Microsemi India Private Limited (now merged with Microchip Technology (India) Private Limited), Hyderabad V. Deputy Commissioner Of Income Tax, Circle-5(1)(1), Hyderabad

ITA 211/BANG/2021

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The case involves Microchip Technology (India) Pvt. Ltd., which appealed against the final assessment order passed by the Deputy Commissioner of Income Tax, Circle 5(1)(1), Hyderabad. The appeal was against the Transfer Pricing adjustment made by the Transfer Pricing Officer (TPO) concerning the Arm's Length Price of international transactions with associated enterprises. The Tribunal examined the comparables selected by the TPO and the assessee, considering factors like functional similarity and financial metrics such as turnover and profit margins. The Tribunal's decision involved a detailed analysis of the comparables' functions, financial data, and the application of legal precedents regarding Transfer Pricing adjustments.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 124590 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 07-12-2022
• Assessment Year: misc
• Appeal Filed On: 26-08-2022
• Other Referred Cases: M/s National Thermal Power Co. Ltd. Vs. CIT, Autodesk India (P) Ltd. V. DCIT, Razorpay Software Pvt. Ltd. v. DCIT, NTT Data FA Insurance Systems (India) Pvt. Ltd. v. DCIT, Arm Embedded Technologies Pvt. Ltd. v. DCIT, GlobalLogic India (P.) Ltd. V. DCIT, Barracuda Networks India Pvt. Ltd. v. DCIT, ADP Pvt. Ltd. v. DCIT, Red Hat India Pvt. Ltd. v. NFAC
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard
• Section: 143(3); 133(6); 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No.211/Bang/2021 Assessment year : 2016-17 Microchip Technology (India) Pvt. Ltd. [for the merged entity – Microsemi India Pvt. Ltd.], Plot No.149/B, Block A, EPIP Industrial Area, Whitefield, Bengaluru – 560 066. PAN: AABCM 9868J Vs. The Deputy Commissioner of Income Tax, Circle 5(1)(1), Hyderabad. ASSESSEE RESPONDENT Assessee by : Smt. Tanmayee Rajkumar, Advocate Respondent by : Shri K. Sankar Ganesh, Jt.CIT(DR)(ITAT), Bengaluru. Date of hearing : 08.12.2022 Date of Pronouncement : 19.12.2022 O R D E R Per Padmavathy S., Accountant Member This appeal is against the final assessment order passed by the AO, National e-Assessment Centre, Delhi u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 07.04.2021 for the assessment year 2016-17. 2. The assessee provides software development and support services to Microsemi SoC on a captive basis in the areas of circuit and IT(TP)A No.211/Bang/2021 Page 2 of 27 logic design and verification, software development and quality assurance, IP verification and development, silicon validation and characterisation application engineering and worldwide technical support services. The assessee filed the return of income for the assessment 2016-17 on 29.11.2016 declaring an income of Rs.8,72,45,650. The case was selected for scrutiny and accordingly a notice u/s.143(2) was duly served on the assessee. Since the assessee had international transactions, a reference was made to the Transfer Pricing Officer (TPO) for verify the Arms Length Price (ALP) of the international transactions the assessee is having with its Associated Enterprises (AEs). The TPO passed an order dated 29.10.2019, determining a TP adjustment of Rs. 6,76,79,662/- in respect of the SWD services segment. The Assessing Officer passed a draft assessment order dated 22.11.2019 by incorporating the above adjustment. Aggrieved, the Assessee filed its objections before the Dispute Resolution Panel (‘DRP’). The DRP vide its directions dated 01.03.2021 rejected the objections of the Assessee. The Assessing Officer passed the final assessment order dated 07.04.2021 in which the TP adjustment originally made was sustained. Aggrieved, the Assessee has preferred the present appeal before this Hon’ble Tribunal. 3. The assessee has chosen Transaction Net Margin Method (TNMM) as the most appropriate method for determining the ALP. Operating Profit by Operating cost (OP/OC) is the Profit Level Indicator (PLI). The PLI of the assessee as per the TP is study is as follows:- IT(TP)A No.211/Bang/2021 Page 3 of 27 Operating Income Rs. 68,51,37,396/- Operating Cost Rs. 59,57,71,651/- Operating Profit (Op. Income – Op. Cost) Rs. 8,93,65,745/- Operating/Net mark-up (OP/OC) 15% 4. Comparables selected and the range of weighted average of OP/TC of comparable companies by the assessee is as follows:- Sl. No. Company Name Weighted Average (in %) 1.Akshay Software Technologies Ltd. 1.44 2.Sankhya Infotech Ltd. (seg) 2.96 3.Sasken Communication Technologies Ltd. (seg) 4.97 4.Sagarsoft (India) Ltd. 7.11 5.Cigniti Technologies Ltd. 9.10 6.CG-VAK Software and Exports Ltd. 9.46 7.Bells Softech Ltd. 10.38 8.E-Zest Solutions Ltd. 11.38 9.Thirdware Solutions Ltd. 42.98 35th Percentile 7.11 Median 9.10 65th Percentile 9.46 5. Out of the above 9 comparables selected by the assessee, the TPO accepted the 3 comparables viz. Cigniti Technologies Ltd., CG- Vak Software & Exports Ltd. and Thirdware Solutions Ltd. and rejected the remaining 6 comparables. The TPO applied fresh filters and accordingly the comparables selected by TPO and the median of weighted average of PLIs of the companies is as under:- IT(TP)A No.211/Bang/2021 Page 4 of 27 Sl. No. Name of the Company Weighted Average 1. Kals Information Systems Pvt. Ltd. 10.76 2. Rheal Software Pvt. Ltd. 14.50 3. CG-VAK Software & Exports Ltd. 17.07 4. Cigniti Technologies Ltd. 19.15 5. R S Software (India) Ltd. 20.84 6. Larsen & Toubro Infotech Ltd. 23.67 7. Tata Elxsi Ltd. 25.69 8. Nihilent Ltd. 26.36 9. Inteq Software Pvt. Ltd. 27.89 10. Persistent Systems Ltd. 30.09 11. Infobeans Technologies Ltd. 32.40 12. Aspire Systems (India) Pvt. Ltd. 33.74 13. Infosys Ltd. 38.31 14. Thirdware Solution Ltd. 39.41 15. Cybage Software Pvt. Ltd. 65.91 35 th Percentile 23.67% Median 26.36% 65 th Percentile 30.09% 6. The TPO computed the ALP based on the above listed comparables and made the TP adjustment as follows:- Operating cost Rs. 59,57,71,651/- Adjusted arm’s length margin (%) Rs. 26.36% Arm’s length price Rs. 75,28,17,058/- Price received Rs. 68,51,37,396/- Shortfall being adjustment u/s. 92CA Rs. 6,76,79,662/- 7. The assessee raised 5 ground and 2 additional grounds contending the TP adjustment. During the course of hearing the ld AR presented arguments with regard to the following ground - IT(TP)A No.211/Bang/2021 Page 5 of 27 a) The TPO erred in selecting companies like R S Software (India) Ltd., Larsen & Toubro Infotech Ltd., Nihilent Ltd., Inteq Software Pvt. Ltd., Persistent Systems Ltd., Infobeans Technologies Ltd., Thirdware Solution Ltd., Infosys Ltd., Aspire Systems (India) Pvt. Ltd. and Cybage Software Pvt. Ltd. which ought to be excluded on account of the companies being functionally dissimilar to the Assessee. (Ground No. 4.6); b) The TPO erred in rejecting Akshay Software Technologies Ltd., Evoke Technologies Private Limited and Sagarsoft (India) Ltd. despite the companies being functionally similar to the Assessee and satisfying all the filters applied by the TPO and the DRP erred in upholding the same (Ground No. 4.7); Additional grounds c) The TPO while applying the turnover filter at the lower limit erred in not applying the said filter at the upper end so as to reject high turnover companies. The DRP further erred in confirming the same. (Additional ground No. 4.5(c)) d) That the TPO erred in upholding the inclusion the RS Software Ltd. though the same was functionally not comparable to the Assessee. Without prejudice, in the event RS Software Ltd. is retained in the final list of comparable, the weighted average margin for FY 2015-16 alone ought to be considered, as the company fails the upper turnover filter for FYs 2013-14 and 2014-15. (Ground No. 4.6 and Additional Ground No. 4.6(a)) 8. It is submitted that these additional grounds regarding non- application of upper filter were omitted to be raised in the original grounds of appeal due to oversight and various decisions of the Tribunal directed the TPO to consider the weighted average margin of R S Software Ltd. for AY 2015-16. We have heard both the parties and perused the material on record. The additional grounds go to the root of the matter and following the decision of Hon’ble Supreme Court IT(TP)A No.211/Bang/2021 Page 6 of 27 judgment in the case of M/s National Thermal Power Co. Ltd. Vs. CIT, 229 ITR 383 (SC), the additional grounds are admitted for adjudication. 9. Regarding Additional ground No. 4.5(c), the ld. AR submitted that the TPO erred in not applying a cap on upper limit on the turnover/service revenue while selecting the companies comparable to the Assessee. In this regard, it is submitted that application of turnover filter is a relevant criteria in choosing comparable companies. It is submitted that the difference in the scale of operations have a direct impact on the profitability. The concept of economies of scale wherein, an increase in the size and scale of the operations lead to a decrease in the long run average cost of each unit or each service project delivered. Therefore, the per unit fixed cost of a small scale company would be much higher than of a medium/large size organisation. Further, it is submitted that medium/large size organisation operating in a particular industry also enjoys benefits of certain other market drivers and cost arbitrages. It is submitted that the turnover of the Assessee is Rs. 68,51,37,396/-. This being so, the TPO ought to have applied the upper turnover filter while selecting companies comparable to the Assessee. 10. Reliance was placed on the decision of the Bangalore Bench of this Hon’ble Tribunal in Autodesk India (P) Ltd. V. DCIT (2018) 96 taxmann.com 263 (Bang Trib) and it was submitted that on application of the turnover filter on 1-200 crores, the following the companies would be excluded:- IT(TP)A No.211/Bang/2021 Page 7 of 27 (a) Infosys Ltd. (b) Larsen & Toubro Infotech Ltd. (c) Persistent Systems Ltd. (d) Aspire Systems (India) Pvt Ltd. (e) Thirdware Solution Ltd. (f) Cybage Software Pvt Ltd. (g) Nihilent Ltd. 11. Reliance is also placed on the decisions of this Hon’ble Tribunal in the case of Razorpay Software Pvt. Ltd. (order dated 27.12.2021 passed in IT(TP)A No. 190/Bang/2021) and NTT Data FA Insurance Systems (India) Pvt. Ltd. v. DCIT (order dated 03.10.2022 in IT(TP)A No. 261/Bang/2021) wherein the said companies were excluded on application of the upper turnover filter. On other hand the ld. DR relied on the order of the lower authorities. 12. We heard the rival submissions and perused the material on record. The coordinate bench of the Tribunal in the case of Autodesk India Pvt.Ltd (supra), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee IT(TP)A No.211/Bang/2021 Page 8 of 27 the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions IT(TP)A No.211/Bang/2021 Page 9 of 27 (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon’ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 13. Respectfully following the above decision of the coordinate Bench, we hold that the above list of comparables whose turnover is more than 200 crores should be excluded from the list of comparables. 14. Vide Ground No. 4.6, the assessee is seeking exclusion of R S Software (India) Ltd., Larsen & Toubro Infotech Ltd., Nihilent Ltd., Inteq Software Pvt. Ltd., Persistent Systems Ltd., Infobeans Technologies Ltd., Thirdware Solution Ltd., Infosys Ltd., Aspire Systems (India) Pvt. Ltd. and Cybage Software Pvt. Ltd. 15. The following submissions were made by the ld. AR:- R S software (India) Ltd. 16. Functionally different: The ld. AR submitted that the company is engaged in diversified activities which are not similar to the services IT(TP)A No.211/Bang/2021 Page 10 of 27 rendered by the Assessee. The company renders custom application development, quality assurance and testing, application maintenance and support, strategic consulting, in respect of which diverse services, segmental details are unavailable. 17. The company is engaged in development of platform services and is rendering data analytics services, which are different from the routine SWD services rendered by the Assessee. The data analytics services rendered by the company will fall within the definition of KPO services, which are incomparable to the services rendered by the Assessee. The company also owns stock in trade. Significant research and development activities: 18. It is submitted that the company conducts research and development work in the areas of real time analytics, MDM, proximity, payments, digital commerce, mobile payments, testing, automation, personalised loyalty in payments and merchant management in payments laboratory. Wide fluctuation in margin: 19. It is submitted that the company, during the FY 2013-14 and 2014-15 had a turnover of Rs. 351.88 crores and 345.51 crores, and profit margin of 24.14% and 32.75%, respectively. However, during the FY 2015-16, the company realised a turnover of Rs. 171.41 crores, leading to loss of -2.09%. It is submitted that there is an apparent wide IT(TP)A No.211/Bang/2021 Page 11 of 27 fluctuation in the margin of the company. The relevant details as computed by the TPO is provided hereunder: *figures in crores FY 2015-16 FY 2014-15 FY 2013-14 Operating revenue 171.41 345.50 351.89 Operating cost 175.07 260.26 283.47 Operating profit -3.66 85.24 68.42 OP/OC -2.09% 32.75% 24.14% 20. The reason for decline in margin is attributable to the strategic shift made by the company as it is making substantial investments in a) developing tools and platforms and b) sales and marketing to enhance its customer base. Further, there is a significant drop in revenue (51 percent) vis-à-vis the previous year. Further, the company recognizes that this shift has impact on the margin of the company. In view of the same, the company ought to be excluded. Presence of intangibles. 21. It is submitted that the company owns significant intangible assets. The company is also developing further intangible assets. The total value of intangible assets as a percentage of fixed assets is 17.3%, which is significantly higher than the intangible assets owned by the Assessee, which is 0.04% of its fixed assets. Further, the company also owns stock in trade, unlike the Assessee. Significant foreign branch expenses 22. It is submitted that the company has significant onsite operations. The company incurred expenses in respect of its foreign IT(TP)A No.211/Bang/2021 Page 12 of 27 branch of 81.64% of operating cost during the FY 2013-14, 68.82% during the FY 2014-15 and 57.41% during the FY 2015-16, which demonstrates that the company operates in a different business model (pg. 140-141 of the appeal set and pages 267-268 and 299 of the PB). 23. Reliance in this regard is placed on the decision of this Hon’ble Tribunal in the cases of NTT Data FA Insurance Systems (India) Pvt. Ltd. v. DCIT (order dated 03.10.2022 in IT(TP)A No. 261/Bang/2021) at para nos. 22-24 and Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 235/Bang/2021]). 24. Without prejudice, it is submitted that if the company were to be retained in the final list of comparables, the company’s turnover for the financial years 2013-14 and 2014-15 is in excess of Rs. 200 crores, and therefore the margins for the said years ought to be excluded, and the margin of the company for FY 2015-16 alone ought to be considered. Inteq Software Pvt. Ltd. (‘Inteq’)- 25. Functionally different: It is submitted that the company is engaged in outsourced product development for small, medium corporation and emerging technology businesses. The company undertakes all the process of product development life cycles, which is a high end product development, which is incomparable to the SWD services rendered by the Assessee. As per the website of the company, the company renders data warehousing services, consulting services, EI and EDI services, testing services healthcare BPO services, and in IT(TP)A No.211/Bang/2021 Page 13 of 27 respect of the diverse services, no segmental details are available. It is submitted that the company is not a pure software development company like the Assessee. The presence of assets such as data processing equipment and electrical installations denote the diversified business segments of the company. 26. It is submitted that the company earns revenue from software development services and service charges and the same is shown in the annual report of the company in a composite manner with no segmental profitability and therefore, it is submitted that the company is not comparable to a routine software development service provider. 27. Significant related party transactions: It was submitted that the company’s related party transactions (sales) for the FY 2013-14 stand at 79.49% of sales, and therefore the company ought to be excluded. 28. Wide fluctuation in the margin: The ld. AR submitted that the company’s margin fluctuate widely, suggesting that there exists a peculiar economic circumstance. For the FY 2013-14, the company’s margin stood at 47.21%, for the FY 2014-15 32.14% and for the FY 2015-16 7.56%. 29. It is submitted that the TPO has relied on the information received under Section 133(6) of the Income tax Act, 1961 (“the Act”) for the assessment year 2015-16 on the ground that no response was received from the company to the notice issued under Section 133(6) of the Act for AY 2016-17. It is submitted that in the absence of IT(TP)A No.211/Bang/2021 Page 14 of 27 response to notice by the Company for AY 2016-17, the TPO erred in considering the information received for AY 2015-16 and holding that the company is functional comparable for the assessment year in question when the details available in the public domain illustrate otherwise. 30. It is submitted that in the case of Barracuda Networks India Pvt. Ltd., the Tribunal upheld the inclusion of the aforesaid company on the ground that the Company cannot be excluded basis non receipt of response to the notice issued under Section 133(6) of the Act. In this regard, it is submitted that the Assessee herein is seeking exclusion of the aforesaid company on the basis of its functional dissimilarity and not for the reason that no response was received from the company under Section 133(6) of the Act. In fact, in Barracuda/BORQS, this Hon’ble Tribunal proceeded on the basis that the Assessee therein had not placed material to doubt the functional comparability of the company whereas, the submissions above in the instant case clearly show that the Company is not similar coupled with the website extracts it is evident that the company is not a pure software developer. It is submitted that annual report of Inteq for AY 2016-17 clearly shows that the company is engaged in consultancy services and therefore is not into pure software development services like the assessee company [pages 107-108 of the appeal set and pages 268 and 303 of the PB]. 31. Reliance is placed on the decision of this Hon’ble Tribunal in the cases of NTT Data FA Insurance Systems (India) Pvt. Ltd. v. IT(TP)A No.211/Bang/2021 Page 15 of 27 DCIT (order dated 03.10.2022 in IT(TP)A No. 261/Bang/2021) at para nos. 19-21 and Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 235/Bang/2021]). Reliance is placed on the decision of the Delhi Bench of the Hon’ble Tribunal in GlobalLogic India (P.) Ltd. V. DCIT (reported in [2022] 134 taxmann.com 35)) for AY 2016-17. In view of the above, it is submitted that Inteq ought to be excluded from the final list of comparables. Infobeans Technologies Ltd. (‘Infobeans’) 32. Functionally different: The ld. AR submitted that Infobeans Technologies Ltd. is engaged in providing software engineering services primarily in Custom application development, Content Management Systems, Enterprise Mobility, big data analytics. Though the annual report of the company mentions that the company is earning 100% revenues from sale of software services, such services are in the nature of CAD,CMS etc., which are in the nature of KPO services. The above services rendered by the company are vastly different from the SWD services rendered by the Assessee, and therefore the company ought to be excluded as being functionally different. Further, the segmental details for these diverse services are not available and therefore the company cannot be selected as a comparable. 33. Significant intangible assets: It was submitted that during the FYs 2013-14 to 2015-16, the company owned intangible assets representing around 7% of the total fixed assets held by the company. IT(TP)A No.211/Bang/2021 Page 16 of 27 34. Expenses in foreign currency: The ld. AR stated that the annual report of the company at Note 33 under the head earnings in foreign currency shows export of goods/services calculated on F.O.B basis, which indicate that the Company has product sales as well. In the absence of segmental details, the company cannot be selected as a comparable. 35. Abnormal increase in revenue and fluctuation in margin: It was submitted that the revenue increased from Rs. 35 crores (FY 2014-15) to Rs. 62 crores (FY 2015-16) in a period of 1 year (76%). Also, the company’s profitability increased by 147%. Also, the company’s margin fluctuates widely (34.98%- FY 2015-16, 20.78%- FY 2014-15, 41.95%-FY 2013-14) which demonstrates that there exists some factor having an impact on the margin, and therefore the company cannot be selected as a comparable. 36. Further, the website of the company shows that the company is engaged in diverse dissimilar services, and therefore it ought to be excluded. Screenshots of the website are annexed herewith. In the present case, as stated above, the annual report clearly reflects that the Company renders diverse services which are high end and not comparable to the software development services rendered by the Assessee. In Airlinq Technology Pvt. Ltd. v. DCIT (Order dated 28.07.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 231/Bang/2021), infact, this Hon’ble Tribunal has distinguished BORQS for this precise reason. Therefore, it is submitted that IT(TP)A No.211/Bang/2021 Page 17 of 27 Infobeans ought to be excluded from the final list of comparables Detailed submissions in this regard are placed at page 110 of the appeal set and 269 and 305 of the paperbook. 37. Reliance is placed on the decision of this Hon’ble Tribunal in the cases of NTT Data FA Insurance Systems (India) Pvt. Ltd. v. DCIT (order dated 03.10.2022 in IT(TP)A No. 261/Bang/2021) at para nos. 16-18, Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 235/Bang/2021]) and the decision of the Hon’ble Tribunal at Hyderabad in ADP Pvt. Ltd. v. DCIT [Order dated 03.02.2022 in ITA Nos. 227&228/Hyd/2021 at para 7] where, in the case of a similarly placed assessee, the Tribunal directed the exclusion of Infobeans from the list of comparables for assessment year 2016-17 on the ground that it is not functionally comparable and no segmental details were available for the said year and the decision of the Delhi Bench of the Hon’ble Tribunal in GlobalLogic India (P.) Ltd. V. DCIT (reported in [2022] 134 taxmann.com 35)) for AY 2016-17. Thus, it is submitted that Infobeans ought to be excluded from the final list of comparables. 38. We heard the rival submissions and perused the material on record. The comparable companies other than R S Software (India) Ltd., Inteq Software Pvt. Ltd., and Infobeans Technologies Ltd. have already been directed to be excluded based on turnover filter. Hence we will now adjudicate the exclusion only these companies in Ground no.4.6. We notice that the coordinate bench in the case of NTT Data IT(TP)A No.211/Bang/2021 Page 18 of 27 FA Insurance Systems (India) Pvt. Ltd (supra) have considered the exclusion of these three companies and held that – Infobeans Technologies Ltd 18. We have heard the rival submissions and perused the materials available on record. In our opinion, this comparable was considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA No.227 & 228/Hyd/2021 dated 3.2.2022 at para 7 page 3678 to 3680 wherein held as under:- 7. “Infobeans Technologies Ltd.: The ld. AR of the assessee submitted that this company is functionally different for the following reasons: 1. It is engaged in diversified activities in the nature of custom application development, content management systems, enterprise mobility, big data analytics, 2. No change in the business as compared to last year 3. Leading provider of consulting technology & next generation service. 4. There is abnormal increase in percentage of revenue from 35.35 crore to 62.06 crore. 5. It is also into IT enabled services i.e. business process management, HR and Payroll, commerce 6. No segmental details are available. 7.1 He relied on various decisions of ITAT including the decision in ITA No. 2233/Hyd/2018 for AY 2014-15 wherein this company is excluded as comparable. 7.2 The Ld. DR, on the other hand, submitted that this company is engaged in rendering of software services and, hence, functionally comparable to assessee company. IT(TP)A No.211/Bang/2021 Page 19 of 27 7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The coordinate bench of this Tribunal in ITA No. 2233/Hyd/2018 for AY 2014-15, directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: 21. Having regard to the rival contentions and the material on record, we find that the Coordinate Bench of the Tribunal in the following case has considered similar objections of the assessee therein to direct exclusion of this company from the final list of comparables. For the purpose of ready reference, the relevant paragraph is reproduced below: "18. We have heard the rival contentions and perused the record. The first aspect is the functional comparability of concern which has been finally selected to be comparable. In respect of Infobeans Systems Pvt. Ltd., the financials of said concern clearly reflect that in addition to providing software development services to its associated enterprises, it had also earned foreign exchange from export of goods on FOB basis. The event of export of goods was also mentioned in notes and also in the Profit and Loss Account, where revenue from sale of software was declared. The segmental details of two activities carried on by the said concern were not available and in the absence of the same, the concern could not be equated as functionally comparable to a concern which was providing software development services to its associated enterprises. Applying the same set of reasoning as in the paras hereinabove, we hold that Infobeans Systems Pvt. Ltd. is not comparable to the assessee ". 22. Respectfully following the same, we direct that Infobeans be excluded from the final list of comparables in this case also. 7.4 On perusal of the order of the coordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the coordinate bench did not IT(TP)A No.211/Bang/2021 Page 20 of 27 consider this company as comparable in assessee’s own case for AYs 2014-15 & 2015-16. Respectfully following the decision of the coordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables.” 18.1 Same view was taken by the Tribunal in the case of Global Logic India Pvt. Ltd. Vs. DCIT reported in (2022) 134 Taxmann.com 35 for the assessment year 2016-17. Respectfully following above judgement, we are inclined to direct the AO/TPO to exclude this company from the list of comparables. Inteq Software Pvt. Ltd 21. We have heard the rival submissions and perused the materials available on record. This comparable has considered in the case of Global Logic India Pvt. Ltd. Vs. DCIT (2022) 134 Taxmann.com 35 for the assessment year 2016-17, wherein held as under:- 46. “The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services. 47. When we examine profit & loss account at page 873 of the annual report paper book, software development and service charges are shown in composite manner with no segmental profitability. In these circumstances, we are of the considered view that Inteq is not a suitable comparable vis-a-vis the taxpayer which is a routine software development service provider working on costplus mark up model, hence ordered to be excluded from the final set of comparables.” IT(TP)A No.211/Bang/2021 Page 21 of 27 21.1 In view of the above order of the Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. R.S. Software (I) Pvt. Ltd 24. We have heard the rival submissions and perused the materials available on record. In our opinion, this comparable M/s. R.S. Software (I) Pvt. Ltd. has been considered as not comparable in the case of Arm Embedded Technologies Pvt. Ltd. in IT(TP)A No.235/Bang/2021 for the A.Y. 2016-17 vide order dated 30.8.2022 in para 25, wherein held as under:- 25. R.S Software (I) Pvt.Ltd: It is submitted that, this company is engaged in diversified activities, which are not similar to the services rendered by the assessee. The company is into custom application development, quality assurance and testing, application maintenance and support, strategic consulting, in respect of which, segmental details are unavailable. The company is engaged in development of platform services and is rendering data analytics services, which are different from the routine SWD services rendered by the assessee. The data analytics services rendered by the company will fall within the definition of KPO services, which are incomparable to the services rendered by the assessee. It is submitted that this company conducts research and development work in the areas of real time analytics, MDM, proximity, payments, digital commerce, mobile payments, testing, automation, personalised loyalty in payments and merchant management in payments laboratory. On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. We note that this company is a full fledged entrepreneur and assumes all the risks attributable to the various business segments for which IT(TP)A No.211/Bang/2021 Page 22 of 27 details are not available. In our view, under such circumstances, this company cannot be held to be functionally comparable with that of assessee which is a captive service provider that caters only to its AE. 24.1 In view of the above order of the Tribunal, we hold that this comparable to be excluded from the list of comparables as it is functionally not comparable with the assessee and directed accordingly. Since we allowed the ground taken by the assessee on the basis of functionality itself, other arguments of the assessee has been not considered. 39. Respectfully following the decision of the coordinate bench we direct AO/TPO to exclude R S Software (India) Ltd., Inteq Software Pvt. Ltd., and Infobeans Technologies Ltd. 40. Vide Ground No. 4.7, the Assessee is seeking the inclusion of Akshay Software Technologies Ltd. (‘Akshay’), Evoke Technologies Private Limited (‘Evoke’) and Sagarsoft (India) Ltd (‘Sagarsoft’). In this regard the ld AR presented the following arguments - Akshay Software Technologies Ltd. (‘Akshay’) 41. As regards Akshay, it is submitted that the TPO rejected this company on the ground that it is functionally different from the Assessee. The DRP upheld its rejection on the ground that the company did not feature in the search matrix of the TPO which is incorrect. 42. In this regard, it is submitted that a perusal of the functions of the company listed in its annual report shows that the company is IT(TP)A No.211/Bang/2021 Page 23 of 27 functionally similar to the Assessee. The website of the company states that the company is engaged in rendering IT services, which are in the nature of SWD. Further, it is submitted that the income from SWD services is 96.5% of total sales and the income from sale of software licenses constitutes a meager 3.4% of the total revenue and therefore the same would not have any impact on the profitability of the company. 43. Reliance is placed on the decision of this Hon’ble Tribunal in the case of Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 235/Bang/2021]). 44. Further the company passes all the filters applied by the TPO. Details submissions in this regard are placed at pages 134, 272 and 309 of the paperbook. Evoke Technologies Private Limited (‘Evoke’). 45. As regards Evoke, it is submitted that the DRP upheld its rejection on the ground that the company did not feature in the search matrix of the TPO which is incorrect. It is submitted that the company is functionally comparable to the Assessee and passes all the filters applied by the TPO. Submissions in this regard are placed at pages 135, 272 and 281 of the paperbook. 46. It is submitted that this company was directed to be included in the final list of comparables in the assessee’s own case by this Hon’ble IT(TP)A No.211/Bang/2021 Page 24 of 27 Tribunal for the assessment year 2011-12 and the decision of this Hon’ble Tribunal in the case of Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 235/Bang/2021]). Further, reliance is also placed on the decision of the Hyderabad Bench of the Hon’ble Tribunal in ADP Pvt. Ltd. v. DCIT (order dated 03.02.2022 passed in ITA Nos. 227&228/Hyd/2021). It is submitted that this company is consistently included in the final list of comparables in cases of similarly placed assessees, and therefore the company ought to be included. 47. We heard both parties. We notice that the coordinate bench in the case of Arm Embedded Technologies Pvt. Ltd (supra) has considered the issue of inclusion of Akshay and Evoke and held as under – We have perused the submissions of both sides in light of records placed before us. We note that this Tribunal in case of Prism Networks Pvt. Ltd.(supra) observed and held as under: 18. We heard the rival submissions. It is clear from the order of the DRP that the DRP has not considered the plea of the Assessee in proper perspective. The fact that the TPO rejected the TP study of the Assessee cannot be the basis not to consider the claim of the Assessee for inclusion of comparable companies. The TPO excluded these companies only on the ground that information related to these companies was not available in the public domain and this fact was shown to be an incorrect assumption by the Assessee in the submissions before the DRP. In such circumstances, it was incumbent on the part of the DRP to have adjudicated the question of inclusion of these companies as comparable companies. The fact that these companies do not figure in the search matrix of the TPO is not and IT(TP)A No.211/Bang/2021 Page 25 of 27 cannot be a ground not to consider inclusion of these companies as comparable companies. Since the DRP has failed to do so, we are of the view that the issue regarding inclusion of the aforesaid companies as comparable companies should be set aside to AO/TPO for fresh consideration in the light of the information available in public domain. Thus ground No. 7 is treated as allowed for statistical purposes. Respectfully following the above view, we remit the comparables back o the Ld.AO/TPO for fresh consideration in the light of information available in public domain 48. We notice that in assessee’s case also these Akshay and Evoke have been excluded on the ground that these companies did not feature in the search matrix of the TPO. Therefore respectfully following the above decision of the coordinate bench we remit this issue back to the AO/TPO for a fresh consideration in the light of the information in public domain and also the various details submitted by the assessee in this regard. Sagarsoft (India) Ltd (‘Sagarsoft’): 49. It is submitted that the company is engaged in rendering software development and consultancy services, and is functionally comparable to the Assessee. Further, the company passes all the filter applied by the TPO. While so, the TPO erroneously held that the company fails the SWD service filter. The DRP upheld its rejection on the ground that the company did not feature in the search matrix of the TPO. IT(TP)A No.211/Bang/2021 Page 26 of 27 50. It is submitted that the company is functionally comparable to the Assessee. The entire service income of the company is from rendering SWD services, and therefore it clearly passes the service revenue filter applied by the TPO. Submissions in this regard are placed at pages 135, 272 and 280 of the paper book. 51. It is submitted that this company is consistently included in the final list of companies in cases of similarly placed assessees. Reliance in this regard is placed on the decision of the Mumbai Bench of this Hon’ble Tribunal in Red Hat India Pvt. Ltd. v. NFAC (order dated 25.02.2022 passed in ITA No. 1379/Mum/2021. 52. We heard the parties. The issue of inclusion of SagarSoft as a comparable has been considered by the Mumbai Bench of the Tribunal in the case of Red Hat India Pvt. Ltd(supra) where it is held that – 54. We have perused the computation given by the assessee at page A381 and A427 of the paper book. Since it is a factual aspect, which needs to be examined at initial level, Ld. TPO may verify the same to reconsider SagarSoft as a comparable after providing opportunity of being heard to the assessee 53. We also notice that a similar view has been held by the coordinate bench in the case of NTT Data FA Insurance Systems (India) Pvt. Ltd (supra) where the issue was remitted back to the AO/TPO. Accordingly respectfully following these decisions we remit the issue of inclusion of SagarSoft back to the AO/TPO for fresh examination. Needless to say that the assessee may be given a reasonable opportunity of being heard. IT(TP)A No.211/Bang/2021 Page 27 of 27 54. The AO/TPO is directed to recompute the ALP in accordance with the directions given in this order. 55. The ld. AR during the course of hearing submitted that the rest of the grounds in the appeal are not pressed at this stage, with liberty to urge the said grounds in any future proceeding, appellate or otherwise, and in these proceedings at a future point in time. Accordingly the rest of the grounds are dismissed as not pressed. 56. In the result, the appeal is partly allowed Pronounced in the open court on this 19 th day of December, 2022. Sd/- Sd/- ( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 19 th December, 2022. /Desai S Murthy / Copy to: 1. Assessee 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.