Carl Zeiss India (Bangalore) Private Limited, Bengaluru V. Deputy Commissioner of Income Tax, Circle-2(1)(1), Bangalore

ITA 192/BANG/2022

AI Insights

The case involves M/s. Carl Zeiss India (Bangalore) Pvt. Ltd., which appealed against the assessment order passed by the Deputy Commissioner of Income Tax, Bengaluru, concerning the assessment year 2017-18. The primary contention revolved around the adjustments made to the arm's length price for international transactions with associated enterprises, as determined by the Transfer Pricing Officer (TPO) and upheld by the Dispute Resolution Panel (DRP). The Tribunal examined various grounds related to the selection of comparables and the treatment of provisions for bad and doubtful debts in the context of transfer pricing regulations under the Income-tax Act, 1961.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 124507 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 2 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-06-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 11-04-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 24-03-2022
• Other Referred Cases: National Thermal Power Co. Ltd. Vs. CIT, Jute Corporation of India Ltd. Vs. CIT, Sprinklr India Pvt. Ltd. vs. DCIT, ACI Worldwide Solutions Pvt. Ltd. vs. DCIT, Galax E Solutions India Pvt. Ltd. vs. DCIT, Xchanging Solutions Ltd. vs. ACIT, Borqs Software Solutions Pvt. Ltd. vs. DCIT, Microsoft Research Lab India Pvt. Ltd. vs. DCIT, Hewlett Packard (India) Software Operation Pvt. Ltd. vs. DCIT, Red Hat India Pvt. Ltd. vs. DCIT, Brocade Communications Systems (P) Ltd. vs. DCIT, Maxim India Integrated Circuit Design Pvt. Ltd. vs. DCIT, Telcordia Technologies India Pvt. Ltd. vs. DCIT, Thyssen Krupp Industries India Pvt. Ltd. vs. DCIT, Subex Ltd. vs. DCIT, Citrix R&D India Pvt. Ltd. vs. DCIT, Cypress Semiconductor Technology India Pvt. Ltd. vs. DCIT, M/s. Arm Embedded Technologies Pvt. Ltd. vs. DCIT, M/s. SAP Labs India Pvt Ltd vs. DCIT, M/s. Advice America Software Development Center Pvt. Ltd. vs. DCIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Question of law; Bad and doubtful debts
• Section: 154; 143(3); 142(1); 274; 143(2); 43; 48; 73; 72; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER IT(TP)A No. 192/Bang/2022 Assessment Year : 2017-18 M/s. Carl Zeiss India (Bangalore) Pvt. Ltd., Plot No. 3, Jigani Link Road, Bommasandra Industrial Area, Bengaluru – 560 099. PAN: AADCC6152H Vs. The Deputy Commissioner of Income Tax, Circle 2 (1)(1), Bengaluru. APPELLANT RESPONDENT Assessee by : Shri Nageshwar Rao, Advocate Revenue by : Ms. Neera Malhotra, CIT-DR Date of Hearing : 12-04-2023 Date of Pronouncement : 16-06-2023 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by the assessee against assessment order dated 25.01.2022 passed by NFAC, Delhi for A.Y. 2017-18 on following grounds of appeal: “Based on the facts and circumstances of the case and in law, Carl Zeiss India (Bangalore) Private Limited (hereinafter referred to as "Carl Zeiss India" or "the Appellant"), respectfully craves leave to prefer an appeal against the order passed by the Additional / Joint / Deputy / Assistant Commissioner of Income Tax/ Income- tax Officer, National Faceless Center, Delhi (hereinafter referred to as "Ld. Assessing Officer" or the "Ld. AO"), dated 25 January 2022 for the Assessment Year ("AY") Page 2 IT(TP)A No. 192/Bang/2022 2017-18, under section 143(3) read with section 144C(13) read with section 144B of the Income-tax Act, 1961 ("the Act") in pursuance of the directions issued by Dispute Resolution Panel (hereinafter referred to as the "Hon'ble DRP"), Bengaluru dated 29 December 2021 under section 144C(5) of the Act inter-alia on the following grounds which are without prejudice to each other: That on the facts and circumstances of the case and in law: General grounds 1. The impugned order of the Ld. AO passed pursuant to the order of the Transfer Pricing Officer – 1(1)(2), Bangalore ("Transfer Pricing Officer" or "Ld. TPO") and the directions issued by the Hon'ble DRP, to the extent prejudicial to the Appellant, is erroneous, bad in law, and contrary to the facts and circumstances of the case. Grounds relating to transfer pricing matters: 2. The Ld. AO has erred in passing the impugned order without following the directions of the DRP, which are binding on the Ld. AO, and accordingly not granting appropriate relief to the Appellant. 3. The Ld. AO /TPO / DRP erred in making an addition of INR 19,65,61,201 to the total income of the Appellant on account of adjustment in the arm's length price for international transactions entered by the Appellant with its associated enterprise. 4. Adjustment on account of re-determination of arm's length price for the services rendered by the Appellant to its Associated Enterprises ("AEs") 4.1 The Ld. AO /TPO / DRP erred, in law and in facts. by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ("the Rules") and in conducting a fresh economic analysis for the determination of ALP in connection with the impugned international transactions and holding that the Appellant's international transactions are not at arm's length. 4.2 The Ld. AO /TPO / DRP erred, in law and in facts, by incorrectly applying the following quantitative and qualitative filters: a) Rejecting comparables companies having different accounting year/ financial year (i.e. companies having Page 3 IT(TP)A No. 192/Bang/2022 accounting year/ financial year other than March 31 or companies whose financial statements were for a period other than 12 months). b) Applying only the lower turnover filter of less than INR 1 crore as a comparability criterion and not applying a higher threshold limit for turnover filter. c) Applying incorrect modified related party transaction ("RPT") filter to reject companies, which included application of the following filters separately: - An RPT filter for the revenue transactions only (RPT revenue greater than 25% of total revenue) - An RPT filter for the expense transactions only (RPT expenses greater than 25% of total expenses) d) Rejecting certain comparable companies using export earnings greater than 75% of the sales as a comparability criterion. e) Rejecting certain comparable companies using employee cost greater than 25% of the total operating revenues as a comparability criterion. f) Rejecting companies reporting loss in two out of three years as persistent loss makers. 4.3 The learned AO / TPO / DRP erred, in law and in facts. by rejecting certain functionally comparable companies based on unreasonable comparable criteria. 4.4 The learned AO / TPO / DRP erred, in law and in facts, by accepting certain functionally non-comparable companies based on unreasonable comparable criteria. 4.5 The Ld. AO /TPO / DRP erred, in law and in facts, by not making suitable adjustments to account for differences in the working capital position of the Appellant vis-a-vis the comparable companies. thus acting against the principles laid down in the Rules. 4.6 The Ld. TPO/A0 have erred, in law and on facts and circumstances of the case. by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies. 4.7 Without prejudice to the above grounds, the Ld. AO TYPO / DRP erred, in law and in facts, by not N p restricting the value of transfer pricing adjustment to international transactions of the Appellant and thereby making adjustment to third party transactions as well which is against TP principles. Page 4 IT(TP)A No. 192/Bang/2022 Consequential grounds: 5. The Ld. AO have erred in initiating penal proceedings under section 274 read with section 270A of the Act. 6. The Ld. AO have erred in issuing a demand notice under section 156 of the Act. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add. alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.” 2. At the outset, the Ld.AR submitted that the assessee has filed applications seeking admission of additional grounds on 19.08.2022 and 17.02.2023. He submitted that specific comparables have been sought for inclusion / exclusion by way of these additional grounds and no new records need to be considered / verified in order to adjudicate them. The Ld.AR submitted that, the assessee while filing the original ground of appeal had not categorically mentioned the comparables, seeking inclusion / exclusion. He submitted that, these additional grounds may be admitted to render complete justice to the assessee. Following are the issues raised by the assessee in the applications dated 19.08.2022 and 17.02.2023 Page 5 IT(TP)A No. 192/Bang/2022 Addl. Grounds of appeal dated 19.08.2022 Page 6 IT(TP)A No. 192/Bang/2022 Addl. Grounds of appeal dated 17.02.2023 2.1 It has been submitted that no new facts needs to be considered in order to dispose of the additional grounds raised by the assessee. It is submitted that, the additional grounds raised do not require verification of any new facts. The Ld.AR, thus prayed for the admission of additional grounds so raised by assessee. 2.2 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. 2.3 We have perused the submissions advanced by both sides in light of records placed before us. We note that the additional grounds are directly connected with the main issue of transfer pricing additions and no new facts needs to be investigated for adjudicating the same. Considering the submissions and respectfully following the decisions of Hon’ble Supreme Court in case of National Thermal Page 7 IT(TP)A No. 192/Bang/2022 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 grounds raised by the assessee. Accordingly, the additional grounds raised by assessee vide application dated 19.08.2022 and 17.02.2023 stands admitted. 3. The Ld.AR has also filed the following letter by way of email on the date of hearing wherein it submits that assessee seeks to argue only certain issues in the main grounds of appeal and few comparables in the Additional Grounds. The specific grounds that the assessee wishes to argue are as under: Page 8 IT(TP)A No. 192/Bang/2022 Page 9 IT(TP)A No. 192/Bang/2022 Page 10 IT(TP)A No. 192/Bang/2022 4. Brief facts of the case are as under: 4.1 The assessee is a Company said to be engaged in the business of manufacturing optical products and providing after- sales support for Carl Zeiss products in India. The return of income was filed by assessee declaring total income of Rs.51,79,33,480/. The case was selected for scrutiny under CASS and accordingly, notice u/s 143(2) & 142(1) was issued to the assessee. In response to the notices u/s 143(2) and 142(1), the assessee e- filed the requisite submissions on ITBA incorporating the details called for from time to time. During the course of assessment proceedings, the Ld.TPO found that the assessee had entered into international transaction with Associated Enterprise. Accordingly reference was made to the TPO (Transfer Pricing) u/s 92CA(1) of the Act for the determination of Arms Length Price (ALP) for AY 2017-18. 4.2 The Ld.TPO on receipt of the reference called upon assessee to file requisite details in form 3CEB. The Ld.TPO noted that, the assessee provides after sales support services for Carl Zeiss products in India. The company caters to both domestic and international market. In addition Carl Zeiss India also provides software development services to its Group Companies. The Ld.TPO noted that the international transactions as disclosed by the assessee in Form 3CEB are as under: Particulars Amount (Paid) Amount (Recd) Purchase of Raw Materials 52,68,67,776 Sale of Finished / Manufactured Goods 53,84,08,441 Page 11 IT(TP)A No. 192/Bang/2022 Sale of Traded Goods / Manufactured Goods 9,65,384 Sale of Traded Goods 85,78,786 Purchase of Traded Goods 168,45,93,438 Purchase of Fixed Assets 1,55,74,868 Royalty 2,35,06,551 Income from Services 48,92,09,994 Commission Income 83,36,80,851 Borrowing 3,00,67,959 Software Expenses 10,44,72,060 Supporting Services 1,24,51,208 Reimbursement of expenses 1,37,85,839 Recovery of expenses 2,71,99,466 Total 241,13,19,699 189,80,42,922 4.3 The Ld.TPO noted that under SWD segment assessee computed its margin to be 13%, for manufacturing segment it computed its margin at 6.17% and for distribution and sales support services, the margin was computed at 9.44%. The margin was computed for all three segments by using PLI as OP/OC. A. SWD segment: The Ld.TPO noted that assessee considered 16 comparables with a median of 8.51%, the details of which are as under: S.No. Name of the company Weighted average of operating profits on operating cost (%) 1 Kals Information Systems Limited 2.37% 2 Sagarsoft India Limited 3.81% 3 Sankhya Infotech Limited 4.12% Page 12 IT(TP)A No. 192/Bang/2022 (Consolidated Segmental) 4 Maveric Systems Limited 4.88% 5 Evoke Technologies Private Limited 5.29% 6 Sasken Communication Technologies Limited (Segmental) 6.55% 7 RS Software Limitetd 7.58% 8 CG-Vak Software and Exports Limited 8.32% 9 Harbinger Systems Private Limitetd 8.71% 10 Jindal Intellicom Private Limited (Segmental) 11.54% 11 Infomile Technologies Limitetd 12.38% 12 SQS India BFSI Limited (Consolidated) 18.67% 13 Puresoftware Private Limited 19.23% 14 Larsen & Toubro Infotech Limited 21.50% 15 R Systems International Limited (Segmental) 22.44% 16 Tata Elxsi Limited 23.88% Data place Range OP/OC (%) 6 35 th percentile 6.55% 8 and 9 Median 8.51% 11 65 th percentile 12.38% B. Manufacturing segment: The Ld.TPO noted that assessee had selected 8 comparables with a median of 8.30%, the details of which are as under: Page 13 IT(TP)A No. 192/Bang/2022 C. Distribution and sales support services segment: The Ld.TPO noted that assessee had selected 8 comparables with a margin of 6.03% and thus treated its transaction to be at arms length, the details of which are as under: 4.4 Disagreeing with the search process carried out by the assessee under all 3 segments, the Ld.AO conducted fresh search and shortlisted the following set of comparables under all the 3 segments as under: A. SWD Sl. No. Company Name F.Year wise OP/OC (%) Wt. Average 2016-17 2015-16 2014-15 1 Rheal Software Pvt. Ltd. -12.27 3.28 3.01 -1.85 2 Kals Information Systems Ltd 1.37 3.97 5.77 3.62 3 Infomile Technologies Ltd. 10.22 9.91 11.12 10.43 4 Harbinger Systems Pvt Ltd 12.28 12.69 17.18 14.1 5 C G-V A K Software & Exports Ltd. 11.65 16.95 17.3 15.09 6 Larsen & Toubro Infotech Ltd. 20.78 19.21 23.98 21.14 7 Great Software Laboratory Pvt. Ltd. 27.18 20.24 10.67 21.24 8 Mindtree Ltd. 20.12 26.11 27.51 24.17 9 R Systems International Ltd. 16.74 31.05 26.44 24.40 Page 14 IT(TP)A No. 192/Bang/2022 10 Persistent Systems Ltd. 25.05 23.95 30.39 26.17 11 Tata Elxsi Ltd. 24.90 29.13 24.45 26.19 12 Infobeans Technologies Ltd. 23.89 34.98 20.46 26.44 13 Aptus Software Labs Pvt. Ltd. 24.83 27.67 26.72 26.46 14 Nihilent Ltd. 34.26 24.46 30.80 29.82 16 OFS Technologies Ltd. 19.88 26.47 67.57 29.93 15 Cygnet Infotech Pvt. Ltd. 25.24 30.45 36.61 30.19 17 Infosys Ltd. 38.79 38.30 41.40 39.50 18 Threesixty Logica Testing Services Pvt. Ltd. 36.63 48.46 42.02 41.94 19 Cybage Software Pvt. Ltd. 41.89 62.90 68.68 57.82 20 Consilient Technologies Pvt. Ltd. 54.85 71.82 69.51 65.14 35th Percentile 21.24 Median 26.18 65th Percentile 26.46 B. Manufacturing segment Page 15 IT(TP)A No. 192/Bang/2022 C. Distribution and sales support services segment 4.5 The Ld.TPO thus computed the proposed adjustment under all the 3 segments being the shortfall as under: Particulars Amount SWD Services 5,02,58,202 Trading segment 14,63,02,998 Manufacturing Segment 3,27,59,921 Total adjustment u/s 92CA 22,93,21,121 5. On receipt of the order u/s. 92CA, the Ld.AO passed the draft assessment order incorporating the proposed adjustment vide order dated 30.03.2021. On receipt of the draft assessment order, the assessee filed objections before the DRP. 5.1. The DRP after considering the various objections raised by the assessee directed to exclude following comparables under the trading segment on functional dissimilarities which are as under: a) Narang Medical Ltd. b) Kalelker Surgicals Pvt. Ltd. Page 16 IT(TP)A No. 192/Bang/2022 c) Biolitec India Pvt. Ltd. 5.2. The DRP directed the Ld.TPO to include Sagarsoft India Ltd. and Maveric Systems Ltd. under the SWD segment. In respect of comparable Aptus Software Labs Pvt. Ltd. and OFS Technologies Ltd., the DRP directed to verify the margin computation. 5.3. The Ld.AO on receipt of the DRP directions passed the impugned order by making addition in the hands of the assessee at Rs.19,65,61,201/-. 6. The Ld.AR submitted that, while passing the impugned order, the adjustment proposed by the Ld.TPO for manufacturing segment became Nil post DRP directions. The Ld.AR submitted that, the assessee filed rectification petition on 24.02.2022 as some of the directions of the DRP were not complied with, while passing the impugned order. He submitted that the said application u/s. 154 was disposed of by order dated 27.04.2022 according to which the total adjustment was reduced to Rs.4,34,70,681/-. It is also submitted that, the adjustment proposed under trading segment became Nil. 7. The Ld.AR submitted that, thus before this Tribunal, the assessee is contesting the adjustment proposed under SWD segment. As reproduced hereinabove, only grounds contested by the assessee is in respect of Ground no. 2 in part, pertaining to SWD segment. Ground nos. 4.3 & 4.4 and additional ground raised in application dated 19.08.2022 being 1(a), 1(b) and additional ground no. 2 raised in application dated 17.02.2023. It is the submission of the Ld.AR that the remaining grounds becomes either general in nature or academic at this stage and Page 17 IT(TP)A No. 192/Bang/2022 may be left open to be contested in an appropriate circumstances. 7.1. Before we carry out the comparability analysis, it is sinequa non to understand the functions performed, assets owned and risks assumed by assessee. Page 18 IT(TP)A No. 192/Bang/2022 Page 19 IT(TP)A No. 192/Bang/2022 Page 20 IT(TP)A No. 192/Bang/2022 Page 21 IT(TP)A No. 192/Bang/2022 Page 22 IT(TP)A No. 192/Bang/2022 7.2. Thus the assessee has been characterised to be a contract service provider to its AE with absolutely minimal risk undertaken in the rendering of services. 8. We note that Ground nos. 4.1-4.4 are to be disposed of along with Additional Ground nos. 1(a) and 1(b) in the application dated 19.08.2022. He submitted that assessee is seeking exclusion of only six comparables in Additional Ground no.1(a) which are as under: a) Larsen & Toubro Infotech Ltd. b) Mindtree Ltd. c) Persistent Systems Ltd. d) Nihilent Ltd. e) OFS Technologies Ltd. f) Infosys Ltd. 8.1. The Ld.AR submitted that these comparables do not satisfy the turnover filter of 1 to 200 crores as for the year under consideration as the turnover exceeds Rs. 200 crores. The Ld.AR has relied on the following decisions in support of its contentions. Page 23 IT(TP)A No. 192/Bang/2022 a) Sprinklr India Pvt. Ltd. vs. DCIT in IT(TP)A No. 250/Bang/2022 for A.Y. 2017-18 b) ACI Worldwide Solutions Pvt. Ltd. in IT(TP)A No. 106/Bang/2022 for A.Y. 2017-18 c) Galax E Solutions India Pvt. Ltd. in IT(TP)A No. 389/Bang/2021 for A.Y. 2016-17 d) Xchanging Solutions Ltd. vs. ACIT in IT(TP)A No. 294/Bang/2021 for A.Y. 2016-17 e) Xchanging Solutions Ltd. vs. DCIT in IT(TP)A No. 3358/Bang/2018 for A.Y. 2014-15 f) Borqs Software Solutions Pvt. Ltd. in IT(TP)A No. 310/Bang/2021 for A.Y. 2016-17 8.2. He also submitted that all these comparables are also not functionally similar with that of the assessee as these are full- fledged entrepreneurs in the field of software development service segment and delivers a gamet of services to its clients for which there is no segmental reporting available. In respect of functional dissimilarities of these comparables with that of assessee, the Ld.AR relied on the following decisions. a) Yahoo Software Development India Pvt. Ltd. vs. JCIT in IT(TP)A No. 178/Bang/2022 for A.Y. 2017-18 by order dated 11.07.2022 b) GlobalLogic India Pvt. Ltd. vs. DCIT in ITA No. 868/Delhi/2021 for A.Y. 2016-17 c) ADP Pvt. Ltd. vs. DCIT in ITA Nos. 227 & 228/H/2021 for A.Y. 2016-17 d) SanDisk India Device Design Centre Pvt. Ltd. vs. JCIT in IT(TP)A No. 288/Bang/2021 for A.Y. 2016-17 Page 24 IT(TP)A No. 192/Bang/2022 e) Citrix R&D India Pvt. Ltd. vs. DCIT in IT(TP)A No. 2428/Bang/2019 for A.Y. 2015-16 f) Cypress Semiconductor Technology India Pvt. Ltd. in IT(TP)A No. 2427/Bang/2019 for A.Y. 2015-16 g) M/s. Microsoft Research Lab India Pvt. Ltd. in IT(TP)A No. 3131/Bang/2018 for A.Y. 2014-15 h) Subex Ltd. vs. DCIT in IT(TP)A No. 282/Bang/2022 for A.Y. 2017-18 by order dated 30.11.2022 i) Infor (India) Pvt. Ltd. vs. DCIT in IT(TP)A No. 198/Hyd/2021 for A.Y. 2016-17 j) Optiva India Technologies Pvt. Ltd. in ITA No. 194/PUN/2021 for A.Y. 2016-17 k) M/s. Hewlett Packard (India) Software Operation Pvt. Ltd. in IT(TP)A No. 2866/Bang/2017 for A.Y. 2013-14 l) Arm Embedded Technologies Pvt. Ltd. in IT(TP)A No. 3374/Bang/2018 for A.Y. 2014-15 m) Red Hat India Pvt. Ltd. in ITA No. 1379/M/2021 for A.Y. 2016-17 8.3. On the contrary, the Ld.DR placed reliance on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 8.4 Admittedly, the assessee is a captive service provider to its AE. The FAR analysis of assessee establishes that it does not undertake any risk in terms of projects undertaken or services rendered. The functions carried out by the assessee are strictly on the basis of directions from its AE and the payment by the AE to the assessee is on cost+markup. The comparables sought by Page 25 IT(TP)A No. 192/Bang/2022 assessee herein for exclusion carry out diverse activities and has significant brand values. These companies are owning huge intangibles and also undertakes its own R&D which is not the case of the assessee before us. The decisions hereinabove relied by the assessee on functional dissimilarities goes to establish that these are functionally not similar with that of the assessee. The relevant extract of the observation by Coordinate Bench of this Tribunal in case of Yahoo Software Development India Pvt. Ltd. vs. JCIT (supra) in respect of Larsen & Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd. and Infosys Ltd. is as under: “4. The Ld.AR submitted that Coordinate Bench of this Tribunal in assessee’s own case in IT(TP)A No. 2657/Bang/2018 & IT(TP)A No. 2365/Bang/2019 for A.Ys. 2014-15 & 2015-16 by order dated 28.02.2020 excluded Infosys Ltd., Mindtree Ltd., L&T Infotech Ltd. and Persistent Systems Ltd. by observing as under: “32. At the time of hearing, the ld. counsel for the assessee has prayed for exclusion of 4 comparable companies that remain after the order of the DRP viz., Persistent Systems Ltd., Infosys Ltd., Mindtree Ltd. and L&T Infotech Ltd. He brought to our notice that as far as Persistent Systems Ltd. is concerned, the reasoning given for excluding this company for AY 2014-15 will equally hold good for the present year as well. In this regard, our attention was drawn to page 601 of the assessee's PB wherein in the annual report of this company, Notes forming part of financial statement in Note (i) which gives the description of income from software services, there is a reference to revenue from licensing & software, which sufficiently indicates that the assessee is not a pure SWD services provider. It was also brought to our notice that the profit & loss account which is at page 596 read with Notes forming part of the financial statement at page 604 wherein the segmental reporting is not based on different segments and the statement presents a consolidated financial statement without any segmental reporting. This company Page 26 IT(TP)A No. 192/Bang/2022 has also significant RPT transaction of 25% on sales. He pointed out that the TPO & DRP on the application of RPT filter has not expressed any opinion. The ld. DR relied on the order of DRP wherein the DRP has made extensive reference to each of the objections regarding absence of segmental revenue in the accounts and has also noticed that the software products segment had an insignificant revenue and that the ownership of intangibles by the assessee has had no effect whatsoever. 33. We have considered the rival submissions. We find that on the question of application of RPT filter, the assessee had made the following submission before the DRP:- 4. Fails the Related Party Transaction to Sales filter applied by the learned TPO In the show- cause notice issued, the learned TPO has excluded companies for which the ratio of RPT to sales exceeds 25% during the current year i.e., during FY 2014-15. The relevant extract from the show-cause notice is reproduced below for ease of reference: e) Companies who have more than 25% related parry transactions of the sales were excluded. Companies having related party transactions of more than 25% are proposed to be excluded. A threshold of 25% is being applied following the provisions of Section 92A(2)(a) which provides a limit of 26% of the equity capital carrying voting rights for treating an enterprise as Associated Enterprise. if the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. Therefore, on a balancing note, 25% is a proper threshold limit for related party transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. The Hon'ble IT.AT has upheld the application of this filter by the TPO in its order in the case of M/s. Supporisoft India Pvt. Ltd for AY 2005-G6 in IT (TP)A 1372/B/11 & 20/2012 dated 28.03.2013 following its own decision in the case of M/s. Actis Advertisers Pvt. Ltd vide ITA No.5277/De1/2011 dated 12.10.2012. Page 27 IT(TP)A No. 192/Bang/2022 On perusal of the Annual Report of Persistent, we observe that the company has RPT in excess of 25% of the sales. The calculation of the same has been provided below for your ease of reference: RPT to Sales ratio for FY 2014-15 Particulars Amount (INR Million) Sale of services 2,410.02 Commission received 10.26 Purchase of software 1.49 Cost of technical professional 1,339.1 Commission paid on sales 111.79 Traveling and conveyance 19.27 Total related party transactions (A) 3,891.93 Total Sales (B) 12,424.98 RPT % of Sales (A/B) 31.32% From the above computation, it is clear that the controlled transactions of Persistent constitutes 31.32% of sales. Based on the above, it can be seen that Persistent fails the `RPT to sales ratio' filter applied by the learned TPO and should therefore not be considered as a comparable." 34. This argument has been addressed by the DRP in its order as follows:- "4.4.9 We note that the approach of the TPO in treatment of related party transaction into two sets, are for revenue transactions and other for expense transaction is logical and correct. We also note that the RPT filter was adopted by the TPO was with the above conditions and has adopted consistently. Hence, we do not find any infirmity the approach. Hence, we reject the assessee's plea. We hold that onsite expenses do not adversely affect comparability and hence, such plea is rejected." 35. Further, the assessee had also raised plea with regard to onsite revenue filter by pointing out that onsite revenue is substantial and therefore this company should not be regarded as a comparable company with a company which does not have any onsite revenue. In this regard, the ld. counsel for the assessee placed reliance on the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. v. DCIT, ITA No.1054/Bang/2011 for AY 2007-08 Page 28 IT(TP)A No. 192/Bang/2022 dated 23.11.2012 wherein this Tribunal took the following view:- "64. The next objection of the Assessee is that when the most appropriate method selected for determining ALP is the TNMM there is no reason as to why one should look at price difference in offshore software development and onsite software development. It is no doubt true that in TNMM it is only the margins in an uncontrolled transaction that is tested with reference to the controlled transaction but it is not possible to ignore the fact that pricing will have an effect on the margins obtained in a transaction. The argument that if pricing structure were to be considered as criteria, then it will have to be seen as to what is the pricing structure of all the comparable for various projects cannot be accepted because the TPO has not chosen any other onsite software service provider with a revenue composition of more than 75% from onsite software services as comparable. As rightly observed by the TPO, the pricing is different in onsite when compared to offshore operations. The further observations of the TPO that the reasons for the same lie in the fact that while in the case of OFFSHORE projects most of the costs are incurred in India; an ONSITE project has to be carried out abroad significantly increasing the employee cost and other costs. 65. The next objection of the Assessee is with regard to Assets employed. The companies, which predominantly generate revenues from onsite activity, do not have significant assets as most of the work is carried on the site of customer outside India. The argument that the TPO has himself observed that software service providers do not require much assets cannot be basis to accept the Assessee's plea. Those observations are made by the TPO in the context of application of turnover filter and have been quoted out of context by the Assessee. 66. The next argument of the Assessee is that TPO has held that margins are lower in onsite software services and that margin is not a criteria to select or reject a comparable under Rule I0B(2) of the I.T. Rules. We are of the view that this argument again ignores the fact that the approach of the TPO has been to highlight the fact that there can be no functional comparability, if the assets Page 29 IT(TP)A No. 192/Bang/2022 employed and risks assumed are taken into consideration. It is in that context the TPO has referred to the margins. 67. The companies who generate more than 75% of the export revenues from onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since, the entire operations of the tax payer are taking place offshore i.e. in India; it is but natural that it should be compared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model. As already stated the Assessee has limited its analysis only to functions but not to the assets, risks as well as prevailing market conditions in which both the buyer and seller of services located. Hence, the companies in which more than 75% of their export revenues come from onsite operations are to be excluded from the comparability study as they are not functioning in similar economic circumstances to that of the tax payer. Hence, it is held that this filter is appropriately applied by the TPO. 68. Admittedly the onsite revenue in the case of the following comparable companies identified by the Assessee was more than 75% of its export revenues viz., a) Visu International Ltd. b) Maars Software International Ltd. c) Akshay Software Technologies Ltd. d) VJIL Consulting Ltd. e) Synfosys Business Solutions Ltd. The above companies were therefore rightly not considered as comparable by the TPO. We hold accordingly." 36. It is seen that the TPO in coming to the conclusion that the onsite revenue filter is not applicable has placed reliance on the decision of the ITAT Mumbai Bench in the case of Capegemini as quoted in para 16 in para 14 of the TPO's order, but that decision does not deal with a case of onsite revenue filter and the decision was rendered on the facts of its own case. 37. On the issue of RPT filter, we notice that the TPO in para 16 has accepted that the RPT filter Page 30 IT(TP)A No. 192/Bang/2022 should be @ 25%. In the case of Persistent Systems Ltd., the RPT is at 31.32% as extracted in the earlier part of this order and therefore this company should be excluded by application of RPT filter. In view of the above, we do not wish to go into other grounds on which this company is sought to be excluded viz., that it is a product company and there is no segmental data between product and services segment, presence of onsite activity and the impact of extra-ordinary event of acquisition during the relevant previous year. Therefore, this company is directed to be excluded from the list of comparable company. 38. As far as L&T Infotech Ltd. is concerned, the ld. counsel for the assessee brought to our notice the decision of ITAT Delhi Bench in the case of Saxo India Pvt. Ltd. v. ACIT, ITA No.6148/Del/2015 for AY 2011- 12, order dated 5.2.2016, wherein the Tribunal took note of the fact that this company was also trading in software and owned insignificant intangible assets. The company was excluded from the list of comparable companies with reference to SWD services provider such as the assessee. The ld.Counsel pointed out that though this decision was rendered with reference to AY 2011-12, the same reasoning would apply to AY 2015-16 also and in this regard, he drew our attention to page 696 of assessee's PB, which gives the details of the revenue generated by this company without any segmental break-up. Our attention was also drawn to page 682 of PB which shows that there is substantial onsite revenue activity as well as cost incurred on onsite software development. We notice from page 676 of assessee's PB that this company as part of its operating profit in Schedule- O of profit & loss account contains expenditure for 'cost of bought out items for resale' and this is a significant part of the operating expenditure. When we see the revenue in Schedule M of the profit & loss account, there is no break-up of the revenue with regard to software services and software product. In our opinion, this distinction is enough to exclude this company from the list of comparable companies as held by the Hon'ble Delhi ITAT in the case of Saxo India Pvt. Ltd. (supra) which decision was also confirmed by the Hon'ble Delhi High Court. Page 31 IT(TP)A No. 192/Bang/2022 39. The next company which the assessee seeks to exclude is Infosys Ltd. As far as this company is concerned, it is seen that the following are the functional dissimilarities brought to our notice:- "Functionally dissimilar - owns intellectual properties, incurs significant R&D costs & onsite activity. - Engaged in diversified business activities. - Involved in development of software products in addition to software services. - Owns intellectual property rights. - Incurs significant research and development costs. - Carries out significant activities based on onsite business. - Owns products such as Finacle, Edge Verve and other product based solutions. Extra-ordinary event of merger with Infosys Consulting India Ltd. Segmental profit & loss account not available. Commands substantial brand value. 40. The DRP, however, has not thought it fit to exclude this company by observing that this company has substantial pre-dominant revenue from software services and the growth was not attributable to any brand value. Presence of onsite activity and the expenses on R&D have all been brushed aside. In our view, the difference pointed out by the ld. counsel for the assessee before us show that this company cannot be compared with that of the assessee basically because of its business model, presence of onsite revenue generation and other reasons cited before us. Besides, the reason that turnover of this company is huge and more than 10 times that of the assessee. 41. The next company sought to be excluded is Mindtree Ltd. The submissions made before us were as follows:- "Functionally dissimilar, diversified operation, significant R&D spend, ownership of intangibles. - Also engaged in business of rendering IP-Led revenue, infrastructure management, package implementation, consultancy services, etc. constituting 45% of overall revenue during FY 2014-15. - Diversified operation i.e. engaged in infrastructure management services, business process management, technology consulting, Page 32 IT(TP)A No. 192/Bang/2022 product engineering and SAP services. Also lacks segmental data. - Significant research & development activity. By incurring R&D expenses, it was able to deliver IP based video surveillance management, recording and analytic products and solutions. It has filed 4 patents in India and US so far in the area of Video analysis. - Ownership of intangibles in the form of intangible property. Significant onsite activity: - 46% of revenue earned under Onsite model. - Incurred overseas branch office expenses amounting to INR 1582 crores - Receives incentives from State of Florida in relation to the development center located overseas. Lack of segmental data - Does not maintain segmental information in respect of profitability reported from business activities in the nature of infrastructure management services, technology consulting and SAP services. - Acquisition of subsidiary - Discoverture Solutions LLC. 42. The DRP while dealing with the aforesaid objections has merely taken the view that the presence of IPR revenue was insignificant and so also expenses of brand value, R&D & intangibles. More importantly, the DRP did not dispute the presence of 46% of revenue from onsite model, but went on to hold that the presence of revenue is not sufficient to exclude a company, when it is otherwise functionally comparable. On this aspect, we have already referred to the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. (supra) and in the light of this decision and the admitted factual position regarding presence of onsite revenue over and above the threshold limit of 25% of total revenue, we are of the view that this company should be excluded from the list of comparable companies. We hold and direct accordingly.” 5. The revenue has not placed anything on record contrary to the above observations. Further admittedly the functions, assets owned and risks assumed by the assessee under the segment is similar with A.Ys. 2014-15 & 2015-16 (supra). Respectfully following the above view, we direct the Ld.AO to exclude Infosys Ltd., Persistent Page 33 IT(TP)A No. 192/Bang/2022 Systems Ltd., Mindtree Ltd. and L&T Infotech Ltd. from the final list.” Respectfully following the above, we direct exclusion of Larsen & Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd. and Infosys Ltd. from the final list. 8.5 The decision of Coordinate Bench of this Tribunal in case of Subex Ltd. vs. DCIT (supra) for A.Y. 2017-18 by order dated 30.11.2022 has considered Nihilent Ltd. and OFS Technologies Ltd. “Nihilent Ltd. 10. The ld AR for the assessee submitted that this company Nihilent Ltd. is predominantly engaged in rendering of software services, business consulting in the area of enterprise transformation, change and performance management and providing related IT services. Nihilent in engaged in rendering diverse services. The Company intends to diversify and expand into various other areas such as analytics, big data, internet of things, etc. In this regard he referred page nos. 763 to 767 of the paperbook. 10.1 The assessee relied on the following rulings, wherein Nihilent Ltd. has been excluded as a comparable: - SanDisk India Device Design Centre Pvt. Ltd., vs. JCIT IT(TP)A No. 288/Bang/2021dated 30.6.2022 - Extracts from the annual report are provided below by the ld AR: (Page 73 of Annual report – FY 2016-17) (Page 20 of Annual report – FY 2016-17) Page 34 IT(TP)A No. 192/Bang/2022 (Page 20 of Annual report – FY 2016-17) (Page 20 of Annual report – FY 2016-17) 10.2 The Appellant also submitted screenshots from the official website of Nihilent Ltd., which evidences the fact that it is engaged into diverse activities other than software development services. 11. The Ld. D.R. submitted that the ld DRP, on perusal of the annual report, noted that this company is engaged primarily in rendering software services and other related IT services. As per information at page 73 the company is a service company primarily rendering software services. Accordingly, it does not hold any physical inventories. As per the background information given at page123 of the annual report, the company is engaged in rendering software services, business consulting in the area of enterprise transformation, change and performance management and providing related IT Services. This fact is further supported by the information disclosed at page 50 and 51 of the annual report that the whole revenue of the company is derived from IT consultancy, software development and related services. Further at page 82 & 83 of the consolidated annual report, it is stated that "The group's activities involve predominantly providing software related services, which is considered to be a single business Page 35 IT(TP)A No. 192/Bang/2022 segment since these are subject to similar risks and returns. Accordingly, software services comprise the primary basis of segmental information as set out in these financial statements, which therefore reflect the information required by AS 17 — Segment". Thus, the ld DRP opined that it is functionally comparable to the assessee which renders software development services and other allied services. Thus, the contentions of the assessee that it is engaged in diverse 'activities and not functionally comparable is without merit. Besides, there is no information in the annual report to indicate that this company is engaged in product development or to indicate that it has revenue stream from product sales. The assessee also could not point to any such information in the annual report. The ld DRP also noted at page 73 of the annual report, the independent auditor has certified, 'the company does not have any purchase of inventories or sales of goods since it is a service company primarily rendering software services'. In view of these, the ld DRP held that this company is functionally comparable to the assessee and the pleas raised in this regard were rejected by him. As the company is primarily engaged in software development services and earns the revenue from this activity there is no need of providing segmental information as per AS 17. 11.1 The ld DR further stated that the assessee has argued before the ld DRP that the Company acquired G Net Group LLC in the US and Intellect Bizware Services Pvt Ltd, which are engaged and specialised in ERP and SAP. On careful perusal of the information in the annual report, the ld DRP noted that "during the year, Gnet Group LLC, USA ("Gnet") has merged with its holding Company — Nihilent Technologies Inc.. USA ("NTI"), with effect from 1 January 2017 vide the Article of Merger filed in the State of Minnesota. As this merger was between a holding company and its wholly owned subsidiary, no consideration was payable". This acquisition was not made by Nihilent, which is being compared. During the year the Group through holding company i.e., Nihilent Technologies Limited has acquired 100% stake in a India base subsidiary Analytics Nihilent with effect from 8t h October 2016. The acquisition by a subsidiary will not have any impact on the profitability of this company especially when it is acquired from O8 October 2016. Further, the group company through the holding company has acquired 51% stake in case of Intellect Bizware Services pvt Ltd, which would not affect the profitability of the company in the near term. Further, the assessee also Page 36 IT(TP)A No. 192/Bang/2022 could not point to any information to show, that on account of such acquisition, the profit margin of this company was materially affected. The increase in business or turnover on account of such acquisition will be reflected in the financial statement of such subsidiary. Thus, the ld DRP was of the view that the acquisition as such has not materially affected the profitability of the company, and hence, it cannot he excluded as comparable. 11.2 The ld DR further stated that with regard to pleas of R&D, the ld DRP noted that the R&D activities are in the nature of routine activities to improve service delivery and there is no specific debit towards R & D in the P & L --account. These indicate that the R&D activities are towards routine business activity. The company does not own intangibles except for computer software licenses. Therefore, the ld DRP was of the view that this company is comparable to the assessee company. The ld DRP also noted that the assessee has failed to establish that such differences, if any, on account of R & D / intangibles, have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, these pleas were rejected by the ld DRP. In view of the above, the ld DRP upheld the selection of this comparable. 12. We have heard the rival submissions and perused the materials available on record. This comparable fails the functionality test and this company Nihilent Ltd. is not functionally similar to assessee’s case as held by the coordinate bench of the Tribunal in the case of M/s. SanDisk India Device Design Centre Pvt. Ltd. in IT(TP)A No.288/Bang/2021 dated 30.6.2022, wherein held as under: “17.9 In respect of Nihilent Ltd., Infobeans Technologies Ltd. and Aspire Systems (India) Pvt. Ltd., Hon’ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT (supra) observed as under: “Comparable Sought to be excluded by the assessee Aspire System India Pvt. Ltd. (Aspire) 40. The assessee sought exclusion of Aspire from the final set of comparables for benchmarking SDS segment on the Page 37 IT(TP)A No. 192/Bang/2022 ground that it fails Related Party Transaction (RPT) filters as its RPT/ sales ratio is more than 25%. The assessee computed the significant related party transactions at 37.58% whereas the Ld. TPO computed it at 23.55%. The TPO is directed to recalculate the RPT/sales ratio by providingof the Income-tax Act,1961 ['the Act' for short]of the Income-tax Act,1961 ['the Act' for short]of the Income- tax Act,1961 ['the Act' for short]of the Income-tax Act,1961 ['the Act' for short]of the Income-tax Act,1961 ['the Act' for short] g opportunity of being heard to the assessee. So this comparable is remitted back to the Ld. TPO to decide afresh.” ........................ ........................ Nihilent Ltd. 44. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-à-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 & A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 & A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis-à-vis assessee which is a routine software development service provider working on cost + markup model, hence ordered to be excluded.” “Infobeans Technologies Ltd. (Infobeans) 49. The assessee sought exclusion of Infobeans on the ground that it is also functionally dissimilar being into providing business IT services (CAD) (application development and maintenance, Big Data, UX and UI, Automation engineering services, including product engineering and lifestyle solutions and business process management) in verticals of storage and virtualization, media and publishing, HR and Payroll and e-commerce. It is also providing software engineering services primarily in Page 38 IT(TP)A No. 192/Bang/2022 Custom Application Development (CAM), enterprise mobility and Big Data Analytics (BDA). 50. Perusal of financials available at page A303, A418 to A421, Infobeans shows that it is into diversified services but its segmental financials are not available without which it is difficult to compute the correct profit margin of the relevant segment. So Infobeans is also ordered to be excluded as a comparable being not a comparable to the assessee.” 17.10 Perusal of the annual report, filed before us in respect of the above two comparables, we note that the segmental financials are not available in respect of Nihilent and Infobeans and the RPT in respect of Aspire Systems India Pvt. Ltd. is more than 25% being the threshold limit considered by the Ld.TPO. Nothing has been placed before us by the Ld.DR in order to take a different view. Respectfully following the Hon’ble Mumbai Tribunal, we direct the Ld.TPO to exclude Nihilent, Infobeans and Aspire Systems from the final set.” 12.1 Keeping in view of the above order of the Tribunal, we direct the AO/TPO to exclude this company Nihilent Ltd. from the list of comparables. OFS Technologies Ltd. 13. The ld AR for the assessee submitted that this company OFS Technologies Ltd. is engaged in diversified activities. OFS is a software development and information technology outsourcing company, enriched its core expertise over the last financial year in Enterprise Application Development, Mobile Applications Development, Cloud Enablement, UI Development, DevOps Implementation and Data Analytics solutions. He submitted that OFS is engaged in outsourced product development which is different from software development activity carried out by the assessee. The Company is also engaged in independent testing. The assessee further submitted that OFS is into diverse activities and there is no segmental data available in the financial statements. Accordingly, based on the above, the assessee submitted that OFS should be rejected as a comparable. Additionally, a. the assessee placed reliance on the following ruling wherein exclusion of the comparables engaged in outsourced product development was upheld: - SAP Labs India Pvt Ltd [TS-506-ITAT-2022(Bang)-TP]/ IT(TP)A No.606/Bang/2021 and IT(TP)A No.2510/Bang/2019 dated 21.7.2022. - The assessee placed reliance on the following ruling wherein it was upheld that testing services are distinct Page 39 IT(TP)A No. 192/Bang/2022 from the software development life cycle and cannot be considered to be akin to software development services and comparables engaged in testing services have been excluded: - M/s. Advice America Software Development Center Pvt. Ltd. vs. The Income Tax Officer, Ward 1(1)(1)(1) [IT(TP)A No.2531/Bang/2017 dated 23.5.2018] Extracts from the annual report are provided below: (Page 47 of Annual report – FY 2016-17) (Page 46 of Annual Report – FY 2016-17) (Page 46 of Annual report – FY 2016-17) Page 40 IT(TP)A No. 192/Bang/2022 (Page 47 of Annual report – FY 2016-17) 14. The Ld. D.R. submitted that the ld DRP on perusal of the annual report, he noted that the company is into software development activities. The company as per the Note 14 to financial statements give at page 72 of the annual report derives income from software development only. As regards employment cost filter, the company passes the employment cost filter. On perusal of the profit and loss account of the company an amount of Rs.3,81,28,529/- is debited towards employment cost as against total sales of Rs.9,37,54,000/- which comes to 40.66%. The assessee argued that it fails the employment cost filter for the F.Y. 2014-15. The assessee also argued before the ld DRP that if the OFS included in the final list of comparable the margin pertaining to only F.Y. 2015-16 and 2016-17 ought to be considered. 14.1 The ld D.R stated that at the outset, the company is functionally comparable to the assessee and also passes the employment cost filter. Therefore, the company has to be included in the list of comparables and the Panel upholds the inclusion of this comparable. However, considering the plea of the assessee that the company fails the employment cost filter for the F.Y. 2014-15, the ld DRP directed the TPO to verify the plea of the assessee. Page 41 IT(TP)A No. 192/Bang/2022 If it fails the employment cost filter for the above year, the TPO was directed to consider the margin only for the F.Ys. 2015-16 and 2016-17. 14.2 The ld. DR further stated that the assessee argued before the ld DRP that the company fails export turnover filter for the F.Y. 2014-15 and hence if the company is considered as comparable the margins pertaining to F.Y. 2015-16 and F.Y. 2016-17 are only to be considered. On verification of the annual reports, it was seen that the company's export turnover is below the threshold limit of 75% adopted by the TPO. The TPO, was therefore directed by the ld DRP to verify and if the export turnover is below 75% for the F.Y. 2014-15 the margins pertaining to financial years 2015-16 and 2016- 17 should be considered for determining the ALP. 14.3 The ld DR stated that a plea was also raised before the ld DRP that this company has incurred substantial expenditure towards R&D and hence not to be taken as comparable. However, perusal of the information in the annual report shown that there is no separate expenditure item under the head R&D in the profit and loss account statement. There is no indication in the annual report to show that the R&D had resulted in any distinct product development giving rise to source of separate revenue stream. The information on technology absorption on which the assessee relied states that R&D activities are integrated with software development process with objective of ensuring efficiency and quality. Therefore, they are to be taken as routine activities in enhancing the quality of delivery of services. In view of the above these pleas were rejected by the ld DRP. Subjected to the above discussion, the selection of this company was upheld by the ld DRP. 15. We have heard the rival submissions and perused the materials available on record. In our opinion, this comparable fails the functionality test and this company OFS Technologies Ltd. is not functionally similar and deserves to be excluded.” Respectfully following the above, we direct exclusion of Nihilent Ltd. and OFS Technologies Ltd. from the final list. Accordingly, ground nos. 4.1, 4.3 to 4.4 and additional ground nos. 1(a) (six comparables) that was sought for exclusion stands allowed. Page 42 IT(TP)A No. 192/Bang/2022 9. In Additional Ground no. 1(b), assessee is seeking inclusion of only two comparables being Maveric Systems Ltd. and Evoke Technologies Pvt. Ltd. 9.1. The Ld.AR submitted that the Ld.TPO rejected Maveric Systems Ltd. by observing that it is functionally different as it carries out software testing services and product development. He submitted that on perusal of the annual report of this company placed at pages 3277-3380, one could understand that this company is engaged in software testing services for offshore clients and onshore. It is the submission of Ld.AR that this comparable passes all the relevant filters applied by the Ld.TPO and therefore deserves to be included. 9.2. In respect of Evoke Technologies Pvt. Ltd., the Ld.AR submitted that Evoke Technologies Pvt. Ltd. has been rejected on account of functional dissimilarity. It is the submission of the Ld.AR that this company is rendering software development services similar to that of assessee and passes through all the relevant filters. The Ld.AR thus prayed for inclusion of both these comparables. The Ld.DR on the contrary relying on the observations of the DRP submitted that these comparables do not satisfy the export revenue filter and therefore deserves to be excluded. We have perused the submissions advanced by both sides in the light of records placed before us. 9.3. We note that the authorities below has not verified the annual reports to come to a conclusion that the export revenue filter is not satisfied. Page 43 IT(TP)A No. 192/Bang/2022 In the interest of justice, we direct these comparables back to the Ld.AO/TPO to verify the FAR analysis of these comparables with that of assessee and to consider its inclusion in case it satisfies all the relevant filters. Accordingly, Additional Ground no. 1(b) stands partly allowed. 10. Additional Ground no. 2 raised in application dated 19.08.2022, the Ld.AR submitted that margins of Harbinger Systems Pvt. Ltd. and CG-Vak Software and Exports Limited has been wrongly computed. He thus seeks a direction for correction of the margins of the two comparables mentioned hereinabove. We direct the Ld.AO/TPO to recompute the margins of these comparables in accordance with law. Accordingly, additional ground no. 2 vide application dated 19.08.2022 stands allowed for statistical purposes. 11. Additional Ground no. 2 in application dated 17.02.2023 is in respect of considering bad debts and provision for bad debts as non-operating expenses while computing the operating margin of comparable companies. 11.1. The Ld.AR has placed reliance on decision of Coordinate Bench of this Tribunal in case of Evolving Systems Networks India Pvt. Ltd. vs. DCIT in IT(TP)A No. 2751/Bang/2017 r.w. M.P. No. 69/Bang/2021 by order dated 24.09.2021 and Rule 10B(3). It is the submission of the Ld.AR that identical issue has been dealt with in this decision and has relied on the decision of Coordinate Bench of this Tribunal in case of Maxim India Integrated Circuit Design Pvt. Ltd. vs. DCIT in IT(TP)A No. 1573/Bang/2017 by order dated 02.11.2020, the observations of Page 44 IT(TP)A No. 192/Bang/2022 this Tribunal in Evolving Systems Networks India Pvt. Ltd. vs. DCIT (supra) are as under: “6. As far as the merits of ground No.4(h) is concerned, the DRP dealt with the issue in the following manner: “2.9 Ground of Objection No. 9: The learned TPO and learned AO has erred, in law and in facts, by considering provision for bad and doubtful debts as non-operating expenses. Having considered the submissions, this Panel has been consistently holding that provisions are not an ascertained liability which is not allowable for purpose of computation of business profit under the IT Act. We are also of the view that the provision for bad & doubtful debts is not made in all the cases. There is no rationale to consider such provision as operating in nature. Even otherwise, for the comparability analysis, such provisions are excluded from the tested parties as well as the comparable, the error in the margins of the relevant year are taken care of. This view of the Panel finds support from several decisions ofthe Hon'ble ITAT, for example in the case of M/s Telcordia Technologies India Pvt. Limited 22 taxmann.com 96/ 137 ITD 1 (Mum)is squarely applicable to the assessee case in which it was decided that the provision for doubtful debt cannot form part of operating cost. Further, In the case of Thyssen Krupp Industries India Pvt Ltd, [2013] 33 taxmann.com 107 the Hon'ble Mumbai Tribunal held that provision for doubtful debts is to be considered as non-operating in nature because it is only a provision. While working out the operating profit, only items of receipts and expenditure, which have direct relation for determining the profit have to be taken into account. In the case of Four Soft Ltd. v. Dy. CIT [2011] 142 TTJ 358/[2012] 16 ITR (Trib.) 73 (Hyd.), it was held that for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the AEs has to be considered and that bad debts/reimbursements have to be excluded. Thus the expenses excluded by the TPO were in the nature of non-operating expenses. Therefore, we do not find any infirmity in the approach of the TPO. Hence, the objection is not found acceptable. Accordingly, we do not find merit in the plea that the margin computation of M/s CG VAK, ICRA Techno Analytics Ltd, L&T Info tech, Persistent Systems & Tech Mahindra are erroneous.” Page 45 IT(TP)A No. 192/Bang/2022 7. Learned Counsel for the assessee brought to our notice the decision of the ITAT, Bengaluru Bench, in the case of Maxim India Integrated Circuit Design Pvt. Ltd., Vs. DCIT in IT(TP)A No.1573/Bang/2017 order dated 02.11.2020 wherein this Tribunal dealt with identical ground of appeal after considering the decision cited in the order of the learned DRP as follows: “13. The next contention of the assessee is that the TPO has not considered Provision for bad and doubtful debts as an operating expenditure. The Ld A.R submitted that the co-ordinate bench has held this expenditure as operational in nature in the case of Brocade Communications Systems (P) Ltd vs. DCIT (2020)(117 taxmann.com 439)(Bang.). On the contrary, the Ld D.R submitted that the provision for bad and doubtful debts is not an ascertained liability and hence it cannot be considered to be operational in nature. He placed his reliance on the decision rendered by Mumbai bench of Tribunal in the case of Telcordia Technologies India P Ltd (22 taxmann.com 96/137 ITO 1) and Thyssen Krupp Industries Pvt Ltd (2013)(33 taxmann.com 107). 14. We heard the parties on this issue and perused the record. We notice that an identical issue has been examined by the co- ordinate bench in the case of Brocade Communications Systems (P) Ltd (supra) and it was decided as under:- "47. In Ground No. 10 the assessee pointed out to the mistakes in computation of PLI. It was submitted that the TPO has considered provision for doubtful debts and provision for doubtful advances are non-operating in nature and the action was upheld by the DRP. In this regard it was submitted that provision for doubtful debts is a provision which is to be made as a part of the operating activities of business governed by the principles of prudence, and therefore it is not correct to contend that the same is non-operating in nature. Reliance in this regard is placed on the decision of the Delhi Bench of the Tribunal in the case of Rolls-Royce India (P.) Ltd. v. DCIT [2016] 69 taxmann.com 209 (Delhi - Trib.). Therefore it was submitted that the aforesaid items are to be treated as being operating in nature. 48. The ld. DR relied on the order of the DRP. 49. We are of the view that in the light of the decision of the Tribunal in the case of Rolls-Royce India (P.) Ltd. (supra), the PLI should directed to be reworked by Page 46 IT(TP)A No. 192/Bang/2022 considering the provision for doubtful debts as operating expenditure. We hold and direct accordingly." In the case of Rolls-Royce India (P) Ltd (supra), the nature of "Provision for doubtful debts was discussed as under:- "51. As regards provision for doubtful debts, ld. counsel submitted that provision for doubtful debts are a part of the operating activities of a business. The accounting standards issued by the ICAI require that accounting policies must be governed by the principles of "prudence". Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only the basic estimate in the light of available information. Para 6 of Accounting Standard-l defines accrual as the assumption that revenues and costs are accrued, i.e., recognized as they are earned or incurred and recorded in the financial statements of the period to which they relate. 52. Thus, going with the abovementioned facts and statutory provisions, when the making of provisions is very much in the interest of business to show the true and fair view and statutorily required, it cannot be said that such provisions are of non-operating nature. Such provisions are made to comply with the requirements of statute. 53. The learned TPO treated provision for doubtful debts as non-operating referring to the Safe Harbour Rules notified by CBDT, which are not applicable for the year under consideration as mentioned above. 54. Ld. CIT(DR) relied on the order of TPO. 55. As regards the treatment of provision of doubtful debts also, we find that the reasoning given by ld. TPO cannot be accepted because he has primarily relied on safe harbor rule for treating this as non-operating expenditure. We find considerable force in the submission of ld. counsel for the assessee, considered earlier, that provision for doubtful debts is a provision which is to be made as a part of the operating activities of business governed by the principles of prudence. We, accordingly, direct that this provision be treated as part of operating expenditure and treatment be made accordingly, because, in any view of the matter, the safe harbor rule is not applicable for the current year under consideration. In the result, this ground is allowed." Page 47 IT(TP)A No. 192/Bang/2022 15. Before us, the Ld D.R placed his reliance on the decision rendered by Mumbai bench of Tribunal in the case of Thyssen Krupp Industries Ltd (supra). We notice that the assessee has claimed that the Provision for doubtful debts as non-operating in nature, which was not accepted by the TPO. The Tribunal accepted the submission of the assessee and accordingly it has held that it is a non-operating in nature. Thus, we notice that the above said decision has been rendered by the Mumbai bench of Tribunal in a different context. In the case of Telcordia Technologies India P Ltd, the Tribunal has made following observations in respect of Provision for doubtful debts, while considering the company named M/s R Systems International Ltd:- "While working out the operating profit, only items of receipts and expenditure, which have direct relation for determining the profit has to be taken into account. Operating profit has to be seen in a comparable transaction under comparable circumstances. The profit level indicators are derived from uncontrolled party engaged in similar business activity under similar circumstances which is the measure of arm's length result. If the assessee's business transactions do not have accretion of doubtful debts and doubtful advances, such an adjustment has to be made in the comparability analysis of the comparable party to determine the arms length price. Thus, both these expenses have been rightly excluded by the TPO to work out the operating profit of the comparable party and accordingly the operating profit ratio of the said entity has been rightly taken by the TPO." Thus, we notice that the above said decision was also rendered in a different context. However, there should not be any dispute that if the provision for doubtful debts is taken as operating expenses in the hands of the assessee, then the said expenditure has to be taken so in the case of comparable companies also. 16. Accordingly, following the decision rendered by the co-ordinate bench in the case of Brocade Systems (P) Ltd (supra) and Rolls Royce India (P) Ltd (supra), we direct the AO/TPO to consider Provision for doubtful debts as an operating expense.” 8. Learned Counsel brought to our notice the decision of the Tribunal rendered in the case of ACI Worldwide Solutions Pvt. Ltd., Vs. DCIT in IT(TP)A No.1893/Bang/2017 order dated 27.09.2019 wherein this Tribunal decided identical issue in favour of the Page 48 IT(TP)A No. 192/Bang/2022 assessee by following the decision of the Hon’ble Karnataka High Court in the case of Pr.CIT Vs. Business Process Outsourcing India Pvt. Ltd., (2018) taxcorp (DT) 73195 (HC Karnataka). The following were the relevant observations of the Tribunal: “8. As far as the exclusion of provision of bad and doubtful debts from the operating cost of the comparable companies is concerned, the learned Counsel for the assessee brought to our notice that while considering the international transaction in the distribution segment, the TPO has himself considered provision for bad and doubtful debts as part of the operating expenditure and by the same logic he should have treated provision for bad and doubtful debts as part of the operating cost in the hands of the comparable companies also. As far as the software development segment of the assessee is concerned, there is no provision for bad and doubtful debts. The learned Counsel for the assessee filed before us copy of the decision of the Hon’ble Karnataka High Court in the case of Principal CIT Vs. Business Process Outsourcing India Pvt. Ltd., (2018) taxcorp (DT) 73195 (HC Karnataka) wherein in an appeal against the order of the Tribunal holding that provision for bad and doubtful debts should be considered as part of the operating expenditure, the Hon’ble High Court confirmed the order of the Tribunal and dismissed the appeal of the Revenue as one not giving rise to any substantial question of law. 9. In the light of the aforesaid decision, we are of the view that provision for bad and doubtful debts should be treated as operating expense while computing the PLI OP/OC of the comparable companies which ultimately remains for comparison. We hold and direct accordingly. “ 9. Learned DR relied on the order of the DRP. 10. We have given a very careful consideration to the rival submissions. We find that the DRP in rejecting the plea of the assessee has placed reliance on the decision of Mumbai Bench of the Tribunal in the case of M/s. Telcordia Technologies India Pvt. Ltd., (supra) and the decision in the cae of Thyssen Krupp Industries India Pvt. Ltd., (supra). Both these decisions have been considered in the Bengaluru Bench of the Tribunal rendered in the case of Maxim India Integrated Circuit Design Pvt. Ltd., (supra). The Tribunal, after noticing the fact that in the decision Page 49 IT(TP)A No. 192/Bang/2022 cited in the order of the DRP, the facts were different and would result in the same effect if the claim of the assessee is accepted. Besides the above, the Karnataka High Court has also taken a view in the case of Business Process Outsourcing India Pvt. Ltd., (supra) that provision for bad and doubtful debts should be taken as operating expenses while computing profit level indicator of the comparable companies. In the light of the aforesaid decisions which have been cited at the time of hearing of the appeal, we are of the view that the claim of the assessee deserves to be accepted. Accordingly, ground No.4(h) raised by the assessee has to be allowed and is hereby allowed.” Respectfully following the above view, we direct the Ld.AO to consider the bad and doubtful debts and provision for bad debts to be operating in nature while computing the PLI of the comparable companies. Accordingly, Additional Ground no. 2 raised by assessee in application dated 17.02.2023 stands allowed. 12. Apart from the above grounds and selected comparables, the Ld.AR has not argued any other grounds or comparables raised either in the grounds of appeal or in the additional grounds of appeal. These issues that are not being argued are left open for assessee to be contested in an appropriate circumstances. In the result, the appeal filed by the assessee stands partly allowed as indicated hereinabove. Order pronounced in the open court on 16 th June, 2023. Sd/- Sd/- (LAXMI PRASAD SAHU) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 16 th June, 2023. /MS / Page 50 IT(TP)A No. 192/Bang/2022 Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file By order Assistant Registrar, ITAT, Bangalore