M/.s Synamedia India Private Limited, Bangalore V. Deputy Commissioner Of Income Tax, Circle- 6(1)(2), Bangalore

ITA 2595/BANG/2019

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 9963 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 9 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-10-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 27-07-2022
• Assessment Year: 2015-2016
• Appeal Filed On: 22-12-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Retrospective amendment; Question of law; Bad and doubtful debts; Capital expenditure
• Section: 92; 92B; 133(6); 143(2); 43; 48; 2(A); 13; 22; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No. 2595/Bang/2019 Assessment Year : 2015-16 M/s. Synamedia India Pvt. Ltd., Block 9A & 9B, Pritech Park, Survey No. 51-64/4, Sarjapur Outer Ring Road, Bellandur Village, Bengaluru – 560 103. PAN: AACCN1140K Vs. The Deputy Commissioner of Income Tax, Circle – 6(1)(2), Bengaluru. APPELLANT RESPONDENT Assessee by : Shri Ankur Pai, Advocate Revenue by : Shri Praveen Karanth, CIT-DR Date of Hearing : 28-07-2022 Date of Pronouncement : 21-10-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the final assessment order dated 29/10/2019 passed by the Ld.DCIT, Circle – 6(1)(2), Bangalore for A.Y. 2014-15 on following grounds of appeal: Page 2 of 51 IT(TP)A No. 2595/Bang/2019 Page 3 of 51 IT(TP)A No. 2595/Bang/2019 Page 4 of 51 IT(TP)A No. 2595/Bang/2019 Page 5 of 51 IT(TP)A No. 2595/Bang/2019 2. Brief facts of the case are as under: 2.1 The assessee is a private limited company engaged in the business of providing software development and related services (Pre-sales support and marketing services). It has filed its return of income for the A.Y. 2015-16 on 29/11/2015 returning total income of Rs.12,78,38,750/-. The case was selected for scrutiny and notice u/s. 143(2) of the Act was issued on 24/03/2016 by the Ld.AO. During the F.Y. 2014-15, relevant to the A.Y. 2015- 16, the assessee had following international transaction with its AE. Description Amount (in INR) Provision for software services 46,55,86,843 Page 6 of 51 IT(TP)A No. 2595/Bang/2019 Provision for marketing support services 495,75,042 Provision of Technical Support Services 1,23,01,251 Interest on delayed receivables 10,59,82,896 Total Adjustment 63,34,46,032 2.2 In respect of software development services provided, the assessee had computed the margin at 11.18 percent on operating cost. The assessee selected Transaction Net Margin Method ("TNMM") as the Most Appropriate Method ("MAM") and selected a set of 11 comparable companies with median of 11.18 percent with 35th to 65th percentile range of 6.13 percent to 14.72 percent. Since the profit margin earned by the assessee was higher than the 35th percentile, the margin earned by the assessee on operating cost was treated to be at arm's length in the TP study. 2.3 The comparables selected by the assessee as per the TP study considering the data for FY 2012-13, 2013-14 and 2014-15 are provided below: S No Comparable Weighted average OP/OC 1 Melstar Information Technologies Limited -9.72 2 New-Age Bizsoft Solutions Private Limited -1.03 3 Akshay Software Technologies Ltd 3.34 4 Helios & Matheson IT (Bangalore) Limited 8.50 5 CG-VAK Software & Exports Ltd 10.25 6 Cadence Design Systems (India) Private Limited 11.18 7 E-Zest Solutions Limited 11.82 8 Kals Information Systems Limited 14.87 9 Helios & Matheson Information Technology Limited 19.36 10 Mindtree Limited 21.47 11 R S Software India Limited 21.49 Data place Range OP/OC 35 th Percentile 8.50 Median 11.18 65 th Percentile 14.87 Page 7 of 51 IT(TP)A No. 2595/Bang/2019 2.4 The Ld.TPO agreed with the TNMM as the most appropriate method however, rejected the method of computation of margin by the assessee. The Ld.TPO applied fresh filters as under. S No Filter 1 Use of current year data wherever available 2 Companies having different FY ending (i.e., not March 31, 2014) or data of the company does not fall within 12- month period i.e., April 1, 2013 to March 31, 2014, were rejected 3 Companies whose income was < 1 crore were excluded 4 Companies whose Software Development Service is less than 75% of its total operating revenues were excluded 5 Related party transaction ("RPT") greater than 25 percent of the sales were excluded 6 Export sales less than 75 percent of sales were excluded 7 Employee cost less than 25 percent of turnover were excluded 2.5 The Ld.TPO selected the final set of comparables as under and computed the margin at 27.37% thereby proposing an adjustment of Rs.73,19,78,383/- in respect of the software development service segment. S No. Comparable Weighted average OP/OC 1 Kals Information Systems Ltd. 11.88% 2 E-Zest Solutions Limited 14.05% 3 CG-VAK Software & Exports Limited 18.50% 4 Tata Elxsi Ltd. (Seg) 19.34% 5 Rheal Software Pvt. Ltd. 19.88% 6 Mindtree Ltd. 20.55% 7 R S Software (India) Ltd. 24.82% 8 Larsen & Toubro Infotech Ltd. 24.21% 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% Range OP/OC 35th Percentile 20.55% Median 27.37% Page 8 of 51 IT(TP)A No. 2595/Bang/2019 65th Percentile 37.90% Marketing support service segment: 2.6 In respect of Marketing support services provided, the assessee had computed the margin at 7.37 percent on operating cost. The assessee selected Transaction Net Margin Method ("TNMM") as the Most Appropriate Method ("MAM") and selected a set of 9 comparable companies with median of 7.37 percent with 35th to 65th percentile range of 6.81 percent to 8.15 percent. Since the profit margin earned by the assessee was at 7.37 percent was within the arms' length range of 6.81 percent and 8.15 percent, the margin earned by the assessee on operating cost was treated at arm's length in the TP study. 2.7 The comparables selected by the assessee are as under: S No Comparable Weighted average OP/OC 1 MCI management India Private Limited 5.49 2 Empire Industries Limited 5.72 3 Crystal Hues Limited 6.16 4 Fusion Events Private Limited 6.81 5 Show house Event Management Private Limited 7.37 6 Competent Automobiles Co Limited (Spares and services) 8.15 7 Netscribes India Private Limited 8.61 8 Majestic Research Services & Solutions Limited 9.16 9 Value 360 Communications Private Limited 10.33 Range OP/OC 35 th Percentile 6.81 Median 7.37 65 th Percentile 8.15 2.8 The Ld.TPO though agreed that TNMM as the most appropriate method applied new filters which are as under: S No Filter 1 Use of current year data wherever available 2 Companies having different FY ending (ie, not March 31, 2014) or data of the company does not fall within 12-month period ie, April 1, 2013 to March 31, 2014, were rejected 3 Companies whose income was < 1 crore were excluded Page 9 of 51 IT(TP)A No. 2595/Bang/2019 4 Companies whose Software Development Service is less than 75% of its total operating revenues were excluded 5 Related party transaction ("RPT") greater than 25 percent of the sales were excluded 6 Export sales less than 75 percent of sales were excluded 7 Employee cost less than 25 percent of turnover were excluded And shortlisted following comparables. 2.9 The Ld.TPO thus computed the margin at 18.49%, thereby proposing an adjustment of Rs.8,15,98,176/- for the marketing support service segment. Technical Support Service Segment 2.10 In respect of Technical Support services provided, the assessee had computed the margin at 9.64 percent on operating cost. The assessee selected Transaction Net Margin Method ("TNMM") as the Most Appropriate Method ("MAM") and selected a set of 10 comparable companies with median of 9.36 percent with 35"1 to 65th percentile range of 5.31 percent to 10.57 percent. Since the profit margin earned by the assessee at 9.64 percent within the arms' length range of 5.31 percent and 10.57 percent, Page 10 of 51 IT(TP)A No. 2595/Bang/2019 the margin earned by the assessee on operating cost was treated at arm's length in the TP study. 2.11 The comparables selected by assessee are as under: S No Comparable Weighted average OC/OC 1 Insight Business Machines Private Limited 2.40 2 HCL Care Limited 3.43 3 DCM Limited 4.66 4 Lycos Internet Limited (Formally known as Ybrant Digital Limited) 5.31 5 Sasken Network Engineering Limited 9.36 6 Ajel Limited 9.91 7 Atul Infotech Private Limited 10.57 8 Telecommunications Consultants India Limited 14.20 9 Regenersis India Private Limited 18.87 10 HCL Infos stems Limited 20.09 Data place Range OP/OC 35th Percentile 5.31 Median 9.36 65th Percentile 10.57 2.12 The Ld.TPO agreed with the assessee that TNMM was to be applied as the MAM. The TP Officer however opined that the data used for determining the Arm's Length Price ("ALP") by the assessee in the TP study was unreliable due to the application of inappropriate filters and hence the TP Officer rejected the TP documentation maintained by the assessee. Further the TPO recomputed the operating mark-up of the assessee at -14.06 percent to operating cost after considering foreign exchange gain/loss as operating in nature. (Page 5-6 of the TPO order). 2.13 The TP Officer thereafter applied certain filters and selected 4 comparable companies which rejecting all the companies selected by the assessee. The primary reason behind assessee and the TPO arriving at different set of comparable companies was due understanding of the functional profile of the assessee in the segment of TSS. Page 11 of 51 IT(TP)A No. 2595/Bang/2019 2.14 The final set of comparables selected by the Ld.TPO are as under: 2.15 The Ld.TPO thus computed the margin at 18.96% whereas assessee was at 11.23% as the margin of the comparable was beyond the tolerance range of 3%, an adjustment was proposed at Rs.1,23,01,251/-. 2.16 The Ld.TPO also computed the interest on outstanding receivables at Rs.10,59,82,896/- by applying a 6 month LIBOR + 400 basis points i.e. 4.38%. 2.17 On receipt of the transfer pricing order, the Ld.AO passed the draft assessment order by disallowing a sum of Rs.29,67,677/- as income from other sources. Assessee against the draft assessment order filed objections before the DRP. The DRP after considering the submissions of the assessee directed inclusion of Cignity Technologies Ltd. in the final list of comparables for SWD segment and also excluded 3 comparables being a) Axis Integrated Systems Ltd. b) Irclass Systems and Solution Pvt. Ltd. c) Rites Ltd. from the marketing support service segment. Page 12 of 51 IT(TP)A No. 2595/Bang/2019 2.18 In respect of Technical support service segment, the DRP directed the Ld.TPO to consider the 4 comparables if it passes the filters applied by the Ld.TPO. 2.19 On receipt of the DRP directions, the Ld.AO passed the impugned order by making addition of Rs.145,67,01,060/- in the hands of the assessee. Against the final assessment order, the assessee is in appeal before this Tribunal. 3. At the outset, the Ld.AR submitted that Ground nos. 1 and 17 are general in nature and therefore do not require adjudication. Accordingly, these grounds are not required to be adjudicated. 4. The Ld.AR further submitted that Ground nos. 4,5,6,8,9, 11 and 12 are not pressed by assessee and accordingly these grounds are dismissed as not pressed. 5. The Ld.AR has filed an application seeking admission of additional grounds vide application dated 18/06/2021 which are as under: Page 13 of 51 IT(TP)A No. 2595/Bang/2019 Page 14 of 51 IT(TP)A No. 2595/Bang/2019 6. It is submitted that assessee wish to argue on Ground no. 18 in respect of comparables (c)–(e) only and that these were inadvertently missed out to be raised in the original ground of appeal by the assessee. It is submitted that the ground may be admitted and adjudicated upon in order to render justice. 7. It has been submitted that no new facts needs to be considered in order to dispose of the additional ground raised by the assessee vide application dated 18/06/2021. 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. Page 15 of 51 IT(TP)A No. 2595/Bang/2019 8. The Ld.AR further submitted that these comparables deserves to be considered based on the principles laid down by Hon’ble Special Bench in case of Quark Systems Pvt. Ltd. vs. DCIT reported in (2010) 38 SOT 307 which has been upheld by Hon’ble Punjab & Haryana High Court in case of CIT vs. Quark Systems India (P.) Ltd. reported in [2011] 11 taxmann.com 427. On the contrary, the Ld.CIT.DR though opposed admission of the additional grounds, could not bring anything on record which would challenge such a right available to assessee under the Act. 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. 9. 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. 10. 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, the additional grounds raised by assessee stands admitted. 11. Before we undertake the comparability analysis, it is sinequanon to understand the functions performed, assets owned and risks assumed. Page 16 of 51 IT(TP)A No. 2595/Bang/2019 12. The Ld.AR submitted that initially the company was named as Cisco Video Technologies India Pvt. Ltd. which was subsequently known as Trilar Video Technologies India Pvt. Ltd. and later on it was renamed as Synamedia Technologies India Pvt. Ltd. For the relevant year under consideration, the transfer pricing study reveals the following functions, assets owned and risks assumed by assessee under the 3 segments. Page 17 of 51 IT(TP)A No. 2595/Bang/2019 Page 18 of 51 IT(TP)A No. 2595/Bang/2019 Page 19 of 51 IT(TP)A No. 2595/Bang/2019 Page 20 of 51 IT(TP)A No. 2595/Bang/2019 Page 21 of 51 IT(TP)A No. 2595/Bang/2019 Page 22 of 51 IT(TP)A No. 2595/Bang/2019 13. From the above, it is clear that assessee has been characterised as a direct service provider engaged in software development, technical support and marketing and sales service to its AEs which bears limited risk. 14. The Ld.AR at the outset submitted that in Ground no. 2(a), assessee wish to contest only following 5 comparables. a) Infosys Ltd. b) Larsen & Toubro Ltd. c) Persistent Systems Ltd. d) Thirdware Ltd. e) Mindtree Ltd. 15. The Ld.AR at the outset submitted that all the above comparables are covered by the decision of Coordinate Bench of this Tribunal in case of LG Soft India Pvt. Ltd. vs. DCIT in IT(TP)A No. 2412/Bang/2019 by order dated 31/05/2022 and Goldman Sachs Services (P.) Ltd. vs. JCIT reported in [2020] 117 taxmann.com 535 (Bangalore-Trib.) wherein the assessee therein was also a captive service provider. It is submitted that these comparables have been held to be not comparable in case of LG Soft India Pvt. Ltd. vs. DCIT (supra) by observing as under: Page 23 of 51 IT(TP)A No. 2595/Bang/2019 “I. Mind Tree Limited: 5. The Ld. A.R. submitted that this company is not functionally comparable as it is engaged in providing service in diverse areas such as analytics, information management, application development business process management, business technology consulting, infrastructure management services, product engineering & SAP services. It was also contended that this company is engaged in sale of product and also engaged in outsourcing IT services in banking and financial services and insurance sector and also as R&D operations and patents and hence not functionally comparable. However, Ld. Dispute Resolution Panel (“DRP”) observed that this company is only engaged in software development and related services as seen from its financials. Therefore, the plea of the assessee that company performs different and diverse activities and hence functionally different was rejected by Ld. DRP. Further, it was observed by Ld. DRP that provision of data analytic services is not functionally different from software development activity. Data analytic services also used only in certain software and tools, writes codes task. Like in other software application, these tools also facilitate and enable business of enterprises for enough management and decisions. Therefore, the Ld. DRP observed that there cannot be any distinction between high end software activity and low-end activity so long as it falls within the purview of software development services. It was observed that under TNMM, such differences are tolerable and there is no requirement that services for activities performed are identical. It is informed that the services are similar and fall within the same domain of software development. Accordingly, Mind Tree Ltd. was included in the list of comparables while determining the ALP of international transactions with A.Es. Against this assessee is in appeal before us. 5.1. We have heard the rival submissions and perused the materials available on record. This company Mind Tree Ltd. was considered as not comparable in the case of Yahoo Software Development India Pvt. Ltd. in IT(TP)A No.2657/Bang/2018 & 2365/Bang/2019 dated 28.2.2020 by Bangalore Bench of Tribunal, wherein it was held as under:- “41. The next company sought to be excluded is Mindtree Ltd. The submissions made before us were as follows:- “Functionally dissimilar, diversified operation, significant R&D spend, ownership of intangibles. Page 24 of 51 IT(TP)A No. 2595/Bang/2019 - 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. - Diversified operation i.e. engaged in infrastructure management services, business process management, technology consulting, product engineering and SAP services. Also lacks segmental data - Significant research & development activity. By incurring R&D expenses, it was able to deliver IP based video surveillance management, recording and analytic products and solutions. It has filed 4 patents in India and US so far in the area of Video analysis. - Ownership of intangibles in the form of intangible property. Significant onsite activity: - 46% of revenue earned under Onsite model. - Incurred overseas branch office expenses amounting to INR 1582 crores - Receives incentives from State of Florida in relation to the development center located overseas. Lack of segmental data - Does not maintain segmental information in respect of profitability reported from business activities in the nature of infrastructure management services, technology consulting and SAP services. - Acquisition of subsidiary – Discoverture Solutions LLC 42. The DRP while dealing with the aforesaid objections has merely taken the view that the presence of IPR revenue was insignificant and so also expenses of brand value, R&D & intangibles. More importantly, the DRP did not dispute the presence of 46% of revenue from onsite model, but went on to hold that the presence of revenue is not sufficient to exclude a company, when it is otherwise functionally comparable. On this aspect, we have already referred to the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. (supra) and in the light of this decision and the admitted factual position regarding presence of onsite revenue over and above the threshold limit of 25% of total revenue, we are of the view that this company should be excluded from the list of comparable companies. We hold and direct accordingly.” 5.2. In view of the above order of the Tribunal, we are inclined to direct the AO/TPO to exclude this company from the list of comparables. Directed accordingly. Page 25 of 51 IT(TP)A No. 2595/Bang/2019 II. Persistent systems Limited:- 6. The Ld. A.R. submitted that this company is a product- based company and has revenue from software licenses; that it is also engaged in R&D activities with significant intangibles. The company has diversified activities and it has no segmental information and hence cannot be considered as comparable. It was also submitted that it has significant onsite expenses and RPT transactions. It was also argued that it has made certain acquisition and therefore, on account of such peculiar economic circumstances Ld. A.R. requested that it has to be excluded as a comparable. 6.1 Ld. DRP observed that the company's core activity was rendering product development services i.e. providing services to business enterprise to develop software products. As per the information at page 211 of the annual report, it has reported income from software services of Rs.12,353.53/- million and software licenses of Rs.71.45/- million aggregating to Rs.12,424.98/- million. Thus, the income from software licences constitute a meagre 0.58% of its operating revenue. It is also noted by Ld. DRP that this company in response to the notice u/s 133(6) of the Act had given details of such licence income as under:- Software product Category Revenue as per books of accounts (INR) eMee Internally developed 20,525,798 Radia Acquired for Distribution activity 3,421,402 GEMS Reselling activity 14,374,000 SAP Reselling activity 28,877,317 WCM Connector (ECSC) Internally developed 1,046,640 eDocs DM connector (ECSC) Internally developed 876,282 AWS Reselling activity 790,500 Cloudsquad Acquired for Distribution activity 1,533,750 Grand Total 71,445,689 Page 26 of 51 IT(TP)A No. 2595/Bang/2019 6.2 From the information in the above table Ld. DRP observed that only an amount of Rs.2.25 crore (i.e. 22.5 million) represent income on account of internally developed which constitute 0.18% of operating revenue, and all others license revenue was from distribution or reselling activity. Besides, the company has also categorically clarified in its reply u/s 133(6) that it is engaged in software product development services only. The relevant extract of the reply is as under:- "Persistent System Limited is predominantly engaged in the business of providing outsourced software product development services to customers across the globe from following industry verticals: Infrastructure and systems, Telecom and Wireless, Life science and Healthcare and Financial services. The company reports segment information based on the above industry verticals. The nature of services provided that each of these segments differs only in terms of the industry and specific requirements of customers in each of these industries. The essential activity across all business segments can be considered to be software product development services". 6.3 Further, Ld. DRP observed that the assessee based on certain information discussed in the consolidated annual report (which included discussion of financial results of Persistent Systems Ltd and its six subsidiaries associates) argued that this company is into product development and IP led revenue. It would be totally incorrect to consider the information pertaining to the entire group as such, when the comparability is to be seen with reference to the stand alone financials of Persistent Systems Ltd, which was considered for comparable analysis by the TPO. 6.4 In this regard, Ld. DRP in his report stated that it is pertinent to note as per the consolidated annual report the revenue from software licence was Rs.535.59 million for the entire group whereas, such revenue in the case of M/s Persistent Systems Ltd was only Rs.71.45 million (Ref page 168 and page 211 of the annual report). It is also seen that in the P&L account of the consolidated financial statement expenses were debited towards Royalty expenses of Rs. 176.73 million (refer page 169) and such a debit is not to be noted in the P&L account of M/s. Persistent Systems Limited. 6.5 Further, as per information at page 88 of the annual report for FY 2012-13 it was stated in the notes to the consolidated results that the increase of intangible block of assets during the year (2012-13), of Rs.262.84 million, was Page 27 of 51 IT(TP)A No. 2595/Bang/2019 mainly on account of acquisition of various IPs during the year and the same is shown in the intangible Asset Schedule of the consolidated financial statement at page115 as under:- Intangible Assets of Group 2012-13 (in Rs.Millions) Software Acquired contractual rights Total Gross block (At cost) As at April 1, 2012 1,287.49 281.63 1569.12 Additions 94.03 261.23 355.26 Disposals 116.10 -- 116.10 Other adjustments Exchange differences 23.86 (0.18) 23.68 As at March 31, 2013 1,289.28 542.68 1,831.96 6.6 All these clearly show that the IP related and product revenue pertain to other group entities and does not pertain to M/s Persistent Systems Ltd, which is being compared. It is also relevant to note that this company has clarified in its reply given u/s 133(6) of the Act, that M/s Persistent Systems Ltd is predominantly engaged in the business of rendering software development services; the revenue reported is primarily on account of rendering of software development services only. The relevant extract is as under:- "In respect of the information you have requested under 3(a) and 3(c) in respect of software products and innovations, overseas subsidiary companies of Persistent Group have acquire certain Intellectual Property (IP) products and generating some revenue from licencing and support of these products. In case of PSL India, which is predominantly engaged in the business of rendering software development services, the revenue reported is primarily on account of rendering of software development services only" 6.7 The above clarification also makes it clear that this company is not into diversified activities. 6.8 Further, Ld. DRP observed that the expenditure incurred towards R&D as per page 225 of the annual report was Rs.62.24 million, which constitute meagre 0.50% of operating revenue. Further, the capital expenditure towards R&D was only Rs.0.28 million, which clearly show that the R&D activities are routine. The value of intangible assets was only Rs.162.85 million constituting 1.31% of operating revenue. There is no reference to any intangible assets or patent owned or developed by the company, in the stand alone annual report. There is also no acquisition of Page 28 of 51 IT(TP)A No. 2595/Bang/2019 intangibles during the year. Further as per note of the annual report, software product developments costs are expensed as incurred unless the technical and commercial feasibility of the project enable to use or sell the software, they are not capitalized. Such a development is not reflected in the Asset schedule. Thus, it can be inferred that the R&D and intangible assets do not have impact on the revenue and profitability of the company. The assessee has failed to establish that such differences, if any, on account of R&D, brand and IRPs have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or-likely to materially affect the profit arising from such transactions in the open market. The said company also clarified u/s 133(6) that its intangible assets are in the nature of software licenses acquired for use in the operation of the company and are not in the nature of inbuilt software product generating revenue for the company. Further, the assessee also performs R&D functions. Hence, these pleas were rejected by Ld. DRP. 6.9. Further, as per Ld. DRP’s report, this company was held to be engaged in software development and not a product company and hence functionally comparable to a software service provider company, by the coordinate bench of ITAT Bangalore in the case of M/s. Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14). In view of the above, Ld. DRP upheld the selection of this comparable. 6.10 Ld. DRP observed that the approach of the TPO in treatment of related party transaction into two sets, are for revenue transactions and other for expense transaction is logical and correct. Further, the RPT filter was adopted by the TPO was with the above conditions and has adopted consistently. Hence, Ld. DRP did not find any infirmity in the approach. Hence, Ld. DRP rejected the assessee's plea. 6.11 In view of the above discussion, Ld. DRP upheld the selection of this company as comparable. 6.12. Against this assessee is in appeal before us. 6.13. We have heard the rival submissions and perused the materials available on record. As rightly pointed out by Ld. A.R., this comparable is considered as not a comparable in the case of Yahoo Software Development India Pvt. Ltd. cited (supra), wherein it was held as under: “32. At the time of hearing, the ld. counsel for the assessee has prayed for exclusion of 4 comparable Page 29 of 51 IT(TP)A No. 2595/Bang/2019 companies that remain after the order of the DRP viz., Persistent Systems Ltd., Infosys Ltd., Mindtree Ltd. and L&T Infotech Ltd. He brought to our notice that as far as Persistent Systems Ltd. is concerned, the reasoning given for excluding this company for AY 2014-15 will equally hold good for the present year as well. In this regard, our attention was drawn to page 601 of the assessee’s PB wherein in the annual report of this company, Notes forming part of financial statement in Note (i) which gives the description of income from software services, there is a reference to revenue from licensing & software, which sufficiently indicates that the assessee is not a pure SWD services provider. It was also brought to our notice that the profit & loss account which is at page 596 read with Notes forming part of the financial statement at page 604 wherein the segmental reporting is not based on different segments and the statement presents a consolidated financial statement without any segmental reporting. This company has also significant RPT transaction of 25% on sales. He pointed out that the TPO & DRP on the application of RPT filter has not expressed any opinion. The ld. DR relied on the order of DRP wherein the DRP has made extensive reference to each of the objections regarding absence of segmental revenue in the accounts and has also noticed that the software products segment had an insignificant revenue and that the ownership of intangibles by the assessee has had no effect whatsoever. 33. We have considered the rival submissions. We find that on the question of application of RPT filter, the assessee had made the following submission before the DRP:- 4. Fails the Related Party Transaction to Sales filter applied by the learned TPO In the show-cause notice issued, the learned TPO has excluded companies for which the ratio of RPT to sales exceeds 25% during the current year i.e., during FY 2014- 15. The relevant extract from the show-cause notice is reproduced below for ease of reference: e) Companies who have more than 25% related parry transactions of the sales were excluded. Companies having related party transactions of more than 25% are proposed to be excluded. A threshold of 25% is being applied following the provisions of Section 92A(2)(a) which provides a limit of 26% of the equity capital carrying voting rights for treating an enterprise as Associated Enterprise. if the limit is reduced further it would only Page 30 of 51 IT(TP)A No. 2595/Bang/2019 result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. Therefore, on a balancing note, 25% is a proper threshold limit for related party transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. The Hon'ble ITAT has upheld the application of this filter by the TPO in its order in the case of M/s. Supporisoft India Pvt. Ltd for AY 2005G6 in IT (TP)A 1372/B/11 & 20/2012 dated 28.03.2013 following its own decision in the case of M/s. Actis Advertisers Pvt. Ltd vide ITA No.5277/De1/2011 dated 12.10.2012. On perusal of the Annual Report of Persistent, we observe that the company has RPT in excess of 25% of the sales. The calculation of the same has been provided below for your ease of reference: From the above computation, it is clear that the controlled transactions of Persistent constitutes 31.32% of sales. Based on the above, it can be seen that Persistent fails the `RPT to sales ratio' filter applied by the learned TPO and should therefore not be considered as a comparable.” 34. This argument has been addressed by the DRP in its order as follows:-“4.4.9 We note that the approach of the TPO in treatment of related party transaction into two sets, are for revenue transactions and other for expense transaction is logical and correct. We also note that the RPT filter was adopted by the TPO was with the above conditions and has adopted consistently. Hence, we do not find any infirmity the approach. Hence, we reject the assessee's plea. We hold that onsite expenses do not adversely affect comparability and hence, such plea is rejected.” 35. Further, the assessee had also raised plea with regard to onsite revenue filter by pointing out that onsite revenue is substantial and therefore this company should not be regarded as a comparable company with a company Page 31 of 51 IT(TP)A No. 2595/Bang/2019 which does not have any onsite revenue. In this regard, the ld. counsel for the assessee placed reliance on the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. v. DCIT, ITA No.1054/Bang/2011 for AY 2007-08 dated 23.11.2012 wherein this Tribunal took the following view:- “64. The next objection of the Assessee is that when the most appropriate method selected for determining ALP is the TNMM there is no reason as to why one should look at price difference in offshore software development and onsite software development. It is no doubt true that in TNMM it is only the margins in an uncontrolled transaction that is tested with reference to the controlled transaction but it is not possible to ignore the fact that pricing will have an effect on the margins obtained in a transaction. The argument that if pricing structure were to be considered as criteria, then it will have to be seen as to what is the pricing structure of all the comparable for various projects cannot be accepted because the TPO has not chosen any other onsite software service provider with a revenue composition of more than 75% from onsite software services as comparable. As rightly observed by the TPO, the pricing is different in onsite when compared to offshore operations. The further observations of the TPO that the reasons for the same lie in the fact that while in the case of OFFSHORE projects most of the costs are incurred in India; an ONSITE project has to be carried out abroad significantly increasing the employee cost and other costs. 65. The next objection of the Assessee is with regard to Assets employed. The companies, which predominantly generate revenues from onsite activity, do not have significant assets as most of the work is carried on the site of customer outside India. The argument that the TPO has himself observed that software service providers do not require much assets cannot be basis to accept the Assessee’s plea. Those observations are made by the TPO in the context of application of turnover filter and have been quoted out of context by the Assessee. 66. The next argument of the Assessee is that TPO has held that margins are lower in onsite software services and that margin is not a criteria to select or reject a comparable under Rule I0B(2) of the I.T. Rules. We are of the view that this argument again ignores the fact that the approach of the TPO has been to highlight the fact that there can be no functional comparability, if the assets employed and risks assumed are taken into consideration. It is in that context the TPO has referred to the margins. Page 32 of 51 IT(TP)A No. 2595/Bang/2019 67. The companies who generate more than 75% of the export revenues from onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since, the entire operations of the tax payer are taking place offshore i.e. in India; it is but natural that it should be compared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model. As already stated the Assessee has limited its analysis only to functions but not to the assets, risks as well as prevailing market conditions in which both the buyer and seller of services located. Hence, the companies in which more than 75% of their export revenues come from onsite operations are to be excluded from the comparability study as they are not functioning in similar economic circumstances to that of the tax payer. Hence, it is held that this filter is appropriately applied by the TPO. 68. Admittedly the onsite revenue in the case of the following comparable companies identified by the Assessee was more than 75% of its export revenues viz., a) Visu International Ltd. b) Maars Software International Ltd. c) Akshay Software Technologies Ltd. d) VJIL Consulting Ltd. e) Synfosys Business Solutions Ltd. The above companies were therefore rightly not considered as comparable by the TPO. We hold accordingly.” 36. It is seen that the TPO in coming to the conclusion that the onsite revenue filter is not applicable has placed reliance on the decision of the ITAT Mumbai Bench in the case of Capegemini as quoted in para 16 in para 14 of the TPO’s order, but that decision does not deal with a case of onsite revenue filter and the decision was rendered on the facts of its own case. 37. On the issue of RPT filter, we notice that the TPO in para 16 has accepted that the RPT filter should be @ 25%. In the case of Persistent Systems Ltd., the RPT is at 31.32% as extracted in the earlier part of this order and therefore this company should be excluded by application of RPT filter. In view of the above, we do not wish to go into other grounds on which this company is sought to be excluded viz., that it is a product company and there is no segmental data between product and services segment, Page 33 of 51 IT(TP)A No. 2595/Bang/2019 presence of onsite activity and the impact of extra-ordinary event of acquisition during the relevant previous year. Therefore, this company is directed to be excluded from the list of comparable company.” 6.14 In view of the above order of the Tribunal, we are inclined to direct the AO/TPO to exclude this company Persistent Systems Ltd. from the list of comparables. III. Infosys Ltd.:- 7.The Ld. A.R. submitted that this company has to be excluded from the list of comparables on the following reasons:-  Infosys is functionally dissimilar and ought to be rejected.  No segmental details are available in the annual report and hence the company should be rejected.  The company also derives income from licensing of software products.  Infosys is engaged in R&D activities.  Infosys has presence of brand.  Infosys has invested in IP.  Infosys fails upper turnover filter. 7.1 Ld. DRP in his report observed that after having considered the submissions, and on perusal of the annual report of the company, this company is engaged in providing IT technology services comprising Application developing and maintenance Independent validation, testing services, Business service management, consulting and systems integration services. All these activities fall within the gamut of 'software services', though performed in five different business verticals. As per the P&L account, the company has revenue from 'software services' of Rs.45,658/- crores and from software products of Rs.1642/-crores (refer page 61 of the annual report), and that the product revenue constitute meagre 3.6% of total operating revenue. Therefore, taking into consideration the various information available in the annual report, and the fact that the company is predominantly having revenue from software services, Ld. DRP was of the considered view that this company can be considered as functionally comparable to the assessee. Accordingly, the plea that the company is engaged in diversified activities was rejected by Ld. DRP. 7.2A plea was raised before Ld. DRP by the assessee that this company also provides data analytic services which is high end and hence, cannot be compared to the assessee. Ld. DRP did not find merit in the plea, as undoubtedly, provision of data analytic services is not functionally different from software development activity. The data Page 34 of 51 IT(TP)A No. 2595/Bang/2019 analytic services also use only certain software and tools, write codes to perform certain tasks. Like any other software application, these tools also facilitate and enables business enterprises for informed management and decision. Therefore, Ld. DRP did not find merit in the plea. Further, there cannot be any distinction between high end software activity and low end activity, so long as it falls within the purview of software development services. Besides, under the TNMM, such differences are tolerable and there is no requirement that the services / activities performed are identical. It is enough that that the services are similar and fall within the same domain of software development. Accordingly, the pleas raised were rejected by the Ld. DRP. 7.3 It was pleaded by assessee that this company has a huge brand which has contributed to its growth in revenue and hence not comparable. A perusal of the annual report show that the growth in revenue was on account of various business initiatives taken to accelerate growth such as — internal re-organization, implementing cost effectiveness through reducing cost of operation, improving utilization percentage of employee, restricting the organization for agility by creating smaller and nimbler sales regions, redesigning supply chain functions, reducing attrition rate, increasing the offshore mix, improving delivery expertise etc., As per information in page 14 of annual report, 97.8%' of revenues was from repeat business. At page 67 of the annual report, it is discussed, " - Clients often cite our industry expertise, comprehensive end-to-end solutions, ability to scale, superior quality and process execution, global delivery model, experienced management team, talented professionals, track record and competitive pricing as reasons for awarding contracts'. Thus, the growth in revenue is not on account of its brand or any exceptional event, and hence cannot be a reason for rejecting this company, which is otherwise found to be functionally comparable. 7.4 The perusal of the details in the annual report by Ld. DRP showed that the company has incurred R & D expenditure to the tune of Rs.605 crores, which constitute meagre 1.3% of its total operating revenue, and which is much less than the generally acceptable tolerable limit of 3% of the total revenue. It was also noted that out of this, only Rs.15 crore was capital in nature and the remaining Rs.590 crore represented revenue expenditure, which go to show that the R&D initiative are substantially routine for immediate business purposes for developing expertise and improved process execution. It was also pleaded that the Page 35 of 51 IT(TP)A No. 2595/Bang/2019 company has significant intangibles. However, on perusal of the information at page 86 of the annual report, Ld. DRP noted that the value of intangible assets as on 31.03.2015 was Nil and as on 31.0.2014 was Rs.13 crore, which is insignificant considering its turnover of Rs.47,300 crore and Asset portfolio of Rs.7347 crore. Ld. DRP noted that, the assessee has failed to establish that such differences, if any, on account of brand and intangibles have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Further, as discussed in para 2.6.2.3 above, the assessee also performs R&D functions. Hence, these pleas were rejected by Ld. DRP. 7.5 On the plea as to difference in the scale & size of operations and consequent abnormal profits, Ld. DRP noted that turnover does not influence the margins in the service sector: Ld. DRP already held that turnover cannot be a criteria for selection of comparables. In this regard it is relevant to note that the coordinate bench of Bangalore in the case Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14) rejected the plea of the assessee to exclude a company comparable on the ground of size and level of operations. Hence, these pleas were rejected by the Ld. DRP. 7.6 In view of the above, Ld. DRP upheld this company as comparable to the assessee. 7.7 Against this assessee is in appeal before us. 7.8 We have heard the rival submissions, perused the materials available on record and gone through the orders of the authorities below. This comparable is considered as no comparable in the case of Yahoo Software Development India Pvt. Ltd. cited (supra) wherein it was held as under: “39. The next company which the assessee seeks to exclude is Infosys Ltd. As far as this company is concerned, it is seen that the following are the functional dissimilarities brought to our notice:- “Functionally dissimilar - owns intellectual properties, incurs significant R&D costs & onsite activity. - Engaged in diversified business activities. - Involved in development of software products in addition to software services. - Owns intellectual property rights. - Incurs significant research and development costs. Page 36 of 51 IT(TP)A No. 2595/Bang/2019 - Carries out significant activities based on onsite business. - Owns products such as Finacle, Edge Verve and other product based solutions. Extra-ordinary event of merger with Infosys Consulting India Ltd. Segmental profit & loss account not available. Commands substantial brand value 40. The DRP, however, has not thought it fit to exclude this company by observing that this company has substantial pre-dominant revenue from software services and the growth was not attributable to any brand value. Presence of onsite activity and the expenses on R&D have all been brushed aside. In our view, the difference pointed out by the ld. counsel for the assessee before us show that this company cannot be compared with that of the assessee basically because of its business model, presence of onsite revenue generation and other reasons cited before us. Besides, the reason that turnover of this company is huge and more than 10 times that of the assessee.” 7.9 In view of the above order of the Tribunal cited (supra) we direct the AO/TPO to exclude this company from the list of comparables. IV. Thirdware Solutions Pvt. Ltd.:- 8. The Ld. A.R. submitted that this company has to be excluded from the list of comparables on the following reasons:-  Thirdware is functionally dissimilar and ought to be rejected.  No segmental details are available in the annual report and hence the company should be rejected.  Thirdware has incurred brand promotion expense. 8.1 The Ld. A.R. for the assessee argued that this company is engaged in sale of products and diversified activities. It was also argued that there is no segmental information for the product and services business and hence cannot be taken as comparable. It was also contended that the company has intangibles and deriving revenue from licensing of software. 8.2 Ld. DRP observed that on perusal of the annual report, Ld. DRP noted that this company is engaged in the business of software development services and software services. (page 116 of annual report), and that the company’s operation comprises of software, development, implementation and support services (page 127 of annual report). At page 120 of the annual report, the company's Page 37 of 51 IT(TP)A No. 2595/Bang/2019 Revenue Recognition disclosure refers to revenue from services from software development and implementation and not to product sales. At page 143 of the annual report, the company has mentioned revenue from sale of products at NIL. However, in the foot note given at page 147 of annual report, it is clearly mentioned that the revenue on account of export of software services was Rs.22,473.24 lakhs, from software services from domestic market Rs.475.67/- lakhs, from subscription and training Rs.44.32/-lakhs, from sale of licenses 14.75 lakhs. The revenue from software license constitute meagre 0.06% of total operating revenue. Thus, the information in the annual report clearly show that this company is predominantly (99.93%) into sale of software services and hence, it is, functionally comparable to the assessee. Further, as per information provided in response to notice u/s 133(6), the company has categorically stated that it is engaged in providing IT software services; and that the revenue of Rs.14.75 lakh represent trading in software license. In view of these, Ld. DRP upheld the selection of this company as comparable. 8.3 Against this assessee is in appeal before us. We have heard the rival submissions and perused the materials available on record. As rightly pointed out by the Ld. A.R., this comparable is considered as not a comparable in the case of LG Soft India Pvt. Ltd. Vs. Deputy Commissioner of Income-tax in IT(TP)A No.3122/Bang/2018 dated 28.5.2019 for the AY 2014-15, wherein it was held as under: “8. 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 (IT(TP)A No.1303/Bang/2012 dated 28.11.2013, 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 in IT(TP)A No.1673/Bang/2012 , we direct exclusion of M/s Thirdware Solutions Ltd.” Page 38 of 51 IT(TP)A No. 2595/Bang/2019 8.4 In view of the above order of the Tribunal cited (supra) we direct the AO to exclude this company from the list of comparables. V. L&T Infotech Ltd.:- 9. The Ld. A.R. submitted that this company has to be excluded from the list of comparables on the following reasons:-  L&T Infotech is functionally dissimilar and ought to be rejected.  No segmental details are available in the annual report and hence the company should be rejected.  L&T Infotech has presence of intangibles.  L&T Infotech has presence of brand.  L&T Infotech has incurred brand promotion expense.  L&T Infotech fails upper turnover filter. 9.1 It was contended by the Ld. A.R. that this company provides wide range of services and also engaged in sale of products and in the absence of segmental information, this company is not comparable. It was contended that L&T Infotech is a brand across globe which has impacted the margins of the company. It was further argued that the company is engaged in trading of goods which is evident from page 1364 of the annual report for FY 2014-15. It was also argued by the Ld. A.R. that because of investment in technology absorption and R&D, it should not be considered as comparable. 9.2 Ld. DRP observed that, at the outset, the assessee had selected this company as functionally comparable in its TP study giving the following reasons, "Larsen & Toubro Infotech Limited is an IT service company. The company is engaged in providing Application Maintenance and Development, Enterprise Resource Planning and specialized services like Data Warehousing and Business Intelligence, Testing Services and Infrastructure Management Services. The services offerings are focussed mainly towards four verticals namely manufacturing, utilities, financial services and telecom. For the period ended March 31, 2015, March 31, 201,4 and March 31, 2013. 100% of the operating revenues respectively were derived from software development services". However, without giving reasons, it has raised a plea that it is functionally different, when the TPO has selected this company as comparable. Further, Ld. DRP also noted that this company has two business segments —services cluster and industrials cluster operating in software development services. The information in the annual report clearly shows that the entire revenue is from provision of software Page 39 of 51 IT(TP)A No. 2595/Bang/2019 services. As per Note 2, regarding Accounting principle on Revenue Recognition, it is stated that revenue is recognized when services are rendered and related costs incurred; and there is no reference to sale of products. The financial statements do not mention about any product sale or inventory. As there is no revenue stream on account of product sales, Ld. DRP did not find any merit in the argument that the company is engaged in product sales. Accordingly, Ld. DRP held it as functionally comparable being a software service provider. 9.3 On the pleas as to presence of brand, Ld. DRP noted that, there is no specific information in the financial statements to indicate that the brand has contributed to revenue growth of the company. On the other hand, the reference in the annual report mentions that the company's efforts to be cost-effective and agile in contributing value to clients have strengthened its brand. In other words, its operational efficiency has contributed to its revenue growth and brand name and not the other way. There is no information to indicate that the brand has impacted the revenue or profit of the company. The intangibles referred in the Asset Schedule represent the computer software, and business rights and as such does not refer to any IPR or license owned by the said company. Certain developments are under way which has not crystallized into an intangible to be a source of revenue. Thus, the assessee has failed to establish that such differences have material effect on the margin of the above company, in terms of clause (i) of sub- rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, these pleas of assessee were rejected by the Ld. DRP. 9.4 On the plea as to difference in the scale & size of operations and consequent abnormal profits, Ld. DRP observed that turnover does not influence the margins in the service sector and held that turnover cannot be a criteria for selection of comparables. Hence, these pleas of assessee were rejected by Ld. DRP. 9.5 Further, Ld. DRP observed that this company was upheld to be functionally comparable to as software service provider company, by the coordinate bench of Bangalore in the case of M/s. Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14). In view of the above, Ld. DRP upheld the selection of this comparable. Page 40 of 51 IT(TP)A No. 2595/Bang/2019 9.6 Against this assessee is in appeal before us. 9.7 We have heard the rival submissions and perused the materials available on record. This company is considered as not a comparable in the case of LG Soft Pvt. Ltd. cited (supra) wherein it was held as under:- “38. As far as L&T Infotech Ltd. is concerned, the ld. counsel for the assessee brought to our notice the decision of ITAT Delhi Bench in the case of Saxo India Pvt. Ltd. v. ACIT, ITA No.6148/Del/2015 for AY 2011- 12, order dated 5.2.2016, wherein the Tribunal took note of the fact that this company was also trading in software and owned insignificant intangible assets. The company was excluded from the list of comparable companies with reference to SWD services provider such as the assessee. The ld. Counsel pointed out that though this decision was rendered with reference to AY 2011-12, the same reasoning would apply to AY 2015-16 also and in this regard, he drew our attention to page 696 of assessee’s PB, which gives the details of the revenue generated by this company without any segmental break-up. Our attention was also drawn to page 682 of PB which shows that there is substantial onsite revenue activity as well as cost incurred on onsite software development. We notice from page 676 of assessee’s PB that this company as part of its operating profit in Schedule O of profit & loss account contains expenditure for ‘cost of bought out items for resale’ and this is a significant part of the operating expenditure. When we see the revenue in Schedule M of the profit & loss account, there is no break-up of the revenue with regard to software services and software product. In our opinion, this distinction is enough to exclude this company from the list of comparable companies as held by the Hon’ble Delhi ITAT in the case of Saxo India Pvt. Ltd. (supra) which decision was also confirmed by the Hon’ble Delhi High Court.” 9.8 Similar view was taken in the case of Yahoo Software Development India Pvt. Ltd. cited (supra), wherein, L&T Infotech Ltd. has been excluded from the list of comparables. Respectfully following the above order, we direct the AO/TPO to exclude L&T Infotech Ltd. from the list of comparables.” Respectfully following the above view, we hold these comparables to be excluded from the final list. The Revenue has not been able to bring out any distinguishing fact / evidences in order to take a contrary view. Page 41 of 51 IT(TP)A No. 2595/Bang/2019 Accordingly Ground no. 2(a) raised by the assessee stands partly allowed. 16. Ground no. 2(b) is raised by assessee seeking exclusion of following comparables under Marketing and Sales Support service segment. 1) Axience Consulting Pvt. Ltd. 2) Ugam Solutions Pvt. Ltd. 17. It is submitted that the above comparables are covered by the decision of Coordinate Bench of this Tribunal in case of Metric Stream Infotech (India) Pvt. Ltd. vs. ACIT in IT(TP)A No. 2347/Bang/2019 by order dated 24/04/2020 for A.Y. 2015-16. The Ld.AR submitted that the reasoning based on which these comparables were excluded in case of Metric Stream Infotech (India) Pvt. Ltd. vs. ACIT (supra) would apply to the present assessee as assessee in the present fact is also a captive service provider as observed by this Tribunal in case of Metric Stream Infotech (India) Pvt. Ltd. vs. ACIT (supra). The Ld.AR relied on the observations of this Tribunal which are as under: “16.1. Ugam Solutions Pvt.Ltd., Ld.AR submitted that complete set of annual report of this comparable is not available in public domain. He submitted that relevant extract of database available from website are placed at page 1421-1423 of paper book is volume 3 from which at page 1423 this company has been stated to be operating in one primary segment being managed analytics. He submitted that this company even otherwise going by the website information is functionally not similar with that of assessee as the clientele of this company services and provides solutions to global market research firms which include research operations, technology infrastructure transition, data warehousing aggregation and visualisation, sample management optimisation, global program management, custom panel solution, reporting solution and mobile solutions etc. He thus submitted that this comparable is functionally not Page 42 of 51 IT(TP)A No. 2595/Bang/2019 similar with assessee who is a captive service provided and provides Ltd functions as required by the associated enterprise. 16.1.1. Ld.CIT DR relied upon authorities below. 16.1.2. We have perused submissions advanced by both sides on the basis of records placed before us. Admittedly this company is into managed analytical services and provides solutions to global market research firms, retailers, leading brands as has been observed by DRP in para 8.2.1. A fit comparable the functions rendered by assessee to the associated enterprise this company cannot be a fit comparable due to functional dissimilarities and risk assumed by this company. Accordingly we direct this comparable to be excluded from the final list. 16.2. Axience Consulting Pvt.Ltd. Ld.AR submitted that this company is also functionally not similar with assessee’s as it is providing services to financial indulged service industry by combining high-end financial analytics, modelling and Tata services with high- quality business intelligence. Referring to page 14 to 5 of annual report Ld.AR submitted that main service provided by this company is in the field of market research and public opinion polling which is very different from sales and marketing support services provided by assessee to its associated enterprises. 16.2.1. On the contrary, Ld. CIT DR placed reliance upon orders passed by authorities below. 16.2.2. We have perused submissions advanced by both sides in light of records placed before us. Admittedly, this company is in financial analysis and research, business intelligence, business and market research, strategic human capital services as recorded by DRP in para 8.3.1. Further we also note page 1428 that there is no segmental details available in respect of revenues earned under each segment. Annual report at page 1431 records that this company is knowledge solution business intelligence and consulting firm providing high-quality solutions. In our considered opinion functions performed by this company cannot be compared with Ltd back-office support provided by assessee to its associated enterprises under sales and marketing segment. Accordingly we direct exclusion of this comparable from final list.” Nothing has been brought on record by the revenue in order to take a different view. Page 43 of 51 IT(TP)A No. 2595/Bang/2019 Respectfully following the above view, we direct the two comparables to be excluded from the final list for marketing and sales support service segment. Accordingly Ground no. 2(b) raised by assessee stands partly allowed. 18. Ground no. 3 is in respect of computing the operating margins of the certain comparables erroneously. 18.1 The Ld.AR submitted that the Ld.TPO considered provision for bad and doubtful debts as operating expenses while computing margins of comparable companies. It is the submission of the assessee that assessee did not have any provision for bad and doubtful debts and therefore any provision for bad and doubtful debts in case of the comparable companies must be excluded from operating expenses while computing the margins. The Ld.AR relied on the decision of Coordinate Bench of this Tribunal in case of ACI Worldwide Solutions Pvt. Ltd. vs. DCIT reported in (2019) 111 taxmann.com 91 in support of this proposition. 18.2 The Ld.DR on the contrary relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 18.3 It is the case of the assessee that as it does not have any provision for bad and doubtful debts for the purpose of computing operating expenses, identical item in the hands of the comparable companies must also be excluded for computing the margins. This in our view is a right approach as necessary adjustment is to be granted to the comparables in order to place Page 44 of 51 IT(TP)A No. 2595/Bang/2019 the comparables at the same level as that of the tested party. Any extraordinary items that is found to be present in the comparables in the form of expenses needs to be excluded in case a similar item is not present in the tested party. We accordingly, direct the Ld.AO/TPO to carry out necessary adjustment in order to iron out the differences between the comparables and the tested party for the purposes of computing the margins. Accordingly this ground raised by assessee stands allowed for statistical purposes. 19. Ground no. 10 is in respect of considering the technical support service segment of assessee to be similar with design engineering services. The Ld.AR submitted that the TPO identified such comparables which are into design engineering services as against technical support service segment of assessee. The Ld.AR referring to page 463 of paper book submitted that the functions performed by assessee under the technical support service segment is primarily into support services in respect of telephone, email troubleshooting, information related to equipment system use etc. It is submitted that the Ld.TPO based on wrong appreciation of the functions selected comparables which were providing services relating to programming, simulation and design services which fall under the category of engineering services. The Ld.AR at the outset submitted that the issue may be remanded for a de novo verification. We have perused the submissions advanced by both sides in the light of records placed before us. 19.1 We note that the functions performed by assessee under technical support service segment is primarily relating to Page 45 of 51 IT(TP)A No. 2595/Bang/2019 information technology whereas the comparables selected by the TPO were primarily into engineering design services. The Ld.TPO is therefore directed to recompute the margin of the assessee having regard to the functions performed by the assessee and by selecting the comparables which are similar with that of the functions performed by the assessee by using appropriate key words on the search database. The Ld.TPO/AO is directed to compute the margins of the assessee under this segment afresh in accordance with law. Needless to say that proper opportunity of being heard must be granted to assessee. 20. Ground nos. 13-15 are in respect of charging notional interest on outstanding trade receivables. 20.1 From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. Alternatively, he submitted that working capital subsumes sundry creditors and therefore separate addition is not called for. 20.2 Ld.TPO computed interest on outstanding receivables at the rate equal to 4.38% on receivables the DRP granted a credit period of 60 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE’s, by holding outstanding receivables to be an independent international transaction. Page 46 of 51 IT(TP)A No. 2595/Bang/2019 20.3 Ld.AR placed reliance on decision of 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. (2017) 398 ITR 66 (Del), held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6 which subsequently upheld by Hon’able 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. 20.4 It has been 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 interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances. 20.5 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 the contentions, he 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 Page 47 of 51 IT(TP)A No. 2595/Bang/2019 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;....’ . 20.6 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 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 noted a decision of the Hon’ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.), 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 Page 48 of 51 IT(TP)A No. 2595/Bang/2019 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?” 20.7 Ld.CIT DR 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. We have perused the submissions advanced by both the sides in the light of the records placed before us. 20.8 This Bench referred to decision of Special Bench of this Tribunal in case of Special Bench of ITAT in case of Instrumentation Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15-7-2016, 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 Page 49 of 51 IT(TP)A No. 2595/Bang/2019 to section 92 B of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR. 20.9 Alternatively, it has been argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to associated enterprise 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 has 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.” 20.10 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 Page 50 of 51 IT(TP)A No. 2595/Bang/2019 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 subsumes the outstanding recivables, no separate cheracterisation is to be made. However for those recivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be charged must be 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 60 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. 21. Ground nos. 16 & 17 are consequential in nature and therefore do not require any adjudication. In the result, the appeal filed by assessee stands allowed in respect of the issues argued and considered hereinabove. Order pronounced in the open court on 21 st October, 2022. Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 21 st October, 2022. /MS / Page 51 of 51 IT(TP)A No. 2595/Bang/2019 Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore