M/s. Yahoo Software Development India Private Limited, Bengaluru V. The Joint Commissioner Of Income Tax, Special Range- 7, Bangalore

ITA 2365/BANG/2019

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 3928 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 24-02-2020
• Assessment Year: 2015-2016
• Appeal Filed On: 15-11-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Source of fund; Working capital adjustments; Cost of acquisition
• Section: 143(3); 92; 10B; 195; 201; 144C; 13; 22; 92CA; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER IT(TP)A NO.2657 /BANG/2018 & IT (TP) A NO.2 3 65/BANG/201 9 ASSESSMENT YEAR S : 2014 - 15 & 2015 - 16 M/S YAHOO SOFTWARE DEVELOPMENT INDIA PVT. LTD. TORREY PINES, EMBASSY GOLF LINKS BUSINESS PARK, OFF INDIRA NAGAR - KORAMANGALA INTERMEDIATE RING ROAD, BENGALURU 560071. PAN: AAACY 1876D VS. THE JOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE - 7, BENGALURU. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI , SRIRAM SESHADRI, CA RESPONDENT BY : SHRI , CIT(DR)(ITAT), BENGALURU. DATE OF HEARING : 24 .0 2 .2020 DATE OF PRONOUNCEMENT : 28 .0 2 .2020 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT IT(TP)A NO.2657/BANG/2018 THIS APPEAL BY THE ASSESSEE IS AGAINST THE FINAL ORDER OF ASSESSMENT DATED 25.7.2018 OF THE DCIT, CIRCLE 7(1) (2), BENGALURU PASSED U/S. 143(3) R.W.S. 144C OF THE INCOME-TAX ACT, 1961 [THE ACT] RELATING TO ASSESSMENT YEAR 2014-15. IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 2 OF 31 2. THE ONLY ISSUE THAT ARISES FOR CONSIDERATION IN THIS APPEAL IS WITH REGARD TO DETERMINATION OF ALP IN RESPECT OF AN INT ERNATIONAL TRANSACTION OF RENDERING SOFTWARE DEVELOPMENT SERVICES [SWD SERVIC ES] BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE (AE) UNDER THE PROVISI ONS OF SECTION 92 OF THE ACT. 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF SOFTWARE DESIGN, DEVELOPMENT, TESTING, SUPPORT AND IMPLEMENT ATION OF COMPUTER SOFTWARE. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIAR Y OF YAHOO (NON- RESIDENT). DURING THE PREVIOUS YEAR, THE ASSESSEE PROVIDED SWD SERVICES TO YAHOO FOR WHICH IT RECEIVED A PAYMENT OF RS.867, 17,41,441. SINCE THE AFORESAID TRANSACTION WAS AN INTERNATIONAL TRANSACT ION, THE INCOME ARISING FROM SUCH INTERNATIONAL TRANSACTION HAS TO BE DETER MINED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92 OF THE ACT. TO J USTIFY THE PRICE RECEIVED IN THE INTERNATIONAL TRANSACTION AS ONE AT ARMS LENGT H, THE ASSESSEE FILED A TRANSFER PRICING (TP) ANALYSIS ADOPTING THE TRANSAC TIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DE TERMINING THE ARMS LENGTH PRICE (ALP). THE PROFIT LEVEL INDICATOR (PL I) CHOSEN FOR THE PURPOSE OF COMPARING THE ASSESSEES PROFIT MARGIN WITH THE COMPARABLE COMPANIES PROFIT MARGIN WAS OPERATING PROFIT TO OPERATING COS T (OP/OC). THE OP/OC OF THE ASSESSEE WAS ARRIVED AT IN THE TP ANAL YSIS AS FOLLOWS:- PARTICULARS AMOUNT (RS) INCOME FROM PROVISION OF SERVICES 8671741441 ADD: EXCHANGE GAIN (NET) 86765355 OPERATING REVENUE 8758506796 TOTAL EXPENSES (AS PER P&L) 7322770620 LESS: PROVISION FOR DOUBTFUL ADVANCES 6751270 LESS: PROVISION FOR LOSS ON FIXED ASSETS HELD FOR S ALE 5244587 LESS: DONATIONS 7271536 OPERATING EXPENSES 7303503227 OPERATING PROFIT 1455003569 OP/OC 19.92% IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 3 OF 31 4. THE ASSESSEE CHOSE 7 COMPARABLE COMPANIES AND TH E ARITHMETIC AVERAGE PROFIT MARGIN OF THOSE 7 COMPANIES WAS ARRI VED AT 11.41%. SINCE THE PROFIT MARGIN OF ASSESSEE WAS MUCH HIGHER THAN THE PROFIT MARGIN OF THE COMPARABLE COMPANIES, THE ASSESSEE CLAIMED THAT THE PRICE RECEIVED IN THE INTERNATIONAL TRANSACTION HAS TO BE REGARDED AS AT ARMS LENGTH. 5. THE TRANSFER PRICING OFFICER (TPO) TO WHOM THE Q UESTION OF DETERMINATION OF ALP WAS REFERRED BY THE AO AS REQU IRED U/S.92CA OF THE ACT, HOWEVER, REJECTED ALL THE 7 COMPARABLES CHOSEN BY THE ASSESSEE AND HE CHOSE A SET OF 8 COMPARABLE COMPANIES. THE AVER AGE ARITHMETIC PROFIT MARGIN OF 8 COMPANIES CHOSEN BY THE TPO WAS AS FOLL OWS:- AMOUNTS IN RS. LAKH S NO NAME OF TAX PAYER OR/ SALES OC OP OP/OC (IN %) 1 INFOSYS LTD. 46,91,700 32,77,700 11,84,200 36.13 % 2 LARSEN & TOUBRO INFOTECH LTD. 4,54,360 3,64,619 89,741 24.61% 3 MINDTREE LTD. 2,99,010 2,48,290 5,072 20.43% 4 PERSISTENT SYSTEMS LTD. 1,18,412 87,649 3,07,625 35.10% 5 R S SOFTWARE (INDIA) LTD. 35,188 28,321 6,867 24.25% 6 CIGNITI TECHNOLOGIES LTD. 5,563 4,359 1,204 27.62% 7 5 Q S INDIA B F S I LTD. 20,061 16,394 3,667 22.37% 8 THIRDWARE SOLUTION LTD. 19,883 13,742 6,140 44.68% AVERAGE 29.40% 6. THE ASSESSEE HAD COMPUTED WORKING CAPITAL ADJUS TMENT AND HAD GIVEN A DETAILED WORKING IN THIS REGARD. BEFORE TH E AO THE SAID DETAILS IN THIS REGARD ARE AT PAGES 186 TO 223 OF ASSESSEES P B. THE TPO, HOWEVER, DID NOT ALLOW WORKING CAPITAL ADJUSTMENT AS WORKED OUT BY THE ASSESSEE IN ITS REPLY. THE TPO DID NOT ALLOW WORKING CAPITAL A DJUSTMENT FOR THE REASON THAT THE ASSESSEE FAILED TO DEMONSTRATE THE IMPACT OF DIFFERENCE IN WORKING IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 4 OF 31 CAPITAL ON ITS PROFIT AS WELL AS THE COMPARABLES PR OFIT. THE TPO WAS ALSO OF THE VIEW THAT SOME OF THE COMPANIES CHOSEN FOR THE PURPOSE OF COMPARISON WERE ENGAGED IN MULTIPLE BUSINESS SEGMENTS AND SEGM ENTAL WORKING CAPITAL IS NOT DISCLOSED IN THE ANNUAL REPORT. HE ALSO HELD THAT COST OF WORKING CAPITAL IS DIFFERENT FOR DIFFERENT COMPANIE S, DEPENDING UPON THE SOURCE OF FUNDS AND CREDIT STANDING OF THE BORROWER AND THEREFORE ASSUMPTION OF PRIME LENDING RATE AS INTEREST RATE A PPLICABLE FOR MAKING THE WORKING CAPITAL ADJUSTMENT WOULD SUFFER FROM RISKS OF INACCURACY. 7. THE TPO ULTIMATELY COMPUTED THE ALP AND CONSEQUE NT ADDITION TO THE TOTAL INCOME OF ASSESSEE AS FOLLOWS:- 15.4. COMPUTATION OF ARM'S LENGTH PRICE: 15.4.1 THE ARITHMETIC MEAN OF THE PROFIT LEVEL IND ICATORS IS TAKEN AS THE ARM'S LENGTH MARGIN. PLEASE SEE ANNEXURE 'A' FOR DETAILS OF COMPUTATION OF PLI OF THE COMPARABLE. BASED ON THIS , THE ARM'S LENGTH PRICE OF THE SERVICES RENDERED BY THE TAXPAY ER TO ITS AE(S) IS COMPUTED AS UNDER: SWD A RM'S LENGTH MEAN MARGIN ON COST 29.40% OPERATING COST (OC) 7303503227 ARM'S LENGTH PRICE(ALP) OF THE OR (@ 129.40% OF OC) 94507,33,176 OPERATING REVENUE (OR) 8758506796 VARIAT ION IN PRICE 6:922,26,380 3% OF PRICE RECEIVED 2627,55,204 SHORTFALL BEING ADJUSTMENT 6922,26,380 15.4.2 THE ABOVE SHORTFALL OF RS. 6922,26,380/- IS PROPOSED AS TRANSFER PRICING ADJUSTMENT U/S 92CA IN RESPECT OF SOFTWARE DEVELOPMENT SEGMENT OF THE TAXPAYER'S INTERNATIONAL TRANSACTIONS. NO ADVERSE INFERENCE IS DRAWN FOR OTHER TRANSACTION S REPORTED BY THE TAXPAYER BASED ON THE SUBMISSIONS MADE BY THE T AXPAYER BEFORE THE TPO AND MATERIAL AVAILABLE ON RECORD. IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 5 OF 31 8. AGGRIEVED BY THE AFORESAID ORDER OF THE TPO WH ICH WAS INCORPORATED IN THE DRAFT ASSESSMENT ORDER BY THE A O, THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP ). THE DRP RETAINED ALL THE COMPARABLES CHOSEN BY THE TPO AND FURTHER D IRECTED 3 COMPARABLES CHOSEN BY THE ASSESSEE TO BE INCLUDED IN THE FINAL LIST OF COMPARABLE COMPANIES VIZ., CG VAK SOFTWARE & EXPORTS LTD., E-Z EST SOLUTIONS LTD. & DAFFODILS SOFTWARE LTD. THE DRP UPHELD THE ORDER O F TPO REGARDING NON- GRANT OF WORKING CAPITAL ADJUSTMENT. CONSEQUENT TO THE ORDER OF DRP, THE ARITHMETIC AVERAGE MEAN OF THE COMPARABLE COMPANIES STOOD AT 24.46% AND STILL THE PRICE WAS NOT AT ARMS LENGTH AND THE ADDITION MADE IN THE DRAFT ASSESSMENT ORDER STOOD REDUCED FROM 69,22,26.380 TO RS.35,26,13,483 IN THE FINAL ASSESSMENT ORDER AGAINST WHICH THE ASSESS EE HAS FILED THE PRESENT APPEAL. THE ASSESSEE IS AGGRIEVED BY THE A FORESAID ADDITION WHICH WAS RETAINED IN THE FINAL ORDER OF ASSESSMENT AND H ENCE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS. AT THE TIM E OF HEARING, IT IS NOTICED THAT IF 3 OUT OF 11 COMPARABLE COMPANIES TH AT REMAIN AFTER THE ORDER OF DRP ARE ADJUDICATED AND EXCLUDED THEN THAT WOULD MEAN THAT THE PROFIT MARGIN OF THE ASSESSEE WITH THE REMAINING COMPARABL E COMPANIES WOULD BE AT ARMS LENGTH AND HENCE THERE WOULD BE NO NECE SSITY TO ADJUDICATE ON THE CHOICE OF COMPARABLE COMPANIES. THE 3 COMPANIE S WHOSE EXCLUSION FROM THE LIST OF COMPARABLE COMPANIES WAS ARGUED BE FORE US ARE (1) THIRDWARE SOLUTIONS LTD., (2) INFOSYS LTD. & (3) P ERSISTENT SYSTEMS LTD. 10. AS FAR AS EXCLUSION OF AFORESAID 3 COMPANIES FR OM THE LIST OF COMPARABLE COMPANIES IS CONCERNED, THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THE DECISION OF ITAT HYDERABA D BENCH IN THE CASE OF KONY IT SERVICES P. LTD. V. DCIT, ITA NO.2304/HYD/2 018 FOR AY 2014-15, ORDER DATED 20.11.2019. IN THE AFORESAID DECISION WAS RENDERED IN THE IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 6 OF 31 CASE OF ASSESSEE ENGAGED IN SOFTWARE DEVELOPMENT SE RVICES, EXCLUSION OF THE AFORESAID 3 COMPANIES CAME UP FOR CONSIDERATION AND THE TRIBUNAL HELD AS FOLLOWS:- (II) THIRDWARE SOLUTIONS LIMITED: (A) AS ARGUED BY THE LD. AR IT IS EVIDENT FROM TH E 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 STOC K 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 IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 7 OF 31 (B) IT IS ALSO APPARENT THAT THE COMPANY IS RECEIVI NG 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 SUBS CRIPTION AMOUNTING TO RS. 59.32 LAKHS AND SALE OF LICENSES R S. 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-I I THAT THE COMPANY HAS NOT DISCLOSED SEGMENTAL DETAILS BETWEEN SOFTWARE DEVELOPMENT SERVICES AND PRODUCTS. THE RELEVANT POR TION IS EXTRACTED HEREINBELOW FOR REFERENCE:- 34) SEGMENT REPORTING THE COMPANYS COOPERATION COMPRISES OF SOFTWARE DEVELOPMENT, IMPLEMENTATION A ND SUPPORT SERVICES. PRIMARY SEGMENTAL REPORTING IS BASED ON GEOGRAPHI CAL AREAS VIZ., DOMESTIC = INDIA (PRODUCTS & SERVICES) AND INTERNATIONAL = REST OF THE WORLD (EXPORTS-SOFTWARE SERVICES). IN PRIMARY SEGMENT, REVENUE AND ALL EXPENSES, WHI CH RELATES TO A PARTICULAR GEOGRAPHICAL SEGMENT, ARE R EPORTED. FIXED ASSETS, CURRENT ASSETS, LOANS AND ADVANCES, CURRENT LIABILITIES AND PROVISIONS ARE CLASSIFIED B ASED ON SPECIFIC GEOGRAPHICAL SEGMENTS BUSINESS. THE COMPA NY MAINTAINS SEPARATE BOOKS OF ACCOUNT FOR THE REPORTE D SEGMENTS. WHEREVER THE COSTS ARE DIRECTLY IDENTIFIABLE WITH THE REPORTED SEGMENT, IT HAS BEEN BOOKED TO THAT SEGMEN T. WHEREVER COMMON EXPENSES ARE INCURRED, THOSE EXPENS ES IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 8 OF 31 HAVE ALREADY BEEN CONSIDE3RED FOR ALLOCATION AND RE LEVANT ENTRIES IN THE BOOKS OF ACCOUNT HAVE BEEN PASSED. H ENCE THERE ARE NO UN-ALLOCABLE EXPENSES. FURTHER, CASH, INVESTMENT (NET OF PROVISION) AND BANK BALANCES ARE REPORTED AT THE ENTERPRISE LEVEL. CURR ENT ASSETS AND CURRENT LIABILITIES RELATING TO THE SPEC IFIC BUSINESS SEGMENTS ARE IDENTIFIED AND REPORTED. THOS E, 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 YEA R. RELEVANT PORTION OF PAGE 210 OF PB-II IS EXTRACTED HEREINBEL OW FOR REFERENCE:- D) INTANGIBLE ASSETS AND AMORTIZATION ACQUIRED INTANGIBLE ASSETS RELATING TO SOFTWARE PURCHASED FOR COMPANYS INTERNAL USE ARE CAPITALISE D AT THE COST OF ACQUISITION AND IS AMORTISED ON THE STR AIGHT LINE METHOD OVER ITS ESTIMATED USEFUL LIFE OF THREE YEAR S, AS PERCEIVED BY THE MANAGEMENT OR USEFUL LIFE OF ASSET AS PER CONTRACT WHICHEVER IS EARLIER. DEPRECIATION ON INTANGIBLE ASSETS IS CALCULATED O N 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 U NITS OF THIRDWARE SOLUTION LIMITED ARE USED IN RELATION TO THE OPERATION / SERVICES BY THE RESPECTIVE UNITS ONLY. INTANGIBLE ASSETS INTERNALLY DEVELOPED BY THE COM PANY ARE CAPITALISED AT THE TOTAL COST ATTRIBUTABLE TOWA RDS THE DEVELOPMENT OF THE PRODUCT AND IS AMORTISED 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 DURIN G THE RELEVANT PERIOD. 11. SINCE THE ASSESSEE COMPANY IS PRIMARILY ENGAGED IN CUSTOM-BUILT MOBILE APPLICATIONS AND SOFTWARE SUPPO RT AND MAINTENANCE RELATED SERVICES TO M/S. KONY GROUP OF COMPANIES, IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 9 OF 31 WE ARE OF THE CONSIDERED VIEW THAT M/S. THIRD-WARE SOLUTIONS LIMITED CANNOT BE CONSIDERED AS A COMPARABLE COMPAN Y BECAUSE OF THE REASONS STATED HEREINABOVE. 11. THE LD. DR SUBMITTED THAT THE FUNCTIONAL PROFIL E OF THE ASSESSEE IN THE PRESENT CASE AND THAT OF THE CASE DECIDED BY TH E ITAT HYDERABAD BENCH IN THE CASE OF KONY IT SERVICES P. LTD. (SUPRA) ARE DIFFERENT. IN THIS REGARD, IT WAS SUBMITTED THAT THE IN THE DECISION R ENDERED IN THE AFORESAID CASE, THERE IS A REFERENCE TO ASSESSEE IN THAT CASE BEING ENGAGED IN SOFTWARE DEVELOPMENT SERVICES, WHEREAS IN THE TPOS ORDER IN THE CASE OF ASSESSEE IN THIS APPEAL, SERVICES PROVIDED ARE DIFF ERENT. 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AR E OF THE VIEW THAT DESCRIPTION OF SERVICES AS MENTIONED IN THE TPOS O RDER IN THE CASE OF ASSESSEE IN THIS APPEAL IS AKIN TO SOFTWARE DEVELOP MENT SERVICES AND IT CANNOT BE SAID THAT THE FUNCTIONAL PROFILE OF ASSES SEE IN THIS CASE AND THAT OF ASSESSEE IN THE CASE OF KONY IT SERVICES P. LTD. (SUPRA) ARE DIFFERENT. MOREOVER, THE CHOICE OF COMPARABLES IN BOTH THE CAS ES BY THE TPO IS IDENTICAL, WHICH BY ITSELF WOULD SHOW THAT THE FUNC TIONAL PROFILE OF THE ASSESSEE AND THAT OF THE ASSESSEE IN THE CASE OF KONY IT SERVICES PVT. LTD. (SUPRA) ARE IDENTICAL. WE FIND THAT THE ITAT HYDERABAD HA S CLEARLY BROUGHT OUT IN ITS ORDER THAT THE FUNCTIONAL PROFIL E OF THE ASSESSEE IN THIS APPEAL AND COMPARABLE COMPANIES VIZ., THIRDWARE SOL UTIONS LTD., INFOSYS LTD. & PERSISTENT SYSTEMS LTD. ARE DIFFERENT INASMU CH AS THE COMMON DIFFERENCE IS BEING THAT THESE COMPANIES ARE NOT PU RE SOFTWARE DEVELOPMENT SERVICES, BUT ARE ALSO ENGAGED IN PRODU CT DEVELOPMENT AND THE SEGMENTAL PROFITS OF THE SOFTWARE DEVELOPMENT S ERVICES SEGMENT IS NOT AVAILABLE. BESIDES THE ABOVE, COMPANY LIKE INFOSYS LTD. OWNS INTELLECTUAL PROPERTY RIGHTS (IPRS), BESIDES HAVING BIG BRAND VA LUE AND THE COMPANY LIKE PERSISTENT SYSTEMS LTD. ALSO OWN SIGNIFICANT I NTANGIBLES, BESIDES OWNING IPRS AND DERIVING INCOME FROM SUCH IPRS. WE ARE THEREFORE OF THE IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 10 OF 31 VIEW THAT THE AFORESAID 3 COMPARABLE COMPANIES SHOU LD BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. WE HOLD AND DIRE CT ACCORDINGLY. 13. THE ONLY OTHER ISSUE WHICH WAS ARGUED BEFORE US WAS ACTION OF THE REVENUE AUTHORITIES IN NOT PROVIDING WORKING CAPITA L ADJUSTMENT TO THE PROFIT MARGIN OF THE COMPARABLE COMPANIES AND THAT OF THE ASSESSEE. IN THIS REGARD, AS WE HAVE ALREADY SEEN, THE PRIMARY REASON ASSIGNED BY THE TPO WHICH WAS ENDORSED BY THE DRP IS THAT THE ASSESSEE HAS NOT DEMONSTRATED THE IMPACT OF WORKING CAPITAL ADJUSTME NT ON THE PROFIT MARGIN OF THE ASSESSEE AS WELL AS COMPARABLE COMPANY. 14. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE RELEV ANT PROVISIONS OF THE ACT IN SO FAR AS COMPARABILITY OF INTERNATIONAL TRA NSACTION WITH A TRANSACTION OF SIMILAR NATURE ENTERED INTO BETWEEN UNRELATED PA RTIES, PROVIDES AS FOLLOWS: DETERMINATION OF ARM'S LENGTH PRICE UNDER SECTION 9 2C . 10B . (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SECTION 92C, THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION [ OR A SPECIFIED DOMESTIC TRANSACTION ] SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE M ETHOD, IN THE FOLLOWING MANNER, NAMELY : (A) TO (D). ..... (E)TRANSACTIONAL NET MARGIN METHOD, BY WHICH, ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION [ OR A SPECIFIED DOMESTIC TRANSACTION ] ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFF ECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COM PUTED HAVING REGARD TO T HE SAME BASE; IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 11 OF 31 ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION [ OR THE SPECIFIED DOMESTIC TRANSACTION ] AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT TH E AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; ( IV ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AN D REFERRED TO IN SUB-CLAUSE ( I ) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB - CLAUSE ( III ); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKE N INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION [ OR THE SPECIFIED DOMESTIC TRANSACTION ] ; (F)...... (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION [ OR A SPECIFIED DOMESTIC TRANSACTION ] WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED W ITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSF ERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RES P ECTIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS AR E FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN E XPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND B ENEFITS ARE TO BE DIVIDED BETWEEN THE RESPE CTIVE PARTIES TO THE TRANSACTIONS; ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE R ESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVE RNMENT IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 12 OF 31 ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION [ OR A SPECIFIED DOMESTIC TRANSACTION ] IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSA CTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT T HE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM , SUCH TRANSACTIO NS I N THE OPEN MARKET; OR ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 15. A READING OF RULE 10B(1)(E)(III) OF THE RULES R EAD WITH SEC.92CA OF THE ACT, WOULD CLEARLY SHOWS THAT THE NET PROFIT MA RGIN ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS HAS TO BE ADJU STED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, WHICH COU LD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. 16. CHAPTERS I AND III OF THE OECD TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS ( HEREAFTER THE TPG) CONTAIN EXTENSIVE GUIDANCE ON COMPARABILITY ANALYSE S FOR TRANSFER PRICING PURPOSES. GUIDANCE ON COMPARABILITY ADJUSTMENTS IS FOUND IN PARAGRAPHS 3.47-3.54 AND IN THE ANNEX TO CHAPTER III OF THE TP G. A REVISED VERSION OF THIS GUIDANCE WAS APPROVED BY THE COUNCIL OF THE OE CD ON 22 JULY 2010. IN PARAGRAPH 2 OF THESE GUIDELINES IT HAS BEEN EXPL AINED AS TO WHAT IS COMPARABILITY ADJUSTMENT. THE GUIDELINE EXPLAINS T HAT WHEN APPLYING THE ARMS LENGTH PRINCIPLE, THE CONDITIONS OF A CONTROL LED TRANSACTION (I.E. A TRANSACTION BETWEEN A TAXPAYER AND AN ASSOCIATED EN TERPRISE) ARE GENERALLY IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 13 OF 31 COMPARED TO THE CONDITIONS OF COMPARABLE UNCONTROLL ED TRANSACTIONS. IN THIS CONTEXT, TO BE COMPARABLE MEANS THAT: NONE OF THE DIFFERENCES (IF ANY) BETWEEN THE SIT UATIONS BEING COMPARED COULD MATERIALLY AFFECT THE CONDITION BEIN G EXAMINED IN THE METHODOLOGY (E.G. PRICE OR MARGIN), OR REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO E LIMINATE THE EFFECT OF ANY SUCH DIFFERENCES. THESE ARE CALLE D COMPARABILITY ADJUSTMENTS. 17. IN PARAGRAPHS 13 TO 16 OF THE AFORESAID OECD GU IDELINES, NEED FOR WORKING CAPITAL ADJUSTMENT HAS BEEN EXPLAINED AS FO LLOWS:- 13. IN A COMPETITIVE ENVIRONMENT, MONEY HAS A TI ME VALUE. IF A COMPANY PROVIDED, SAY, 60 DAYS TRADE TERMS FOR PAYM ENT OF ACCOUNTS, THE PRICE OF THE GOODS SHOULD EQUATE TO T HE PRICE FOR IMMEDIATE PAYMENT PLUS 60 DAYS OF INTEREST ON THE I MMEDIATE PAYMENT PRICE. BY CARRYING HIGH ACCOUNTS RECEIVABLE A COMPANY IS ALLOWING ITS CUSTOMERS A RELATIVELY LONG PERIOD TO PAY THEIR ACCOUNTS. IT WOULD NEED TO BORROW MONEY TO FUND THE CREDIT TERMS AND/OR SUFFER A REDUCTION IN THE AMOUNT OF CASH SUR PLUS WHICH IT WOULD OTHERWISE HAVE AVAILABLE TO INVEST. IN A COMP ETITIVE ENVIRONMENT, THE PRICE SHOULD THEREFORE INCLUDE AN ELEMENT TO REFLECT THESE PAYMENT TERMS AND COMPENSATE FOR THE TIMING EFFECT. 14. THE OPPOSITE APPLIES TO HIGHER LEVELS OF ACCO UNTS PAYABLE. BY CARRYING HIGH ACCOUNTS PAYABLE, A COMPANY IS BEN EFITTING FROM A RELATIVELY LONG PERIOD TO PAY ITS SUPPLIERS. IT WOULD NEED TO BORROW LESS MONEY TO FUND ITS PURCHASES AND/OR BENE FIT FROM AN INCREASE IN THE AMOUNT OF CASH SURPLUS AVAILABLE TO INVEST. IN A COMPETITIVE ENVIRONMENT, THE COST OF GOODS SOLD SHO ULD INCLUDE AN ELEMENT TO REFLECT THESE PAYMENT TERMS AND COMPE NSATE FOR THE TIMING EFFECT. 15. A COMPANY WITH HIGH LEVELS OF INVENTORY WOULD SIMILARLY NEED TO EITHER BORROW TO FUND THE PURCHASE, OR REDU CE THE AMOUNT OF CASH SURPLUS WHICH IT IS ABLE TO INVEST. NOTE TH AT THE INTEREST RATE JULY 2010 PAGE 6 MIGHT BE AFFECTED BY THE FUND ING STRUCTURE IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 14 OF 31 (E.G. WHERE THE PURCHASE OF INVENTORY IS PARTLY FUN DED BY EQUITY) OR BY THE RISK ASSOCIATED WITH HOLDING SPECIFIC TYP ES OF INVENTORY) 16. MAKING A WORKING CAPITAL ADJUSTMENT IS AN ATTEM PT TO ADJUST FOR THE DIFFERENCES IN TIME VALUE OF MONEY BETWEEN THE TESTED PARTY AND POTENTIAL COMPARABLES, WITH AN ASSUMPTION THAT THE DIFFERENCE SHOULD BE REFLECTED IN PROFITS. THE UNDE RLYING REASONING IS THAT: A COMPANY WILL NEED FUNDING TO COVER THE TIME GAP BETWEEN THE TIME IT INVESTS MONEY (I.E. PAYS MONEY TO SUPPL IER) AND THE TIME IT COLLECTS THE INVESTMENT (I.E. COLLECTS MONEY FROM CUSTOMERS) THIS TIME GAP IS CALCULATED AS: THE PERIOD NEEDED TO SELL INVENTORIES TO CUSTOMERS + (PLUS) THE PERIOD NEEDED TO COLLECT MONEY FROM CUSTOMERS (LESS) THE PERIOD GRANTED TO PAY DEBTS TO SUPPLIERS. 18. EXAMPLES OF HOW TO WORK OUT ADJUSTMENT ON ACCOU NT OF WORKING CAPITAL ADJUSTMENT IS ALSO GIVEN IN THE SAID GUIDEL INES. THE GUIDELINE ALSO EXPRESSES THE DIFFICULTY IN MAKING WORKING CAPITAL ADJUSTMENT BY CONCLUDING THAT THE FOLLOWING FACTORS HAVE TO BE KEPT IN MIND (I) THE POINT IN TIME AT WHICH THE RECEIVABLES, INVENTORY AND PAYABLES SHOUL D BE COMPARED BETWEEN THE TESTED PARTY AND THE COMPARABLES, WHETH ER IT SHOULD BE THE FIGURES OF RECEIVABLES, INVENTORY AND PAYABLE AT TH E YEAR END OR BEGINNING OF THE YEAR OR AVERAGE OF THESE FIGURES. (II) THE S ELECTION OF THE APPROPRIATE INTEREST RATE (OR RATES) TO USE. THE RATE (OR RATES ) SHOULD GENERALLY BE DETERMINED BY REFERENCE TO THE RATE(S) OF INTEREST APPLICABLE TO A COMMERCIAL ENTERPRISE OPERATING IN THE SAME MARKET AS THE TESTED PARTY. THE GUIDELINES CONCLUDE BY OBSERVING THAT THE PURPO SE OF WORKING CAPITAL ADJUSTMENTS IS TO IMPROVE THE RELIABILITY OF THE CO MPARABLES. 19. IN THE PRESENT CASE THE TPO HELD THAT NO ADJUST MENT SHOULD BE MADE TO THE PROFIT MARGINS ON ACCOUNT OF WORKING CA PITAL DIFFERENCES IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 15 OF 31 BETWEEN THE TESTED PARTY AND THE COMPARABLE COMPANI ES FOR THE FOLLOWING REASONS:- (I) THE DAILY WORKING CAPITAL LEVELS OF THE TESTED PA RTY AND THE COMPARABLES WAS THE ONLY RELIABLE BASIS OF DETERMIN ING ADJUSTMENT TO BE MADE ON ACCOUNT OF WORKING CAPITAL BECAUSE THAT WOULD BE ON THE BASIS OF WORKING CAPITAL DEPLO YED THROUGHOUT THE YEAR. (II) SEGMENTAL WORKING CAPITAL IS NOT DISCLOSED IN THE ANNUAL REPORTS OF COMPANIES ENGAGED IN DIFFERENT SEGMENTS AND THER EFORE PROPER COMPARISON CANNOT BE MADE. (III) DISCLOSE IN THE BALANCE SHEET DOES NOT CONTAIN BREA K UP OF TRADE AND NON-TRADE DEBTORS AND CREDITORS AND THEREFORE W ORKING CAPITAL ADJUSTMENT DONE WITHOUT SUCH BREAK UP WOULD RESULT IN COMPUTATION BEING SKEWED. (IV) COST OF CAPITAL WOULD BE DIFFERENT FOR DIFFERENT CO MPANIES AND THEREFORE WORKING CAPITAL ADJUSTMENT MADE DISREGARD ING THIS DIFFERENT BASED ON BROAD APPROXIMATIONS, ESTIMATION S AND ASSUMPTIONS MAY NOT LEAD TO RELIABLE RESULTS. 20. THE TPO ALSO PLACED RELIANCE ON A DECISION OF C HENNAI ITAT IN THE CASE OF MOBIS INDIA ITA NO.2112/MDS/2011 (2013) 38 TAXMANN. COM . THAT DECISION WAS BASED ON THE FACTUAL ASPECT THAT THE A SSESSEE WAS NOT ABLE TO DEMONSTRATE HOW WORKING CAPITAL ADJUSTMENT WAS A RRIVED AT BY THE ASSESSEE. THEREFORE, NOTHING TURNS ON THE DECISION RELIED UPON BY THE CIT(A) IN THE IMPUGNED ORDER. IN THE MATTER OF DETE RMINATION OF ARMS LENGTH PRICE, IT CANNOT BE SAID THAT THE BURDEN IS ON THE ASSESSEE OR THE DEPARTMENT TO SHOW WHAT IS THE ARMS LENGTH PRICE. THE DATA AVAILABLE WITH THE ASSESSEE AND THE DEPARTMENT WOULD BE THE S TARTING POINT AND DEPENDING ON THE FACTS AND CIRCUMSTANCES OF A CASE FURTHER DETAILS CAN BE CALLED FOR. AS FAR AS THE ASSESSEE IS CONCERNED, T HE FACTS AND FIGURES WITH IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 16 OF 31 REGARD TO HIS BUSINESS HAS TO BE FURNISHED. REGARD ING COMPARABLE COMPANIES, ONE HAS TO FALL BACK UPON ONLY ON THE IN FORMATION AVAILABLE IN THE PUBLIC DOMAIN. IF THAT INFORMATION IS INSUFFIC IENT, IT IS BEYOND THE POWER OF THE ASSESSEE TO PRODUCE THE CORRECT INFORMATION ABOUT THE COMPARABLE COMPANIES. THE REVENUE HAS ON THE OTHER HAND POWER S TO COMPEL PRODUCTION OF THE REQUIRED DETAILS FROM THE COMPARA BLE COMPANIES. IF THAT POWER IS NOT EXERCISED TO FIND OUT THE TRUTH THEN I T IS NO DEFENSE TO SAY THAT THE ASSESSEE HAS NOT FURNISHED THE REQUIRED DETAILS AND ON THAT SCORE DENY ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL DIFFERENCE S. REGARDING APPLYING THE DAILY BALANCES OF INVENTORY, RECEIVABLES AND PA YABLES FOR COMPUTING WORKING CAPITAL ADJUSTMENT, THE DELHI BENCH OF ITAT IN THE CASE OF ITO VS. E VALUE SERVE.COM (2016) 75 TAXMANN.COM 195 (DEL-TR IB) HAS HELD THAT INSISTING ON DAILY BALANCES OF WORKING CAPITAL REQU IREMENTS TO COMPUTE WORKING CAPITAL ADJUSTMENT IS NOT PROPER AS IT WILL BE IMPOSSIBLE TO CARRY OUT SUCH EXERCISE AND THAT WORKING CAPITAL ADJUSTMENT H AS TO BE BASED ON THE OPENING AND CLOSING WORKING CAPITAL DEPLOYED. THE BENCH HAS ALSO OBSERVED THAT THAT IN TRANSFER PRICING ANALYSIS THE RE IS ALWAYS AN ELEMENT OF ESTIMATION BECAUSE IT IS NOT AN EXACT SCIENCE. ONE HAS TO SEE THAT REASONABLE ADJUSTMENT IS BEING MADE SO AS TO BRING BOTH COMPARABLE AND TESTED PARTY ON SAME FOOTING. THEREFORE THERE IS L ITTLE MERIT IN TPO/DRPS OBJECTION ON WORKING ADJUSTMENT BASED ON UNAVAILABL E DAILY WORKING CAPITAL REQUIREMENTS DATA. THERE IS ALSO NO MERIT IN THE O BJECTION OF THE TPO/DRP REGARDING ABSENCE OF SEGMENTAL DETAILS AVAILABLE OF WORKING CAPITAL REQUIREMENTS OF COMPARABLE COMPANIES CHOSEN AND ABS ENCE OF DETAILS OF TRADE AND NON-TRADE DEBTORS OF COMPARABLE COMPANIES AS THESE DETAILS ARE BEYOND THE POWER OF THE ASSESSEE TO OBTAIN, UNLESS THESE DETAILS ARE AVAILABLE IN PUBLIC DOMAIN. REGARDING ABSENCE OF COST OF WORKING CAPITAL FUNDS, THE OECD GUIDELINES CLEARLY ADVOCATES ADOPTI NG RATE(S) OF INTEREST APPLICABLE TO A COMMERCIAL ENTERPRISE OPERATING IN THE SAME MARKET AS THE IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 17 OF 31 TESTED PARTY. THEREFORE THIS OBJECTION OF THE TPO/ DRP IS ALSO NOT SUSTAINABLE. 21. IN THE LIGHT OF THE ABOVE DISCUSSION, WE ARE OF THE VIEW THAT THE REVENUE AUTHORITIES WERE NOT JUSTIFIED IN DENYING A DJUSTMENT ON ACCOUNT OF WORKING CAPITAL ADJUSTMENT. WE MAY ALSO ADD THAT T HE COMPLETE WORKING CAPITAL ADJUSTMENT WORKING HAS BEEN GIVEN BY THE AS SESSEE AND A COPY OF THE SAME IS AT PAGE 186 TO 200 OF THE ASSESSEES PA PER BOOK. NO DEFECT WHATSOEVER HAS BEEN POINTED OUT IN THESE WORKING BY THE CIT(A). WE MAY ALSO FURTHER ADD THAT IN TERMS OF RULE 10B(1)( E) ( III) OF THE RULES, THE NET PROFIT MARGIN ARISING IN COMPARABLE UNCONTROLLED TR ANSACTIONS SHOULD BE ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, I F ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS WHICH COULD MATERIALLY AFFECT THE AMOU NT OF NET PROFIT MARGIN IN THE OPEN MARKET. I T IS NOT THE CASE OF THE TPO/DRP THAT DIFFERENCES IN WORKING CAPITAL REQUIREMENTS OF THE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED COMPARABLE TRANSACTIONS IS NOT A DIFFERENCE WHICH WILL MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN I N THE OPEN MARKET. IF FOR REASONS GIVEN BY THE REVENUE AUTHORITIES WORKING CA PITAL ADJUSTMENT CANNOT BE ALLOWED TO THE PROFIT MARGINS, THEN THE COMPARAB LE UNCONTROLLED TRANSACTIONS CHOSEN FOR THE PURPOSE OF COMPARISON W ILL HAVE TO BE TREATED AS NOT COMPARABLE IN TERMS OF RULE 10B(3) OF THE RU LES, WHICH PROVIDES AS FOLLOWS:- (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABL E TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPR ISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATER IALLY AFFECT THE PRICE OR COST CHARGED TO PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 18 OF 31 (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE T O ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 22. IN SUCH A SCENARIO THERE WOULD REMAIN NO COMPAR ABLE UNCONTROLLED TRANSACTIONS FOR THE PURPOSE OF COMPARISON. THE TR ANSFER PRICING EXERCISE WOULD THEREFORE FAIL. THEREFORE IN KEEPING WITH TH E OECD GUIDELINES, ENDEAVOR SHOULD BE MADE TO BRING IN COMPARABLE COMP ANIES FOR THE PURPOSE OF BROAD COMPARISON. THEREFORE THE WORKING CAPITAL ADJUSTMENT AS CLAIMED SHOULD BE ALLOWED. WE HOLD AND DIRECT ACCOR DINGLY. 23. AS WE HAVE ALREADY OBSERVED, THE ASSESSEE IN T HE PRESENT CASE HAS GIVEN ALL THE DETAILS REQUIRED FOR WORKING CAPI TAL ADJUSTMENT AND THE REVENUE AUTHORITIES WERE NOT JUSTIFIED IN DENYING T HE CLAIM OF ASSESSEE FOR DEDUCTION. THE TPO/AO IS DIRECTED TO ALLOW WORKING CAPITAL ADJUSTMENT IN THE LIGHT OF THE MATERIAL ALREADY AVAILABLE ON RECO RD, AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 24. THE TPO/AO IS DIRECTED TO COMPUTE THE ALP IN TH E LIGHT OF DIRECTIONS AS GIVEN ABOVE, AFTER AFFORDING OPPORTUNITY OF BEIN G HEARD TO THE ASSESSEE. 25. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TR EATED AS PARTLY ALLOWED. IT(TP)A NO.2365/BANG/2019 26. THIS APPEAL BY THE ASSESSEE IS AGAINST THE FINA L ORDER OF ASSESSMENT DATED 27.9.2019 OF THE JT. CIT, SPECIAL RANGE 7, BANGALORE PASSED U/S. 143(3) R.W.S. 144C OF THE ACT RELATING TO ASSESSMENT YEAR 2015-16. 27. AS FAR AS THE INTERNATIONAL TRANSACTION AND OTH ER DETAILS ARE CONCERNED, THE FACTS ARE SIMILAR TO AY 2014-15. IN AY 2015-16, THE ASSESSEE FILED A TP ANALYSIS CHOOSING 12 COMPARABLE COMPANIES WHOSE IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 19 OF 31 AVERAGE PROFIT MARGIN WAS 11.82%. THE ASSESSEES P ROFIT MARGIN WAS 19.23% COMPUTED IN THE FOLLOWING MANNER:- PARTICULARS AMOUNT IN LAKHS AMOUNT IN MILLION REVENUE FROM OPERATIONS 4,850 OTHER INCOME 120 OPERATING REVENUE 4,73 0 TOTAL EXPENSES 3,976 LESS: DONATION 9 OPERATING COST 3,967 OPERATING PROFIT 763 OP/OC 19.23% OP/OR 16.13% 28. SINCE THE PROFIT MARGIN OF THE ASSESSEE WAS MOR E THAN THE AVERAGE PROFIT MARGIN OF COMPARABLE COMPANIES, THE ASSESSEE CLAIMED THAT THE PRICE RECEIVED IN THE INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH. THE TPO ACCEPTED 3 OUT OF 12 COMPARABLE COMPANIES CHOSE N BY ASSESSEE IN ITS TP STUDY VIZ., CG VAK SOFTWARE & EXPORTS LTD., E-ZEST SOLUTIONS LTD. AND TATA ELXSI LTD. AS COMPARABLE COMPANIES. THE T PO ON HIS OWN SELECTED 13 OTHER COMPARABLE COMPANIES AND ARRIVED AT A SET OF 16 COMPARABLE COMPANIES. THE AVERAGE ARITHMETIC MEAN PROFIT OF THE COMPARABLE COMPANIES WAS AS FOLLOWS:- SWD SEGMENT S.NO. COMPANY NAME FINANCIAL YEAR WISE OP/OC (%) 2014-15 2013-14 2012-13 AVERAGE 1 KALS INFORMATION SYSTEMS LTD 5.77 16.94 . 13.51 11.88 2 E-ZEST SOLUTIONS LTD 12.59 15.80 FAILS EXPORT FILTER 14.05 3 CG - V - AK SOFTWARE & EXPORTS LTD. 19.87 13.81 22.07 18.50 4 TATA ELXSI LTD. (SEG) 23.33 22.02 11.24 19.34 5 RHEAL SOFTWARE PVT. LTD. 2.76 36.64 NO DATA IN PUBLIC DOMAIN 19.88 6 MINDTREE LTD. 20.55 21.18 19.75 20.55 7 LARSEN & TOUBRO INFOTECH LTD. 24.22 23.54 25.10 24.21 IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 20 OF 31 8 R S SOFTWARE (INDIA) LTD. 32.66 24.14 17.44 24 .8 2 9 INFOBEANS TECHNOLOGIES LTD. 20.70 41.95 29.22 29.91 10 PERSISTENT SYSTEMS LTD. 31.11 35.44 28.20 31.69 11 NIHILENT TECHNOLOGIES LTD. 29.19 35.72 NO DATA IN PUBLIC DOMAIN 32.21 12 ASPIRE SYSTEMS (INDIA) PVT. LTD. 30.98 38.04 NO DATA IN PUBLIC DOMA IN 34.18 13 INTEG SOFTWARE PVT. LTD. 31.16 45.00 FAILS EMPLOYEE COST FILTER 37.90 14 INFOSYS LTD. 40.29 36.28 39.25 38.59 15 THIRDWARE SOLUTION LTD. 43.69 44.68 32.65 41.12 16 CYBAGE SOFTWARE PVT. LTD. 68.17 68.82 60.81 66.27 35TH PERCENTILE 20 .5 5% MEDIAN 27.37% 65TH PERCENTILE 37.90% _ 29. THE TPO DID NOT ALLOW THE WORKING CAPITAL ADJUS TMENT AND FINALLY DETERMINED THE ALP AND CONSEQUENT ADDITION MADE TO THE TOTAL INCOME AS FOLLOWS:- 22.4. COMPUTATION OF ARM'S LENGTH PRICE: 22.4.1 THE MEDIAN OF THE WEIGHTED AVERAGE PROFIT LE VEL INDICATORS IS TAKEN AS THE ARM'S LENGTH MARGIN. PLE ASE SEE ANNEXURE A& B FOR DETAILS OF COMPUTATION OF PLI OF THE COMPARABLE. BASED ON THIS, THE ARM'S LENGTH PRICE O F THE SERVICES RENDERED BY THE TAXPAYER TO ITS AE(S) IS COMPUTED A S UNDER: PARTICULARS FORMULA AMOUNT (IN RS. MILLION) TAXPAYERS OPERATING REVENUE OR 4,730.00 TAXPAYERS OPERATING COST OC 3,967.00 TAXPAYERS OPERATING PROFIT OP . 763.00 TAXPAYERS PLI PL1=OP/OC 19.23% 35TH PERCENTILE MARGIN OF COMPARABLE SET 20.55% ADJUSTMENT REQUIRED (IF PLI< 35TH PERCENTILE) YES MEDIAN MARGIN OF COMPARABLE SET M 27.37% IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 21 OF 31 ARM'S LENGTH PRICE ALP=(1+M)*OC 5,052.77 PRICE RECEIVED OR 4,730.00 SHORTFALL BEING ADJUSTMENT ALP-OR 322.7679 22.4.2 THE ABOVE SHORTFALL OF RS.322.77 MILLION IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA IN RESPECT OF SOFTWARE DEVELOPMENT SEGMENT OF THE TAXPAYER'S INTERNATIONAL TRANSACTIONS. 30. THE ADDITION SUGGESTED BY THE TPO WAS INCORPORA TED BY THE AO IN THE DRAFT ORDER OF ASSESSMENT AND AGAINST SUCH DRAF T ORDER, THE ASSESSEE PREFERRED OBJECTIONS BEFORE THE DRP. THE DRP EXCLU DED THIRDWARE SOLUTIONS FROM THE LIST OF COMPARABLE COMPANIES AND INCLUDED SASKEN COMMUNICATION TECHNOLOGIES LTD. AND CIGNITI TECHNOL OGIES LTD. THE DRP DID NOT GRANT ANY WORKING CAPITAL ADJUSTMENT. CONS EQUENT TO THE RELIEF ALLOWED BY THE DRP AS ABOVE, THE TP ADJUSTMENT AND ADDITION TO BE MADE TO TOTAL INCOME STOOD REDUCED FROM RS.32,74,23,000 TO 19,86,00,800. 31. THE ASSESSEE, AGGRIEVED, BY THE DETERMINATION O F ALP AS ABOVE HAS FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 32. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE HAS PRAYED FOR EXCLUSION OF 4 COMPARABLE COMPANIES THAT REMAIN AFTER THE ORDER OF THE DRP VIZ., PERSISTENT SYSTEMS LTD., INFOSYS LTD., MI NDTREE LTD. AND L&T INFOTECH LTD. HE BROUGHT TO OUR NOTICE THAT AS FAR AS PERSISTENT SYSTEMS LTD. IS CONCERNED, THE REASONING GIVEN FOR EXCLUDIN G THIS COMPANY FOR AY 2014-15 WILL EQUALLY HOLD GOOD FOR THE PRESENT YEAR AS WELL. IN THIS REGARD, OUR ATTENTION WAS DRAWN TO PAGE 601 OF THE ASSESSEE S PB WHEREIN IN THE ANNUAL REPORT OF THIS COMPANY, NOTES FORMING PART O F FINANCIAL STATEMENT IN NOTE (I) WHICH GIVES THE DESCRIPTION OF INCOME FROM SOFTWARE SERVICES, THERE IS A REFERENCE TO REVENUE FROM LICENSING & SOFTWARE , WHICH SUFFICIENTLY INDICATES THAT THE ASSESSEE IS NOT A PURE SWD SERVI CES PROVIDER. IT WAS IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 22 OF 31 ALSO BROUGHT TO OUR NOTICE THAT THE PROFIT & LOSS A CCOUNT WHICH IS AT PAGE 596 READ WITH NOTES FORMING PART OF THE FINANCIAL S TATEMENT AT PAGE 604 WHEREIN THE SEGMENTAL REPORTING IS NOT BASED ON DI FFERENT SEGMENTS AND THE STATEMENT PRESENTS A CONSOLIDATED FINANCIAL STA TEMENT WITHOUT ANY SEGMENTAL REPORTING. THIS COMPANY HAS ALSO SIGNIFI CANT RPT TRANSACTION OF 25% ON SALES. HE POINTED OUT THAT THE TPO & DRP ON THE APPLICATION OF RPT FILTER HAS NOT EXPRESSED ANY OPINION. THE LD. DR RELIED ON THE ORDER OF DRP WHEREIN THE DRP HAS MADE EXTENSIVE REFERENCE TO EACH OF THE OBJECTIONS REGARDING ABSENCE OF SEGMENTAL REVENUE I N THE ACCOUNTS AND HAS ALSO NOTICED THAT THE SOFTWARE PRODUCTS SEGMENT HAD AN INSIGNIFICANT REVENUE AND THAT THE OWNERSHIP OF INTANGIBLES BY TH E ASSESSEE HAS HAD NO EFFECT WHATSOEVER. 33. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE F IND THAT ON THE QUESTION OF APPLICATION OF RPT FILTER, THE ASSESSEE HAD MADE THE FOLLOWING SUBMISSION BEFORE THE DRP:- 4. FAILS THE RELATED PARTY TRANSACTION TO SALES FILTER APPLIED BY THE LEARNED TPO IN THE SHOW-CAUSE NOTICE ISSUED, THE LEARNED TPO HA S EXCLUDED COMPANIES FOR WHICH THE RATIO OF RPT TO SALES EXCEE DS 25% DURING THE CURRENT YEAR I.E., DURING FY 2014-15. TH E RELEVANT EXTRACT FROM THE SHOW-CAUSE NOTICE IS REPRODUCED BE LOW FOR EASE OF REFERENCE: E) COMPANIES WHO HAVE MORE THAN 25% RELATED PARRY TRANSACTIONS OF THE SALES WERE EXCLUDED. COMPANIES HAVING RELATED PARTY TRANSACTIONS OF MORE THAN 25% ARE PROPOSED TO BE EXCLUDED. A THRESHOLD OF 25% IS BEING APPLIED FOLLOWING THE PROVISIONS OF SECTION 92A(2)(A) WHICH PROVIDES A LIMIT OF 26% OF THE EQUI TY CAPITAL CARRYING VOTING RIGHTS FOR TREATING AN ENTE RPRISE AS ASSOCIATED ENTERPRISE. IF THE LIMIT IS REDUCED FURT HER IT WOULD ONLY RESULT IN ELIMINATING MORE AND MORE COMPANIES, ON THE OTHER HAND IF THE LIMIT IS RELAXE D THEN IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 23 OF 31 COMPANIES WITH PREDOMINANTLY RELATED PARTY TRANSACT IONS WOULD GET INCLUDED WHICH WOULD NOT REPRESENT UNCONTROLLED TRANSACTIONS. THEREFORE, ON A BALANCIN G NOTE, 25% IS A PROPER THRESHOLD LIMIT FOR RELATED PARTY TRANSACTIONS. THE COMPANIES HAVING MORE THAN 25% RELATED PARTY TRANSACTIONS SHOULD THEREFORE BE REJE CTED AS COMPARABLES. THE HON'BLE IT.AT HAS UPHELD THE APPLICATION OF THI S FILTER BY THE TPO IN ITS ORDER IN THE CASE OF M/S. SUPPORI SOFT INDIA PVT. LTD FOR AY 2005-G6 IN IT (TP)A 1372/B/11 & 20/2012 DATED 28.03.2013 FOLLOWING ITS OWN DECISION IN THE CASE OF M/S. ACTIS ADVERTISERS PVT. LTD VIDE IT A NO.5277/DE1/2011 DATED 12.10.2012. ON PERUSAL OF THE ANNUAL REPORT OF PERSISTENT, WE O BSERVE THAT THE COMPANY HAS RPT IN EXCESS OF 25% OF THE SALES. THE CALCULATION OF THE SAME HAS BEEN PROVIDED BELOW FOR YOUR EASE OF REFERENCE: R PT TO SALES RATIO FOR FY 2014-15 PARTICULARS AMOUNT (INR MILLION) SALE OF SERVICES 2,410.02 COMMISSION RECEIVED 10.26 PURCHASE OF SOFTWARE 1.49 COST OF TECHNICAL PROFESSIONAL 1,339.1 COMMISSION PAID ON SALES 111.79 TRAVELING AND CONVEYANCE 19.27 TOTAL RELATED PARTY TRANSACTIONS (A) 3,891.93 TOTAL SALES (B) 12,424.98 RPT % OF SALES (A/B) 31.32% FROM THE ABOVE COMPUTATION, IT IS CLEAR THAT THE CONTROLLED TRANSACTIONS OF PERSISTENT CONSTITUTES 31.32% OF SA LES . BASED ON THE ABOVE, IT CAN BE SEEN THAT PERSISTENT FAILS THE `RPT TO SALES RATIO' FILTER APPLIED BY THE LEARNED TPO AND SHOULD THEREFORE NOT BE CONSIDERED AS A COMPARABLE. 34. THIS ARGUMENT HAS BEEN ADDRESSED BY THE DRP IN ITS ORDER AS FOLLOWS:- IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 24 OF 31 4.4.9 WE NOTE THAT THE APPROACH OF THE TPO IN T REATMENT OF RELATED PARTY TRANSACTION INTO TWO SETS, ARE FOR REVENUE TRANSACTIONS AND OTHER FOR EXPENSE TRANSACTION IS L OGICAL AND CORRECT. WE ALSO NOTE THAT THE RPT FILTER WAS ADOP TED BY THE TPO WAS WITH THE ABOVE CONDITIONS AND HAS ADOPTED CONSI STENTLY. HENCE, WE DO NOT FIND ANY INFIRMITY THE APPROACH. H ENCE, WE REJECT THE ASSESSEE'S PLEA. WE HOLD THAT ONSITE EXP ENSES DO NOT ADVERSELY AFFECT COMPARABILITY AND HENCE, SUCH PLEA IS REJECTED. 35. FURTHER, THE ASSESSEE HAD ALSO RAISED PLEA WITH REGARD TO ONSITE REVENUE FILTER BY POINTING OUT THAT ONSITE REVENUE IS SUBSTANTIAL AND THEREFORE THIS COMPANY SHOULD NOT BE REGARDED AS A COMPARABLE COMPANY WITH A COMPANY WHICH DOES NOT HAVE ANY ONSITE REVEN UE. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA P. LTD. V. DCIT, ITA NO.1054/BANG/2011 FOR AY 2007-08 DATED 23 .11.2012 WHEREIN THIS TRIBUNAL TOOK THE FOLLOWING VIEW:- 64. THE NEXT OBJECTION OF THE ASSESSEE IS THAT WHEN THE MOST APPROPRIATE METHOD SELECTED FOR DETERMINING ALP IS THE TNMM THERE IS NO REASON AS TO WHY ONE SHOULD LOOK AT PRI CE DIFFERENCE IN OFFSHORE SOFTWARE DEVELOPMENT AND ONSITE SOFTWARE D EVELOPMENT. IT IS NO DOUBT TRUE THAT IN TNMM IT IS ONLY THE MAR GINS IN AN UNCONTROLLED TRANSACTION THAT IS TESTED WITH REFERE NCE TO THE CONTROLLED TRANSACTION BUT IT IS NOT POSSIBLE TO IG NORE THE FACT THAT PRICING WILL HAVE AN EFFECT ON THE MARGINS OBTAINED IN A TRANSACTION. THE ARGUMENT THAT IF PRICING STRUCTURE WERE TO BE CONSIDERED AS CRITERIA, THEN IT WILL HAVE TO BE SEE N AS TO WHAT IS THE PRICING STRUCTURE OF ALL THE COMPARABLE FOR VARIOUS PROJECTS CANNOT BE ACCEPTED BECAUSE THE TPO HAS NOT CHOSEN ANY OTHE R ONSITE SOFTWARE SERVICE PROVIDER WITH A REVENUE COMPOSITIO N OF MORE THAN 75% FROM ONSITE SOFTWARE SERVICES AS COMPARABL E. AS RIGHTLY OBSERVED BY THE TPO, THE PRICING IS DIFFERENT IN ON SITE WHEN COMPARED TO OFFSHORE OPERATIONS. THE FURTHER OBSERV ATIONS OF THE TPO THAT THE REASONS FOR THE SAME LIE IN THE FACT T HAT WHILE IN THE CASE OF OFFSHORE PROJECTS MOST OF THE COSTS ARE INC URRED IN INDIA; AN ONSITE PROJECT HAS TO BE CARRIED OUT ABRO AD SIGNIFICANTLY INCREASING THE EMPLOYEE COST AND OTHE R COSTS. IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 25 OF 31 65. THE NEXT OBJECTION OF THE ASSESSEE IS WITH REGA RD TO ASSETS EMPLOYED. THE COMPANIES, WHICH PREDOMINANTLY GENERA TE REVENUES FROM ONSITE ACTIVITY, DO NOT HAVE SIGNIFIC ANT ASSETS AS MOST OF THE WORK IS CARRIED ON THE SITE OF CUSTOMER OUTSIDE INDIA. THE ARGUMENT THAT THE TPO HAS HIMSELF OBSERVED THAT SOFTWARE SERVICE PROVIDERS DO NOT REQUIRE MUCH ASSETS CANNOT BE BASIS TO ACCEPT THE ASSESSEES PLEA. THOSE OBSERVATIONS ARE MADE BY THE TPO IN THE CONTEXT OF APPLICATION OF TURNOVER FILTE R AND HAVE BEEN QUOTED OUT OF CONTEXT BY THE ASSESSEE. 66. THE NEXT ARGUMENT OF THE ASSESSEE IS THAT TPO H AS HELD THAT MARGINS ARE LOWER IN ONSITE SOFTWARE SERVICES AND T HAT MARGIN IS NOT A CRITERIA TO SELECT OR REJECT A COMPARABLE UND ER RULE I0B(2) OF THE I.T. RULES. WE ARE OF THE VIEW THAT THIS AR GUMENT AGAIN IGNORES THE FACT THAT THE APPROACH OF THE TPO HAS B EEN TO HIGHLIGHT THE FACT THAT THERE CAN BE NO FUNCTIONAL COMPARABILITY, IF THE ASSETS EMPLOYED AND RISKS ASSUMED ARE TAKEN INT O CONSIDERATION. IT IS IN THAT CONTEXT THE TPO HAS RE FERRED TO THE MARGINS. 67. THE COMPANIES WHO GENERATE MORE THAN 75% OF THE EXPORT REVENUES FROM ONSITE OPERATIONS OUTSIDE INDIA ARE E FFECTIVELY COMPANIES WORKING OUTSIDE INDIA HAVING THEIR OWN GE OGRAPHICAL MARKETS, COST OF LABOUR ETC., AND ALSO RETURN COMME NSURATE WITH THE ECONOMIC CONDITIONS IN THOSE COUNTRIES. THUS AS SETS AND RISK PROFILE, PRICING AS WELL AS PREVAILING MARKET CONDI TIONS ARE DIFFERENT IN PREDOMINANTLY ONSITE COMPANIES FROM PR EDOMINANTLY OFFSHORE COMPANIES LIKE THE TAXPAYER. SINCE, THE EN TIRE OPERATIONS OF THE TAX PAYER ARE TAKING PLACE OFFSHORE I.E. IN INDIA; IT IS BUT NATURAL THAT IT SHOULD BE COMPARED WITH COMPANIES W ITH MAJOR OPERATIONS OFFSHORE, DUE TO THE REASON THAT THE ECO NOMICS AND PROFITABILITY OF ONSITE OPERATIONS ARE DIFFERENT FR OM THAT OF OFFSHORE BUSINESS MODEL. AS ALREADY STATED THE ASSE SSEE HAS LIMITED ITS ANALYSIS ONLY TO FUNCTIONS BUT NOT TO T HE ASSETS, RISKS AS WELL AS PREVAILING MARKET CONDITIONS IN WHICH BOTH THE BUYER AND SELLER OF SERVICES LOCATED. HENCE, THE COMPANIES IN WHICH MORE THAN 75% OF THEIR EXPORT REVENUES COME FROM ONSITE OPERATIONS ARE TO BE EXCLUDED FROM THE COMPARABILITY STUDY AS THEY ARE NOT FUNCTIONING IN SIMILAR ECONOMIC CIRCUMSTANCES TO TH AT OF THE TAX PAYER. HENCE, IT IS HELD THAT THIS FILTER IS APPROP RIATELY APPLIED BY THE TPO. IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 26 OF 31 68. ADMITTEDLY THE ONSITE REVENUE IN THE CASE OF THE FOLLOWING COMPARABLE COMPANIES IDENTIFIED BY THE ASSESSEE WAS MORE THAN 75% OF ITS EXPORT REVENUES VIZ., A) VISU INTERNATIO NAL LTD. B) MAARS SOFTWARE INTERNATIONAL LTD. C) AKSHAY SOFTWAR E TECHNOLOGIES LTD. D) VJIL CONSULTING LTD. E) SYNFOS YS BUSINESS SOLUTIONS LTD. THE ABOVE COMPANIES WERE THEREFORE R IGHTLY NOT CONSIDERED AS COMPARABLE BY THE TPO. WE HOLD ACCORD INGLY. 36. IT IS SEEN THAT THE TPO IN COMING TO THE CONCLU SION THAT THE ONSITE REVENUE FILTER IS NOT APPLICABLE HAS PLACED RELIANC E ON THE DECISION OF THE ITAT MUMBAI BENCH IN THE CASE OF CAPEGEMINI AS QUOTED IN PARA 16 IN PARA 14 OF THE TPOS ORDER, BUT THAT DECISION DOES NOT DEAL WITH A CASE OF ONSITE REVENUE FILTER AND THE DECISION WAS RENDERED ON THE FACTS OF ITS OWN CASE. 37. ON THE ISSUE OF RPT FILTER, WE NOTICE THAT THE TPO IN PARA 16 HAS ACCEPTED THAT THE RPT FILTER SHOULD BE @ 25%. IN T HE CASE OF PERSISTENT SYSTEMS LTD., THE RPT IS AT 31.32% AS EXTRACTED IN THE EARLIER PART OF THIS ORDER AND THEREFORE THIS COMPANY SHOULD BE EXCLUDED BY APPLICATION OF RPT FILTER. IN VIEW OF THE ABOVE, WE DO NOT WISH TO GO INTO OTHER GROUNDS ON WHICH THIS COMPANY IS SOUGHT TO BE EXCLUDED VIZ., T HAT IT IS A PRODUCT COMPANY AND THERE IS NO SEGMENTAL DATA BETWEEN PROD UCT AND SERVICES SEGMENT, PRESENCE OF ONSITE ACTIVITY AND THE IMPACT OF EXTRA-ORDINARY EVENT OF ACQUISITION DURING THE RELEVANT PREVIOUS YEAR. THEREFORE, THIS COMPANY IS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANY. 38. AS FAR AS L&T INFOTECH LTD. IS CONCERNED, THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THE DECISION OF ITAT DELHI BENCH IN THE CASE OF SAXO INDIA PVT. LTD. V. ACIT, ITA NO.6148/DEL/2015 FOR AY 2011- 12, ORDER DATED 5.2.2016 , WHEREIN THE TRIBUNAL TOOK NOTE OF THE FACT THAT T HIS COMPANY WAS ALSO TRADING IN SOFTWARE AND OWNED INSI GNIFICANT INTANGIBLE ASSETS. THE COMPANY WAS EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES WITH REFERENCE TO SWD SERVICES PROVIDER SUCH AS THE ASSESSEE. THE LD. IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 27 OF 31 COUNSEL POINTED OUT THAT THOUGH THIS DECISION WAS R ENDERED WITH REFERENCE TO AY 2011-12, THE SAME REASONING WOULD APPLY TO AY 2015-16 ALSO AND IN THIS REGARD, HE DREW OUR ATTENTION TO PAGE 696 OF A SSESSEES PB, WHICH GIVES THE DETAILS OF THE REVENUE GENERATED BY THIS COMPANY WITHOUT ANY SEGMENTAL BREAK-UP. OUR ATTENTION WAS ALSO DRAWN T O PAGE 682 OF PB WHICH SHOWS THAT THERE IS SUBSTANTIAL ONSITE REVENU E ACTIVITY AS WELL AS COST INCURRED ON ONSITE SOFTWARE DEVELOPMENT. WE NOTICE FROM PAGE 676 OF ASSESSEES PB THAT THIS COMPANY AS PART OF ITS OPER ATING PROFIT IN SCHEDULE- O OF PROFIT & LOSS ACCOUNT CONTAINS EXPENDITURE FOR COST OF BOUGHT OUT ITEMS FOR RESALE AND THIS IS A SIGNIFICANT PART OF THE O PERATING EXPENDITURE. WHEN WE SEE THE REVENUE IN SCHEDULE M OF THE PROFIT & LO SS ACCOUNT, THERE IS NO BREAK-UP OF THE REVENUE WITH REGARD TO SOFTWARE SER VICES AND SOFTWARE PRODUCT. IN OUR OPINION, THIS DISTINCTION IS ENOUG H TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLE COMPANIES AS HELD BY TH E HONBLE DELHI ITAT IN THE CASE OF SAXO INDIA PVT. LTD. (SUPRA) WHICH DECISION WAS ALSO CONFIRMED BY THE HONBLE DELHI HIGH COURT. 39. THE NEXT COMPANY WHICH THE ASSESSEE SEEKS TO EX CLUDE IS INFOSYS LTD. AS FAR AS THIS COMPANY IS CONCERNED, IT IS SE EN THAT THE FOLLOWING ARE THE FUNCTIONAL DISSIMILARITIES BROUGHT TO OUR NOTIC E:- FUNCTIONALLY DISSIMILAR - OWNS INTELLECTUAL PROPE RTIES, INCURS SIGNIFICANT R&D COSTS & ONSITE ACTIVITY. - ENGAGED IN DIVERSIFIED BUSINESS ACTIVITIES. - INVOLVED IN DEVELOPMENT OF SOFTWARE PRODUCTS IN ADD ITION TO SOFTWARE SERVICES. - OWNS INTELLECTUAL PROPERTY RIGHTS. - INCURS SIGNIFICANT RESEARCH AND DEVELOPMENT COSTS. - CARRIES OUT SIGNIFICANT ACTIVITIES BASED ON ONSITE BUSINESS. IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 28 OF 31 - OWNS PRODUCTS SUCH AS FINACLE, EDGE VERVE AND OTHER PRODUCT BASED SOLUTIONS. EXTRA-ORDINARY EVENT OF MERGER WITH INFOSYS CONSULT ING INDIA LTD. SEGMENTAL PROFIT & LOSS ACCOUNT NOT AVAILABLE. COMMANDS SUBSTANTIAL BRAND VALUE. 40. THE DRP, HOWEVER, HAS NOT THOUGHT IT FIT TO EXC LUDE THIS COMPANY BY OBSERVING THAT THIS COMPANY HAS SUBSTANTIAL PRE-DOM INANT REVENUE FROM SOFTWARE SERVICES AND THE GROWTH WAS NOT ATTRIBUTAB LE TO ANY BRAND VALUE. PRESENCE OF ONSITE ACTIVITY AND THE EXPENSES ON R&D HAVE ALL BEEN BRUSHED ASIDE. IN OUR VIEW, THE DIFFERENCE POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE BEFORE US SHOW THAT THIS COMPANY CANNO T BE COMPARED WITH THAT OF THE ASSESSEE BASICALLY BECAUSE OF ITS BUSIN ESS MODEL, PRESENCE OF ONSITE REVENUE GENERATION AND OTHER REASONS CITED B EFORE US. BESIDES, THE REASON THAT TURNOVER OF THIS COMPANY IS HUGE AND MO RE THAN 10 TIMES THAT OF THE ASSESSEE. 41. THE NEXT COMPANY SOUGHT TO BE EXCLUDED IS MINDT REE LTD. THE SUBMISSIONS MADE BEFORE US WERE AS FOLLOWS:- FUNCTIONALLY DISSIMILAR, DIVERSIFIED OPERATION, SI GNIFICANT R&D SPEND, OWNERSHIP OF INTANGIBLES. - ALSO ENGAGED IN BUSINESS OF RENDERING IP-LED REVENU E, INFRASTRUCTURE MANAGEMENT, PACKAGE IMPLEMENTATION, CONSULTANCY SERVICES, ETC. CONSTITUTING 45% OF OVER ALL REVENUE DURING FY 2014-15. - DIVERSIFIED OPERATION I.E. ENGAGED IN INFRASTRUCTUR E MANAGEMENT SERVICES, BUSINESS PROCESS MANAGEMENT, TECHNOLOGY CONSULTING, PRODUCT ENGINEERING AND SAP SERVICES. ALSO LACKS SEGMENTAL DATA. IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 29 OF 31 - SIGNIFICANT RESEARCH & DEVELOPMENT ACTIVITY. BY IN CURRING R&D EXPENSES, IT WAS ABLE TO DELIVER IP BASED VIDEO SURVEILLANCE MANAGEMENT, RECORDING AND ANALYTIC PRO DUCTS AND SOLUTIONS. IT HAS FILED 4 PATENTS IN INDIA AND US SO FAR IN THE AREA OF VIDEO ANALYSIS. - OWNERSHIP OF INTANGIBLES IN THE FORM OF INTANGIBLE PROPERTY. SIGNIFICANT ONSITE ACTIVITY: - 46% OF REVENUE EARNED UNDER ONSITE MODEL. - INCURRED OVERSEAS BRANCH OFFICE EXPENSES AMOUNTING TO INR 1582 CRORES - RECEIVES INCENTIVES FROM STATE OF FLORIDA IN RELATI ON TO THE DEVELOPMENT CENTER LOCATED OVERSEAS. LACK OF SEGMENTAL DATA - DOES NOT MAINTAIN SEGMENTAL INFORMATION IN RESPECT OF PROFITABILITY REPORTED FROM BUSINESS ACTIVITIES IN THE NATURE OF INFRASTRUCTURE MANAGEMENT SERVICES, TECHNOLOGY CONS ULTING AND SAP SERVICES. - ACQUISITION OF SUBSIDIARY DISCOVERTURE SOLUTIONS LLC. 42. THE DRP WHILE DEALING WITH THE AFORESAID OBJEC TIONS HAS MERELY TAKEN THE VIEW THAT THE PRESENCE OF IPR REVENUE WAS INSIGNIFICANT AND SO ALSO EXPENSES OF BRAND VALUE, R&D & INTANGIBLES. M ORE IMPORTANTLY, THE DRP DID NOT DISPUTE THE PRESENCE OF 46% OF REVENUE FROM ONSITE MODEL, BUT WENT ON TO HOLD THAT THE PRESENCE OF REVENUE IS NOT SUFFICIENT TO EXCLUDE A COMPANY, WHEN IT IS OTHERWISE FUNCTIONALLY COMPAR ABLE. ON THIS ASPECT, WE HAVE ALREADY REFERRED TO THE DECISION OF THE ITA T BANGALORE BENCH IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA P. LTD. (SUPRA) AND IN THE LIGHT OF THIS DECISION AND THE ADMITTED FACTUAL POSITION REGARDING PRESENCE OF ONSITE REVENUE OVER AND ABOVE THE THRESHOLD LIMIT O F 25% OF TOTAL REVENUE, IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 30 OF 31 WE ARE OF THE VIEW THAT THIS COMPANY SHOULD BE EXCL UDED FROM THE LIST OF COMPARABLE COMPANIES. WE HOLD AND DIRECT ACCORDING LY. 43. THE ONLY OTHER ISSUE THAT WAS ARGUED BEFORE US IS NON-GRANTING OF WORKING CAPITAL ADJUSTMENT. IN THIS REGARD, THE FA CTS ARE IDENTICAL AND THE REASONS FOR NON-GRANTING WORKING CAPITAL ADJUSTMENT ARE ALSO IDENTICAL. THE ASSESSEE HAS GIVEN THE WORKING CAPITAL ADJUSTMENT C ALCULATIONS AND THE SAME ARE AT PAGES 265 TO 291 OF THE ASSESSEES PB. THESE DETAILS HAVE NOT BEEN DISPUTED BY THE AO AS WELL AS THE DRP. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE DECISION RENDERED ON AN IDENTIC AL ISSUE WHILE DEALING WITH SIMILAR OBJECTIONS RAISED BY THE ASSESSEE IN AY 201 4-15, THE WORKING CAPITAL ADJUSTMENT SHOULD BE ALLOWED TO THE ASSESSE E AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE HOL D AND DIRECT ACCORDINGLY. 44. THE AO/TPO IS DIRECTED TO COMPUTE THE ALP AFTER AFFORDING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE AND AS P ER DIRECTIONS CONTAINED IN THIS ORDER. 45. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. 46. THUS, BOTH THE APPEALS ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF FEBRUARY, 2020. SD/- SD/- ( CHANDRA POOJARI ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 28 TH FEBRUARY, 2020. / DESAI S MURTHY / IT(TP)A NOS.2657/BANG/18 & 2365/BANG/19 PAGE 31 OF 31 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGAL ORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE