Appeal details
Counselvise Citation
[2022] 106 COUNSELVISE.COM (IT) 8309 (ITAT-PUNE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
11 month(s) 23 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
11-07-2022
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
C
Assessment Year
2016-2017
Appeal Filed On
18-07-2021
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, PUNE SHRI INTURI RAMA RAO, AM AND SHRI PARTHA SARATHI CHAUDHUR, JM ITA No. 214/PUN/2021 : A.Y. 2016-17 Ventura (India) Pvt. Ltd., Upper Ground Level, 1, Level 2, Tower B1, Magarpatta City SEZ, Hadapsar, Pune-411 013. PAN: AABCE 3274 C Appellant Vs. The Dy. C.I.T. TP 2(2) Pune. Respondent Appellant by : S/Shri M.P. Lohia, Rajendra Agiwal & Hemen Chandariya Respondent by : Smt. Vidya Bajpai Date of Hearing : 07-07-2022 Date of Pronouncement : 12-07-2022 ORDER PER PARTHA SARATHI CHAUDHURY This Appeal emanates from the findings of the learned Dispute Resolution Panel (hereinafter referred to as ‘DRP’ for short) dated 19-02-2021 for A.Y. 2016-17 as per the following grounds of appeal. “Based on the facts and circumstances of the case, Ventura (India) Private Limited (hereinafter referred to as 'the Appellant') respectfully craves leave to prefer an appeal under section 253(1)( d) of the Income-tax Act, 1961 (hereinafter referred to as 'Act'), against the order dated 26 March 2021 issued by the Additional/ Joint! Deputy/ Assistant Commissioner of Income Tax/ Income-tax Officer, National e-Assessment Centre, Delhi (hereinafter referred to as 'learned AO') under section 143(3) r.w.s. Section 144C(13) of the Act in pursuance of the directions dated 19 February 2021 issued by the Honorable Dispute Resolution Panel - 3 (WZ), Mumbai (hereinafter referred to as 'Hon'ble DRP') and the order passed by learned Transfer Pricing Officer ('TPO') dated 31 October 2019, on the following grounds: On the facts and in circumstances of the case and in law, the learned TPO, learned AO and Hon’ble DRP have erred as under: 1. Inappropriate confirmation of transfer pricing adjustment of INR 7,90,08,000 in relation to the international transaction pertaining to provision of Information Technology ('IT') services to Associated Enterprises (AEs) Erred on the facts and in circumstances of the case and in law by confirming transfer pricing adjustment of INR 7,90,08,000 by not considering/accepting the analysis undertaken by the Appellant to determine arm's length price for its international transaction pertaining to provision of IT services for A Y 2016-17. 2 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 2. Non-consideration of comparability analysis as documented in the transfer pricing study report Erred in law on facts and in circumstances of the case by not considering the data provided in the transfer pricing study report for benchmarking analysis in relation to international transaction of provision of IT services. 3. Modification of turnover criteria applied by the Appellant , Erred in law on facts and in circumstances of the case by not considering the turnover filter applied in case of provision of IT services by the Appellant of INR I crore to TNR 600 crores (i.e. rejecting companies having turnover lesser than INR I crore and higher than INR 600 crores) as a comparable selection criteria and applying turnover criteria of rejecting companies having turnover less than INR 11.50 crores and more than INR 1,150.15 crores (which is selecting companies within 10 times higher or 10 times lower range). 4. Application of certain inappropriate qualitative filters Erred in law on facts and in circumstances of the case in law by selecting following inappropriate filters and applying certain filters on selective basis: 1. Rejection of companies with less than 75% earnings from exports as against 25% earnings from export filter applied by the Appellant; Rejection of companies with different accounting year; 2. Rejection of companies with different accounting year; 3. Rejection of companies with forex spending greater than 75% of operating cost; 4. Rejection of companies having employee cost less than 25% of the total cost; and 5. Rejection of companies having gross intangibles greater than 50% of operating revenue. 5. Acceptance of companies having super normal profit. Erred in law on facts and in circumstances of the case in law by including following companies, having supernormal profits in the set of comparable companies in respect of international transactions pertaining to provision of IT Services: - Aspire Systems (India) Ltd - - Thirdware Solutions Limited - Cybage Software Private Limited - Dun & Bradstreet Technologies & Data Services Private Limited ('Dun & Bradstreet') - E-Infochips Limited 6. Rejection of certain companies identified by the Appellant in the transfer pricing study report in relation to IT services Erred on facts and in circumstances of the case and in law by rejecting following companies from the set of comparable companies identified by the Appellant in respect of international transactions pertaining to provision of IT Services: - Akshay Software Technologies Limited - Mudunuru Limited - Cigniti Technologies Ltd - Maveric Systems Limited - Kals Information Systems - CG- V AK Software & Exports Ltd - Infornile Technologies Ltd 3 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 7. Accepting certain additional companies as comparable to Ventura India in relation, to provision of IT Services Erred on facts and in circumstances of the case and in law in accepting following additional companies as comparable to the Appellant in relation to international transactions pertaining to provision of IT Services: - Cybage Software Pvt. Ltd. - Thirdware Solutions Ltd. - Aspire Systems (India) Ltd. - Nihilent Technologies Pvt. Ltd. - Harbinger Systems Pvt. Ltd. - E-Inforchips Ltd. - Dun & Bradstreet Technologies & Data Services Pvt. Ltd (Dun & Bradstreet) - Exilant Technology Pvt. Ltd. - Puresoftware Pvt. Ltd. - Bhilwara Infotechnology Ltd. 8. Adopting of incorrect methodology while computing related party filter of 25% in case of Aspire systems (India) Pvt. Ltd. Erred in computing the workings of related party filter by considering the percentage of related party income and related party expenses to operating income and operating expenses. respectively, instead of holistic approach of total value of related party transactions as a percentage of operating revenue in case of Aspire Systems (India) Private Limited. 9. Erred in considering foreign exchange difference as non-operating in nature Erred in treating the foreign exchange difference as non-operating in nature while computing the operating margins of comparables as well as tested party, in respect of international transaction of provision of IT services 10. Erred in computing operating margins and consequently working capital adjusted operating margins in relation to comparable companies pertaining to provision of IT Services Erred in computing operating margins and consequently erred in computing working capital adjusted operating margins in relation to comparable companies pertaining to provision of IT Services 11. Non-consideration of adjustment to factor the differences on account of risk undertaken by comparable companies and the Assessee Erred on the facts and circumstances of the case and in law by comparing the full-fledged risk bearing entities with the Appellant's being limited risk bearing entity without making any risk adjustment on account of differences between the functional and risk profile of comparable companies vis-a-vis the risk profile of the Appellant. 12. Initiation of penalty proceedings under section 271 (l)(c) of the Act on additions made to the total income Erred on the facts and in circumstances of the case and in law in initiating penalty proceedings against the Appellant under section 271 (1)( c) of the Act on account of transfer pricing adjustment disallowance, without appreciating the facts that, proposed transfer pricing adjustment to the international transactions of theAssessee are on account of difference of opinion as to application of selection criterion for selection of comparable companies, interpretation of the provisions, etc. 4 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 13. Proposed levy of interest under section 234B of the Act on account of additions made to the total income Erred on the facts and in circumstances of the case and in law by proposing to levy interest under section 234B of the Act, as applicable, on account of unanticipated additions made to the total income of the Assessee on account of transfer pricing adjustment amounting to INR 7,90,08,000. The Appellant craves leave to add, alter, vary, omit, substitute or amend one or more of the above Grounds of Appeal at any time before or at the time of proceedings so as to enable your Honours to decide these objections according to law. 2. At the outset, learned counsel for the assessee submitted referring to the Grounds of Appeal filed in the Appeal Memo that the assessee is pressing only Ground No. 7 and rest of the grounds are not pressed. That after hearing the submissions of the learned counsel therefore, the only effective ground is Ground No. 7 and all other grounds filed in the Appeal Memo are dismissed as not pressed. 3. In respect to Ground No. 7, the assessee is disputing the inclusion of certain companies as comparables in the final set of comparables in respect of assessee-company for benchmarking international transactions and determination of ALP. The assessee wants exclusion of certain companies which have been included by the TPO/AO considering them to be comparable companies with that of the assessee. Brief background in this case are that (a) Ventura India incorporated on 10 th June 2004, is registered as a 100% Export Oriented Unit under the Software Technology Park Scheme at Pune. It is engaged in rendering information technology enabled services (‘ITes) including BPO services which primarily includes call center and other support services. (b) Subsequent to demerger of ComputerLand UK (CL UK) and merger of CL UK Pune branch into Ventura India from Ventura India from appointed date 31 st January 2014, Ventura India started rendering Information Technology (IT) Services including application management and development, infrastructure management, software testing and data migration services to its group companies. 5 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 (c) Thus, during the year under consideration, Ventura India has rendered BPO and support services to its Associated Enterprise (AEs i.e. (Capita Consumer Management Ltd) and third party customer (i.e. NEXT) and provision of IT services to sits AEs (i.e. Capita Business Services Ltd and Capita (ITS). 4. That, during the year the assessee entered into international transactions with its AE and the operating revenue with this AE with regard to provisions of information technology services of Rs. 1,15,01,46,090/- applying TNMM method and this segment of the transaction entails the disputed area. The assessee incurred operating cost of Rs. 99,62,34,471/-. These facts are incorporated in the TPO’s order from para 4 onwards. 5. The assessee pleads exclusion of the following companies. (a) Thirdware Solution Ltd. In respect of this company, the assessee submits that : Thirdware is functionally dissimilar to the Assessee’s IT services segment as Thirdware also deals in software products. Separate segmental profitability of software services operation is not available; Thirdware is a consistently supper normal profit earning company; and Various judicial precedents are available which states that Thirdware is functionally not comparable to IT services providing companies. (b) However, the T.P.O did not agree with the contentions of the assessee and he observed that though the assessee’s main contention was that Thirdware also deals in software products but however, in the annual report of the company the revenue from sale of products was Rs. Zero whereas the revenue from sale of services was Rs. 22,136.09 lakhs as per the P & L account of the company and therefore, the T.P.O held that this company does not derive any revenue from software products and the assessee’s objections were rejected. 6 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 (c) The DRP dealt with this issue from pages 77 onwards and gave their finding at page 105 at para 8.2.4 onwards. The DRP as per its detailed findings upheld the observations of the T.P.O referring to the annual report of Thirdware Solutions Ltd. that mainly the income of the companies is from software services and thus the Thirdware Solution company was functionally comparable to that with the assessee. 5. At the time of hearing, the learned counsel demonstrated through annual report of the company which is annexed at paper 1217 onwards that Thirdware solutions is functionally different with that of the assessee and therefore, cannot be comparable company in the final set of comparables. In this regard, the assessee also placed heavy reliance in the decision of the Co- ordinate Bench Pune Tribunal in the case of Veritas Software Technology India P. Ltd. Vs. Dy. CIT (TP-2), Pune in I.T.A. No. 207/PUN/2021 for A.Y. 2016-17, order dated 31-12-2021. That on identical facts and circumstances, it was held by Tribunal as follows: 15. THIRDWARE SOLUTIONS LTD. The assessee sought the exclusion of this company from list of comparables on the ground that (i) The company is engaged in consulting, design, implementing and support of enterprise applications for Fortune 500 firms. Also in transaction systems, analytics and cloud applications. Two decades of experience in transaction, analytics and cloud layers of enterprise applications – a global leader in enterprise applications. (ii) No segmental information for sale of licenses and sale of services is available. (iii) (iii) However, the TPO rejected the exclusion on the ground that 99% of the revenue is derived from the provision of software services. (B) Even before the DRP, the DRP confirmed the action of the TPO by holding that 99% of the revenue is derived from the provisions of software services and the contentions that it is engaged into diversified services is not supported by the information contained in the annual report. (C). Being aggrieved, the appellant is in the present appeal before us reiterating the same submissions as made before the lower authorities. Our attention is drawn to explanatory note given on revenue recognition at page 2144 stated that : “Revenue is primarily derived from software development, implementation 7 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 services, application management services and other related services and from the sale of license and subscription for software application.” It is further submitted that revenue from subscription for software application and sale of license indicates that there is income from development of software products. (D). On the other hand, ld. CIT-DR referring to the annual report of the company i.e. Thirdware Solutions Ltd. submits that 99% of income is derived from the provisions of software services. He further submits that the contention of the appellant that this company is engaged in diversified activities is not supported by the information contained in the annual report of the company and, therefore, the contention of the appellant company cannot be accepted. (E). We heard the rival submissions and perused the material on record. We find at page no.2139 of the paper book the breakup of the software services from local unit, export of software services, revenue from subscription & training and sale of licence as under :- “Software Services from local unit : 2809.62; Export of Software Services : 19285.11; Revenue from Subscription & Training : 32.59; and, Sale of Licence : 8.77” Even though, more than 90% of the total revenue is derived from provisions of software services. In the absence of segment-wise profits and losses, it is not possible to determine the impact of the operations of sale of products and training on the profitability of software service segment of the company. Therefore, we are of the considered opinion that this company i.e. Thirdware Solutions Ltd. cannot be compared with that of the appellant company which is purely software development company. In the circumstances, we direct the Assessing Officer/TPO to exclude this company from the list of comparables. 6. The learned counsel for the assessee further submitted that the aforestated decision pertains to same assessment year i.e. 2016-17 which is presently before us. 7. Similarly the Co-ordinate Bench, Hyderabad in the case of ADP (P) Ltd. Vs. Dy. CIT. Hyderabad in ITA No. 227 and 228 (HYD) of 2021 for A.Y. 2016- 17 reported in (2022) 135 taxmann.com (Hyderabad – Trib) held as follows: (xi) THIRDWARE SOLUTIONS LTD. "36. This company was selected by the Transfer Pricing Officer and retained by the DRP. Objecting to the selection of the aforesaid company as a comparable, the learned Authorised Representative submitted that this company is involved in the activities of software development services as well as development of product. However, no segmental details are available. Thus, he submitted that this company cannot be treated as a comparable. In support of such contention, the learned Authorised Representative relied upon the following decisions: - ITA No 2233 of 2018 ADP Private Ltd Hyderabad i) ACIT vs. Tech Mahindra Ltd., [2018) 91 taxmann.com 329; ii) Ness Innovative Business Services Pvt. Ltd. vis DCIT, [2014) 151 ITD 190; ITA Nos..227 & 228/Hyd/2021 ADP Pvt. Ltd., Hyd. :- 28 -: iii) LSI Technologies India Pvt. Ltd. vis ITO, [2015) 60 taxmann.com 405; iv) PCIT vis S. T. Ericsson India Pvt. Ltd. ITA no.821/2017, dated 31.01.2018; v) S. T. Ericsson India Pvt. Ltd. vis ACIT, ITA no.1672/Del./ 2014; vi) Dialogic Networks India Pvt. Ltd. vis ACIT, ITA no. 7280/Mum/ 2012, 8 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 dated 27.07.2018; and vii) Accenture Services Pvt. Ltd. vis ACIT, [2018) 96 taxmann.com 37. The learned Departmental Representative submitted, before the Transfer Pricing Officer the assessee has not objected to the selection of this company as a comparable. He submitted, only in subsequent stages, the assessee has objected to selection of the aforesaid company by raising new grounds. He submitted, since the issue of development of product by this company and unavailability of segmental details, were not raised before the Transfer Pricing Officer, it requires verification. 38. We have considered rival submissions and perused materials on record. Though, it may be a fact that the assessee may not have objected to selection of this company before the Transfer Pricing Officer, however, the assessee raised objections against selection of Infor Global Solutions India Pvt. Ltd. this company before the DRP as well as before us. The grievance of the assessee is, the company being involved in development of products and since no segmental details are available in the annual report, it cannot be treated as comparable. The Co- ordinate Bench in Tech Mahindra Ltd. (supra) having found this company to be involved in development of software product and trading in software licenses has held that it cannot be a comparable to a software development service provider. Similar view has been expressed in the other decisions cited before us by the learned Authorised Representative. Since, many of these decisions relate to very same assessment year, following the ratio laid down in these decisions, we hold that this company cannot be a comparable to the assessee". The decision of Hyderabad Bench also pertains to the same assessment year i.e. 2016-17. We are of the considered view that on perusal of the aforestated decision and the Annual Repot of Thirdware Solutions Ltd. that this company is functionally not comparable to the assessee and that also the company is engaged in provision of diversified services for which separate segmental information is not available. In such scenario respectfully following the aforestated Tribunal decisions pertaining to the same assessment year i.e. 2016-17, we direct the A.O/T.P.O to exclude Thirdware solutions from the final set of comparables. 8. Asphire Systems (India) Pvt. Ltd. (a) The contention before the Department by the assessee was that this company is engaged in providing diversified services and hence, it is functionally not comparable to Ventura India. It is involved in outsources operations; F.Y. 2015-16 is an exceptional year of operation for Aspire; it is a consistently supernormal profit earning company; and Non-availability of segmental information. 9 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 (b) The T.P.O did not agree with the submissions of the assessee and analyzed on contrary that the company is engaged in software development which is similar to that of the assessee. The company is also earning revenue from sale of services. Thus, Aspire Systems (India) Pvt. Ltd. was considered as a comparable. (c) That before the D.R.P the assessee submitted as follows: (i) The company fails the RPT filter applied by the TPO; (ii) The company is functionally not comparable to the assessee; (iii) This is exceptional year of operation for the company; (iv) the segmental profitability statement of the company is prepared on regional basis and not on the basis of various services provided; and (v) The company is a supernormal profit making company. (d) The submissions of the assessee did not find favour with the DRP and they upheld the findings of the TPO/AO including Aspire Systems (India) Pvt. Ltd. to final set of comparables. The final findings of the DRP were that ultimately Aspire Systems (India) Pvt. Ltd. was included in the business of provisions of software development services and had derived entire revenue from such activity. Therefore, this company is comparable. 9. At the time of hearing, the ld. Counsel placed reliance on the decision of the co-ordinate Bench Pune in the case of Veritas Software Technologies India Pvt. Ltd. (supra) wherein it was held as follows: 14. ASPIRE SYSTEMS (INDIA) PVT. LTD. : The appellant company had objected the inclusion of this comparable on the ground that (i) The related party transactions are more than 25%. (ii) It is engaged into developing, innovative products through its onsite and offshore model. (iii) The TPO rejected the above contentions by holding that the company has derived entire revenue from software services and the related party 10 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 transactions does not exceed 25%. (iv) Even before the DRP, the same submissions were reiterated. However, the DRP upheld the inclusion in the list of comparables by holding that the submissions made by the assessee are based on the website information which cannot be relied upon. (B) Being aggrieved, the appellant is challenging the inclusion of this company in the list of comparables by arguing that it is engaged in diversified activity such as product engineering, testing, IT infrastructure support, cloud computing, etc, exceptional year companies amalgamated with Aspire super normal profit-making company. (ii) The TPO had not considered the website information and it is super normal profit-making company and (iii) The business model of the company is different from that of the assessee company as it had rendered service of onsite and offshore. (C). On the other hand, ld. CIT-DR contended that the annual report does not reveal any income for sale of software products, ITES, in-fact the annual report revealed that the entire revenue operation only from onsite of software services, software development and the information contained in the website cannot be relied upon. As regards to the amalgamation to the company applied Development Software (India) Pvt. Ltd. and Pure Apps Consulting Services Private Limited, it is submitted that the assessee has not demonstrated as to how the amalgamation of this two companies has impacted the profitability of the assessee company and in any event both the companies are engaged in the business of development of software and provisions of software services. (D). We heard the rival submissions and perused the material on record. The company considered its business segment as its primary segment. The company is engaged in the business of providing outsourced technology services. The company focused on helping software companies creates innovating products through its onsite and offshore model. The company activities are not distinguishable on the basis of risk and method of operations. Accordingly, the company views the entire business as once segment. In notes forming part of the annual accounts at page no.1933 of the paper book, it is mentioned as under :- “The company considers its business segment as its primary segment. The company is engaged in the business of providing outsourced technology services, company focused on helping software companies create innovative products through its onsite and offshore model. The company’s activities are not distinguishable on the basis of risk and return, the methods of operations and regulatory environment, accordingly, the company views the entire business as one segment.” (E). That apart, in note no.36 of notes of accounts, the total expenditure in foreign currency is Rs.46,15,94,724/- indicating the incurring of expenditure onsite. It is settled position of law that when the business model of the assessee is different from that of comparables, then the company cannot be considered as comparable. In the present case, only indication available in the annual report suggesting that it is rendering both onsite and offshore services is incurring of expenditure in foreign currency. There is no other indication available. That apart, this contention was not raised before the lower authorities. Therefore, we are no option but remit the matter to the file of the AO/TPO to examine the business model of this company with that of the assessee company and adjudicate the issue of comparability” (a) In the aforesaid decision, the Tribunal observed that the business model of the assessee if it is different from that of the comparable, then the company cannot be considered as a comparable. That, in the referred case, only indication available in the field report suggested that the said company 11 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 was rendering both onsite and offshore services is incurring expenditure in foreign currency. There was no other indication available. In such circumstances, the matter was remitted back to the A.O/T.P.O to examine business model of the said company with that of the assessee company and adjudicate the issue of the comparability. That, in the same of line on the same parity of reasoning, the ld. D.R also conceded that the matter may be restored to the file of the A.O/T.P.O for adjudication. In view thereof, this issue is remitted to the file of the A.O/T.P.O as per the directions contained at para (E) in the decision of Veritas Software Technology India Pvt. Ltd (supra). 10. E-Infochips Ltd. (a) The assessee submits that this company is also not functionally comparable for the following reasons. E-Infochips is engaged in manufacturing and sale of products; E-Infochips is engaged in diversified portfolio and therefore, functionally not comparable to the assessee. E-Infochips is consistently earning super-normal profits; E-Inforchips is involved in rendering services to various industries; and Service-wise segmental bifurcation is also not available in the annual report. (b) These submissions of the assessee were not accepted by the T.PO. and he opined that from the annual report of this company, revenue from sale of product is at 5.16% of the total revenue whereas the remaining 94.84% revenue was from sale of services. Therefore, predominantly it is software service company. The D.R.P dealt with this issue at para 8.2.8.1.and they analyzed and held that this company is primarily engaged in software development services and earned more than 95% of the revenue from such activity. Thus, objection of the assessee was rejected and the company was selected as a comparable. (c). At the time of hearing, the learned counsel for the assessee taken us through the annual report of the company which is at page 1586 of the paper book and submitted that merger has taken place of this company with other two entities i.e. Smart Guard Systems Pvt. Ltd., N-Gin Technologies Pvt. Ltd., 12 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 whereas SGSPL was engaged in business of rendering engineering services and consultancy services, nGin Technologies was engaged in business of rendering software services. Therefore, it was submitted that after merger, the entity did not have functional compatability with that of the assessee. Similar question arose before Co-ordinate Bench in the case of Veritas Software Technology India Pvt. Ltd (supra) wherein it was observed and held as follows: “18. E-INFOCHIP LIMITED: The appellant company is seeking the exclusion of this company from the list of comparables selected by the TPO as confirmed by the DRP. The appellant has objected inclusion of this company in the list of comparables before the TPO on the ground that (i) It is engaged in sale of products, product engineering and semiconductor, service computer programming , consultancy and IT enabled services. The appellant submitted that in the absence of any segmental data, this company cannot be compared with that of the appellant company. (ii) Two subsidiary companies were merged with the appellant company. The impact of merger of these two companies has not been evaluated. (iii) However, the TPO upheld the inclusion by holding that 97% of the revenue is generated from the operations of Software Development activity and the acquisition had insignificant impact on the profitability of this company. (B) The TPO further held that the company cannot be excluded based on the website information. Even the DRP also upheld the inclusion. (C) Being aggrieved, the appellant is before us in the present appeal. (D). The ld. AR submitted that the company is into diversified activity such as, IT enabled services and sale of products. He placed reliance on the information contained in the disclosure of Accounting Policies etc., wherein it is stated as under : “e-Infochips Limited (e-Infochips) provide solutions to key verticals like Aerospace & Defense, Automotive, Consumer Electronics, Energy & Utilities, Healthcare, Home, Office, Industrial Automation, Media & Broadcast, Medical Devices, Retail & E-Commerce, Security & Surveillance and semiconductor.” Our attention is also drawn to the information contained on segmental reporting at page 2686 of the paper book wherein it is stated as under : “Information about Primary Segments. The company is primarily engaged in Software Development and IT enable services and products which is considered the only reportable business segment as per Accounting Standard –AS17. “Segment Reporting” prescribed in Companies accounting standards notified under Section 133 of the Companies Act, 2013 (“the Act”) read with Rule 7 of the Companies (Accounts) Rules, 2014 and other relevant provisions of the Act. Information about Secondary Segments Sales by market. . . . . .” (E). On the other hand, the ld. CIT-DR placing reliance on the page 11 of the annual report of this company wherein name of the main 13 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 product/service has been described as Computer Programming, Consultancy & related activities submitted that it is only a Software Development service. He further submitted that out of the total revenue of Rs.269,04,44,983/-, sale of services is Rs.255,82,06,799/- and revenue from sale of products is Rs.13,22,38,184/-. He submitted that revenue from Software Consultancy charges should be treated as part of Software Development services which means the revenue from Software Development services works out to 95.08%, therefore, this company cannot be excluded. It is further submitted that a supernormal profit making company cannot be ipso facto be excluded from the list of comparables. (F). We heard the rival submissions and perused the material on record. From the perusal of the annual report of this company, it would show that company derives income from Software Development as well as provision of technical know-how and revenue from sale of products etc. Though the break-up of the revenue is available, segment-wise profits are not available. Therefore, the impact of profitability from provisions of technical know-how and sale of products on the profitability of software development segment is not known. Hence, we are of the considered opinion that this company cannot be considered as comparable. Hence, we direct the AO/TPO to exclude this company from the list of comparables”. (d). Respectfully following the aforesaid findings of the Tribunal on the same parity of reasoning, we direct the A.O/T.P.O to exclude this company from the final set of comparable in respect of the assessee. 11. Dun and Bradstreet Technologies & Data Services Pvt. Ltd. In this regard, it was submitted that it is functionally not comparable to Ventura India, provides diversified services and no segmental data is available, Possession of significant intangibles; and Super Normal profit company. (a) In this case also, the T.P.O held that the revenue of this company is mainly from software services as per the annual report and thus continues as functionally similar with the assessee, therefore, included in the final set of comparables. (b). The DRP has dealt with this issue from page 117 to 120 from para 8.2.9 onwards and has upheld the observations of the T.P.O. (c) The assessee once again relied on the decision of Co-ordinate Bench of Pune Tribunal in the case of Veritas Software Technology India Pvt. Ltd. (supra) and we find that it was observed and held as follows: 14 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 17. DUN AND BRADSTREET TECHNOLOGIES & DATA SERVICES PVT. LTD. : The appellant sought the exclusion of this company from the list of comparables selected by the TPO on the ground that (i) Functional dissimilarity, as the company is engaged into diversified activities and no segmental information is available. However, the TPO rejected the contention of the appellant by holding that entire revenue of the company is derived from the activities of the provisions of software services. (B) Even the DRP confirmed the inclusion of this company in the list of comparables. (C). Before us, the assessee sought the exclusion of this company on the ground that this company is engaged in providing data analytics services cum-predictive analytics and also engaged in diversified activities which is totally different from the software development services. It is also sought that the exclusion of this company on the ground that the entire business transactions are to its holding company or its affiliates. Therefore, comparison cannot be made with another controlled transaction and also is a super-normal profit-making company. (D) On the other hand, ld. CIT-DR placing reliance on page no.131 of the annual report wherein, it is stated that entire revenue from the operations is derived from the services of the provisions of IT and provisions of software development services contended that this company is not into diversified activities and solely into the software development services. The submissions made by the assessee are based on the website information, which cannot be relied upon. (E). We heard the rival submissions and perused the material on record. The assessee company is seeking exclusion of this company from the list of the comparables on the ground that the company is engaged in diversified activities. We have carefully perused the annual report of this company, though it was stated that the company was incorporated with the object of providing predictive analytics but the information given in the annual accounts clearly shows that entire revenue is derived from the provisions of IT and software development services as contained in page no.138 of the annual report. The entire revenue is derived from the sale of software services as evident from the information contained in the profit and loss account at page no.135 and 136 of the annual report. However, we find merit in the contention of the appellant that a comparison can be made with only uncontrolled transactions. It is evident from the information contained in annual report that the company, as mentioned in the annual report at page no.2347 of the paper book, renders services to its parent company as well as some other affiliates companies only. However, this contention was made for the first time before us and requires verification of this facts/evidence by the AO/TPO. Hence, we remit this issue of comparability of this company to the TPO/AO.” (d). That, following the same parity of reasons as aforestated in the same facts and circumstances, the issue in respect of this company is remitted back to the file of the A.P.O/A.O as per our similar directions provided in the above referred judgment. 12. Exilant Technologies Pvt. Ltd. It was submitted by the assessee that this company is engaged in the business of information technology consulting and implementation and therefore functionally different to Ventura India; and Segmental information of Exilant Technologies is not available. 15 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 (a). The T.P.O observed and held as follows: “The contention of the assessee that Exilant Technologies is functionally different is not acceptable. It can be seen from the Annual Report on page No. 1 under the head “Description of product or services category” that the company is engaged in information Technology Software and other related services. Further, on page 15 of the annual Report, under the head “Principal Business Activities of the Company” it is stated as below. Name and description of main products/ % to total turnover of /services the company Information of Technology Software and Other related services 100% Moreover, it can be seen from Profit and Loss Account (page 114 and page 117 of AR) of the company that it is earning Revenue of Rs. 3,75,57,97,901/- from sale of services out of the total revenue of Rs. 3,75,93,93,43,986/-. It shows 98.39% of its revenue from software development and only 0.09% of the revenue is from sale of products. Thus, it can be concluded that the company is engaged in the software development services. This company is retained as comparable.” (b) The ld. D.R.P. on this issue in para 8.2.10 observed and held as follows: “8.2.10.1 The assessee has objected to the inclusion of Exilant Technologies Pvt. Ltd. As a comparable by the TPO on the grounds that (i) the company is functionally different; and (ii) the company is engaged in diversified activities, but separate segmental information is not available. The contentions of the assessee in this regard and our findings thereon are discussed herein below. 8.2.10.2 Functional comparability: The assessee contends that Exilant Technologies is engaged in the business of Information Technology consulting and implementation, and it also provides business solutions through global software development, Business IT services, application development and maintenance, business process management, business technology consulting, cloud and product engineering, etc. The website of the company shows that it is engaged in diversified business operations. On the basis of the above, the assessee has contended that the company is functionally not comparable to it. We have considered the contentions of the assessee. It is seen that the TPO has rejected the contention of the assessee regarding functional dissimilarity, observing that on the first page of the Annual Report of the company, under the heading 'Description of product or services category', is given as "Information Technology Software and other related services". Further, the TPO has also observed that on Page 15 of the Annual Report, under the heading “Principal Business Activities of the Company", the name and description of main products/services of the company is again mentioned as, "Information Technology Software and other related services" and it has been further stated that 100% of the turnover of the company is therefrom. Moreover, as per the Profit & Loss Account (Pages 114 & 117 of the Annual Report), out of the total revenue of Rs.375,93,43,986/-, revenue of Rs.375,57,97,901/- was from sale of services, and, thus, 98.39% of the total revenue is from software development and only 0.09% of the revenue is earned from sale of products. Accordingly, the TPO has held that the company is comparable to the assessee. 16 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 The contentions of the assessee are based partly on the information available on the website of the company, which, as discussed above, cannot be considered. The assessee has also relied upon the information available in the Annual Report on Page 102, under the heading, "Company Overview", in support of its contention that Exilant also provides business solutions, business IT services, application development and maintenance, etc. However, from the information extracted. By the assessee, it is apparent that these services are provided by the subsidiaries of the company. Further, the assessee has not disputed the above findings of the TPO, which are based on the Annual Report of the company. From the findings of the TPO, it is clear that the company is engaged in provision of software development services and almost the entire revenue is also from such activity. Since the assessee has not disputed the findings of the TPO before us, we hold that Exilant Technologies is functionally comparable to the assessee. 8.2.10.3 Non-availability of segmental information: The assessee’s contention regarding non-availability of segmental information is based on the premise that the company is engaged in diversified activities. Since it has been found that almost the entire revenue of the company is from software development services, this objection of the assessee rejected. 8.2.10.4 In view of the above, inclusion of Exilant Technologies Pvt. Ltd. As a comparable by the TPO is upheld.” (c) We find that Exilant Technology Pvt. Ltd. has already been decided by the Co-ordinate Bench in Veritas Software Technologies India Pvt. Ltd. (supra) wherein it has been directed that this company has to be excluded from the list of comparables. On this issue, it was observed and held as follows: “19. EXILANT TECHNOLOGIES PVT. LTD. : The appellant company objected to the inclusion of this company in the list of comparables before the TPO on the ground that (i) It is engaged in provision of information technology consulting and implementation, provides business process management and product engineering services, develops and owns intangible properties. Segmental information is not available. (B). However, the TPO rejected the above contentions by holding that 98.39% of the total revenue is from the activities of Software Development and therefore, held that the company is comparable with that of the appellant company. (C). Apart from the contention raised before the TPO, it is urged before the DRP that the company is also into Research and Development work and possess intangibles in the form of patents. However, the DRP also upheld the inclusion of this company in the list of comparables. Being aggrieved, the appellant is in appeal before us. (D). The ld. AR submitted that this company is functionally dissimilar with that of the assessee company as it is into Information Technology consulting and implementation company. Along with its subsidiaries, Exilant provides/delivers business solutions through global software development, Business IT services, application development and maintenance, business process management, business technology consulting, cloud and product engineering. Exilant is a Private Limited company incorporated and headquartered in India and has registered office in Bangalore, Karnataka. Apart from having offices in India, the company has offices in United States of America, United Kingdom and Singapore. The company has also its wholly owned subsidiary in Switzerland and Singapore. 17 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 It is also submitted that the company provides product engineering and consulting services, develops and owns the intangibles. Finally, it is submitted that the business model of this company is different from that of the appellant company as it provides on-site software services. The ld. AR placing reliance on the judgment of Hon’ble Delhi High Court in the case of PCIT Vs. Open Solutions Software Services (P) Ltd. (2020)116 taxmann.com 708 (Delhi), PCIT Vs. Aptara Technology (P) Ltd. (2019) 40 TR 100 (Bombay) and Rampgreen Solutions (P) Ltd. Vs. CIT (2015) 377 ITR 533 submitted that the companies having different business models are not comparable with the appellant company and therefore, urged for exclusion of this company from the list of comparables. (E). The ld. CIT-DR submitted that since 98.39% of the revenue is derived from the software development this company is comparable with that of the appellant company. (F). We heard the rival submissions and perused the material on record. We have also perused the annual report of the company which is placed at pages 3594 to 3716 of the paper book. From the information contained in the Director’s report at page 3599, it is seen that the entire revenue of this company is derived from the activities of Software services and products and Software licences. Activities of the company are described as Information Technology Software and other related services which is placed at page 15 of the annual report. Balance sheet placed at page 3678 also shows that this company is in possession of intangibles worth Rs.1,67,46,061/-. It is settled position of law that a company which is engaged in the diversified activities such as Development of Software and sale of products cannot be compared with another company which is purely a Software Development company. We have noted in the above discussion that the company is into Software Development and sale of products. Further, there is no segmental data available. In the light of the above factual matrix, this company cannot be compared with that of the appellant company which is purely Software Company in view of the law laid down by the Hon’ble Delhi High Court in the case of Open Solutions Software Services (P) Ltd. (supra). In the light of these findings given by us, we direct the AO/TPO to exclude this company from the list of comparables. (d). Following on the same parity of reasoning and considering the submissions of the parties, we direct the A.O/T.P.O to exclude this company from the final list of comparables. 13. Puresoftware Pvt. Ltd. The assessee contended that Puresoftware is functionally not comparable to the assessee, it is involved in diversified activities and has a high investment portfolio; segmental information in relation to IT services segment is not available. (a) The ld. A.R apart from reiterating the submissions made before the subordinate authorities further submitted that there has been inconstancy in the approach of the T.P.O while selecting this company as a comparable. The T.P.O on one hand has held that the Pureshoftware Pvt. Ltd.is functionally comparable with that of the assessee which is primarily software testing, services and development company and similarly, the 18 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 assessee had selected two comparable companies i.e. Maveric Systems Ltd., and Cigniti Technologies Ltd. These companies also, as evident from para 19.4 and 19.8 of the T.P.O’s order are engaged in software testing services but these companies which were taken up as comparable by the assessee was rejected by the T.P.O while on the other hand the T.P.O has taken up Puresoftware Pvt. Ltd. and held it as comparable though it is also engaged in testing and software development. Thus, there is inconsistency in his decision. The ld. D.R submitted that the Puresoftware Pvt. Ltd. not only deals with software testing but also services and software development. Whereas Cigniti Technologies Ltd. is engaged in rendering software testing, services only and similarly Maveric Systems Ltd. is also rendering only software testing services. Therefore, the functionality of these companies i.e. Maveric Systems Ltd., and Cigniti Technologies Ltd., and Puresoftware Pvt. Ltd. are not 100% similar and there is some difference. The ld. D.R therefore, supported the order of the T.P.O in selecting Puresoftware Pvt. Ltd. as a comparable company with that of the assessee. (b) Having heard the rival contentions, we find that as evident from the record specifically in the T.P.O’s order, we find that Puresoftware Pvt. Ltd. is engaged in the business of software testing services and software development company whereas as evident from para 19.4 and 19.8 of the T.P.O’s order respectively i.e. Maveric systems Ltd., and Cigniti Technologies Ltd. are engaged in software testing services only. Therefore, the functionality classification requires detailed factual verification. In the interest of justice, we are of the considered view that this issue has to be remitted back to the file of the A.P.O/TP.O to verify in detail, the functions of the concerned comparables and then decide as to the comparability. Therefore this issue is remitted back to the A.O/TP.O. 19 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 Needless to say that he shall follow the principles of natural justice and provide proper opportunity of hearing to the assessee. 14. In the combined result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced on this 12 th day of July 2022. Sd/- sd/- (INTURI RAMA RAO) (PARTHA SARATHI CHAUDHURY) ACCOUNTANT MEMBER JUDICIAL MEMBER Pune; Dated, this 12 th day of July 2022 Ankam Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. The D.R.P.(3) Mumbai-1. 4. The Pr. CIT – 1, Pune 5. The D.R. ITAT C’ Bench, Pune. 5. Guard File BY ORDER, Sr. Private Secretary ITAT, Pune. 20 ITA No. 214/PUN/2021 Ventura (India) P. Ltd. A.Y. 2016-17 Date 1 Draft dictated on 07-07-2022 Sr.PS 2 Draft placed before author 11-07-2022 Sr.PS 3 Draft proposed and placed before the second Member JM/AM 4 Draft discussed/approved by second Member AM/JM 5 Approved draft comes to the Sr. PS Sr.PS 6 Kept for pronouncement on 12-07-2022 Sr.PS 7 Date of uploading of order 13-07-2022 Sr.PS 8 File sent to Bench Clerk 14-7-2022 Sr.PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order
