ble CIT(A) erred in accepting companies that ought to have been rejected as comparable for IT Enabled services: a. I n f o s y s B P O L i m i t e d b. BNR Udyog Limited c. Excel Infoways Limited d. E4e Healthcare Services Private Limited ck 10. The learned AO/ TPO/ CIT(A) erred in not providing appropriate adjustment towards the various entrepreneurial risks borne by the companies selected as comparable in respect of software services and ITeS rendered by the Appellant. II. Corporate Tax 11. Re-computation of deduction under Section 10AA of the Act — reduction of telecommunication expenses from Export Turnover — INR 16,56,696 11.1 The learned AO/CIT(A) has erred in re-computing the deduction under section 10AA of the Act by reducing the telecommunication expense of INR 77,46,266 (comprising of telephone expenses and telecommunication line charges) from Export Turnover. 11.2 The learned AO/CIT(A) ought to have observed that telephone expenses are incurred for regular operations of the Company and are not specifically attributable to the delivery of IT and IT enabled services in India. 11.3 The learned AO/CIT(A) ought to have observed that it is practically not possible to determine quantum of telecommunication line charges attributable to the delivery of IT and IT enabled services outside India on account of the following: Page 5 of 26 IT(TP)A Nos. 162 & 164/Bang/2018  Telecommunication charges are paid for obtaining specific bandwidth capacity.  Such bandwidth capacity would be utilized for general business purposes as well as for downloading data / software for rendering IT and IT enabled services. 11.4 Notwithstanding and without prejudice to the above, the learned AO/CIT(A) has erred in law by not reducing the telecommunication expenses from total turnover in computation of deduction under section 10AA of the Act. 11.5 The learned AO/CIT(A) has erred in law by making protective addition in respect of reduction of telecommunication expenses from export turnover. 11.6 The learned AO/CIT(A) ought to have appreciated that concept of protective addition can be applied only when an income has to be added in the hands of more than one taxpayer, in a situation where there is an element of ambiguity as to in whose hands the said income can be rightly brought to tax. 11.7 The learned AO/CIT(A) ought to have appreciated that jurisdictional High Court decision is binding on subordinate authorities even if appeal against such High Court decision is pending before Apex Court. 12. Disallowance of software expenses under section 40(a)(i) — INR 1,48,09,404 12.1 The learned AO/CIT(A) has erred in disallowing software expense amounting to INR 1,48,09,404 for non- deduction of tax at source ("TDS"). 12.2 The learned AO/CIT(A) ought to have observed that on the said expense, no TDS was required to be deducted as per the tax treaty of India with the respective countries of the payees. 12.3 Notwithstanding and without prejudice to the above, the learned AO/CIT(A) ought to have appreciated that an expense cannot be disallowed under section 40(a) when TDS liability on such expenses has arisen due to retrospective amendment. 12.4 Notwithstanding and without prejudice to the above, the learned AO/CIT(A) ought to have appreciated that out of the total expense of INR 1,48,09,404 a sum of INR 45,48,965 relates to hardware support and technical services which are not subject to tax based on the tax treaties with the respective countries of payees. 12.5 Notwithstanding and without prejudice to the above, the learned AO/CIT(A) has erred in not appreciating the fact that explanation 5 to section Page 6 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 9(1)(vi) was inserted vide Finance Act 2012 with effect from 1 June 1976 and TDS obligation on software was hit by the doctrine of 'impossibility of performance' as upheld by several judicial precedents 12.6 Notwithstanding and without prejudice to the above, the learned AO/CIT(A) erred in not granting deduction under section 10AA on the enhanced income after considering the above disallowance. 12.7 Learned CIT(A) has erred in holding that issue is covered by the jurisdictional Hon'ble High Court of Karnataka in Assessee's own case. 13. Levy of interest under section 234B — INR 7,15,88,232 13.1 The Learned AO has erred in levying interest under section 234B which is consequential to additions made in the assessment order 14. Levi. of interest under section 234D — INR 2,99,796 14.1 The learned AO has erred in levying interest under section 234D which is consequential to additions made in the assessment order 14.2 Notwithstanding and without prejudice to the above, learned AO has erred in levying interest under section 234D even though refund was issued to the Appellant after the date of regular assessment. The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided.” 2. The revenue has raised the following grounds of appeal: “1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The Ld. CIT (A) erred in law in demanding comparability standards that may itself defeat the purpose of law relating to determination of Arm's Length Price under the Income -Tax Act. 3. The Ld. CIT (A), while seeking the exact comparability, erred in fact and in law in imposing conditions beyond law Page 7 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin. 4. The Ld. CIT (A) erred in excluding the comparables while the same qualifying all the qualitative and quantitative filters applied by the TPO. 5. The Ld. CIT(A) erred in disregarding the position of law that there could e difference between the enterprises compared under the TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises. 6. The Ld. CIT(A) erred in fact and in law in seeking exact comparability while searching for comparable companies of the assessee company under TNMM whereas the requirement of law and international jurisprudence require seeking similar comparable companies. 7. The Ld. CIT (A) erred in deleting the addition made on account of belated remittance of PF/ESI by the assessee on the basis of jurisdictional High Court's judgment in the case CIT Vs Sabri Enterprises, even though the issue has not reached finality as the revenue's SLPs are pending before the Hon'ble Apex Court on the said issue. 8. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the Ld. CIT (A) be reversed and that of the Assessing Officer be restored. 9. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of appeal.” 3. Assessee has also filed additional grounds wherein following issues has been raised. “Based on the facts and circumstances of the case, M/s. Altisource Business Solutions Pvt. Ltd. ("The Appellant" or "The Petitioner"), respectfully submits the following additional grounds of appeal for admission before Your Honours: Transfer pricing grounds Ground No. 7.1: The learned AO/ learned TPO/ Hon'ble CIT(A) erred in not appreciating the fact that negative working capital adjustment should not be allowed. Page 8 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 Ground No. 8.3: The Hon'ble CIT(A) has given conflicting directions while adjudicating on the accept/reject of the comparable companies, being, Datamatics Global Services Ltd., Genesys International Services Ltd., ICRA Techno Analytics Ltd., Infosys Ltd., Sasken Communication Technologies Ltd. and Spry Resources India Pvt. Ltd.. In doing so, the Hon'ble CIT(A) has erred in: a. Not appreciating the fact that ALP can be computed even on the basis on a smaller set of comparables. b. Holding that a larger set of comparables takes care of the differences between the comparables as compared to a smaller set of the comparables selected based on strict comparability c. Holding that the companies selected by the learned TPO are appropriate comparables for determination of the ALP. Ground No. 9.3: The Hon'ble CIT(A) has erred in suo moto rejecting the following companies that ought to be included as comparables for IT Enabled Services: a. Informed Technologies India Ltd. b. Jindal Intellicom Ltd. The said additional grounds are without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Honorable Income Tax Appellate Tribunal to decide this appeal according to law.” 4. It has been submitted that no new facts needs to be considered in order to dispose of the additional grounds raised by the assessee vide application dated 25.07.2019. It is submitted that the additional grounds is a legal issue that goes to the root cause of the proceedings. The Ld.AR, thus prayed for the admission of additional grounds so raised by assessee. 4.1 On the contrary, the Ld.CIT.DR though opposed admission of the additional ground, could not bring anything on record which would challenge such a right available to assessee under the Act. 4.2 We have perused the submissions advanced by both sides in light of records placed before us. Page 9 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 4.3 The Ld.DR did not object for the additional grounds being admitted. 4.4 We note that one of the additional grounds is directly connected with the main issue of disallowance and no new facts needs to be investigated for adjudicating the same. Another issues alleged by the assessee is a legal issue that does not require investigation of any facts. 4.5 Considering the submissions and respectfully following the decisions of Hon’ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional ground raised by the assessee. Accordingly, the application for raising additional grounds stands allowed for the year under consideration. Accordingly additional grounds raised by assessee vide application dated 25.07.2019 stands admitted. 5. Brief facts of the case are as under: 5.1 Assessee is a private limited company engaged in providing mortgage, technology and financial services. During the year under consideration, assessee filed its return of income on 30.11.2012 declaring total income of Rs. 55,45,47,990/- and book profit of Rs. 61,88,86,482/-. The return was selected for scrutiny and notice u/s. 143(2) was issued. The Ld.AO observed that the assessee had international transactions exceeding Rs. 50 crores and therefore the case was referred to the transfer pricing officer. 5.2 Upon receipt of reference u/s. 92CA, the Ld.TPO called upon assessee to file the details of international transactions. Assessee in response submitted as under: Page 10 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 5.3 The Ld.TPO observed that assessee used OP/OC and computed the PLI at 15.79% for SWD as well as ITES segment. It used TNMM as the most appropriate method to determine the arms length price of the transaction. In the TP documentation the assessee used 9 comparables for both the segments. The comparables selected by the assessee under SWD segment are as under: SI. No Name of the Company (M/s.) Wt. Avg (%) 1 Acropetal Technologies Ltd. 26.19 2 Akshay Software Technologies Ltd. -0.17 3 Cat Technologies Ltd. 8.68 4 Helios & Matheson Information Technology Ltd. 14.16 5 Maveric Systems Ltd. -0.60 6 R S Software (India) Ltd. 14.23 7 Si lverl i ne Technologies Ltd. 9.50 8 Cherrytec1ntel i solve Ltd. 21.38 9 Cigniti Technologies Ltd. (formerly known as Chakkilam Infotech Ltd. 7.63 Arithmetic mean 9.19% 5.4 Following were the comparables selected by assessee under ITES segment. Page 11 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 Sl.No. Name of the Company (M/s.) Wt. Avg (%) 1 Informed Technologies India Ltd. 14.00 2 Jindal Intellicom Ltd. 13.27 3 ICRA Online Ltd. 23.95 4 Cosmic Global Ltd. 22.27 5 Accentia Technologies Ltd. 24.99 6 Techprocess Solutions Ltd. 4.40 7 Wisec Global 0.15 8 Cameo Corporate Services 9.10 9 In House Productions Ltd. 13.56 Arithmetic mean 13.96% 5.5 As the margins of the comparables selected by the assessee was at 9.19% for SWD segment and 13.96% for ITES segment, it held the international transaction to be at arms length. 5.6 The Ld.TPO dissatisfied with the comparables selected by the assessee applied various filters and finalised following comparables under the two segments: SWD Segment: Sl. No. Company Name Adjusted Margins FY 2011-12 1 Datamatics Global Services Ltd. 22.83% 2 Genesys International Corpn. Ltd. 33.45% 3 ICRA Techno Analytics Ltd. 24.05% 4 Infosys Ltd. 49.67% 5 Larsen & Toubro Infotech Ltd. 33.52% 6 Mindtree Ltd. 22.79% 7 Persistent Systems Ltd. 34.89% 8 R S Software (India) Ltd. 25.59% 9 Sasken Communication Technologies Ltd. 21.24% 10 Spry Resources India Pvt Ltd. 19.01% AVERAGE 28.71% Page 12 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 ITES Segment: SI.No. Company Name Adjusted Margins FY 2011-12 1. Accentia Technologies Ltd. 8.19% 2. Universal Print Systems Ltd. 53.61% 3. Informed Technologies India Ltd. 5.50% 4. Infosys BPO Ltd. 32.22% 5. Jindal intellicom Ltd. -0.48% 6. Microgenetic Systems Ltd. 19.08% 7. TCS E-Serve Ltd. 61.23% 8. BNR Udyog Ltd. 46.31% 9. Excel Infoways Ltd. 34.12% 10. E4e Healthcare Services Pvt. Ltd. 18.08% Arithmetic mean 28.11% 5.7 The Ld.TPO thus proposed an adjustment under both the segments as follows. Sl.No. International transaction Adjustment proposed by TPO 1. SWD 7,07,03,150/- 2. ITES 32,31,53,009/- 5.8 The Ld.TPO adopted (–)ve working capital adjustment for software development services segment at (-)6.07% and under ITES segment it restricted the working capital adjustment at 0.32%. Upon receipt of the order u/s. 92CA, the Ld.AO passed the draft assessment order by making further disallowance, the details of which are as under: Sl. No. Particulars Amount (in Rs.) 1. Transfer pricing adjustments under section 92CA of the Act 39,38,56,159 Page 13 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 2. Disallowance of deduction under section 10AA 16,56,696 3. Disallowance under section 40(a)(i) 1,48,09,404 4. Belated remittances of PF / ESI / LWF 1,26,71,028 5.9 The assessee filed appeal before the Ld.CIT(A), against the assessment order passed u/s. 143(3) r.w.s. 144C on 31.03.2016, post the draft assessment order. The Ld.CIT(A) after considering various submissions by the assessee rejected the objections in respect of various comparables, that was selected. The Ld.CIT(A) did not appreciate the submissions of the assessee in respect of working capital adjustment, under both the segments. He also confirmed the additions made by the Ld.AO in respect of corporate tax issues. 5.10. Against the order passed by the Ld.CIT(A), the assessee filed present appeal before this Tribunal. 6. At the outset, the Ld.AR submitted, vide Notes to the arguments filed during the course of hearing, that the effective grounds of appeal that the assessee wish to argue are as under: The Additional Grounds of Appeal filed by the assessee on 26.7.2019. Ground Nos. 7.1 & 7.  Exclusion of Companies - SWD Segment - Ground No. 8.1  Exclusion of Companies - SWD Segment - Additional Ground No. 8.3  Exclusion of Companies - ITES Segment - Ground No. 9.2  Inclusion of Companies - ITES Segment - Additional Ground No. 9.3  Negative Working Capital - Additional Ground No. 7.1  Deduction under Sec. 10AA - Ground No. 11  Disallowance of Software Expenses under Sec. 40(a)(i) Ground No. 12 7. Based on the above submissions of the assessee, we restrict our opinion in respect of the above grounds. All other grounds that has not been argued by the Ld.AR are dismissed as not pressed. 8. Ground no. 7 – The Ld.AR submitted that ground no. 7 as well as Ground no. 7.1 raised by the assessee in application dated Page 14 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 26.07.2019 is in respect of the working capital adjustment that is not computed in accordance with law. 8.1 It is submitted that, the assessee is a captive unit, that provides services to its AE. The Ld.AR submitted that, the assessee is reimbursed on cost plus markup, and assumes minimal risk associated with the business. He thus submitted that (-)ve working capital, therefore cannot be computed under the SWD services segment, and that, the working capital on actual has to be granted to the assessee, in order to eliminate material differences, if any, with that of the comparables. In support of this argument, he placed reliance on the decision of Coordinate Bench of this Tribunal in case of e4e Business Solutions India Pvt. Ltd. in IT(TP)A No. 2900/Bang/2018 by order dated 08.12.2020. 8.2 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. 8.3 We have perused the submissions advanced by both sides in the light of records placed before us. 8.4 We note that, Working Capital Adjustment has not been correctly computed by the Ld.TPO, under both the segments. It is necessary that while comparing assessee with that of similar companies, adjustment are intended to iron out any differences like inventories, receivables, payables etc. Hence as observed by Coordinate Bench of this Tribunal, in e4e Business Solutions India Pvt. Ltd. (supra), working capital positions affects the additional cost incurred by any business and therefore the adjustment seeks to adjust for the differences in time value of money between the tested parties and the comparables. Page 15 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 8.5 It is also been brought to the notice that Coordinate Bench of this Tribunal in case of Quest Global Engineering Services (P) Ltd. vs. ACIT reported in (2022) 139 taxmann.com 262 dealt with similar situation and deleted (-)ve Working Capital Adjustment. The reasoning for deleting the (-)ve Working Capital Adjustment as observed by this Tribunal was that, in determining ALP under TNMM, the correct approach would be to look at cost incurred by the assessee only and should not impute any additional cost as done by the Ld.TPO which enhances the ALP artificially. Hon’ble Tribunal further in e4e Business Solutions India Pvt. Ltd. (supra) observed as under: “14. We find that the facts of the Assessee's case are similar to that of the case of the Bangalore ITAT in the case of M/S.Software AG Bangalore Technologies Pvt.Ltd. and therefore we are inclined to delete the negative working capital adjustment. In determining ALP under TNMM, the correct approach would be to look at the costs incurred by the assessee only and should not impute any additional cost as done by TPO, which indirectly enhances the ALP artificially. The contrary view expressed in decision cited by the learned DR takes the view that Working capital adjustment is required in all cases as any credit extended to customers will result in cash locked up and will result in the assessee borrowing money from the banks and incur additional cost towards interest on these borrowings which cost will have effect on the price charged. It is the reasoning in these decisions that under TNM method that every ingredient of profit margins of comparable companies are analysed, whether it is positive or negative. The decision proceeds on the basis of effect on price owing to working capital requirement. We are of the view that working capital adjustment itself is computed on the basis of outstanding current assets and liabilities at the year end. It means that other things being equal, an entity having higher working capital will incur more interest cost which will reduce profitability. Hence no importance shall be given to pricing aspect. Since the assessee does not have any working capital risk, the question of negative working capital does not arise.” Page 16 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 8.6 We therefore respectfully following the above view, direct the Ld.TPO to delete the (-)ve Working Capital Adjustment computed under the software development segment. 8.7 In respect of the Working Capital Adjustment computed under ITES segment, we direct the Ld.TPO to compute the working capital on actuals. Assessee is directed to provide all necessary details for both the segments in order to compute the Working Capital Adjustment on actuals by the Ld.TPO. Accordingly ground no. 7 and additional Ground no. 7.1 raised by assessee stands allowed. 9. Ground nos. 8 & 9 are in respect of certain comparables sought by assessee to be excluded under the ITES as well as SWD segment. Before going into the comparability analysis, it is sine qua non to understand the functions performed, assets owned and risks assumed by assessee under the segment. 9.1 The Ld.CIT(A) in his order considered the FAR analysis as under: “The Appellant wishes to submit that a detailed TP Report as required under Rule 10D of the Income Tax Rules, 1962 ("the Rules") was maintained by the Appellant and was filed before the learned transfer pricing officer ("TP0") 16 April 2015. Functional Assets and Risks ("FAR") profile of the Appellant Based on the FAR analysis provided in the TP Report, it is evident that the Appellant operates as a services provider to its AEs assuming low risks relating to carrying out its operations with respect to the software development services and ITeS. Accordingly, the Appellant was characterised as a low risk captive service provider rendering software services and ITeS as per the requirements of the AEs. The detailed FAR analysis is provided in Section 4, Page No 20-24 of the TP Report for the year ended March 31, 2012.” Page 17 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 Assets owned Tangible Assets The tangible assets employed by Altisource India are considered essential for running the business. Tangible assets employed by Altisource India are given below. Tangible Assets Employed by Altisource India Sl.No. Name of Tangible Assets 1 Computer hardware 2 Leasehold improvements 3 Furniture & fixtures 4 Office equipments 5 Electrical equipments Intangible Assets Altisource India does not own any non-routine intangibles and accordingly does not own trade secrets or undertake research and development activities on its account that would lead to the development of non-routine intangibles. Assessee has submitted that, it does not own any non-routine intangibles and does not own any trade secrets or undertake any research and development activities on this account that would lead to the development of non-routine intangibles under ITES segment, it is submitted that it owns the regular business assets like computer hardware, furniture, fixtures etc. Risks assumed It is submitted that assessee under both the segments is a risk mitigated company and except for foreign exchange fluctuation risk, service liability risk (ITES segment), it does not bear any significant risk in rendering the services to its AE. Page 18 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 Characterisation Assessee being a capital service provider that assumes minimal risk associated the business carried under both the segments. Based on the above, we shall analyse the comparables sought for inclusion and exclusion by the assessee. 9.2 Ground no. 8.1 – Assessee seeks exclusion on following comparables under SWD services segment. a) Larsen & Toubro Infotech Ltd. b) Persistent Systems Ltd. In the additional ground raised by assessee following comparables are sought for exclusion. 9.3 Further assessee was inclined to seek exclusion of only two comparables, that are alleged for exclusion in the Additional ground 8.3 which are as under: a) Genesys International Services Ltd. b) Infosys Ltd. 9.4 The Ld.AR submitted that the comparability of all the above four comparables sought for exclusion were considered by Coordinate Bench of this Tribunal in case of Agilis Information Technologies India (P.) Ltd. vs. ACIT reported in [2018] 89 taxmann.com 440 (Delhi-Trib.) which are eventually followed by another bench of this Tribunal in case of CGI Information Systems & Management Consultants (P.) Ltd. vs. ACIT reported in [2018] 94 taxmann.com 97 (Bangalore-Trib.) for A.Ys. 2010-11 and 2012-13. It is submitted that the Ld.TPO chose similar set of comparables in case of Agilis Information Technologies India (P.) Ltd. vs. ACIT (supra). Page 19 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 9.5 The Ld.AR submitted that the functions of assessee in case of Agilis Information Technologies India (P.) Ltd. and that of CGI Information Systems & Management Consultants (P.) Ltd. (supra) are identical in as much as they are capital service provider like assessee before us, rendering exclusive services under SWD and ITES segment to its AE. 9.6 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. 9.7 We have perused the submissions advanced by both sides in the light of records placed before us. 9.8 We note that Coordinate Bench of this Tribunal in case of CGI Information Systems & Management Consultants (P.) Ltd. (supra) for A.Y. 2012-13, excluded the above comparables by observing as under: “29. We have considered the rival submissions. In the case of Agilis Information Technologies India (P.) Ltd. (supra), this Tribunal considered the comparability of the 3 companies which the Assessee seeks to exclude from the final list of comparable companies chosen by the TPO. The functional profile of me Assessee and that of the Assessee in the case of Agilis Information Technologies India (P.) Ltd. (supra), is identical inasmuch as the said company was also involved in providing SWD services to its AE and the TPO had chosen some comparable companies which were also chosen by the TPO in the case of the Assessee for the purpose of comparability. In the aforesaid decision the Tribunal held on the comparability of the 3 companies which the Assessee seeks to exclude as follows: (a) Infosys Ltd., was excluded from the list of comparable companies by following the decision of the Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies (P) Ltd. [2013] 36 taxmann.com 289/219 Taxman 26 (Delhi). The discussion is contained in paragraphs 4.5 to 4.7 of the Tribunal's order. The Tribunal accepted that Infosys Ltd. is a giant risk taking company and engaged in development and sale of software products and also owns intangible assets and therefore not comparable with a Page 20 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 software development service provider such as the Assessee in that case. (b) Larsent & Tourbro Infotech Ltd., was excluded from the list of comparable companies by relying on the decision of the Delhi Bench of ITAT in the case of Saxo India (P.) Ltd. v. Asstt. CIT [2016] 67 taxmann,com 155 (Delhi - Trib.). The discussion is contained in paragraphs 4.8 to 4.10 of the Tribunal's order. The Tribunal held that L & T Infotech Ltd., was a software product company and segmental information on SWD services was not available. The Tribunal also noticed that the appeal filed by the revenue against the tribunal's order was dismissed by the Hon'ble Delhi High Court in ITA No.682/2016. (c) Persistent Systems Ltd., was excluded from the list of comparable companies on the ground that this company was a software product company and segmental information on SWD services was not available. The Tribunal in coming to the above conclusion referred to the decision rendered by ITAT Delhi Bench in the case of Cash Edge India (P) Ltd. v. ITO ITA No.64/De1/2015 order dated 23.9.2015 and the decision of Hon'ble Delhi High Court in the case of Saxo India Pvt. Ltd. (supra). The findings in this regard are contained in Paragraphs 4.14 to 4.16 of its order.” 30. Respectfully following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of compariSon with the profit margins. In this regard we are also of the view that the plea of the learned DR for a remand of the issue to the DRP on the ground that the DRP has not given any reasons in its directions cannot be accepted. The DRP bas endorsed the view of the TPO in its directions and therefore the reasons given by the TPO should be regarded as the conclusions of the DRP. 31. The learned DR. next submitted that Genesys International Corporation Ltd., should be excluded from the list of comparable companies. The comparability of this company with the Assessee has been discussed by the TPO in page-11 of his order. The Assessee objected to inclusion of this company in the list of comparable companies for the reason that this company is functionally different and owns intangible assets which are peculiar Page 21 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 only when the Assessee owns software products. The objections of the Assessee are contained in its letter dated 22.12.2015 addressed to the TPO and in annexure-B to the said letter. The relevant portion of the objection is at pages 711-713 of the Assessee's paper book. According to the Assessee this company is engaged in providing Geographical Information Services comprising of Photogrammetry, Remote Sensing, Cartography, Data Conversion, state of the art terrestrial and 3D geocontent including location based and other computer based related services. Pagc-38 of the Annual report 2012 containing the above description was brought to the notice of the TPO, Attention of the TPO was invited to the directors report to the shareholders at page ii of the annual report 2012, wherein the Directors have informed the shareholders that the company continued in its journey, to be innovators and leaders in the fields of location based services related geoplatforms and advanced survey techniques. There is no segmental reporting because it is stated in the annual report that this company is only in one segment viz., GIS based services and therefore there is no requirement of segmental reporting. It was also submitted that this company owns substantial intangibles equivalent to 10.42% of its total turnover. 32. The TPO however has regarded this company as a comparable company by observing that this company develops software for mapping and geospatial services and operates a few development centres in India. The company is predominantly into software development services. The intangibles in the possession of the company are only the GIS database which is only depreciation. It does not add significant value to the company. 33. The objections as put forth before the TPO were reiterated before the DRP. The DRP in paragraphs 6.2.2 & 6.2.3 of its directions dealt with this issue as follows: "6.2.2 The functions of the Assessee company have been examined in detail. A financial product on which the settlement system of bank runs is a real time system. It is very complex. Any bug or problem in it can crash the entire banking system of several nations. The Assessee's claim of providing only basic software services is rejected. 6.2.3 The Panel holds that the software for financial product is much more complex than a geospatial software. Therefore, the panel holds that the Genesys is a valid comparable." Page 22 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 34. The learned counsel for the Assessee submitted that the DRP has completely proceeded on wrong facts which does not either emanate from the order of the TPO or the submissions of the Assessee. He reiterated submissions made before the TPO and DRP. The learned OR relied on the order of the DRP/TPO. 35. We have given a careful consideration to the rival submissions. It is clear from the material brought to the notice of the TPO by the Assessee that this: company renders mapping and geospatial services. In rendering such services it develops software. But that does not mean that this company is in the business of software development. The business profile of this company as per the annual report does not show that this company is into software development service. The only line of business that this company carries on is rendering GIS based services and this is clear from the annual report which specifies that since the company carries on only one line of business viz., GIS based services there is no need to give any segmental results. In the circumstances, we are of the view that there is no basis for the TPO to conclude that this company is predominantly into software-development services. The presence of intangible assets is indicative of the fact that this company is not in software development services business. The TPO has overlooked this aspect and proceeded on the basis that the presence of intangible assets would not be significant. Rule 10B(2) of the Income Tax Rules, 1962 (Rules) specifically provides that for the purposes of sub-rule (1) of Rule 10B, the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:— a) the specific characteristics of the property transferred or services provided in either transaction; b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; In the given facts and circumstances, we are of the view that Genesys International Corporation Ltd., cannot be considered as a comparable company and the said company should be excluded from the final list of comparable companies. We hold accordingly.” 9.9 Nothing contrary has been brought to our notice by the Ld.DR in order to deviate from the above view. Respectfully following the same, we direct the Ld.TPO to exclude the following comparables. Page 23 of 26 IT(TP)A Nos. 162 & 164/Bang/2018  Genesys International Services Ltd.  Infosys Ltd.  Larsen & Toubro Infotech Ltd.  Persistent Systems Ltd. 9.10 Ground no. 9.2 raised by assessee is in respect of exclusion of following comparables under ITES segment.  Infosys BPO Ltd.  Excel Infoways Ltd. 9.11 The Ld.AR further submitted that Coordinate Bench of this Tribunal in case of CGI Information Systems & Management Consultants (P.) Ltd. (supra) has excluded the above comparables. Under similar circumstances, the Ld.DR relied on orders passed by Ld.CIT(A). 9.12 We have perused the submissions advanced by both sides in the light of records placed before us. 9.13 We note that Coordinate Bench of this Tribunal in case of CGI Information Systems & Management Consultants (P.) Ltd. (supra) observed as under: “45. We have considered the rival submissions. In the case of Baxter (I) (P) Ltd., (supra) the Delhi ITAT Bench considered comparability of the aforesaid three companies with a company engaged in providing ITES such as the Assessee. The functional profile of the Assessee and the Assessee in the case of Baxter (I) (P.) Ltd. (supra) are identical inasmuch as 7 out of the 10 companies chosen by the TPO in the case of the Assessee were chosen as comparable in the case of Baxter (I) (P.) Ltd. (supra). The Tribunal held on the comparability of the three companies Infosys BPO Ltd., TCS E-service Ltd. and Excel Infoway Ltd., as follows: (i) In paragraph 23 of its order the Tribunal held that Infosys BPO Ltd., is not comparable with a company providing ITES because of brand value and extraordinary events in the previous year relevant to AY 2012-13 viz., Page 24 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 acquisition of an Australia based company which had effect on its profits. (ii) In paragraphs 24 & 25 of its order the Tribunal held Excel Infoway Ltd., as not comparable because of consistent diminishing revenue. The figures of diminution revenue are given in paragraph 24 of its order. (iii) In paragraphs 21 & 22 of its order the Tribunal held that Excel Infoway Ltd., was liable to be excluded because it was also engaged in the business of software testing, Verification and validation of software at the time of implementation and data centre management activities.” 9.14 Nothing contrary has been brought in by the revenue in order to deviate from the above view. Respectfully following the same, we direct the Ld.TPO to excluded Infosys BPO Ltd. and Excel Infoways Ltd. from the final list of comparables. 10. Ground no. 11 is in respect of recomputation of deduction u/s. 10AA of the Act by reducing telecommunication expenses from the export turnover. Both sides submitted that this issue is no longer resintegra in lieu of the decision of Hon’ble Supreme Court in case of HCL Technologies Ltd. reported in (2018) 93 taxmann.com 33. 10.1 Accordingly, we direct the Ld.AO / TPO to compute the deduction u/s. 10AA of the Act in accordance with the principles laid down by Hon’ble Supreme Court in case of HCL Technologies Ltd.(supra). Accordingly this ground raised by assessee stands allowed. 11. Ground no. 12 is raised by assessee in respect of the disallowance of software expenses u/s. 40(a)(i) of the Act. The Ld.AR submitted that during the year under consideration, the assessee debited sum of Rs. 1,48,09,404 towards software expenses paid to non-residents. The Ld.AO disallowed the above Page 25 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 expenses under section 40(a) (i) of the Act for non-deduction of tax. The Ld.AO held that the payments made by the assessee were towards right to use, and the same would be classified as ‘royalty’, both under the Act and under the respective tax treaties of the payee's. 11.1 The Ld.AO disallowed the expenses by relying on the decision of Hon'ble Karnataka High Court in case of Samsung Electronics Co. Ltd. reported in (2011) 203 taxman 477. The Ld.AR submitted that this decision has been reversed by Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. reported in [2021] 125 taxmann.com 42 (SC), we direct the Ld.AO/TPO to verify the invoices raised against which the payments were made by assessee in the light of principles laid down by Hon’ble Supreme Court in the above referred case. The Ld.AO is directed to consider the claim in accordance with law by granting appropriate opportunity of being heard to assessee. Accordingly this ground raised by assessee stands allowed for statistical purposes. 12. Ground nos. 13-14 are consequential in nature and therefore do not require adjudication. Revenue’s appeal: 13. Ground nos. 1 to 6 are general in nature and assessee has not pressed on various issues in respect of the filters applied we do not intend to adjudicate these grounds. 14. Ground no. 7 raised by assessee is on account of belated remittance of PF/ESI that was deleted by the Ld.CIT(A) by following the decision of Hon'ble Karnataka High Court in case of CIT vs. Sabari Enterprises reported in [2008] 298 ITR 141 and in the case of Page 26 of 26 IT(TP)A Nos. 162 & 164/Bang/2018 Spectrum Consultants India (P.) Ltd. reported in [2013] 34 taxmann.com 20 (Karnataka HC). 15. Subsequently, we note that Hon'ble Karnataka High Court in case of ESSAE TERAOKA PVT. LTD. vs. DCIT reported in (2014) 366 ITR 408 is followed same decision and deleted the disallowance made. 16. We do not find any infirmity in the view taken by Ld.CIT(A) and accordingly this ground raised by revenue stands dismissed. 17. Ground nos. 8 & 9 are general in nature and therefore do not require adjudication. In the result, the appeal filed by assessee stands allowed as indicated hereinabove and appeal filed by revenue stands dismissed. Order pronounced in open court on 29 th June, 2022. Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 29 th June, 2022. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore