M/s. Tecnotree Convergence Pvt Ltd, Bangalore V. Deputy Commissioner of Income Tax, Circle-7(1)(1), Bangalore

ITA 3157/BANG/2018

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 6403 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 25-11-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Services rendered outside India; Non-deduction of tax; Capital expenditure; TDS; Set aside
• Section: 2; 5(2); 40(a)(ia); 195; 9(1); 9(1); 9(1); 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “B”, BANGALORE Before Shri B.R.Baskaran, AM & Smt.Beena Pillai, JM ITA No.3156/Bang/2018 : Asst.Year 2012-2013 ITA No.3157/Bang/2018 : Asst.Year 2014-2015 ITA No.3158/Bang/2018 : Asst.Year 2015-2016 M/s.Tecnotree Convergence Private Limited, No.65/2, B Block, 1 st Floor, TRIDIB, Bagmane Tech Park, C.V.Raman Nagar Bangalore – 560 093. PAN : AAACL7345L. v. The Deputy Commissioner of Income-tax, Circle 7(1)(1) Bangalore. (Appellant) (Respondent) Appellant by : Sri.K.R.Vasudevan, Advocate Respondent by : Sri.Srinath Sadanala, Addl.CIT-DR Date of Hearing : 14.12.2021 Date of Pronouncement : 15.12.2021 O R D E R PER BENCH:- All the three appeals filed by the assessee are directed against the orders passed by LD CIT(A) and they relate to the assessment years 2012-13, 2014-15 and 2015-16. All these three appeals were heard together and are being disposed of by this common order for the sake of convenience. 2. In all the three years, one common issue relating to disallowance of commission payments made to non-resident agents u/s 40(a)(i) of the Act for non-deduction of tax at source. In AY 2012-13, the assessee is also contesting the addition made on account of transfer pricing adjustment. 3. The facts relating to the case are stated in brief. The assessee is a subsidiary of M/s Technotree Finland. It is engaged in providing Billing ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 2 and OSS Software to “Communication service providers” worldwide. Besides the above, the assessee also renders software services to its clients both for maintenance and core development. 4. We shall first adjudicate the common issue urged in all the three years, viz., disallowance of commission expenses u/s 40(a)(i) for non- deduction of tax at source. The assessee had paid commission to its foreign agents in all the three years without deducting tax at source. The AO took the view that the assessee is liable to deduct tax at source and accordingly disallowed commission expenses u/s 40(a)(i) of the Act. The commission expenses disallowed by the AO are Rs.2.64 crores, Rs.2.73 crores and Rs.0.50 crores respectively in the years relevant to AY 2012-13, 2014-15 and 2016-17. The Ld CIT(A) held that the services provided by the agents are not simple marketing services, but involve providing technical and non-technical services. Accordingly the Ld CIT(A) held that the services provided by foreign agents are in the nature of managerial, technical and consultancy services and they would fall under the category of “Fee for Technical Services”. Hence the assessee is liable to deduct tax at source from these payments. For arriving at this conclusion, the Ld CIT(A) has referred to certain clauses of the agreements to high light the nature of services provided by the foreign agents and also a clause which provides for deduction of TDS also. Accordingly, the Ld CIT(A) confirmed the addition made by the AO u/s 40(a)(i) in all the three years under consideration. 5. The Ld A.R submitted that the foreign agents are marketing Technotree’s products in foreign countries by arranging meetings with customers and other potential clients. They also provide administrative assistance which included procuring Visa, lodging, boarding, travel and other logistics requirements. The Ld A.R submitted that these services will not fall under the category of Fee for technical services. He submitted that the income did not accrue in India in the hands of these foreign agents and hence there is no requirement of deducting tax at ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 3 source from the payments made to them. He submitted that identical payments made by the assessee in the year relevant to AY 2013-14 were disallowed by the AO. However, the Tribunal deleted the disallowance and the order passed by the Tribunal has since been upheld by the Hon’ble jurisdictional Karnataka High Court, vide its order dated 07-06- 2021 passed in ITA No.834/2018. He further submitted that the Tribunal has examined similar types of payments made in the years relevant to AY 2010-11 & 2011-12 in terms of provisions of sec.9(1)(vii) and also the amendments made in those sections. The Tribunal held that these types of payments do not result in income chargeable in India. 6. On the contrary, the Ld D.R placed his reliance on the decision rendered by LD CIT(A). He submitted that the Ld CIT(A) has examined the agreements entered by the assessee with the foreign agents and accordingly observed that the type of services rendered by them are in the nature of fee for technical services. 7. We heard rival contentions and perused the record. We notice that the AO has made the disallowance u/s 40(a)(i) of commission payments on the reasoning that similar payments made in the earlier years have been disallowed u/s 40(a)(i) for non-deduction of tax at source. 8. The Ld CIT(A), however, examined the agreement entered by the assessee with the foreign agents. He noticed that, as per the terms of agreement, the foreign agents will assist the assessee in relation to both technical and non-technical including commercial issues and provide necessary support in fulfilling its obligations both statutory and contractual. Further they will assist in matters related to work permits and visa. Further they also provide services in connection with legal compliance, work permit and visas. They also help in marketing of products, generating future business promotion activities and arranging logistic support. Accordingly, the Ld CIT(A) has taken the view that these services fall under the category of managerial, technical or ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 4 consultancy services. He also noticed that the agreement itself provide for deduction of tax at source. Accordingly, the Ld CIT(A) has taken the view that the assessee is liable to deduct tax at source from the payments made to the foreign agents. 9. We notice that the Ld CIT(A) has considered the clauses mentioned in the agreement entered between the parties. However, in the grounds of appeal filed before us, the assessee has furnished details of actual services provided by foreign agents in each of the years as under:- (A) Assessment year : 2012-13:- (a) Taap Co.:- Administrative assistance including arranging work permits, Visa assistance, arranging meetings, making efforts for marketing Tecnotree’s Products in Iran and arranging introductory meetings and potential clients. (b) Paras Rasa Net:- Administrative assistance including procuring Visa, lodging, boarding, travel and other logistical requirements, arranging meetings with customers and other potential clients at all the levels (B) Assessment Year : 2014-15 and 2015-16:- (a) SAEI IT Consulting Limited:- Recommending potential clients in Middle east and South Africa, Providing region specific support services like Visa Assistance and work permits, arranging meetings etc. (b) Tramlee Enterprises :- Providing region specific marketing information, to arrange meetings with clients, Providing region specific support services like Visa Assistance and work permits 10. On a perusal of above said services, we notice that the foreign agents have been mainly providing marketing support services and other services provided by them are incidental to the main marketing support services. In our view these services would not fall under the category of “managerial, technical or consultancy services contemplated in Explanation 2 to sec.9(1)(vii) of the Act. In this view of the matter, the ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 5 payments made to the foreign agents for providing above said services, in our view, would not fall under the category of Fee for technical services. Hence we are unable to agree with the view expressed by Ld CIT(A) on this issue. There is also no dispute that the payments have been made to the foreign agents for the services rendered abroad and hence, it would constitute business income in their hands. Hence the income has accrued to them abroad and hence they cannot be deemed to accrue or arise in India. 11. We notice that the Hon’ble High Court of Karnataka has examined an identical issue in the assessee’s own case in AY 2013-14 (referred supra). The jurisdictional High Court has observed as under:- “10. However, the facts of the aforesaid case are distinguishable as in the present case, the services were rendered by Associated Enterprises outside India. The consultancy was not at all utilised in India. In case the argument canvassed by the learned counsel is accepted, it will certainly amount to violation of double taxation treaty. On the other and, the Hon’ble Supreme Court in case of Toshuku Ltd (supra)** while dealing with non resident commission agent has held that if no operations of business are carried out in the taxable territories, the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. The Apex Court in paragraphs 12 and 13 of the aforesaid judgment has held as under: (** 1981 AIR 148) 12. The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident assessees during the relevant year. This takes us to section 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the Department, had either accrued or arisen through and from the business connection in India that existed between the non- resident assessees and the statutory agent. This contention overlooks the effect of clause (a) of the Explanation to clause (i) of sub-section (1) of section 9 of the Act which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If, however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 6 and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. (See Commissioner of Income-tax, Punjab v. R. D. Aggarwal & Co. & Anr.(1) and M/s. Carborandum Co. v. C.I.T., Madras(2) which are decided on the basis of section 42 of the Indian Income-tax Act, 1922, which corresponds to section 9(1)(i) of the Act.) 13. In the instant case the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by clause (a) of the Explanation to section 9(1)(i) of the Act. The commission amounts which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the Department.” 11...... 12. Keeping in view the totality of the circumstances of the case, this Court is of the considered opinion that in the present case the Associated Enterprises has rendered services out of India n the form of placing orders with the manufacturers who are already outside India. The Commission was paid to Associate Enterprises out of India. No taxing event has taken place within the territories of India and therefore, the Tribunal was justified in allowing the appeal of the assessee.” 12. The Ld A.R also invited our attention to the order passed by the co- ordinate bench in the assessee’s own case for AY 2010-11 and 2011-12 in ITA No.1447 & 1448/Bang/2017 and ITA Nos. 1519 & 1520/Bang/2017 dated 03-07-2019. The Ld A.R submitted that the Tribunal, in the above said years, has examined the applicability of amendments made in sec.9(1)(vii) and sec.195 of the Act and concluded that these amendments do not make the payments received by foreign agents as income accrued in their hands in India. For the sake of convenience, we extract below the decision rendered by the co-ordinate bench in the hands of the assessee in AY 2010-11 and 2011-12:- “10. Ground No.6 : Disallowance of commission expenses paid to Foreign Parties under section 40(a)(i) of the Act for non-deduction of tax at source on such payments. ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 7 10.1 In this ground (supra), the assessee assails the order of the CIT(A) in upholding the action of the AO in disallowing export commission expenses amounting to Rs.4,17,10,537/- and commission paid for hiring of apartments amounting to Rs.1,11,111/- paid to non-resident parties under section 40(a)(i) of the Act without appreciating that such payments were not taxable in India. 10.2 The facts of the matter, on this issue, that emanate from a perusal of the record, is that in the course of assessment proceedings, the AO observed that the assessee had made payments of commission aggregating to Rs.4,18,21,648/- in foreign currency, to non-resident / foreign parties, without deducting tax at source under section 195 of the Act on such payments. The assessee contended that these payments were made to non-residents operating overseas; who do not have any presence in India and therefore there was no requirement to deduct tax at source on such payments. The AO, however, was of the view that, since the services were rendered in relation to the assessee's business carried out in India from undertakings eligible for deduction under section 10A of the Act, it is liable to be taxed in India and therefore held that the assessee was under obligation to deduct tax at source on such payments. As the assessee had not deducted tax at source on the said commission payments to non-residents, the AO invoked the provisions under section 40(a)(i) of the Act and disallowed these expenses claimed. On appeal, the CIT(A) upheld the order of the AO on this issue. 10.3.1 Before us, the learned AR for the assessee reiterated the submissions put forth before the authorities below. It is submitted that the only reason for disallowance of these expenses incurred on commission payments to non- residents is that TDS was liable to be deducted on these payments and which was not done. According to the learned AR, the details of the parties to whom the payments were made were admittedly submitted before the AO and as can be seen from the details, these parties are non- residents and have no permanent establishment (PE) or business connection in India. Therefore, according to the learned AR, since these payments having been made to non-residents for services rendered abroad, they are not taxable in India. In support of these contentions, the learned AR placed reliance on the following judicial pronouncements:- (i) Zanar Home Collection Vs. JCIT (2015) 68 SOT 184 (Bangalore - Trib); and (ii) DCIT Vs. S. R. M. Agro Foods (2016) 161 ITD 786 (Mumbai - Trib). 10.3.2 In the course of hearings before us, the amendments to Section 9 the Act, particularly the Explanations inserted in the Section, came up for discussion. The learned AR for the assessee submitted that the fundamental and primary requirement of Section 9 of the Act is that the income should accrue or arise in India; whether directly or indirectly through or from any business in India. According to the learned AR, this primary requirement has not undergone any change due to amendments made to the Section and the Explanations inserted at the end of the Section only dispensed with the requirement that was earlier read into the Section; that the non-resident should have a place of business or business connection in India or that the non- resident should have rendered services in India. Similarly, the Explanation 2A, inserted by Finance Act, 2018 has only ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 8 expanded the scope of "business connection". However, the primary requirement that the income should accrue or arise in India has not been diluted. 10.4.2 Per contra, the learned DR for Revenue emphatically supported the orders of the authorities below. 10.5.1 We have carefully considered the rival contentions on the issue before us and perused and carefully considered the material on record; including the judicial decisions cited. The facts related to the issue before us, are not in dispute. The assessee has made the impugned payments to non- residents in various countries for services rendered outside India. The fact of the payments and the nature of the payments are not in dispute. The only contention of the AO is that since the services were rendered in relation to the business of the assessee in India, the payments for such services rendered are liable for deduction of tax at source thereon and since TDS was not done thereon, the payments are liable for disallowance under section 40(a)(i) of the Act. 10.5.2 Section 195 of the Act deals with the deduction of tax at source from out of the payments made to non-residents. Under Section 195 of the Act, an obligation is cast on a person making payment to a non-resident of any sum, which is chargeable to tax under the provisions of the Act, to deduct tax at the time of payment of such sum or at the time of credit thereof to the account of the payee, whichever is earlier. In terms of the aforesaid provision, tax is required to be withheld in respect of payments to non-residents only if such payment is chargeable to tax in India. The Hon'ble Apex Court in the case of GE India Technology Centre (P) Ltd., Vs. CIT (327 ITR 456) (SC), explaining its earlier decision rendered in the case of Transmission Corporation of AP Vs. CIT (239 ITR 587) (SC), held that only if the income is chargeable to tax in India in the hands of the non-resident recipient, would tax be required to be deducted at source from such payment. Various Courts and Tribunals have followed the aforesaid decision of the Hon'ble Apex Court and have consistently held that in the absence of any activity in India by a non-resident commission agent, the commission does not accrue or arise in India and is not taxable in India. 10.5.3 Explanation - 2 added to Section 195 of the Act by Amendment introduced by Finance Act, 2012 w.e.f. 01.04.1962 reads as under:- "[Explanation 2 - For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction there under applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has - (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India." This Explanation has only added a further fiction in respect of the person making payment to a non-resident and not the person receiving the payment, i.e., non- resident agent who is receiving the payment. ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 9 10.5.4 To elaborate further, Section 195 of the Act can be divided into three limbs:- (a) Any person responsible for paying to non-resident, not being a company (i.e., the assessee company in case on hand) (b) There has to be payment of any other sum chargeable under the provisions of the Act. (c) The recipient of the payment has to be non-resident (i.e., Foreign commission agent in the case on hand). So the person responsible to pay to the non-resident is the assessee in the case on hand, as stated in limb "a" above and therefore as per Section 195(1) of the Act, he is under obligation to deduct tax on payment made to non-resident; provided the payment is chargeable to tax as laid down in limb "b". This Explanation - 2 (supra) clarifies that the person who is obliged to comply with sub-section (1) of Section 195 of the Act has to make the deduction of tax at source there under. Thus, the obligation to deduct tax shall extend to all persons, both resident or non-resident, whether or not the non- resident person has - (i) A residence or place of business connection in India; OR (ii) Any other presence in any manner whatsoever in India. Hence, this Explanation (supra) is only to define and clarify the opening words of Section 195(1) of the Act which reads : "any person responsible for paying to non-resident." Therefore, it only defines the person responsible for paying to non-resident and not the payee i.e., the non-resident to whom the payment is being made. 10.5.5 It is, therefore, imperative to first analyze whether the commission paid by the assessee to the non-resident commission agents are chargeable to tax in India. If the answer to the said question is in the affirmative, only then the provisions relating to the withholding of tax under section 195 of the Act shall be applicable /attracted. As per Section 5(2) of the Act, a non-resident is liable to be taxed in India in respect of: (a) income received or is deemed to be received in India in such year by or on behalf of such person; or (b) income accrues or arises or is deemed to accrue or arise in India during such year. Section 5(2) of the Act, the charging section for taxing non-resident income, provides for two conditions (supra). The first condition of receipt of income in India is not applicable to the case on hand, as the non-resident agents have not received the commission in India. However, the second condition i.e., of whether the income accrues or arises or is deemed to accrue or arise in India, requires to be examined. ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 10 10.5.6 Section 9 of the Act provides for the income that is deemed to accrue or arise in India. It creates a legal fiction and provides that certain income shall be deemed to accrue or arise in India. The plain language of Section 9(1)(i) of the Act provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, shall be deemed to accrue or arise in India. 10.5.7 Applying the above provisions of the Act to the factual matrix of the case on hand, the question that needs to be addressed is whether the income earned by the foreign commission agents accrues or arises from any business connection in India. In this regard, the Hon'ble Apex Court in its decision in the case of CIT Vs. Toshoku Ltd., (1980) 125 ITR 525 (SC) held that the commission amounts which were earned by non-residents for the services rendered outside India cannot be deemed to be incomes that have either accrued or arisen in India. 10.5.8 The Explanations introduced to explain and expand the scope of "business connection" in Section 9(1) of the Act are as under:- "[Explanation 2.--For the removal of doubts, it is hereby declared that 'business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident,-- (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the nonresident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or habitually secures orders in India, mainly or wholly for the non resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident: Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business." "Explanation 2A.--For the removal of doubts, it is hereby clarified that the significant economic presence of a non-resident in India shall constitute "business connection" in India and "significant economic presence" for this purpose, shall mean-- (a) transaction in respect of any goods, services or property carried out by a non- resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 11 (b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means." "Explanation 3.--Where a business is carried on in India through a person referred to in clause (a) or clause (b) or clause (c) of Explanation 2, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India." From a plain reading of these explanations, it is clear that it is applicable only if the non-residents have income accruing or arising to them in India and the transactions happen in India. As such, in our view, these Explanations (supra) are not applicable to the facts of the case on hand, where the commission agents are non-residents and the impugned payments are made for services rendered outside India. 10.5.9 The explanation at the end of Section 9 of the Act introduced by Finance Act, 2010, w.e.f. 01.06.1976 reads as under:- "Explanation.--For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,-- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India." As can be seen from the above, this Explanation applies to clause (v), clause (vi) and clause (vii) of sub section (1) of section 9of the Act, (i) which relates to income by way of interest, royalty and "fees for technical services." In the case on hand, it is the commission income of the non-resident for the services rendered outside India and therefore this Explanation has no application to the facts of the assessee's case. 10.5.10 In view of the factual and legal matrix of the case, as discussed above, we hold that as the services are provided outside India, the commission payments made by the assessee to non-residents cannot be treated as income deemed to accrue or arise in India and therefore the provisions of Section 195 of the Act are not applicable in the case on hand. In order to invoke the provisions of Section 195 of the Act, the income should be chargeable to tax in India. In the case on hand, since the commission payments to non-residents are not chargeable to tax in India, therefore the provisions of section 195 of the Act are not applicable / attracted. In this view of the matter, we hold that the action of the AO in invoking the provisions of section 40(a)(ia) of the Act to disallow the impugned payments is unsustainable and the said disallowance is deleted. Consequently, ground No.6 of the assessee's appeal is allowed.” ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 12 13. In view of the foregoing discussions, we hold that the payments made by the assessee to foreign agents are mainly towards marketing services only. Other services rendered by them are in the nature of support services only, which are incidental to the main marketing support services. Hence we hold that these services do not fall under the category of Fee for technical services. Following the decision rendered by the co-ordinate bench in the assessee’s own case AY 2010- 11 and 2011-12 and also the decision rendered by Hon’ble High Court of Karnataka in AY 2013-14 in assessee’s own case, we hold that no income chargeable in India has accrued in the hands of the foreign agents. Accordingly, we hold that the assessee is not liable to deduct tax at source from the payments made to the foreign agents. Accordingly, we set aside the orders passed by Ld CIT(A) on this issue in all the three years under consideration and direct the AO to delete the disallowance made u/s 40(a)(i) of the Act. 14. We shall now take up another issue urged in assessment year 2012-13, i.e., the addition made on account of transfer pricing adjustment. At the time of hearing, the Ld A.R pressed only ground no.6 & 7 urged in respect of transfer pricing adjustment. The assessee had entered into various international transactions with its Associated Enterprises (AEs). The TPO has made transfer pricing adjustment in respect of transactions relating to provision of software services. During the year relevant to AY 2012-13, the assessee has received Rs.20.66 crores from its AE on provision of software services. The TPO rejected transfer pricing study conducted by the assessee and finally selected following comparable companies:- Sl.No. Name of taxpayer OP/OC 1. Datamatics Global Services 14.57% 2. Genesys International Services Ltd 30.09% 3. ICRA Techno Analytics Ltd 17.24% 4. Infosys Ltd 43.10% ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 13 5. Larsen & Toubro Infotech Ltd 25.47% 6. Mindtree Ltd 15.01% 7. Persistent Systems Ltd 27.20% 8. R S Software (India) Ltd 15.34% 9. Sasken Communication Technologies Ltd 12.15% 10. Spry Resource India P Ltd 26.18% Average 22.63% The TPO noticed that the working capital adjustment results in negative rate of 4.86%. Accordingly, the TPO added the same to the average margin of 22,63% arrived above and accordingly arrived at adjusted margin of 27.49%. Accordingly, he made transfer pricing adjustment of Rs.2,24,47,737/-. 15. The Ld CIT(A) excluded three comparable companies, viz., Datamatics Global Services Ltd, Genesys International Corpn Ltd and ICRA Techno Analytics Ltd from the above list. With regard to the negative working capital adjustment made by TPO, the Ld CIT(A) has simply observed that the assessee has not provided any detailed working of the adjustment it was seeking. It appears that the Ld CIT(A) has misunderstood that the assessee is seeking working capital adjustment, where as the claim of the assessee was that there is no necessity of making any working capital adjustment, when the workings turnout to be negative. 16. Before us, the assessee seeks exclusion of three comparable companies, viz., Infosys Ltd, Larsen and Toubro Infotech Ltd and Persistent Systems Ltd. The assessee also contends that negative working capital should be ignored. The Ld A.R placed his reliance on the decision rendered by the Tribunal in the case of M/s SAP Labs India P Ltd vs. DCIT (ITA No.684/Bang/2017 dated 23.7.2021) and submitted that the above said three comparable companies have been directed to be excluded in the above said case by the Tribunal. He submitted that ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 14 the decision rendered in the above said case also pertains to AY 2012-13 and accordingly prayed for exclusion of above said three companies. 17. On the contrary, the Ld D.R submitted that assessee seeks exclusion of above said three companies mainly for the reason that their profit margin is high. He submitted that other comparable companies like Mindtree Ltd R S software (India) Ltd have not been sought for exclusion, though they also have brand value and further they fall under the category of companies like Infosys Ltd, Larseh & Toubro Infotech Ltd. He further submitted that the Persistent Systems Ltd was directed to be excluded only on the reasoning that there was amalgamation of some company during the year. However, the merged company was also in the same line of business and hence the said reasoning should fail. 18. We heard rival contentions and perused the record. We notice that the co-ordinate bench has directed exclusion of Infosys Ltd, Larsen and Toubro Infotech Ltd and Persistent Systems Ltd in the case of SAP Labs India P Ltd (supra), wherein it has followed the decision rendered by another co-ordinate bench in the case of NXP India P Ltd vs. DCIT (ITA No.692/B/2017 dated 27-04-2020). The decision rendered by the co-ordinate bench in the case of NXP India P Ltd (supra) in respect of these three comparable companies is extracted below:- PERSISTENT SYSTEMS LIMITED 6. The assessee objected for the exclusion of this company by the lower authorities in the tally of comparables by arguing that it is engaged in OPD and there is a difference in OPD and IT services and that the assessee is having revenue from other sources and no segmental data is available. It was also submitted that in the assessment year 2012-2013, it is an abnormal year of operation and it is owning various intangibles. For this purpose, he relied on the order of the Bangalore Bench of the Tribunal in the case of NXP Semiconductor India Private Limited in IT(PA) No.1634/Bang/ 2014 for assessment year 2009- 2010 - order dated 22nd July, 2015. 6.1 We have carefully gone through the order of the co- ordinate Bench in the case of NXP Semiconductor India Pvt. Ltd. (supra) for the assessment year 2009- 2010, wherein it was observed that Persystent Systems Limited was engaged in product development and product design and analysis services is functionally different from a pure software service provider and therefore, excluded it from ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 15 the list of comparables for software development services. The same view was taken in the case of Saxo India Pvt. Ltd. in ITA No.6148/Del/2015 - order dated 05th February, 2016, by observing that Persystent Systems Limited is engaged in running software development services as well as sale of software products. Albeit the percentage of software products in the total revenue is less, as has been noted by the TPO, and also there is no precise information about the contribution made by such small sale of software products to the total profits of the company. As no segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, it was directed to exclude Persystent Systems Limited from the list of comparables. In the present case also, it is noticed that Persystent Systems Limited is engaged in software products development. There is a difference between the outsourced software product development and IT services, which is evident from page nos. 973 and 974 of the paper book, as under:- "Outsourced Software Product Development (OPD) is different from IT services. Unlike a typical IT services project, where requirements are fixed while time and money are variable, a software product development project starts with fixed time and money, thus leaving requirements as the only variable. Essentially, the product development team's task is to produce the best set of requirements within a fixed time and budget. Persistent Systems has emerged as a leader in the OPD segment - a segment which is fast growing. OPD and outsourced IT services: the difference. How is OPD different from outsourced IT services is an oft asked question. In IT services, projects start with well- defined requirements, and vendors use time and money as variables to arrive at a reasonable cost estimate for the project. After completion, the project goes into maintenance mode. In product development, requirements are less clearly defined. Instead, most product developers are given ship-dates for the product that are typically determined by external factors. Once the ship-dates are identified, the budgets for the product are frozen. In product development projects, all requirements can never be completely fulfilled in a particular version. As a result, most product companies plan multiple product versions for their product. Every team member must contribute not only to building features for the current release but must also contribute enhancements and provide feedback for future releases of the product." 6.2 Persystent Systems Limited having revenue of 8103.64 Million from software services and other income of 323.76 million from income from other sources. Assessment year 2012-2013 is an abnormal year of operation to Persystent Systems Limited, which is evident from the annual report placed on record by the assessee in its paper book. Further, Persystent Systems Limited is having intangibles to the tune of 2402.67 million as evident from its balance sheet ended on 31.03.2012. Being so, it is not comparable to assessee's case. We, therefore, direct the TPO to exclude Persystent Systems Limited from the list of comparables. ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 16 LARSEN & TOUBRO INFOTECH LIMITED 7. The learned AR relied on the order of the ITAT Bangalore Benches in the case of CGI Information Systems and Management Consultants Private Limited in IT(TP)A No.586/Bang/2015 - order dated 11.04.2018 and submitted that it was excluded from the list of comparables for the reason that Larsen & Toubro Infotech Limited was a software product company and segmental information on SWD services was not available. In the present case, Larsen & Toubro Infotech Limited engaged in development of software onsite and its overseas revenue for the financial year 2011-2012 was Rs.27,838,752,995 and domestic revenue was Rs.1,756,792,454. Further in the case of Huawei Technologies India Pvt. Ltd. in IT(TP)A No.1939/Bang/2017 for assessment year 2012-2013 - order dated 31.10.2018 has taken the same view that it cannot be a comparable with that of the assessee. Being so, we direct the TPO to exclude the same from the list of comparables. INFOSYS LIMITED 8. The argument of the learned AR is that Infosys Limited is functionally different from the assessee. It owns intangible and undertakes research and development. The learned AR also submitted that it has high brand value and turnover. On the contrary, the learned DR submitted that the nature of services remains the same irrespective of whether it is engaged in providing onsite / offsite services. 8.1 We have heard the rival submissions and perused the material on record. Similar issue came up for consideration before the Tribunal in the case of NXP Semi Conductors India Pvt. Ltd. v. DCIT in IT(TP)A No.1634/Bang/2014 - order dated 27.07.2015, wherein it was held as under:- "10.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a coordinate bench of the Tribunal in the case of Cisco Systems Services B.V., India Branch (supra), for Assessment Year 2009- 10 had held that this company be excluded from the final set of comparables on the ground that it is functionally dis-similar and different from a purely software service provider and at para 20 of the order has held as under :- "20. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software services development etc. Though the said company was having other business also, with regard to its software development segment, this Tribunal held Bodhtree Consulting Ltd., Infosys Ltd., Kals Information Systems Ltd. and Tata Elxsi Ltd. to be not proper comparables. Relevant paras of the order dt.14.8.2014 is reproduced hereunder :- ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 17 26.2 Infosys Technologies Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:- "11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 18 (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly." The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies." 10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems Services BE, India Branch (supra), we direct the Assessing Officer/TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider." ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 19 8.2 In the present case also, Infosys Limited is engaged in a leading global technology services corporation. The company provides business consulting, technology, engineering and outsourcing services to help clients build tomorrows enterprise. In addition, the company offers software products for the banking industry. It owns high brand value at Rs.56,286 crore in the year 2012 and percentage of brand value to revenue is 1.67% and brand value as a percentage of market capitalization is 34.2%, and also incur huge amount for research and development at Rs.5 crore as a capital expenditure and Rs.655 crore as a revenue expenditure for the year ended 31st March, 2012. Therefore, it cannot be said to be a comparable. We, therefore, direct the TPO to exclude Infosys Limited from the list of comparables.” 19. We notice that the co-ordinate benches are consistently holding that the above said three companies are not comparable to a small company like that of assessee. Accordingly, following the above said decision of co-ordinate bench, we direct exclusion of these three companies. 20. The next issue relates to negative working capital. It is the contention of the assessee that the negative working capital should be ignored, since the assessee is a risk free enterprise. In this regard, the Ld A.R placed his reliance on the decision rendered by the co-ordinate bench in the case of ACIT vs. e4e Business Solutions India P Ltd (ITA No.2900/Bang/2018 dated 08-12-2020, wherein it has been held that the negative working capital should be ignored, since it artificially increases Arms Length Price. Accordingly, we restore this issue to the file of TPO with the direction to follow the principles laid down in the case of e4e Business solutions India P Ltd (supra). 21. In the result, all the appeals of the assessee are allowed. Order pronounced on this 15 th day of December, 2021. Sd/- (Beena Pillai) Sd/- (B.R.Baskaran) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore; Dated : 15 th December, 2021. Devadas G* ITA Nos.3156 to 3158/Bang/2018 M/s.Tecnotree Convergence Private Limited. 20 Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT(A)-7, Bangalore 4. The Pr.CIT-7, Bangalore. 5. The DR, ITAT, Bengaluru. 6. Guard File. Asst.Registrar/ITAT, Bangalore