Appeal Details
Counselvise Citation
[2021] 104 COUNSELVISE.COM (IT) 6367 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
2 year(s) 11 month(s) 27 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
14-12-2021
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
DB-A
Assessment Year
2014-2015
Appeal Filed On
17-12-2018
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH ‘A, HYDERABAD (THROUGH VIDEO CONFERENCING) BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER IT(TP)A No.2337 /H/2018 Assessment Year: 2014-15 M/s Wave Crest Payment Technology Pvt. Ltd., Plot No. 38, N Heights Building, 6 th Floor, Awfis Business Centre Hitech City, Phase-II, Madhapur, Hyderabad v. Deputy Commissioner of Income Tax, Circle-17(2), Hyderabad PAN:AABCW0832A (Appellant) (Respondent) Assessee by: Sh. Mahaveer Jain, AR Respondent by: Sh. YVST Sai, DR Date of hearing: 09.11.2021 Date of pronouncement: 15.12.2021 O R D E R VIJAY PAL RAO, JUDICIAL MEMBER This appeal by the assessee is directed against the assessment order dated 31 st October, 2021 passed under section 143(3) read with section 144C(13) of the Act in pursuance to the directions of the DRP under section 144C(5) of the Income tax Act dated 11.09.2018 and 26.10.2018 for the assessment year 2014-15. The assessee has raised the following revised grounds:- 1. The learned Transfer Pricing Officer has erred in rejecting the following Assessee’s comparable: 1.1 The learned Transfer Pricing officer erred by rejecting Akshay Software Technology Limited as a comparable company on unjustifiable grounds and Hon’ble Dispute Resolution Panel has erred in confirming the same. 1.2. The learned Transfer Pricing Office erred by rejecting Sasken Communications Technologies Limited as comparable company on unjustifiable grounds ad Hon’ble Dispute Resolution Panel has erred in confirming the same. 2. The learned Transfer Pricing Officer has erred in accepting the following companies which as an entirely different functional and risk profile: 2 ITA No. 233/H/2018 A.Y. 2014-15 2.1 The learned Transfer Pricing Officer erred on facts and law by comparing the Assessee with Tata Elxsi Limited which has an entirely different functional and risk profile and Hon’ble Dispute Resolution Panel has erred in confirming the same. 2.2 The learned Transfer Pricing Officer erred on facts and law by comparing the Assessee E-infochips Limited which has an entirely different functional and risk profile and Hon’ble Dispute Resolution Panel has erred in confirming the same. 2.3 The learned Transfer Pricing Officer erred on facts and law by comparing the Assessee with Larsen &Toubro infotech Ltd. which has an entirely different functional and risk profile and Hon’ble Dispute Resolution Panel has erred in confirming the same. 2.4 The learned Transfer Pricing officer erred on facts and law by comparing the same Assessee with Infosys Limited which has an entirely different functional and risk profile and Hon’ble Dispute Resolution Panel has erred in confirming the same. 2.5 The Learned Transfer Pricing Officer erred on facts and law by comparing the Assessee with Persistent Systems Limited which has an entirely different functional and risk profile and Hon’ble Dispute Resolution Panel has erred in confirming the same. 2.6 The Learned Transfer Pricing officer erred on facts and law by comparing the Assessee with Infobeans Technologies Limited which has an entirely different functional and risk profile and Hon’ble Dispute Resolution Panel has erred in confirming the same. 2.7 The learned Transfer Pricing Officer erred on facts and law by comparing the Assessee with Thirdware Solutions Limited which has an entirely different functional and risk profile and Hon’ble Dispute Resolution Panel has erred in confirming the same. 3. The learned Transfer Pricing Officer erred by rejecting following companies appearing in his/her own search filter: 3.1 The Learned Transfer Pricing Officer erred by rejecting Maverick Systems Limited which was incorrectly excluded in the learned Transfer Pricing Officer’s search filter and Hon’ble Dispute Resolution Panel has erred in confirming the same. 3.2 The learned Transfer Pricing Officer erred by rejecting Athena Global Technologies Limited which was incorrectly excluded in the learned Transfer Pricing Officer’s search filter and Hon’ble Dispute Resolution Panel has erred in confirming the same. 3.3 The learned Transfer Pricing Officer erred by rejecting Evoke Technologies Private Limited which was incorrectly excluded in the learned Transfer Pricing Officer’s search filter and Hon’ble Dispute Resolution Panel has erred in confirming the same. 3.4 The learned Transfer Pricing Officer erred by rejecting Kals Information Systems Limited which was incorrectly excluded in the learned Transfer Pricing officer’s search filter and Hon’ble Dispute Resolution Panel has erred in confirming the same. 4. The learned Transfer Pricing Officer erred on facts and law by not applying an upper limit to the turnover filter and thereby ignoring the numerous judgments of the Hon’ble Tribunal and Hon’ble Dispute Resolution Panel has erred in confirming the same. 5. The learned TPO has grossly erred by comparing the Appellant with comparable companies having unreasonably high average margin of 34.69% whereas the lawmakers have prescribed a reasonable margin of 20% under the Safe harbor rules for the software development industry.” 3 ITA No. 233/H/2018 A.Y. 2014-15 2. The assessee is engaged in the Software Development Services and filed its return of income for the year under consideration on 25.11.2014 declaring total income of Rs. 05,70,83,190/-. The case was selected for scrutiny through CASS and since the assessee has entered into international transactions during the previous year relevant to the year under consideration. Therefore, the case was referred to the TPO for determination of the Arm’s Length price (ALP). The profile of the assessee as taken from the transfer pricing study document and recorded by the TPO in para 3 is as under:- “3. WaveCrest India is a wholly owned subsidiary of WaveCrest Group Ltd. Gibraltor (“WaveCrest Group Ltd. along with its subsidiaries is collectively referred to as “WaveCrest Group”). WaveCrest India provides backend software development and support services to tis associated enterprise (AE in singular and AE’s in aggregate). WaveCrest India has responsibility to develop & test new applications/enhancements and provide maintenance support for existing applications. The services are rendered on cost plus, basis, based on the services agreement entered with associated enterprise/s. The taxpayer mentions that as regards the services rendered to WaveCrest Holding Limited are concerned, these are in in the nature of IT support services. Considering that the online utility of the Form 3CEB does not specifically provide for reporting of support services with a specific services description code, the same has been mentioned as BPO services inadvertently.” 3. The assessee has declared international transaction in 3CEB report / TP document for the year under consideration as under:- Name of AE Nature of transaction Amount (Rs) Wave Crest Group Ltd. Provision of software development and support services 20,19,96,429 Wave Crest Holding Limited Provision of software development and support services 12,73,47,844 Total 32,93,44,273 T2 The TPO noted that the assessee has not reported certain transactions of receivables from AE which is reproduced as under:- 4 ITA No. 233/H/2018 A.Y. 2014-15 A.E. Nature of International Transaction Amount (Rs.) WaveCrest Group Ltd. Receivables 5,62,01,891 In its audited financial statements, the assessee has reported operating profit to cost at 16.67%. In its T.P. analysis, the assessee claimed its international transaction at arm’s length by adopting TNMM as most appropriate method and selecting seven comparable as under as under:- SI. No. Comparable NCP 1. Akshay Software Technologies Ltd. 8.91% 2. Bells Softech Ltd. 7.92% 3. Helios & Matheson Information Technology Ltd. 18.62% 4. Locuz Enterprise Solution Ltd. 6.96% 5. Spry Resources India Private Ltd. 20.78% 6. CSS Corp Pvt. Ltd. 20.01% 7. Sasken Communication Technologies Ltd. 12.19% 8. Average margin of comparable 13.63% The assessee claimed that its international transactions having 15% operating profit to cost in comparison to 13.3% average margins of comparables are at arm’s length. Needless to say, the assessee has applied profit level indicator (PLI) as OP/OC which is not in dispute. The TPO rejected all the seven comparables selected by the assessee and carried out a fresh search to select the comparables for determination of arm’s length price of international transaction entered into by the assessee. The TPO proposed to select 13 comparables as under:- S. No. Company Name OR OC Operating Profit OP/O C (%) 1. SOS INDIA BFSI LTD 164,09,33,805 164,09,33,80 5 36,51,44,689 22.25 2. TATA ELXSI LTD (seg) 558,25,94,000 558,25,94,00 0 124,4,28,000 22.29 5 ITA No. 233/H/2018 A.Y. 2014-15 3. MINDTREE LTD 2501,90,00,000 2501,90,00,0 00 541,50,00,00 0 21.64 4. R S SOFTWARE (INDIA) LTD 283,71,11,000 283,71,11,00 0 68,17,09,000 23.83 5. TECH MAHINDRA LTD (seg) 13739,35,00,000 13739,35,00, 000 3274,55,00,0 00 81.00 6. e-INFOCHIPS LTD 113,59,89,199 113,59,89,19 9 92,01,23,238 24.04 7. LARSEN & TOUBRO INFOTECH LTD 3666,51,02,339 3666,51,02,3 39 881,52,69,54 3 27 8. CIGNITI TECHNOLOGIES LTD 43,58,33,603 43,58,38,603 12,04,59,559 64 9. INFOSYS LTD 32741,00,00,000 32741,00,00, 000 11904,00,00, 000 36.36 10. PERSISTENT SYSTEMS LTD 871,00,90,000 43,58,38,603 314,10,80,00 0 36.06 11. INFOBEANS TECHNOLOGIES LTD 22,23,74,867 32741,00,00, 000 9,77,81,523 42.08 12. ICRA TECHNO ANALYTICS LTD 19,18,00,000 871,00,90,00 0 9,38,46,000 48.93 13. THIRDWARE SOLTIONS LTD 206,75,74,000 23,23,74,867 69,38,66,000 50.51 Average 35.44 The TPO also adopted TNMM as most appropriate method and operating profit /operating cost as PLI and profit before interest and tax is considered for operating margins. These parameters applied by the TPO are not disputed by the assessee except the functional comparability of the companies selected by the TPO as comparables. The assessee raised objections against the comparables selected by the TPO which were rejected by the TPO as discussed in the impugned order. After considering the objections of the assessee, the TPO finally selected 12 comparables as under:- S NO. Company Name OR OC OP OP/OC% 1. SQS India BFSI Ltd. 2,00,60,78,494 1,64,09,33,805 36,51,44,689 22.35 2. Tata Elxsi Ltd. (seg) 6,82,70,22,000 5,58,25,94,000 1,24,44,28,000 22.29 3. Mindtree Ltd. 30,43,40,00,000 25,01,90,00,000 5,41,50,00,000 21.64 4. R S Software 3,51,88,20,000 2,83,71,11,000 68,17,09,000 24.03 6 ITA No. 233/H/2018 A.Y. 2014-15 5. Tech Mahindra Ltd. (Seg) 1,70,13,90,00,000 1,37,39,35,00,000 32,74,55,00,000 23.83 6. e-Infochips Ltd. 2,05,61,12,437 1,13,59,89,199 92,01,23,238 81.00 7. Larsen & Tourbo Infotech Ltd. 45,48,03,71,882 36,66,51,02,339 8,81,52,69,543 24.04 8. Cigniti Technologies Ltd. 55,62,98,162 43,58,38,603 12,04,59,559 27.64 9. Infosys Ltd. 44,65,00,00,000 3,27,41,00,00,000 1,19,04,00,00,000 36.36 10. Persistent Systems Ltd. 11,85,11,70,000 8,71,00,90,000 3,14,10,80,000 36.06 11. Infobeans Technologies Ltd. 33,01,56,390 23,23,74,867 9,77,81,523 42.08 12. Thirdware solutions Ltd. 2,06,75,74,000 1,37,37,08,000 69,38,66,000 50.51 Average 34.31 In the final set of comparables, the TPO arrived at average margin at Rs. 34.31% in comparison to 15% margin of the assessee from international transactions. The TPO proposed the adjustment on account of shortfall under section 92CA of the Income Tax Act as under:- Arm’s Length Margin on cost 34.31% Operating Revenue 37,37,16,550 AE segment Revenue 32,93,44,273 AE segment Revenue as % of Operating Revenue 88.13% Operating Cost 32,19,71,595 Proportionate operating cost ( Total OC x 88.12/100) 28,37,43,123 Arm’s Length Price (ALP) @ 134.31% OF Operating Cost 38,10,95,388 Price Received 32,93,44,273 Shortfall being Adjustment 5,17,51,115 The Assessing Officer then, passed a draft assessment order dated 29.12.2017 making an addition on account of TP adjustment of Rs. 5,17,51,115/-. The assessee filed the objections against the draft assessment before the DRP on 24 th January, 2018 which were disposed of by this DRP vide directions dated 11.09.2018. Thereafter the assessee filed an application dated 24.09.2018 for rectification of 7 ITA No. 233/H/2018 A.Y. 2014-15 mistakes which was disposed by the DRP vide directions dated 26.10.2018. There are two set of directions by the DRP; first on the original objections raised by the assessee and thereafter on the rectification application filed by the assessee. Before the DRP, the assessee prayed inclusion of a set of comparables which were excluded by the TPO. The DRP accepted one comparable from the new set of the companies namely C.G.-VAK Software Export Ltd., as functionally comparable and added to the list of comparables. In pursuance to the directions of the DRP, the Assessing Officer passed the final assessment order dated 31 st October, 2018 whereby the Assessing Officer taken the arm’s length margin of ten comparables at 34.69% as under:- SI No. Comparable NCP 1. Mindtree Ltd. 21.64 2. RS Software (India) Ltd. 24.03 3. Tata Elxsi Ltd. 22.29 4. E-infochips Ltd. 81.00 5. Larsen & Toubro Infotech Ltd. 24.04 6. Infosys Ltd. 36.36 7. Persistent systems Ltd. 36.06 8. Infobeans Technologies Ltd. 42.08 9. Thridware Solutions Ltd. 50.51 10. CG-VAK Software & Export Ltd. 8.91 Average 34.69 4. Aggrieved by the final assessment order passed in pursuance to the directions of DRP, the assessee filed the present appeal. The assessee raised the grounds against the rejections of certain companies selected by the assessee as comparable as well as against the selection of the companies by the TPO which were finally retained by the DRP as comparables. 4.1 GROUND NO. 1 Ground no. 1 is regarding the two companies which were selected by the assessee as part the set of seven comparables which were rejected by the TPO and 8 ITA No. 233/H/2018 A.Y. 2014-15 confirmed by the DRP namely Akshay Software Technologies Ltd., and Sasken Communication Technology Ltd., Akshay Software Technologies Ltd., The learned AR of the assessee has submitted that the TPO as well as DRP has rejected this company on the ground that this company has incurred 85% of the total expenditure in respect of foreign branch and substantial part is towards employee benefit expenses which is a different business model from that of assessee. However, there was no onsite filter applied by the TPO while selecting the companies therefore, the rejection of this company on this ground is not justified when this company is otherwise functionally comparable being engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP product and services. All these services are part of Software Development Services. The learned AR has relied upon the decision of the Bangalore Benches of the Tribunal in case of M/s ARM Embedded Technologies Pvt. Ltd., vs. Income Tax Officer in IT(TP)A No. 3374/Bang/2018 dated 24.11.2020. Sasken Communication Technology Ltd., The learned AR has submitted that the DRP has rejected the said company on the ground that this company fails export filter and is functionally not comparable. The AR has pointed out that this company has income from export services at 74.35% of total Revenue which is just 0.65% sort of 75% export Revenue filter applied by the TPO / DRP. When this company is otherwise functionally comparable then merely because it has a 0.65% sort of 75% of export Revenue filter cannot be excluded from the set of comaprables. He has relied upon the decision of Bangalore Benches dated 24.11.2020 in the case of M/s ARM Embedded Technologies Pvt. Ltd., vs. Income Tax Officer in IT(TP)A No. 3374/Bang/2018 dated 24.11.2020. 5. On the other hand, the learned DR has submitted that the DRP has considered the relevant facts regarding the Revenue from the different segments and noted that 9 ITA No. 233/H/2018 A.Y. 2014-15 this company has income from sale of Software License to the tune of Rs. 27,28,760/- and commission received of Rs. 05,62,522/-. Further this company is in a different business model of providing onsite Software Development Services and a substantial part of the expenditure has been incurred in respect of foreign branch comprising of employees benefit expenditure of Rs. 20.02 Crores out of total expenditure of Rs. 22.73 Crores. Thus 85% of the total expenditure pertains to the foreign branch expenditure and substantial part of such expenditure has been incurred towards employees’ benefit which shows that the business model adopted by this comparable company is different from the assessee. He has relied upon the order of the TPO as well as DRP. 6. As regards Sasken Communication Technology Ltd., it is matter of record that this company has export income of only 74.35% of the total income. Therefore, this company fails the export filter applied by the TPO. He has further contended that there cannot be any relaxation in filter applied by the TPO for selection of comparables. If this is allowed then it would amount to cherry picking of the companies. The filter once applied would exclude the companies at threshold which are not satisfying the filter so applied. Therefore, the learned DR has submitted that once this company fails to satisfy the filter of export sales of 75% it cannot be included in the potential list of comparables for further analysis of functional comparability. 7. We have considered the rival submissions as well as the relevant material on record. So far as the functional comparability of Akshay Software Technologies Limited is concerned, we note that company is engaged in providing Software Development Services and the nature of Services provided by this company is not disputed either by the TPO or by the DRP. However, the TPO and DRP have rejected this company which was part of the set of comparbales selected by the assessee on the ground that this company has a different model that of assessee because 85% of the total expenditure pertains to foreign branch expenditure and further the substantial part of the expenditure is incurred towards employees benefit. At the 10 ITA No. 233/H/2018 A.Y. 2014-15 outset, we note that the functional comparable of this company has been considered by the Bangalore Benches of this Tribunal in the case of M/s ARM Embedded Technologies Pvt. Ltd., vs. Income Tax Officer (supra) in para 9 as under:- “(i) Akshay Software Technologies Ltd. - The company is functionally comparable as it has majority of the revenue is from of software related services. The TPO did not apply the on-site development filter and foreign branch expenses are not the same as on-site development of software. There is no difference in the business model adopted by the company and the assessee. The company was included as comparable in the decision of co-ordinate Bench in the case of EMC Software and Services Pvt. Ltd. Vs. JCIT 115 taxmann.com 293 (Bang - Tribunal) at para 7(i) page 595 of Paper Book as under : " 7 (i) Akshay Software Ltd. which has a margin of 8.13%. The income from commission on sale of software license constitute meager 0.5% of total revenue and TPO has not applied transfer development filter. The said company was rejected by the TPO for the reason that the company is engaged in providing provisional services, procurement installation, and employment support of ERP products. The DRP has rejected the comparable without applying the filter and there is no difference in the business model adopted by the company and the assessee. We on perusal of the Annual Report at Page 1373 of Paper Book, found IT(TP)A No.3374/Bang/2018 that major revenues are from operations as per Note 19 being income from software services and commission received on sale of software licenses. The earnings as per Note 28 as per the financial statements, the company has earning from export of software and in the F.Y. 2013-14 which constitute more than 95% of income. Therefore we found these facts are not considered by the TPO or DRP and accordingly we restore this issue to the file of TPO for examination and verification." We found there is a functional comparability in respect of assessee profile and accordingly, we direct the TPO to include the comparable in the final list for determination of ALP. The Tribunal has noted the fact that there is no difference in the business model adopted by this company that of assessee merely because certain expenditure were incurred in respect of foreign branch which are not categorized onsite Development of Software. Further, when the TPO did not apply onsite filter while selecting the comparable then applying the said filter for this company is not justified. Accodingly following the decision of the Bangalore Benches of the Tribunal in the case of M/s ARM Embedded Technologies Pvt. Ltd., vs. Income Tax Officer (supra) we 11 ITA No. 233/H/2018 A.Y. 2014-15 direct the TPO to include this company in the set of comaprables for determination of ALP. 7.1 Sasken Communication Technology Ltd., The assessee has contended that merely because this company has 0.65% less export sales then the filter of 75% it cannot be rejected when it is otherwise functionally comaparable. It is pertinent to note that once a filter of 75% export Revenue is applied then it has to be applied uniformly for selection of the comparable companies and cannot be relaxed for a particular company. The filter applied while selecting the comparables is to exclude the companies from the potential list of comaprables for further functional analysis. Therefore, once a company fails to satisfy the filter, the same cannot be considered for further analysis of functionally comparability. Undisputedly this company has failed to satisfy the filter of 75% of export Revenue and therefore, the same cannot be considered in the list of comparables. The assessee has relied upon the decision of Bangalore Benches of the Tribunal in the case of M/s ARM Embedded Technologies Pvt. Ltd., vs. Income Tax Officer (supra), wherein the Tribunal has held as under:- (ii) Sasken Communication Technologies Ltd. - The Company is functionally comparable as it has engaged in rendering SWD services and software product development and has income from software products, which constitutes a meager 0.88% of total revenue. Such income would not have any impact on the profitability of the SWD services segment. There is no difference in the business model adopted by the company and the assessee. The company was included as comparable in the decision of co-ordinate Bench in the case of EMC Software and Services Pvt. Ltd. Vs. JCIT (supra) at para 7(ii) page 595 of Paper Book as under:- : " 7 (ii) Sasken Communication Technologies Ltd. : The company has a margin of 10.25% and was rejected by the TPO on the functional dissimilarity and was confirmed by the DRP observing that the company fails export turnover filter. The company earns revenue from licensing and software development and royalty and the company offers software products. The learned Authorised Representative submissions are that the company is functionally similar to the assessee's profile and services rendered are predominantly software development services and income from software products constitute a meager amount of total revenue 12 ITA No. 233/H/2018 A.Y. 2014-15 shall not have any impact on the profitability of the company's software development IT(TP)A No.3374/Bang/2018 segment. The learned Authorised Representative referred to the profit and loss account at page 1455 where the abridged statement profit and loss account was disclosed and as on 31.3.2014, the revenue from the operations of software products is Rs.309.17 lakhs and software services are Rs.3508.49 lakhs. The learned Authorised Representative emphasizing that there is no impact on the profits. We are of the opinion that the assessee company has customers in US and Europe area and the export revenue filter test has to be applied by the TPO. Accordingly we restore this issue to the file of TPO for fresh consideration." We found there is a functional comparability in respect of assessee's profile and accordingly, we direct the TPO to include the comparable in the final list for determination of ALP. In the said case, there was no issue of filter of 75% before the Tribunal and the Tribunal has considered only the functional comparable of this company without considering the export turnover filter. Hence the question of functional comparability cannot be looked into once this company fails the threshold limit of export turnover of 75%. The percentage of shortfall less or more is totally irrelevant when it is not satisfying with the threshold limit of 75%. Accordingly, we do not find any error or illegality in the impugned order of the Assessing Officer as well as directions of the DRP. 8. GROUND NO.2 Ground no. 2 is regarding inclusion of certain companies in the set of comparables by the TPO for determination of arm’s length price which are having entirely different functional and risk profile. Out of nine comparable companies in the final set of comparables selected by the TPO after the directions of the DRPs’. The assessee has challenged the functional comparability of the seven companies which are as under:- 1. Tata Elxsi Ltd. 2. E-infochips Limited 3. Larsen & Toubro Infotech Ltd. 4. Infosys Limited 13 ITA No. 233/H/2018 A.Y. 2014-15 5. Persistent Systems Limited 6. Infobeans Technologies Limited 7. Thirdware solution Limited We will consider and discuss the functional comparability and risk profile of seven companies one by one. 8.1 Tata Elxsi Limited The learned AR of the assessee has submitted that this company provides consulting and product design and engineering services to the consumer electronics communication and transportation entry and system integration and support services for enterprise customer. These areas of operations are completely different when compared to the assessee business profile which is a pure Software Development Services provider. He has further contended that the activities of Tata Elxsi Limited are in the nature of KPO Services and hence cannot be considered to be comparable of the assessee. He has relied upon the decision of Delhi Benches of the Tribunal dated 1 st May, 2020, in the case of M/s Global Logic India Ltd. vs. DCIT in ITA No. 4740/Del/2018 and submitted that the Tribunal has rejected this company as comparable to a Software Development Company on the ground of functional dis- similarity. He has also relied upon the decision of Hyderabad Benches of the Tribunal dated 6.8.2019 in the case of M/s Infor (India) P. Ltd. vs. DCIT in ITA Nos. 161 & 2307/Hyd/2018. 8.2 On the other hand, learned DR has submitted that as per annual report of this company, it provides Software Development Services and the activity under this segment is functionally comparable to the assessee and fulfil filters applied by the TPO. The TPO as well as DRP considers the segmental data only in respect of the Software Development Services and not in respect of product sales. He has referred to the directions of the DRP and submitted that the business of this company is primarily Software Development and Services and system integration and support. The Software Development and Services segment comprises of three divisions (a) Embedded Product Design (b) Industrial Design (c) Visual computing lab. Once the 14 ITA No. 233/H/2018 A.Y. 2014-15 segmental financial data is available in the annual report then the other business activity of the company becomes irrelevant. He has relied upon the directions of the DRP. 8.3 We have considered the rival submissions as well as relevant material on record. Undisputedly, the Tata ELXSI Ltd., is a market leader in its field of services and having various segments of services as well as product sales. Even in the segment of Software Development and Services, there are various divisions comprising of a services provided for industrial design, visual computing labs and embedded product design. This company is also having R&D to the tune of 2.7% of the total turnover which was not considered as significant by the DRP. Further this company has also having internally generated intangibles of Rs. 5.30 Crores which was also considered as insignificant by the DRP. It is pertinent to note that the size of this company as well as turnover is manifold bigger than the assessee’s size and Revenue. The Delhi Benches of the Tribunal in the case of M/s Global Logic India Ltd. vs. DCIT (supra) has considered the functional comparability of this company with a Software Development Services provider in para 8.2 to 8.3 as under:- 8.2 We have heard the rival submission of the parties on the issue in dispute and perused the relevant material including ITA No.4740/Del./2018 annual report of the company. The details of revenue from operations available on page 51 of the Annual Report (page 394 of PB-2), reproduced as under: 18. Revenue From Operations Year ended 31 st March, 2014 Sale of traded goods [Refer None(i) below] 4,700.51 Rendering on services [Refer None(ii) below] 72,509.25 Total 77,209.76 (i) Sale of traded goods include sales of computers, networking and storage systems. ii. Rendering of services comprises: a) Product Design 66,427,07 b) Graphics Animation and Gaming 1,843,15 c) System Integration and Support 4,239.03 72,509.25 8.3 Out of the above revenue streams, we find that major revenue has been earned from rendering of product design services. Under Product design, the assessee 15 ITA No. 233/H/2018 A.Y. 2014-15 has carried major project of design and developing of a complete electronic control unit (ECU) including hardware and software for hybrid electric vehicle, designed the control hardware for India’s Mars orbiter Mission, worked with GVK to design the experiential services for various consumer touch points at Mumbai International Airport’s new integrated terminal-2. The relevant part of the Annual Report has been reproduced by the learned TPO in his order. From the various achievements of the company mentioned in the Annual Report, we are of the opinion that the company has earned revenue from designing using softwares rather than software development services and software maintenance services. The other services of graphic animation and gaming includes major project for animation and visual effects for two feature films, which won the 59th Filmfare award and the star Guild Award 2014 for Best visual effects for it works in film “ Dhoom 3”. The company also carried out visual effects for the film “Bhag Milka Bhag”. The services under the revenue from graphics animation and gaming are also different from services of software development.” The Tribunal has noted that the company has earned Revenue from the designing using software than Software Development Services and software maintenance services. The other services of graphic animation and gaming includes major project for animation and visual effects for two feature films which are different from the services of the Software Development. These finding of the Tribunal are based on the factual details and financial data available in the annual report. Similarly, the Co-ordinate Bench of this Tribunal in the case of M/s Infor (India) P. Ltd. vs. DCIT (supra) for the assessment year 2014-15 vide order dated 6.8.2019 in para 77 to 78 has analyzed the functional comparability of this company as under:- "77. As regards Tata Elxsi Ltd, Thirdware Solutions Ltd and Persistent Systems Ltd are concerned, we find that their comparability to the assessee has been considered in the assessee's own case for the A.Y 2007-08 and it is submitted that there is no change of activities of either the assessee or the comparables during the relevant A.Y before us i.e. A.Y 2014-15. 78. The learned DR has not rebutted this contention of the assessee. Therefore, respectfully following the decision of the Coordinate Bench at Mumbai in ITA No.520/Mum/2012 dated 4.12.2018, in the case of Infor Global Solutions India (P.) Ltd. v.Deputy Commissioner of Income Tax, we direct the exclusion of these three companies from the final list of comparables. For the sake of ready reference, the relevant paras are reproduced hereunder: "29. We have considered rival submissions and perused materials on record. The primary and fundamental reason on the basis of which assessee seeks rejection of the aforesaid comparable is, it is also engaged in the development of product 16 ITA No. 233/H/2018 A.Y. 2014-15 and segmental details are not available. Notably, in case of LSI Technologies India (P.) Ltd. (supra), the Co-ordinate Bench while examining the comparability of the aforesaid company to a software development service provider, has rejected this company as a comparable considering the fact that it is engaged in product development and product design services. The same view has been reiterated by the Tribunal in the other decisions cited by the learned Authorized Representative. Since, many of these decisions pertain to the impugned assessment year, respectfully following the aforesaid decisions of the Tribunal, we direct the Assessing Officer to exclude this company from the list of comparables. 35. We have considered rival submissions and perused materials on record. On a perusal of the documents placed in the paper book it appears that this company is engaged in various activities including development of niche product and development services. Thus, the company is functionally different from the assessee. Considering the aforesaid aspect, the Co- ordinate Bench in case of Telcordia Technologies India (P.) Ltd. (supra), which is for the very same assessment year, has excluded this company as a ITA No. 1689/HYD/2019 and S.A.No.98/Hyd/2020, A.Y.2015-16 M/s Infor (India) Private Limited, Hyderabad comparable. Similar view has also been expressed in the other decisions cited by the learned Authorized Representative. Thus, keeping in view the decisions of the Tribunal referred to above, we hold that this company cannot be a comparable to the assessee. 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 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". 8.4 Hence, in view of the facts and circumstances of the case and particularly the business activity of Tata ELXSI Ltd., and following the decisions of this Tribunal cited (supra), we hold that this company is not functionally comparable to the assessee and accordingly the TPO is directed to exclude this company from the set comparables for determining the arm’s length price. 17 ITA No. 233/H/2018 A.Y. 2014-15 9. e-Infochips Ltd. The Ld. AR of the assessee has submitted that this company is engaged in the business of providing Software Development in ITeS and product which is considered as only reportable business segment. This company is into product engineering and Software R & D Services with more than 500 products developed. It has eight various intellectuals properties and therefore, this company is a super profit of 81% therefore, this company cannot be considered as comparable to the assessee. He has relied upon the decision of co-ordinate Bench of this Tribunal dated 20.11.2019 in the case of M/s Kony IT Services Private Limited. vs. DCIT in ITA No. 2304/HYD/2018 as well as in the case of M/s. Infor (India) P Ltd. Vs. DCIT in ITA Nos. 161 & 2307/Hyd/2018. 9.1 On the other hand, the Ld. DR has submitted that as per the financial of this company and particularly profit and loss account it cannot be seen that the Revenue from sale of product is just 2.5% of the total operating Revenue. Thus, this company is predominantly having Software Services Business and functionally comparable to the assessee. The assessee has not brought any material on record to show that this company is having intellectual property rights/intangibles. The R&D activity does not have any effect on the margins of this company and therefore, in terms of clause (i) of Rule 10B (3) if none of these differences is likely to materially affect the profit arising from such transaction in open market such uncontrolled transactions shall be considered as comparable to an international transaction. He has relied upon the direction of the DRP. 10. We have considered the rival submission as well as relevant material on record. The DRP has accepted this fact that this company is generating Revenue from sale of product though the same is not considered as in significant in comparison to the Revenue from Software Development Services. Further the objection of the assessee regarding the R&D activities and I.P./Intangibles were rejected by DRP for want of any supporting material. At the outset we note that the co-ordinate Bench of 18 ITA No. 233/H/2018 A.Y. 2014-15 this Tribunal in the case of M/s. Infor India Pvt. Ltd. vs. DCIT (supra) has considered the functional comparability of this company in para 85 as under: “As regards E-Infochips Ltd is concerned, the contention of the assessee is that it is functionally different as it is engaged to software develop ent of software products and ITeS and that there no segmental data. The TPO &DRP have rejected the objections of the assessee. The learned Counsel for the assessee has referred to the disclosure of segments explanatory wherein the company has disclosed itself as primarily engaged in software development and ITeS services and products, as reportable as per AS17. Further, at page 897, there is an inventory in the balance sheet and at page 899, there is classification of inventories. However, we do not find any revenue from sale of products. Therefore, it cannot be accepted that this company is into product development. The other objection of the assessee is that it has abnormal profit 79.76% during the relevant A.Y. and therefore, it has witnessed super normal profit of 38% on a year on year basis. This objection of the assessee is acceptable because, in the other cases of the Infosys Ltd. L&T Infotech Ltd. and Mindtree ltd. We have held that not only high turnover but even where the comparables have earned super normal profit, they also have to be excluded this company from the final list of comparables. Thus, the assessee’s grounds of appeal on exclusion of the companies are partly allowed.” 11. Following the earlier orders of the coordinate Bench of this Tribunal, we direct the TPO to exclude this company for the set of comparable while determining the ALP of international transaction of the assessee. 12. Larsen & Toubro Infotech Ltd. The Ld. DR of the assessee has submitted that as per the financials of this company it has shown as substantial number of intangibles in its asset base which constitute 23.37% of total asset. This company has created a brand name for itself in the market which has significantly impacted on profits of this company. He has relied upon the decision of co-ordinate Bench in the case of Infor (India) P. Ltd., M/s. Global Logic India Ltd. and M/s. M/s ARM Embedded Technologies Pvt. Ltd (supra). 12.1 On the other hand, the Ld. DR has submitted that Larsen & Toubro Infotech provides services of application, maintenance, development, ERP data, warehousing Business-intelligence, infrastructure management services which are functionally comparable to the assessee. It has reported 100% operation revenue from Software Development Services. The ld. DR has further submitted that the DRP has considered 19 ITA No. 233/H/2018 A.Y. 2014-15 Note-2 of the annual report on Revenue recognition where the company recognize the revenue when the services are rendered and related cost is incurred which shows that there is no reference for any product sale or inventory in the financial statements. He has relied upon the directions of DRP. 13. We have considered the rival submissions and as well as relevant material on record. At the outset, we note that the Delhi Benches of the Tribunal in the case of M/s Global Logic India Ltd. vs. DCIT (supra) has considered the functional comparability of this company in para 6.4 to 6.7 as under: “6.4 We have heard rival submission of the parties on the issue in dispute. The learned Counsel of the assessee submitted that the company owns significant intangibles (Rs.75,04,78,329/-) in the ITA No.4740/Del./2018 form of the software and intangible assets under development. On perusal of fixed assets schedule, available on page S-1245 of the Annual Report ( page 116 of PB-2), we find that at the beginning of the year the assessee owned intangible assets of Rs.153,42,45,196/- which included software of Rs.143,61,95,196 ( 93 %), thus the intangible other than the software are insignificant. During the year, the company has sold/transferred the software and claimed depreciation, which resulted in net block of software at the end of the year to Rs.33,22,11,879/-. The assessee has also shown intangible assets under development of Rs.41,82,66,450/-, which makes the net intangibles owned by the company to Rs.75,04,78,329/- at the end of the year. But no depreciation has been claimed on the under developed intangibles, therefore there is no effect on the profitability of the company on account of the underdeveloped intangibles. Thus, the objection of the assessee of non-comparability of the assets is rejected. 6.5 Further, the learned Counsel submitted that operating expenses amounting to Rs.34,91,74,116/-and Rs.54,82,74,109/- on cost of the software packages for own use and cost of the bought-out items for resale during the year under consideration. Thus, according to the learned Counsel, the company was engaged in sale of the product and accordingly not comparable. On perusal of the profit and loss account of the company on page S-1237 of the Annual Report (Page 108 of PB-2), we find that company has shown two revenue streams. First, as revenue from the operations of Rs.46,439,403,178/-from overseas and Second as other income (loss of Rs.81,09,17,799/-). No revenue from sale of product has been shown. As regard to the objection of cost of ITA No.4740/Del./2018 software packages for own use under operating expenses, is concerned in our opinion, for a company engaged in software development, incurring expenses on purchase of the software for own use cannot term the assessee as engaged in sale of the product. Regarding the cost of the items for resale is concerned, the cost of purchase of inventory for resale will not impact on the profit and loss account because when goods are not sold, then it will appear in closing stock and resultant effect on profit and loss account is nil. 20 ITA No. 233/H/2018 A.Y. 2014-15 6.6 The next objection of the assessee is regarding multiple segments. From segment reporting on page S-1258 of the Annual Report (page 129 of PB-2), we find that the assessee has reported three business segments. The first segment is service cluster which includes banking, financial services, insurance, media and entertainment, travel and logistics and healthcare. The second segment industry cluster which includes Hi Tech and consumer electronics, consumer, retail and Pharma, energy and process, auto Mobile and aerospace, plant equipment and industrial machinery, utilities and E &C. The third segment, is telecom segment which refers to product engineering services (PES) which has been discontinued in this year. Regarding the PES, in Director's report, (available on page S-1225 of the Annual Report or page 96 of PB-2), it is reported as under: "TRANSFER OF PRODUCT ENGINEERING SERVICES (PES) BUSINESS TO L&T TECHNOLOGY SERVICES LIMITED (LTTSL) AND WINDING UP OF GDA TECHNOLOGIES INC. (GDA INC.) As part of business restructuring undertaken within L&T Group, it was decided to consolidate the engineering services business under a separate subsidiary of L&T, L&T Technology Services Ltd. (LTTSL). Pursuant to this, the Company initiated and completed transfer of its Product Engineering Services (PES) Business Unit to LTTSL effective January 1, 2014, PES Business Unit was transferred by way of slump sale for total sales consideration of Rs.489.53 crs based on ITA No.4740/Del./2018 fair valuation, GDA Technologies Inc., USA (GDA Inc.), a wholly owned subsidiary of the Company was part of PES business with synergy in terms of the end customers they serve, primarily the semiconductor companies. Over last few years, the performance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, certain IPs (Intellectual Properties) owned by GDA Inc. were transferred to LTTSL, the Company was wound up during the year." 6.7 In view of the above reporting, it is clear that under the telecom segment, the assessee was engaged in providing engineering services, which is distinct from the services of the software development. Thus, at entity level, the company cannot be considered functionally similar to the assessee. The company cannot be considered comparable at the segment level also because of there are expenses of Rs.205,80,17,445/- ( page 129 of PB-2) , which has not been allocated into three segments, and thus the segmental result are distorted. The Tribunal has noted that during the year this company has sold the Software and claimed the depreciation which resulted into net block of software at the end of the year to Rs. 33.22 Crores. There are also intangible assets under development to the tune of Rs. 81.4 which makes the net intangible owned by this company of Rs. 75.04 Crores at the end of the year. But not depreciation has been claimed on the underdeveloped intangibles. The Tribunal further noted that the 21 ITA No. 233/H/2018 A.Y. 2014-15 company has shown two revenue streams one from operations of overseas and second from other income. This company has also provided telecom engineering services distinct from the services of Software Development. The company cannot be considered as comparable even at segmental level because there are common expenses of Rs. 205.80 Crores not allocated into three segments and consequently results are distorted. Further during the year, extraordinary event of demerger of Product Engineering Services business has occurred which has also impacted the profit of the company at entity level. Similarly, the Bangalore Benches of the Tribunal in the case of M/s ARM Embedded Technologies Pvt. Ltd. (supra) has considered the functional comparability of this company at Page 11 and 12 as under: “ii) L & T Infotech Limited - The company is not functionally comparable, as it has high brand value and market leader and also benefit from its parent brand. It has proprietary business and during the year extraordinary events like product engineering services business of the company was transferred to its subsidiary and has incurred expenses in foreign currency being 57.13% of its total expenditure. The company was excluded as comparable in the decision of co-ordinate Bench in the case of EMC Software and Services Pvt. Ltd. Vs. JCIT (supra) at para 6(ii) at page 592 & 593 of Paper Book as under : " 6 (ii) L & T Infotech Limited : The company has a margin of 24.61% and has high brand value and is a market leader, high presence and the intangible income in proprietary products. Significant expenditure in foreign currency to the extent of 57.13%. During the year the product engineering business service of the company was transferred to its subsidiary. The company segments are divided into service cluster, industrial cluster and telecom business. As per the Annual Report of the company, the company has a significant capital work-in-progress and the company has developmental products. The comparable was excluded from the final list of comparable in assessee's own case for the Assessment Year 2011-12 by the DRP and further the comparable company was excluded by the co-ordinate Bench of Delhi Tribunal in the case of Pitney Bowes Software India Pvt. Ltd. Vs. ACIT 101 Taxman.com 350. The learned Authorised Representative also relied on CGI Information Systems & Management Consultants (P) Ltd. Vs. ACIT (2018) 94 taxman.com 97 and DCIT Vs. Taxman India Pvt. Ltd. (2016) 74 Taxmann.com 88 (Del). We found that the co-ordinate Bench of Tribunal in M.P. No.95/Bang/2019 in IT(TP)A No.3122/Bang/2018 for the Assessment Year 2014-15 has dealt on the issue at page 2 para 4 as under : “4. We heard Ld D.R and perused the record. We find merit in the miscellaneous petition filed by the assessee. Accordingly following paragraph is inserted after IT(TP)A No.3374/Bang/2018 paragraph 10 in the impugned order of the Tribunal, which will adjudicate the issue relating to "L & T Infotech Ltd":- 22 ITA No. 233/H/2018 A.Y. 2014-15 "10A The assessee has sought exclusion of M/s L & T Infotech Ltd on the ground that there were extraordinary events during the year, it possesses brand and intangibles, it has not provided segmental information and it has got sub- contracting expenses. The Ld A.R submitted that the above said company has been excluded by the co-ordinate bench in the case of Metric Stream Infotech P Ltd (IT(TP)A No.1418 & 2735/Bang/2017) relating to AY 2013-14 and also in the case of Electronics for Imaging India P Ltd (IT(TP)A No.1506/Bang/2016 relating to AY 2011-12). The Ld. A.R submitted that there is no change in facts in this year also and accordingly prayed for exclusion of the above said company. 10A.1 We heard Ld D.R and perused the record. We notice that M/s L & T Infotech Ltd has been excluded by the co-ordinate bench in the case of Metric Stream Infotech P Ltd (supra) for AY 2013-14 and also in the case of Electronics for Imaging India P Ltd (supra) for AY 2011-12. The Ld A.R submits that there is no change in facts prevailing in the current year vis-a-vis the years considered by the co-ordinate benches in the above said cases. Accordingly, following the above said decisions, we direct exclusion of M/s L & T Infotech Ltd." We considering the functional dissimilarity and judicial decisions and various facts which are not similar to the assessee functional profile. Accordingly, we direct the TPO to exclude M/s. L & T Infotech Limited from the final list of comparable in determining the ALP.” 14. In view of the facts and circumstances as discussed above as well as following the earlier decisions of the Tribunal on the functional comparability of this Company, we direct the TPO to exclude this company from the set of comparables while computing arm’s length price. 15. Infosys Ltd. The learned AR of the assessee has submitted that as per the financials of this company, it provides solutions that span the entire software life cycle encompassing consulting, design, development, re-engineering, maintenance systems integration, package evaluation and implementation. In addition, the company develops/owns proprietary products like Finacle, Infosys m-Connect. It has also earned revenue by sale of its products. This company derives substantial portion of its revenue from proprietary products (including its flagship banking product suite Finacle). In the segmental P&L has a segment of software services & products. However, the allocation of income for software services & product is not provided. He has further 23 ITA No. 233/H/2018 A.Y. 2014-15 submitted that the company has created a brand name for it, in the market and this ‘brand value’ has significant impact on the profits of the company. He has relied upon the following two decisions as under:- i. M/s Kony IT Services Private Limited, I.T.A.T. Hyderabad, ITA No. 2304/Hyd/2018, for A.Y. 2014-15. ii. M/s Infor (India) P. Ltd., I.T.A.T., Hyderabad, ITA Nos. 161 and 2307/Hyd/2018 A.Y. 2014-15. 16. On the other hand, learned DR has relied upon the order of the DRP and submitted that the objections raised by the assessee regarding R & D expenditure and brand value are not having any impact on the operating profit of this company being insignificant so far as the quantum of the expenditure is concerned, therefore, this company is functionally comparable. 17. We have considered the rival submissions as well as the relevant material on record. At the outset, we note that the co-ordinate Bench of this Tribunal in the case of M/s Kony IT Services Private Limited (supra) has considered the functional comparability of this company at page 16 to 22 as under:- “(iv) M/s. Infosys Limited: (a) From the profitability reported in the P & L Account (Page No. 324, 349 and 357 of PB-II) it is evident that the company had undergone extraordinary events as stated by the Ld. AR and this acquisition had substantial impact on the profitability of the company during the previous year. Extraction from Page 324 "Lodestone Holding AG On October 22, 2012. Infosys acquired 100%of the outstanding share capital of Lodestone Holding AG, a global management consultancy firm headquartered in Zurich, Switzerland. The acquisition was executed through a share purchase agreement for an upfront cash consideration of 1,187 crore and a deferred consideration of up to Rs. 608 crore. During the year, we invested in our subsidiaries, for the purpose of operations and expansion, as follows: Subsidiary In foreign currency Crore Infosys Americas, Inc. USD O.1 million 1 24 ITA No. 233/H/2018 A.Y. 2014-15 Lodestone Holding AG CHF 20 million 136 Infosys Public Services, Inc USD 12.5 million 75 Edgeverve Systems Limited 1 (1) On April 15, 2014, the Board of Directors of Infosys authorized the Company to execute a Business Transfer Agreement and related documents with Edgeverve (Refer to Note 2.10.2 of the standalone financials). Refer to statement pursuant to Section 212 of the Companies Act,1956 for the summary financial performance of our subsidiaries. The audited financial statements and related information of subsidiaries will be available on our website,www.infosys.com." Extraction from page 349 of PB-II 2.10.1 Investment in Lodestone Holding AG On October 22, 2012, Infosys acquired 100% of the outstanding share capital of Lodestone Holding AG, a global management consultancy firm headquartered in Zurich, Switzerland. The acquisition was executed through a share purchase agreement for an upfront cash consideration of Rs. 1, 87 crore and a deferred consideration of up to Rs. 608 Cr. The deferred consideration is payable to the selling shareholders of Lodestone on the third anniversary of the acquisition date and is contingent upon their continued employment for a period of three years. The investment in Lodestone has been recorded at the acquisition cost and the deferred consideration is being recognized on a proportionate basis over a period of three years from the date of acquisition. An amount of Rs. 228 Crore and Rs. 85 Cr representing the proportionate charge of the deferred consideration has been recognized as an expense during the years ended March 31, 2014 and March 31, 2013 respectively." Extraction from Page 357 of PB-II 2.26 Merger of Infosys Consulting India Limited The Honorable High Court of Karnataka sanctioned the scheme of amalgamation of Infosys Consulting India Limited (ICIL) with Infosys Limited with an effective date of August 23, 2013 and an appointed date of January 12, 2012 ICIL was a wholly- owned subsidiary of Infosys Limited and was engaged in software-related consultancy services. The merger of ICIL into Infosys Limited has been accounted for under pooling of interest method referred to in Accounting Standard 14. Accounting for Amalgamation (AS-14). All the assets and liabilities of ICIL on an after the appointed date and prior to the effective date have been transferred to Infosys Limited on a going concern basis. As ICIL was a wholly-owned subsidiary of Infosys Limited, no shares have been allotted to the shareholders upon the scheme becoming effective. 11.2. However, in the case of the assessee company there are no such events leading to super profits. (b) The company has a bumper turnover of Rs. 42,531 Crs which cannot be compared with the turnover of the assessee company which is only Rs. 41 Crs. 25 ITA No. 233/H/2018 A.Y. 2014-15 (c) The company has recognised Intellectual property rights (IPRs) for Rs. 59 Crs as evident from Page 348 of PB-II. In the case of assessee company there is no accretion of such kind of assets. (d) The company has spent huge amount on R & D Activities amounting to Rs. 261 Crs during the previous year and also have filed 79 patterns in its name as pointed by the Ld. AR and apparent from the PB-II, page No.304 and 311. Extraction from Page 304 of PB-II "Our research and development efforts focus on the twin goals of improving productivity and quality of our services, alongside working towards technology driven innovation and differentiation that will deliver greater value to our clients. At Infosys Labs, Service innovation is being achieved through enhanced automation, optimization, prevention and effective collaboration among described teams. Infosys Labs has established a set of service innovation groups focused on enhancing quality and productivity of six dominant Infosys services-Business Process Outsourcing; Infrastructure Management Services; Independent Validation Services; Application Development and Maintenance including Large Deals; Consulting and Systems Integration; and Modernization. These groups work on service platforms with a focus on automation, optimization, consolidation, and on enhancing the effectiveness of contextual collaboration for distributed teams. Under its Client Innovation umbrella, Infosys Labs has established six Centres of Excellence (CoE), namely Modernization, Advanced Analytics, Security and Dependability, Advanced Mobility, Experience, and Innovation Co-Creation. The CoEs work towards establishing technology- based client innovation and differentiation through the establishment of Client Innovation Centres, publishing focused technology points of view, implementing proofs of concepts driven by our focus on client value, and conducting client workshops. Additionally, we have set up innovation centres with a number of our clients, university partners, and industry research consortia to drive co-creation. Infosys Labs focuses on developing significant new intellectual property to enhance the productivity and quality of our services while enabling differentiation in client offerings. During fiscal year 2014, Inlosys Labs filed 79 unique patent applications in the United States Patent and Trademark Office (USPTO), the Indian Patent Office and other jurisdictions. On a standalone basis, our research and development expenses for fiscal years 2014, 2013 and 2012 were Rs. 873 crore, Rs. 907 crore and Rs. 655 crore, respectively." Extraction from Page 311 of PB-II "Research and development expenditure The R&D centers of the Company (Finacle and Infosys Labs) located at Bangalore, Bhubaneswar, Chandigarh, Chennai, Pune, Hyderabad, Mysore and Thiruvananthapuram have 26 ITA No. 233/H/2018 A.Y. 2014-15 been accorded approval for weighted deduction by the Department of Scientific and Industrial Research (DSIR) effective November 23, 2011. The eligible R&D revenue and capital expenditure on a standalone basis are Rs 261 crore and Nil respectively for the year ended March 31, 2014 and Rs. 247 crore and Rs. 3 crore respectively for the year ended March 31, 2013. On a standalone basis, the total R&D expenditure, including eligible R&D expenditure discussed above for fiscal years 2014 and 2013 is as follows: In crore 2014 2013 Revenue expenditure 873 907 Capital Expenditure -- 6 Total 873 913 R&D expenditure / total revenue (%) 2.0% 2.5% (e) It is also apparent from page No.326 of PB-II that the company has incurred huge selling and marketing expenses of Rs. 2,390 Crs. Extraction from Page 326 of PB-II III Results of operations The function-wise classification of the Standalone Statement of Profit and Loss is as follows: Year ended March 31 2014 % 2013 % Income from software services and products 44,341 100.0 36.765 100.0 Software development expenses 26,738 60.3 21,662 58.9 17,603 39.7 41.1 Gross profit 15,103 Selling and marketing expenses 2,390 5.4 1,870 5.1 General and administration expenses 2,686 6.0 2,218 6.0 5,076 11.4 4,088 11.1 Operating profit before depreciation 12,527 28.3 11,015 30.0 While as in the case of the assessee company no such expenses have been incurred as it is catering only to its parent company. 12. Considering the above-mentioned factors, we are of the considered view that M/s. Infosys Limited is not a comparable company with respect to the assessee company for TP Adjustments.” We further note that the size of the company as well as having brand value and leader in the market has been considered by the Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd reported in 36 taxmann.com 289 and held that Infosys Ltd., is not comparable having its giant size and brand value. Accordingly, following the decision of the co-ordinate Bench as well as the decision of 27 ITA No. 233/H/2018 A.Y. 2014-15 Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd (supra), we direct the TPO to exclude this company from the set of comparables. 18. Persistent Systems Ltd., The learned AR of the assessee has submitted that as per the segmental information in the annual report of the company, it is into Telecom and Wireless. Life science and Healthcare and infrastructure and Systems. Further, it is engaged in rendering “software product development” services to its customers as against the contract software development services provided by the Assessee. No segmental information is available for this company. It has diversified operations, which inter alia includes Intellectual Property (‘IP’) led business. This company is focusing on product development activities and product vertical contribute significant amount of revenue. 19. On the other hand, the Ld. DR has submitted that as per the annual report of this company, it is specializing in software product services and technology. Though there is revenue from sale of software services however, predominately this company earns revenue from foreign currency from sale of software and there is no reference to sale of products. Thus, this company is mainly engaged in providing software services. The R&D expenditure is very meagre of 0.33% of the operating revenue. Similarly, intangible asset is only 1.36% of the operating revenue therefore, these are not having any significant impact on the operating profits of the company. DRP has followed the decision of the Bangalore Benches of the Tribunal in the case of M/s. Advice America Software vs. Income Tax Officer in ITA No. 2531/Bang/2017, dated 23.05.2018. 20. We have considered the rival submissions as well as relevant material on record. The DRP has accepted this fact that this company is having intangible assets as well as has incurred expenditure towards R&D though the same are not considered in significant. Further, this company is also having revenue from I.P. but the DRP 28 ITA No. 233/H/2018 A.Y. 2014-15 noted that it does not pertain to Indian company. Once, this company is specialized in software products Services and Technology innovation and offers product life style services then these activities cannot be held to be functionally comparable with the assessee. The Coordinate Bench of this Tribunal in the case of M/s Kony IT Services Private Limited vs. DCIT (supra) has considered the functional comparability of the assessee at page 22 to 24 as under: “(v) M/s Persistent Systems Ltd:- (a) It is evident from Page No. 533 of PB-II that the company is mainly engaged in three areas such as products (IP Business), platforms (Solutions Integration) and services (Product Engineering) and is also selling its branded products. Extraction from Page 533 of PB-II "Business overview Your company specializes in building computer software products. Your company's business is organized with a focus on the following three areas: Products (IP Business), Platforms (Solutions Integration) AND Services (Product Engineering). Your company has decided to brand the product business separately from the Persistent brand and has named it 'Accelerite' (www.accelerite.com). Accelerite will be headquartered in the Silicon Vally and will help your Company provide clarity - the Persistent brand is for product development and the Accelerite brand is for products. Your company has organized the development and engineering teams around three strategies. Account-Led, Platform-Led and Product-Led. Further, Account-Led teams are organized as Named Accounts and Growth Accounts. Driven by growth in the platform based solutions and IP led business, the consolidated revenue of your Company recorded an increase of 15.2% in the US Dollar terms and 28.9% in the Rupee term during the year under review. The consolidated EBIDTA increased by 28.4% and the net profit after tax went up by 32.9% during the same period." (b) It is also evident from page no.701 of PB-II that the company is also engaged in R & D Activities and has incurred Revenue and Capital expenditure towards the same for Rs. 3.96 Crs. 29 ITA No. 233/H/2018 A.Y. 2014-15 Extraction from Page 701 of PB-II "35. Research and development expenditure. The particulars of expenditure incurred on in-house research and development centre approved by the Department of Scientific and Industrial Research (DSIR) are as follows: For the year ended March 31, 2014 March 31, 2013 Capital 2.43 – For the year ended March 31, 2014 March 31, 2013 Capital 2.43 - Revenue 37.18 27.87 39.61 27.87 (c) Though the company's revenue flows from the three streams viz., products (IP Business), platforms (Solutions Integration) and services (Product Engineering), the main segments disclosed in the Annual Report are Telecom & Wireless, Life- sciences & Health care, and Infrastructure & systems. Thus, the segmental details in the annual report is absent. Extraction from Page 675 of PB-II "(m) Segment reporting (i) Identification of Segment The Company's operations predominantly relate to providing software products, services and technology innovation covering full life cycle of product to its customers. (ii) Allocation of income and direct expenses Income and direct expenses allocable to segments are classified based on items that we individually identifiable to that segment such as salaries and project related travel expenses. The remainder is considered as un-allocable expense and is charged against the total income. (i) Un allocated item Un allocated items include general corporate income and expense items which are not allocated to any business segment. Segregation of assets, liabilities, depreciation and other non-cash expenses into various reportable segments have not been presented except for trade receivables as these items are used interchangeably between segments and the company is of the view that it is not practical to reasonable allocate these items to individual segments and an adhoc allocation will not be meaningful." 13. From the above, it is evident that M/s. Persistent Systems Ltd is functionally dissimilar to the assessee company, it also has intangibles unlike the assessee company and further segmental data are not available. Hence, M/s. Persistent Systems Ltd cannot be treated as a comparable company with the assessee company for the purpose of TP adjustments.” 30 ITA No. 233/H/2018 A.Y. 2014-15 21. Similarly, in the case of Infor (India) P. Ltd. vs. DCIT (supra), the Tribunal has excluded this company from the comparables of Software Development Service Provider in Para 7.7 as under: "7.7. As regards Tata Elxsi Ltd, Thirdware Solutions Ltd and Persistent Systems Ltd are concerned, we find that their comparability to the assessee has been considered in the assessee's own case for the A.Y 2007-08 and it is submitted that there is no change of activities of either the assessee or the comparables during the relevant A.Y before us i.e. A.Y 2014-15.” In view of the decision of the coordinate Bench of this Tribunal in the case M/s Kony IT Services Private Limited, we direct the TPO to exclude this company from the set of comparables. 22. Infobeans Technologies Ltd. The Ld. AR has submitted that as per the Financials of the company it has revenue from sale of software products. The company has earnings in foreign exchange by export of goods calculated on F.O.B. basis. Further, the company also has MODVAT and sales tax deposits. Infobeans in engaged in Custom Application Development (CAD), content Management Systems (CMS), Enterprises Mobility (EM) and Big Data Analytics (BDA) which is high end service and distinct from routine software development services. These services also fall within the definition of knowledge process outsourcing (KPO) services as published in the Safe Harbour by CBDT. He has relied upon the decisions as under: (i) M/s Kony IT Services Private Limited. (ii) M/s. Alcatel Lucent India Ltd. 22.1 On the other hand, the learned DR has submitted that as per the annual report of this company, the entire Revenue drived by this company is from Software Services. 23. We considered the rival submissions as well as the relevant material on record. The co-ordinate Bench of this Tribunal in the case of M/s Kony IT Services 31 ITA No. 233/H/2018 A.Y. 2014-15 Private Limited (supra) has considered the functional comparability of this company at page 15 and 16 as under: “(iii) M/s. Infobeans Technologies Limited: - (a) From the Annual Report Page No.276 of the PB-II it is apparent that the assessee has also been engaged in sale of goods along with rendering of services because the turnover is reported on export of goods / services calculated on FOB basis. (b) The company also has MODVAT deposits and sales tax deposit. (c) Therefore, the company is functionally dissimilar to the assessee company. (d) For reference the relevant portion of the Annual Report enclosed in paper book-II, page no.276 is extracted herein below: Note-27 EARNINGS IN FOREIGN EXCHANGE a. Export of goods / services calculated on F.O.B. basis 329,659883 216,854,891 Total 329,659883 216,854,891 LONG TERM LOANS & ADVANCES Security Deposit- Secured considered Good Telephone Deposit Other Deposit Custom Deposit Deposit with MPPKVVCL Sales Tax Deposit (Kotak FDR) Deposit (M-VAT) M.P.S.E.D.C. Ltd 9,400 9,153 10,000 140,850 10,000 25,000 10,121,460 9,400 3,500 10,000 73,150 -- 25,000 -- Total 10,325,863 121,050 The Tribunal has noted the fact that this company has MODEVAT and Sales Tax deposits. Therefore, this company is engaged in the sale of goods alongwith rendering of services. Accordingly, following the earlier order of this Tribunal, we direct the TPO to exclude this company from the set of comparables while computing the arm’s length price. 32 ITA No. 233/H/2018 A.Y. 2014-15 24. Thirdware Solution Limited The Ld. AR has submitted that the company earns revenue from development and sale of software products. Further it is also involved in earning revenue from subscription contracts and sale of user licenses for software applications. From the annual report of the company in notes to accounts it can be seen that 100% revenue is derived from sale of products and revenue from sale of service is nil. The company has reported “purchases of stock in trade” amounting to INR 40.21 crores as a cost in P&L A/c. Further, the company has acquired intangibles during the year. He has relied upon the following decisions as under:- i. M/s Infor (India) P. Ltd., I.T.A.T. Hyderabad, ITA Nos. 161 & 2307/Hyd/2018 ii. M/s ARM Embedded Technologies Pvt. Ltd., I.T.A.T. Bangalore, IT(TP)A No. 3374/Bang/2018. 24.1 On the other hand, the learned DR has submitted that as per the annual report of this company it is engaged in the business of Software Development and Consultancy Services. The company’s revenue recognition disclosure shows the Revenue from services from Software Development and implementation. Though in the profit and loss account, the company has mentioned the Revenue from sale of products however in the foot note, it is clearly mentioned that the Revenue was on account of export of software services. The Revenue from sale of license is very meagre of 0.03% of total operating Revenue. He has relied upon the directions of the DRP. 25. We have considered the rival submissions as well as relevant material on record. The DRP has not disputed the fact that this company is generating Revenue from various activities which includes export of software services being sale of software and separately on account of software services sales subscription and training. This company has also shown Revenue from sale of licenses. The Bangalore Benches of the Tribunal in the case of M/s ARM Embedded Technologies Private Ltd. 33 ITA No. 233/H/2018 A.Y. 2014-15 vs. Income Tax Officer, Bangalore (supra) has considered the functional comparability of this company at 15 & 16 as under:- “iv) Third ware Solutions Ltd. - The company is not functionally comparable as it has different diversified activities, and derives income from software development, income from subscription contract and from sale of user licenses. Further, no segmental details are available and has diverse services and also error in computation of margins. The company was excluded as comparable in the decision of co-ordinate Bench in the case of EMC Software and Services Pvt. Ltd. Vs. JCIT (supra) at para 6(iv) pages 594 & 595 of Paper Book as under : " 6 (iv) Thirdware Solutions Ltd. the company is functionally dissimilar and is engaged in rendering software development implementation and support services and engaged in the development of software products and earns revenue from sale of user licenses and purchase stock in trade during the year and has intangibles. Further the margins of the company fluctuate year on year basis due to different revenue recognition model which the company has adopted. The above comparable was excluded in assessee's own case on functional dissimilarity in the Assessment Years 2005-06 and 2007-08 and learned Authorised Representative also relied on Lime Labs (India) Pvt. Ltd. Vs. ITO 101 Taxman.com 201 (Delhi Trib.). We found the co-ordinate Bench of the Tribunal in the case of LG Software India Pvt. Ltd. Vs. DCIT in IT(TP)A No.3122/Bang/2018 dt.28.05.2019 for the Assessment Year 2014-15 has excluded the comparable as observed at paras 8 & 8.1 at page 4 as under : "8. We also notice that in A.Y 2008-09, the co-ordinate bench has excluded M/s. Thirdware Solutions Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s. Thirdware Solutions Ltd. is engaged in product development and earns revenue from sale of licenses and subscription. Further, the segmental details were not available. 8.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in A.Y 2008- 09, we direct exclusion of M/s. Thirdware Solutions Ltd." The comparable Thirdware Solutions Ltd. has to be excluded as it is predominant in activity and segmental details are not available. Accordingly we direct the TPO/A.O to exclude this comparable from the list of comparables for determining the ALP." 25.1 The Tribunal noted that this company is engaged in the development of software products and earns Revenue from sale of user license. There is purchase of stock during the year and also has intangibles. The coordinate Bench of this Tribunal in the case of M/s Kony I.T. Services Private Ltd., vs. DCIT, Hyderabad (supra) has also considered the functional comparability of this company at page 13 to 15 as under: 34 ITA No. 233/H/2018 A.Y. 2014-15 “(ii) Thirdware Solutions Limited: (a) As argued by the Ld. AR it is evident from the Annual Report (page No.235 of PB-II) that the company has derived revenue from sale of products amounting to Rs. 206.75 Crs. Further, there is no revenue from sale of services during the previous year. The assessee has also purchased stock amounting to Rs. 40.21 Crs. While as the assessee company is not engaged into any activity of producing physical goods. Page No.235 of PB-II (b) It is also apparent that the company is receiving revenue from various streams and none of them were pertaining to software development services. As apparent from page 237 of PB-II, the company has received Revenue from training and subscription amounting to Rs. 59.32 lakhs and sale of licenses Rs. 7.98 lakhs. The assessee company is only engaged in ITES. Extraction from page no.237 of PB-II: (c) It is also apparent from page no. 217 of PB-II that the company has not disclosed segmental details between software development services and products. The relevant portion is extracted hereinbelow for reference:- "34) Segment Reporting The Company’s cooperation comprises of software development, implementation and support services. Primary segmental reporting is based on geographical areas viz., Domestic = India (Products & Services) and International = Rest of the world (Exports-software services). In primary segment, revenue and all expenses, which relates to a particular geographical segment, are reported. Fixed Assets, Current Assets, Loans and Advances, Current Liabilities and provisions are classified based on specific geographical segment's business. The company maintains separate books of account for the reported segments. Wherever the costs are directly identifiable with the reported segment, it has been booked to that segment. Wherever common expenses are incurred, those expenses have already been considered for allocation and relevant entries in the books of account have been passed. Hence there are no un-allocable expenses. Further, cash, investment (net of provision) and bank balances are reported at the enterprise level. Current assets and current liabilities relating to the specific business segments are identified and reported. Those, which are not identifiable, are reported as common assets / liabilities." (d) As disclosed in the annual account it is also apparent that the company has acquired intangibles during the year. Relevant portion of page 210 of PB-II is extracted hereinbelow for reference:- "d) Intangible Assets and Amortization Acquired intangible assets relating to software purchased for company's internal use are capitalized at the cost of acquisition and is amortized on the straight line method over its estimated useful life of three years, as perceived by the management or useful life of asset as per contract whichever is earlier. 35 ITA No. 233/H/2018 A.Y. 2014-15 Depreciation on intangible assets is calculated on pro-rata basis with reference to date of addition over its useful life of three years, as perceived by the management or useful life of asset as per contract, whichever is earlier. The intangible assets acquired b the respective units of Thirdware Solution Limited are used in relation to the operation / services by the respective units only. Intangible assets internally developed by the company are capitalised at the total cost attributable towards the development of the product and is amortized on the straight-line method over its estimated useful life of three years, as perceived by the management." 10.1. In the case of the assessee company neither such expenses are incurred, or any intangibles are acquired during the relevant period. 11. Since the assessee company is primarily engaged in custom-built mobile applications and software support and maintenance related services to M/s. Kony Group of Companies, we are of the considered view that M/s. Third-ware Solutions Limited cannot be considered as a comparable company because of the reasons stated hereinabove.” Following the earlier orders of this Tribunal, we direct the TPO to exclude this company from the set of comparables. 26. Ground No. 3 Ground no. 3 is regarding exclusion of certain companies by the TPO while selecting final set of comparables in pursuance to the fresh search undertaken by the TPO. The assessee is seeking inclusion of four companies in the set of comparables which are as under:- i. Maveric Systems Limited ii. Athena Global Technologies Limited iii. Evoke Technologies Private Limited iv. Kals Information Systems Limited We will discuss the comparability of these four companies one by one. 26.1 Maveric Systems Limited The learned AR of the assessee has submitted that the DRP has rejected this company on the ground that it has substantial expenses of 6% of turnover towards R & D which is beyond tolerance limit of 3%. The learned AR has pointed out that as per the financials, this company has not incurred any R&D cost. The annual report of this 36 ITA No. 233/H/2018 A.Y. 2014-15 company shows that it is engaged in the Software Development and Testing Services. The other two companies namely Signity Technologies Limited and R.S. Software (India) Ltd., were included by the TPO in the final list of comparable but the DRP has rejected those two companies. In support of his contention he has relied upon the decision of the Tribunal dated 24.11.2020 in case of M/s ARM Embedded Technologies Pvt. Ltd., vs. Income Tax Officer (supra). 27. On the other hand, learned DR has submitted that it is evident from the annual report of this company that it has incurred substantial expenses to the tune of Rs. 6% of the turnover towards R&D which is beyond the generally acceptable tolerance limit of 3% of the Revenue. The DRP has noted that the assessee has not controverted this finding of TPO. He has relied upon the orders of the authorities below. 28. We have considered the rival submissions as well as relevant material on record. The TPO and DRP has excluded this company from the set of comparables by applying a filter of R&D expenditure of more than 3%. The assessee has contended that as per the annual report, no R&D expenditure incurred by this company. The learned AR has also relied upon the decisions of Bangalore Benches of the Tribunal in the case of M/s ARM Embedded Technologies Pvt. Ltd., vs. Income Tax Officer (supra), wherein the Tribunal has considered the comparability of the company at pages 20 and 21 as under:- “(vii) Maveric Systems Ltd. - The Company is functionally comparable as it has engaged in software testing and integral part of software development. The DRP erred in upholding the exclusion of the company on the ground that it incurred R&D exp of 6% of turnover, when no filter was applied by the TPO to exclude companies incurring R&D expenses. The company was included as comparable in IT(TP)A No.3374/Bang/2018 the decision of co-ordinate Bench in the case of EMC Software and Services Pvt. Ltd. Vs. JCIT (supra) at para 7(iii) page 595 of Paper Book as under : " 7 (iii) Maveric Systems Limited : This comparable was rejected by the TPO and it was sought for inclusion by the assessee and whereas TPO has rejected without any basis and was excluded on the ground that the company was engaged in R & D activity and expenditure is 6% of total turnover. Similarly, the DRP has upheld the exclusion of the company. The learned Authorised Representative submitted that company's functional profile is comparable and applied the TPO filters. Whereas the DRP has observed that the company has 37 ITA No. 233/H/2018 A.Y. 2014-15 incurred substantial expenses to the tune of 6% of turnover towards R & D and the tolerable limit is 3%. We found the observations of the DRP are without any basis. Accordingly we restore this issue to the file of TPO to give a logical conclusion and findings." We found there is a functional comparability in respect of assessee's profile and accordingly we direct the TPO to include the comparable in the final list for determination of ALP.” In the said case, the assessee did not dispute the fact of R&D expenditure incurred to the tune of 6% of the turnover however, the Tribunal has reversed the directions of the DRP to apply the R&D expenditure filter on the ground that the TPO has not applied any filter of R&D expenditure. The Tribunal followed the decision of the coordinate Bench in the case of EMC Software & Services Limited vs. JCIT wherein this issue was restored to the record of the TPO for giving a logical conclusion and finding regarding the R&D filter if any applied by the TPO. In the case in hand, the assessee has not disputed that the TPO excluded this company due to R&D filter breached by this company. Therefore, the decision relied upon by the learned AR would not help the case of the assessee. We further note that the coordinate Bench of this Tribunal in the case of M/s. Infor (India) P Ltd. Vs. DCIT in ITA Nos. 161 & 2307/Hyd/2018 dated 06.08.2019, which has been relied upon by the learned AR while supporting the other comparbales has considered the functional comparability of this company in para 71 and 72 as under:- “71. The learned DR, on the other hand, relied on the orders of the authorities below as well as the annual Report of Maveric Systems Ltd., wherein it is reported that 6% of the turnover has been spent towards R&D. 72. Having regard to the rival contentions and the material on record, we are satisfied that though this company is functionally similar, it fails the R&D filter of less than three percent of the turnover and hence cannot be taken as a comparable to the assessee.” Accordingly, in view of the fact that this company is having R&D Expenditure equivalent to 6% of the turnover cannot be taken as comparable. 29. Athena Global Technologies Private Limited The TPO as well as DRP excluded this company from the final set of comparables due to negative net worth in the last three years and contained 38 ITA No. 233/H/2018 A.Y. 2014-15 inventory which shows that the company is not functionally comparable. The learned AR has submitted that the negative net worth could be due to past losses but in the current physical year, the company has earned positive operating profit of 0.3%. Further the inventory has remained unchanged and there is no increase and decrease in inventory. Since this company is engaged in the Software Development and Consultancy Services which is functionally comparable with the assessee and shall be included in the set of comparables. 29.1 On the other hand, the learned DR has submitted that undisputedly this company has a negative network in the last three years and has been incurring persistent losses over the last three years. As per the NASSCOM report, the I.T. industry is growing @ 13 to 15% in these years. Further as per Note 14 of annual report, the company has reported inventory of Rs. 5.84 crores and cost of material at Rs. 1.07 Lacs which shows this company is not functionally comparable to the assessee. He has relied upon the TPO and directions of the DRP. 30. Having considered the rival submissions as well as relevant material on record, we note that the the assessee has not disputed this fact that this company is having a negative network in last three years. Further this company is also showing the inventory which mean the company is engaged in software products. Even though, there may not be change in the inventory for the year but this fact cannot be denied that the company is having products and therefore, having regard to the persistent loss making company and a different business profile this company cannot be considered has functionally comparable to the assessee. Hence, we do not find any error or illegality in the directions of the DRP qua this company. 31. Evoke Technologies Private Limited The learned AR has submitted that the DRP has excluded this company on the ground that the financial statements of its branch out of India are not audited and therefore cannot be relied upon. Further the DRP held that it fails export filters which is only 20.34% of the total Revenue. However, there is no branch of export filter as 39 ITA No. 233/H/2018 A.Y. 2014-15 this company is having export of 99.93% to the total Revenue. The learned AR thus contended that merely because this company is having unaudited financials of branch office outside India cannot be a ground for exclusion of this company as the contribution of the branch profit to the total profit is less than 25% and has positive impact on the overall financials. He has relied upon the decision of the coordinate Bench of this Tribunal in the case of M/s. Infor (India) P Ltd. Vs. DCIT in ITA Nos. 161 & 2307/Hyd/2018 dated 06.08.2019. 32. On the other hand, learned DR has relied upon the direction of the DRP and submitted that the financials of the branch office of this company are not audited and therefore, the authenticity of the same is doubtful and not reliable. 33. We have considered the rival submissions as well as relevant material on record. The DRP has raised two objections while excluding this company from the set of comparables: 1 st is unaudited financials of the branch outside India and 2 nd failure is of export filter of 75% of total turnover. So far as the export filter is concerned, since the learned AR has pointed out that there is some calculation mistakes and this company is having 99.93% export turnover of total turnover. Therefore, this factual aspect is required to be verified at the level of the TPO. The second objection of unaudited financial statements of branches have been considered by the coordinate Bench of this Tribunal in the case of M/s. Infor (India) P Ltd. Vs. DCIT (supra) in para 73 as under:- “73. As regards Evoke Technologies is concerned, the contentions of the assessee are that this company is functionally similar to the assessee, whereas the TPO & DRP have held that the financials of this company include the revenue of one branch outside India which are unaudited and hence are not reliable. The learned Counsel for the assessee however, drew our attention to page 963 of the Paper Book, which is part of the Annual Report of Evoke Technologies Ltd wherein the revenue of Indian Branch of assessee is separately shown. Taking the same into consideration, we direct the AO/TPO to reconsider the comparability of this company by taking the revenue from Indian Branch only. Thus, the ground for Maveric Systems Ltd is rejected and for Evoke Technologies Ltd is allowed for statistical purposes.” 40 ITA No. 233/H/2018 A.Y. 2014-15 Accordingly, we remit this issue to the record of the TPO for re-verification of export turnover of this company to the total turnover and by taking only the Revenue of Indian branch of this company and excluding the foreign branches because the accounts of which are not audited. Needless to say before passing a fresh order, the assessee be given an opportunity of hearing. 34. Kals Information Systems Limited This company was excluded by the DRP on the ground that no information is available on the contribution of the Software Development Services to the total operating Revenue. Further this company is into Software Services and Software Products and in the absence of segmental data, this cannot be taken as a comparable. The learned AR has submitted that the annual report of this company does not show any opening or closing inventory therefore, it cannot be said that this company is in the Software Product. This company has shown only one segment which is Software Services. 35. On the other hand, learned DR has submitted that this company is engaged in the Development & Software and Software Product and there is no segmental data available as per the annual report and financials of this company therefore in the absence of such information, it cannot be taken as a comparable of the assessee. 36. We have heard the rival submissions as well as relevant material on record. In the absence of relevant details regarding the actual nature of the business activity whether it is pure Software Development Services or Products this cannot be taken as a comparable for determination of arm’s length price of the international transactions of Software Development Services. The assessee has also not disputed this fact that the annual report of this company does not throw any light on the segmental details therefore, a company not having a definite financial details cannot be taken as a comparable merely on the basis of assumption and presumption. Hence, we do not find any reason to interfere with the directions of the DRP qua this company. 41 ITA No. 233/H/2018 A.Y. 2014-15 37. Ground nos. 4 & 5 are general in nature and does not require any specific adjudication. 38. The TPO while passing the fresh order shall determine the ALP on the basis of comparable companies remain after this order as well as outcome of the set aside issues of certain comparables. The appeal of the assessee is partly allowed. 39. In the result, the appeal is partly allowed. Order pronounced in the open Court on 15.12.2021. Sd/- Sd/- Sd/ [A. MOHAN ALANKAMONY] [VIJAY PAL RAO] ACCOUNTANT MEMBER JUDICIAL MEMBER Dated:15/12/2021 sh Copy forwarded to: 1. Appellant – 2. Respondent – 3. CIT(A) – 4. CIT- 5. DR – By order Assistant Registrar
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