M/s. EIT Services India Private Limited, Bangalore V. Assistant Commissioner Of Income Tax, Special Range - 2, Bangalore

ITA 2498/BANG/2019

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 7145 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 8 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-09-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 10-08-2021
• Assessment Year: 2015-2016
• Appeal Filed On: 09-12-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction
• Section: 143(3); 133(6); 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES B, BANGALORE BEFORE SHRI GEORGE GEORGE K, JM & SHRI B.R.BASKARA N, AM IT(TP)A NO.2498/BANG/2019 :ASST.YEAR2015-2016 M/S.EIT SERVICES INDIA PVT.LTD. DIGITAL PARK, 39/40, ELECTRONIC CITY, PHASE II, HOSUR ROAD BANGALORE 560 100. PAN : AAACD4078L . V. THE ASST.COMMISSIONER OF INCOME-TAX, SPECIAL RANGE-2 BANGALORE. (APPELLANT) (RESPONDENT) APPELLANT BY : SRI.PADAMCHAND KHINC HA RESPONDENT BY : SRI.MUZAFFAR HUSSAIN, CIT-DR DATE OF HEARING : 10.08.2021 DATE OF PRONOUNCEMENT : 03.09.2021 O R D E R PER B R BASKARAN, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST FINAL ASSESSMENT ORDER DATED 10.10.2019 PASSED U/S 143(3) R.W.S. 144C(13) OF THE I.T.ACT FOR ASSESSMENT YEAR 2015-16 IN PURSUANCE OF DIRECTIONS GIVEN BY LD DISPUTE RESOLUT ION PANEL (DRP). 2. SEVERAL GROUNDS ARE RAISED WITH REGARD TO TRANSF ER PRICING ADJUSTMENT, BOTH WITH REGARD TO SOFTWARE DE VELOPMENT SEGMENT AND I.T.ENABLED SERVICES. THE LEARNED AR, D URING THE COURSE OF HEARING, SUBMITTED THAT AS REGARDS I.T.EN ABLED SERVICES, REVISED ORDER U/S 92CA OF THE I.T.ACT HAS BEEN PASSED ACCEPTING THE INTERNATIONAL TRANSACTIONS TO BE AT ARMS LENGTH. AS REGARDS SOFTWARE DEVELOPMENT SEGMENT IS CONCERNED, THE LEARNED AR CONFINED HIS SUBMISSION T O THE EXCLUSION OF FOUR COMPARABLE COMPANIES AND INCLUSIO N OF IT(TP)A NO.2498/BANG/2019. M/S.EIT SERVICES INDIA PRIVATE LIMITED. 2 THREE COMPARABLE COMPANIES, WHICH WERE URGED IN THE GROUNDS OF APPEAL. THE LEARNED AR ALSO PRESSED GROU ND NO.6.A. WITH REGARD TO THE GRANT OF WORKING CAPITAL ADJUSTMENT. THE ASSESSEE HAS ALSO FILED AN ADDITIO NAL GROUND CONTENDING THAT THE TRANSFER PRICING ADJUSTMENT SHO ULD BE RESTRICTED TO THE VALUE OF INTERNATIONAL TRANSACTIO NS ONLY. 3. BRIEF FACTS OF THE CASE ARE AS FOLLOW: THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF RENDERING SOFTWARE DEVELOPMENT SERVICES, SOFTWARE MAINTENANCE AND TECHNICAL CALL CENTRE SERVICES PRIM ARILY TO ITS ASSOCIATE ENTERPRISES (AES). THE ASSESSEE HAD UNDER TAKEN SEVERAL INTERNATIONAL TRANSACTIONS WITH ITS AES. AS REGARDS THE SOFTWARE DEVELOPMENT SEGMENT, THE FINAL LIST OF COM PARABLE CONSIDERED BY THE TPO ARE AS FOLLOWS:- SR. NO. NAME OF THE COMPANY 1. KALS INFORMATION SYSTEMS LIMITED 2. E-ZEST SOLUTIONS LIMITED 3. CG-VAK SOFTWARE & EXPORTS LIMITED 4. TATA ELXSI LIMITED (SEG.) 5. RHEAL SOFTWARE PRIVATE LIMITED 6. MINDTREE LIMITED 7. LARSEN & TOUBRO INFOTECH LIMITED 8. R S SOFTWARE (INDIA) LIMITED 9. INFOBEANS TECHNOLOGIES LIMITED 10. PERSISTENT SYSTEMS LIMITED 11. NIHILENT TECHNOLOGIES LIMITED 12. ASPIRE SYSTEMS (INDIA) PRIVATE LIMITED 13. INTEQ SOFTWARE PRIVATE LIMITED 14. INFOSYS LIMITED 15. THIRDWARE SOLUTIONS LIMITED 16. CYBAGE SOFTWARE PRIVATE LIMITED IT(TP)A NO.2498/BANG/2019. M/S.EIT SERVICES INDIA PRIVATE LIMITED. 3 4. DRAFT ASSESSMENT ORDER WAS PASSED ON RECEIPT OF THE TPOS ORDER PASSED U/S 92CA OF THE I.T.ACT. AGAINST THE DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED OBJECTIONS BEF ORE THE DRP. THE DRP CONFIRMED THE COMPARABLE LIST CONSIDER ED BY THE TPO EXCEPT FOR THIRDWARE SOLUTIONS LIMITED. INS TEAD OF THIRDWARE SOLUTIONS LIMITED, THE DRP INCLUDED SASKE N COMMUNICATION TECHNOLOGIES LIMITED. SUBSEQUENT TO T HE DRPS ORDER, FINAL ASSESSMENT ORDER WAS PASSED. 5. THE ASSESSEE BEING AGGRIEVED, HAS FILED THIS APP EAL BEFORE THE TRIBUNAL. THE LIMITED PRAYER OF THE ASSE SSEE, INSOFAR AS THE SOFTWARE DEVELOPMENT SERVICES IS THA T THE ASSESSEE WANTS EXCLUSION OF FOUR COMPARABLES SELECT ED BY THE TPO AND AFFIRMED BY THE DRP AND INCLUSION OF THREE COMPARABLES. THE DETAILS OF THE COMPANIES SOUGHT TO BE EXCLUDED ARE (I) LARSEN & TOUBRO INFOTECH LIMITED, (II) INFOBEANS TECHNOLOGIES LIMITED, (III) PERSISTENT SYSTEMS LIMITED, AND (IV) INFOSYS LIMITED. THE DETAILS OF THE COMPANIES SOUGHT TO BE INCLUDED BY THE ASSESSEE IN THE COMPARABLE LIST ARE (I) I2T2 INDIA LIMITED, (II) EVOKE TECHNOLOGIES LIMITED, AND (III) MELSTAR INFORMATION TECHNOLOGIES LIMITED. 6. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. BEFORE US THE LD A.R PLACED HI S RELIANCE ON THE ORDER DATED 28.2.2020 PASSED BY THE COORDINA TE BENCH IN THE CASE OF M/S. YAHOO SOFTWARE DEVELOPMENT INDI A PVT. IT(TP)A NO.2498/BANG/2019. M/S.EIT SERVICES INDIA PRIVATE LIMITED. 4 LTD. (IT (TP)A NO.2365/BANG/2018) RELATING TO ASSES SMENT YEAR 2015-16, WHEREIN M/S. PERSISTENT SYSTEMS LTD., L&T INFOTECH LTD. AND INFOSYS LTD. HAVE BEEN HELD TO BE NOT GOOD COMPARABLE COMPANIES. HE SUBMITTED THAT M/S. INFO BEANS TECHNOLOGIES LTD. HAS BEEN HELD TO BE NOT A GOOD CO MPARABLE IN THE CASE OF METRIC STREAM INFOTECH (INDIA) PVT. LTD. IN ITA NO.2347/BANG/2019 DATED 24.4.2020. 7. WE NOTICE THAT THE COORDINATE BENCH IN THE CASE OF YAHOO SOFTWARE DEVELOPMENT INDIA PVT. LTD. (SUPRA) HAS EX CLUDED FOLLOWING 3 COMPANIES HOLDING THEM AS NOT GOOD COMP ARABLE COMPANIES. (A) PERSISTENT SYSTEMS LTD:- 33. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT ON THE QUESTION OF APPLICATION OF RPT FILTER, THE ASSESSEE HAD MADE TH E FOLLOWING SUBMISSION BEFORE THE DRP:- 4. FAILS THE RELATED PARTY TRANSACTION TO SALES F ILTER 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. THE RELEVANT EXTRACT FROM THE SHOW- CAUSE NOTICE IS REPRODUCED BELOW FOR EASE OF REFERE NCE: E) COMPANIES WHO HAVE MORE THAN 25% RELATED PARRY T RANSACTIONS OF THE SALES WERE EXCLUDED. COMPANIES HAVING RELATED PARTY TRANSACTIONS OF MORE THAN 25% ARE PROPOSED TO BE EXCLUDED. A THRESHOLD OF 25% IS BEIN G APPLIED FOLLOWING THE PROVISIONS OF SECTION 92A(2)(A) WHICH PROVIDES A LIMIT OF 26% OF THE EQUITY CAPITAL CARRYING VOTING RIGHTS FOR TREATING AN ENTERPRISE AS ASSOCIATED ENTERPRISE. IF THE LIMIT I S REDUCED FURTHER IT WOULD ONLY RESULT IN ELIMINATING MORE AND MORE COMP ANIES, ON THE OTHER HAND IF THE LIMIT IS RELAXED THEN COMPANIES W ITH PREDOMINANTLY RELATED PARTY TRANSACTIONS WOULD GET INCLUDED WHICH WOULD NOT REPRESENT UNCONTROLLED TRANSACTIONS. THEREFORE, ON A BALANCING NOTE, 25% IS A PROPER THRESHOLD LIMIT FOR RELATED PARTY T RANSACTIONS. THE COMPANIES HAVING MORE THAN 25% RELATED PARTY TRANSA CTIONS SHOULD THEREFORE BE REJECTED AS COMPARABLES. THE HON'BLE ITAT HAS UPHELD THE APPLICATION OF THIS FILTER BY THE TPO IN ITS ORDER IN THE CASE OF M/S. SUPPORISOFT INDIA PVT. LTD FOR AY 2005- IT(TP)A NO.2498/BANG/2019. M/S.EIT SERVICES INDIA PRIVATE LIMITED. 5 G6 IN IT (TP)A 1372/B/11 & 20/2012 DATED 28.03.2013 FOLLOWING ITS OWN DECISION IN THE CASE OF M/S. ACTIS ADVERTISERS PVT. LTD VIDE ITA NO.5277/DE1/2011 DATED 12.10.2012. ON PERUSAL OF THE ANNUAL REPORT OF PERSISTENT, WE O BSERVE THAT THE COMPANY HAS RPT IN EXCESS OF 25% OF THE SALES. THE CALCULAT ION 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 SA LES RATIO' FILTER APPLIED BY THE LEARNED TPO AND SHOULD THEREFORE NOT BE CONSIDE RED AS A COMPARABLE. 34. THIS ARGUMENT HAS BEEN ADDRESSED BY THE DRP IN ITS ORDER AS FOLLOWS:- 4.4.9 WE NOTE THAT THE APPROACH OF THE TPO IN T REATMENT OF RELATED PARTY TRANSACTION INTO TWO SETS, ARE FOR REVENUE TR ANSACTIONS AND OTHER FOR EXPENSE TRANSACTION IS LOGICAL AND CORRECT. WE ALS O NOTE THAT THE RPT FILTER WAS ADOPTED BY THE TPO WAS WITH THE ABOVE CONDITION S AND HAS ADOPTED CONSISTENTLY. HENCE, WE DO NOT FIND ANY INFIRMITY T HE APPROACH. HENCE, WE REJECT THE ASSESSEE'S PLEA. WE HOLD THAT ONSITE EXP ENSES DO NOT ADVERSELY AFFECT COMPARABILITY AND HENCE, SUCH PLEA IS REJECT ED. 35. FURTHER, THE ASSESSEE HAD ALSO RAISED PLEA WITH REG ARD TO ONSITE REVENUE FILTER BY POINTING OUT THAT ONSITE REVENUE IS SUBSTANTIAL AND THEREFORE THIS COMPANY SHOULD NOT BE REGARDED AS A COMPARABLE COMPANY WITH A COMPANY WHICH DOES NOT HAVE ANY ONSITE REVENUE. IN THIS REGARD, THE LD. COUNSEL FO R 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 THE RE IS NO REASON AS TO WHY ONE SHOULD LOOK AT PRICE DIFFERENCE IN OFFSHORE SOFTWARE DEVELOPMENT AND ONSITE SOFTWARE DEVELOPMENT. IT IS NO DOUBT TRU E THAT IN TNMM IT IS ONLY THE MARGINS IN AN UNCONTROLLED TRANSACTION THAT IS TESTED WITH REFERENCE TO THE CONTROLLED TRANSACTION BUT IT IS NOT POSSIBLE T O IGNORE THE FACT THAT PRICING WILL HAVE AN EFFECT ON THE MARGINS OBTAINED IN A TR ANSACTION. THE ARGUMENT THAT IF PRICING STRUCTURE WERE TO BE CONSIDERED AS CRITERIA, THEN IT WILL HAVE TO BE SEEN AS TO WHAT IS THE PRICING STRUCTURE OF ALL THE COMPARABLE FOR VARIOUS PROJECTS CANNOT BE ACCEPTED BECAUSE THE TPO HAS NOT CHOSEN ANY OTHER IT(TP)A NO.2498/BANG/2019. M/S.EIT SERVICES INDIA PRIVATE LIMITED. 6 ONSITE SOFTWARE SERVICE PROVIDER WITH A REVENUE COM POSITION OF MORE THAN 75% FROM ONSITE SOFTWARE SERVICES AS COMPARABLE. AS RIGHTLY OBSERVED BY THE TPO, THE PRICING IS DIFFERENT IN ONSITE WHEN COMPAR ED TO OFFSHORE OPERATIONS. THE FURTHER OBSERVATIONS OF THE TPO THAT THE REASON S FOR THE SAME LIE IN THE FACT THAT WHILE IN THE CASE OF OFFSHORE PROJECTS MO ST OF THE COSTS ARE INCURRED IN INDIA; AN ONSITE PROJECT HAS TO BE CARR IED OUT ABROAD SIGNIFICANTLY INCREASING THE EMPLOYEE COST AND OTHE R COSTS. 65. THE NEXT OBJECTION OF THE ASSESSEE IS WITH REGA RD TO ASSETS EMPLOYED. THE COMPANIES, WHICH PREDOMINANTLY GENERATE REVENUES FR OM ONSITE ACTIVITY, DO NOT HAVE SIGNIFICANT ASSETS AS MOST OF THE WORK IS CARRIED ON THE SITE OF CUSTOMER OUTSIDE INDIA. THE ARGUMENT THAT THE TPO H AS 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 FILTER 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 THAT MARGIN I S NOT A CRITERIA TO SELECT OR REJECT A COMPARABLE UNDER RULE I0B(2) OF THE I.T. R ULES. WE ARE OF THE VIEW THAT THIS ARGUMENT AGAIN IGNORES THE FACT THAT THE APPROACH OF THE TPO HAS BEEN TO HIGHLIGHT THE FACT THAT THERE CAN BE NO FUN CTIONAL COMPARABILITY, IF THE ASSETS EMPLOYED AND RISKS ASSUMED ARE TAKEN INTO CO NSIDERATION. IT IS IN THAT CONTEXT THE TPO HAS REFERRED TO THE MARGINS. 67. THE COMPANIES WHO GENERATE MORE THAN 75% OF THE EXPORT REVENUES FROM ONSITE OPERATIONS OUTSIDE INDIA ARE EFFECTIVELY COM PANIES WORKING OUTSIDE INDIA HAVING THEIR OWN GEOGRAPHICAL MARKETS, COST O F LABOUR ETC., AND ALSO RETURN COMMENSURATE WITH THE ECONOMIC CONDITIONS IN THOSE COUNTRIES. THUS ASSETS AND RISK PROFILE, PRICING AS WELL AS PREVAIL ING MARKET CONDITIONS ARE DIFFERENT IN PREDOMINANTLY ONSITE COMPANIES FROM PR EDOMINANTLY OFFSHORE COMPANIES LIKE THE TAXPAYER. SINCE, THE ENTIRE OPER ATIONS OF THE TAX PAYER ARE TAKING PLACE OFFSHORE I.E. IN INDIA; IT IS BUT NATU RAL THAT IT SHOULD BE COMPARED WITH COMPANIES WITH MAJOR OPERATIONS OFFSH ORE, DUE TO THE REASON THAT THE ECONOMICS AND PROFITABILITY OF ONSITE OPER ATIONS ARE DIFFERENT FROM THAT OF OFFSHORE BUSINESS MODEL. AS ALREADY STATED THE ASSESSEE HAS LIMITED ITS ANALYSIS ONLY TO FUNCTIONS BUT NOT TO THE ASSET S, RISKS AS WELL AS PREVAILING MARKET CONDITIONS IN WHICH BOTH THE BUYER AND SELLE R OF SERVICES LOCATED. HENCE, THE COMPANIES IN WHICH MORE THAN 75% OF THEI R EXPORT REVENUES COME FROM ONSITE OPERATIONS ARE TO BE EXCLUDED FROM THE COMPARABILITY STUDY AS THEY ARE NOT FUNCTIONING IN SIMILAR ECONOMIC CIR CUMSTANCES TO THAT OF THE TAX PAYER. HENCE, IT IS HELD THAT THIS FILTER IS AP PROPRIATELY APPLIED BY THE TPO. 68. ADMITTEDLY THE ONSITE REVENUE IN THE CASE OF THE FOLLOWING COMPARABLE COMPANIES IDENTIFIED BY THE ASSESSEE WAS MORE THAN 75% OF ITS EXPORT REVENUES VIZ., A) VISU INTERNATIONAL LTD. B) MAARS SOFTWARE INTERNATIONAL LTD. C) AKSHAY SOFTWARE TECHNOLOGIES LTD. D) VJIL C ONSULTING LTD. E) SYNFOSYS BUSINESS SOLUTIONS LTD. THE ABOVE COMPANIE S WERE THEREFORE RIGHTLY NOT CONSIDERED AS COMPARABLE BY THE TPO. WE HOLD AC CORDINGLY. 36. IT IS SEEN THAT THE TPO IN COMING TO THE CON CLUSION THAT THE ONSITE REVENUE FILTER IS NOT APPLICABLE HAS PLACED RELIANCE ON THE DECISI ON OF THE ITAT MUMBAI BENCH IN IT(TP)A NO.2498/BANG/2019. M/S.EIT SERVICES INDIA PRIVATE LIMITED. 7 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 REVENU E FILTER AND THE DECISION WAS RENDERED ON THE FACTS OF ITS OWN CASE. 37. ON THE ISSUE OF RPT FILTER, WE NOTICE THAT TH E TPO IN PARA 16 HAS ACCEPTED THAT THE RPT FILTER SHOULD BE @ 25%. IN THE CASE OF PER SISTENT SYSTEMS LTD., THE RPT IS AT 31.32% AS EXTRACTED IN THE EARLIER PART OF THIS ORD ER AND THEREFORE THIS COMPANY SHOULD BE EXCLUDED BY APPLICATION OF RPT FILTER. I N VIEW OF THE ABOVE, WE DO NOT WISH TO GO INTO OTHER GROUNDS ON WHICH THIS COMPANY IS S OUGHT TO BE EXCLUDED VIZ., THAT IT IS A PRODUCT COMPANY AND THERE IS NO SEGMENTAL DATA BETWEEN PRODUCT AND SERVICES SEGMENT, PRESENCE OF ONSITE ACTIVITY AND THE IMPACT OF EXTRA-ORDINARY EVENT OF ACQUISITION DURING THE RELEVANT PREVIOUS YEAR. THEREFORE, THIS COMPANY IS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANY . (B) LARSEN & TOUBRO INFOTECH LTD:- 38. AS FAR AS L&T INFOTECH LTD. IS CONCERNED, TH E LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THE DECISION OF ITAT DELHI BE NCH IN THE CASE OF SAXO INDIA PVT. LTD. V. ACIT, ITA NO.6148/DEL/2015 FOR AY 2011-12, ORDER DATED 5.2.2016, WHEREIN THE TRIBUNAL TOOK NOTE OF THE FACT THAT THIS COMPAN Y WAS ALSO TRADING IN SOFTWARE AND OWNED INSIGNIFICANT INTANGIBLE ASSETS. THE COMPANY WAS EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES WITH REFERENCE TO SWD SERVICES PROVIDER SUCH AS THE ASSESSEE. THE LD. COUNSEL POINTED OUT THAT THOUGH THIS DECI SION WAS RENDERED WITH REFERENCE TO AY 2011-12, THE SAME REASONING WOULD A PPLY 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 WI THOUT ANY SEGMENTAL BREAK-UP. OUR ATTENTION WAS ALSO DRAWN TO PAGE 682 OF PB WHIC H SHOWS THAT THERE IS SUBSTANTIAL ONSITE REVENUE 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 OPERATING PROFIT IN SCHEDULE-O OF PROFIT & LOSS ACCOUNT CONTAINS EXPENDITURE FOR COST OF BOUGHT OUT ITEMS FOR RESALE AND THIS IS A SIGNIFICANT PART OF THE OPERATING EXPENDITURE. WHEN WE SEE THE REVENUE IN SCHEDULE M OF THE PROFIT & LOSS ACCOUNT, THERE IS NO BREAK-UP OF THE REVENUE WITH REGARD TO SOFTWARE SERVICES AND SOFTWARE PRODUCT. IN OUR OPINION, THIS DISTINCTION IS ENOUG H TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLE COMPANIES AS HELD BY THE HONBLE DELHI ITAT IN THE CASE OF SAXO INDIA PVT. LTD. (SUPRA) WHICH DECISION WAS ALSO CON FIRMED BY THE HONBLE DELHI HIGH COURT (C) INFOSYS LTD . 39. THE NEXT COMPANY WHICH THE ASSESSEE SEEKS TO EXCLUDE IS INFOSYS LTD. AS FAR AS THIS COMPANY IS CONCERNED, IT IS SEEN THAT THE FOLL OWING ARE THE FUNCTIONAL DISSIMILARITIES BROUGHT TO OUR NOTICE:- 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. IT(TP)A NO.2498/BANG/2019. M/S.EIT SERVICES INDIA PRIVATE LIMITED. 8 - CARRIES OUT SIGNIFICANT ACTIVITIES BASED ON ONSITE BUSINESS. - OWNS PRODUCTS SUCH AS FINACLE, EDGE VERVE AND OTHER PRODUCT BASED SOLUTIONS. EXTRA-ORDINARY EVENT OF MERGER WITH INFOSYS CONSULT ING INDIA LTD. SEGMENTAL PROFIT & LOSS ACCOUNT NOT AVAILABLE. COMMANDS SUBSTANTIAL BRAND VALUE. 40. THE DRP, HOWEVER, HAS NOT THOUGHT IT FIT TO EXCLUDE THIS COMPANY BY OBSERVING THAT THIS COMPANY HAS SUBSTANTIAL PRE-DOMINANT REVE NUE FROM SOFTWARE SERVICES AND THE GROWTH WAS NOT ATTRIBUTABLE TO ANY BRAND VALUE. PRESENCE OF ONSITE ACTIVITY AND THE EXPENSES ON R&D HAVE ALL BEEN BRUSHED ASIDE. IN OUR VIEW, THE DIFFERENCE POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE BEF ORE US SHOW THAT THIS COMPANY CANNOT BE COMPARED WITH THAT OF THE ASSESSEE BASICALLY BECAUSE OF ITS BUSINESS MODEL, PRESENCE OF ONSITE REVENUE GENERATION AND OTHER REA SONS CITED BEFORE US. BESIDES, THE REASON THAT TURNOVER OF THIS COMPANY IS HUGE AND MO RE THAN 10 TIMES THAT OF THE ASSESSEE. 8. WE NOTICE THAT M/S. INFOBEANS TECHNOLOGIES LTD. HAVE BEEN DIRECTED TO BE EXCLUDED BY THE COORDINATE BENC H IN THE CASE OF METRIC STREAM INFOTECH (INDIA) PVT. LTD. WI TH THE FOLLOWING OBSERVATIONS: 14.3. INFOBEANS TECHNOLOGIES LTD., LD.AR SUBMITTED THAT THIS COMPARABLE WAS SELECTED B Y AUTHORITIES BELOW AS IT PASSES ALL FILTERS, BASED UPON RESPONSE RECEIVED FROM THIS COMPANY UNDER SECTION 133 (6) OF THE ACT. HE SUBMIT TED THAT THIS OBSERVATION IS CONTRARY TO THE FACTS AND FIGURES AP PEARING IN ANNUAL REPORT. REFERRING TO PAGE 1015 LD.ARSUBMITTED THAT THIS COMPANY IS OPERATING AT CMMI LEVEL 3 AND - IS A SOFTWARE SERVICE COMPANY SPECIALISING IN BUSIN ESS APPLICATION DEVELOPMENT FOR WEB AND MOBILE. IN THE COMPANY OVERVIEW THIS COMPANY HAS BEEN STATED TO BE PRIMARILY ENGAGED IN PROVIDING CUSTOM DEVELOPED SERVICES TO OFFSHORE CLIENTS AND IT PROVI DES SOFTWARE ENGINEERING SERVICES PRIMARILY IN CUSTOM APPLICATION DEVELOPMEN T, CONTENT MANAGEMENT SYSTEMS, ENTERPRISE MOBILITY, BIG DATA ANALYTICS. L D.AR THUS SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY NOT AT ALL SIMILAR WITH A C APTIVE SERVICE PROVIDER LIKE ASSESSEE THAT THIS PROVIDING LTD SERVICES TO ITS AS SOCIATED ENTERPRISES. 14.3.1.0N THE CONTRARY LD. CIT DR, REFERRING OBSERV ATIONS OF DRP IN PARA 3.6.1 SUBMITTED THAT THE ACTIVITIES OF COMPANY FALL UNDER THE GAMUT OF SOFTWARE DEVELOPMENT HAS CATEGORISED BY COMPANY ITSELF AND T HAT THE INFORMATION OBTAINED UNDER SECTION 133 (6) IS SUFFICIENT ENOUGH TO COME TO SUCH CONCLUSIONS. HOWEVER HE SUBMITTED THAT THIS COMPARA BLE ALSO MAY BE SENT BACK TO LEARNT AO/TPO FOR VERIFICATION. IT(TP)A NO.2498/BANG/2019. M/S.EIT SERVICES INDIA PRIVATE LIMITED. 9 14.3.2. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. IT IS OBSERVED THAT THE ANNUAL REPORT OF THIS COMPA NY CATEGORISES THE DIVERSIFY SERVICES PROVIDED BY THIS COMPANY UNDER SOFTWARE DE VELOPMENT SEGMENT. WE ALSO NOTE THAT THIS COMPANY IS BASICALLY INTO APPLI CATION DEVELOPMENT FOR WEB AND MOBILE AND PROVIDES CUSTOMISED SERVICES TO ITS OFFSHORE CLIENTS COMPRISING. ENTIRE REVENUE RECEIVED BY THIS COMPARABLE EASE UND ER ONE SINGLE SEGMENT OF SALE OF SOFTWARE. THIS COMPANY ALSO OWNS SOFTWARELI CENSES. 14.3.3. IN OUR CONSIDERED OPINION THIS COMPARABLE CANNOT BE CONSIDERED TO BE FUNCTIONING IN 100% RISK MITIGATED ENVIRONMENT AND IS A FULL-FLEDGED ENTERPRISE. SUCH A COMPARABLE CANNOT BE COMPARED WI TH A CAPTIVE SERVICE PROVIDER LIKE ASSESSEE. ACCORDINGLY WE DIRECT THIS COMPARABLE TO BE EXCLUDE D FROM FINALIST. 9. FOLLOWING THE ABOVE SAID DECISIONS RENDERED BY C O- ORDINATE BENCHES, WE DIRECT EXCLUSION OF PERSISTENT SYSTEMS LTD., LARSEN & TOUBRO INFOTECH LTD. AND INFOSYS LTD . & INFOBEANS TECHNOLOGIES LTD. FROM THE FINAL LIST OF COMPARABLES. 10. WITH REGARD TO THE PRAYER OF THE ASSESSEE TO IN CLUDE 3 COMPARABLE COMPANIES, WE NOTICE THAT THE COORDINATE BENCH IN THE CASE OF GOLDMAN SACHS SERVICES PVT. LTD. (IT (TP)A NO.2355/BANG/2019 DATED 15.6.2020) HAS RESTORED ALL THE 3 COMPANIES TO THE FILE OF THE A.O./TPO FOR EXAMINING THE CLAIM OF ASSESSEE WITH THE FOLLOWING DIRECTIONS. 10. THE LEARNED AUTHORIZED REPRESENTATIVE ARGUED FO R INCLUSION OF THREE COMPARABLES (I) I2T2 INDIA LIMITED, (II)EVOKE TECHN OLOGIES LIMITED AND (III)MELSTAR INFORMATION TECHNOLOGIES LIMITED AND M ADE SUBMISSIONS ON COMPARABLES AND SUBSTANTIATED WITH CHART AND PAPER BOOK. (I) I2T2 INDIA LIMITED THE LDAR SUBMITTED THAT TH E COMPARABLE COMPANY MARGIN IS 3.67%.THE COMPARABLE HAS TO BE INCLUDED A S THE RPT DETAILS ARE AVAILABLE IN THE ANNUAL REPORT AND REFERRED TO PAGE NO 2385 OF THE PAPER BOOK. WE ARE OF THE OPINION THAT THE ASSESSING OFFI CER COULD HAVE CALLED FOR THE INFORMATION UNDER SECTION 133(6) OF THE ACT TO CONFIRM THE DETAILS IN THE PROCEEDINGS. ACCORDINGLY, WE RESTORE THIS COMPARABL E TO THE FILE OF THE TPO/A.O. FOR EXAMINATION AND VERIFICATION OF FACTS. (II) EVOKE TECHNOLOGIES LIMITED HAS MARGIN OF 0.5 3%. THE LDAR SUBMITTED THAT THE COMPANY IS FUNCTIONALLY COMPARABLE AND PAS SES ALL THE TPOS FILTERS. THE BRANCH IS A SUB-SET OF AN ENTITY AND T HE RESULTS OF THE BRANCH ARE IT(TP)A NO.2498/BANG/2019. M/S.EIT SERVICES INDIA PRIVATE LIMITED. 10 INCLUDED IN THEAUDITED FINANCIAL STATEMENTS OF THE ENTITY AND QUALIFY EXPORT REVENUE, AS THE COMPANY IS IN THE BUSINESS OF SOFTW ARE DEVELOPMENT SERVICES AND IMPLEMENT SERVICES. THE LDAR HAS SUPPORTED HIS ARGUMENTS WITH THE PAPER BOOK AT PAGE NO 2452 AND PROFIT AND LOSS ACCO UNT. WHEREAS THE DRP HAS COMMENTED THAT UNAUDITED ACCOUNTS CANNOT BE RELIED. THE LEARNED AUTHORIZED REPRESENTATIVE RELIED ON THE DECISION OF NOKIA SEIMENS NETWORKS INDIA (P) LTD. VS. ACIT 70 TAXMANN.COM 236 (DEL), W ITH OBSERVATIONS AT PAGE 5 AS UNDER : CONSIDERING THE FACTS AND SUBMISSIONS, WE RESTORE T HE COMPARABLE TO THE FILE OF ASSESSING OFFICER FOR EXAMINATION AND VERIFICATI ON OF THE FACTS AND MATERIAL. (III) MEL STAR INFORMATION TECHNOLOGY LIMITED MARGI N IS 5.29%. THE COMPANY HAS MADE PROFIT IN THE CURRENT YEAR AND NOT A LOSS MAKING COMPANY. WHEREAS THE DRP HAS REJECTED THE COMPANY, WHICH HAS INCURRED LOSS IN TWO YEARS OUT OF THREE YEARS. BUT FOR ALL T HE PAST YEARS, THE TPO HAD APPLIED BENCHMARK OF REJECTING COMPANIES WITH LOSES FOR ALL THREE YEARS. 11. THE LEARNED AUTHORISED REPRESENTATIVE RELIED ON THE DECISION OF CIT VS. GOLDMAN SACHS (2016) 69 TAXMANN.COM 19 AND STAR INT ERNATIONAL LIMITED VS. DCIT (2019) 112 TAXMAN.COM 258. IN THE CASE OF CIT VS. GOLDMAN SACHS INDIASECURITIES (P) LIMITED (SUPRA) IN PARAS 4(A) AND 4(B) THE OBSERVATIONS ARE READ AS UNDER : 12. WE, CONSIDERING THE FACTS, CIRCUMSTANCES AND JU DICIAL DECISIONS ARE OF THE OPINION THAT THE DISPUTED ISSUE IN RESPECT OF L OSSES OF CONTINUOUS THREE YEARS HAS TO BE VERIFIED/ TESTED BY THE ASSESSING O FFICER. ACCORDINGLY WE REMIT THIS MATTER TO THE FILE OF TPO/A.O FOR EXAMIN ATION. 11. FOLLOWING ABOVE DECISION, WE RESTORE I2T2 INDIA LIMITED, EVOKE TECHNOLOGIES LIMITED AND MELSTAR INFORMATION IT(TP)A NO.2498/BANG/2019. M/S.EIT SERVICES INDIA PRIVATE LIMITED. 11 TECHNOLOGIES LIMITED TO THE FILE OF AO/TPO FOR EXAM INING IT AFRESH. 12. THE ASSESSEE HAS SUBMITTED THAT THECLAIM OF WORKING CAPITAL ADJUSTMENT WAS REJECTED BY TPO AND LD DRP. HE SUBMITTED THAT THE TRIBUNAL IS CONSISTENTLY HOLDING THAT THE WORKING CAPITAL ADJUSTMENT IS PERMISSIBLE AND IN MA NY CASES; THE TPO HAS ALSO ALLOWED THE SAME. ACCORDINGLY, HE SUBMITTED THAT THE ASSESSEE MAY BE GRANTED WORKING CAPITAL ADJUSTMENT. 13. WE FIND MERIT IN THE SUBMISSIONS MADE BY LD A.R. ACCORDINGLY, WE RESTORE THIS ISSUE TO THE FILE OF A O/TPO WITH THE DIRECTION TO GRANT WORKING CAPITAL ADJUSTMENT. 14. IN THE ADDITIONAL GROUND, THE ASSESSEE IS C ONTENDING THAT THE TRANSFER PRICING ADJUSTMENT SHOULD BE REST RICTED TO THE VALUE OF INTERNATIONAL TRANSACTIONS ONLY. THER E IS MERIT IN THE SAID CONTENTION AS THE WHOLE PURPOSE OF TRANSFE R PRICING EXERCISE IS TO DETERMINE THE ARMS LENGTH PRICE OF I NTERNATIONAL TRANSACTIONS. ACCORDINGLY WE DIRECT THE AO/TPO TO RESTRICT THE TRANSFER PRICING ADJUSTMENT TO THE VALUE OF INT ERNATIONAL TRANSACTIONS ONLY. 15. ALL OTHER GROUNDS HAVE NOT BEEN PRESSED B Y LD A.R AND ACCORDINGLY, ALL OF THEM ARE DISMISSED AS NOT P RESSED. IT(TP)A NO.2498/BANG/2019. M/S.EIT SERVICES INDIA PRIVATE LIMITED. 12 16. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS DAY OF 3 RD SEPTEMBER, 2021 . SD/- SD/- (GEORGE GEORGE K) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED :3 RD SEPTEMBER, 2021. BANGALORE; VG/SPS COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE DRP-1, BANGALORE 4. THE PR.CIT-2, BANGALORE. 5. THE DR, ITAT, BENGALURU. 6. GUARD FILE. ASST. REGISTRAR ITAT, BANGALORE