M/s. Applied Materials India Private Limited, Bangalore V. Deputy Commissioner Of Income Tax, Circle- 1(1)(1), Bangalore

ITA 2582/BANG/2019

AI Insights

The case involves Applied Materials India Pvt. Ltd., a subsidiary of Applied Materials Inc., USA, which provides software development services and engineering services to its associated enterprise. The dispute centered on the transfer pricing adjustments made by the Ld.TPO, which included the exclusion of certain comparables and the inclusion of interest on delayed receivables as a separate international transaction. The Tribunal examined the functional comparability of various companies and the application of the arm's length principle to the transactions between the assessee and its AE. The Tribunal's decision involved a detailed analysis of the functions, assets, and risks of the comparables, as well as the economic circumstances surrounding the transactions.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 124280 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-12-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 22-11-2022
• Assessment Year: 2015-2016
• Appeal Filed On: 19-12-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Not Found
• Assessee Lawyers: Not Found
• Keywords: Related party transaction; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Retrospective amendment; Question of law; TDS; Set aside
• Section: 92; 92B; 40(a)(ia); 133(6); 192; 64; 113; 43; 48; 73; 13; 22; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No. 2582/Bang/2019 Assessment Year : 2015-16 M/s. Applied Materials India Pvt. Ltd., Unit -5, 3 rd Floor, Explorer Building, International Tech Park, Whitefield Road, Bangalore – 560 001. PAN: AAECA2635C Vs. The Deputy Commissioner of Income Tax, Circle – 1(1)(1), Bangalore. APPELLANT RESPONDENT Assessee by : Shri T. Suryanarayana, Senior Advocate Revenue by : Shri A. Ramesh Kumar, Addl. CIT (DR) Date of Hearing : 23-11-2022 Date of Pronouncement : 30-12-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the order dated 30/10/2019 passed by the Ld.DCIT, Circle – 1(1)(1), Bangalore for A.Y. 2015-16 on following grounds of appeal: Page 2 IT(TP)A No. 2582/Bang/2019 Page 3 IT(TP)A No. 2582/Bang/2019 Page 4 IT(TP)A No. 2582/Bang/2019 Page 5 IT(TP)A No. 2582/Bang/2019 Page 6 IT(TP)A No. 2582/Bang/2019 Page 7 IT(TP)A No. 2582/Bang/2019 2. Brief facts of the case are as under: 2.1 The assessee is a wholly owned subsidiary of Applied Materials Inc., USA, which is a supplier of products and services to the global semiconductor industry and is engaged in the Page 8 IT(TP)A No. 2582/Bang/2019 provision of SWD services and engineering services to Applied Inc., its AE, as a captive service provider. 2.2 The Ld.AO noted that assessee had international transaction with its Associated Enterprise and therefore reference was made to the Ld.TPO for determining the arms length price of the international transaction. 2.3 On reference being made, the Ld.TPO called for economic details of the international transactions which are as under: Particulars Amount in Rs. Purchase of fixed assets Rs. 1,42,71,849/- Software development services Rs. 429,81,72,137/- Reimbursement of expenses Reimbursement of travel expenses Rs. 3,06,70,299/- Reimbursement of expat salary related expenses Rs. 5,24,18,236/- Reimbursement of expenses for employee stock purchase plan Rs. 1,80,66,453/- Reimbursement of software expenses Rs. 2,08,70,149/- Reimbursement of training expenses Rs. 1,15,98,967/- Reimbursement of employees’ contribution to employee stock purchase plan Rs. 4,97,22,765/- Reimbursement of repairs and maintenance Rs. 12,41,012/- Recovery of expenses Recovery of expenses at cost Rs. 2,12,68,240/- Recovery of travel expenses Rs. 2,83,70,976/- Recovery of CSR expenses Rs. 37,63,400/- Reimbursement of training expenses Rs. 93,483/- Recovery of withholding taxes of employees on restricted stocks unit and ESOP granted and remitted to local tax authorities Rs. 7,47,14,054/- Page 9 IT(TP)A No. 2582/Bang/2019 2.4 The Ld.TPO noted that the assessee used TNMM as most appropriate method and OP/OC as PLI to compute its margin at 14.77%. The assessee used following 7 comparables with average margin of 19.77%, and thus held the transaction to be at arms length. Sl. No. Name of the company Average NPI (in %) 1. Akshay Software Technologies Ltd. 4.72 2. Lycos Internet Ltd. 5.34 3. R S Software (India) Ltd. 25.03 4. Sasken Communications Technologies Ltd. 16.25 5. Helios & Matheson Information Technology Ltd. 19.77 6. Evoke Technologies Pvt. Ltd. 5.69 7. R Systems International Ltd. 20.48 35 th Percentile 5.69 Median 16.25 65 th Percentile 19.77 2.5 The Ld.TPO noted that the assessee excluded subcontracting charges while computing its operating margins. The Ld.TPO thus called upon the assessee to explain the same. Before the Ld.TPO, the assessee submitted that in order to ensure timely delivery of software development services to its AE, it utilized the services of certain third-party subcontractors who performed a part of the services in the relevant previous year. It was further submitted to the Ld.TPO that, the said subcontracting charges formed part of its total cost base, on which the cost plus mark-up of 10% was applied only because the revenue recognition policy followed by the assessee and the service agreement entered into by it with its AE both required that the mark-up be charged on the entire costs incurred by it for provision of the services. It was thus submitted that since the subcontracting charges were paid to third-party Page 10 IT(TP)A No. 2582/Bang/2019 service providers under uncontrolled circumstances, the same ought to be considered as being at arm’s length. 2.6. It was also submitted by the assessee that the third-party service providers, being Tier I and Tier II companies in India, were marking-up their costs by a significant margin and it was thus submitted that the aforesaid subcontracting charges included the profit element which was earned by such third-party service providers. It was submitted that applying a further mark- up on such already marked-up charges would lead to a duplication of mark-up, which would be wholly unreasonable. In that view of the matter, it was submitted that the said subcontracting charges were merely pass-through costs and thus ought to be excluded from both the Assessee’s operating revenue and cost base while determining its effective NCP margin for provision of the software development services. 2.7. However, the Ld.TPO was of the view that, the subcontracting charges formed a part of the operating cost of the assessee for provision of SWD services and thus cannot be excluded from either its cost base or operating revenue as it would not give a correct picture of the profit margin earned by it. The Ld.TPO thus computed assessee’s margin at 10.02% as under: Operating Income Rs.429,81,72,137/- Operating Cost Rs. 390,68,94,345/- Operating Profit (Op. Income – Op. Cost) Rs. 39,12,77,792/- Operating/Net mark-up (OP/TC) 10.02% 2.8 Dissatisfied with the TP analysis by assessee, the Ld.TPO applied the following filters: Page 11 IT(TP)A No. 2582/Bang/2019 Step Description 1. Companies whose data is not available for FY 2014-15 - excluded. 2. Companies having different financial year ending (i.e., not March 31, 2014) or data of the company does not fall within 12 month period i.e., 01-04-2013 to 31-03-2014 - rejected. 3. Companies whose software development service income < Rs. 1 Cr- excluded. 4. Companies whose software development service income is less than 75% of the total operating revenues - excluded. 5. Companies which have more than 25% related party transactions of the sales - excluded. 6. Companies which have export service income less than 75% of the sales - excluded. 7. Companies with employee cost less than 25% of turnover - excluded. 2.9 The Ld.TPO thus shortlisted the following 16 comparables: Sl. No. Name of the Company Mark-up on Total Costs (WC–unadj) (in %) 1. Kals Information Systems Ltd. 11.88 2. E-Zest Solutions Ltd. 14.05 3. CG-VAK Software & Exports Ltd. 18.50 4. Tata Elxsi Ltd. 19.34 5. Rheal Software Pvt. Ltd. 19.88 6. Mindtree Ltd. 20.55 7. Larsen & Toubro Infotech Ltd. 24.21 8. R S Software (India) Ltd. 24.82 9. Infobeans Technologies Ltd. 29.91 10. Persistent Systems Ltd. 31.69 11. Nihilent Technologies Ltd. 32.21 12. Aspire Systems (India) Pvt. Ltd. 34.18 13. Inteq Software Pvt. Ltd. 37.90 14. Infosys Ltd. 38.59 15. Thirdware Solution Ltd. 41.12 16. Cybage Software Pvt. Ltd. 66.27 35 th Percentile 20.55% Median 27.37% 65 th Percentile 37.90% 2.10 Out of the 7 comparables selected by the Assessee, the Ld.TPO accepted one comparable, viz. R SSoftware (India) Ltd., and rejected the other 6. The Ld.TPO thus proposed the shortfall at Rs.67,80,39,190/- as adjustment. Page 12 IT(TP)A No. 2582/Bang/2019 2.11. The Ld.TPO also computed interest on delayed receivables at Rs.3,10,32,759/- by using 6 Month LIBOR rate computed at 4.6386%. 2.12. On receipt of the order passed by the Ld.TPO, draft assessment order dated 26/12/2018 was passed by the Ld.AO in which the aforesaid TP adjustment was incorporated. The Ld.AO further recomputed the total income of the assessee by: (i) disallowing an amount of Rs. 5,24,18,236/- under Section 40(a)(i) of the Act and (ii) disallowing an amount of Rs.65,65,463/- claimed as depreciation on leasehold premises on the basis that the Assessee had not demonstrated that the same were put to use. Aggrieved, the Assessee filed its objections before the DRP which, vide its directions dated 19.09.2019, partly allowed the objections raised by the Assessee. 2.13. The DRP rejected the contentions of the Assessee and upheld the inclusion of following companies on the basis that they are functionally comparable: (a) Tata Elxsi Ltd. (b) Rheal Software Private Limited (c) Mindtree Limited (d) R S Software (India) Limited (e) Larsen & Toubro Infotech Limited (f) Infobeans Technologies Limited (g) Persistent Systems Limited (h) Nihilent Technologies Limited (i) Aspire Systems (India) Pvt. Ltd. (j) Inteq Software Private Limited (k) Infosys Ltd. (l) Cybage Software Private Limited Page 13 IT(TP)A No. 2582/Bang/2019 2.14. In respect of Thirdware Solutions Ltd., and CG-VAK Software exports Ltd,, the DRP accepted contention of the Assessee and directed their exclusion from the final list of comparables. The DRP also accepted contention of the Assessee and directed inclusion of the software service segment of Sasken Technologies Ltd. However in respect of Akshay Software Technologies Ltd., Evoke Technologies Ltd., Infomile Technologies Ltd., and I2T2 India Ltd., the DRP rejected the contentions of the Assessee and upheld their exclusion. 2.15. The DRP rejected the contentions of the Assessee that the subcontracting charges incurred by the assessee for provision of the software development services ought to be considered as pass-through costs and thus ought not to have been included in the operating revenues or costs while determining the arm’s length price of the services provided by it to its AE. 2.16. The DRP upheld the action of the Ld.TPO in determining the TP adjustment in respect of the delayed receivables. While doing so, the DRP remanded the matter to the Ld.TPO to the limited extent of recomputing the adjustment. In that regard, the DRP directed the Assessee to produce details of the receivables invoice wise, their dates of realization and the number of days delay in realization. The said details were sought for the receivables forming part of the opening balance as well. The DRP further directed the Ld.TPO to apply the rate of interest applicable to short term deposits as opposed to PLR adopted by the TPO. 2.17. On receipt if directions from the DRP, the Ld.AO passed the final assessment order in which the TP adjustment came to be Page 14 IT(TP)A No. 2582/Bang/2019 reworked and the total income of the Assessee came to be recomputed after making certain disallowances. 2.18 Aggrieved by the final assessment order, the Assessee has preferred the above before this Tribunal. 3. At the outset the Ld AR submitted that assessee wish to contest Ground nos.4.1, 5.11,& 5.11(a), Ground Nos. 5.10 and additional ground no. 5.13(a) and Ground nos.10 to12. She submitted that remaining grounds are either general in nature and do not require adjudication. 3.1. Assessee has also raised following additional grounds vide applications dated 12/10/2021 and 16/09/2022 respectively. Page 15 IT(TP)A No. 2582/Bang/2019 3.1.1 It has been submitted that no new facts needs to be considered in order to dispose of the additional grounds raised by the assessee. It is submitted that the additional grounds is a legal issue that goes to the root cause of the proceedings. The Ld.AR, thus prayed for the admission of additional grounds so raised by assessee. 3.1.2 On the contrary, the Ld.CIT.DR though opposed admission of the additional ground, could not bring anything on record which would challenge such a right available to assessee under the Act. Page 16 IT(TP)A No. 2582/Bang/2019 We have perused the submissions advanced by both sides in light of records placed before us. The Ld.DR did not object for the additional grounds being admitted. 3.1.3 We note that one of the additional grounds is directly connected with the main issue of disallowance and no new facts needs to be investigated for adjudicating the same. Another issues alleged by the assessee is a legal issue that does not require investigation of any facts. 3.1.4 Considering the submissions and respectfully following the decisions of Hon’ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional ground raised by the assessee. Accordingly applications for admission of additional grounds stands allowed. We thus restrict adjudication of issues in respect of the grounds argued by the Ld.AR before this Tribunal in Ground no.4.1, 5.11,&5.11(a), Ground Nos. 5.10 and additional ground no. 5.13(a) and Ground no.10 to12. 4. Ground No. 4.1: is in respect of Exclusion of subcontracting charges: 4.1 It is submitted by the Ld.AR that the determination of net cost margin excluding the sub-contract charges is decided against the assessee by coordinate bench of this Tribunal in assessee's own case for the AY 2011-12 in IT(TP)A No. 17/Bang/2016 by order dated 21-9-2016. It is submitted that for assessment year 2014-15 in assessee’s own case reported in Page 17 IT(TP)A No. 2582/Bang/2019 (2022) 141 taxmann.com 421 this Tribunal followed the view taken in assessment year 2011-12(supra) by observing as under: 18. The ld. AR submitted that the determination of net cost margin excluding the sub-contract charges is decided against the assessee by the Tribunal in assessee's own case for the AY 2011-12 in IT(TP)A No. 17/Bang/2016 dated 21-9-2016 (pages 2265 to 2269 of PB, paras 4 to 8 of the order). The relevant observations of the Tribunal are as follows:— "7. We have considered the rival submissions as well as the relevant material on record. Undisputedly, the assessee is charging a mark up on the software development services provided to the AE being captive service provider. Therefore the assessee is not acting as an agent or distributor of the AE but is a provider of services of its own. It is not the case of rendering services of an agent without any value addition but the assessee is providing software development services to the AE and charging margin on the same. Therefore the cost on the software development activity is incurred by the assessee and charging the AE on the said services with a mark up of 10% on cost. The cost of sub-contracting in software development services is also charged with 10% mark up to the AE. When the margin on the cost of sub-contracting charges is part of the operating revenue of the assessee then only the cost of sub-contracting activity cannot be excluded as pass through. It would amount to artificially inflate the margins of the assessee on the other revenue from the services other than sub-contracting activity. In any case, pass through cost can be considered only when the activity of providing services to the AE does not involve value addition on the part of the AE. The decision of the Delhi Benches of the Tribunal in the case of DCIT v. Cheil Communications India Pvt. Ltd. (supra) would not help the case of the assessee as in the said case the activity of the assessee was only a distributor without any value addition. It is pertinent to note that outsourcing cost in software development services activity is part and parcel of cost of providing the service to the AE and cannot be separated from the operating cost and operating revenue of the said segment of services. Accordingly, the cost of software development services cannot be treated in this fashion as claimed by the assessee. Hence we do not find any merit in the contention raised by the assessee on this issue. 8. As regards the alternative plea raised by the ld. AR that the comparables should also have similar activity, we find that the TPO has applied a filter of cost of employee which subsumes the outsourcing activity of both assessee as well as the comparables. Accordingly, the issue is decided against the assessee." 19. Respectfully following the above decision of the coordinate bench of the Tribunal, we see no reason to interfere with the decision of the Page 18 IT(TP)A No. 2582/Bang/2019 lower authorities and hence these grounds of the assessee are dismissed. Respectfully following the above decision of the coordinate bench of the Tribunal, we see no reason to interfere with the decision of the lower authorities and hence these grounds of the assessee are dismissed. Accordingly this ground raised by the assessee stands dismissed. 5. Ground No. 5.11 and 5.11(a) in the appeal: 5.1 In this ground, the assessee is seeking exclusion of the following list of comparables: • Tata Elxsi Ltd. • Rheal Software Pvt. Ltd. • Mindtree Ltd., • R S Software (India) Ltd. • Larsen and Toubro Infotech Ltd • Infobeans Technologies Ltd. • Persistent Systems Ltd. • Nihilent Technologies Ltd. • Aspire Systems (India) Pvt. Ltd. • Inteq Software Pvt. Ltd. • Infosys Ltd. • Cybage Software Pvt. Ltd. • CG-VAK Software Exports Limited 5.2 Before we undertake the comparability analysis it is sine qua non to understand the FAR of the assessee under the SWD segment for the year under consideration, which is as under. Page 19 IT(TP)A No. 2582/Bang/2019 FAR Page 20 IT(TP)A No. 2582/Bang/2019 Page 21 IT(TP)A No. 2582/Bang/2019 Page 22 IT(TP)A No. 2582/Bang/2019 Page 23 IT(TP)A No. 2582/Bang/2019 Page 24 IT(TP)A No. 2582/Bang/2019 Page 25 IT(TP)A No. 2582/Bang/2019 5.3 It is submitted that none of the comparables sought for exclusion could be eliminated on turnover filter as assessee has a turnover of more than Rs.200 crs. The Ld AR thus submitted that these are to be considered on functionality as under: Page 26 IT(TP)A No. 2582/Bang/2019 A. Tata Elxsi Ltd.: A.1 The Assessee sought exclusion of this company inter alia for the reasons that: (i) it performs diverse dissimilar functions and segmental details regarding the same are not available; (ii) there is presence of intangibles and inventory; and (iii) it performs onsite activities. A.2 The Ld.AR submitted that the TPO rejected the contentions of the Assessee and the DRP upheld the same. The Ld.AR submitted that this company provides product design and engineering services. It also provides digital content creation for media and entertainment industry. She submitted that the operations of the company are classified into two business segments., i.e., software development & services and systems integration & support. It is submitted that the company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration and services segment for which no segmental details are available. A.3 Further, the Ld.AR submitted that this company has been consistently being excluded from the final list of comparables in assessee’s own case for the previous years. It is submitted that for the assessment year 2011-12, coordinate bench of this Tribunal excluded Tata Elxsi from the final list reported in (2016)73 taxmann.com 160 and for the assessment years 2012- 13 to 2014-15, the Ld.TPO himself did not considered the same to be comparable to the Assessee. Page 27 IT(TP)A No. 2582/Bang/2019 On the contrary, the Ld.DR relied on the observations of the DRP/TPO. We have perused the submission advanced by both sides in light of records placed before us. A.4 We note that this comparable has been excluded in assessee’s own case by observing as under: (6) Tata Elxsi Ltd. 30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. v. ACIT, 137 ITD 1 (Mum). 31. The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra). 32. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged in diversified activities of product design services, innovation design, engineering services, visual computing labs, etc. We further note that in the case of Telcordia Technologies Pvt. Ltd. (supra), the Mumbai Bench of the Tribunal vide its order dated 11.5.2012 in para 9.7 has held as under:- "7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for Page 28 IT(TP)A No. 2582/Bang/2019 comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable parties." 33. No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly, in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra), we do not find any reason to interfere with the finding of the DRP'. Respectfully following the above view we direct exclusion of Tata Elxsi Ltd., from the final list. B. Rheal Software Pvt Ltd: B.1 It is submitted that this company is functionally dissimilar to the Assessee and is engaged in diversified activities like outsourced software development, database solutions, web enabling legacy applications, custom application development. The Ld.AR submitted that no segmental information is available in respect of revenue earned during the year. It is further submitted that this company recorded fluctuating margins and the same is reproduced below: Particulars AY 2013-14 AY 2014-15 % change Operating revenue 8,80,89,662 6,78,67,848 -26% Operating expenditure 6,44,67,606 6,31,24,010 Operating profit 2,36,22,056 14,73,838 OP/TC 36.64% 2.76% -92% B.2 Further, it is submitted that the financial details of the company are not available for the assessment year 2012-13. Detailed submissions are placed at pages 774-782 and 1028- 1034. In view of the above, it is submitted that Rheal ought to be excluded from the final list of comparables. Page 29 IT(TP)A No. 2582/Bang/2019 On the contrary, the Ld.DR relied on the observations of the DRP/TPO. We have perused the submissions advanced by both sides in the light of records placed before us. B.3 The Ld.AR vehemently submitted that the comparability analysis could be conducted only if the details are available on public domain. It is submitted that the Ld.TPO in the instant case collected information from this comparable u/s. 133(6) which was not accessible to assessee. It is the contention of the Ld.AR that without a fair representation, the comparable has been selected by the Ld.TPO. Before us, the Ld.AR has alleged on the issues that has not been submitted before the Ld.AO and therefore in the interest of justice, we direct this comparable to be reconsidered by the Ld.AO based on the submissions filed by the assessee. In the event, this comparable does not satisfy the filters applied by the Ld.TPO, the same may be excluded. Needless to say that proper opportunity of being heard must be granted to assessee. C. Infobeans Technologies Ltd.: C.1 It is submitted that the company is a software services company specializing in business applications development for web and mobile. The company provides software engineering services primarily in Custom Application Development, Content Management Systems, Enterprise Mobility, Big Data Analytics. These are KPO services for which no segmental details are available. The above services rendered by the company are vastly different from the routine low end software development services rendered by the Assessee, and therefore the company ought to be Page 30 IT(TP)A No. 2582/Bang/2019 excluded as being functionally different. Further, the segmental details of these diverse services are not available and therefore the company cannot be selected as a comparable. C.2 It is submitted that this company is consistently excluded from the final list of comparables in cases of assessees placed similar to the Assessee. She also relied on decision of coordinate bench of this Tribunal in the cases of: • Cypress Semiconductor Technology India Pvt. Ltd. by order dated 24.03.2022 passed in IT(TP)A 2427/Bang/2019 and • EIT Services India Pvt. Ltd. v. ACIT by order dated 03.09.2021 passed in IT(TP)A No. 2498/Bang/2019. • Sandisk India Device Design Centre Pvt.Ltd vs.JCIT in IT(TP)A No. 288/Bang/2021 by order dated 30/06/2022. • HP PPS Services India Pvt.Ltd vs. DCIT In IT(TP)A No.278/Bang/2021 for assessment year 2016-17 by order dated 29/09/2022. wherein the company was directed to be excluded from the final list of comparables. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. C.3 We note that in case of Sandisk India(supra), this Tribunal was considering a situation wherein Sandisk India was a captive service provider like that of assessee and had excluded this comparable. Similar view was taken in case of HP PPS Services India Pvt.Ltd(supra) by this Tribunal. We refer to the observation in case of HP PPS Services India Pvt.Ltd(supra) as under: “4. In respect of Infobeans Technologies Ltd., the Ld.AR further submitted that this company is engaged in providing custom developed services to offshore clients. It was submitted that Infobeans is engaged in providing Page 31 IT(TP)A No. 2582/Bang/2019 software engineering services primarily in Custom application development (‘CAD’), Content Management Systems (‘CMS’), Enterprise Mobility (‘EM’), Big data analytics (‘BDA’), and has incurred expenses towards the software licenses and subscription fees worth INR 46.44 lakhs. The Ld.AR referred to Pg 47 of the paper book in support. 5. The Ld.AR also submitted that the segmental information is not available for the company and the company is into diversified activities such as providing business IT services (comprising application development and maintenance, Big Data, UX & UI, Automation engineering services, including product engineering and lifecycle solutions, and business process management); in the Verticals of Storage & Virtualization, Media & Publishing, HR & Payroll and e commerce The Ld.AR referred to page 854 of the paper book in support of the submission. The Ld.DR on the contrary relied on orders passed by the authorities below and decision of Coordinate Bench of this Tribunal in case of BORQS Software Solutions Pvt. Ltd. vs. ITO in IT(TP)A No. 310/Bang/2021 by order dated 25/10/2021 for A.Y. 2016-17. We have perused the submission advanced by both sides in light of records placed before us. 6. We note that coordinate bench of this Tribunal in case of M/s.SanDisk India Device Design Centre Pvt. Ltd. vs. JCIT (supra) observed and held as under: “17.3 At the outset, the Ld.AR submitted that the above comparables have been considered by Coordinate Bench of this Tribunal, Hon’ble Hyderabad Tribunal as well as Hon’ble Mumbai Tribunal in other cases having similar facts it is also been submitted by Ld.AR that these comparables do not satisfy the turnover filter that has been applied by the Ld.TPO and at the outset deserves to be eliminated. The Ld.AR referring to the annual reports, placed in the paper books filed before this Tribunal reveals that turnover is more than Rs.200 crores and does not match even 10 times the turnover of assessee. The Ld.AR thus submitted that applying either the turnover filter of Rs. 1 crore to Rs. 200 crores or 10 times the assessee’s turnover to 1/10 th , these comparables deserves to be excluded. 17.4 It is also submitted that these comparables are not functionally similar with that of the assessee as has been observed by Coordinate Bench of this Tribunal in following cases: Page 32 IT(TP)A No. 2582/Bang/2019 1. Decision of Hon’ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT in ITA No. 1379/M/2021 by order dated 25.02.2022 for A.Y. 2016-17. 2. Decision of Hon’ble Hyderabad Tribunal in case of Infor (India) Pvt. Ltd. vs. DCIT in ITA-TP.No. 198/Hyd/2021 by order dated 06.10.2021 for A.Y. 2016-17. 3. Decision of Coordinate Bench of this Tribunal in case of OLF (India) Software Pvt. Ltd. vs. ACIT in IT(TP)A No. 182/Bang/2021 by order dated 28.09.2021 for A.Y. 2016-17. 17.5 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. 17.6 We have perused the submissions advanced by both sides in the light of records placed before us. 17.7 He placed reliance on the decision of Coordinate Bench of this Tribunal in case of OLF (India) Software Pvt. Ltd. vs. ACIT (supra) wherein this Tribunal following its decision in case of LSI India research development (P.) Ltd. vs. DCIT reported in [2021] 124 taxmann.com 83, excluded Persistent Systems Ltd., L&T Infotech Ltd., Thirdware Solutions and Infosys Ltd. by observing as under: “3.2 This Tribunal in LSI India research development (P.) Ltd. v. DCIT (supra) observed in respect of persistent systems, L & T Infotech, Thirdware Solutions, Infosys Ltd. as under: 16. As far as the challenge by the assessee on exclusion of aforesaid 5 companies in ground No. 2(f), the ld. counsel for the assessee has brought to our notice a decision of Bangalore Bench of ITAT for the very same Assessment Year 2014-15 in the case of LG Soft India (P.) Ltd. v. DCIT [IT(TP) Appeal No. 3122 (Bang.) of 2018, dated 28-5-2019]. In this order rendered in a case of assessee rendering SWD services such as the assessee, the Tribunal excluded 3 out of 5 companies referred to in the earlier paragraph and remanded 1 company for fresh consideration with the following observations:- "5. The Ld A.R submitted that M/s Infosys Ltd, M/s Persistent Systems Ltd and M/s Thirdware Solutions Ltd have been excluded by the co-ordinate bench in the assessee's own case in AY 2008-09 in IT(TP)A No. 1673/Bang/2012. 6. We notice that the co-ordinate bench has excluded M/s Infosys Ltd in AY 2008-09 by following the decision rendered by another co-ordinate bench in the case of Page 33 IT(TP)A No. 2582/Bang/2019 3DPLM Software Solutions Ltd (IT(TP)A No. 1303/Bang/2012 dated 28-11-2013, wherein the decision rendered in the case of Triology E Business Software India P Ltd (ITA No. 1054/Bang/2011) was followed and it was held that M/s Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the break-up of revenue from software services and software product is not available. 6.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Infosys Ltd. 7. In AY 2008-09, the co-ordinate bench has excluded M/s Persistent Systems Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s Persistent Systems Ltd is engaged in product development and product design services while the assessee is a software development service provider. Further, the segmental details were not available. 7.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Persistent Systems Ltd. We also notice that in AY 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 AY 2008-09, we direct exclusion of M/s Thirdware Solutions Ltd. 17. As far as exclusion of Larsen & Toubro Infotech Ltd., is concerned, the Tribunal in the very same case of LG Soft (P.) Ltd. (supra) in another order dated 27-9-2019 in MP No. 95/Bang/2019 held that exclusion of Larsen & Toubro Infotech Ltd., was omitted to be adjudicated in the original order dated 28-5-2019 passed by the Tribunal referred in the earlier paragraph and held that Larsen & Toubro Infotech Ltd., is also not a comparable company because there were extraordinary events that occurred in the relevant previous year and that it possessed brand and Page 34 IT(TP)A No. 2582/Bang/2019 intangibles and there was no segmental information of sub-contracting expenses”. 3.3 There is nothing on record brought by the Ld.CIT.DR in order to establish that these are comparable with assessee that is a captive service provider which functions at the strict supervision and instructions by the AE’s. Further we note that turnover criteria has to be applied with an upper limit which is not been considered by the Ld. TPO. The TPO has applied less than 1 crore turnover limit to eliminate the comparables however it failed to apply upper limit considering the functions performed assets owned and risk assumed by assessee under this segment for the year under consideration.” 17.8 Before us, the Ld.AR has not been able to place anything on record contrary to the above observation. We therefore respectfully following the above view, direct the Ld.AO/TPO to exclude Persistent Systems Ltd., L& T Infotech Ltd., Thirdware Solutions and Infosys Ltd. from the final list. 17.9 In respect of Nihilent Ltd., Infobeans Technologies Ltd. and Aspire Systems (India) Pvt. Ltd., Hon’ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT (supra) observed as under: “Comparable Sought to be excluded by the assessee Aspire System India Pvt. Ltd. (Aspire) 40. The assessee sought exclusion of Aspire from the final set of comparables for benchmarking SDS segment on the ground that it fails Related Party Transaction (RPT) filters as its RPT/ sales ratio is more than 25%. The assessee computed the significant related party transactions at 37.58% whereas the Ld. TPO computed it at 23.55%. The TPO is directed to recalculate the RPT/sales ratio by providing opportunity of being heard to the assessee. So this comparable is remitted back to the Ld. TPO to decide afresh.” “Nihilent Analytics Ltd. (Nihilent) 44. The assessee sought exclusion of Nihilent on ground of its functional dissimilarity vis-à-vis assessee. We have examined the website information of Nihilent, made available by the assessee at page No.405 of the paper book, wherein it is mentioned that it is engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data science, cloud services etc. 45. Perusal of the disclosure of enterprise’s reportable segment explanatory available at page No.A406 of the paper book shows that Nihilent is engaged in software development and consultancy, engineering services, web Page 35 IT(TP)A No. 2582/Bang/2019 development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing and financials of Nihilent available at page No.A304, A405-A406 of the paper book shows that Nihilent has only one business segment and in the absence of segmental financials, as it is into diversified business, this company cannot be a valid comparable vis- à-vis assessee, who is a low risk entity working on cost + markup model. Hence, Nihilent is ordered to be excluded as a comparable. Nihilent Ltd. 46. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-à-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 & A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 & A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis-à-vis assessee which is a routine software development service provider working on cost + markup model, hence ordered to be excluded.” “Infobeans Technologies Ltd. (Infobeans) 49. The assessee sought exclusion of Infobeans on the ground that it is also functionally dissimilar being into providing business IT services (CAD) (application development and maintenance, Big Data, UX and UI, Automation engineering services, including product engineering and lifestyle solutions and business process management) in verticals of storage and virtualization, media and publishing, HR and Payroll and e-commerce. It is also providing software engineering services primarily in Custom Application Development (CAM), enterprise mobility and Big Data Analytics (BDA). 50. Perusal of financials available at page A303, A418 to A421, Infobeans shows that it is into diversified services but its segmental financials are not available without which it is difficult to compute the correct profit margin of Page 36 IT(TP)A No. 2582/Bang/2019 the relevant segment. So Infobeans is also ordered to be excluded as a comparable being not a comparable to the assessee.” 17.10Perusal of the annual report, filed before us in respect of the above two comparables, we note that the segmental financials are not available in respect of Nihilent and Infobeans and the RPT in respect of Aspire Systems India Pvt. Ltd. is more than 25% being the threshold limit considered by the Ld.TPO. Nothing has been placed before us by the Ld.DR in order to take a different view. Respectfully following the Hon’ble Mumbai Tribunal, we direct the Ld.TPO to exclude Nihilent, Infobeans and Aspire Systems from the final set.” 7. We also note that the Ld.DR placed reliance on the decision of Coordinate Bench of this Tribunal in the case of BORQS Software Solutions Private Limited v. ACIT (supra). 8. We have heard rival submissions and perused the material on record. On perusal of the financial of Infobean Technologies Limited placed at pg 1676 of AR, it is clear that the said company is engaged in providing software engineering services primarily in Custom application development, Content Management Systems, Enterprise Mobility, big data analytics (The company's overview is annexed to this order as Annexure-A) (placed at page 1676 of the paper book submitted by the assessee). The above services rendered by the company are different from the services rendered by routine software development companies like that the assessee in the instant case. Further, the segmental details for these diverse services are not available and therefore the company cannot be selected as a comparable. Apart from the functional dissimilarity that has been observed regarding this company by Hon’ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT in ITA No. 1379/M/2021 by order dated 25.02.2022 for A.Y. 2016-17 which is followed by Coordinate Bench of this Tribunal in case of M/s. SanDisk India Device Design Centre Pvt. Ltd. vs. JCIT (supra). We also note that this company is not a good comparable for following reasons: (i) Significant Intangible assets: During the FYs 2013-2015 to 2015-2016, the company owned intangible assets representing around 7% of the total fixed assets held by the company. (ii) Export of goods: The annual report of the company at Note 33 under the head earnings in foreign currency shows export of goods calculated on F.O.B. basis. In the absence of segmental details, the company cannot be selected as a comparable. Page 37 IT(TP)A No. 2582/Bang/2019 (iii) Expenses in foreign currency: It also incurred significant expenditure in foreign currency, in the nature of onsite activities representing around 1.5% of the total sales. (iv) Abnormal increase in revenue and fluctuation in margin: The revenue increased from Rs.35 crore (F.Y.2014- 2015) to Rs.62 crore (FY 2015-2016) in a period of 1 year (76%). Also, the company's profitability increased by 147%. Also, the company's margin fluctuates widely (34.98% - F.Y.2015-016, 20.78% - F.Y. 2014-2015, 41.95% - F.Y.2013-2014) which demonstrates that there exists some factor having an impact on the margin, and therefore the company cannot be selected as a comparable. (v) Sales Tax: The annual report of the company shows that it incurs Central Sales Tax liability, which demonstrates that the company is not a pure software development company. 9. For all the above noted reasons, this company has been consistently excluded from the final set of comparables. Reference is made to the following orders of the ITAT :- (i) SanDisk India Device Design Centre Pvt. Ltd. v. JCIT (Order dated 30.06.2022 passed by this Hon'ble Tribunal in IT(TP)A No. 288/Bang/2021 for AY 2016-17)- at para 17.9 and 17.10 (on account of functional dissimilarity as company renders diverse services and lack of segmental details); (ii) ADP Pvt. Ltd. v. DCIT [Order dated 03.02.2022 in ITA Nos. 227&228/Hyd/2021 for A Y 2016-17]- at para 7.4 (on account of functional dissimilarity as company earns revenue from export of goods and segmental details are unavailable). (iii) GlobalLogic India (P.) Ltd. V. DCIT (reported in [2022] 134 taxmann.com 35- for AY 2016-17) (on account of functional dissimilarity as the company is into diversified activities which are not comparable to routine SWD service provider) (iv) Red Hat India Pvt. Ltd. v. ITO, NFAC (Order dated 25.05.2022 passed by the Mumbai Bench of this Hon'ble Tribunal in ITA No. 1379/Mum/2021 for AY 2016-17)- at paras 49 and 50 (on account of functional dissimilarity as company renders diverse services and lack of segmental details). (v) Skillnet Solutions India Pvt. Ltd. v. DCIT (Order dated 24.02.2021 passed by the Mumbai Bench of this Hon'ble Tribunal in ITA No. 6570/Mum/2017 for the AY 2013-14)- at para 6 (on account of functional dissimilarity as the Page 38 IT(TP)A No. 2582/Bang/2019 company renders diverse services and segmental details are unavailable) (vi) Alcatel Lucent India Ltd. v ACIT (Order dated 29.11.2019 passed by the Delhi Bench of this Hon'ble Tribunal in ITA No. 4706/0el/2018 for AY 2014-15)- at para 15 (on account of functional dissimilarity as the company was engaged in providing custom development services to offshore customers and was engaged in software engineering services in different fields and segmental details were unavailable) (vii) Kony IT Services Private Limited v. DCIT (Order dated 20.11.2019 passed by the Hyderabad Bench of this Hon'ble Tribunal in ITA No. 2304/Hyd/2018 for AY 2014- 15)- at para (iii) on page 15 (on account of functional dissimilarity as it has earning from export of goods and has deposited MODVAT and sales tax). (viii) Avaya India Pvt. Ltd. v. ACIT (Order dated 24.09.2019 passed by the Delhi Bench of this Hon'ble Tribunal in ITA No. 7290/0el/2018 for the A Y 2014-15)- at para 7.4 (on account of functional dissimilarity as the company has earnings from export of goods). (ix) Pubmatic India Pvt. Ltd. v. ACIT (Order dated 09.03.2018 passed by the Pune Bench of this Hon'ble Tribunal in ITA No. 655/Pun/2017 for the AY2012-13)- at para 18 (on account of functional dissimilarity as the company has earnings from export of goods). 10. In the case law relied on by the Ld.DR, namely, BORQS Software Solutions Private Limited v. ACIT (supra), this Tribunal merely affirmed the findings of the DRP, which in turn relied on the reply filed by the company in response to notice u/s 133(6) of the I.T.Act. Further, this Tribunal held the finding of DRP has not been countered by the assessee in the said case. However, the company's response to the notice u/s 133(6) of the I.T.Act is contrary to the functions set out in the audited financial statements (enclosed as Annexure-A to this order), and therefore, the same cannot be relied upon. 10.1 Further, the website of the company shows tht the company is engaged in diverse service, which are not similar to functions of a captive service provider like the assessee in the instant case. Since the Ld.AR has clearly established that Infobean Technologies Limited is not functionally comparable to that of the assessee, we follow the orders of the ITAT referred in para 9 (supra) and direct the Ld.AO / TPO to exclude Infobean Technologies Limited from comparable list. It is ordered accordingly.” Page 39 IT(TP)A No. 2582/Bang/2019 C.4 No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Respectfully following the above view we direct exclusion of Infobean Technologies Ltd., from the final list. D. Nihilent Technologies Ltd.: D.1 It is submitted that the company is engaged in rendering software services, business consulting in the area of enterprise transformation. The company is focused on providing end to end software product development services and is also involved in product design and architecture. Segmental details are not available. Also, the company has significant onsite expenditure and the expenditure constitute 37.47% of the total sales. D.2 Further it is submitted that the company has acquired a business intelligence and analytics company and has also acquired 51% of shareholding in Intellect Bizware Services Private Limited (Mumbai, India) specializing in ERP and enterprise innovations based on SAP and HANA to develop and strengthen its presence in the ERP space. D.3 The Ld.AR also relied on the coordinate bench of this Tribunal in case of ARM Embedded Technologies Pvt. Ltd. v. DCIT by order dated 30.08.2022 passed in IT(TP)A No. 235/Bang/2021 for assessment year 2016-17 wherein the company was directed to be excluded as being functionally dissimilar. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. Page 40 IT(TP)A No. 2582/Bang/2019 E. Aspire Systems (India) Pvt. Ltd.: E.1 It is submitted that the company is engaged in providing outsourced technology services and is focused in helping software companies create innovative products through onsite and offshore model. The company is also engaged in providing next generation integration platform services to its client. E.2 Further, no segmental details are available. The company has entered into a scheme of arrangement for demerger of windmill segment during the year. Thus, the peculiar economic circumstances would impact the financial statements. Also, the company owns significant intangibles. The company has also incurred significant onsite expenses constituting 16% of the total revenue. E.3 The Ld.AR also relied on the coordinate bench of this Tribunal in case of ARM Embedded Technologies Pvt. Ltd. v. DCIT by order dated 30.08.2022 passed in IT(TP)A No. 235/Bang/2021 for assessment year 2016-17, wherein the company was directed to be excluded as being functionally dissimilar. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. F. Cybage Software Pvt Ltd: F.1 The company is a technology consulting organisation specialising in outsoursed product engineering services. The company is also engaged in ITES and BPO services and also a diverse range of digital marketing services. Thus, the company is into diversified activities. However, segmental details of the company are not available. F.2 The Ld.AR also relied on the decision of Page 41 IT(TP)A No. 2582/Bang/2019 • Coordinate bench of this Tribunal in case of ARM Embedded Technologies Pvt. Ltd. v. DCIT by order dated 30.08.2022 passed in IT(TP)A No. 235/Bang/2021 for assessment year 2016-17 • Hon’ble Hydrabad Tribunal in case of Infor (India) Pvt. Ltd. v. ACIT by order dated 19.10.2020 passed in ITA No. 1689/Hyd/2019 wherein the said company was directed to be excluded. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. We have perused the submission advanced by both sides in light of records placed before us. F.3 We note that the above comparables have been considered by coordinate bench of this Tribunal in case of ARM Embedded Technologies Pvt. Ltd. v. DCIT(supra) by observing as under: “22. Aspire Systems (India) Pvt. It is submitted that, this company is functionally not comparable with the assessee as it earns income from power generation. The Ld.AR placed reliance on page 127 of Annual Report. The Ld.AR submitted that, the company owns significant intangibles in form of goodwill, customer contracts. He placed reliance on page 2077 & 2087 of annual report paper book in support. It is submitted that Applied Development Software (India) Pvt.Ltd., and Pure Apps Consulting Services Pvt. Ltd., amalgamated with the company that lead to acquisition of assets. He placed reliance on page 2056 of annual report paper book. The Ld.AR placed reliance on following decisions in support: Decision of Hon’ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT reported in (2022) 136 taxmann.com 52 Decision of Hon’ble Hydrabad Tribunal in case of Infor India Pvt. Ltd. in IT(TP)A No. 198/Hyd/2021 by order dated 06.10.2021 for A.Y. 2016-17. Decision of Hon’ble Punjab & Haryana in Equant Solutions India (P.) Ltd. reported in (2020) 113 taxmann.com 517 Coordinate bench of this Tribunal in case of ARM Embedded Technologies (P.) Ltd. reported in (2021) 129 taxmann.com 263 Page 42 IT(TP)A No. 2582/Bang/2019 Coordinate bench of this Tribunal in case of Yahoo Software Development India Pvt. Ltd. reported in TS-191- ITAT-2020(Bang) On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. We note that this company earns its revenue from power generation and it has nothing to do with the rendering of software development service. In fact, we note that this company is a full fledged entrepreneur in the business of power generation and therefore is not comparable functionally with a captive software service provider like assessee. Nothing is been placed by the Revenue contrary to the above observation. We therefore respectfully following the above view, direct the Ld.AO/TPO to exclude Aspire System India Pvt. Ltd. from the final list. 23. Nihilent Technologies Limited It is submitted that, this company is functionally dissimilar to the assessee and therefore ought to be rejected from the final list of comparables. It is submitted that, services rendered by this company are wide in range and diversified. The Ld.AR submitted that, the company is engaged in diversified activities. It is submitted that, it renders services in the nature of consulting, software development and product development, provision of business consulting in the area of the enterprise transformation, change and performance management, digital transformation, business intelligence and data science services and also providing related IT services. The Ld.AR submitted that, software-consulting services include end-to-end solutions, onsite management and IT functions, and planning & system designing, which are in no way comparable to the captive software development activities as provided by the assessee. The Ld.AR further submitted that, this company has incurred significant expenses in foreign currency of 37.68%, 33.27% and 37.47% of its total expenditure during the FYs 2015-16, 2014-15 and 2013-14, respectively, which suggests that is engaged in provision of onsite services. And that, during the FY relevant to assessment year under consideration, this company acquired GNet Group LLC, a business intelligence and analytical company, and Intellect Bizware Services Pvt. Ltd., specialising in ERP and enterprise innovation. The Ld.AR submitted that, these acquisitions are bound to have a significant impact on the financials of the company. The Ld.AR thus submitted that, for all the above reasons this Page 43 IT(TP)A No. 2582/Bang/2019 company cannot be considered to be comparable with. He relied on the decision of Hon’ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. v. ACIT (supra) On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. The assessee sought exclusion of Nihilent on ground of its functional dissimilarity vis-à-vis assessee. We have examined the website information of Nihilent, made available by the assessee at page No. 405 of the paper book, wherein it is mentioned that it is engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data science, cloud services etc. 45. Perusal of the disclosure of enterprise's reportable segment explanatory available at page No. A406 of the paper book shows that Nihilent is engaged in software development and consultancy, engineering services, web development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing and financials of Nihilent available at page No. A304, A405-A406 of the paper book shows that Nihilent has only one business segment and in the absence of segmental financials, as it is into diversified business, this company cannot be a valid comparable vis- à-vis assessee, who is a low risk entity working on cost + markup model. Hence, Nihilent is ordered to be excluded as a comparable. Nihilent Ltd. 46. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-à-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A 412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 & A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 & A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis-à- vis assessee which is a routine software development Page 44 IT(TP)A No. 2582/Bang/2019 service provider working on cost + markup model, hence ordered to be excluded. We note that the assessee in Red Hat India Pvt. Ltd. v. ACIT (supra) was a captive service provider to its AE for assessment year 2016-17. Nothing has been placed by the Revenue to deviate from the above view taken by the coordinate bench of this Tribunal in Red Hat India Pvt. Ltd. v. ACIT (supra). We are of the view that, based on the functions performed by this company as submitted by the Ld.AR and the observations of Hon’ble Mumbai Tribunal, this comparable deserves to be excluded from the final list. We therefore respectfully following the above view, direct the Ld.AO/TPO to exclude Nihilent Technologies Ltd from the final list. 24. Cybage Software Pvt.Ltd. It is submitted that this company is engaged in the provision of diversified services which include product engineering, testing & quality assurance services, specialized services, support services, etc. It is submitted that this company is engaged in product development and has developed a product called ‘excelshore’ apart from providing spectrum of services including ITeS and BPO services and that segmental information of the diverse business functions undertaken by the company is not available. The Ld.AR submitted that this company is making super normal profits and that it is not reflective of the performance of the industry in which it operates. Particulars FY 2013-14 FY 2014-15 FY 2015-16 OP/OC 68.82% 67.75% 62.04% Reliance in this regard is placed on the decision of the Hon’ble Hyderabad Tribunal in Infor (India) Pvt. Ltd. v. DCIT (supra). On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. Primarily we note that this company is a product company and has diversified business segments. We note that this company is a full fledged entrepreneur and assumes all the risks attributable to the various business segments for which details are not available. In our view, under such circumstances, this company cannot be held tobe functionally comparable with that of assessee which is a captive service provider that caters only to its AE.” F.4 No contrary view has been brought to our notice regarding comparability of this company with that of a pure software Page 45 IT(TP)A No. 2582/Bang/2019 development service provider. Respectfully following the above view we direct exclusion of Aspire Systems(India) Ltd., Nihilent Technologies Ltd., and Cybage Software Ltd, from the final list. G. Inteq Software Private Ltd: G.1 It is submitted that the company provides application services, software testing, data warehousing, EI & EDI, BPO and staffing services. The company is also involved in end to end product development with primary focus in healthcare industry and there is no segmental information. G.2 The Ld.AR also relied on the decision of • Coordinate Bench of this Tribunal in case of ARM Embedded Technologies Pvt. Ltd. v. DCIT by order dated 30.08.2022 passed in IT(TP)A No. 235/Bang/2021 for assessment year 2016-17, • Decision of Hon’ble Delhi Tribunal in case of Global Logic India Ltd., reported in (2022) 134 taxmann.com 35 wherein the company was directed to be excluded as being functionally dissimilar. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. We have perused the submission advanced by both sides in light of records placed before us. G.3 We note that the above comparables have been considered by coordinate bench of this Tribunal in case of Global Logic India Ltd., (supra) in a captive service provider by observing as under: INTEQ SOFTWARE LTD. (INTEQ) 46. The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the Page 46 IT(TP)A No. 2582/Bang/2019 annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services. 47. When we examine profit & loss account at page 873 of the annual report paper book, software development and service charges are shown in composite manner with no segmental profitability. In these circumstances, we are of the considered view that Inteq is not a suitable comparable vis-à-vis the taxpayer which is a routine software development service provider working on cost-plus mark up model, hence ordered to be excluded from the final set of comparables. G.4 No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Respectfully following the above view we direct exclusion of Inteq Software Ltd., from the final list. H. Mindtree Ltd: H.1 It is submitted that this company is engaged in diversified activities such as analytics and information management application development and maintenance, business process management, business technology consulting, could, digital business, independent testing, infrastructure management services mobility, product engineering and SAP services. For which segmental information are not available. H.2 She submitted that this company is also engaged in business of rendering IP-Led revenue, infrastructure management, package implementation, consultancy services, etc. constituting 45% of overall revenue during FY 2014-15. It was brought to our notice that this company, has significant research & development activity, due to which this company was able to deliver IP based video surveillance management, recording and analytic products and solutions. The Ld.AR also submitted that this company filed four patents in India and US so far in the area of Video analysis. Page 47 IT(TP)A No. 2582/Bang/2019 Also, the company came to be excluded from the final list of comparables in the assessee’s own case for the assessment year 2014-15. The Ld.AR relied on following decisions: • Decision of coordinate bench of this Tribunal in the cases of Yahoo Software Development India Pvt. Ltd. v. JCIT by order dated 28.02.2020 passed in IT(TP)A No. 2365/Bang/2019 On the contrary, the Ld.DR relied on the observations of the DRP/TPO. We have perused the submission advanced by both sides in light of records placed before us. H.3 We note that primarily the segmental details are not available in respect of the various services rendered by this comparable. Further the intangible asset has been valued at Rs.117 crs. thereby indicating the ownership of the software developed by the company. This also indicates the high brand value this company possess. In assessee’s case being a captive service provider, there it does not own any intangibles. In our opinion this company deserved to be excluded. We direct the Ld.TPO to exclude Mindtree Ltd from the final list of comparables. I. Larsen and Toubro Infotech Ltd. : I.1 It is submitted that the company ought to be excluded from the final list of comparables for the reason that it is functionally incomparable to the Assessee on various counts. It is submitted that the Ld.TPO and DRP erred in not appreciating the contentions of the Assessee and consequently erred in upholding the inclusion of the company in the final list of comparables. Page 48 IT(TP)A No. 2582/Bang/2019 I.2 It is submitted that this company renders infrastructure management services, digital consultation, data and analytics which cannot be equated to the routine SWD services rendered by the Assessee. The Ld.AR submitted that this company is also engaged in trading IT related products, and owns proprietary software products like Unitrax®, Accurusi and Scriptor TM which are developed in-house. The company is also engaged in activities such as cloud computing, infrastructure management, analytics & information management etc., and no segmental details are available in respect of the variety of services rendered by this company. The Ld.AR submitted that this company ownes huge marketing intangibles, intellectual property rights and business rights and brand value, as a result of this high brand value, and the company enjoys a high bargaining power in the market. I.3 It is submitted that this company is consistently excluded from the final list of comparables in cases of assessees placed similar to the Assessee. Also, the company came to be excluded from the final list of comparables in the assessee’s own case for the assessment year 2014-15. The Ld.AR relied on following decisions: • decision of coordinate bench of this Tribunal in assessee’s own case for AY 2014-15 reported in (2022) 141 taxmann.com 142; • decision of coordinate bench of this Tribunal in the cases of Yahoo Software Development India Pvt. Ltd. v. JCIT by order dated 28.02.2020 passed in IT(TP)A No. 2365/Bang/2019 and • decision of coordinate bench of this Tribunal in the cases of EIT Services India Pvt. Ltd. v. ACIT by order dated 03.09.2021 passed in IT(TP)A No. 2498/Bang/2019; Page 49 IT(TP)A No. 2582/Bang/2019 wherein, this company was directed to be excluded from the final list of comparables. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. J. R S Software (India) Ltd: J.1 It is submitted that the company provides end to end solutions like custom application development, quality assurance and testing, application maintenance and support and strategic consulting. No segmental details are available. It is submitted that the company is also engaged in platform services and is rendering data analytics services which is different from routine SWD services rendered by the Assessee. J.2 It is submitted that company is also engaged in licensing activity. The company also does research and development activities and has incurred significant expenses in relation to onsite services of approximately 52% of its total revenue. The company has conducted R&D activities in the areas of Real time analytics, MDM, Proximity, Payments, Digital Commerce, Mobile Payments, Testing, Automation, Personalised Loyalty in payments and merchant management in the payments laboratory. J.3 Reliance is placed on following decisions: • decision of coordinate bench of this Tribunal in assessee’s own case for assessment year 2014-15 reported in (2022) 141 taxmann.com 142; • decision of coordinate bench of this Tribunal in ARM Embedded Technologies Pvt. Ltd. v. DCIT by order dated 30.08.2022 passed in IT(TP)A No. 235/Bang/2021 for assessment year 2016-17 Page 50 IT(TP)A No. 2582/Bang/2019 wherein, the company was directed to be excluded as being functionally dissimilar. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. K. Persistent Systems Ltd : K.1 The Ld.AR submitted that this company is functionally not similar to the assessee, as it is engaged in rendering IT services and in the development of software products without there being separate segmental information disclosed in its Annual Report for such activities. The company focuses mainly on product development and during the year under consideration launched a new product brand ‘Accelerite’. Further, the company develops in-house software products such as eMee and Enterprise Content Search Connector. K.2 Further, it is submitted that, this company made significant investments towards research and development activities in the relevant previous year. The company has incurred significant expenses in foreign currency amounting to 15.03% of its total revenue which suggests that is engaged in provision of onsite services. Persistent has established “persistent labs” which focuses on latest technologies viz., gesture computing, machine learning etc. Using the innovations of Persistent labs. The company has developed ‘SimplEye’ an innovative mobile app which helps visually impaired use smart phones. K.3 It is submitted that this company is consistently excluded from the final list of comparables in cases of assessees placed similar to the Assessee. Also, the company came to be excluded from the final list of comparables in the assessee’s own case for Page 51 IT(TP)A No. 2582/Bang/2019 the assessment year 2014-15. The Ld.AR relied on following decisions: • decision of coordinate bench of this Tribunal in assessee’s own case for AY 2014-15 reported in (2022) 141 taxmann.com 142; • decision of coordinate bench of this Tribunal in the cases of Yahoo Software Development India Pvt. Ltd. v. JCIT by order dated 28.02.2020 passed in IT(TP)A No. 2365/Bang/2019 and • decision of coordinate bench of this Tribunal in the cases of EIT Services India Pvt. Ltd. v. ACIT by order dated 03.09.2021 passed in IT(TP)A No. 2498/Bang/2019; wherein the company was directed to be excluded from the final list of comparables. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. L. Infosys Ltd.: L.1 At the outset it is submitted that this company is functionally dissimilar to the Assessee on various counts and therefore it ought to be rejected from the final list of comparables. It is submitted that the TPO and DRP erred in not appreciating the contentions of the Assessee and consequently erred in upholding the inclusion of the company in the final list of comparables. L.2 It is submitted that Infosys renders services like infrastructure management, business process management, and other high end services like analytics and digital transformation, apart from sale of products and therefore is a full fledged risk bearing entrepreneur who cannot be compared to the Assessee who renders routine IT services. Apart from rendering diverse dissimilar services, the company offers software products and Page 52 IT(TP)A No. 2582/Bang/2019 platforms, which was admitted to by the TPO (page 40 of the TP order). While the company earns income from both rendering software services and development of products, there are no segmental details in respect of the services rendered. Further, the services rendered by the company are not functionally comparable to the routine SWD services rendered by the Assessee. The company owns seven Edge products/platforms and six other product based solutions. The company leverages on its premium banking solution ‘Finnacle ®’. Also, the company has significant intangibles as a part of its fixed assets in the nature of intellectual property. The company owns significant brand value, and focuses immensely on brand building. For this purpose it incurs significant brand building expenses, which goes to help the company have a premium pricing for its services. The company has also incurred significant selling and marketing expenses. The company derives more than 50.4% of its revenue from onsite activities and places high reliance on the onsite activities as they generate higher revenue when compared to services performed at their own facilities. The company also heavily focuses on research and development activity and incurs significant expenditure for this account. For the concerned financial year the company has incurred research and development expenses of Rs. 605 crores. The company for the relevant financial year has earned abnormally high profit with margin of 38.61%, which makes it incomparable to the Assessee. In any event, the turnover of the company is much higher when compared to the Assessee’s, and hence it ought to be excluded from the list of comparables. Detailed submissions in this regard Page 53 IT(TP)A No. 2582/Bang/2019 are placed at pages 638-661 and 1140-1159 of the paperbook. In view of the above difference, the company ought to be excluded from the final list of comparables. L.3 It is submitted that this company is consistently excluded from the final list of comparables in cases of assessees placed similar to the Assessee. Also, the company came to be excluded from the final list of comparables in the assessee’s own case for the assessment year 2014-15. The Ld.AR relied on following decisions: • decision of coordinate bench of this Tribunal in assessee’s own case for AY 2014-15 reported in (2022) 141 taxmann.com 142; • decision of coordinate bench of this Tribunal in the cases of Yahoo Software Development India Pvt. Ltd. v. JCIT by order dated 28.02.2020 passed in IT(TP)A No. 2365/Bang/2019 and • decision of coordinate bench of this Tribunal in the cases of EIT Services India Pvt. Ltd. v. ACIT by order dated 03.09.2021 passed in IT(TP)A No. 2498/Bang/2019; wherein the company was directed to be excluded from the final list of comparables. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. We have perused the submission advanced by both sides in light of records placed before us. L.4 We note that the above comparables have been considered by coordinate bench of this Tribunal in assessee’s own case for AY 2014-15 by observing as under: 25. We have heard the rival submissions. The ld. AR did not press for the exclusion of R S Software (India) Ltd in the course of hearing. Accordingly this issue is dismissed as not pressed. The ld AR made a Page 54 IT(TP)A No. 2582/Bang/2019 detailed written submission with regard to the inclusions which are reproduced below:— (a) Regarding Infosys Ltd., it is submitted that this company is functionally dissimilar to the assessee company on various counts and therefore it ought to be rejected from the final list of comparables. Infosys Ltd. renders services like customer service experience, simplification of digital marketing etc., which are not part of routine IT services and therefore cannot be compared to the Assessee who renders routine IT services. While the TPO observed that the company provides business consulting, technology, engineering and outsourcing services and operates in three business segments which correspond to vertical line of business in SWD and therefore is comparable. Apart from rendering diverse dissimilar services, the company offers software products and platforms. However, the TPO observed that from the annual report of the company, under the segmental break-up does not disclose revenue from sale of products. It was submitted that while the company earns income from both rendering software services and development of products, there are no segmental details in respect of the services rendered. Further, the services rendered by the company are not functionally comparable to the routine SWD services rendered by the Assessee. The company also invests in products which helped the company establish itself as a credible IP Owner. Also, the company has significant intangibles as a part of its fixed assets in the nature of intellectual property. It company owns seven Edge products/platforms and six other product based solutions. It leverages on its premium banking solution 'Finnacle ®', owns significant brand value and focuses immensely on brand building. For this purpose it incurs significant brand building expenses, which goes to help the company have a premium pricing for its services. IT derives more than 51% of its revenue from onsite activities and places high reliance on the onsite activities as they generate higher revenue when compared to services performed at their own facilities. Since the company adopts a business model different from that of the Assessee who renders services offshore, the company ought to be excluded. The company also heavily focuses on research and development activity and incurs significant expenditure for this account. For the concerned financial year the company has incurred research and development expenses of Rs. 873 crores. The company for the relevant financial year has earned abnormally high profit with margin of 36.13%, which makes it incomparable to the Assessee. The company has also incurred significant selling and Page 55 IT(TP)A No. 2582/Bang/2019 marketing expenses. Further, during the year under consideration, the company merged with its wholly owned subsidiary Infosys Consulting India Ltd., for which no reasonably accurate adjustment can be made to eliminate the material effects thereof on the margin of the company. In any event, the turnover of the company is much higher when compared to the assessee, and hence it ought to be excluded from the list of comparables. (b) Regarding Larsen & Toubro Infotech Ltd., it is submitted that it is functionally incomparable to the Assessee on various counts. The company is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles, intellectual property rights and business rights. Also, in addition to the above, the company owns proprietary software products like Unitrax ®, Accurusi and Scriptor TM which are developed in- house. During the relevant financial year, the company has added Rs. 708 million worth of intangible assets. Also, the company is engaged in diversified activities including cloud computing, infrastructure management, analytics & information management etc. Further, L&T enjoys significant brand value. As a result of this high brand value, the company enjoys a high bargaining power in the market. The company has also incurred significant expenses in foreign currency amounting to 44.03% of its total expenditure which suggests that is engaged in provision of onsite services. Hence, it operates on a business model different from that of the Assessee and is thus incomparable to it. Further, during the year under consideration, the company has undertaken major restructuring, whereby the company decided to consolidate engineering services businesses under a separate subsidiary of L&T. Pursuant to this the product engineering services business of the company was transferred to its subsidiary L&T Technology Services Ltd., and thereafter its wholly owned subsidiary GDA Technologies Inc. which was a part of the aforesaid business was wound up. It is submitted that no reasonably accurate adjustments can be made to eliminate the material effects of the said differences between the company and the Assessee. The annual report of the company also discloses significant amount of capital work-in-progress which indicates that the company is into development of products. (c) Persistent Systems Ltd. : It is submitted that this company ought to be excluded from the final list of comparables inter alia for the reasons that it is functionally not comparable to the Assessee and as there exists peculiar economic circumstances for which no Page 56 IT(TP)A No. 2582/Bang/2019 appropriate adjustment can be made to its mark-up to eliminate the material effects thereof. It is functionally dissimilar as it is engaged in rendering IT services and in the development of software products without there being separate segmental information disclosed in its Annual Report for such activities. The company focuses mainly on product development and during the year under consideration launched a new product brand 'Accelerite'. Further, it made significant investments towards research and development activities in the relevant previous year. The company has incurred significant expenses in foreign currency amounting to 13.14% of its total revenue which suggests that is engaged in provision of onsite services. The company also made significant investment in intellectual property led solutions and also had a dedicated team for research and IP developments. It also owns several IP solutions, and during the year under consideration it acquired four products. Also, Persistent Systems, Inc. which is a subsidiary of the company acquired CloudSquads, Inc during the year under consideration. The acquisition constitutes peculiar economic circumstances for which no adjustment can be made to this company's mark-up to eliminate the material effects thereof. (d) *********** (e) The exclusion of comparability of above companies were considered by the Tribunal in assessee's own case for AYs 2010- 11 in Dy. CIT v. Applied Motors India (P.) Ltd. [2016] 73 taxmann.com 160 (Bang. - Trib.) by order dated 21-9-2016 (supra) and were directed to be excluded from the final list of comparables. Further reliance is placed on the decisions of this Tribunal in the cases of LG Soft India (P.) Ltd. v. Dy. CIT [IT(TP) Appeal No. 3122 (Bang.) of 2018, dated 28-5-2019], EMC Software and Services India (P.) Ltd. v. Jt. CIT [2020] 115 taxmann.com 293 (Bang. - Trib.) and Brocade Communications Systems (P.) Ltd. v. Dy. CIT [2020] 117 taxmann.com 439/185 ITD 634 (Bang. - Trib.), wherein in the cases of similarly placed assessees, for the assessment year 2014-15, the company came to be excluded. In view of the above, it is submitted that this company ought to be excluded from the final list of comparables. 26. The ld. DR supported the orders of the lower authorities. 27. We find that in the assessee's own case for AY 2011-12, the coordinate Bench of this Tribunal vide order dated 21-9-2016 (supra) has dealt with this issue and held as under:— "9.2.4 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the Page 57 IT(TP)A No. 2582/Bang/2019 functional comparability of these two companies have examine by the co-ordinate bench of this Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. (supra) in paras 60 and 61 & paras 24 to 26 as under: 60. ** ** ** 61. ** ** **' (4) Persistent Systems Ltd. 24. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product development. The segmental information for services and product is not available. Further, the assessee has also pointed out that there was an acquisition and restructuring during the year under consideration. 25. The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. 26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables.' We further find from the Annual Report that there is no change in the activity and functions of these companies during the year under consideration in comparison to the Assessment Year 2010-11. Accordingly, following the Page 58 IT(TP)A No. 2582/Bang/2019 decisions of the co-ordinate benches of this Tribunal (supra), we direct the A.O./TPO to exclude these companies from the set of comparables." ** ** ** (iii) Infosys Ltd. 18. We have heard the learned DR as well as the learned A.R. and considered the relevant material on record. At the outset, we note that the co-ordinate bench of this Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. (supra) has considered this issue in para 17 as under: '(2) Infosys Ltd. 17. The assessee objected against the selection of this company on the ground that this company has a big name and brand value and therefore it has a bargaining power. It also contended that the turnover of this company is Rs. 21,140 crores, which is 442 times higher than the assessee.' Following the decision of this Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. (supra), we do not find any reason to interefere with the directions of the DRP on this issue. (iv) L&T Infotech Ltd. 19. ** ** ** We further find that the comparability of this company has been considered by the co-ordinate bench of the this Tribunal in the case of DCIT v. Electronics for Imaging India Pvt. Ltd. (supra) in paras 62 to 65 as under: '62. The assessee has raised objection against this company on the basis of high turnover in comparison to the assessee. It was also contended that related party transaction (RPT) of this company is 18.66%. The DRP rejected objections of the assessee on the ground that TPO has applied 25% filter of RPT and annual report of the company does not show any other services rendered other than software development services provided by this company. Thus the DRP held that software development segment is comparable to the assessee and therefore this company has to be retained as comparable. 63. We have heard the ld. AR as well as ld. DR and considered the relevant material on record. The ld. AR has submitted that this company is having 18.66% RPT and further this company earns revenue from both services and products. Thus, the ld. AR submitted this company is also in the software products and therefore cannot be Page 59 IT(TP)A No. 2582/Bang/2019 considered as good comparable. He has further contended that in a series of decisions, the Tribunal has applied 15% RPT filter and since this company is having more than 15% RPT, the same cannot be considered as a good comparable. 64. On the other hand, the ld. DR has submitted that TPO has applied RPT filter of 25% and therefore only for this company, the RPT cannot be reduced to 15%. Further, the DRP has examined annual report of this company and found that this company earns revenue from software development services and accordingly is comparable. 65. We have considered the rival submissions and relevant material on record. We find that in the normal circumstances the tolerance range of RPT should not be more than 15%. In the case of the assessee, the availability of the comparable is not an issue and therefore we do agree with the view taken by the coordinate Benches of the Tribunal that the threshold limit of tolerance range should not exceed 15% as far as RPT revenue is concerned. Therefore, we direct the AO/TPO to apply 15% RPT filter in respect of all the comparables.'" In view of the above facts recorded by the DRP as well as the decision of the co-ordinate Bench, we do not find any reason to interfere with the directions of the DRP. 28. Following the aforesaid order of the Tribunal for the AY 2011-12 in assessee's own case (supra), we direct exclusion of Infosys Ltd., Larsen and Toubro Infotech Ltd., and Persistent Systems Ltd. from the list of comparables. Respectfully following the above view we direct exclusion of Larsen & Tubro Ltd., Persistant systems Ltd., RS Software (India) Ltd., and Infosys Ltd., from the final list. Accordingly, this ground raised by assessee stands allowed. 5.4 Additional ground No.5.11(a): Assessee seeks exclusion of CG-VAK Software Exports Ltd. 5.4.1 In this regard, it is submitted that the DRP on accepting the contentions of the Assessee had directed the exclusion of CG- VAK (page 69-70 of the DRP directions). However, the Assessing Officer included the same in the final list of comparables. It is Page 60 IT(TP)A No. 2582/Bang/2019 therefore prayed that the Assessing Officer be directed to exclude the same in line with the directions issued by the DRP. We direct the Ld.AO to follow the directions of the DRP and exclude this comparable from the final list. Accordingly, this ground raised by assessee stands allowed. 6. Ground Nos. 5.10 and additional ground no. 5.13(a) 6.1 Vide these grounds, the Assessee is seeking the inclusion of Akshay Software Technologies Ltd., I2T2 India Limited, Infomile Technologies Limited, Isummation Technologies Pvt. Ltd., Orangescape Technologies Ltd., Maveric Systems Limited and Batchmaster Software Private Limited in the list of comparables. All these comparables are remanded to Ld.AO to consider for inclusion. 6.2 It is submitted that these companies are engaged in providing MSS services. It is submitted that these comparables were not considered by the Ld.TPO, as they did not appear in the search matrix carried out by him, which has been upheld by the DRP. The both sides relied on the submission made in respect of comparables sought for inclusion under SWD segment. 6.3 On similar situation, we have remanded the comparable to the Ld.AO/TPO for fresh consideration herein above following the decision of coordinate bench of this Hon’ble Tribunal in the case of Prism Networks Pvt. Ltd. reported in (2022) 141 taxmann.com 163. Accordingly, we allow these grounds raised by assessee. 7. Ground No.7: Interest on receivables 7.1 The Ld.AR submitted that the Ld.TPO proposed transfer pricing adjustment in respect of outstanding receivables in Page 61 IT(TP)A No. 2582/Bang/2019 respect of trade creditors being the AEs by using 6 months LIBOR + 450 basis points and CUP as the most appropriate method. 7.2 The Assessee wishes to submit that the delayed/ outstanding receivables should not be considered as a separate international transaction. Further, it is humbly submitted that determination of ALP in respect of delayed receivables from inter-company transactions is not required since ALP of inter- company transactions of provision of services has been already determined and no separate adjustment is necessary in this regard. 7.3 The Ld.AR placed reliance on decision of Hon’ble Delhi Tribunal in Kusum Healthcare Pvt.Ltd vs. ACIT reported in (2015) 62 Taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. reported in (2017) 398 ITR 66, held that, no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Hon’ble Delhi Tribunal in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order dated 21/07/16 in ITA No. 379/2016, also upheld by Hon'ble Supreme Court vide order dated 21/07/17, in CC No. 4956/2017. 7.4 It was submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any Page 62 IT(TP)A No. 2582/Bang/2019 interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables as assessee adopted TNMM as the MAM for computing its margin, and therefore no separate adjustment is required to be made. 7.5 On the contrary, Ld.CIT.DR submitted that, interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of her contentions, she placed reliance on decision of Delhi Tribunal order in Ameriprise India Pvt. Ltd. vs. ACIT (2015- TII-347-ITAT-DEL-TP) wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to Section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that: (i) the expression "international transaction" shall include-- ...... (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;....' . 7.6 Ld.CIT DR submitted that expression 'debt arising during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non- payment of interest by AEs on debt arising during course of Page 63 IT(TP)A No. 2582/Bang/2019 business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case referred to the decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., reported in (2013) 215 Taxmann 108, which dealt with question of law: (c) `Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?' 3.5.6. She submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under- charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. In so far as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. He thus submitted that the Interest on outstanding receivables have been rightly constituted as independent international transaction 7.7 We have perused the submissions advanced by both the sides in the light of the records placed before us. This Bench referred to decision of Special Bench of this Tribunal in case Instrumentation Page 64 IT(TP)A No. 2582/Bang/2019 Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15/07/2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions." 7.8 In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. We also direct the Ld.TPO that in the event the WCA Page 65 IT(TP)A No. 2582/Bang/2019 subsumes the outstanding receivables, no separate characterisation is to be made. However for those receivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be charged must be LIBOR + 300 basis points which is in accordance with the principles laid down by Hon’ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt. Ltd., reported in (2015) 276 CTR 445 by considering a credit of 90 days. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly this ground raised by the assessee stands allowed for statistical purposes. 8. Ground nos. 10 & 11- Corporate Tax issues 8.1 Ground No. 10 (Disallowance u/s. 40(a)(ia) of the Act for salary cost reimbursed to Applied Material Inc. on an ‘at cost’ basis. 8.1.1 At the outset, the Ld.AR submitted that the issue is regarding disallowance under section 40 (a) (i) of the act for non- deduction of TDS on reimbursement of salary expenses made on behalf of the seconded employees as fee for technical services. 8.1.2 The Ld.AR submitted that TDS has been deducted on the entire salary paid by assessee to the seconded employees and what is reimbursed is the payment which has been partly made by the AE to the families of such seconded employees. The Ld.AR submitted that though the 100% salary has been subjected to TDS assessee has paid only part of the salary to the seconded employees in India and balance of such salary has been reimbursed to the AE as the same has been paid by the AE to the employees. The Ld.AR submitted that all the details relevant in Page 66 IT(TP)A No. 2582/Bang/2019 respect of the salaries and the TDS deduction which were submitted before the authorities below which has not been considered. 8.1.3 The Ld.AR relied on the following decisions. • Decision of Hon’ble Karnataka High Court in case of DIT(IT) vs. Abbey Business Services India (P.) Ltd. reported in [2020] 122 taxmann.com 174 • Decision of Hon’ble Karnataka High Court in case of M/s. Flipkart Internet Pvt. Ltd. vs. DCIT (IT) in W.P. No. 3619/2021(T-IT) by order dated 24.06.2022 • Decision of Hon’ble Pune Tribunal in case of M/s. Faurecia Automotive Holding vs. DCIT (IT) in ITA No. 784/PUN/2015 by order dated 08.07.2019 • Coordinate Bench of this Tribunal in case of M/s. Toyota Boshoku Automotive India Pvt. Ltd. vs. DCIT in IT(TP)A No. 1646/Bang/2017 by order dated 13.04.2022 and • Coordinate Bench of this Tribunal in the case of Goldman Sachs Services Pvt. Ltd. vs. DCIT in IT(IT)A Nos. 362 to 369 & 338 to 345/Bang/2020 by order dated 29.04.2022. 8.1.4 It is submitted that identical issue has been considered at length and in detail in the above decisions. The Ld.AR referred to the recent decision of Hon’ble Karnataka High Court in case of M/s. Flipkart Internet Pvt. Ltd. vs. DCIT (IT) (supra) wherein Hon’ble Court observed as under: “(viii) The Revenue has relied upon the judgment of the Apex Court in C.C., C.E. & S.T.-Bangalore (Adjudication) etc. v. M/s.Northern Operating Systems Pvt. Ltd.12 where the Apex Court has interpreted the concept of a secondment agreement taking note of the contemporary business practice and has indicated that the traditional control test to indicate who the employer is may not be the sole test to be applied. The Apex Court while construing a contract whereby employees were seconded to the assessee by foreign group of Companies, had upheld the demand for service tax holding that in a secondment arrangement, a secondee would continue to be employed by the original employer. (ix) The Apex Court in the particular facts of the case had held that the Overseas Co., had a pool of highly skilled Page 67 IT(TP)A No. 2582/Bang/2019 employees and having regard to their expertise were seconded to the assessee and upon cessation of the term of secondment would return to their overseas employees, while returning Civil Appeal Nos.2289-2293/2021 such finding on facts, the assessee was held liable to pay service tax for the period as mentioned in the show cause notice. (x) It needs to be noted that the judgment rendered was in the context of service tax and the only question for determination was as to whether supply of man power was covered under the taxable service and was to be treated as a service provided by a Foreign Company to an Indian Company. But in the present case, the legal requirement requires a finding to be recorded to treat a service as 'FIS' which is "make available" to the Indian Company. (xi) Accordingly, any conclusion on an interpretation of secondment as contained in the M.S.A. to determine who the employer is and determining the nature of payment by itself would have no conclusive bearing on whether the payment made is for 'FIS' in light of the further requirement of "make available."” On the contrary, the Ld.DR placed reliance on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 8.1.5 We note that the evidences filed by assessee has not been considered by the revenue authorities. 8.1.6 We therefore remand this issue to the Ld.AO to consider the claim in accordance with the decision of Hon’ble Karnataka High Court in case of M/s. Flipkart Internet Pvt. Ltd. vs. DCIT (IT) (supra) and Coordinate Bench of this Tribunal in the above referred cases M/s. Toyota Boshoku Automotive India Pvt. Ltd. vs. DCIT (supra) Goldman Sachs Services Pvt. Ltd. vs. DCIT(supra) having regard to the evidences filed by the assessee. Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law. On verification once it is Page 68 IT(TP)A No. 2582/Bang/2019 ascertained that the assessee has deducted tax on the entire salary payable to the seconded employee under section 192 of the act, no disallowance is warranted under section 40(a) (i) of the act. Accordingly these grounds raised by assessee stands allowed for statistical purposes. 8.2 Ground no. 11 - Denial of depreciation claimed on leasehold improvements. 8.2.1 In the assessment year under consideration, the Assessee undertook various civil and interior work in the nature of putting up of modular furniture, lab design and installation activities, electrical and cable networking, fire safety systems, etc. Accordingly, during the year an addition of Rs. 6,85,95,212/- was made towards leasehold improvements, falling within the block of ‘Furniture and Fixtures’ and consequent depreciation on the same was claimed. 8.2.2 The Assessing officer disallowed the claim of depreciation amounting to Rs. 65,65,463 on leasehold improvements pertaining to additions during the year, on the basis that the Assessee failed to submit documentary proof/ evidences substantiating the date of ‘put to use’ of assets for leasehold improvements acquired during FY 2014-15. 8.2.3 In this regard it is submitted that the Assessee had capitalised the leasehold improvements after receiving the invoices from the relevant vendor, which was after the purchase of asset was completed and was ready to be put to use. The date of put to use have been certified by the tax auditor in the tax audit report. Page 69 IT(TP)A No. 2582/Bang/2019 8.2.4 The Ld.AR thus submitted that assessee is eligible to claim the depreciation on a leasehold improvement. The Ld.AR submitted that this issue has been considered by Coordinate Bench of this Tribunal in assessee’s own case for A.Y. 2014-15 reported in (2020) 141 taxmann.com 421. On the contrary, the Ld.DR relied on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 8.2.5 We note that in assessee’s own case for A.Y. 2014-15 (supra), this Tribunal has considered the issue by observing as under: “51. The assessee has acquired additional workspace at the following locations:- a. Unit 2 and 3, 3rd Floor, Explorer building, International Tech Park, Whitefield Road, Bangalore. b. Ground Floor, Inventor Building, International Tech Park, Whitefield Road, Bangalore. 52. In connection with the above, the assessee undertook various civil and interior work in the nature of putting up of modular furniture, lab design and installation activities, electrical and cable networking, fire safety systems, etc. Accordingly during the year an addition of Rs.6,78,99,990/- was made towards leasehold improvements, falling within the block of 'Furniture and Fixtures' and consequent depreciation on the same was claimed. 53. The AO disallowed the claim on the ground that the claim is on the basis of date of bill and not on the basis of the asset being put to use. The AO disallowed the entire depreciation on leasehold improvement for Rs.25,31,31,220/-. 54. The DRP upheld the disallowance on the ground that the assessee failed to produce any document to show that the assets were ready to use/put to use. 55. Before us, the ld. AR submitted that the assessee had capitalised the leasehold improvements after receiving the invoices from the relevant vendor, which was after the asset was completed and was ready to be put to use. The Page 70 IT(TP)A No. 2582/Bang/2019 ld AR brought to our attention that the date of put to use have been certified by the tax auditor in the tax audit report. The ld AR alternatively submitted that, in the event of depreciation claim is disallowed, the disallowance need to be re- worked considering the date in which the relevant new premises started to function as the date of assets being put to use. The ld AR also contended that the depreciation disallowance should be restricted to the additions made during the year under consideration and not on the opening written down value (WDV) on which depreciation is allowed in the earlier years. 56. We have heard the ld. DR and perused the material on record. The AO has denied the depreciation on leasehold improvement since, according to AO, the assessee had not furnished the invoices & bills supporting the expenditure and that the assessee had not provided evidence for completion of the work. The break-up of disallowance of depreciation of Rs.25,31,31,220/- is as under which is worked out as per date put to use as certified in the tax audit report (page 1523 of paper book):- i. Depreciation of Rs.2,11,89,432/- claimed on opening WDV as at 1 April 2013 at the rate of 10%. ii. Depreciation of Rs. 4,123,788/- claimed on additions made during FY 2013-14 at the rate of 10%. 57. We notice that the AO has considered the entire WDV while computing disallowance and not the current year additions to the assets which is not the right way to compute the disallowance. In our considered view, the computation of disallowance should be restricted to the additions made during the year. We therefore set aside the issue and restore it to the AO with a direction for proper verification of additions made to assets in the year under consideration based on the evidences submitted by the assessee for the purpose determination of disallowance in accordance with law. Accordingly this issue is remitted to the AO for fresh decision, after giving opportunity of being heard to the assessee.” 8.2.6 Both sides submits that the facts of the issue in the present year is identical with that of A.Y. 2014-15. We therefore direct the Ld.AO to verify the additions made to the asset during the year under consideration based on the evidences filed by assessee for determining the disallowance in accordance with law. Page 71 IT(TP)A No. 2582/Bang/2019 8.2.7 The directions issued by Coordinate Bench for A.Y. 2014-15 may be carefully considered at the time of deciding the issue. Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 9. Ground no. 12 is consequential in nature. 10. Ground no. 13 is dismissed as not pressed as the issue is covered against the assessee. In the result, the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 30 th December, 2022. Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 30 th December, 2022. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore