M/s. Continental Automotive Components India Private Limited, Bengaluru V. Deputy Commissioner Of Income Tax, Circle-2(1)(1), Bangalore

ITA 280/BANG/2021

AI Insights

The case involves M/s. Continental Automotive Components India Pvt. Ltd., which appealed against the final assessment order passed by the TPO under the Income Tax Act. The primary contention revolved around the transfer pricing adjustments made for various segments including manufacturing and software development services, and the treatment of certain expenses as capital or revenue. The Tribunal examined the methodologies used by the TPO for determining the ALP and the selection of comparables, and found that several issues required re-evaluation to ensure compliance with the principles of fair assessment and the provisions of the Income Tax Act.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 125224 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-02-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 11-01-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 24-06-2021
• Other Referred Cases: Haworth India Pvt. Ltd ITA No.5341/Del/2010, Gates Unitta India Company (P.) Ltd. v. DCIT, Demag Cranes & Components (India) Pvt. Ltd. v. DCIT, SkodaAuto India p Ltd, Sony India (P) Ltd.'s case, E-Gain Communication (P) Ltd., Thyssen Krupp Industries India Pvt. Ltd., Kirloskar Toyota Textile Machinery Pvt. Ltd. v. ACIT, Arm Embedded Technologies Pvt. Ltd. v. DCIT, Global Logic India Ltd. v. DCIT, NTT Data FA Insurance Systems (India) Pvt. Ltd. v. DCIT, PCIT v. Saxo India P. Ltd., ADP Pvt. Ltd. v. DCIT, Red Hat India Pvt. Ltd. v. NFAC, PCIT v. Cashedge India Pvt. Ltd., Infor (India) Pvt. Ltd. v. DCIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Question of law; Wholly owned subsidiary; Avoidance of tax; Royalty expenses; Revenue expenditure; Capital expenditure; Set aside
• Section: 92C; 92; 92B; 133(6); 37(1); 10B; 195; 250; 192; 64; 113; 43; 48; 73; 72; 13; 22; 92CA; 101; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No.280/Bang/2021 Assessment year : 2016-17 M/s. Continental Automotive Components India Pvt. Ltd., Plot No.53B, Bommasandra Industrial Area, Hosur Road, Attibele Hobli, Anekal Taluk, Bengaluru – 560 099. PAN: AAKCS 9578C Vs. The Deputy Commissioner of Income Tax, Circle 2(1)(1), Bengaluru. ASSESSEE RESPONDENT Assessee by : Shri T. Suryanarayana, Advocate Respondent by : Ms. Neera Malhotra, CIT(DR)(ITAT), Bengaluru. Date of hearing : 12.01.2023 Date of Pronouncement : 06.02.2023 O R D E R Per Padmavathy S., Accountant Member This appeal is against the final assessment order passed by the assessing officer (AO), National Faceless Assessment Centre (NFAC) u/s.143(3) r.w.s.144C(13) of the Income Tax Act (the Act) dated 30.04.2021 for AY 2016-17. IT(TP)A No.280/Bang/2021 Page 2 of 115 2. The Assessee is a wholly owned subsidiary of Continental Automotive GmbH, Germany. It operates in Manufacturing segment, Trading segment and Services segment. For the assessment year 2016- 17, the assessee filed the return of income on 30.11.2016, declaring a loss of Rs.39,55,30,001. The case was selected for scrutiny under CASS and the statutory notices were duly served on the assessee. During the previous year relevant to the assessment year 2016-17, several international transactions took place between the Assessee and its AEs, including purchase of raw materials for the manufacturing segment, payment of royalty fee and provision of SWD services and in the course of assessment the Assessing Officer (“AO”) made a reference to the TPO for examination of the arm’s length price of the aforesaid transactions. On such reference, the TPO passed an order dated 28.10.2019 under Section 92CA of the Income-tax Act, 1961 (“the Act”) determining a TP adjustment with respect to manufacturing segment, SWD services segment and payment of royalty totalling to Rs.173,02,90,000/-. Initially, a draft assessment order dated 30.12.2019 came to be passed by the AO in which the aforesaid TP adjustment was incorporated, apart from the additions made to the income of the Assessee on account of disallowance of provision for warranty and royalty expenses claimed as revenue expenditure. 3. Aggrieved, the Assessee filed its objections before the DRP which, vide its directions dated 22.02.2021, rejected Assessee’s objections insofar as the TP adjustments made by the TPO and the disallowance made in respect of provision for warranty were IT(TP)A No.280/Bang/2021 Page 3 of 115 concerned. As regards the royalty expenses claimed as revenue expenditure, the DRP upheld the action of the AO in treating the same as capital expenditure, while granting depreciation at the rate of 25%. Pursuant to the directions of the DRP, the AO passed the final assessment order dated 30.04.2021in line with the directions of the DRP. Aggrieved, the Assessee has preferred this appeal before this Hon’ble Tribunal. 4. The following issues are contended by the assessee through various grounds raised – 1. Ground no.1 to 8 - General 2. Ground No. 9 to 18 - Transfer pricing adjustment (“TP adjustment”) of Rs.80,82,39,048/-made by the Transfer Pricing Officer (“TPO”) in respect of the manufacturing segment of the Assessee 3. Ground No. 19 to 21 - TP adjustment of Rs. 29,14,50,952/- made by the TPO in respect of the international transaction towards payment of royalty 4. Ground No. 22 to 34 - TP adjustment of Rs.63,06,00,000/- made by the TPO in respect of the software development services (‘SWD services’ for short) rendered by the Assessee 5. Ground No. 35 to 43 - Disallowance of provision for warranty to the extent of Rs. 3,43,62,724/- and 6. Ground No. 44 to 56 - Disallowance of Rs. 21,31,88,214/- being royalty expenses by treating the same as a capital expenditure 7. Ground 57 – Levy of interest u/s.234B IT(TP)A No.280/Bang/2021 Page 4 of 115 MANUFACTURING SEGMENT 5. In the manufacturing segment, the assessee is in charge of conceptualization and designs. It procures equipment for manufacture both fixed and capital equipments. It owns any intellectual Property rights (IPR) for the products developed by them. It receives technology and manufacturing know-how from its Associate Enterprise (AE) for its manufacturing process. It purchases raw materials and components from both third parties and AEs. The nature of raw materials purchased from the AEs and third parties are different. The raw materials procured from the AE are globally sourced by Continental group wherein prices are negotiated globally to get price advantage for bulk purchases. Manufacturing and assembly of products is undertaken by the assessee. The assessee receives guidance from its AEs on the quality control procedures to be followed. The assessee sells finished products to third parties as well as to its AE. Majority of the sales are to OEMs. Continental Group has a Global Key Accounts Management (KAM) structure through which it maintains customers relationship with OEMs having global presence which helps the assessee to establish customer relationship with the Indian entities of global OEMs. The assessee sells goods both to independent third parties as well as to its AEs. For sales to third parties the price is driven by market conditions and for sales to AEs, it is based on agreed pricing policy. IT(TP)A No.280/Bang/2021 Page 5 of 115 6. In the manufacturing segment the assessee adopted the Transaction Net Margin Method (TNMM) as the most appropriate method for determination of Arm’s Length Price (ALP). Under this method the comparison is made between the Assessee’s the operating/ net margins with that of comparable companies to analyse if the related party transactions have been undertaken on an arm’s length basis. Rule 10B(1)(e) of the Income Tax Rules, 1962 (Rules), explains transactional net margin method as a method by which,— (i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; Report this ad (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realized by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub- clause (iii); (v) the net profit margin thus established is then taken into IT(TP)A No.280/Bang/2021 Page 6 of 115 account to arrive at an arm’s length price in relation to the international transaction. 7. In its TP Study, the Assessee in terms of Rule 10B(1)(e ) (i) of the Rules, net profit realized by the Assessee was chosen with reference to cost i.e., Operating profit on Operating Cost was chosen as the profit level Indicator (PLI) for comparing Assessee’s margin with the comparable companies. The TPO to whom a reference was made for determination of ALP in terms of Sec.92CA accepted the PLI chosen for the purpose of comparison. In terms of Rule 10B(1)( e) of the Rules, the Assessee in its TP Study adjusted the net profit margin it earned to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market. In the TP study, the assessee made the following adjustments to the operating cost: • costs associated with unutilised capacity. • costs on account of high customs duty • costs on account of foreign exchange fluctuations 8. The margins of the assessee in the manufacturing segment as per the TP study is as given below – Operating Income Rs. 786,29,70,000/- Operating Cost Rs.733,40,80,000/- Operating Profit (Op. Income (less) Op. Cost Rs. 52,88,90,000/- Net mark-up (OP/OR) 6.73% IT(TP)A No.280/Bang/2021 Page 7 of 115 9. The TPO did not allow the above adjustments to the operating cost and accordingly recomputed the margin of the assessee as under – Operating Income Rs. 786,29,70,000/- Total Cost Rs.842,40,50,000/- Operating loss (Op. Income – Op. Cost) (Rs. 56,10,80,000/-) Net mark-up (OP/OR) -7.14% 10. The assessee selected the following comparables in the TP study– Sl. No. Name of the company Average OP/Sales(in %) (weighted average) 1. Rane Engine Valve Ltd. 2.46 2. Hindustan Hardy Spicer Ltd. 1.19 3. JMT Auto Ltd. 7.09 4. Bharat Gears Ltd. 2.72 5. Munjal Showa Ltd. 5.49 Arithmetical Mean 3.79 11. Accordingly the assessee concluded that the margin on the international transaction in the manufacturing segment is within the arm’s length price. 12. The TPO in addition to the comparables selected by the assessee conducted new search to filter fresh comparables. The final list of comparables as per TPO is as listed below – IT(TP)A No.280/Bang/2021 Page 8 of 115 Sl. No. Name of the Company OP/Sales (in %) Comparable selected by the Assessee in its TP study, accepted by the TPO 1 Rane Engine Valve Ltd. 2.46 2 Hindustan Hardy Spicer Ltd. 1.19 3 Bharat Gears Ltd. 2.72 4 Munjal Showa Ltd. 5.49 5 JMT Auto Ltd. 7.09 Companies selected by the TPO in the show cause notice 6 Varroc Engineering Ltd. 4.51 7 Aditya Auto Products & Engg. (India) Pvt. Ltd. 5.43 8 Maco Pvt. Ltd. 6.64 9 JMT Auto Ltd. * (TP study comparable) 6.85 10 Aspee Springs Ltd. 10.49 11 TVS Upasana Ltd. 10.87 12 Leewon Precision Pvt. Ltd. 12.38 Median 6.85%* 13. Though TPO had accepted all the companies selected in the TP study, he arrived at the median of 6.85%, by selecting only those companies which were selected by him in the show cause notice. The TPO accordingly arrived at the TP adjustment as under – Particulars Amount (in million) Operating revenue 7,862.97 Operating cost 8,424.05 Operating profit -561.08 OP/OR -7.14% OP/OC -6.66% Arm’s length OP/OR 6.85% Arm’s length OP 538.61 Arm’s length cost 7,324.36 Adjustment 1,099.69 IT(TP)A No.280/Bang/2021 Page 9 of 115 14. In arriving at the above adjustment, the TPO considered the figures at the entity level, rather than restricting the adjustment to the proportion of international transactions to total cost in the segment. It can be seen from the above that the TPO arrived at Rs.538.61Mn that the operating profit that the Assessee should have made by applying 6.85% on revenue of Rs. 7,862.97Mn and after reducing the same from the operating revenue arriving at cost of Rs. 7,324.36 Mn. Since the Assessee’s cost was taken at Rs. 8,424.05 Mn incurred in the manufacturing segment and the AO reduced the Arm’s Length margin of 7.50% to arrive at the operating cost of Rs. 7,324.36 Mn where the difference of Rs.1099.69 Mn (Rs.8424.05Mn – Rs.7324.36 Mn) was added as adjustment consequent to determination of ALP 15. The assessee filed the objections before the DRP. The DRP rejected the submissions of the assessee and upheld the TP adjustment in the manufacturing segment. The assessee is in appeal against the final order of assessment passed in accordance with the directions of the DRP 16. Ground Nos.9 and 10 are general in nature. 17. The grounds raised and pressed by the assessee with regard to TP adjustment in manufacturing segment are – (i) That the lower authorities erred in not granting an adjustment for underutilisation of capacity (Ground No.11). (ii) That the lower authorities erred in not granting adjustment towards custom duty expenses.(Ground No. 12). IT(TP)A No.280/Bang/2021 Page 10 of 115 (iii) That the lower authorities erred in not granting an adjustment towards exchange fluctuation.(Ground No. 13) (iv) That the lower authorities erred in not granting depreciation adjustment (Ground No. 14) (v) That the lower authorities erred in upholding the inclusion of Aditya Auto Products and Engg. (India) Pvt. Ltd., Aspee springs Ltd., Leewon Precision Pvt. Ltd., Maco Pvt.ltd., TVS Upasana Ltd., and Varroc Engineering Ltd. as comparable to the Assessee(Ground No. 15). (vi) That the lower authorities erred in not including Gabriel India Ltd. and Vijayshree Autocom Ltd. as comparables to the Assessee. (Ground No. 16) (vii) That the TPO erred in not including the additional companies of the Assessee (Ground No. 17) (viii) Without prejudice, the lower authorities ought to have appreciated that adjustment if any, should be restricted to the proportion of cost of international transactions of the Assessee to total operating cost in the manufacturing segment. (Ground no. 18) Ground no. 11: Capacity utilisation 18. This ground is in relation to the action of the revenue authorities in not allowing adjustment to the operating costs of the Assessee by reducing the cost on account of underutilization of capacity. It is submitted that the Assessee was not able to operate at its optimum capacity and could not recoup its fixed costs due to industry slowdown, leading to lesser demand and high depreciation cost, since the economy had faced global recession and the industry meltdown had hit the automotive industry and affected the opportunity of the Assessee to acquire new customers. This resulted in underutilization of the production capacity in the factory, resulting in low utilization of the available capacity for the FY 2015-16 to manufacture the products. IT(TP)A No.280/Bang/2021 Page 11 of 115 The Assessee operated at 31.63% of its installed capacity whereas the comparable companies chosen by the Assessee operated at an average of 76.50%.It is evident from the capacity utilization of 31.63% that the Assessee had under-utilized its capacity considering low demand for its products. Hence, the Assessee could not manufacture at optimal capacity and recoup the fixed expenses for the year and the adjustment for under-utilization of capacity is warranted. 19. The TPO did not grant an adjustment for capacity under utilisation on the ground that the adjustment would have to be made to the comparable companies and not the tested party and that the capacity utilisation of each of the comparable companies has not been considered. It was also observed that under-utilization of capacity is not only for the Assessee but had affected the entire industry. Therefore, its comparable companies also have the same effect as the Assessee. Normally, utilization of capacity is significantly different between the Assessee and comparable companies in the initial stage of operation. However, the Assessee is not in the initial stage of operation. 23. The DRP while upholding the order of the TPO relied on decision of ITAT Delhi in the case of Haworth India Pvt. Ltd ITA No.5341/Del/2010 (“Haworth India”) and also on various other rulings to hold that the Assessee did not produce any evidence for assuming the capacity utilization of comparable companies and whatever data IT(TP)A No.280/Bang/2021 Page 12 of 115 relied upon by the assessee for seeking the adjustment was either unreliable or incorrect 20. Before the Tribunal, it was submitted by the ld AR that firstly, from a harmonious reading of sub-clause (iii) of clause (e) of Rule 10B and sub-rule (3) of 10B, it is evident that for a comparability analysis of an international transaction with the uncontrolled transaction, reasonable and accurate adjustment is permitted to eliminate any difference which materially affects the price or costs or the profit arising from such transaction in the open market. Nowhere the rule suggest that such adjustment should be made only to the uncontrolled transaction, that is, comparable companies and not to the 'tested party' whose transaction is being compared. It is submitted that the adjustment can be made either in the case of the 'tested party' or the comparable companies so that the difference which could materially affect the amount of net profit margin is removed. More so, in practical situations there may be absence of reliable data in the case of the comparable companies for which such material difference is to be analysed or examined. In certain cases there may arise some difficulty when the reliable data for particular cost or profit may not be available, therefore, a reasonable accurate adjustment in the hands of the tested party may throw fruitful result. 21. It was submitted that in the case of Haworth India, this Hon’ble Tribunal had held that the adjustment, if any, can be made to eliminate the material differences between the Assessee and its comparable IT(TP)A No.280/Bang/2021 Page 13 of 115 companies to the extent these adjustments are reasonably accurate. Such adjustment can be allowed only in a case where Assessee is able to furnish accurate and credible evidence in this regard. In the relevant case law, since Haworth India had not been able to furnish credible and accurate information with regard to capacity utilization, the adjustment was not allowed. However, in the Assessee’s case, the Assessee has provided all information practically possible. Sufficient evidence has been provided in the form of capacity data of comparable companies as well as industry average from the Federation of Indian Chambers of Commerce & Industry (“FICCI”) survey report. Hence principally capacity utilization adjustment should have been granted. The ld AR that identical issue was decided by this Tribunal in Assessee’s own case for AY 2012-13 in IT (TP) A No.713/Bang/2017 by order dated 24.11.2021. 22. The learned DR relied on the order of the DRP. 23. We notice that the coordinate bench of the Tribunal in assessee’s own case by its order remanded to issue to the TPO with the following observations:- “24. We have heard both the parties and perused the material on record. In this case, the exact details of capacity utilisation of comparable companies was not made available to the TPO. It was alleged that the TPO should obtained it by exercising his powers u/s. 133(6) of the Act so as to compare the capacity utilisation of the comparables with the assessee company. In our opinion, it is appropriate to remit the issue relating to adjustment on account of capacity utilisation of the assessee to the file of the AO/TPO for deciding the same afresh keeping in view the OECD guidelines. IT(TP)A No.280/Bang/2021 Page 14 of 115 If the exact details of capacity utilisation of comparable companies are not available in the public domain, the AOITPO is directed to obtain the same directly from the comparable companies and decide the issue afresh, after affording opportunity of being heard to the assessee. Accordingly, this issue is remitted to the AO/TPO.” 24. Respectfully following the aforesaid order, we remand the issue to the TPO/AO for consideration afresh on the lines indicated in the decision of the Tribunal for AY 2012-13, after affording the Assessee opportunity of being heard. Ground no. 12: Adjustment for custom duty 25. This ground is in relation to adjustment to the cost base of the Assessee on account of custom duty. The Assessee has incurred significant customs duty charges which are proportionately much greater than that of the comparable companies leading to a lower profitability for the Assessee. The comparable companies have not incurred any significant custom duty expense as they primarily manufacture using materials available indigenously within India. It is submitted that the Assessee is still in the process of localizing its manufacturing process. To meet the quality standards and to overcome technological challenges, the Assessee imports raw materials from its AEs. Therefore, it becomes necessary for the Assessee to import raw materials from its AEs which is not the case for the comparable companies, thus, putting the Assessee in a comparative disadvantage viz-a-viz the comparables. The TPO rejected the adjustment sought IT(TP)A No.280/Bang/2021 Page 15 of 115 inter alia for the reason that the decision to import is a conscious decision taken by the Assessee and in the absence of any external factors, beyond the control of the Assessee necessitating imports, no adjustment can be made. The DRP affirmed the order of the TPO. 26. The ld AR submitted that the import of raw materials is not a commercial decision but on the other hand is necessitated for reasons beyond the Assessee’s i.e., by lack of capacity to localize the procurement which the Assessee is still in the process of doing. Detailed submissions in this regard is placed at pages 643-644 of the paper book. The ld AR also submitted that this issue is covered in the Assessee’s favour by the decision of this Hon’ble Tribunal in the Assessee’s own case for the assessment year 2014-15. 27. The ld DR supported the order of the lower authorities. 28. We heard the parties and perused the materials on record. We notice that the coordinate bench in assessee’s own case in ITA No.129/Bang/2019 for AY 2014-15 vide order dated 29.03.2022 has considered the same issue and held that – Both the parties agreed that identical issue was decided by this Tribunal in Assessee’s own case for AY 2012-13 in IT (TP) A No.713/Bang/2017 and this Tribunal by it’s order dated 24.11.2021 remanded to issue to the TPO with the following observations: “30. This issue came up for consideration before the Chennai Tribunal in the case of Gates Unitta India Company (P.) Ltd. v. DCIT, 84 taxman.com 69 wherein it was held as follows:- "5. Before us, Id. A.R submitted that 90% of the raw materials of the assessee are' imported as such customs duty adjustments to be made and it includes Rs. 4.31 crores pertained to the customs duty in the manufacturing segment. In principle the customs duty adjustments is allowed in view of the Co-ordinate Bench decision in the case of Motonic India Automotive (P.) Ltd. v. Assn. CIT [20161 73 taxmann.com 235 (Chennai Trib.) wherein held that: '6.1 At this stage, it is pertinent to mention the finding of the Pune Bench in the case of Demag Cranes & Components (India) Pvt. Ltd. v. DCIT (supra) dated 4.1.2012 in ITA No.120/PN/2011, which is as follows : "37. We have heard the parties and perused the available material on records in the light of the second limb of the ground 4(b). it is relevant mentioned that we have already analysed the relevant provisions of Income Tax rules vis a vis the scope of the adjustments in the preceding paragraphs in the context of the adjustments on account of the 'working capital'. in principles, our findings on the issue remain applicable to the adjustments on account of the import cost mentioned in ground 4(b) too. The difference between the AL Margin before and after the said adjustments on account of 'import cost' works out to 0.57% (7.18%-6.61%). Revenue has not disputed the said working of the assessee. In these factual circumstances and in the light of the scope of adjustments discussed above, in our opinion and in principle, the assessee should win on this ground too. One such decision relied upon by the assessee's counsel supports our finding relates to the decision of this bench of the Tribunal in the case of SkodaAuto India p Ltd 122 TT.I 699 (Pune) dated March 2009 wherein, it is held (in para 19 of the order) that,- "No doubt , a higher import content of raw material by itself does not warrant an adjustment in operating margins, as was held in Sony India (P) Ltd.'s case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee's control. As was observed by a Co-ordinate Bench of this Tribunal in the case of E-Gain Communication (P) Ltd. (supra) "the differences which are likely to materially affect the price, cost charged or paid in, IT(TP)A No.280/Bang/2021 Page 17 of 115 or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect". We do not agree with the AO that every time the assessee pays the higher import duty, it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. All these things could be relevant only when higher import content is a part of the business model which the assessee has consciously chosen but then if it is a business model to import the SKD kits of the cars, assemble it and sell it in the market, that is certainly not the business models of the comparables that the TPO has adopted in this case. The adjustments then are required to be made for functionally differences. The other way of looking at the present situation is to accept that business model of the assessee company and the comparable companies are the same and it is on account of initial stages of business that the unusually high costs are incurred. The adjustments are thus required either way. It is, therefore, permissible in principle to make adjustments in the costs and profits in fit cases. We also do not agree with the authorities below that the onus is on the assessee to get all such details of the comparable concerns so as to make this comparison possible. The assessee cannot be expected to get the details and particulars which are not in public domain. In such a situation, i.e. when information available in public domain is not sufficient to make these comparisons possible, it is inevitable that some approximations are to be made and reasonable assumptions are to be made. The argument before us was that it was first year of assessee's operations and complete facilities ensuring a reasonable indigenous raw material content was not in place. The assessee's claim is that it was in These circumstances that the assessee had to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car vas computed in the light of the costs as would apply when the complete facilities of regular production are in place. None of these arguments were before any of the authorities below. What was argued before the AO was mere fact of higher costs on account of higher import duty but then this argument proceeded on the fallacy that an operating profit margin for higher import duty is permissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a Co-ordinate Bench and we are in respectful agreement IT(TP)A No.280/Bang/2021 Page 18 of 115 with the views of our esteemed colleagues. 17-25 additional argument was not available before authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing the TPO to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter to the file of the TPO for fresh adjudication in the light of our above observations." 38. The perusal of the impugned orders shows that the above cited guidelines by way of decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd (supra) were not available to the revenue authorities. Therefore, we are of the opinion, the issue should be set aside to the files of the TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any. However, the TPO/A0/DRP see to it that the difference in question is 'likely to materially affect' the price/profit in the open market as envisaged in sub rule (3) of Rule 1013 of the Income tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto.' Accordingly, we direct the A.O. to give suitable adjustment against the custom duty component while determining the ALP.' Hence, to bring uniformity, the customs duty was to be eliminated from the comparable price also to arrive at correct PLI. Accordingly, we remit the issue to the file of AO for fresh consideration." 31. In view of the above finding of the Tribunal in Gates Unitta India Company (P.) Ltd. (supra), we are inclined to remit this issue to the AO/TPO with similar direction.” Following the aforesaid order, we remand the issue to the TPO/AO for consideration afresh on the lines indicated in the decision of the Tribunal for AY 2012-13, after affording the Assessee opportunity of being heard. 29. Respectfully following the above order of the coordinate bench we remand the issue to the TPO/AO for consideration afresh on the IT(TP)A No.280/Bang/2021 Page 19 of 115 lines indicated in the decision of the Tribunal for AY 2014-15, after affording the Assessee opportunity of being heard. Ground no. 13: Adjustment for foreign exchange fluctuations 30. This ground is with regard to adjustment to operating cost on account of foreign exchange fluctuation. In this regard it was submitted that the Assessee imports a considerable amount of raw material for undertaking the manufacturing operations in India (78.13%). As a rule, import prices are significantly impacted by the foreign exchange rates, which is the case for the Assessee as well. Hence, foreign exchange fluctuation will be one of the significant factors impacting the import costs and in turn influencing the profitability. Accordingly, it made an adjustment to its operating costs by reducing the same. The TPO disallowed such adjustment. 31. The DRP denied the Assessee’s claim for the adjustment on the grounds that (i) the adjustment should be made to the comparables; (ii) there are many assumptions in the process of granting the adjustment; (iii) the selling price is determined by the market force, and it appears that the Assessee is paying high price to its AEs which is making it suffer losses. 32. In this regard, the ld AR submitted that the Assessee bears the forex risk and hence it has incurred high forex fluctuation loss which is embedded in the raw material import cost. The significant imports made by the Assessee are in Euro and USD. While accounting, the IT(TP)A No.280/Bang/2021 Page 20 of 115 same is converted to INR based on the foreign exchange rates communicated by the Continental Group. During the relevant year, the INR depreciated considerably vis-à-vis most of the other major currencies and imports became costlier for the Assessee. Although there was no significant increase in the price of imports as compared to the previous year, the foreign exchange rate fluctuations has also contributed towards increased material costs. Therefore, an adjustment for the abnormal impact due to foreign currency fluctuation during the year, has to be considered on the value of import purchases made during the year. The ld AR also submitted that this issue is covered in the Assessee’s favour by the decision of this Hon’ble Tribunal in the Assessee’s own case for the assessment year 2014-15 (supra). 33. We heard the rival submissions and perused the material on record. We notice that the coordinate bench in assessee’s own case in ITA No.129/Bang/2019 for AY 2014-15 vide order dated 29.03.2022 has considered the same issue and held that - 49. Both the parties agreed that identical issue was decided by this Tribunal in Assessee’s own case for AY 2012-13 in IT (TP) A No.713/Bang/2017 and this Tribunal by it’s order dated 24.11.2021 remanded to issue to the TPO with the following observations: “39. This issue was also considered by the Chennai Tribunal in the case of Gates Unitta India Company (P.) Ltd. (supra) and it was held as under:- "7. We have heard both the parties and perused the material on record. In our opinion, forex fluctuations loss in the operating cost of the assessee and also forex gains in the operating income IT(TP)A No.280/Bang/2021 Page 21 of 115 of assessee, both to be excluded from the operating expenses as well as operating income respectively in view of the Order of Tribunal in the case of Moronic India Automotive (P.) Ltd. (supra) in for assessment year 2009-10 vide order dated 17.08.2016 wherein held that:— "g. We find force in the argument of the Id. AR. It is normal that exchange rate is subject to fluctuation due to economic conditions. While determining the ALP, one has to consider these factors, more so, our view is fortified by the decision of the Tribunal in the cases of Honda Trading Corp. India Pvt. Ltd. v. ALIT in ITA No.5297/De1/2o11 for the assessment year 2007-08 and DHL Express (India) Put. Ltd. v. ALIT in ITA No.7360/Mum/2010 for the assessment year 2006-07. Accordingly, we direct the TPO to provide considerable exchange fluctuation adjustment while determining the ALP. Accordingly, this issue is remitted to the file of the TPO for determining the ALP after considering the above three components i.e. customs duty adjustment, air freight adjustment and foreign exchange fluctuation adjustment." Accordingly, this issue is remitted to the file of AO for fresh consideration." 40. Following the aforesaid decision of the Tribunal, we remit this issue to the AO/TPO with similar directions for fresh decision.” 50. Following the aforesaid order, we remand the issue to the TPO/AO for consideration afresh on the lines indicated in the decision of the Tribunal for AY 2012-13, after affording the Assessee opportunity of being heard. 34. Respectfully following the above decision we the TPO/AO for consideration afresh on the lines indicated in the decision of the Tribunal for AY 2014-15, after affording the Assessee opportunity of being heard. IT(TP)A No.280/Bang/2021 Page 22 of 115 Ground No. 14: Depreciation adjustment 35. The assessee raised this ground in relation to the plea of the Assessee for grant of depreciation adjustment in computing operating cost of the Assessee. It is submitted that the Assessee has invested huge capital in purchasing fixed assets which are an integral part of the manufacturing operations. The Assessee incurred high depreciation cost to sales of 8.70%. As it did not manufacture the products as estimated, the Assessee could not recover its fixed costs and incurred losses. The Assessee, without prejudice to the above arguments, has claimed adjustment to neutralize the difference between its depreciation cost and the significantly lower depreciation costs of the comparable companies. 36. The DRP in its directions held that depreciation adjustment is related to the capacity adjustment and can be granted only in the initial years and that such high investments are observed not only for the Assessee but in the entire industry. It was further held that since the average of comparable margins are taken and a margin of 3% is also allowed, the same would take care of adjustments that cannot be carried out. 37. The Assessee submits that the DRP directed grant of depreciation adjustment vis-à-vis differences in depreciation cost in the IT(TP)A No.280/Bang/2021 Page 23 of 115 Assessee’s own case in AY 2012-13, consequent to which the transfer pricing adjustment in the manufacturing segment for the AY 12-13 was reduced by INR 24.23 crores. Since there has been no change in facts from AY 12-13, the Assessee prays that the same be granted in the current year as well. 38. We heard the rival submissions and perused the material on record. We notice that the coordinate bench in assessee’s own case in ITA No.129/Bang/2019 for AY 2014-15 vide order dated 29.03.2022 has considered the same issue and held that - 54. We are of the view that the adjustment on account of underutilization of capacity will sufficiently take care of the depreciation adjustment and no separate adjustment is required to be granted on account of difference in quantum of depreciation vis-a-vis difference in capacity utilization and cost of fixed assets. We hold and direct accordingly. The decisions cited are all in the context of capacity utilization and cannot be extended to grant of depreciation adjustment. 39. Respectfully following the above decision we hold and direct accordingly. 40. Through Ground No.15, the assessee is seeking exclusion of certain comparable companies chosen by the TPO. 41. The ld AR presented written submissions with regard to the exclusions the extract of which is as given below – IT(TP)A No.280/Bang/2021 Page 24 of 115 Aditya Auto Products and Engg. (India) Pvt. Ltd. Functionally dissimilar: It is submitted that this company is engaged in the manufacture of window regulators and door latches, which are non- electronic in nature. On the other hand, the Assessee manufactures instrument clusters, engine systems, speed sensors, airbag controllers, anti lock braking system, etc which depend on electric circuitry to function. Therefore the non-electronic products manufactured by this company are not comparable to the products manufactured by the Assessee. Research and development: The company is engaged in inhouse R&D resulting in creation of intangibles and has a certified R&D centre. On the other hand, the Assessee does not undertake and R&D activities. Detailed submissions in this regard are placed at pages 221-226 of the appeal set. Reliance in this regard is placed on the findings of this Hon’ble Tribunal in the order passed in the Assessee’s case for the assessment year 2014- 15, while adjudicating on the comparability of Rajsriya Automotive Industries Pvt. Ltd. (at paras 56-58) Aspee Springs Ltd: (Aspee) Functionally dissimilar: It is submitted that this company is functionally dissimilar to the Assessee. Aspee is engaged in the business of manufacturing Washers, Circlips, Bushes, Retaining Rings, Clips and other similar automotive parts. These auto components are less complex and are mechanical in nature as compared to that of the Assessee which manufactures electrical components. Aspee can be characterized as a full-fledged manufacturer while the Assessee is only a licensed manufacturer assuming normal risks and not engaged in R&D activities. Also, Aspee performs research and development activities and therefore, this company is not functionally comparable to the Assessee. IT(TP)A No.280/Bang/2021 Page 25 of 115 The company is also in possession of intangible assets generated during the course of its operations. Different business model: The company earns over 10% revenue from “job-work income: which suggests that the company operated in a different business model. Detailed submissions in this regard are placed in pages 227-231 of the paperbook. Moreover, the company was rejected by the TPO in the assessment year 2015-16 on the ground of functional dissimilarity (screenshot of the search matrix is placed at page 230 of the paperbook). Reliance in this regard is placed on the decision of this Hon’ble Tribunal in the Assessee’s own case for assessment year 2014-15 (para 64) Leewon Precision Pvt. Ltd. Functionally dissimilar: It is submitted that the company is engaged in manufacture of camshafts, which are not electrical components, and thus not comparable to the products manufactured by the Assessee. It is submitted that in the assessment year 2015-16, this company was rejected by the TPO as being functionally dissimilar (screenshot of the search matrix is placed at page 235 of the appeal set). In the absence of any change in facts, this company is liable to be rejected for the year under consideration. Without prejudice, the margin of the company as computed by the TPO is erroneous. The correct margin of the company is as under: • 12.35% for FY 2015-16, • 11.16% for FY 2014-15, and • 6.30% for FY 2013-14. IT(TP)A No.280/Bang/2021 Page 26 of 115 Details submissions in this regard are placed at pages 233-238 of the appeal set. Reliance in this regard is placed on the findings of this Hon’ble Tribunal in the order passed in the Assessee’s case for the assessment year 2014- 15, while adjudicating on the comparability of Rajsriya Automotive Industries Pvt. Ltd. (at paras 56-58) Maco Pvt. Ltd.: Functionally dissimilar: Company is engaged in manufacture of connecting rods, gudgeon pins, crank pins, and other pin type items, which are not electrical components, and thus not comparable to the products manufactured by the Assessee. It is submitted that in the assessment year 2015-16, this company was rejected by the TPO as being functionally dissimilar (screenshot of the search matrix is placed at page 241 of the appeal set). In the absence of any change in facts, this company is liable to be rejected for the year under consideration. Reliance in this regard is placed on the findings of this Hon’ble Tribunal in the order passed in the Assessee’s case for the assessment year 2014- 15, while adjudicating on the comparability of Rajsriya Automotive Industries Pvt. Ltd. (at paras 56-58). Detailed submissions in this regard are placed at pages 233-242 TVS Upasana Ltd: (“TVS”) Functionally dissimilar: It is submitted that TVS is functionally not comparable to the Assessee as it is engaged in the business of manufacturing spokes and nipples for all the major OEM’s in India. These auto components are less complex and are mechanical in nature as compared to the electric components manufactured by the Assessee. It is submitted that in the assessment year 2015-16, this company was rejected by the TPO as being functionally dissimilar (screenshot of IT(TP)A No.280/Bang/2021 Page 27 of 115 the search matrix is placed at page 246 of the appeal set). In the absence of any change in facts, this company is liable to be rejected for the year under consideration. Reliance in this regard is placed on the findings of this Hon’ble Tribunal in the order passed in the Assessee’s case for the assessment year 2014- 15(at paras 59-61). Detailed submissions in this regard are placed at pages 243-246 of the paperbook. Varroc Engineering Ltd. At the outset, it is submitted that the company was rejected by the TPO for the assessment year 2015-16 on the ground of functional dissimilarity (screenshot of the search matrix is placed at page 250 of the appeal set). In the absence of any change in facts, the company ought to be excluded in the year under consideration. Research and development: It is submitted that the company undertakes extensive R&D activities and hence may be classified as full fledged manufacturer undertaking high risk. On the other hand, the Assessee does not undertake any R&D activity. Detailed submissions are placed at pages 247-250 of the paperbook. 42. We heard the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in assessee’s own case for AY 2014-15 vide order dated 29.3.2022 held as under while considering one of the exclusions sought by the assessee (Rajsriya Automotive Industries. Pvt Ltd) held that :- IT(TP)A No.280/Bang/2021 Page 28 of 115 58. In terms of Rule 10B(2)( a) of the rules specific characteristics of property transferred or services provided in either transaction is a relevant criteria. It may be true that broadly the Assessee and the comparable Rajsriya can be said to be in automotive component manufacturing. However, the specific characteristics of the property manufactured by the Assessee is electrical/electronics parts whereas the comparable company Rajsriya is manufacture of automotive components. Therefore there is a difference in the specific characterics of the property manufactured. So also in terms of Rule 10B(2)( b) of the Rules, presence of intangible as an Asset employed would be a relevant criteria to choose comparable. That being the case, we are of the view that if on a narrower search, if sufficient number of comparable companies are available in the automobile electrical/electronics component, then it would be just and proper to disregard companies who manufacture automotive components. We hold and direct accordingly. 43. We further notice that the Hon’ble Tribunal has applied the same criteria while considering the exclusion of the TVS Upasana Ltd., and Aspee springs Ltd and held that - TVS Upasana Ltd: (“TVS”) 59. The plea of the Assessee for exclusion of TVS is almost identical to the plea for rejection of Rajsriya as a comparable. It is the plea of the Assessee that TVS is functionally not comparable to the Assessee as it is engaged in the business of manufacturing spokes and nipples for all the major OEM’s in India. These automotive components are less complex and are mechanical in nature as compared to the electric components manufactured by the Assessee. The Assessee is into the manufacture of electrical components like instrument clusters, engine systems, speed sensors, airbag controllers, anti-lock braking system etc for the automobile industry. It is the further plea of the Assessee that TVS is also engaged in manufacture of various products and operates in different segments. Moreover, raw material consumption ratio on sales of TVS and the Assessee are widely IT(TP)A No.280/Bang/2021 Page 29 of 115 variant. The proportion of raw materials consumed by the Assessee (76%) exceeds 2 times that of TVS. Particulars TV Upasana Ltd Amt (in Rs) Assessee Amt (in Rs) Raw material cost 33,50,12,898 394,68,84,336 Sales 91,47,45,212 517,71,01,220 Raw material cost/Sales 37% 76% It was also pleaded that TVS fails the RPT filter of 15% consistently applied by the Tribunal. Therefore, the said company cannot be considered as a comparable and ought to be excluded from the final list of comparables. 60. The learned DR relied on the order of the DRP and the submissions were identical to the choice of comparable Rajsriya. 61. After giving a careful consideration to the rival contentions, we find that the reason that the Assessee was in electrical/electronic components manufacture and TVS is in manufacture of automotive/mechanical components in the automobile industry is a difference in the characteristics of the property which is a relevant criteria for choosing comparable companies. On this aspect whatever conclusions we drawn in respect of the comparable Rajsriya would be equally applicable to this comparable company also. In respect of the Related Party Transaction (RPT), the range of related party transaction would vary between 15% and 25% depending on the availability of comparable companies. If more companies are available for comparability then the percentage of RPT can be restricted to 15% and in cases where such comparable companies are not available then the range can go upto 25% to rope in more comparable companies. The fact that raw material consumption is more in the case of the Assessee does not seem to fit into any of the criteria for deciding comparability in terms of Rule 10B(2) of the Rules. IT(TP)A No.280/Bang/2021 Page 30 of 115 Aspee Springs Ltd: (Aspee) 62. The plea of the Assessee for exclusion of this company is on the ground that this company is functionally dissimilar to the Assessee. Aspee is engaged in the business of manufacturing Washers, Circlips, Bushes, Retaining Rings, Clips and other similar automotive parts. These auto components are less complex and are mechanical in nature as compared to that of the Assessee which manufactures electrical components. Also, Aspee performs research and development activities and therefore, this company is not functionally comparable to the Assessee. It was submitted that the DRP has erred in holding that R&D activities are not relevant in selection of comparables as the same will exist is many companies. The DRP has failed to consider that Aspee has spent an amount of Rs. 40,00,000 towards development of a product which will have a material impact on the financials of the company. Aspee can be characterized as a full-fledged manufacturer while the Assessee is only a licensed manufacturer assuming normal risks and not engaged in R&D activities. The company is also in possession of intangible assets generated during the course of its operations. The proportion of raw materials consumed by the Assessee (76%) exceeds 1.5 times that of the comparable company. The relevant details as extracted from the annual reports are provided below. Particulars Amt (Rs.) Raw material cost 14,55,03,466 Sales 30,61,07,713 Raw material cost/Sales 48% From the above, it is evident that Aspee operates on a different business model from that of the Assessee and hence is functionally non-comparable. Therefore, the said company ought to be excluded from the final list of comparables. 63. The learned DR relied on the order of the DRP. IT(TP)A No.280/Bang/2021 Page 31 of 115 64. In so far as the contention regarding the dissimilarity in the characteristics of the property and presence of R & D activities the conclusions while dealing with Rajsriya will apply to this company also. As far as the difference in own consumption of raw material and different business model, we are of the view that the conclusions while dealing with the comparable TVS will equally apply to this comparable also. We hold and direct accordingly. 44. The ld AR submitted that the above two comparables are excluded by the TPO himself in assessee’s case for AY 2015-16. Respectfully following the decision of the coordinate bench we direct the TPO to exclude the above two comparables. 45. The ld AR while praying for exclusion of Aditya Auto Products and Engg. (India) Pvt. Ltd., Leewon Precision Pvt. Ltd., Maco Pvt.ltd., and Varroc Engineering Ltd submitted that the ratio laid down by the Tribunal in the above decision is that there is a difference in the specific characteristics of the property manufactured by the assessee and the comparable companies who are into manufacture of automotive components. Further we notice that the TPO has excluded these comparables in assessee’s own case for AY 2015-16 based on functional dissimilarity. Therefore we are of the view that the facts of the year under consideration need to be re-examined and accordingly remit the issue back to the TPO. The TPO is directed to keep in mind the ratio laid down by the Hon’ble Tribunal in assessee’s own case for AY 2014-15 while deciding the issue after giving a reasonable opportunity of being heard to the assessee. IT(TP)A No.280/Bang/2021 Page 32 of 115 46. Ground No.16 pertains to inclusion of Gabriel India Ltd. and Vijayshree Autocom Ltd. as comparables. In this regard the ld AR submitted that – Gabriel India Ltd. It is submitted that this company came to be rejected by the TPO without any reasons, and was affirmed by the DRP merely on the ground that the company did not feature in the search matrix of the TPO. In this regard it is submitted that the company is functionally comparable. The company is engaged in the manufacture of automotive gears and components and is thus comparable to the Assessee. In fact, in the previous assessment year 2015-16, the company was accepted by the TPO as a comparable (screenshot of the relevant extract is placed at page 254 of the appeal set). In the absence of any change in facts, the company ought to be included in the final list of comparables. The company passes all the filters applied by the TPO. It is submitted that since the company is functionally comparable, the DRP’s action in affirming the rejection of the company merely on the ground that it does not feature in the search matrix, is baseless. In addition to the above, the aforesaid company has been directed to be included in the final set by the Hon’ble DRP in the Assessee’s own case for AY 2017-18, post which the TPO, in order giving effect, had accepted the said company as comparable and included it in the final set. Vijayshree Autocom Ltd.: This company was rejected by the TPO in the search matrix on the ground of no availability of data. The DRP affirmed its exclusion on the ground that company does not feature in the search matrix of the TPO. IT(TP)A No.280/Bang/2021 Page 33 of 115 In this regard, it is submitted that the company is engaged in the manufacture of automotive components, which includes fuel tanks, chassis reinforcements, stressed members and brackets, and is therefore comparable to the Assessee. In fact, in the previous assessment year 2014-15, the company was accepted by the TPO as a comparable (screenshot of the relevant extract is placed at page 260 of the appeal set). In the absence of any change in facts, the company ought to be included in the final list of comparables. The company passes all the filters applied by the TPO. The DRP’s rejection on the ground that the company does not feature in the search matrix of the TPO is factually incorrect. 47. The ld DR argued that the TPO / DRP including these companies as comparable in a different assessment year in assessee’s case cannot be the criteria for inclusion in the year under consideration. 48. We heard the parties and perused the material on record. We notice that the TPO / DRP has included these comparables in AY 2014-15, AY 2015-16 and AY 2017-18. We further notice that the reason for not including these comparable as given by the TPO /DRP is that the company does not feature in the search matrix of the TPO. We are unable to appreciate this contention since these comparables have been included in assessee’s own case by the TPO/DRP in different assessment years. We also notice that the TPO/DRP has not given any finding based on facts for rejecting the inclusion. Therefore we remit the issue back to the TPO for considering the issue of inclusion of Gabriel India Ltd. and Vijayshree Autocom Ltd. afresh IT(TP)A No.280/Bang/2021 Page 34 of 115 after giving a reasonable opportunity of being heard to the assessee. It is ordered accordingly. 49. Ground No. 17 is with regard to the error in the order of the TPO while computing the ALP. In this regard it is submitted that while the TPO accepted the companies selected by the assessee in its TP study, being Rane Engine Valve Ltd., Hindustan Hardy Spicer Ltd., Bharat Gears Ltd., and Munjal Showa Ltd., while computing the arm’s length margin, failed to take the same into consideration. In view of the TPO having accepted the companies as being comparable, it is submitted that the companies ought to be included in the final list of comparables. We accordingly direct the TPO to recomputed the ALP. 50. In ground No.18, the Assessee has contended that the adjustment, if any should be restricted to the proportionate value of the international transactions of the Assessee. In this regard it was pointed out by the Assessee that the adjustment (if any) should be restricted only to the international transaction of the Assessee pertaining to purchase of raw materials from its AEs and other related transactions. The DRP did not accept this contention of the Assessee despite various decisions of this Hon’ble Tribunal in support of the Assessee. The Assessee submits that the mandate in Chapter X of the Act is only to re- determine the consideration received or given to arrive at income arising from an International Transaction with Associated Enterprises. In respect of transactions with non AEs, Chapter X of the Act has no role to play and therefore to make an adjustment including the non-AE IT(TP)A No.280/Bang/2021 Page 35 of 115 transactions is erroneous and contrary to the provisions of the Act. Reliance in this regard is placed on the findings of this Hon’ble Tribunal in the order passed in the assessee’s own case for the assessment year 2014-15. 51. We notice that the coordinate bench in assessee’s own case has considered the identical issue and held that – 73. In this regard, we find that identical issue has been decided by the Tribunal in the case of Ika India Pvt. Ltd., (supra) and the Tribunal held as follows: “44. Section 92(1) of the Act provides as under:- "Any income arising from an international transaction shall be computed having regard to the arm's length price". 45. Section 92B defines the term "international transaction" to mean "a transaction between two or more associated enterprises .....” . 46. A conjoint reading of section 92 with section 92B clearly brings out that computation of income at ALP is permissible only in respect of international transaction, which, in turn, means a transaction between two or more associated enterprises. Similar position has been reiterated in the machinery provision contained in section 92C dealing with the manner of computation of ALP. Sub- section (1) of section 92C stipulates that:- "The arm's length price in relation to an international transaction shall be determined by any of the following methods ............. ". 47. It is the plea of the assessee that addition by way of transfer pricing adjustment is mandated only in respect of IT(TP)A No.280/Bang/2021 Page 36 of 115 transactions between two or more AEs. The profit from comparable transactions of the assessee with non-AEs is one of the subtle and most reliable modes for determining ALP of the international transactions. The Act does not contemplate an addition by way of TP adjustment in respect of transaction with non-AEs. 48. The TPO determined addition to total income, consequent to determination of ALP only in relation to international transaction i.e., transactions with AE in the export of finished goods segment by considering the value of international transaction at Rs.3,31,50,982 which is the value of export of finished goods by the assessee to its AE and not on the total sales in the finished goods segment of Rs.39,19,74,355 (vide para 8.3 of the TPO’s order). 49. The Hon'ble Bombay High Court in the case of Phoenix Mecano (India) Private Limited [ITA No. 1182 of 2014], had to deal with the following question of law suggested by the revenue:- Whether on the facts and in the circumstances of the case, the Hon'ble Tribunal was correct in directing the AO to restrict the determination of the ALP to transactions with the AE rather than on the entire turnover of the Company. Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was correct while issuing the above directions without appreciating the observations of the DRP that there was no segmental audit of the transactions of AE and non AE and therefore there was no method whereby the AO could come to a fair determination of ALP by only restricting to transactions with AE." 50. The Hon’ble Bombay High Court on the above questions of law held as follows:- IT(TP)A No.280/Bang/2021 Page 37 of 115 “5. With the assistance of the learned counsel for respective parties, we have considered the submissions and the judgment of the Tribunal. The Tribunal in para 7 of its order has observed as under:- "7. We have heard both the parties and their contention have carefully been considered. So far it relates to grievance of the assessee that the TP adjustment can only be applied to international transactions of the assessee with the AE and it cannot be applied at entity level, the issue is found to be covered by the aforementioned decision of the Tribunal in the case of Thyssen Krupp Industries India Pvt. Ltd. (supra). Therefore, we hold that determination of arms length price should be restricted only to international transaction of the assessee with its AE. It was pointed out that the figures are available with the AO, details of which has also been filed before us at page 170 of the paperbook. Therefore, we direct the AO to take only the international transactions of the assessee with its AE for the purpose of determining arms length price. We direct accordingly." 6. The Tribunal has held that the figures are available with the Assessing Officer, the details of which has also been filed with the Tribunal at page 170 of the paperbook. It would be clear that the details of the international transaction are specifically made available and therefore the apprehension of the department as such is misplaced. ........ 6. Considering the provisions of Section 92 of the Income Tax Act, so also the reasoning adopted by the Tribunal suggesting that separate figures of international transaction are available, so also the order referred above. No substantial question of law arises for consideration. As such the appeal is dismissed with no costs." (Emphasis supplied) 51. The Hon'ble Mumbai Tribunal in the case of Thyssen Krupp Industries India Pvt. Ltd. [ITA No. 7032/Mum/2011] held that IT(TP)A No.280/Bang/2021 Page 38 of 115 the ALP can only be determined on the value of international transaction alone and not on the entire turnover of the assessee at entity level. This decision was further upheld by the Hon'ble Bombay High Court in the case of Thyssen Krupp Industries India Pvt. Ltd. [ITA No. 2201 of 2013], which held as below:- "2. .............. (a) Whether on facts and the circumstances of the case and law, the Tribunal was justified in law in restricting the Transfer Pricing (TP) adjustment only to the transaction between the Associated Enterprises (AEs.)? 3. ........... ........... (e) We find that in terms of Chapter X of the Act, redetermination of the consideration is to be done only with regard to income arising from International Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered to with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act. 5. In the above view, as the provisions of the Act in respect of transfer pricing are self evidence, Question No.(a) as proposed does not give rise to any substantial question of law. Thus not entertained.” The ITAT Bangalore in the case of Kirloskar Toyota Textile Machinery Pvt. Ltd. v. ACIT [IT(TP)A No.1401/Bang/2010 held as under:- IT(TP)A No.280/Bang/2021 Page 39 of 115 “Taking into consideration of these factors, we accept the first fold of submission made by the learned counsel for the assessee and direct the Assessing Officer to confine the adjustment, qua the purchases made by the assessee from the AE. To be more specific, the adjustment is to be made only to the purchases made from the AE ..... (emphasis supplied) The CIT(A) in exercise of his powers of enhancement of income took the view that the ALP has to be determined on the basis of the entire sales in the finished goods segment including transactions with Non-AE also. The reasoning adopted by the CIT(A) for doing so was as follows:- “10.0 While examining the working of ALP in the case of Assessee, it was observed that the TPO has reduced the adjustment proportionately by holding that only 8.46% of revenue of the Assessee is from AE. She accordingly adopted 8.46% of the operating revenue and 8.46% of the Operating cost for purpose of the determination of ALP. However, this method is not the correct approach as the ALP determination should have been based on the entire operating revenue and entire operating cost. Since this change in method would have amounted to enhancement of the income of the Assessee, so opportunity of being heard was given to the Assessee vide order sheet entry dated 11.08.2017, as to why the proportionate reduction done by the TPO should not be disregarded. The Assessee sought time to file written submissions and the same was allowed. The Assessee filed written submissions vide letter dt 29.08.2017. The same have duly been considered and the issue is being decided as follows: 10.1 In the case under consideration, the Assessee is selling its product to AE as well as to non AEs, for the manufacture of which, part purchases are from AEs and remaining from the non AEs. The TPO has considered OP/OR for purpose of computation of the ALP as the quantum of sales to AE are lesser than the purchase from AE IT(TP)A No.280/Bang/2021 Page 40 of 115 and thus lesser controlled. When a product is sold, only overall profit margin is recorded without any data as to what would be the profit in relation to purchases from AE. So this cannot be presumed that the profit percentage earned in relation to costs related to AE transactions as well as non-AE transactions was same. Since costs are common to the products ultimately sold by the Assessee, and the same includes AE transactions, so it is always possible that the margin of profit percentage vis-a-vis costs related to AE transaction is not the same as profit margin on costs related to non-AE transactions but ultimately overall certain profits are being shown. Further, the transactions with non-AEs can be presumed to be at arm's length as there is no reason to earn lesser profit. But in case of transactions with AEs, there is always a likelihood of earning lesser profits as transactions are controlled and decisions are influenced by AE. Thus the overall profits on account of transactions with AE as well as non-AE gets suppressed.” 51. We have heard the rival submissions. The ld. counsel for the assessee reiterated submissions made before the CIT(A) that transaction with non- AE cannot be subject matter of determination of ALP because section 92 clearly speaks of determination of ALP only in respect of transactions with AE. He also referred to certain decisions of the Tribunal for the proposition that section 92 of the Act is not applicable to non-AE transactions. These decisions have already been extracted in the earlier paragraphs. The ld. DR relied on the order of the CIT(Appeals). 52. We have considered the rival submissions. The reasoning of the CIT(A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw materials used in manufacture of finished goods are also sourced from AE and there is a possibility of the cost of such component having been bargained at a price which is not at arm’s length. This presumption of the CIT(Appeals) is without any basis. He has not demonstrated with actual figures as to how there IT(TP)A No.280/Bang/2021 Page 41 of 115 would be impact on profit margin on sale of finished products to AE because of purchases of some components from AE. He has given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from its AE is at arm’s length. Therefore, the basis on which the CIT(A) proceeded to apply the ALP test for transactions with non-AE is neither correct on facts nor permissible in law. As rightly contended by the assessee, section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. 53. In view of the above transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee.” 74. The facts and circumstances of the case in this appeal on this issue is identical to the case decided by the Tribunal in the case of IKA (supra). The reasoning of the CIT(A) in this case and the case of IKA (supra) are also identical. Therefore the decision rendered in the case of IKA (supra) squarely applies to the present case. Therefore, the adjustment on account of determination of ALP has to be restricted only to that part of the transaction with AE and not the entire value of the manufacturing segment as was done by the revenue authorities. 52. Respectfully following the above decision we direct the AO/TPO to restrict the adjustment on account of determination of ALP only to that part of the transaction with AE and not the entire value of the manufacturing segment. It is ordered accordingly. GROUND Nos. 19 to 21: Payment of royalty fee 53. The TPO noticed from 3CEB report that the assessee has reported a payment of Rs.29,14,50,952 as royalty towards leveraging IT(TP)A No.280/Bang/2021 Page 42 of 115 on the extensive research base developed by the Continental Group over the years (hereinafter referred to as “Basic R&D”). The TPO also noticed that the assessee has also paid a sum of Rs.84,13,51,663 towards technical know-how. The TPO arrived at the ALP of the payment of royalty as NIL by holding that – “24.3 Conclusion Though the payments towards technical knowhow and royalty are made separately they ultimately are towards for the use of production R&D carried out by the AE and are duplicative in nature. The payment is apportioned by different cost centers of the affiliate on an agreed percentage basis and not linked to the extent or type of services, if any, actually rendered by the individual unit. Despite the high-sounding words used no specific tangible service is identified or its Arm's Length Price determined and could not substantiated for the basis of quantification of the amount of payment. The payment made by Continental India apparently looks like a tribute payable by a subsidiary to its holding company. It is not relatable to any specific tangible service rendered by the holding company to the subsidiary and hence the undersigned treats the entire payment toward royalty paid to the AE by the Taxpayer as NIL under CUP method as no other third party would have paid such a sum form any other third party without actually receiving any tangible services, without any basis of quantification and without any proof for the receipt of the services. In view of the above, the entire payment of Royalty Fee of Rs. 29, 14, 50,952 is treated as an adjustment U/s 92CA.” 54. Before the DRP the assessee submitted that the payment of Royalty is integral part of manufacturing activity and accordingly there should not be any separate adjustment. The assessee also submitted that the DRP in assessee’s own case for AY 2012-13 has deleted the IT(TP)A No.280/Bang/2021 Page 43 of 115 adjustment made towards payment of royalty. The DRP did not accept the submissions of the assessee and held that the assessee has not substantiated of receipt of actual services received and that the payments made are commensurate with the services. The DRP also held that the CUP is the most appropriate method and accordingly upheld the TP adjustment made towards payment of royalty. 55. Before us the ld AR submitted that – Basic R&D refers to the generic research and development performed for the use of all companies in the Continental Group. It may comprise of research into future concepts, or developments of devices for automotive purposes, which are still to be marketed with customers etc. The benefits made available include the following: - Development results such as designs, layouts, formulas, improvements, discoveries and software; - Technical drawings and specifications which can mean any oral or written information for instance, drawings, illustrative materials, cards, films specifications or any other technical description including quality and test specification and other know how data; - Trade secrets - Access to standard practices i.e. standard procedures, methodologies, best practices, knowledge updates, etc. relating to manufacturing process of a product, application of a technology, testing of a product/component(s), etc; - Validation of project matrices and feasibility analysis for various projects, by global team; - Access to various tools, platforms. The technical know-how received from the AEs helped in running the manufacturing facility of the Assessee. Had the technical know-how from the AEs not been available, the Assessee would not have been able IT(TP)A No.280/Bang/2021 Page 44 of 115 to function, and the basic R&D is an inevitable pre requisite for the Assessee to run its manufacturing operations. The key benefits to the Assessee by centralized services provided by AE include, but are not limited to: • Access to high quality research data and technology at reasonable cost which was unlikely to be obtained by Continental India from a third party. The Continental Group spends considerable sum towards research and development activities. Continental India had an opportunity to leverage on the research data at a very affordable cost and to ensure high quality standards of the manufactured products which have in turn led to an increase in the manufacturing sales over the years. • Access to patented intangibles of the Continental Group including Development results such as designs, formulas, improvements, discoveries and software, technical drawings and specifications which can mean any oral or written information for instance, drawings, illustrative materials, cards, films specifications or any other technical description including quality and test specifications and other know-how data, Trade secrets. etc. • The technical assistance provided by the Continental Group helps in avoiding a disruption in the production process by breakdown of machinery/equipment as these help the machines to function smoothly and seamlessly. The Assessee does not undertake any research activity on its own and relies on the R&D activity performed by the Continental Group for undertaking its manufacturing operations. The Basic R&D is therefore, the essence or the heart of the manufacturing process undertaken by the Assessee and as such the business of the Assessee cannot survive in absence of the same. In fact the growth of the manufacturing sales year on year as tabulated below demonstrates the importance of the know how received: IT(TP)A No.280/Bang/2021 Page 45 of 115 Financial year 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 Manufactu- ring sales 398.85 1354.45 2145.30 3615.15 4831.06 5728.32 5177.10 6362.67 7729.17 The detailed reasons and documentary evidences submitted by the Assessee demonstrate that the above mentioned services were necessary, actually received, and benefited the Assessee. The evidences produced are placed at pages 777-968 of the paper book and include the royalty agreement, technical drawings received, manual provided, documents showing the receipt of the IPs and usage thereof in the manufacturing process, emails, etc. It is submitted that the above details and documents furnished by the Assessee demonstrate the need for the services, the actual receipt and the benefits arising there from. It is submitted that the royalty being integral to the manufacturing process and being intrinsically linked to it, ought to be benchmarked in an aggregate manner. The TPO’s action of treating the same as an independent international transaction is erroneous. Reliance in this regard is placed on the following decisions: A. Avery Dennison (India) (P.) Ltd. v. ACIT (reported in [2016] 65 taxmann.com 188 (Delhi - Trib.)), at para 30 which was affirmed by the Hon’ble High Court of Delhi in ITA No. 386/2016 vide order dated 28.07.2016, at para 3; and B. Cummins India Ltd. v. ACIT (reported in [2015] 53 taxmann.com 53 (Pune - Trib.) at paras 24-26. In view of the above, the action of the TPO in segregating the transaction is wholly erroneous. In any event, the action of the TPO in treating the ALP at Nil in an adhoc manner, without following the procedure prescribed under rule 10D of the Income-tax Rules, 1962 (“the Rules”) is wholly without jurisdiction. Reliance in this regard is placed on the decisions of CIT v. Lever India Exports Ltd. (reported in IT(TP)A No.280/Bang/2021 Page 46 of 115 [2017] 78 taxmann.com 88 (Bombay) at para 7); and Knorr Bremse India P. Ltd v. ACIT (reported in [2016] 77 taxmann.com 101 (Del- Trib) – para 18). Therefore, the adjustment is liable to be deleted.” 56. We heard both the parties and perused the material on record. We notice that The TPO determined an adjustment in respect of the payment of royalty by holding that (i) the Assessee had not demonstrated receipt of the services, or benefit there from; and (ii) the services are duplicative in nature. We also notice that the assessee has placed the relevant documents in terms of agreement etc., in this connection before the lower authorities and that the same have not been examined. We also see merit in the argument of the ld AR that the AO and the DRP, while making an adjustment on the corporate tax front, have categorically held that the Assessee has received the services having enduring benefit thereby disallowing the same expenses u/s.37 also and therefore revenue cannot take a different stand for TP adjustment. We further notice that the TPO has arrived at the ALP as NIL without doing any bench marking merely based on the ground that the assessee has not substantiated having received the services without examining the documents submitted. In view of this we remit the issue back to the TPO for fresh examination of various evidences submitted by the assessee and decide the issue in accordance with law. SWD SERVICES SEGMENT IT(TP)A No.280/Bang/2021 Page 47 of 115 57. The assessee chose TNMM as the most appropriate method in the TP study for SWD services segment. Operating Profit by Operating Cost is the profit level indicator. Accordingly the operating margin of the assessee in this segment is arrived at as below – Operating Income Rs. 324,61,10,000/- Operating Cost Rs.306,79,90,000/- Operating Profit (Op. Income – Op. Cost) Rs.17,81,20,000/- Operating/Net mark-up (OP/OC) 5.81% 58. The assessee chose the following comparables in the TP study – Sl. No. Name of the company Weighted Average OP/OC margin (in %) 1. CG Vak Software and Exports Ltd. 9.01 2. Otco International Ltd. 15.00 3. RS Software (India) Ltd. 20.26 4. Sasken Communication Technologies Ltd. 5.97 5. TVS Infotech Ltd. 3.18 6. R Systems International Ltd. 25.51 7. Tata Elxsi Ltd. 11.17 8. Akshay Technologies Ltd. 0.00 9. Evoke Technologies Ltd. 5.49 10. Kals Information Systems Ltd. 7.05 11. Maveric Systems Ltd. -2.49 12. Isummation Technologies Pvt. Ltd. 3.16 13. Rheal Software Pvt. Ltd. 2.79 IT(TP)A No.280/Bang/2021 Page 48 of 115 59. Accordingly the assessee concluded that the margins of the assessee in the SWD services segment is within arm’s length. Out of the above, the TPO accepted only 3 comparables highlighted and rejected the rest of the 10 comparables. The TPO used revised filters to chose new comparables and the final list of comparables as per TPO is as given below – Sl. No. Name of the Company Weighted Average OP/OC % 1. Kals Information Systems Pvt. Ltd. 8.60% 2. Rheal Software Pvt. Ltd. 14.50% 3. Sybrant Technologies Pvt. Ltd. 14.74% 4. Harbinger Systems Pvt. Ltd. 15.06% 5. CG-VAK Software & Exports Ltd. 18.50% 6. R S Software (India) Ltd. 20.87% 7. Larsen & Toubro Infotech Ltd. 24.83% 8. Nihilent Technologies Ltd. 26.36% 9. Inteq Software Pvt. Ltd. 28.20% 10. Persistent Systems Ltd. 30.89% 11. Infobeans Technologies Ltd. 32.42% 12. Thirdware Solution Ltd. 36.90% 13. Infosys Ltd. 38.61% 14. Aspire Systems (India) Pvt. Ltd. 39.28% 15. Cybage Software Pvt. Ltd. 66.45% 35 th Percentile 20.87% Median 26.36% 65 th Percentile 30.89% IT(TP)A No.280/Bang/2021 Page 49 of 115 60. The TPO therefore computed the TP adjustment in SWD services segment as per below workings – Taxpayers operating revenue Rs. 3,246.11 million Taxpayer operating cost Rs. 3,067.99 million Taxpayers operating profit Rs. 178.12 million Taxpayers PLI 5.81% 35 th Percentile Margin of comparables set 20.87% Adjustment required (if PLI<35 th Percentile) Yes Median margin of comparable set 26.36% Arm’s length price Rs. 3,876.71million Price received Rs. 3,246.11 million Shortfall being adjustment u/s. 92CA Rs. 630.6 million 61. The DRP rejected all the contentions of the Assessee and upheld the TP order. The AO passed the final assessment order in line with the directions of the DRP in which the TP adjustment of Rs. 63,06,00,000/- was sustained and the assessee is in appeal against the same. 62. The grounds in the appeal which are being pressed are as follows: (i) That the lower authorities erred in including Rheal Software Pvt. Ltd., Inteq Software Pvt. Ltd., Larsen & Toubro Infotech Ltd., Nihilent Ltd, Persistent Systems Ltd., Infobeans Technologies Ltd., Aspire Systems (India) Pvt. Ltd., Infosys Ltd., Cybage Software Pvt. Ltd., and Thirdware Solution Ltd. (Ground No. 28). IT(TP)A No.280/Bang/2021 Page 50 of 115 (ii) That the lower authorities erred in not directing inclusion of Maveric Systems Ltd., Akshay Software Technologies Ltd., Sasken Communication Technologies Ltd., Ace Software Exports Ltd., Minvesta Infotech Ltd., Evoke Technologies Ltd., Agilysis IT Services India Pvt. Ltd., Sagarsoft India Ltd., Isummation Technologies Pvt. Ltd. DCIS Dot Com Solutions Pvt. Ltd., Batchmaster Software Pvt. Ltd. (Ground No. 29). (iii) That the lower authorities erred incomputing the margin of Harbinger Systems Pvt. Ltd. Thirdware Solutions Ltd. and CG Vak Software and Exports Ltd. (iv) That the DRP erred in not granting WC Adjustment (Ground No. 33). 63. Ground No 22 to 27 are not pressed by the ld AR during the course of hearing and accordingly dismissed as not pressed. 64. With regard to the exclusion of sought by the assessee through ground no.28, the ld AR made the following submissions – Rheal Software Pvt. Ltd.: Functionally dissimilar: The Assessee submits that Rheal is engaged in custom software development and maintenance which is unlike the IT support operations of the Assessee.Though it is mentioned in the annual report that the company is earning its 100% revenuefrom software related services, such services are in the nature of custom applicationdevelopment, application development, mobile development, sharepoint development, cloudmigration, database optimization and legacy app migrations.It is observed that Rheal is engaged in the business of databasesolutions, custom application development, web enabling legacy applications which fallunder the classification of KPO services, which are not comparable to the services of the Assessee. IT(TP)A No.280/Bang/2021 Page 51 of 115 Submissions in this regard are placed at pages 310-316 of the appeal set. Inteq Software Pvt. Ltd. Functionally different: It is submitted that the company is engaged in outsourced product development for small, medium corporation and emerging technology businesses. The company undertakes all the process of product development life cycles, which is a high end product development, which is incomparable to the SWD services rendered by the Assessee. As per the website of the company, the company renders data warehousing services, consulting services, EI and EDI services, testing services healthcare BPO services, and in respect of the diverse services, no segmental details are available. Further these services are in the nature of ITE services and thus not comparable to the services of the Assessee. Significant related party transactions: The company’s related party transactions (sales) for the FY 2013- 14 stand at 79.49% of sales, and therefore the company ought to be excluded. Wide fluctuation in the margin: It is submitted that the company’s margin fluctuate widely, suggesting that there exists a peculiar economic circumstance. For the FY 2013-14, the company’s margin stood at 47.21%, for the FY 2014-15 32.14% and for the FY 2015-16 7.56%. Submissions in this regard are placed at pages 316-325 of the appeal set. In view of the above, it is submitted that Inteq ought to be excluded from the final list of comparables. Larsen & Toubro Infotech Ltd. (‘L&T’) Functionally different: IT(TP)A No.280/Bang/2021 Page 52 of 115 It is submitted that the company is engaged in diversified business which are not comparable to that of the Assessee. Further, segmental details as regards the same are not available. Further, the company owns proprietary software products which are developed in-house. Accordingly, it is submitted that L&T is a product company and is thus not comparable to captive SWD service providers such as the Assessee. Significant brand value and intangible assets: The company is a market leader and thus enjoys significant benefits on account of high brand value, ownership of marketing intangibles, intellectual property rights and business rights. As a result of high brand value, the company enjoys a high bargaining power in the market. The company also undertakes R&D activities. Significant expenses in foreign currency: The company incurred significant overseas cost and office expenses of 46.90%, 47.92% and 47.01% of its total expenditure during the FYs 2013-14, 2014-15 and 2015-16, respectively, 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. Peculiar economic circumstances: The company suffers from peculiar economic circumstance during the FYs 2013-14, 2014-15 and 2015-16. During the FY 2015-16, pursuant to the amalgamation of GDA Technologies Ltd., and Information Systems Resource Centre Pvt. Ltd. into the company, the entire business, assets, liabilities, duties and obligations stood vested in the company. During the FY 2014-15, the company had acquired Information Systems Resource Centre Pvt. Ltd., which was completed during the FY 2015-16. During the FY 2013-14, the company transferred its Product Engineering IT(TP)A No.280/Bang/2021 Page 53 of 115 Services business to L&T Technology Services Ltd. and wound up its subsidiary GDA Technologies Inc. Detailed submissions are placed at pages 327-335 of the appeal set. Thus, the Assessee submits that L&T ought to be excluded from the final list of comparables. Nihilent Ltd. (‘Nihilent’) Functionally different: It is submitted that the company is engaged in diversified activities. Nihilent 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 services rendered by the company are wide in range and diversified. It is 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 company undertakes R&D activities. Significant marketing expenses: The company has incurred marketing expenses of 2.11% (of total sales) during the FY 2013-14, 1.65% during the FY 2014-15 and 0.69% during the FY 2015-16. On the contrary the Assessee’s marketing expenses are marginal (0.13%) Significant expenses in foreign currency: The 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. IT(TP)A No.280/Bang/2021 Page 54 of 115 Hence, it operates on a business model different from that of the Assessee and is thus incomparable to it. Peculiar economic circumstances: It is submitted that during the FY 2015-16, Nihilent had acquired GNet Group LLC - a business intelligence and analytical company, and Intellect Bizware Services Pvt. Ltd. specialising in ERP and enterprise innovation. The acquisitions are bound to have a significant impact on the financials of the company, and thus it cannot be considered for the comparability analysis. Detailed submissions are placed at pages 337-344 of the appeal set. In view of the above, it is submitted that Nihilent ought to be excluded from the final list of comparables. Persistent Systems Ltd. (‘Persistent’) Functionally different: It is submitted that the company is engaged in licensing and sale of products and also earns royalty income. The company is engaged in development of proprietary software products under ‘Accelerite’, ‘Penlist’, ‘PSEnsure’ and ‘PSEnquire’ brands. However, segmental details as regards its diverse services are unavailable. Even going by the company’s reply to the TPO’s notice under Section 133(6) of the Act, the company is predominantly engaged in the business of providing outsourced product development services, which are vastly different from the services rendered by the Assessee. Further, it is submitted that the company undertakes significant R&D activities and has established ‘Persistent Labs’ to focus on R&D activities. Significant intangibles: IT(TP)A No.280/Bang/2021 Page 55 of 115 The company also owns significant intangibles of 5.99%, 6.42% and 5.01% of net block of assets during the FYs 2013-14, 2014- 15 and 2015-16, respectively. Significant foreign currency expenses: The company has also incurred significant expenses in foreign currency, demonstrating that it renders significant onsite services, which business model is different from that of the Assessee’s. The expenses incurred by the company as a percentage of its total sales is 13.41%, 15.03% and 18.40% for the Fys 2013-14, 2014- 15, and 2015-16, respectively. Significant related party transactions: The RPT sales of the company as a percentage of total sales stand at 19.48% for the FY 2014-15 and 17.29% for the FY 2015-16. Further the RPT expenses as a percentage of operating expenses stand at 15.46% for the FY 2014-15 and 19.07% for the FY 2015-16. Marketing expenses: The company has incurred significant amounts of marketing expenses in the nature of advertisement and sponsorship fees, as opposed to the Assessee which incurred marginal expenses. Peculiar economic circumstances: The company suffers from peculiar economic circumstances in as much as during the FY 2015-16, the company has acquired the assets of Aepona IoT platform from Intel and the CloudPlatform assets from Citrix. As a part of the acquisition, the company acquired development centres in Belfast, UK and Srilanka. This acquisition is bound to have an effect on the margin of the company, in respect of which no reasonably accurate adjustments can be made to eliminate the material effects thereof. Detailed submissions are placed at pages 345-353 of the appeal). Therefore, it is submitted that this company ought to be excluded from the final list of comparables. IT(TP)A No.280/Bang/2021 Page 56 of 115 Infobeans Technologies Ltd. (‘Infobeans’) Functionally different: The company is engaged in providing software engineering services primarily in Custom application development, Content Management Systems, Enterprise Mobility, big data analytics. Though the annual report of the company mentions that the company is earning 100% revenues from sale of software services, such services are in the nature of CAD,CMS etc., which are in the nature of KPO services. The above services rendered by the company are vastly different from the SWD services rendered by the Assessee, and therefore the company ought to be excluded as being functionally different. Further, the segmental details for these diverse services are not available and therefore the company cannot be selected as a comparable. Significant intangible assets: During the FYs 2013-14 to 2015-16, the company owned intangible assets representing around 7% of the total fixed assets held by the company. 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. Abnormal increase in revenue: The revenue increased from Rs. 35 crore (FY 2014-15) to Rs. 62 crore (FY 2015-16) in a period of 1 year (76%). Also, the company’s profitability increased by 147%. Detailed submissions in this regard are placed at pages 355-361 of the appeal set. Thus, it is submitted that Infobeans ought to be excluded from the final list of comparables. Aspire Systems (India) Pvt. Ltd. (‘Aspire’) IT(TP)A No.280/Bang/2021 Page 57 of 115 Functionally different: The company is engaged in diversified business activities of providing integration platform services using its platforms in addition to software development services. It also provides services in the nature of product engineering, enterprise solutions, independent testing services, engineering services, infrastructure & application support services, business intelligence & analytics, etc and is also into IT infrastructure support services, and outsourced technology services. Significant intangible assets: It is submitted that Aspire owns non-routine intangible assets such as trademarks, customer contracts and goodwill which cannot be compared to the Assessee. The company also incurred significant expenses in relation to onsite services of approximately 20 percent of its total revenue. Significant related party transactions: Further, the company fails the RPT filter applied by the TPO. The computation of related party transactions is given below: Nature of the Transaction FY 2013-14 FY 2014-15 FY 2015-16 Rendering of services 223,417,070 298,621,389 544,052,341 Purchase of services 188,253,217 214,308,033 283,206,248 Expenses Reimbursed 9,650,786 26,519,375 25,773,664 Remuneration to KMP 61,447,016 83,854,419 95,990,266 Reimbursemen t of Income 2,224,914 Electricity Charges Paid 9,462,212 Total RPT 482,768,179 623,303,216 960,709,645 Total Sales 1,565,292,158 1,791,127,395 2,308,061,232 RPT to Sales 30.84% 34.80% 41.62% IT(TP)A No.280/Bang/2021 Page 58 of 115 % Source Note.31 of AR Note.31 of AR Pg.195 of AR Peculiar economic circumstance: It is also submitted that the company has entered into amalgamations during the relevant FY. The extra ordinary event of the company will have an impact on its profitability as the revenue of the amalgamated company is now included in the revenue of Aspire. Detailed submissions are placed at pages 363-367 of the appeal set. In view of the above, it is submitted that the Company is functionally not comparable to the Assessee and ought to be excluded from the final list of comparables. Infosys Ltd. (‘Infosys’) Functionally different: The company earns income from both rendering software services and development of products. The company provides end-to-end business solutions like business consulting, technology, engineering and outsourcing services. In addition, the company offers software products and platforms. Despite rendering diverse services, 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. The company owns several Edge products/platforms and six other product based solutions. Also, the company owns non-routine intangibles which are different from the intangibles owned by the Assessee. The company also heavily focuses on research and development activity and incurs significant expenditure for this account. IT(TP)A No.280/Bang/2021 Page 59 of 115 Brand value: The company owns significant brand value and focuses on immense 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 incurred expenses of 77 crores during the FY 2013-14, 94 crores during the FY 2014-15 and 178 crores during the FY 2015-16. The company also incurred significant selling and marketing expenses. The company also incurs significant subcontracting charges, which suggests that the business model of the company is different from that of the Assessee’s. Onsite expenses: The company has significant onsite revenue amounting to 51.10%, 50.40% and 52.70% of the total sales for the FYs 2013- 14, 2014-15, and 2015-16, respectively. Further, owing to the size, stature, reputation and IPs, Infosys earned abnormally high margins for the said years, as represented below: Detailed submissions are placed at pages 369-383 of the appeal set. Therefore, it is submitted that the company ought to be excluded from the final list of comparables. Cybage Software Pvt. Ltd. (‘Cybage’) Functionally different: It is submitted that Cybage is engaged in the provision of diversified services which include product engineering, testing & quality assurance services, specialized services, support services, Particulars FY 2013-14 FY 2014- 15 FY 2015-16 OP/ OC 36.28 41.30 38.22 IT(TP)A No.280/Bang/2021 Page 60 of 115 etc. Further from the website of Cybage, it is evident that it is engaged in product development and has developed a product called ‘excelshore’ apart from providing spectrum of services including ITeS and BPO services. The financials of Cybage do not provide for segmental information in respect of the diverse business functions undertaken by the company. Moreover, the company renders diverse range of marketing services like content marketing, creative production and marketing operations. The company earns significant onsite revenue. Super normal profits: The company is making super normal profits (details of which are as under) and the same is not reflective of the performance of the industry in which the assessee operates. Particulars FY 2013- 14 FY 2014- 15 FY 2015-16 OP/OC 62.82% 68.68% 62.90% Detailed submissions are placed at pages 385-391 of the appeal set. In view of the above, it is submitted that the Cybage ought to be excluded from the final list of comparables. Thirdware Solution Ltd. (‘Thirdware’) Functionally different: The company is engaged in development of software products and earns revenues from sale of user licenses for software applications apart from rendering software development services, implementation services, application management services and other related services. These diverse services are reported under one segment without any details being available as regards these services. The company also purchased stock-in-trade during the year under consideration. The company also owns intangibles. Incurred brand promotion expenses. IT(TP)A No.280/Bang/2021 Page 61 of 115 Significant related party transactions greater than 25% i.e 25.34% for FY 2015-16 Significant expenses in foreign currency of 16.98% of the total sales for the FY 2015-16. Fluctuation in margin: The margins of the company fluctuate on a year-on-year basis due to the different revenue recognition model that the company follows. The company earned super normal profits. Detailed submissions are placed at pages 393-399 of the appeal set. The company was excluded by the TPO in the Assessee’s own case for the assessment year 2013-14. It is further submitted that in the Assessee’s own case for AY 2018-19, the DRP directed exclusion of this company at para no. 2.42. Therefore, it is submitted that the company ought to be excluded from the final list of comparables. 65. With regard to all the above exclusions the ld AR relied on the following decisions (i) Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 235/Bang/2021) (ii) Global Logic India Ltd., reported in (2022) 134 taxmann.com 35. (iii) NTT Data FA Insurance Systems (India) Pvt. Ltd. v. DCIT (order dated 03.10.2022 in IT(TP)A No. 261/Bang/2021) (iv) PCIT v. Saxo India P. Ltd. (2016) 74 taxmann.com 88 (v) ADP Pvt. Ltd. v. DCIT [Order dated 03.02.2022 in ITA Nos. 227&228/Hyd/2021] (vi) Red Hat India Pvt. Ltd. v. NFAC (order dated 25.02.2022 passed in ITA No. 1379/Mum/2021) (vii) PCIT v. Cashedge India Pvt. Ltd. (Order dated 04.05.2016 passed in ITA No. 279/2016) IT(TP)A No.280/Bang/2021 Page 62 of 115 (viii) Infor (India) Pvt. Ltd. v. DCIT (order dated 06.10.2021 passed in IT(TP)A No. 198/HYD/2021). (ix) CIT v. Agnity India Technologies P. Ltd. (reported in (2013) 36 taxmann.com 289 (Delhi)) 66. The ld AR submitted that Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., have been excluded in assessee’s own case for AY 2014-15 by the coordinate bench of the Tribunal. 67. The ld DR relied on the order of the lower authorities. 68. We heard the rival submissions and perused the material on record. We notice that the Delhi Bench of the Tribunal in the case of Global Logic India Ltd (supra) has considered the exclusion of the above companies and held that – COMPARABLE COMPANIES SOUGHTTO BE EXCLUDED BY THE TAXPAYER LARSEN & TOUBRO INFOTECH LTD. (L&T) 14. The taxpayer sought to exclude L&T from the final set of comparables chosen by the ld. TPO for the purpose of benchmarking its international transactions qua SDS on the grounds inter alia that it is functionally dissimilar; that its segmental data is not available; that L&T is a huge brand with ownership of intangibles and on account of extra ordinary event; and on the ground that this company was rejected in taxpayer's own case in Global Logic India Ltd. v. Dy. CIT [2020] 117 taxmann.com 39 (Delhi - Trib.). 15. However, on the other hand, ld. DR for the Revenue opposed the contentions raised by the taxpayer to exclude L&T as a comparable on the grounds inter alia that this comparable was chosen by the taxpayer itself and in case of TNMM applied for benchmarking the international transactions minor dissimilarities are not to be taken into account; that IT(TP)A No.280/Bang/2021 Page 63 of 115 the taxpayer cannot be taken as a captive entity as its spectrum is much more and it is also a global brand having presence in many countries and relied upon the order passed by the ld. TPO/ld. DRP. 16. When we examine profile of L&T from its financials, available at pages 6, 7 & 11 of the paper book, it is into providing application development and maintenance services providing digital solutions such as big data analytics, enterprise computing, cognitive computing, infrastructure management services and enterprise solutions. It has also been awarded and recognized by various forums for providing such niche services in the field of innovation in information technology category, analytics solutions/services etc., explained at page 11 of the paper book. 17. When we examine Notes forming Parts of Accounts at page 116 of the paper book, it is evident that L&T is having two segment accounts, namely, (i) Services Cluster Segment which includes Banking and Financial Services, Insurance, Media & Entertainment, Travel & Logistics and Healthcare, and (ii) Industrial Cluster Segments which consists of Hi Tech and Consumer Electronics, Consumer Retail & Pharma, Energy & Process, Automobile & Aerospace, Plant Equipment & Industrial Machinery, Utilities and E&C. But aforesaid various segments do not indicate profit earned from provisions of SDS. Apart from it, L&T is a huge brand having ownership of significant intangibles to the tune of Rs. 7.42 millions, as is evident from its financials at pages 8 and 103 of the paper book. 18. Coordinate Bench of the Tribunal rejected L&T in taxpayer's own case for AY 2014-15 (supra), available at pages 61 to 63 of the case law paper book, by returning following findings :— "6.6 The next objection of the assessee is regarding multiple segments. From segment reporting on page S-1258 of the Annual Report (page 129 of PB-2), we find that the assessee has reported three business segments. The first segment is service cluster which includes banking, financial services, insurance, media and entertainment, travel and logistics and healthcare. The second segment industry cluster which includes Hi Tech and consumer IT(TP)A No.280/Bang/2021 Page 64 of 115 electronics, consumer, retail and Pharma, energy and process, auto Mobile and aerospace, plant equipment and industrial machinery, utilities and E &C. The third segment, is telecom segment which refers to product engineering services (PES) which has been discontinued in this year. Regarding the PES, in Director's report, (available on page S-1225 of the Annual Report or page 96 of PB- 2), it is reported as under : "TRANSFER OF PRODUCT ENGINEERING SERVICES (PES) BUSINESS TO L&T TECHNOLOGY SERVICES LIMITED (LTTSL) AND WINDING UP OF GDA TECHNOLOGIES INC. (GDA INC.) As part of business restructuring undertaken within L&T Group, it was decided to consolidate the engineering services business under a separate subsidiary of L&T, L&T Technology Services Ltd. (LTTSL). Pursuant to this, the Company initiated and completed transfer of its Product Engineering Services (PES) Business Unit to LTTSL effective January 1, 2014, PES Business Unit was transferred by way of slump sale for total sales consideration of Rs. 489.53 crs based on ITA No. 4740/Del./2018 fair valuation, GDA Technologies Inc., USA (GDA Inc.), a wholly owned subsidiary of the Company was part of PES business with synergy in terms of the end customers they serve, primarily the semiconductor companies. Over last few years, the performance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, certain IPs (Intellectual Properties) owned by GDA Inc. were transferred to LTTSL, the Company was wound up during the year." In view of the above reporting, it is clear that under the telecom segment, the assessee was engaged in providing engineering services, which is distinct from the services of the software development. Thus, at entity level, the company cannot be considered functionally similar to the assessee. The company cannot be considered comparable at the segment level also because of there are expenses of Rs. 205,80,17,445/- ( page 129 of PB-2) , which has IT(TP)A No.280/Bang/2021 Page 65 of 115 not been allocated into three segments, and thus the segmental result are distorted. During the year, the extraordinary event of demerger of product engineering service business (PES) has occurred with effect from 01/01/2014, which has also impacted the profit of the company at the entity level. In the decision of the Tribunal in case of Xchanging Technology Service India Private Limited (ITA No. 1897/Del./2004), which has been approved the Hon'ble High Court in ITA No. 813/2015 , the company is held to be not valid comparable on account of extraordinary events. Thus, In view of the extraordinary event in the year under consideration also, this company is liable to be excluded from the set of the comparable." 19. In taxpayer's own case in Global Logic India (P.) Ltd. v. DCIT [IT Appeal No. 8726 (Delhi) of 2019, dated 29-6-2020] L&T was excluded by the coordinate Bench of the Tribunal by returning following findings:— "20. The Tribunal in assessee's own case in ITA No. 4740/Del/2018 relating to Assessment Year 2014-15 vide order dated 1-5-2020 has directed the exclusion of the said concern from the final list of comparables while benchmarking the ALP of the international transaction by the assessee with its AE. Before parting, we may also refer to an extraordinary event under which Larsen & Toubro Infotech Ltd. initiated and completed transfer of its Product Engineering Services Business (PES) Unit to L&T Technology Services Ltd. w.e.f. January 1, 2014 as part of the business restructuring undertaken within the Larsen & Toubro group. Though the initiation started from 1-1-2014 but the whole effect of the transaction was during the year under consideration. Further, Larsen & Toubro Infotech Ltd. during the year under consideration acquired Information Systems Resource Centre Private limited ("ISRC") thereby making it wholly owned subsidiary and because of such extraordinary event of acquisition, the said concern cannot be held to IT(TP)A No.280/Bang/2021 Page 66 of 115 be a valid comparable and thus has to be excluded from the final set of comparable. Accordingly, we hold so." 20. In view of the facts inter alia that L&T is into various segments having no segmental financials, having huge brand value and intangibles is not a suitable comparable vis-à-vis taxpayer which was working as a captive entity and that contention raised by the ld. DR that under TNMM minor dissimilarities do not affect the overall comparability is not sustainable because though it is a taxpayer's own comparable but there being no estoppel against statute and that taxpayer can rectify its mistake at any stage of the proceedings. Secondly, it is not a case of minor dissimilarities rather it is a case of functional dissimilarity and non-availability of segmental financials to provide the clear picture qua profit earned by the company from provisions of SDS. L&T is a big brand having ownership of huge intangibles which ought to provide competitive advantage to the taxpayer in the form of premium pricing and huge volume of business ultimately leading to the higher profitability. So, we are of the considered view that L&T is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded. THIRDWARE SOLUTION LTD. (THIRDWARE) 40. The taxpayer sought exclusion of Thirdware on the ground that it is functionally dissimilar vis-à-vis the taxpayer. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld. DRP to retain this comparable. 41. Perusal of Notes - Additional Information and Profit & Loss account, available at page 570 of the annual reports paper book, shows that it has income earned from sale of licence and provision of training services also under the head 'software services from local unit', 'export of software services', 'revenue from subscription & training' and 'sale of licence' to the tune of Rs. 2809.62 lakhs, Rs. 19285.11 lakhs, Rs. 32.59 lakhs & Rs. 8.77 lakhs respectively. The taxpayer has also brought on record website of the company, available at pages 71 to 73 of the appeal memo, which shows that Thirdware is having competency in providing IT(TP)A No.280/Bang/2021 Page 67 of 115 services in most advanced and niche area of technologies such as Robotic Process Automation, Big Data Analytics& Cloud Computing. 42. From the profile of Thirdware it has come on record that Thirdware is functionally dissimilar vis-à-vis the taxpayer as it has been deriving income from sale of licence and software services export from SEZ unit and revenue from subscription and training etc. and it is also into sale of licence and its segmental financials are not available. 43. Thirdware has been ordered to be excluded by the coordinate Bench of the Tribunal in case of Fiserve India (P.) Ltd. v. ITO [2015] 60 taxmann.com 48 (Delhi - Trib.) on ground of dissimilarity to routine software development service provider which has been affirmed by Hon'ble Delhi High Court in ITA 17/2016 order dated 6-1-2016. So, we order to exclude Thirdware from the final set of comparables. INFOBEANS TECHNOLOGIES LTD. (INFOBEANS) 44. The taxpayer sought exclusion of Infobeans as a comparable again on ground of functional dissimilarity, it also being into providing services viz. software engineering services primarily in Custom Application Development (CAD), Content Management Systems, Enterprise Mobility, Big Data Analytics, UX & UI, Automation Engineering Services, as is evident from its financials, available on page 123 of the annual report paper book. 45. The taxpayer also brought on record profile of the Infobeans at pages 58 to 60 of the appeal memo wherein it is claimed by the Infobeans that it is providing wide range of services under four verticals i.e. services, automation, enterprise and industries and under the automation services verticals, the company is providing advanced robotic process automation services. Since Infobeans is into diversified activities it cannot be a suitable comparable vis-à- vis the taxpayer which is a routine software development services provider. Infobeans has been excluded as a comparable on account of functional dissimilarity vis-à-vis routine software development service provider by the coordinate Bench of the Tribunal in case of Pub Matic India (P.) Ltd. IT(TP)A No.280/Bang/2021 Page 68 of 115 (supra). So, in view of the matter, we order to exclude Infobeans from the final set of comparables. 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 annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services. 69. 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. 70. We further notice that the Hyderabad bench of the Tribunal in the case of ADP Pvt Ltd.(supra), has considered the issue of exclusion in the case of Persistent Systems Ltd., Aspire Systems (India) Pvt. Ltd., and Infosys Ltd and held that - Persistent Systems Ltd 6.2 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue IT(TP)A No.280/Bang/2021 Page 69 of 115 authorities. The coordinate bench in assessee’s own case in ITA No. 2233/Hyd/2018 for AY 2014-15, directed the AO to exclude this company from the list of comparables for determining ALP by observing as under: “27. As regards Persistent Systems Ltd, the objections of the assessee are as under: a) The Company is functionally not comparable. It is engaged in selling of the following: i. Software products (IP); ii. Platforms (Solutions & Integration); and iii.services (product engineering) b.There are no segmental details between software products and services. 28. In the case of Tata Elxsi, the assessee has taken the following objections: a) It is not functionally comparable to the assessee. In the financial statements of the company, the nature of business carried out by Tata Elxsi is given below: i) Corpoprate Information "Tata Elxsi Ltd was incorporated in 1989. The Company provides product design and engineering services to the consumer electronics, communications and transportation industries and systems integration and support services for enterprise customers. It also provides digital content creation for media and entertainment industry" 29. We find that in the case of Infor (India) (P) Ltd vs. ACIT in ITA No.2307/Hyd/2018, the Coordinate Bench of the Tribunal has considered similar objections of the assessee therein and has held that these two companies along with Thirdware Solutions Ltd is not comparable to the software development company like the assessee before us. The relevant portions has been reproduced by us in the above paras. Respectfully following the same, these two companies are also directed to be excluded from the final list of ITA No 2233 of 2018 ADP Private Ltd Hyderabad comparables. Thus, assessee's ground of appeal No.2 is partly allowed.” 6.3 In the said decision, it has been held that the company is functionally different and engaged in diversified activities and since the revenue could not controvert the said decision nor brought any contrary decision, following the same, we direct the IT(TP)A No.280/Bang/2021 Page 70 of 115 AO/TPO to exclude this company from the final list of comparables. Aspire Systems India Pvt. Ltd 8.2 We have considered the rival submissions and perused the material on record as well as gone through the orders of AO/TPO/DRP. We find that the extraordinary events regarding amalgamation issue was not raised before them and the ld. AR of the assessee has raised this issue for the first time before us, which is placed on record. The ld. AR has also relied on various decisions. Therefore, we remit this issue to the file of the TPO/AO for examining all the factual issues regarding this company raised before us and decide the issue in accordance with law after providing reasonable opportunity of being heard to the assessee. The assessee is directed to provide necessary documents before the AO/TPO to substantiate its claim Infosys Ltd 9.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The coordinate bench in assessee’s own case in ITA No. 2233/Hyd/20189, for AY 2014-15, directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: “25. Having regard to the rival contentions and the material on record, we find that in a number of decisions including the assessee's own case, Infosys Ltd has been held to be not comparable with any other software development company such as the assessee due to its huge turnover and high profit margin and also as it is into software products and owns intangible intellectual property rights. In the case of Agnity India Technologies Ltd, 36 Taxmann.com 289 (Del), the Hon'ble Delhi High Court has held that Infosys Ltd is not comparable to other software development company. Relevant paragraphs are reproduced hereunder: IT(TP)A No.280/Bang/2021 Page 71 of 115 "8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The Tribunal for valid and good reasons has pointed out that Infosys Technologies Ltd. cannot be taken as a comparable in the present case. This leaves L&T Infotech Ltd. which gives us the figure of 11.11 %, which is less than the figure of 17% margin as declared by the respondent- assessee. This is the finding recorded by the Tribunal. The Tribunal in the impugned order has also observed that the assessee had furnished details of workables in respect of 23 companies and the mean of the comparables worked out to 10%, as against the margin of 17% shown by the assessee. Details of these companies are mentioned in para 5 of the impugned order". 26. Respectfully following the same, we direct the exclusion of this company from the final list of comparables.” 9.4 On perusal of the entire financial statements, we observe that the company is functionally not comparable and selling and marketing expenses are 5% of revenue and there were extraordinary events also noted i.e. transfer of product – financial & edge services as well as diversified activities like artificial intelligence, products services, platforms, consulting etc. Also onsite revenue was 52.7% and no segmental details like services, consulting products are available. In view of the above observations, the coordinate bench in assessee’s own case for AY 2014-15 directed to exclude this company as comparable. Respectfully following the said decision, we direct the AO/TPO to exclude this company as comparable from the list of comparables. 71. We also notice that the coordinate bench in the case of ARM Embedded Technologies Pvt. Ltd (supra) has considered the exclusion of Nihilent Ltd., and Cybage Software Pvt. Ltd. and held that – Nihilent Ltd We have perused the submissions of both sides in light of records placed before us. IT(TP)A No.280/Bang/2021 Page 72 of 115 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. 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. Cybage Software Pvt. Ltd 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 to be functionally comparable with that of assessee which is IT(TP)A No.280/Bang/2021 Page 73 of 115 a captive service provider that caters only to its AE 72. The profile of the assessee as per the TP study (page 1459 of PB) is - 5.4 Software engineering and design services segment Services segment may include: • Product conceptualization; • Designing / development; and • know-how, customization, etc. Functional Analysis Continental India has entered into an agreement with its AEs for providing application / specific with regard to development and porting of software, creation of software specification Under the services segment, AEs perform the following functions and assumes the following ewonsibilities • Perform market research for the products. • The basic designs/technical drawings required for the development activity is provided by the AEs. Therefore, the base technology is owned by the AEs; and • Provide other ancillary or related documentation as may reasonably be required and requested by Continental India. Continental India performs the following functions -and assumes the following responsibilities _rter the development agreement executed with its AEs: Perform work with regard to development and porting of software, creation of software specifications and test specifications, performance of integration tests and studies as well as the development of firmware and software under specific request from its AEs; • Perform additional tasks as specified by AEs; - IT(TP)A No.280/Bang/2021 Page 74 of 115 • Provide other ancillary or related services as may reasonably be required and reqiiested by AEs; • To ensure that it has the requisite expertise, infrastructure and personnel to provide the service and to perform its obligations under the contract; and • Provide all necessary-information regarding the products to the associated enterprises in order to allow them to register the products in their territory. 73. In the various decisions above, the companies have been excluded for the reason that they are functionally dissimilar to the function of the respective assessees and for the reason that the segmental details are not available where the comparables are engaged in more than one service. Therefore it is important that the functions of the assessee be compared with that of these companies based on facts. Further the Ld AR submitted that most of these comparables have been excluded by the DRP in assessee’s own case in the subsequent years based on these criteria. In view of this we remit the issue of exclusion of all the companies viz., Rheal Software Pvt. Ltd., Inteq Software Pvt. Ltd., Larsen & Toubro Infotech Ltd., Nihilent Ltd, Persistent Systems Ltd., Infobeans Technologies Ltd., Aspire Systems (India) Pvt. Ltd., Infosys Ltd., Cybage Software Pvt. Ltd., and Thirdware Solution Ltd., back to the AO/TPO to examine the comparability considering the functionality of the assessee and these companies and decide accordingly keeping in mind the ratio laid down by the Tribunal in the decisions quoted above. Needless to say that the assessee be given a reasonable opportunity of being heard. IT(TP)A No.280/Bang/2021 Page 75 of 115 74. Vide ground no.29, the Assessee is seeking inclusion of Maveric Systems Ltd., Akshay Software Technologies Ltd., Sasken Communication Technologies Ltd., Ace Software Exports Ltd., Minvesta Infotech Ltd., Evoke Technologies Ltd., Agilysis IT Services India Pvt. Ltd., Sagarsoft India Ltd., Isummation Technologies Pvt. Ltd. DCIS Dot Com Solutions Pvt. Ltd., Batchmaster Software Pvt. Ltd. in the final list of comparables. 75. Maveric Systems Ltd – The ld AR submitted that this company was selected by the Assessee and came to be rejected by the TPO and the DRP solely on the ground that the company did not feature in the search matrix of the TPO. The ld AR further submitted that the company is functionally comparable and passes all the filters applied by the TPO. The company is engaged in computer programming, consultancy and related services, which are comparable to the services of the Assessee. It is submitted that a company which is comparable to the Assessee cannot be rejected on the only ground that it does not feature in the search matrix of the TPO. The ld AR also submitted that this Hon’ble Tribunal in the Assessee’s case for AY 2014-15, wherein this company was remanded to the TPO for fresh examination. Moreover, the DRP had remanded the company for verification by the TPO in the assessment year 2017-18, post which the company was included in the final list of comparables. Therefore it is submitted that the company ought to be included in the final list of comparables. IT(TP)A No.280/Bang/2021 Page 76 of 115 76. The ld DR submitted that the decision of the DRP for AY 2017- 18 cannot be directly considered as the basis for inclusion of this company. 77. We heard the rival submissions and perused the material on record. We notice that the coordinate bench in assessee’s own case for AY 2014-15 has considered the inclusion of this company and held that – 93. As far as inclusion of Maveric Systems Ltd. are concerned, we find that inclusion of Maveric Systems Ltd. was remanded by the Tribunal to the TPO for consideration afresh in the case of EMC Software & Services India P. Ltd. (supra) with the following observations:- “(iii) Maveric Systems Limited : This comparable was rejected by the TPO and it was sought for inclusion by the assessee and whereas TPO has rejected without any basis and was excluded on the ground that the company was engaged in R & D activity and expenditure is 6% of total turnover. Similarly, the DRP has upheld the exclusion of the company. The learned Authorised Representative submitted that company’s functional profile is comparable and applied the TPO filters. Whereas the DRP has observed that the company has incurred substantial expenses to the tune of 6% of turnover towards R & D and the tolerable limit is 3%. We found the observations of the DRP are without any basis. Accordingly we restore this issue to the file of TPO to give a logical conclusion and findings.” 94. Following the aforesaid decision, we remand the issue of inclusion of this company i.e., Maveric Systems Ltd. to the TPO for fresh consideration on the lines directed in the order of the Tribunal referred to above. 78. For the year under consideration, the reason for exclusion as stated by the DRP is that the company does not feature in the search IT(TP)A No.280/Bang/2021 Page 77 of 115 matrix of the TPO, whereas the contention of the ld AR is that the company satisfies all filter. We therefore respectfully following the decision of the coordinate bench in assessee’s own case remit the issue of inclusion of this company to TPO for fresh consideration. 79. Akshay Software Technologies Ltd. - As regards Akshay the TPO rejected this company on the ground that it is functionally different from the Assessee. The DRP upheld its rejection on the ground that the company did not feature in the search matrix of the TPO which is incorrect. 80. In this regard, the ld AR submitted that a perusal of the functions of the company listed in its annual report shows that the company is functionally similar to the Assessee. The website of the company states that the company is engaged in rendering IT services, which are in the nature of SWD. Further, it is submitted that the income from SWD services is 96.5% of total sales and the income from sale of software licenses constitutes a meagre 3.4% of the total revenue and therefore the same would not have any impact on the profitability of the company. The ld AR further submitted that the company passes all the filters applied by the TPO. Reliance in this regard is placed on the decision of this Hon’ble Tribunal in the Assessee’s own case for the AY 2014-15, where in the company came to be remanded. IT(TP)A No.280/Bang/2021 Page 78 of 115 81. We heard the parties and perused the materials on record. We notice that the coordinate bench in assessee’s own case for AY 2014- 15 has considered the inclusion of this company and held that – 90. As far as inclusion of Akshay Software Technologies Ltd. is concerned, it was selected by the assessee as a comparable company in its TP study, but was rejected by the TPO for the reason that this company was engaged in providing professional services, procurement, installation, implementation, support & maintenance of ERP products and services and incurrent significant foreign branch expenses indicating a different operating model from that of assessee. It is the plea of assessee that assessee’s function is comparable with this company and that the TPO had chosen companies with significant foreign branch expenses as comparable companies. The ld. counsel for the assessee brought to our notice a decision of ITAT Bangalore in the case of EMC Software & Services India P. Ltd. v. JCIT in IT(TP)A No.3375/Bang/2018, order dated 18.12.2019 for AY 2014-15, wherein in the comparability of this company was remanded to the TPO for consideration afresh. The ld. DR relied on the order of the DRP. 91.After considering the rival submissions, we find that comparability of this company was remanded to the TPO for consideration afresh in the case cited by the ld. counsel for the assessee. Following were the relevant observations of the Tribunal:- “(i) Akshay Software Ltd. which has a margin of 8.13%. The income from commission on sale of software license constitute meager 0.5% of total revenue and TPO has not applied transfer development filter. The said company was rejected by the TPO for the reason that the company is engaged in providing provisional services, procurement installation, employment support of ERP products. The DRP has rejected the comparable without applying the filter and there is no difference in the business model adopted by the company and the assessee. We on perusal of the Annual Report at Page 1373 of Paper Book, found that major revenues are IT(TP)A No.280/Bang/2021 Page 79 of 115 from operations as per Note 19 being income from software services and commission received on sale of software licenses. The earnings as per Note 28 as per the financial statements, the company has earning from export of software and in the F.Y. 2013- 14 which constitute more than 95% of income. Therefore we found these facts are not considered by the TPO or DRP and accordingly we restore this issue to the file of TPO for examination and verification.” 92.We are of the view that the issue of comparability of Akshay Software Ltd. should be examined afresh by the TPO as per the directions of the Tribunal in the order referred to above. We hold and direct accordingly. 82. Respectfully following the above decision of the coordinate bench we remit the issue of inclusion of Akshay back to the TPO for examination afresh after giving a reasonable opportunity of being heard to the assessee. 83. Sasken Communication Technologies Ltd. As regards Sasken, the company was rejected by the TPO and the DRP on the ground that the company did not feature in the search matrix of the TPO. 84. The ld AR submitted that the Assessee has re-run the search (using same keywords applied by the learned TPO) and thereby identified Sasken as comparable company and submitted the Annual Report for the TPO’s consideration. Further, it is submitted that the company is functionally comparable to the Assessee and passes all the filters applied by the TPO. Submissions in this regard are placed at pages 414-417 of the appeal set. It is further submitted that in the IT(TP)A No.280/Bang/2021 Page 80 of 115 Assessee’s own case for AY 2018-19, pursuant to a remand by the DRP, the TPO included the company in the final list of comparables. 85. We heard the ld DR. We notice that the coordinate bench in assessee’s own case while considering the inclusion of Sasken as a comparable has held that – 97.As far as exclusion of Sasken Communication Technologies Ltd. (“Sasken”) We find that this company was selected by the Assessee and came to be rejected by the TPO for the reason that the company is functionally not comparable to the Assessee. The exclusion of the company came to be upheld by the DRP on the grounds that (i) the company fails export turnover filter; (ii) the company earns revenue from licensing, SWD and royalty; and (iii) the company offers R&D consultancy, wireless and software products. In this regard, it was submitted that the company is functionally similar to the Assessee as the services rendered by the company predominantly are in the nature of SWD services. The services rendered by the company predominantly fall within the ambit of SWD services as per the Safe Harbour rules prescribed by the CBDT and therefore the company is comparable to the Assessee. The income from software products constitutes a meagre 4.2% of total revenue, which would not have any impact on the profitability of the company’s SWD services segment. It was contended that the DRP erred in upholding the exclusion of the company on altogether different grounds than what was held by the TPO, without first putting the Assessee on notice of the same. Without prejudice, it is submitted that the DRP erred in taking into account only the revenues earned from services rendered to customers in North America, Europe and Asia Pacific region while determining whether the company passes the export revenue filter applied by the TPO. It was submitted that if the entire foreign exchange earned by the company during the year is taken into consideration, it would pass the export revenue filter applied by the TPO. It was submitted that Sasken has incurred research IT(TP)A No.280/Bang/2021 Page 81 of 115 and development expenditure only to the tune of 0.50 percent of the software services revenue amounting to INR 35,083.49 lakhs. Therefore, it was submitted that the company ought to be included in the final list of comparables. We have considered the submissions and are of the view that it would be appropriate to remit the issue and direct the TPO/AO to consider the claim in this regard afresh as the DRP has drawn conclusions, without opportunity to the Assessee. 86. Respectfully following the above decision of the coordinate bench we remit the issue of inclusion of Sasken back to the TPO for examination afresh after giving a reasonable opportunity of being heard to the assessee. 87. Ace Software Exports Ltd - This company was rejected by the TPO in the TP order on the ground that it fails the service revenue filter. The DRP upheld its rejection on the ground that it is functionally dissimilar. 88. In this regard, the ld AR submitted that the company is engaged in computer programming, consultancy and related activities which are IT services comparable to the services of the Assessee. Therefore the DRP’s findings are erroneous. Moreover, the company passes the service revenue filter applied by the TPO. Submissions in this regard are placed at pages 424-427 of the appeal set. It is further submissions that in the Assessee’s own case for AY 2018-19, the DRP directed inclusion of this company at para no. 2.55. Hence, considering no change in facts in terms functional profile of Ace Software Exports Ltd IT(TP)A No.280/Bang/2021 Page 82 of 115 from the current year to AY 2018-19, the said comparable company should be accepted. 89. We heard the rival submissions. We notice that for AY 2018-19, in assessee’s own case the DRP has given a direction to TPO (page 4980 & 4982) to include this company on the ground that the functions are similar to that of the assessee. We also notice that the TPO in the order giving effect has included the company as per DRP directions. The DRP has rejected the inclusion for the reason that the assessee did not propose the inclusion of this company during TP proceedings and that it is involved in ITES services. However it is the submission of the ld AR that the company is engaged in IT services such computer programming, consultancy and related activities. We are therefore of the considered view that the comparability and inclusion of this company needs to be looked afresh for the year under consideration based on examination of facts. Accordingly we remit the issue back to the AO/TPO for verification of facts afresh and decide accordingly. 90. Minvesta Infotech Ltd This company was rejected by the TPO for the reason that its data was not available in the public domain and was upheld by the DRP for the reason that it follows a different financial year. 91. The ld AR submitted that undisputedly, the company is functionally comparable and passes all the filters applied by the TPO. It is submitted that it is a settled position that a company which is IT(TP)A No.280/Bang/2021 Page 83 of 115 otherwise functionally comparable cannot be rejected for following different financial year, if the extrapolated details are available. Reliance in this regard is placed on the decision of the Hon’ble High Court of Punjab and Haryana in CIT vs. Mercer Consulting (India)(P) Ltd. (reported in (2016) 76 taxmann.com 153). The extrapolated details of the company for the relevant financial years are produced along with the synopsis. Therefore, it is submitted that the company ought to be included in the final list of comparables 92. We have heard the rival contentions and perused the material on record. We notice that the Hon'ble P & H High Court in the case of Mercer Consulting India Pvt. Ltd.(supra) has dealt with the issue of exclusion of comparables on failure of different financial year end filters wherein it was held as under: - 28. We are unable to agree with the decision of the TPO and of the DRP that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different, it would make no difference. If it is possible to determine the value of the transactions during the corresponding periods, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the TPO must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29. ***** 30. This view is not contrary to Rule 10(B)(4) which reads as under:- IT(TP)A No.280/Bang/2021 Page 84 of 115 “10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into”. 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R.Systems International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B. 93. The ratio laid down in the above decision of the Hon’ble High Court is that the company cannot be excluded merely because its financial year is different from the financial year of the assessee and that so long as the data relating to the financial year is available even if the financial year followed is different the company should be included for the purpose of comparables. Respectfully following the above decision we are not in agreement with the decision of the lower authorities to exclude Minvesta Infotech Ltd only on the basis that the company fails different financial year filter. We therefore remit the issue back to the AO/TPO to examine the relevant financial data from which the details can be extrapolated for the purpose of comparison IT(TP)A No.280/Bang/2021 Page 85 of 115 and accordingly decide the inclusion of the company after giving a reasonable opportunity of being heard to the assessee. 94. Evoke Technologies Ltd. This company was rejected by the TPO and the DRP on the ground that the company did not feature in the search matrix of the TPO. 95. In this regard, it is submitted that the Assessee has re-run the search (using same keywords applied by the TPO) and thereby identified Evoke as comparable company and submitted the Annual Report for the TPO’s consideration. The ld AR also submited that Evoke is engaged in software development and tech support services and is thus comparable to the Assessee. The company passes all the filters applied by the TPO. The ld AR relied on the decision of this Hon’ble Tribunal in the case of Arm Embedded Technologies Pvt. Ltd.(supra) 96. We heard the ld DR. We notice that the coordinate bench in the case of Arm Embedded Technologies Pvt. Ltd.(supra) has considered the issue of inclusion of Evoke and held that – Ground No. 2.11: That the Ld.TPO erred in excluding Akshay Software Technologies Ltd, Sasken Communication Technologies Ltd. and Evoke Technologies Pvt. Ltd., even though the same are functionally comparable to the assessee. It is submitted that this company is engaged in providing software development services. It is submitted that these comparables were not considered by the Ld.TPO as they did not IT(TP)A No.280/Bang/2021 Page 86 of 115 appear in the search matrix carried out by him, which has been upheld by the DRP. He placed reliance on the decisions of coordinate bench of this Hon’ble Tribunal in the case of Prism Networks Pvt. Ltd. reported in (2022) 141 taxmann.com 163. 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 Tribunal in case of Prism Networks Pvt. Ltd.(supra) observed and held as under: 18. We heard the rival submissions. It is clear from the order of the DRP that the DRP has not considered the plea of the Assessee in proper perspective. The fact that the TPO rejected the TP study of the Assessee cannot be the basis not to consider the claim of the Assessee for inclusion of comparable companies. The TPO excluded these companies only on the ground that information related to these companies was not available in the public domain and this fact was shown to be an incorrect assumption by the Assessee in the submissions before the DRP. In such circumstances, it was incumbent on the part of the DRP to have adjudicated the question of inclusion of these companies as comparable companies. The fact that these companies do not figure in the search matrix of the TPO is not and cannot be a ground not to consider inclusion of these companies as comparable companies. Since the DRP has failed to do so, we are of the view that the issue regarding inclusion of the aforesaid companies as comparable companies should be set aside to AO/TPO for fresh consideration in the light of the information available in public domain. Thus ground No. 7 is treated as allowed for statistical purposes. Respectfully following the above view, we remit the comparables back to the Ld.AO/TPO for fresh consideration in the light of information available in public domain. Accordingly this ground stands allowed for statistical purposes. IT(TP)A No.280/Bang/2021 Page 87 of 115 97. Respectfully following the above view, we remit the comparables back to the Ld.AO/TPO for fresh consideration after giving a reasonable opportunity of being heard to the assessee. 98. Agilysis IT Services India Pvt. Ltd. The company was excluded by the TPO on the ground that the company’s RPT details were not available in the annual report, and was affirmed by DRP on the ground that it did not feature in the search matrix of the TPO. 99. In this regard the ld AR submitted that the company is engaged in provision of IT services, and passes all the filters applied by the TPO, and is therefore comparable to the Assessee. Therefore, the DRP’s rejection of the company on the sole ground that it did not feature in the TPO’s search matrix is erroneous. It is submitted that the company did not have any related party transactions, and therefore details in that regard are not available in the annual report. 100. We heard the rival submissions and perused the material on record. We notice that the TPO has rejected the company for the reason that the RPT details are not available. The fact whether the assessee had any related party transaction during the year under consideration has not been properly verified by the TPO. Further the DRP upheld the exclusion entirely for a different reason stating the company is not featuring in the search matrix of the TPO. We therefore remit this issue back to the AO/TPO to verify the facts pertaining to the comparable IT(TP)A No.280/Bang/2021 Page 88 of 115 afresh and decide the inclusion accordingly after giving a reasonable opportunity of being heard to the assessee. 101. Sagarsoft India Ltd.: The company was rejected by the TPO on the ground that it fails 75% service revenue filter, and was upheld by the DRP on the ground that it did not feature in the search matrix of the TPO. 102. In this regard, it is submitted that the company is engaged in software development and consultancy services and 100% of its revenue is from rendering SWD services. Therefore the TPO’s rejection on the ground that it fails the service revenue filter is grossly erroneous. It is submitted that the company passes all the filter applied by the TPO. Therefore, the DRP’s rejection of the company on the sole ground that it did not feature in the TPO’s search matrix is erroneous. It is submitted that in the Assessee’s own case for the assessment years 2017-18 and 2018-19, the company was remanded by the DRP to the TPO for verification of its comparability, post which the company was included in the final list of comparables. The ld AR in this regard placed reliance on the decision of this Hon’ble Tribunal in NTT Data FA Insurance Systems (India) Pvt. Ltd. v. DCIT (order dated 03.10.2022 in IT(TP)A No. 261/Bang/2021) at para nos. 10-12. 103. We heard the rival submissions and perused the material on record. We notice that the coordinate bench in the case of NTT Data IT(TP)A No.280/Bang/2021 Page 89 of 115 FA Insurance Systems (India) Pvt. Ltd. (supra) has considered the inclusion of the company and held that – 12. We have heard the rival submissions and perused the materials available on record. These companies have not been included in the comparable on the reason that these companies were not appeared in TPO search matrix and documentation was available on this comparable. In our opinion, it is appropriate to remit this issue to the file of AO to consider it afresh to see whether all the filters applied by the TPO is satisfied. Accordingly, this ground is remitted back to the file of AO for fresh consideration. Accordingly, all three comparables are remitted to AO for fresh consideration on similar lines. 104. In assessee’s case also the reason for not including the company is that it fails 75% service revenue filter, and that it did not feature in the search matrix of the TPO. Therefore respectfully following the above decision of coordinate bench we remit the issue back to the AO/TPO for fresh consideration. 105. Isummation Technologies Pvt. Ltd. This company was rejected by the TPO and the DRP on the ground that the company did not feature in the search matrix of the TPO. 106. In this regard, it is submitted that the Assessee has re-run the search (using same keywords applied by the TPO) and thereby identified the above company as comparable company and submitted the Annual Report for the TPO’s consideration. The Assessee submits that Isummation is engaged in software development services and is thus comparable to the Assessee. The company passes all the filters applied by the TPO. It is submitted that in the Assessee’s own case for IT(TP)A No.280/Bang/2021 Page 90 of 115 the assessment years 2017-18 and 2018-19, the company was remanded by the DRP to the TPO for verification of its comparability, post which the company was included in the final list of comparables. 107. We heard the rival submissions. We notice that for AY 2018-19, in assessee’s own case the DRP has given a direction to TPO (page 5173 & 5174) to include this company on the ground that the functions are similar to that of the assessee. We also notice that the TPO in the order giving effect has included the company as per DRP directions. The DRP has rejected the inclusion that the company did not feature in the search matrix of the TPO. We are therefore of the considered view that the comparability and inclusion of this company needs to be looked afresh for the year under consideration based on examination of facts and to see whether all the filters applied by the TPO is satisfied. Accordingly we remit the issue back to the AO/TPO for verification of facts afresh and decide accordingly. 108. DCIS Dot Com Solutions Pvt. Ltd. This company was rejected by the TPO on the ground that sufficient financial information was unavailable and was affirmed by the DRP on the ground that it did not feature in the search matrix of the TPO. 109. In this regard, it is submitted that DCIS is engaged in software development services as is evident from the annual report of the company and hence, functionally similar. The annual report of the company furnishes all relevant details for determining its IT(TP)A No.280/Bang/2021 Page 91 of 115 comparability, and therefore the TPO’s rejection on the ground of insufficient information is erroneous. It is submitted that the company passes all the filters applied by the TPO. Therefore, the DRP’s rejection on the sole ground that it does not feature in the search matrix of the TPO is erroneous. It is submitted that in the Assessee’s own case for the assessment years 2017-18 and 2018-19, the company was remanded by the DRP to the TPO for verification of its comparability, post which the company was included in the final list of comparables 110. We heard the rival submissions. We notice that for AY 2018-19, in assessee’s own case the DRP has given a direction to TPO (page 5198 & 5201) to include this company on the ground that the functions are similar to that of the assessee. We also notice that the TPO in the order giving effect has included the company as per DRP directions. The DRP has rejected the inclusion that the company did not feature in the search matrix of the TPO. We are therefore of the considered view that the comparability and inclusion of this company needs to be looked afresh for the year under consideration based on examination of facts and to see whether all the filters applied by the TPO is satisfied. Accordingly we remit the issue back to the AO/TPO for verification of facts afresh and decide accordingly.. 111. Batchmaster Software Pvt. Ltd.: The company was rejected by the TPO on the ground of functional dissimilarity and was affirmed by the DRP on the ground that it did not feature in the search matrix of the TPO. IT(TP)A No.280/Bang/2021 Page 92 of 115 112. In this regard, it is submitted that the company is engaged in development of software as is evident from the annual report, and is therefore comparable to the Assessee. The company passes all the filters applied by the TPO. Therefore, the DRP’s rejection on the sole ground that the company does not feature in the search matrix of the TPO is wholly erroneous. It is submitted that in the Assessee’s own case for the assessment year 2017-18, the company was remanded by the DRP to the TPO for verification of its comparability, post which the company was included in the final list of comparables. It is further submitted that in the Assessee’s own case for AY 2018-19, the DRP remanded the comparable to the TPO for inclusion upon verification is the company passes all the filters (para no. 2.56). Pursuant to the same, the company came to be included by the TPO in the final list of comparables. 113. We heard the rival submissions. We notice that for AY 2018-19, in assessee’s own case the DRP has given a direction to TPO (page 5226 & 5243) to include this company on the ground that the functions are similar to that of the assessee. We also notice that the TPO in the order giving effect has included the company as per DRP directions. The DRP has rejected the inclusion that the company did not feature in the search matrix of the TPO. We are therefore of the considered view that the comparability and inclusion of this company needs to be looked afresh for the year under consideration based on examination of facts and to see whether all the filters applied by the TPO is satisfied. IT(TP)A No.280/Bang/2021 Page 93 of 115 Accordingly we remit the issue back to the AO/TPO for verification of facts afresh and decide accordingly. 114. Ground No. 30 is with regard to the lower authorities erred in computing the margin of Harbinger Systems Pvt. Ltd. Thirdware Solutions Ltd. and CG VAKSoftware and Exports Ltd. We remit this issue back to AO/TPO with a direction to examine afresh and consider the correct margins accordingly. 115. Ground Nos.31 and 32 have become academic in the light of our above decision with regard to inclusions and exclusions and therefore do not warrant separate adjudication. 116. Ground No. 33 is with regard to non grant of Working Capital adjustment by the TPO. The ld AR submited that that Rule 10B(3) of the Income-tax Rules, 1962 (“the Rules”), itself categorically provides that an adjustment ought to be provided for any differences in the economic factors between the tested party and the comparables. A working capital adjustment is one such adjustment which is to be applied in order to adjust for the differences between the working capital positions of the tested party and of the comparable. The ld AR further submitted that since it is now a settled proposition of law that necessary adjustments are to be made to the margins of comparables to give effect to the differences in the working capital positions of the tested party and of the comparables, the TPO ought to have given the Assessee the benefit of the same. Reliance is placed by the Assessee on IT(TP)A No.280/Bang/2021 Page 94 of 115 the decision of this Hon’ble Tribunal in the case of Arm Embedded Technologies Pvt. Ltd.(supra) 117. We heard the rival submissions and perused the material on record. We notice that the coordinate bench in the case of Arm Embedded Technologies Pvt. Ltd.(supra) has considered the issue of working capital and held that – We have heard the submissions of both sides on this issue based on the records placed before us. We note that, this issue has been considered by this coordinate bench of this Tribunal in the case of Huawei Technologies India P. Ltd. in IT(TP)A No.1939/Bang/2017 dated 31.10.2018, wherein, it was held as under – “10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT (A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act insofar as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows; Determination of arm’s length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a)**** (e) transactional net margin method, by which – (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] IT(TP)A No.280/Bang/2021 Page 95 of 115 entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transaction is computed having regard to the same base: (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]: (f).**** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; IT(TP)A No.280/Bang/2021 Page 96 of 115 (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions: (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in. or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 11. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec. 92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 12. Chapters I and III of the DECO Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the DECO on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability IT(TP)A No.280/Bang/2021 Page 97 of 115 adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: None of the differences (if any) between the situations being compared could materially effect the condition being examined in the methodology (e.g price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 13. In Paragraphs 13 to 16 of the aforesaid DECO guidelines, need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the Price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July IT(TP)A No.280/Bang/2021 Page 98 of 115 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential com parables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts in suppliers" 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to he kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rare (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: IT(TP)A No.280/Bang/2021 Page 99 of 115 (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year, (ii) Segmental working capital is not disclosed in the annual reports of companies engaged or different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013]38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required IT(TP)A No.280/Bang/2021 Page 100 of 115 details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v E Value Servc.com [2016] 75 taxmann.com 195 (Delhi -Trib.}, has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT(A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting raters) of interest applicable 10 a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 108(l)(e)(iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable IT(TP)A No.280/Bang/2021 Page 101 of 115 uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 108(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly. In view of the above, we remit the issue to the file of AO/TPO to compute the working capital adjustment after necessary examination in the light of the above observation and after allowing an opportunity of hearing to the assessee 118. Respectfully following the above decision of the Co-ordinate Bench we hold that the working capital adjustment is to be allowed as IT(TP)A No.280/Bang/2021 Page 102 of 115 per actuals, after considering the decisions rendered in this order on the exclusion/inclusion of comparable companies out of/into the final set of comparables. The TPO/ AO are accordingly directed. 119. The other grounds raised in its appeal in relation to its international transaction of provision of SWD services are not pressed at this stage. However, the Assessee seeks liberty to urge the said grounds in any future proceeding, appellate or otherwise, and in these proceedings at a future point in time. The liberty prayed for is allowed. The TPO/AO is directed to compute the ALP in the SWD services segment, after due opportunity of being heard to the Assessee afforded. CORPORATE TAX GROUNDS 120. Ground Nos. 35-43 is with regard to disallowance of provision for warranty. During the year, the Assessee had created a provision for warranty amounting to Rs. 8,46,53,034/- which was claimed as deduction. The AO disallowed the provision for warranty contending the same to be contingent liability/ created on estimate basis. The DRP upheld the disallowance proposed by the learned AO and rejected the Assessee’s objections in this regard. The AO passed the final order disallowing the closing balance of 3,43,62,724/-. 121. It is submitted by the ld AR that the Assessee is primarily engaged in the business of manufacturing and trading of instrumentation products, clusters, sensors and other allied components for the automobile industry. The Assessee provides warranty of 24 IT(TP)A No.280/Bang/2021 Page 103 of 115 months on its products to the customers. During the year, the Assessee had closing liability towards provision for warranty amounting to Rs. 34,362,764. The Assessee creates two kinds of provision for warranty, they are: a. General Provision for warranty – The Assessee creates general provision for warranty on a scientific basis towards the expected liability that could arise during such warranty period. The Assessee creates provision for warranty on the percentage of sale for each product. The quality department based on past experience and historical trend of the performance of each product arrives at a percentage based on which provision for warranty is created. b. Additional provision for warranty – Bearing in mind the nature of industry of that of automobile components manufacturer, the Assessee needs to create additional provision for warranty based on the circumstances and specific cases. During the year under consideration, there was no additional provision for warranty created. The movement in provision for warranty as accounted for by the Assessee for the year under consideration is as under: Particulars Amount in Rs. Opening balance 4,01,12,831/- Add: Provision created during the year (debited to P & L A/c) 8,46,53,034/- Less : Actual warranty claims (9,04,03,141/-) Closing balance 3,43,62,724/- 122. It is pointed out by the ld AR that it can be seen from the movement of provision for warranty tabulated above, the actual utilization (Rs. 9,04,03,141/-) during the year under consideration is IT(TP)A No.280/Bang/2021 Page 104 of 115 more than the provision created (Rs. 8,46,53,034/-). As such the net impact on account of provision for warranty to the profit and loss results is negative. Accordingly, the ld AR submitted that the utilization of the expense is on the higher side compared to the provision created, which itself indicates that the methodology followed by the Assessee is scientific. The ld AR further submitted that an analysis of the warranty provision over a period of five years and the same is tabulated below: AY Opening balance Actual debit to P&L Actual expenditure Balance 2012-13 4,41,87,200 7,83,67,911 2,62,34,907 9,63,20,204 2013-14 9,63,20,204 1,66,55,739 5,88,40,832 5,41,35,111 2014-15 5,41,35,111 94,97,052 2,61,22,163 3,75,10,000 2015-16 3,75,12,432 4,10,30,636 3,84,30,238 4,01,12,830 2016-17 4,01,12,831 8,46,53,034 9,04,03,141 3,43,62,724 Total 23,02,04,372 24,00,31,281 123. It is contended by the ld AR that it can observed from the above table that the utilization of the warranty provision exceeds the provision created over a five-year period which indicates that the methodology followed by the Assessee is scientific. 124. It is pointed out that in the draft assessment order, the AO had made several observations which the Assessee had clarified before the DRP as under: IT(TP)A No.280/Bang/2021 Page 105 of 115 Sl. No. AO’s contention Assessee’s submission Reference 1 There is a huge difference between provision amount and utilization The difference between the provision amount and the utilization amount is not the benchmark that is required to be considered. What needs to be seen is whether the provision created is on scientific basis. The amount of provision is a factual outcome of the methodology followed in creating provision and utilization would be the actual expenditure incurred against the warranty claims. In the present case, the Assessee has followed the scientific methodology based on which provision amount is arrived at. Further, utilization amount represents expense incurred on actual claims received by the Assessee. Further, it is relevant to note that the utilization of the warranty provision exceeds the provision created in the past years, which indicates that the methodology followed by the Assessee is scientific. 2 Provision is made on estimate basis/ adhoc basis The Assessee had submitted following details to the AO: • Ledger extract for actual warranty expenses incurred by the Assessee along with the supporting documents on sample basis • Summary of provision created for warranty The above evidences and the methodology of creating such provision substantiates that the paper book ref – Page No.1569- 1574 Page No.1553- 1555 IT(TP)A No.280/Bang/2021 Page 106 of 115 warranty policy adopted by the Assessee is on scientific basis and not adhoc basis. 3 Actual warranty claims debited to profit and loss account/ No separate ledger The AO failed to appreciate that the Assessee adjusts actual warranty claims against provision in the provision account, a separate ledger is maintained for the said purpose. The AO ought to have appreciated the fact that the Assessee debits the actual warranty claims to provision for warranty ledger account and not to the profit and loss account. 125. Accordingly it is submitted that the Assessee follows the specific methodology of creating provision for warranty consistently over the years. The said methodology has been submitted before the AO during the course of assessment proceedings. The Assessee submits that it creates provision for warranty on a scientific basis. The ld AR drew our attention to the decision of coordinate bench of this Hon’ble Tribunal in the Assessee’s own case for the assessment year 2014-15, on identical facts, has held that the provision for warranty is to be allowed as a deduction as the provision created satisfied all the requirements for claiming the provision as a liability. The ld AR further, submitted that this Hon’ble Tribunal in the Assessee’s own case for the assessment year 2010-11 has rendered a finding that the Assessee is following scientific basis of creating the provision and had remanded the matter for verification of details by the Assessing IT(TP)A No.280/Bang/2021 Page 107 of 115 Officer. Subsequently, the Assessing Officer passed an order giving effect to this Hon’ble Tribunal’s order, accepting the claim made by the Assessee. 126. Notwithstanding and without prejudice to the above the ld AR submitted that AO cannot disallow closing balance of the provision for warranty as the same is not debited to the profit and loss account. The AO ought to have appreciated that during the year the actual utilization is more than provision created and as such the net impact on account of provision for warranty to the profit and loss account is negative. 127. The learned DR relied on the order of the DRP 128. We heard the rival submissions and perused the material on record. We notice that the coordinate bench in assessee’s own case for AY 2014-15, has considered the identical issue and held that – 107. We have carefully considered the submissions and are of the view that provision for warranty created is based on past experience and historical trend of each product and at a percentage. The claim made by the Assessee that the method followed for creating provision for anticipated liability on account of warranty stands vindicated by the fact that the actual liability on account of warranty expenses is always on the higher side. The reasons given by the DRP for not accepting the claim of the Assessee is that the provision is created as a percentage of sale, ignoring the fact that past experience is also the basis for creation of provision for warranty. We are therefore of the view that the provision for warranty has to be allowed as a deduction, as the provision created satisfies the requirements for claiming provision as a liability, as laid down in the judicial precedents IT(TP)A No.280/Bang/2021 Page 108 of 115 referred to above. We hold and order accordingly and allow the relevant ground of appeal of the Assessee. 129. Since there no change in the current year with regard to the provisions for warranty and the facts being identical, we respectfully follow the above decision of the coordinate bench and hold that warranty has to be allowed as a deduction. It is ordered accordingly. 130. Ground Nos. 44-56 relate to disallowance of royalty of Rs. Rs.29,14,50,952/-. The Assessee incurred Rs.29,14,50,952/- towards payment of royalty by entering into various agreements with the group companies i.e. Continental Automotive GmbH, Germany, Continental Automotive France SAS, France, Continental Automotive Systems Inc., USA, Conti Temic microelectronic GmbH, Germany and Continental Teves AG & Co. oHG, Germany. The Compensation for the aforementioned agreements has been agreed to be paid by the Assessee as royalty in percentage terms of net sales on account of use of intellectual property generated from basic R & D and prescribed percentage on net sales on account of use of intellectual property generated from old application R & D. Further, separate compensation towards the license has been agreed to be paid by the Assessee as royalty computed as percentage of net sales of sensoric products per year. The AO disallowed the claim treating the same as R&D expenditure giving enduring benefit to the assessee and accordingly capital in nature. The AO held that the assessee has not produced proper evidence of the nature of expenditure. The DRP upheld the IT(TP)A No.280/Bang/2021 Page 109 of 115 treatment of the impugned amount as capital expenditure but directed the AO to allow depreciation u/s.32 on the same by placing reliance on the decision of the Supreme Court in the case of Honda Siel Cars India Limited (2019) 101 taxman 222(SC). Aggrieved by the final order passed by the AO pursuant to the directions of the DRP the assessee is in appeal before the Tribunal 131. The ld AR submitted that that the royalty incurred by was for the use of technology of the Continental Group for manufacturing and sales of the products. Such expenditure should be allowed under section 37(1) of the Act based on following submission: i. Section 37 of the Act is a residual clause for claiming deduction for any expenditure incurred for the purposes of the business. ii. For the purpose of claiming deduction under section 37 of the Act, the following conditions should be fulfilled: • The expenditure must be revenue in nature and should not be covered by any express deductions under sections 30 to 36 of the Act. • The expenditure should not be personal in nature. • The expenditure should be incurred wholly and exclusively for the purposes of the business or profession. iii. Such payments are made only towards “access” to technical knowledge and not absolute transfer of technical knowledge or information. iv. Such expenses were incurred by the Assessee for increasing profitability relating to products manufactured by the Assessee by applying new methods of manufacture/ technology provided under the aforementioned agreements. IT(TP)A No.280/Bang/2021 Page 110 of 115 v. The object of the aforementioned agreements was to obtain the benefit of technical knowledge available with the licensors, for running the business of the Assessee. vi. Further, the royalty is payable by the Assessee for making use of licensed intellectual property and/ or technical information owned by the Continental Group. In this regard, Continental group provides wide array of assistance, services, support and guidance to the Assesseeon recurring basis. It can be said that the royalty expense incurred by the Assesseeis commensurate to the benefits obtained by the Assesseeon a year on year basis. The keyareas of support/ assistance/ service provided by Continental group are as below: a) Standard practices; b) Access to various tools/ platforms; c) Assistance in sourcing; d) Provision of design, procedure and layouts; e) Training; f) Validation; g) Testing; h) Problem resolution; and i) Other assistances. The aforesaid technical service, support and guidance received from Continental group is essential for the uninterrupted conduct of Assessee’s day-to-day business activities. Continental group invests their efforts for providing the said services on a continuous basis vii. Further, the royalty is calculated as a percentage of sales, hence, it is recurring in nature and there is no enduring benefit derived by the Assessee in this regard. Accordingly the same should be considered as revenue in nature and should be allowed as deduction under section 37(1) of the Act, since it satisfies all the aforementioned conditions. viii. In this regard, the Assessee also wishes to place reliance on the following decisions: IT(TP)A No.280/Bang/2021 Page 111 of 115 • Hon'ble Karnataka High Court decision in the case of CIT v. Luwa India Ltd [2012] 18 taxmann.com 365 (Kar.) • Samsung India Electronics Private v. ACIT [I.T.A. No. 5316/Del/2011] • Kanpur Cigarettes (P.) Ltd. v. CIT147 Taxman 428 (Allahabad High Court) • CIT v. Kirloskar Tractors Ltd [1998] 231 ITR 849 (Bombay HC) • Alembic Chemical Works Co. Ltd. v. CIT[1989] 43 Taxman 312 (SC) • J.K. Synthetics Ltd. v. CIT[2009] 176 Taxman 355 (Delhi High Court) • DCIT v. Honda SIEL Power Products Ltd I.T.A .No. 1579/DEL/2017 (A.Y 2012-13) & S. A No. 217/Del/2017 in ITA No. 1579/Del/2017 132. The ld AR submitted that the ratio laid down by these judicial pronouncements is that that there are certain conditions to be satisfied for the payment to be treated as revenue expenditure and in this regard drew our attention to the various clauses of the agreement entered into by the assessee which is tabulated below – Factors under consideration Whether the conditions are satisfied? Clause reference in the Agreements A and B License period and termination Yes. All the licenses are granted for a limited period. The agreements can be terminated at the discretion of both parties. • Agreement A - 6.1.2 • Agreement B - 7.1 and 7.2 Restriction on creation of further rights/ assignment Yes. The Assessee can sub- license only on receipt of prior written approval from the Licensor. • Agreement A - 2.2 • Agreement B - 3.1 Confidentiality Yes. The Assessee is obligated to hold in confidence all the information provided under the agreement. • Agreement A - 8 • Agreement B - 6.1 to 6.5 IT(TP)A No.280/Bang/2021 Page 112 of 115 133. The ld AR further submitted that for the above expenses, the Assessee receives a wide array of assistance, services, support and guidance on a recurring basis whereby it can be said that these royalty payments made are commensurate to the benefits obtained by the Assessee on a year on year basis. The ld AR also submitted a detailed note on the broad key areas of support/ assistance/ service provided by Continental global to Assessee and also counter arguments with regard to each of the contentions of the AO/DRP. The same has been taken on record for the purpose of adjudication. 134. We heard both the parties and perused the materials on record. We notice that the Hon'ble Karnataka High Court in the case of CIT v. Luwa India Ltd (supra) has considered a similar issue and held that – 8. It is clear that though certain decisions have been relied on to determine the question as to whether the expenditure incurred is capital or revenue, there is no universal formula that is laid down and finding would depend upon the facts of the given case and depend upon the terms of the agreement, method of payment and the valuation upon which payment is made and also on other material facts of the case. In the present case, the ITAT having Factors under consideration Whether the conditions are satisfied? Clause reference in the Agreements A and B Degree of transfer Yes. The scope of the license is only to grant right to use licensed intellectual property. There is no transfer of absolute ownership of any intellectual property. • Agreement A - 2.1 • Agreement B - 3.1 Nature of royalty Yes. Royalty was paid based on a percentage of net sales as provided in the agreements • Agreement A - 5.1 • Agreement B - 4.1 IT(TP)A No.280/Bang/2021 Page 113 of 115 regard to the contents of the agreement entered into by the assessee with M/s. LUWA Switzerland has held that the licence that was granted does not confer any proprietary right in obtaining technical know-how, the licence is granted as per the agreement subject to payment of royalty to make use of know- how and technology. The royalty payable is depending upon the sales made and export. The said finding is on the question of fact and cannot at all be said to be perverse or arbitrary. As the facts in this case is identical to the facts of the case in Ciba of India Ltd. case cited above and also the decision in I.A.E.C. (Pumps) Ltd. (supra) cited above. There is no merit in the contention of learned counsel appearing for the Assessee that since know-how and technology granted by the licence and the patents is of enduring nature, the same would constitute capital expenditure as the payment made is on the basis of sales and export made by the assessee. The mere fact that the said know-how and patent has been acquired even before commencement of production in this case would not in any way material itself having regard to the agreement and payment of royally as referred to above and therefore, finding of the ITAT that the expenditure made towards royalty in a sum of Rs. 28,07,950/- is revenue expenditure is justified and we answer the first substantial question of law against the revenue and in favour of the assessee. 135. The ratio laid down by the Hon’ble High Court is that the payment of royalty to make use of know-how and technology which is also depending upon the sales made and export is to be treated as a revenue expenditure and should be allowed as a deduction accordingly. In assessee’s case it is noticed that the assessee has entered into agreements with various entities in the Continental group for making use of licensed intellectual property and/ or technical information owned by the Continental Group and to obtain the benefit of technical knowledge available with the licensors, for running the business of the Assessee. It is also submitted by the ld AR that the royalty is calculated IT(TP)A No.280/Bang/2021 Page 114 of 115 as a percentage of sales, hence, it is recurring in nature and there is no enduring benefit derived by the Assessee in this regard. We also notice that the AO has treated the expenditure as capital in nature for the reason that the assessee has not produced proper evidence of the nature of expenditure and the nomenclature used is R&D expenses. We further notice that the various clauses of the agreement supporting the claim of the assessee that the payment made is towards royalty have not been examined by the AO though it is submitted by the ld AR that these agreements were submitted before the lower authorities. In the light of this discussion we are of the considered view that the issue should be remitted back to the AO to examine the issue afresh based on the agreements and other evidences submitted by the assessee. We also direct the AO to keep in mind the ratio laid down by the Hon’ble Jurisdictional High Court in the case of Luwa India Ltd.(Supra) while examining the case facts in assessee’s case and decide accordingly. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly. 136. The assessee while contending this issue raised grounds with regard to allowability of the impugned expenditure u/s. 35(1)(iv) and that there is a double disallowance. In view of our decision on the allowability of impugned expenditure u/s.37, these grounds have become academic not warranting separate adjudication. 137. Ground No.57 is consequential not warranting separate adjudication. IT(TP)A No.280/Bang/2021 Page 115 of 115 138. In the result, the appeal of the assessee is partly allowed. Pronounced in the open court on this 06 th day of February, 2023. Sd/- Sd/- ( GEORGE GEORGE K. ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 06 th February, 2023. /Desai S Murthy / Copy to: 1. Assessee 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.