The Joint Commissioner of Income Tax Special Range-3 , Bangalore V. M/s Huawei Technologies India Pvt Ltd , Bangalore

ITA 370/BANG/2019

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 0012 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-07-2021
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-07-2021
• Assessment Year: 2014-2015
• Appeal Filed On: 01-03-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Services rendered outside India
• Section: 143(3); 92D; 234B; 133(6); 195; 192; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER IT A NO. 339/BANG/2019 & ASSESSMENT YEAR : 2014 - 15 M/S. HUAWEI TECHNOLOGIES INDIA PRIVATE LTD., SYNO 37, 46, 45/3, 45/4, ETC, KNO 1540, DIVYASHREE PARK, NEAR EPIP INDUSTRIAL AREA, KUNDALAHALLI VILLAGE, BANGALORE 560 037. PAN: AAACH 8597L VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, SPECIAL RANGE 3, BANGALORE. APPELLANT RESPONDENT & IT(TP)A NO. 370/BA N G/2019 ASSESSMENT YEAR : 2014 - 15 THE JOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE 3, BANGALORE. VS. M/S. HUAWEI TECHNOLOGIES INDIA PRIVATE LTD., BANGALORE 560 037. PAN: AAACH 8597L APPELLANT RESPONDENT APPELLANT BY : MR. ALIASGER RAMPURAWALA, ADVOCATE RESPONDENT BY : MR. MUZAFFAR HUSSAIN, C IT(DR)(ITAT ), BENGALURU. DATE OF HEARING : 14 .0 7 .202 1 DATE OF PRONOUNCEMENT : 2 2 .0 7 .202 1 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE ARE CROSS APPEALS BY THE ASSESSEE AND THE R EVENUE AGAINST THE ORDER OF THE CIT(APPEALS)-3, BENGALURU DATED 24 .12.2018 FOR THE ASSESSMENT YEAR 2014-15. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS:- ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 2 OF 42 TRANSFER PRICING GROUND: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LEARNED ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 3(1)(2) (LD. AO') / LEARNED ASSISTANT COMMISSIONER OF INCOME- TAX (TRANSFER PRICING)-1(3)(1) (`LD. TPO') IN MAKIN G AN ADJUSTMENT OF RS. 84,74,69,606 TO THE TRANSFER PRIC E OF THE APPELLANT'S INTERNATIONAL TRANSACTIONS IN RESPECT O F SOFTWARE DEVELOPMENT SERVICES. FURTHER, THE LEARNED COMMISSI ONER OF INCOME-TAX (APPEALS) -III, BANGALORE (`LD. CIT(A)') ERRED IN PARTIALLY CONFIRMING THE ACTION OF LD. AO/TPO. 2. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WITH RESPECT TO ADJUSTMENT TO THE TRANSFER PRI CE OF THE SOFTWARE DEVELOPMENT SERVICES, THE LD. CIT(A) ERRED IN UPHOLDING THE ACTION OF LD. AO/ TPO IN: 2.1. REJECTING THE TRANSFER PRICING (`TP') DOCUMEN TATION MAINTAINED BY THE APPELLANT UNDER SECTION 92D OF TH E ACT, IN GOOD FAITH AND WITH DUE DILIGENCE. 2.2. REJECTING THE COMPARABILITY ANALYSIS CARRIED OUT BY THE APPELLANT IN THE TP DOCUMENTATION AND IN CONDUCTING A FRESH COMPARABILITY ANALYSIS FOR THE INTERNATIONAL TRANSA CTION OF SOFTWARE DEVELOPMENT SERVICES BASED ON THE APPLICAT ION OF ADDITIONAL FILTERS FOR DETERMINING THE ARM'S LENGTH PRICE. 2.3. USING DATA, WHICH WAS NOT CONTEMPORANEOUS AND WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF PREPARING THE TP DOCUMENTATION. 2.4. NOT CONSIDERING THE MULTIPLE YEAR/PRIOR YEAR DATA OF COMPARABLE COMPANIES WHILE DETERMINING THE ARM'S LE NGTH PRICE IN RELATION TO THE APPELLANT'S INTERNATIONAL TRANSA CTIONS WITH ITS AES. 2.5. USING INFORMATION UNDER SECTION 133(6) OF THE ACT, WHICH TANTAMOUNT TO CHOOSING SECRET COMPARABLE COMPANIES WHOSE INFORMATION WAS NOT AVAILABLE IN PUBLIC DOMAIN WHIL E PREPARING THE TRANSFER PRICING DOCUMENTATION FOR THE RELEVANT FINANCIAL YEAR. 2.6. INCLUDING THE FOLLOWING COMPARABLE COMPANIES EVEN THOUGH THEY ARE FUNCTIONALLY DIFFERENT FROM OPERATI ONAL PROFILE OF THE APPELLANT: A) INFOSYS LTD.; ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 3 OF 42 B) LARSEN & TOUBRO INFOTECH LTD.; C) MINDTREE LTD.; D) PERSISTENT SYSTEMS LTD.; AND E) THIRDWARE SOLUTIONS LTD. 2.7. EXCLUDING THE FOLLOWING COMPANIES SELECTED BY THE APPELLANT IN ITS TP STUDY REPORT EVEN THOUGH THEY W ERE FUNCTIONALLY COMPARABLE TO THE APPELLANT AND PASSES ALL THE FILTERS APPLIED BY THE LD. TPO IN ITS ORDER: A) AKSHAY SOFTWARE TECHNOLOGIES LTD.; B) E-ZEST SOLUTIONS LTD.; C) SASKEN COMMUNICATIONS TECHNOLOGIES LTD. 2.8 NOT INCLUDING FOLLOWING ADDITIONAL COMPANIES P ROPOSED AS COMPARABLES TO THE APPELLANT DURING THE COURSE OF T P ASSESSMENT PROCEEDINGS AND WHICH PASSES ALL THE FILTERS APPLIE D BY THE LD. TPO IN ITS ORDER: A) SANKHYA INFOTECH LIMITED; B) I2T2 INDIA LIMITED; C) DAFFODIL SOFTWARE LIMITED; D) KIREETI SOFT TECHNOLOGIES LIMITED; E) EXILANT TECHNOLOGIES PRIVATE LIMITED; F) CELESTREAM TECHNOLOGIES PRIVATE LIMITED; G) MAVERIC SYSTEMS LIMITED; AND H) EVOKE TECHNOLOGIES PRIVATE LIMITED 2.9. NOT PROVIDING ADJUSTMENT FOR THE DIFFERENCES IN WORKING CAPITAL OF THE APPELLANT AND THE COMPARABLE I COMPA NIES. 2.10. NOT PROVIDING SUITABLE ADJUSTMENT TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VI S-A-VIS THE COMPARABLE COMPANIES. 2.11.COMPUTING INCORRECT OPERATING MARK-UP OF CERTA IN COMPARABLE COMPANIES. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 4 OF 42 DIRECT TAX GROUND: 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED IN LEVYING INTEREST UNDER SEC TION 234B OF THE ACT OF RS. 16,13,16,690. THAT THE APPELLANT CRAVES LEAVE TO ADD TO AND/OR TO ALTER, AMEND, RESCIND, MODIFY THE GROUNDS HEREIN ABOVE OR PRODUCE FURTHER DOCUMENTS BEFORE OR AT THE TUNE OF HEARING OF THIS APPEAL. 3. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS:- 1. THE ORDER OF THE LEARNED CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. WHETHER THE CIT(A) ERRED IN FACT IN REJECTING CI GNITI TECHNOLOGIES LTD & SQS INDIA BSFI LTD(THINKSOFT GLO BAL SERVICES LTD) AS A COMPARABLE ON THE GROUNDS THAT I T IS FUNCTIONALLY DIFFERENT WHEN THE PRIMARY SOURCE OF I NCOME OF THE COMPARABLES IS FROM PROVISION OF SOFTWARE DEVELOPME NT SERVICES. 3. WHETHER WHILE SEEKING THE EXACT COMPARABILITY ME NTIONED ABOVE, THE CIT(A) WAS RIGHT IN FACT AND IN LAW IN I MPOSING CONDITIONS BEYOND LAW WHEREAS THE REQUIREMENT OF LA W IS TO ACKNOWLEDGE ONLY THOSE DIFFERENCES THAT ARE LIKELY TO MATERIALLY AFFECT THE MARGIN. 4. WHETHER THE CIT(A) IS CORRECT IN FACT AND LAW IN DISREGARDING THE POSITION OF LAW THAT THERE COULD B E DIFFERENCES BETWEEN THE ENTERPRISES COMPARED UNDER THE TNMM MET HOD THAT ARE NOT LIKELY TO MATERIALLY AFFECT THE PRICE OR CO ST CHARGED OR THE PROFITS ACCRUING TO SUCH ENTERPRISES. 5 IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WHETH ER THE CIT(A) ERRED IN FACT IN DIRECTING THE TPO TO INCLUD E CG-VAK SOFTWARE & EXPORTS LTD AS A COMPARABLE COMPANY WITH OUT APPRECIATING THAT THE COMPANY IS ENGAGED INTO R&D A CTIVITIES AND THEREFORE HAS A DIFFERENT REVENUE MODEL AND THEREFO RE FUNCTIONALLY NOT COMPARABLE TO THE TAX PAYER. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED A T THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT( A) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND TH AT OF THE ASSESSING OFFICER MAY BE RESTORED. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 5 OF 42 7. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND / OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 4. THE ASSESSEE, HUAWEI INDIA, IS THE WHOLLY SUBSID IARY OF HUAWEI TECH. INVESTMENT COMPANY LIMITED, HONG KONG ('HUAWE I HONG KONG') WHICH IS IN-TURN A SUBSIDIARY OF HUAWEI CHINA. HUA WEI TECHNOLOGIES COMPANY LIMITED ('HUAWEI CHINA'), GLOBAL TELECOM SO LUTIONS PROVIDER BASED IN CHINA. HUAWEI CHINA IS ENGAGED IN THE BUSI NESS OF RESEARCH, DEVELOPMENT, MANUFACTURING AND MARKETING OF TELECOM MUNICATION EQUIPMENT. 5. HUAWEI INDIA RENDERS SOFTWARE DEVELOPMENT SERVIC ES TO ITS AES IN THE FIELD OF TELECOMMUNICATIONS. HUAWEI CHINA OWNS ALL THE VALUABLE INTELLECTUAL PROPERTY RIGHTS AND OTHER COMMERCIAL O R MARKETING INTANGIBLES AND IS INVOLVED IN COMPLEX OPERATIONS OF DEVELOPING PROPRIETARY TECHNOLOGIES AND MARKETING OF THE SAME. 6. THE ASSESSEE COMPANY HAS ENTERED INTO THE FOLLOW ING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES). I NTERNATIONAL TRANSACTION AMOUNT (IN RS.) RENDERING SOFTWARE DEVELOPMENT SERVICES 5,064,293,224 DRAWDOWN FROM ECB 1,2 5 6 ,256,730 PURCHASE OF FIXED ASSETS 212,808,168 PURCHASE OF CONSUMABLE 2,644,170 7. THE FINANCIAL OF ASSESSEE AS PER P&L ACCOUNT ARE AS UNDER:- PARTICULARS TOTAL OPERATING INCOME 5064293224 OPERATING COST 4578857490 OPERATING PROFIT 485435734 OP/OC 10.60% ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 6 OF 42 8. THE SEGMENTAL FINANCIALS OF ASSESSEE FOR FY 2013 -14 AS PER TPO ARE AS FOLLOWS:- PARTICULARS AMOUNT (INR) REVENUE FROM OPERATIONS 5,064,293,224 OTHER INCOME 14,303,508 TOTAL REVENUE (A) 5,078,596,732 LESS: NON-OPERATING INCOME INTEREST INCOME 0 PROFIT ON SALE OF FIXED ASSETS (NET) 1,024,746 TOTAL NON-OPERATING INCOME (B) 1,024,746 TOTAL OPERATING INCOME (C=A-B) 5,077,571,986 EMPLOYEE BENEFITS EXPENSE 2.960,266,267 DEPRECIATION & AMORTISATION EXPENSE 365,837,531 OTHER EXPENSES 1,252,753,692 TOTAL EXPENDITURE (D) 4,578,857,490 LESS: NON-OPERATING EXPENDITURE 0 TOTAL NON-OPERATING EXPENDITURE (E) 0 TOTAL OPERATING EXPENSES (F=D-E) 4,578,857,490 OPERATING PROFIT (G=C-F) 498,714,496 OP/OC 10.89 % 9. THE ASSESSEE SELECTED THE FOLLOWING COMPARABLES: - SL. NO. NAME OF THE COMPANY WT. AVG (%) 1. AKSHAY SOFT WARE TECHNO LOGIES LTD. 7.46 2. BELL SOFTECH LTD. 7.92 3. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. 18.27 4. LO CUZ ENTERPRISE SOLUTIONS LTD. 6.91 5. CSS CORP P VT LTD. 20.01 6. E - Z E S T SOLUTIONS LTD. 12.60 7. SASKEN COMMUNICATION 10.31 ARITHMETIC MEAN 11.93 ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 7 OF 42 10. THE TPO SELECTED THE FOLLOWING COMPARABLES:- AMOUNTS IN RS. LAKH S NO NAME OF TAX PAYER OR/SALES OC OP OP/OC (IN %) 1 INFOSYS LTD. 46,91,700 32,77,700 11.84,200 36.13% 2 LARSEN & TOUBRO INFOTECH LTD. 4,54,360 3,64,619 89,741 24.61% 3 MINDTREE LTD. 2,99,010 2,48,290 5,072 20.43% 4 PERSISTENT SYSTEMS LTD. 1,18,412 87,649 3,07,625 35.10% 5 R S SOFTWARE (INDIA) LTD. 35,188 28,321 6,867 24. 25% 6 CIGNITI TECHNOLOGIES LTD. 5,563 4,359 1,204 27.62 % 7 S Q S INDIA BFSI LTD. 20,061 16,394 3,667 22.37% 8 THIRDWARE SOLUTION LTD. 19,883 13,742 6,140 44.68 % AVERAGE 29.40% 11. THUS, THE TPO MADE A TP ADJUSTMENT OF RS.84,74 ,69,606 RELATING TO SWD SEGMENT. CONSEQUENTLY THE AO PASSED ASSESSM ENT ORDER DATED 2.2.2018 U/S. 143(3) R.W.S. 92 OF THE ACT. 12. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT( APPEALS) WHO DIRECTED EXCLUSION OF THE COMPANIES VIZ., CIGNITI T ECHNOLOGIES LTD. AND SQS INDIA BFSI LTD. (THINKSOFT GLOBAL SERVICES LTD. ) AND INCLUSION OF CG VAK SOFTWARE & EXPORTS LTD. FINALLY, THE FOLLOWING COMPANIES REMAINED IN THE COMPARABLES:- (1) INFOSYS LTD. (2) LARSEN & TOUBRO LTD. (3) MINDTREE LTD. (4) PERSISTENT SYSTEMS LTD. (5) R S SOFTWARE (INDIA) LTD. (6) THIRDWARE SOLUTIONS LTD. (7) CG VAK SOFTWARE & EXPORTS LTD. 13. NOW THE ASSESSEE AND REVENUE ARE IN CROSS APPEA LS BEFORE US AGAINST THE ORDER OF CIT(APPEALS). ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 8 OF 42 14. FIRST WE WILL TAKE UP THE ASSESSEES APPEAL . THE ASSESSEE HAS NOT PRESSED GROUND NOS.2 TO 2.5, 2.7, 2.8, 2.10 AND 2.11. ACCORDINGLY THESE GROUNDS ARE DISMISSED AS NOT PRESSED. 15. GROUND NO.2.6 OF THE ASSESSEE IS REGARDING EXCL USION OF THE FOLLOWING COMPARABLES:- (I) INFOSYS LTD. (II) LARSEN & TOUBRO INFOTECH LTD. (III) MINDTREE LTD. (IV) PERSISTENT SYSTEMS LTD., AN (V) THIRDWARE SOLUTIONS LTD. (I) INFOSYS LTD. 16. THE LD. AR SUBMITTED THAT INFOSYS LTD. IS FUNCT IONALLY DIFFERENT FROM THE ASSESSEE AND HAS TO BE EXCLUDED FROM THE COMPAR ABLES ON ACCOUNT OF: HEAVILY ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUC TS DIVERSIFIED OPERATIONS AND NON-AVAILABILITY OF SE GMENT DATA SIGNIFICANT AMOUNT OF BRAND VALUE AND IPR SIGNIFICANT RESEARCH AND DEVELOPMENT EXPENSES BUSINESS RESTRUCTURING AND EXTRAORDINARY EVENT 17. IN ADDITION THE MARGIN OF THE COMPANY IS WRONGL Y COMPUTED BY TREATING PROVISION FOR BAD AND DOUBTFUL DEBT AS NON -OPERATING EXPENSE. INFOSYS LIMITED WAS CONSIDERED AS COMPARABLE BY THE TPO FOR AY 2011-12 AND AY 2012-13 BUT THE SAME WAS NOT CONSIDERED AS P ROPER COMPARABLE FOR AY 2013-14 BY HOLDING THAT SEGMENTAL DATA WAS N OT AVAILABLE. IT WAS SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION TOO THE SEGMENTAL DATA IS NOT AVAILABLE AND AS SUCH THIS COMPANY NEEDS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 9 OF 42 18. AS REGARDS WRONG COMPUTATION OF MARGIN, THE LD. DR SUBMITTED THAT THE ISSUE OF TREATING PROVISION FOR BAD AND DOUBTFU L DEBT AS NON-OPERATING EXPENSE HAS BEEN DISCUSSED IN THE ORDER OF CIT(APPE ALS) AND THE ACTION OF THE AO IS TO BE UPHELD. SO THERE IS NO ERROR IN COM PUTATION OF MARGIN OF THIS COMPANY. 19. ON THE NEXT ARGUMENT OF THE ASSESSEE THAT THERE WAS BUSINESS RESTRUCTURING AND EXTRAORDINARY EVENT, THE MERGER O F INFOSYS CONSULTING INDIA LIMITED (ICIL) HAD BEEN ACCOUNTED FOR UNDER P OOLING OF INTEREST METHOD, AND THAT THE ASSETS AND LIABILITIES OF ICIL HAD BEEN TRANSFERRED TO INFOSYS LIMITED ON A GOING CONCERN BASIS, THEREFORE , INFOSYS LTD SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES; THE LD. DR SUBMITTED THAT A MERGER CAN BE CONSIDERED AS EXTRA ORDINARY EVENT IF IT HAD A SIGNIFICANT IMPACT ON THE PROFITS OR MARGINS OF SUCH OTHER COMPANY. THE ASSESSEE HAD NOT INDICATED THAT SUCH A MERGER HAD IMPACTED THE REVEN UE OF INFOSYS LTD. THERE IS NOTHING TO SHOW THAT ASSESSEE IS ADVERSELY IMPACTED IF THIS COMPANY IS SELECTED AS A COMPARABLE. THEREFORE THI S COMPANY CANNOT BE EXCLUDED ON THE REASON OF MERGER. 20. ANOTHER ARGUMENT OF THE LD. AR IS THAT INFOSYS LTD. IS ENGAGED IN DIVERSIFIED OPERATIONS SUCH AS BUSINESS CONSULTING, ENGINEERING AND OUTSOURCING SERVICES AND IT OFFERS SOFTWARE PRODUCT AND PLATFORMS. THE ANNUAL REPORT CLEARLY SPECIFY INCOME DERIVING FROM SALE OF PRODUCTS. SIGNIFICANT R&D, BRAND VALUE, SIZE AND SCALE OF OPE RATIONS OF INFOSYS LTD. MADE IT FUNCTIONALLY DISSIMILAR TO THE ASSESSEE. T HERE WAS NO SIGNIFICANT INFORMATION ON PRODUCTS AND SERVICES SEGMENT AS SEG MENTAL DATA WAS NOT AVAILABLE. 21. THE LD. AR NEXT CONTENDED THAT INFOSYS LTD. HAD HUGE BRAND VALUE AND CONTRIBUTED TO ITS GROWTH IN REVENUE AND HENCE NOT COMPARABLE. THE LD. DR SUBMITTED THAT BRAND IS NOT RESTRICTED TO P ARENT COMPANY BUT ALSO ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 10 OF 42 AVAILABLE TO ALL ASSOCIATED COMPANIES IF THEY ARE U SING BRAND NAME. IN THE CASE OF ASSESSEE ALSO, IT WAS USING THE BRAND HUAW EI IN ITS PRODUCTS AND ASSESSEE IS EXPECTED TO PROVIDE SERVICE COMMENSURAT E WITH THE BRAND IMAGE. THUS INFOSYS LTD. CANNOT BE EXCLUDED BECAU SE OF BRAND VALUE AND THE ASSESSEE IS ALSO AT THE SAME FOOTING. 22. THE LD. DR SUBMITTED THAT AS REGARDS THE RELIAN CE OF THE APPELLANT ON THE ORDER OF TPO FOR AY 2013-14, EACH YEAR NEEDS TO BE LOOKED INTO SEPARATELY AND THE COMPARABLES NEED TO BE SELECTED AFTER EXAMINING THE ISSUE OF FILTERS APPLIED AND THE FUNCTIONALITY OF T HE COMPANY BASED ON THE FINANCIALS OR THE OTHER DATA AVAILABLE WITH THE TPO . SO THIS ARGUMENT WAS REJECTED. 23. THE LD DR SUBMITTED THAT THE PLATFORMS/PRODUCTS AND SOLUTIONS OF THE COMPANY ARE NOT OFF THE SHELF PRODUCTS AS ARGUED BY THE ASSESSEE. THE COMPANY HAD REVENUE FROM SOFTWARE SERVICES OF RS.42 ,531 CRORES AND THAT FROM SOFTWARE PRODUCTS WAS ONLY RS.1,810 CORES. AS SUCH, THE PRODUCT REVENUE CONSTITUTED A MEAGRE 4.08% OF TOTAL OPERATI NG REVENUE. IT PASSED THE FILTER OF REVENUE FROM CORE SERVICES GREATER T HAN 75% AND FUNCTIONALLY COMPARABLE TO ASSESSEE. THE MEAGRE REVENUE FROM SOF TWARE PRODUCTS DOES NOT IMPACT THE MARGINS OF COMPANY FROM SOFTWAR E DEVELOPMENT AND SEGMENTAL DATA IS NOT REQUIRED TO BE CONSIDERED. 24. ON THE CONTENTION OF THE ASSESSEE THAT INFOSYS LTD. HAS A HUGE R&D EXPENDITURE, THE LD. DR SUBMITTED THAT COMPANY HAS INCURRED R&D EXPENDITURE OF RS.873 CRORE WHICH IS A MEAGRE 1.96% OF ITS TOTAL OPERATING REVENUE. FROM THE NOTE 1.1 OF THE ANNUAL REPORT AT PAGE 50, THE DEVELOPMENT OF INTANGIBLES AND ITS IMPACT ON THE RE VENUE AND PROFITABILITY CAN BE INFERRED AS MEAGRE. THE ASSESSEE HAS FAILED TO ESTABLISH THAT DIFFERENCES, IF ANY, ON ACCOUNT OF R&D, BRAND AND I NTANGIBLES HAVE MATERIAL EFFECT ON THE MARGIN OF THE SAID COMPANY. FURTHER THE ASSESSEE ITSELF ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 11 OF 42 CONSIDERED SUCH COMPANIES AS COMPARABLE WHICH HAD R &D EXPENDITURE TO SALES RATIO LESS THAN 3%. THE REASON GIVEN BY ASSE SSEE TO APPLY SUCH A FILTER WAS TO SELECT COMPANIES WHICH DO NOT OWN INT ANGIBLES AND ARE PURE SERVICE PROVIDERS. THUS THIS COMPANY CANNOT BE REJ ECTED AS A COMPARABLE BECAUSE OF R&D OR INTANGIBLES. 25. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ISSUE OF COMPARABILITY OF INFOSYS LTD. CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN THE CASE OF MICROSOFT RESEARCH LAB INDIA PVT. LTD. [IT(TP)A NO.3131/BANG/2018 FOR THE AY 2014-15 . VIDE ORDER DATED 05.02.2020 THE TRIBUNAL EXCLUDED THIS COMPANY FROM THE COMPARABLES HOLDING AS FOLLOWS:- (I) INFOSYS LIMITED : THE TURNOVER BEING RS.44,341 CRORES AND IT IS FUNCTIONALLY NOT COMPARABLE AS THE TURNOVER IS M ORE THAN 500 TIMES OF THE ASSESSEE TURNOVER OF RS.84.09 CRORES. THE COMPANY IS ENGAGED IN DEVELOPING SOFTWARE PRODUCTS PINNACLE AND WAS REJECTED BY THE DRP IN ASSESSEE OWN CASE FOR THE AS SESSMENT YEAR 2011-12. FURTHER HAS HIGH BRAND VALUE AND INCU RRED HUGE EXPENDITURE IN R & D WITH EXCEPTIONAL AREAS OF OPER ATION AND EARNED SUPER NATURAL PROFITS AND IS ENGAGED IN DIVE RSIFIED ACTIVITIES. WE FOUND THAT THE COMPARABLE WAS EXCLUD ED BY THE CO- ORDINATE BENCH DECISION OF THE TRIBUNAL IN THE CASE OF M/S. MARWELL INDIA P. LTD. VS. DCIT IN IT(TP)A NO.3082/B ANG/2018 FOR THE ASSESSMENT YEAR 2014- 15 DT.23.10.2019 AT P AGE 20 PARA 4.2 (B) WHICH READ AS UNDER: 4.2 (B). INFOSYS LTD: IT HAS BEEN SUBMITTED BY LD.COUNSEL THAT THIS COMPA RABLE HAS BEEN INCLUDED BY LD.TPO IN FINALIST. IT HAS BEE N SUBMITTED THAT THIS COMPARABLE IS NOT COMPARABLE DU E TO HIGH TURNOVER AND INTANGIBLES OWNED BY THIS COMPANY . IT HAS BEEN SUBMITTED THAT HONBLE DELHI HIGH COURT IN CASE OF CIT VS AGNITY INDIA TECHNOLOGIES REPORTED IN (20 13) 36 TAXMANN.COM 289 HAS HELD THIS COMPANY TO BE BAD COMPARABLE TO A COMPANY WHICH IS CAPTIVE SERVICE PROVIDER UNDER THE SEGMENT. IT HAS BEEN SUBMITTED T HAT THIS COMPANY PROVIDES END TO END BUSINESS SOLUTIONS THAT LEVERAGE TECHNOLOGY TO ENABLE CLIENTS TO ENHANCE BU SINESS PERFORMANCE. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 12 OF 42 LD. CIT DR PLACED RELIANCE UPON THE ORDER PASSED BY AUTHORITIES BELOW. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. ADMITTEDLY THIS COMPANY OWNS HUGE INTANGIBLES AND I S AN ENTREPRENEUR IN THE FIELD OF SOFTWARE SERVICE DEVEL OPMENT SERVICE SEGMENT. AT PAGE-1100 OF PAPER BOOK, VOL.II I IT IS OBSERVED THAT THIS COMPANY PRIMARILY DERIVES REVENU E FROM SOFTWARE DEVELOPMENT AND RELATED SERVICES AND FROM LICENSING OF PRODUCTS. IN SEGMENTAL DETAILS AT PAGE -1110, IT IS OBSERVED THAT REVENUE GENERATED FROM SOFTWARE SE RVICES IS RS.4253/- CRORES WHICH IS MUCH HIGH AND HENCE CA NNOT BE COMPARED TO A CAPTIVE SERVICE PROVIDER LIKE THAT OF ASSESSEE. RESPECTFULLY FOLLOWING DECISION OF ORDERABLE DELHI HIGH COURT (SUPRA) WE DIRECT LD. AO/TPO TO EXCLUDE THIS COMPARABLE FROM THE FINAL LIST. WE CONSIDERING THE FACTS, FUNCTIONAL PROFILE AND TH E DECISION OF THE CO-ORDINATE BENCH, DIRECT THE TPO TO EXCLUDE TH E COMPARABLE FROM THE FINAL LIST OF COMPARABLES FOR DETERMINATIO N OF ALP. 26. SINCE THE FACTS OF THE CASE ARE SIMILAR RELATIN G TO SWD SEGMENT TO THE CASE OF MICROSOFT RESEARCH LAB INDIA PVT. LTD. (SUPRA) , WE DIRECT EXCLUSION OF INFOSYS LTD. FROM THE COMPARABLES. (II) LARESEN & TOUBRO INFOTECH LTD. 27. THE LD. AR SUBMITTED THAT LARSEN AND TOUBRO INF OTECH LIMITED (L&T) SHOULD BE EXCLUDED FROM THE LIST OF THE COMPARABLES AS IT IS FUNCTIONALLY DIFFERENT FROM THE APPELLANT ON ACCOUNT OF FOLLOWIN G: SIGNIFICANT AMOUNT OF INTANGIBLE ASSETS INCLUDING I PR AND BUSINESS RIGHTS SIGNIFICANT BRAND VALUE EXTRAORDINARY EVENTS DURING THE YEAR SIGNIFICANT OVERSEAS STAFF COSTS AND SUB-CONTRACTIN G EXPENSES. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 13 OF 42 28. FURTHER ON THE ASSESSEES SUBMISSION THAT THIS COMPANY HAS SUBCONTRACTING EXPENSES, THE LD. DR SUBMITTED THAT IT IS VERY COMMON PRACTICE IN THE SOFTWARE DEVELOPMENT SECTOR THAT PE RSONNEL FOR THE CODING E.G. PROGRAMMERS ARE TAKEN ON CONTRACT BY THE COMPA NIES FOR THE DURATION OF THE PROJECT AND THEY ARE JUST LIKE EMPLOYEES OF THE DEVELOPER AS THEY FUNCTION UNDER CONTROL AND DIRECTION OF THE DEVELOP ER. SO SUB-CONTRACTING EXPENSES DO NOT MAKE L&T FUNCTIONALLY DIFFERENT FRO M THE APPELLANT. THIS IS ENTIRELY DIFFERENT FROM THE CASE WHERE THE SOFTWARE DEVELOPMENT WORK ITSELF IS OUTSOURCED TO THE SOFTWARE DEVELOPER E.G. THE AE OF THE APPELLANT HAS OUTSOURCED ITS WORK TO THE APPELLANT. SO THESE ARGU MENTS OF THE APPELLANT ARE TO BE REJECTED. 29. THE LD. DR SUBMITTED THAT THE ISSUE OF BRAND OF THIS COMPANY IS SIMILAR TO THE CONTENTIONS OF THE REVENUE IN INFOSY S LTD. AS REGARDS THE ARGUMENT THAT IT WAS A PRODUCT COMPANY, THE LD. DR SUBMITTED THAT FROM THE ANNUALS OF THE COMPANY IT IS EVIDENT THAT THE COMPA NY IS IN SOFTWARE DEVELOPMENT. ON PERUSAL OF THE 'DIRECTOR'S REPORT' (AS IN THE ANNUAL REPORT), UNDER THE SUB HEAD 'PERFORMANCE OF THE COM PANY', IT IS OBSERVED THAT THE COMPANY IS OPERATING IN THE SECTOR OF 'IT SERVICES'. THE IT SERVICE SECTOR REVENUE IS CATEGORIZED INTO THREE PARTS ON T HE BASIS OF THE NATURE OF BUSINESS OF THE CLIENTS. OF THE TOTAL IT SERVICES R EVENUE, 43.5% COMES FROM THE CLIENTS FROM SERVICES SECTOR, 48.6% FROM CLIENT S OPERATING IN MANUFACTURING SECTOR AND 7.9% (FOR NINE MONTHS) FRO M CLIENTS OPERATING IN THE TELECOM SECTOR. THE BASIC WORK OF L&T REMAINS T HE SAME I.E. PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS CLIENTS OPERAT ING IN DIFFERENT BUSINESS SEGMENTS. EARNINGS IN FOREIGN CURRENCY (NOTES FORMI NG PART OF ACCOUNTS ANNUAL REPORT) ALSO SHOWS THE MAJOR EARNINGS ARE FR OM SOFTWARE EXPORT. THE REVENUE RECOGNITION METHOD IN THE 'NOTES FORMING PA RT OF ACCOUNTS' ALSO REFERS TO SERVICES PERFORMED ON 'FIXED PRICE BASIS' OR 'TIME AND MATERIAL BASIS'. THUS THE FUNCTIONAL PROFILE OF THE COMPANY IS SAME AS THAT OF THE ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 14 OF 42 ASSESSEE COMPANY. THE ALP IN THE CASE OF THE ASSESS EE HAS BEEN DETERMINED BY TREATING TNMM AS THE MOST APPROPRIATE METHOD. THIS METHOD REQUIRES BROAD COMPARABILITY OF THE FUNCTION ALITY OF THE COMPARABLES. SO IN CASE THE COMPANY IS IN SOFTWARE DEVELOPMENT, IT WOULD NOT MATTER AS TO WHAT KIND OF CUSTOMER IT SERVES AS THE BROAD RANGE OF SERVICES REMAIN THE SAME AND THAT IS THE DEVELOPMEN T OF SOFTWARE. FURTHER, IT WILL NOT MATTER WHETHER THE COMPARABLE DEVELOPS COMPLETE SOFTWARE FOR ITS CLIENT E.G. DEVELOPS A FINAL PRODUCT AS PER DEMAND OF THE CLIENT OR DEVELOPS ONLY SOME SOFTWARE MODULES, AS PER THE REQUIREMENTS OF ITS CLIENT. THE FUNCTION REMAINS SAME. A COMPANY CAN BE CONSIDERED IN THE BUSINESS OF SOFTWARE PRODUCTS ONLY IF IT IS ITSELF DEVELOPING A ND SELLING THE PRODUCTS DEVELOPED BY IT AND NOT IF ITS CLIENT IS SELLING TH E PRODUCTS DEVELOPED FOR IT BY SUCH COMPANY. THE APPELLANT IS ALSO SIMILARLY PLACE D AS IT IS PROVIDING SERVICES TO ITS AE, WHICH USES THE SAME IN ITS OWN PRODUCTS. SO THESE ARGUMENTS OF THE APPELLANT DO NOT HAVE ANY MERIT AS THE COMPANY IS FUNCTIONALLY SIMILAR TO THE APPELLANT. AS THERE IS NO REVENUE STREAM ON ACCOUNT OF PRODUCT SALES, THERE IS NO MERIT IN THE ARGUMENT OF THE APPELLANT THAT THE COMPANY IS ENGAGED IN PRODUCT SALES. 30. AS REGARDS THE CONTENTION OF ASSESSEE THAT THE PRODUCT ENGINEERING BUSINESS SEGMENT OF L&T WAS TRANSFERRED TO L&T TECH NOLOGY SERVICES LTD AND THE SAME HAD AN IMPACT ON THE MARGINS OF THIS C OMPANY, THE LD. DR SUBMITTED THAT A PERUSAL OF THE ANNUAL REPORT OF L& T SHOWS THAT THE COMPANY HAD THREE BUSINESS SEGMENTS SERVICES CLUS TER, INDUSTRIALS CLUSTER AND TELECOM CLUSTER (PRODUCT ENGINEERING SE RVICES). W.E.F. JAN 1, 2014, THE PRODUCT ENGINEERING SERVICES (PES) WAS TR ANSFERRED TO L&T TECHNOLOGY SERVICES LIMITED, AND ACCORDINGLY ONLY T HE NINE MONTH REVENUE RESULTS FROM PRODUCT ENGINEERING SERVICES (PES) WER E CONSIDERED IN THE COMPANY'S FINANCIAL STATEMENT FOR THE YEAR. AS SUCH THERE WASN'T ANY IMPACT ON FUNCTIONAL COMPARABILITY. THE APPELLANT H AS NOT POINTED OUT ANY ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 15 OF 42 IMPACT ON REVENUE WHICH COULD HAVE INCREASED THE MA RGINS OF THIS COMPANY OR IMPACT ON THE FUNCTIONAL COMPARABILITY O N ACCOUNT OF SUCH BUSINESS TRANSFER. IN FACT, ON ACCOUNT OF SUCH TRAN SFER, THE QUANTUM OF REVENUE WILL BE LESS WHICH WILL ONLY LOWER THE MARG INS. 31. ON THE ASSESSEES ARGUMENT THAT L&T HAS SUBSTAN TIAL OVERSEAS STAFF COST AND SUB-CONTRACTING EXPENSES, THE LD. DR SUBMITTED AS IN THE CASE OF INFOSYS, NO SUCH GROUND OF APPEAL HAS BEEN RAISED BY THE APPELLANT THAT THERE SHOULD BE FILTER RELATING TO ONSITE WORK . NO SUCH FILTER WAS APPLIED BY THE APPELLANT ITSELF IN ITS TP STUDY. SO THIS AR GUMENT OF THE APPELLANT HAS TO BE REJECTED. 32. ON THE ARGUMENT OF THE ASSESSEE THAT L&T HAS IN TANGIBLES AND SO IT SHOULD NOT BE CONSIDERED AS AN APPROPRIATE COMPARAB LE IN ITS CASE, THE LD. DR SUBMITTED THAT ON PERUSING THE DETAILS OF INTANG IBLE ASSETS OF L&T, IT IS OBSERVED THAT THE ENTIRE VALUE OF THE GROSS BLOCK B EFORE DEPRECIATION IS ON ACCOUNT OF SOFTWARE USED FOR THE DEVELOPMENT PURPOS ES. A MEAGRE AMOUNT OF RS 9.8 CRORE IS SHOWN AS BUSINESS RIGHTS, WHICH IS NOT BEING DEVELOPED YEAR AFTER YEAR BUT IS A RIGHT WHICH HAS BEEN AMORT IZED OVER LAST FIVE YEARS AND THE NET BOCK OF THE SAME AS ON 31.03.2014 SHOWS NIL VALUE. INTANGIBLE ASSETS UNDER DEVELOPMENT, AS IN THE LIST OF INTANGI BLE ASSETS, IS SHOWN AS NIL. FURTHER, EVEN IF THERE IS ANY SELF-GENERATED I NTANGIBLE, NOT BEING ON ACCOUNT OF NORMAL PURCHASE AS IN CASE OF SOFTWARE, IN THE CASE OF APPELLANT TOO, WHILE IT IS PERFORMING ITS FUNCTIONS OF SOFTWA RE DEVELOPMENT, SUBSTANTIAL INTANGIBLES GET GENERATED AS ACTIVITY O F SOFTWARE DEVELOPMENT INHERENTLY GENERATES IPR. CONSIDERING ABOVE, THIS A RGUMENT OF THE APPELLANT CANNOT BE ACCEPTED. 33. FURTHER, L&T WAS CONSIDERED TO BE FUNCTIONALLY COMPARABLE TO A SOFTWARE SERVICE PROVIDER COMPANY BY THE ITAT BANGA LORE IN THE CASE OF M/S. ADVICE AMERICA SOFTWARE DEVELOPMENT CENTRE PRI VATE LIMITED (IN ITA ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 16 OF 42 (TP) NO. 2531/BANG/2017 DATED 23.05.2018 RELATING T O A.Y. 2013-14. IN THE CASE OF DCIT VS. TARGET CORPORATION OF INDIA PVT. LTD. IT(T .P.)A. NO.343/BANG/2015 (ASSESSMENT YEAR : 2010-11) TOO ITAT HAD OBSERVED THAT THE SAID COMPANY WAS FUNCTIONALLY COMPARABLE FOR SOFTWA RE DEVELOPMENT SERVICES. CONSIDERING ABOVE, THE LD. DR SUBMITTED THAT THE GROUND OF APPEAL IN RELATION TO LARSEN AND TOUB RO INFOTECH HAS TO BE REJECTED. 34. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. SIMI LAR ISSUE WAS DECIDED BY THE TRIBUNAL IN THE CASE OF MICROSOFT RESEARCH LAB INDIA PVT. LTD. (SUPRA) WHEREIN IT WAS OBSERVED AS FOLLOWS:- WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. IT IS OBSERVED THAT DELHI ITAT IN CASE OF AGINITY I NDIA TECHNOLOGIES INDIA PRIVATE LIMITED (SUPRA) HAS HELD AS FOLLOWS: LARSEN AND TOUBRO INFOTECH LTD WAS EXCLUDED FROM T HE LIST OF COMPARABLE COMPANIES BY RELYING ON THE DECI SION OF THE DELHI BENCH ITAT IN CASE OF SAXO INDIA D VS ACI T. THE DISCUSSION IS CONTAINED AT PARA 4 .8 TO 4.10 OF TRI BUNALS ORDER. THE TRIBUNAL HELD THAT LMT INFOTECH LTD WAS SOFTWARE PRODUCT COMPANY AND SEGMENTAL INFORMATION ON SWT SERVICES WAS NOT AVAILABLE. THE TRIBUNAL ALSO N OTICED THAT APPEAL FILED BY REVENUE AGAINST RIVALS ORDER W AS DISMISSED BY ORDERABLE DELHI HIGH COURT IN ITA NO. 682/2016. RESPECTFULLY FOLLOWING THE SAME WE ARE OF CONSIDERE D OPINION THAT THIS COMPANY DESERVES TO BE EXCLUDED F ROM THE FINAL LIST. WE RELY ON THE COORDINATE BENCH DECISION AND DIRECT THE TPO/A.O. TO EXCLUDE THE COMPARABLE FROM THE FINAL L IST FOR DETERMINATION OF ALP. 35. IN VIEW OF THE ABOVE DECISION, WE DIRECT EXCLUS ION OF LARSEN & TOUBRO INFOTECH LTD. FROM THE COMPARABLES. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 17 OF 42 (III) MINDTREE LTD. 36. THE LD. AR SUBMITTED THAT MINDTREE LTD. SHOULD NOT BE CONSIDERED AS A PROPER COMPARABLE FOR THE FOLLOWING REASONS:- TP ADJUSTMENTS HAVE BEEN MADE IN THE CASE OF MINDTR EE. OWNERSHIP OF INTANGIBLES AND DEVELOPMENT OF INTELLE CTUAL PROPERTY PRODUCT BUSINESS DIVERSIFIED OPERATIONS 37. THE LD. DR SUBMITTED THAT TP ADJUSTMENTS IN THE CASE OF MINDTREE DOES NOT DISTURB ITS FINANCIALS AND AS SUCH THE SAM E DOES NOT MAKE THE COMPANY AS FUNCTIONALLY INCOMPARABLE TO THE APPELLA NT. THE CONTENTION OF ASSESSEE THAT THIS COMPANY BEING FUNCTIONALLY DIFFE RENT HAS BEEN DISCUSSED BY THE TPO AND HIS FINDINGS HAS NOT BEEN CONTROVERT ED BY ASSESSEE. THE BASIS OF CLAIM THAT THE SAID COMPANY IS INTO DIVERS IFIED BUSINESS OR PRODUCT BUSINESS IS THE WEBSITE OF THIS COMPANY. HOWEVER TH IS REFERENCE OF APPELLANT TO WEBSITE OF THE COMPANY IS MISPLACED, A S THE ANNUAL REPORT OF THE MINDTREE IS MORE RELIABLE THAN THE WEBSITE AS T HE LATTER IS DYNAMIC IN NATURE AND MAY REPRESENT THE STATUS AT THE TIME OF ACCESSING THE SAME RATHER THAN THE STATUS DURING THE RELEVANT FINANCIA L YEAR. FURTHER THE PURPOSE OF WEBSITE IS TO ADVERTISE AND TO ATTRACT M ORE CLIENTS AND THUS IT MAY REFLECT THE CAPABILITIES OF THE COMPANY RATHER THAN THE ACTUAL FUNCTIONING DURING A SPECIFIC YEAR. SO RELIANCE CAN NOT BE PLACED ON THE WEBSITE OF THE COMPANY. THE ALP IN THE CASE OF THE ASSESSEE HAS BEEN DETERMINED BY TREATING TNMM AS THE MOST APPROPRIATE METHOD. THIS METHOD REQUIRES BROAD COMPARABILITY OF THE FUNCTION ALITY OF THE COMPARABLES. SO IN CASE THE COMPANY IS IN SOFTWARE DEVELOPMENT, IT WOULD NOT MATTER AS TO WHAT KIND OF CUSTOMER IT SERVES AS THE BROAD RANGE OF SERVICES REMAIN THE SAME AND THAT IS THE DEVELOPMEN T OF SOFTWARE. SO, ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 18 OF 42 ACCORDING TO THE LD. DR, THESE ARGUMENTS OF THE APP ELLANT DO NOT HAVE ANY MERIT AS THE COMPANY IS FUNCTIONALLY SIMILAR TO THE APPELLANT. 38. THE LD. DR SUBMITTED THAT ASSESSEE HAS ARGUED THAT MINDTREE IS INTO DEVELOPMENT OF INTELLECTUAL PROPERTY AND HAS I NTANGIBLES. THE ISSUE HAS BEEN DISCUSSED BY THE TPO WHICH HAS NOT BEEN CONTRO VERTED. THE CONTENTION OF ASSESSEE THAT AS PER THE ANNUAL REPOR T OF MINDTREE, IT HAS RECEIVED LONG TERM FUNDS FROM COUNCIL FOR SCIENTIFI C AND RESEARCH (CSIR) TO DEVELOP A PROJECT UNDER `DEVELOPMENT OF INTELLIG ENT VIDEO SURVEILLANCE SERVER SYSTEM'. THIS ARGUMENT DOES NOT CARRY ANY WE IGHT. FIRSTLY PAGE 109 OF THE ANNUAL REPORT OF MINDTREE RELATES TO CONSOLI DATED FINANCIALS OF THE GROUP. SECONDLY THE BORROWING FROM CSIR IS A MEAGER RS 2.70 CRORES AS AGAINST THE TURNOVER OF THE COMPANY WHICH IS 3031.6 0 CRORE. THIRDLY THERE IS NOTHING TO SUGGEST IN THE ANNUAL THAT THIS HAS RESU LTED IN GENERATION OF IP FOR THE COMPANY. THE TPO HAS RIGHTLY POINTED OUT TH AT TOTAL INTANGIBLES OF MINTREE ARE OF RS 6.7 CRORE, WHICH IS JUST 1% OF TH E TOTAL NON-CURRENT ASSETS AND THERE IS NOTHING TO SUGGEST THAT THESE INTANGIB LES HAVE DRIVEN THE REVENUE OF THIS COMPANY. THE REMAINING INTANGIBLES OF RS 69.80 CRORE ARE THE SOFTWARE USED FOR DEVELOPMENT. FURTHER, EVEN IF THERE IS ANY SELF- GENERATED INTANGIBLE, NOT BEING ON ACCOUNT OF NORMA L PURCHASE AS IN CASE OF SOFTWARE, IN THE CASE OF APPELLANT TOO, WHILE IT IS PERFORMING ITS FUNCTIONS OF SOFTWARE DEVELOPMENT, SUBSTANTIAL INTANGIBLES AR E GENERATED. CONSIDERING ABOVE, THE ARGUMENT OF THE APPELLANT CA NNOT NOT BE ACCEPTED. 39. THIS ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN THE CASE OF MICROSOFT RESEARCH LAB INDIA PVT. LTD. (SUPRA) WHEREIN THIS COMPANY WAS EXCLUDED FROM COMPARABLES OBSERVING AS UNDER:- 4.2(F) WE FOUND FOR THE ASSESSMENT YEAR 2014-15, THE COMPANY WAS EXCLUDED BY THE CO- ORDINATE BENCH DECI SION IN THE CASE OF MARWELL INDIA PVT. LTD. VS. DCIT (SUPRA) AT PAGE 24 PARA 4.2 (F) OF THE ORDER AS UNDER : ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 19 OF 42 4.2 (F). MINDTREE LTD THIS COMPARABLE HAS BEEN INCLUDED BY LD.TPO THE FIN AL LIST. LD. COUNSEL SUBMITTED THAT IT IS FUNCTIONALLY NOT SIMILAR WITH THAT OF ASSESSEE. IT IS SUBMITTED THAT ASSESSEE ENGAGED IN PROVIDING SERVICES SUCH AS AGILE, ANALYT ICS AND INFORMATION MANAGEMENT, APPLICATION DEVELOPMENT AND MAINTENANCE, BUSINESS PROCESS MANAGEMENT, BUSINESS TECHNOLOGY CONSULTING, CLOUD, DIGITAL BUSINESS, INDEPENDENT TESTING, INFRASTRUCTURE MANAGEMENT SERV ICES, MOBILITY, PRODUCT ENGINEERING AND SAP SERVICES. LD. AR REFERRED TO PAGE 1088 IN SUPPORT. IT IS FURTHER BEE N SUBMITTED THAT THIS COMPANY DOES NOT HAVE SEGMENTAL INFORMATION ON THE BASIS OF WHICH REVENUE EARNED FR OM DIFFERENT VERTICALS COULD BE IDENTIFIED. THIS COMPA NY ALSO OWNS HUGE INTANGIBLES AND THEREFORE DESERVES TO BE EXCLUDED. ON THE CONTRARY LD. CIT DR PLACED RELIANCE UPON ORD ERS PASSED BY AUTHORITIES BELOW. WE HAVE EXAMINED THE ANNUAL REPORTS OF THIS COMPANY AND IT IS OBSERVED THAT THIS COMPANY CARRIES OUT RE SEARCH AND DEVELOPMENT ACTIVITIES AND HAS CREATED LARGE INTANGIBLES. UNDER SUCH CIRCUMSTANCES WE DO NOT FIN D THIS COMPANY TO BE COMPARABLE WITH THAT OF A CAPTIVE SER VICE PROVIDER LIKE ASSESSEE. WE THEREFORE DIRECT THE LD. AO/TPO TO EXCLUDE THIS COMPARABLE FROM THE FINAL LIST. CONSIDERING THE FUNCTIONAL DISSIMILARITY AND HIGH T URNOVER CRITERIA AND JUDICIAL DECISION, WE DIRECT THE TPO/A.O. TO EX CLUDE THE COMPARABLE FROM THE FINAL LIST OF COMPARABLES FOR D ETERMINATION OF ALP. (IV) PERSISTENT SYSTEMS LTD. 40. THE LD. AR SUBMITTED THAT MINDTREE SHOULD NOT B E CONSIDERED AS A PROPER COMPARABLE FOR THE FOLLOWING REASONS:- ENGAGED IN PRODUCT DEVELOPMENT ENGAGED IN DIVERSIFIED BUSINESS INCLUDING INTELLECT UAL PROPERTY ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 20 OF 42 EXTRAORDINARY EVENTS ENGAGED IN R&D ACTIVITIES LARGE SCALE OF OPERATION 41. THE LD. DR SUBMITTED THAT THE REFERENCE OF ASS ESSEE TO WEBSITE OF THE COMPANY IS MISPLACED, AS THE SAME RELATES TO EN TIRE GROUP OF PERSISTENT SYSTEMS. FURTHER, THE ANNUAL REPORT OF THE COMPANY IS MORE RELIABLE THAN THE WEBSITE AS THE LATTER IS DYNAMIC IN NATURE AND MAY REPRESENT THE STATUS AT THE TIME OF ACCESSING THE SAME RATHER THAN THE S TATUS DURING THE RELEVANT FINANCIAL YEAR. FURTHER THE PURPOSE OF WEBSITE IS T O ADVERTISE AND TO ATTRACT MORE CLIENTS AND THUS IT MAY REFLECT THE CAPABILITI ES OF THE GROUP RATHER THAN THE ACTUAL FUNCTIONING DURING A SPECIFIC YEAR. ON P ERUSAL OF THE ANNUAL REPORT OF THIS COMPANY, IT IS OBSERVED THAT AT PAGE 158 [CLAUSE (IV)] OF THE UNCONSOLIDATED ANNUAL REPORT, IT IS MENTIONED THAT THE ACTIVITIES OF THE COMPANY DO NOT INVOLVE PURCHASE OF INVENTORY AND SA LE OF GOODS, AND ITS NATURE OF BUSINESS WAS RENDERING OF SERVICES. THE R EFERENCE OF APPELLANT TO PAGES 59, 60, 77 AND 105 OF ANNUAL REPORT IS ALSO M ISPLACED, AS THE SAME RELATE TO ENTIRE GROUP OF PERSISTENT SYSTEMS AND UN CONSOLIDATED REPORT STARTS FROM PAGE 155 OF THE ANNUAL REPORT. THE REVE NUE RECOGNITION METHOD IN THE 'NOTES FORMING PART OF FINANCIAL STATEMENTS' ON PAGE 166 OF THE ANNUAL REPORT ALSO REFERS TO 'INCOME FROM SOFTWARE SERVICES'. IT REFERS TO SERVICES PERFORMED ON 'FIXED PRICE BASIS OR 'TIME A ND MATERIAL BASIS'. AS PER PAGE 181, NOTE 21 OF THE ANNUAL REPORT, THE REVENUE FROM OPERATIONS IS STATED TO BE ON ACCOUNT OF SALE OF SOFTWARE SERVICE S AMOUNTING RS.11,841.16 MILLION. AS PER PAGE 195 OF THE ANNUAL REPORT, THE EARNINGS IN FOREIGN CURRENCY OF RS.10,606.23 MILLION, (CONSTITU TING 89.57%) WAS FROM SALE OF SOFTWARE; AND THERE IS NO REFERENCE TO SALE OF PRODUCTS. THUS IT IS EVIDENT THAT THIS COMPANY'S REVENUE FROM OPERATION WAS PREDOMINANTLY ON ACCOUNT OF SERVICES RENDERED. THERE IS NO MENTION O F ANY REVENUE STREAM ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 21 OF 42 FROM SALE OF PRODUCTS IN THE P& L ACCOUNT OR BALANC E SHEET. AT PAGE 183 OF THE ANNUAL REPORT, IT IS GIVEN THAT THE COMPANY'S O PERATIONS PREDOMINANTLY RELATE TO PROVIDING SOFTWARE PRODUCTS SERVICES AND TECHNOLOGY INNOVATION COVERING FULL LIFE CYCLE OF PRODUCTS TO ITS CUSTOME RS. THE PRIMARY REPORTING SEGMENTS ARE IDENTIFIED BASED ON REVIEW OF MARKET A ND BUSINESS DYNAMICS BASED ON RISK AND RETURNS AFFECTED BY THE TYPE OF C LASS OF CUSTOMERS FOR THE SERVICES PROVIDED. AS PER PAGE 164 (NOTE 1) OF THE ANNUAL REPORT, THE COMPANY IS SPECIALIZING IN SOFTWARE PRODUCTS SERVIC ES AND TECHNOLOGY INNOVATION AND OFFERS COMPLETE PRODUCT LIFE CYCLE S ERVICES. THIS INDICATES THAT THE COMPANY IS DEVELOPING SOFTWARE FOR ITS CUS TOMERS, WHO IN TURN ARE IN BUSINESS OF SOFTWARE PRODUCT DEVELOPMENT AND OUT SOURCING THE WORK OF SOFTWARE DEVELOPMENT TO THIS COMPANY. THUS THE APPE LLANT HAS WRONGLY INFERRED THAT M/S PERSISTENT SYSTEMS LTD ITSELF IS IN SOFTWARE PRODUCT DEVELOPMENT. IN FACT, THE APPELLANT ITSELF IS SIMIL ARLY PLACED AS IT IS DEVELOPING SOFTWARE FOR ITS AE, WHICH IN TURN IS FI NALLY USING IT IN ITS OWN PRODUCTS. ALTHOUGH THE 'NATURE OF OPERATIONS ' OF T HE COMPANY USE THE WORDS 'SPECIALIZING IN SOFTWARE PRODUCTS', `SERVICE S AND TECHNOLOGY INNOVATION', 'COMPLETE PRODUCT LIFE CYCLE SERVICES' ETC., HOWEVER AS BROUGHT OUT BY THE TPO IN HIS ORDER, THE COMPANY IS DEVELOP ING PRODUCTS FOR ITS CUSTOMERS AND NOT ITSELF SELLING THE PRODUCTS. THIS IS ALSO CONFIRMED BY THE COMPANY IN THE INFORMATION PROVIDED UNDER SECTION 1 33(6) OF THE ACT. IN FACT, THE BUSINESS STRATEGY OF THE ENTIRE GROUP IS TO PROVIDE SERVICES TO THE CLIENTS, WHICH ARE SOFTWARE PRODUCT COMPANIES. THUS THE FUNCTIONAL PROFILE OF THE COMPANY IS SAME AS THAT OF THE APPELLANT. TH E ALP IN THE CASE OF THE APPELLANT HAS BEEN DETERMINED BY TREATING TNMM AS T HE MOST APPROPRIATE METHOD. THIS METHOD REQUIRES BROAD COMPARABILITY OF THE FUNCTIONALITY OF THE COMPARABLES. SO IN CASE THE COMPANY IS IN SOFTWARE DEVELOPMENT, IT WOULD NOT MATTER AS TO WHAT KIND OF CUSTOMER IT SERVES AS THE BROAD RANGE OF SERVICES REMAIN THE SAME AND THAT IS THE DEVELOPMEN T OF SOFTWARE. FURTHER, ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 22 OF 42 IT WILL NOT MATTER WHETHER THE COMPARABLE DEVELOPS COMPLETE SOFTWARE FOR ITS CLIENT E.G. DEVELOPS A FINAL PRODUCT AS PER DEMAND OF THE CLIENT OR DEVELOPS ONLY SOME SOFTWARE MODULES FOR AS PER THE REQUIREME NTS OF ITS CLIENT. THE FUNCTION REMAINS SAME. THUS, A COMPANY CAN BE CONSI DERED IN THE BUSINESS OF SOFTWARE PRODUCTS ONLY IF IT IS ITSELF DEVELOPING AND SELLING THE PRODUCTS DEVELOPED BY IT AND NOT IF ITS CLIENT IS S ELLING THE PRODUCTS DEVELOPED FOR IT BY SUCH COMPANY. THE APPELLANT IS ALSO SIMILARLY PLACED AS IT IS ALSO INTO SOFTWARE DEVELOPMENT FOR THE PRODUC TS FOR ITS AE. SO THESE ARGUMENTS OF THE APPELLANT DO NOT HAVE ANY MERIT AS 'THE COMPANY IS FUNCTIONALLY SIMILAR TO THE APPELLANT. IN AGNITY INDIA TECHNOLOGIES PVT. (SUPRA) THE ITAT HELD PERSISTENT SYSTEMS LTD TO BE A PROPE R COMPARABLE FOR SOFTWARE DEVELOPMENT ACTIVITIES. 42. AS REGARDS EXPENDITURE INCURRED TOWARDS R&D, THE LD. DR SUBMITTED THAT AS PER PAGE 195 OF THE ANNUAL REPORT THE SAME WAS RS.39.61 MILLION, WHICH CONSTITUTE MEAGER 0.33% OF OPERATING REVENUE. AS DISCUSSED SUPRA WHILE DEALING WITH INFOSYS LTD AS A PROPER COMPARABLE, IN ITS TP STUDY THE APPELLANT HAS ITSELF ACKNOWLEDGED THAT R&D EXPENDITURE WHICH IS LESS THAN 3% OF THE SALES IS AN APPROPRIAT E FILTER TO REJECT COMPANIES WHICH ARE IN R&D OR IN DEVELOPMENT OF INT ANGIBLES. SO AS PER APPELLANT'S OWN YARD STICK THIS COMPANY CANNOT BE R EJECTED ON ACCOUNT OF R&D OR INTANGIBLES. FURTHER THE VALUE OF INTANGIBLE ASSETS OF PERSISTENT SYSTEMS WAS ONLY RS.162.85 MILLION CONSTITUTING 1.3 6% OF OPERATING REVENUE. THERE IS NO REFERENCE TO ANY INTANGIBLE AS SETS OR PATENT OWNED OR DEVELOPED BY THE COMPANY, IN THE STAND ALONE ANNUAL REPORT. THERE IS ALSO NO ACQUISITION OF INTANGIBLES DURING THE YEAR. THUS , IT CAN BE INFERRED THAT THE R&D AND INTANGIBLE ASSETS DO NOT HAVE IMPACT ON THE REVENUE AND PROFITABILITY OF THE COMPANY. ON PERUSING THE 'SUM MARY OF SIGNIFICANT ACCOUNTING POLICIES' IN THE ANNUAL REPORT (PAGE 164 OF ANNUAL REPORT) OF PERSISTENT SYSTEMS, IT IS OBSERVED THAT INTANGIBLE ASSETS ARE PRIMARILY THE ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 23 OF 42 SOFTWARE LICENSES PURCHASED AND CONTRACTUAL RIGHTS ACQUIRED' AND ARE VALUED ON THE BASIS OF 'PURCHASE PRICE AND ATTRIBUT ABLE COST OF BRINGING THE ASSET TO ITS WORKING CONDITION FOR INTENDED USE'. N OWHERE THERE IS REFERENCE TO THE IPR GENERATED BY THE COMPANY ITSELF AND ITS VALUATION. THUS THE INTANGIBLES IN THE FIXED ASSETS SCHEDULE ARE ON ACC OUNT OF SOFTWARE/CONTRACTUAL RIGHTS PURCHASED AND USED FOR THE DEVELOPMENT PURPOSES. FURTHER, EVEN IF THERE IS ANY SELF-GENERA TED INTANGIBLE, NOT BEING ON ACCOUNT OF NORMAL PURCHASE AS IN CASE OF SOFTWAR E, AS DISCUSSED SUPRA, IN THE CASE OF APPELLANT TOO, WHILE IT IS PERFORMIN G ITS FUNCTIONS OF SOFTWARE DEVELOPMENT, SUBSTANTIAL INTANGIBLES ARE GENERATED. THE APPELLANT HAS FAILED TO ESTABLISH THAT DIFFERENCES, IF ANY, ON AC COUNT OF R&D, BRAND AND IRPS HAVE MATERIAL EFFECT ON THE MARGIN OF THE ABOV E COMPANY, IN TERMS OF CLAUSE (I) OF SUB-RULE (3) OF RULE 10B, WHICH PROVI DES THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF NONE OF THE DIFFERENCES, IF ANY, BETWEEN ENTERPRISES ENTERI NG INTO BUSINESS TRANSACTIONS OR LIKELY TO MATERIALLY AFFECT THE PRO FIT ARISING FROM SUCH TRANSACTIONS IN THE OPEN MARKET. 43. THE CONTENTION OF ASSESSEE IS THAT THERE WAS OC CURRENCE OF EXTRAORDINARY EVENTS DURING THE YEAR UNDER CONSIDER ATION IN THE CASE OF THIS COMPANY AND SO IT SHOULD NOT BE CONSIDERED AS A COM PARABLE. THE LD. DR SUBMITTED THAT PAGE 27 OF ANNUAL REPORT RELATES TO THE CONSOLIDATED FINANCIALS OF THE GROUP AND THE EXTRA ORDINARY EVEN T RELATES TO ACQUISITION BY PERSISTENT SYSTEMS INC (PSI) AND NOT BY THE INDIAN ENTITY NAMELY PERSISTENT SYSTEMS LIMITED WHICH HAS BEEN CONSIDERED AS A COMP ARABLE BY THE TPO. THE APPELLANT HAS NOT EXPLAINED AS TO HOW THESE ACT S OF SUBSIDIARIES HAVE IMPACTED THE PROFIT MARGINS OF MIS PERSISTENT SYSTE MS. SO THIS ARGUMENT OF THE APPELLANT IS TO BE REJECTED. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 24 OF 42 44. ON THE SCALE OF OPERATIONS, THE LD. DR SUBMITTE D THAT THE TPO HAS USED EMPLOYEE COST FILTER OF 25% TO EXCLUDE THE COM PANIES NOT IN THE SOFTWARE DEVELOPMENT SEGMENT. THE APPELLANT HAS NOT EXPLAINED AS TO HOW MORE NUMBER OF EMPLOYEES AFFECTS THE MARGINS OF THIS COMPANY. 45. THE LD. DR FURTHER SUBMITTED THAT THIS COMPANY WAS UPHELD TO BE FUNCTIONALLY COMPARABLE TO A SOFTWARE SERVICE PROVI DER COMPANY BY THE HON'BLE ITAT BANGALORE IN THE CASE OF M/S. ADVICE AMERICA SOFTWARE DEVELOPMENT CENTRE PRIVATE LIMITED (IN ITA (TP) NO. 2531/BANG/2017 DATED 23.05.2018 (A.Y. 2013-14) . IN AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA) ALSO THE ITAT HAD HELD PERSISTENT SYSTEMS LTD TO BE A PROPER COMPARABLE FOR SOFTWARE DEVELOPMENT ACTIVITIES. 46. CONSIDERING ABOVE, THE LD. DR SUBMITTED THAT TH E GROUND RELATING TO THIS COMPARABLE HAS TO BE DISMISSED. 47. THIS COMPARABLE I.E., PERSISTENT SYSTEMS LTD. CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN THE CASE OF MICROSOFT RESEARCH LAB INDIA PVT. LTD. (SUPRA) WHEREIN THIS COMPANY WAS EXCLUDED FROM COMPARABLES OBSERVING AS UNDER:- WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. AT PAGE-1432 , IT IS OBSERVED THAT COMPANIES OPERATIONS PREDOMINANTLY RELATES TO PROVIDING SOFTWARE PRODUCTS SERVICES AND TECHNOLOGY, INNOVATI ON COVERING FULL LIFE CYCLE OF PRODUCT TO ITS CUSTOMERS. IT IS OBSERVED THAT DELHI ITAT IN CASE OF AGINITY I NDIA TECHNOLOGIES INDIA PRIVATE LIMITED (SUPRA) HAS HELD AS FOLLOWS: PERSISTENT SYSTEMS LTD WAS EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES ON THE GROUND THAT THIS COMPAN Y WAS A SOFTWARE PRODUCT COMPANY AND SEGMENTAL INFORMATION ON SWD SERVICES WAS NOT AVAILABLE. THE TRIBUNAL IN COMING TO THE ABOVE CONCLUSION REFERRED TO THE DECISIONS RENDERED BY ITAT DELHI BENCHES IN CASE OF CASH EDGE INDIA PRIVATE LIMITED VS ITU IN ITA NO. 64/DEL /2015 ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 25 OF 42 VIDE ORDER DATED 23/09/15 AND THE DETAILS OF ORDERA BLE DELHI HIGH COURT IN CASE OF SEXUAL INDIA PRIVATE LI MITED (SUPRA). THE FINDINGS IN THIS REGARD ARE CONTAINED IN PARAGRAPH 4.14 TO 4.16 OF ITS ORDER. RESPECTFULLY FOLLOWING THE SAME WE ARE OF CONSIDERED OPINION THAT THIS COM PANY DESERVES TO BE EXCLUDED FROM THE FINAL LIST. WE, RESPECTFULLY FOLLOW THE COORDINATE BENCH DECISI ON, AND DIRECT THE TPO TO EXCLUDE THE COMPARABLE FROM THE FINAL LI ST OF COMPARABLE FOR DETERMINATION OF ALP. 48. FOLLOWING THE AFORESAID DECISION, WE DIRECT TO EXCLUDE PERSISTENT SYSTEMS LTD. FROM THE LIST OF COMPARABLES. (V) THIRDWARE SOLUTIONS LTD. 49. THE LD. AR ON THE BASIS OF DETAILED SUBMISSION S STATED THAT THIS COMPANY IS ENGAGED IN SALE OF PRODUCTS AND HAS TO B E EXCLUDED. 50. THE LD. DR, ON THE OTHER HAND, SUBMITTED THAT A PERUSAL OF THE FINANCIALS OF THIS COMPANY SHOWS THAT THE REVENUE O F THIS COMPANY IS ONLY FROM SALE OF SOFTWARE DEVELOPMENT SERVICES AND NOT FROM SALE OF ANY PRODUCTS. AS PER PAGE 16 OF THE FINANCIALS, THE COM PANY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND CONSULTANCY SE RVICE AND THAT THE OPERATION OF THE COMPANY COMPRISES OF SOFTWARE, DEV ELOPMENT, IMPLEMENTATION AND SUPPORT SERVICES. THOUGH AT PAGE 2 OF THE P&L A/C STATEMENT THE COMPANY HAS MENTIONED REVENUE FROM SA LE OF PRODUCTS AT RS.20675/- LAKHS, HOWEVER IT IS CLEARLY MENTIONED T HAT THE REVENUE WAS ON ACCOUNT OF EXPORT OF SOFTWARE SERVICES TO THE TUNE OF RS.20,194.37/- LAKHS, FROM SOFTWARE SERVICES FROM LOCAL UNIT RS.414.07/-L AKHS, FROM SUBSCRIPTION AND TRAINING RS.59.32/- LAKHS, FROM SALE OF LICENSE S 7.98 LAKHS. THE REVENUE FROM SOFTWARE LICENCE CONSTITUTES A MEAGER 0.03% OF TOTAL OPERATING REVENUE. THUS IT IS VERY CLEAR THAT THIS COMPANY IS PREDOMINANTLY INTO SALE OF SOFTWARE SERVICES AND HENCE CAN BE SAFELY TAKEN AS A COMPARABLE. FURTHER AT PAGE 7 OF ANNUAL REPORT IT IS MENTIONED THAT THE COMPANY HAS ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 26 OF 42 ACQUIRED INTANGIBLE ASSET RELATING TO SOFTWARE PURC HASED FOR COMPANY'S INTERNAL USE WHICH WAS CAPITALIZED AS THE COST OF A CQUISITION. THUS THIS COMPANY IS A PROPER COMPARABLE. 51. ON THE CONTENTION OF ASSESSEE THAT THE TPO HAS ERRONEOUSLY CONSIDERED FOREX LOSS AS NON-OPERATING EXPENSE, THE LD. DR SUBMITTED THAT THE TPO HAS CONSIDERED FOREX GAIN/LOSS AS OPERATING IN NATURE. THE CIT(APPEALS) DIRECTED THE TPO TO REVERIFY THIS ASPE CT IN RELATION TO THIS COMPARABLE ALSO AND IF THE FOREX LOSS IS NOT CONSID ERED AS OPERATING IN NATURE THEN HE SHOULD TREAT IT AS OPERATING AND REC OMPUTE THE MARGIN OF THIS COMPANY. 52. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE M ATERIAL ON RECORD. SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN THE CASE OF MICROSOFT RESEARCH LAB INDIA PVT. LTD. (SUPRA) WHEREIN THE TRIBUNAL HELD AS UNDER:- WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. ON PERUSAL OF THE ANNUAL REPORTS PLACED AT PAGE 573 OF PAPER BOOK VOLUME 2, IT IS OBSERVED THAT THIS COMPANY HAS DEVE LOPED ITS OWN PRODUCT BY THE NAME PAPA. IT IS OBSERVED THAT THI S COMPANY HAS INCURRED HUGE EXPENSES TOWARDS IMPORT OF SOFTWA RE SERVICES EVIDENCING OUTSOURCING OF SOFTWARE SERVICES UNLIKE THAT OF ASSESSEE. IT IS ALSO OBSERVED THAT THIS COMPANY IS INTO PRODUCTION OF SOFTWARE PRODUCT AND THEREFORE CANNOT BE FUNCTIO NALLY IS HELD SIMILAR TO A CONTRACT SERVICE PROVIDER UNDER THIS S EGMENT LIKE THAT OF ASSESSEE. LD.COUNSEL PLACED RELIANCE UPON DECISI ON OF COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF NOMURA RESEARCH INSTITUTE FINANCIAL TECH (INDIA) PVT. LTD., VS DCIT IN ITA NO. 284/KOL/2016 VIDE ORDER DATED 26/10/2018. RESPECTFULLY FOLLOWING THE SAME WE DIRECT LD. AO/TP O TO EXCLUDE THIS COMPARABLE FROM THE FINALIST. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 27 OF 42 ACCORDINGLY, WE RELY ON THE TRIBUNAL AND DIRECT THE TPO TO EXCLUDE THIS COMPARABLE FROM THE FINAL LIST SELECTE D IN DETERMINING THE ALP. 53. FOLLOWING THE ABOVE DECISION OF THE TRIBUNAL, THIS COMPANY IS DIRECTED TO BE EXCLUDED FROM THE COMPARABLES. 54. THE ASSESSEE HAS ALSO SOUGHT INCLUSION OF THE F OLLOWING COMPARABLES:- (I) SANKHYA INFOTECH LTD. (II) I2T2 INDIA LTD. (III) EVOKE TECHNOLOGIES PVT. LTD. (I) SANKHYA INFOTECH LTD. 55. THIS COMPANY WAS NOT PART OF ASSESSEE'S OWN COM PARABLES IN ITS TP STUDY AND THE SAME WAS PROPOSED AS ADDITIONAL COMPA RABLE BEFORE TPO. THE TPO CONSIDERED IT AS FUNCTIONALLY DIFFERENT BY HOLDING THAT THE SAME IS ENGAGED IN DIVERSIFIED ACTIVITIES. 56. THE LD. AR MADE DETAILED SUBMISSIONS THAT THE C OMPANY IS FUNCTIONALLY SIMILAR TO ASSESSEE AND PASSES ALL THE FILTERS APPLIED BY THE TPO. 57. THE LD. DR SUBMITTED THAT THE COMPANY HAS AN IN -HOUSE RESEARCH AND DEVELOPMENT CENTRE INVOLVED IN THE DEVELOPMENT ACTIVITIES OF NEW PRODUCTS IN THE FIELD OF SIMULATION AND TRAINING. T HE COMPANY IS MAINLY INTO SOFTWARE PRODUCT DEVELOPMENT AND RELATED R&D ACTIVI TIES. DURING THE YEAR UNDER CONSIDERATION THE COMPANY HAS DEBITED AN EXPE NSE OF RS 8.17 CRORES ON ACCOUNT OF R&D, AND OF THIS RS 7.99 CRORE CONSTITUTES EMPLOYEE COST. THAT THE COMPANY IS IN RESEARCH AND DEVELOPME NT AND THUS DEVELOPING ITS OWN INTANGIBLES ALSO BECOMES EVIDENT FROM THE FACT THAT ITS TANGIBLE FIXED ASSETS ARE VALUED AT ONLY RS 53.48 L ACS AS AGAINST INTANGIBLE ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 28 OF 42 ASSETS OF RS 4848.47 LACS. THESE INTANGIBLES INCLUD E LEARNING MANAGEMENT PRODUCTS, TRAINING MANAGEMENT PRODUCTS, SIMULATOR P RODUCTS, KNOWLEDGE BASED CONTENT, OPTIMIZATION PRODUCTS ETC. AS AGAINS T NORMAL INTANGIBLE OF 'SOFTWARE PURCHASED' IN CASE OF ROUTINE SOFTWARE DE VELOPER. THIS MAKES IT EVIDENT THAT THE COMPANY IS MAINLY IN THE BUSINESS OF TECHNICAL TRAINING AND R&D RATHER THAN SOFTWARE DEVELOPMENT. NOWHERE IN TH E ANNUAL REPORT THERE IS ANY REFERENCE TO THE SOFTWARE DEVELOPMENT ACTIVI TIES OF THE COMPANY AND IT IS OBSERVED THAT THE COMPANY CATEGORIZES ITS ACT IVITIES AS SOFTWARE SERVICES AND SOFTWARE PRODUCTS. NATURE OF SOFTWARE SERVICES HAS NOT BEEN INDICATED SPECIFICALLY AND THUS HAS TO BE INTERPRET ED ON THE BASIS OF INFORMATION AVAILABLE IN THE ANNUAL REPORT. ALTHOUG H IN THE ANNUAL REPORT THE COMPANY REPEATEDLY REFERS TO REVENUE FROM ITS SOFTW ARE PRODUCTS AND SOLUTIONS ONLY, HOWEVER IN THE SEGMENTAL DATA IT HA S SHOWN ENTIRE REVENUE FROM SOFTWARE SERVICES, WITHOUT EXPLAINING THE NATU RE OF SOFTWARE SERVICES. SINCE COMPLETE SEGMENTAL DATA RELATING TO REVENUE F ROM MULTIPLE STREAMS AND THE EXPENSES ON THE SAME IS NOT AVAILABLE, SO T HIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE APPELLANT COMPANY. THE ASSESSEE HAS JUST RELIED ON THE SEGMENTAL DETAILS OF 'SOFTWARE SERVIC ES' AND 'SOFTWARE PRODUCTS' AS GIVEN IN THE ANNUAL REPORT WITHOUT EXP LAINING AS TO HOW SOFTWARE SERVICES CONSTITUTE SOFTWARE DEVELOPMENT S ERVICES ONLY AND THE DETAILS INDICATED IN THE ANNUAL REPORT ARE IRRELEVA NT. FURTHER, THIS COMPANY HAS ALREADY BEEN REJECTED AS A PROPER COMPARABLE FO R THE SOFTWARE DEVELOPMENT SEGMENT BY THE ITAT IN SEVERAL CASES AS UNDER:- SYSARRIS SOFTWARE (P.) LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE- 12 (3), BANGALORE[2016] 67 TAXMANN.COM 243 (BANGALORE) DY. CIT V. KODIAK NETWORKS INDIA (P.) LTD. [IT (TP) APPEAL NO. 532 (BANG.) OF 2013, DATED 30-7-2013], A ND ITO V. SUNQUEST INFORMATION SYSTEMS (INDIA) (P.) LT D. [2015] 61 TAXMANN.COM 81 (BANG. - TRIB.). ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 29 OF 42 THE ITAT HELD THAT THIS COMPANY IS ENGAGED IN THE B USINESS OF DEVELOPMENT OF SOFTWARE PRODUCTS & SERVICES AND TRAINING. CONSIDERING ABOVE, THIS COMPANY CANNOT BE CONSIDERE D AS A PROPER COMPARABLE. 58. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, ALL COMPARABLE SEGMENT DETAILS ARE AV AILABLE. THIS COMPANY WAS CONSIDERED BY THE TRIBUNAL IN THE CASE OF BROCADE COMMUNICATIONS SYSTEMS PVT. LTD., IT(TP)A NO.79/BANG/2019 DATED 19.6.2020 WHEREIN THE ISSUE WAS REMITTED BACK TO TPO FOR FRESH CONSIDERAT ION OBSERVING AS FOLLOWS:- 34. THIS COMPANY WAS SELECTED BY THE ASSESSEE IN I TS TP STUDY AND CAME TO BE REJECTED BY THE TPO FOR THE REASON T HAT IT FAILS THE EXPORT REVENUE FILTER. WHILE THE ASSESSEE DEMONSTRA TED BEFORE THE DRP THAT THE COMPANY PASSES THE FILTER AND EARNED R EVENUE FROM EXPORT OF SERVICES COMPRISING 96.53% OF THE TOTAL R EVENUE, THE DRP UPHELD THE REJECTION OF THE COMPANY ON AN ALTOG ETHER NEW BASIS THAT THE COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE AND PRODUCTS, AND THAT IT HAD INCURRED SUBSTANTIAL R&D EXPENSES TO THE TUNE OF 5.9% OF TOTAL OPERATING REVENUE. 35. AT THE OUTSET IT WAS SUBMITTED THAT THE COMPANY IS FUNCTIONALLY COMPARABLE AND PASSES ALL THE FILTERS APPLIED BY THE TPO. IT WAS SUBMITTED THAT ACTION OF THE DRP IN UPH OLDING THE EXCLUSION OF THE COMPANY ON AN ALTOGETHER NEW BASIS WITHOUT FIRST PUTTING THE ASSESSEE ON NOTICE OF THE SAME IS WHOLL Y ERRONEOUS AND UNSUSTAINABLE. 36. WE ARE OF THE VIEW THAT THE COMPARABILITY OF TH E COMPANY SHOULD BE CONSIDERED AFRESH BY THE TPO BOTH ON THE EXPORT REVENUE FILTER AND THE FILTERS APPLIED BY THE DRP, BECAUSE ADMITTEDLY THE ASSESSEE WAS NOT CONFRONTED BY THE D RP ON THE NEW FILTER IT APPLIED NOR DID IT GIVE A FINDING ONE WAY OR THE OTHER ON THE EXPORT TURNOVER FILTER. 59. BEING SO, WE REMIT THE ISSUE TO THE TPO FOR FRE SH CONSIDERATION WITH A DIRECTION TO CONSIDER THE SEGMENT DATA. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 30 OF 42 (II) I2T2 INDIA LTD. 60. THE LD. AR SUBMITTED THAT THIS COMPANY WAS REND ERING SOFTWARE DEVELOPMENT SERVICES AND CONSULTING ACTIVITIES AND HENCE COMPARABLE TO IT, HOWEVER THE SAME HAD WRONGLY BEEN NOT ACCEPTED BY T HE TPO BY HOLDING THAT RPT INFORMATION WAS NOT AVAILABLE. IT WAS SUBM ITTED THAT THE COMPANY SATISFIED ALL THE FILTERS ADOPTED BY THE TPO AND HE NCE SHOULD NOT BE REJECTED AS COMPARABLE ONLY BECAUSE RPT INFORMATION IS NOT AVAILABLE IN THE FINANCIALS OF THIS COMPANY. 61. THE LD. DR SUBMITTED THAT PERUSAL OF THE ANNUAL REPORT OF THIS COMPANY (DIRECTORS REPORT- ACKNOWLEDGEMENTS) SHOWS THAT THE COMPANY IS IN THE ITES INDUSTRY AND HAS DONE TRANSACTION PROCE SSING WORK, WHICH IS NOT FUNCTIONALLY COMPARABLE. FURTHER RPT INFORMATIO N IS AN IMPORTANT ASPECT IN SELECTION OF COMPARABLES AND IN ABSENCE O F SUCH DATA A COMPANY CANNOT BE CONSIDERED AS A PROPER COMPARABLE. 62. THIS ISSUE WAS CONSIDERED BY THE TRIBUNAL IN T HE CASE OF LSI INDIA RESEARCH & DEVELOPMENT PVT. LTD. IN IT(TP)A NO.3170 /BANG/2018 DATED 7.10.2020 WHEREIN IT WAS HELD AS FOLLOWS:- 27. AS FAR AS INCLUSION OF I2T2 INDIA LTD. IS CONCERNE D, WE FIND THAT IN THE CASE OF LG SOFT INDIA (P.) LTD. ( SUPRA ) THIS COMPANY WAS DIRECTED TO BE INCLUDED. THE TRIBUNAL IN PARA 1 1 OF ITS ORDER HELD THAT THE TPO EXCLUDED THIS COMPANY FOR THE REA SON THAT THE RELATED PARTY TRANSACTION (RPT) HAD NOT BEEN DISCLO SED IN THE ANNUAL REPORT. THE TRIBUNAL HELD THAT IF THERE IS N O DISCLOSURE OF RPT IN THE ANNUAL REPORT, IT HAS TO BE CONCLUDED TH AT THERE WAS NO RPT AND THEREFORE THIS COMPANY SHOULD BE INCLUDED A S A COMPARABLE COMPANY. FOLLOWING THE AFORESAID DECISIO N, WE DIRECT INCLUSION OF I2T2 INDIA LTD. AS COMPARABLE COMPANY. 63. FOLLOWING THE AFORESAID DECISION, WE DIRECT FOR INCLUSION OF THIS COMPANY I.E., I2T2 INDIA LTD. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 31 OF 42 (III) EVOKE TECHNOLOGIES LTD. 64. THE LD. AR SUBMITTED THAT THIS COMPANY WAS NOT ACCEPTED BY THE TPO ON THE GROUND THAT STANDALONE FINANCIALS OF THI S COMPANY INCLUDED UNAUDITED REVENUE AND EXPENDITURE OF A BRANCH LOCAT ED OUTSIDE INDIA. THE COMPANY IS MAINLY IN SOFTWARE DEVELOPMENT AND HENCE THE SAME IS FUNCTIONALLY SIMILAR TO IT AND UNAUDITED FINANCIAL OF THE BRANCH OFFICE CANNOT BE A REASON TO REJECT THIS COMPANY AS A COMPARABLE. 65. THE LD. DR SUBMITTED THAT A PERUSAL OF THE STA TUTORY AUDITOR'S REPORT SHOWS THAT THE FINANCIAL STATEMENTS INCLUDE BRANCH REVENUE OF RS. 9,24,86,670/- AND PROFIT OF RS. 1,41,11,040/- BASED ON UNAUDITED FINANCIAL STATEMENT OF THE BRANCH OUTSIDE INDIA. SO THE DATA OF THIS COMPANY CANNOT BE CONSIDERED AS RELIABLE. AS SUCH THIS COMPANY CAN NOT BE CONSIDERED AS A PROPER COMPARABLE. FURTHER, AS PER THE GEOGRAPHIC S EGMENTATION INFORMATION, THE REVENUE FROM INDIA WAS GIVEN TO BE RS. 3621.72 LAKHS AND THAT THE REVENUE FROM US WAS GIVEN TO BE RS. 924.87 LAKHS. THUS IT CAN BE SEEN THAT THE EXPORT REVENUE CONSTITUTE ONLY 20.34% OF THE TOTAL REVENUE. THEREFORE THIS COMPANY CANNOT BE CONSIDERED AS COMP ARABLE. 66. THIS COMPANY WAS CONSIDERED BY THE TRIBUNAL I N THE CASE OF CITRIX R&D INDIA PVT. LTD. IN IT(TP)A NO.3134/BANG/2018 DA TED 29.01.2020 WHEREIN IT WAS HELD AS FOLLOWS:- 15. THE ASSESSEE SEEKS INCLUSION OF EVOKE TECHNOLO GIES PVT. LTD. WHICH WAS REJECTED BY THE TPO AS A COMPARABLE COMPANY FOR THE REASON THAT DATA RELATING TO THIS COMPANY W AS NOT AVAILABLE IN THE PUBLIC DOMAIN AND THAT IT HAD A DIFFERE NT FINANCIAL YEAR ENDING. BEFORE THE DRP ALSO, THE ASSESSEE DID N OT CHALLENGE THE ACTION OF THE TPO IN EXCLUDING THE AFORESAID COMPAN Y BECAUSE THE ASSESSEE DID NOT HAVE A DATA RELATING TO THIS C OMPANY. THE ASSESSEE IS NOW SEEKING INCLUSION OF THIS COMPANY O N THE BASIS OF DECISION RENDERED BY THE HYDERABAD BENCH OF ITAT IN THE CASE OF INFOR (INDIA) PVT. LTD. ITA NO.2307/HYD/2018 FOR AY 2014-15. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 32 OF 42 IN THE AFORESAID DECISION, THE HYDERABAD BENCH TOOK THE FOLLOWING VIEW :- 3. AS REGARDS EVOKE TECHNOLOGIES IS CONCERNED, THE CONTENTIONS OF THE ASSESSEE ARE THAT THIS COMPANY I S FUNCTIONALLY SIMILAR TO THE ASSESSEE, WHEREAS THE T PO & DRP HAVE HELD THAT THE FINANCIALS OF THIS COMPANY I NCLUDE THE REVENUE OF ONE BRANCH OUTSIDE INDIA WHICH ARE UNAUDITED AND HENCE ARE NOT RELIABLE. THE LEARNED C OUNSEL FOR THE ASSESSEE HOWEVER, DREW OUR ATTENTION TO PAG E 963 OF THE PAPER BOOK, WHICH IS PART OF THE ANNUAL REPO RT OF EVOKE TECHNOLOGIES LTD WHEREIN THE REVENUE OF INDIA N BRANCH OF ASSESSEE IS SEPARATELY SHOWN. TAKING THE SAME INTO CONSIDERATION, WE DIRECT THE AO/TPO TO RECONSI DER THE COMPARABILITY OF THIS COMPANY BY TAKING THE REV ENUE FROM INDIAN BRANCH ONLY. THUS, THE GROUND FOR MAVER IC SYSTEMS LTD IS REJECTED AND FOR EVOKE TECHNOLOGIES LTD IS ALLOWED FOR STATISTICAL PURPOSES. 16. WE ARE OF THE VIEW THAT IT WOULD BE APPROPRIATE TO DIRECT THE TPO/AO TO CONSIDER THIS ISSUE AFRESH, AFTER OPP ORTUNITY TO THE ASSESSEE AND IN THE LIGHT OF FACTS BROUGHT TO OUR N OTICE AS ABOVE. 67. FOLLOWING THE AFORESAID DECISION, WE REMIT THE ISSUE TO THE AO/TPO FOR FRESH CONSIDERATION AND DECISION ON SIMILAR LIN ES. 68. THE NEXT GROUND OF THE ASSESSEE IS WITH REGARD TO WORKING CAPITAL ADJUSTMENT (WCA). THE LD. AR SUBMITTED WCA OUGHT T O HAVE BEEN ALLOWED BY THE TPO AND ALSO RELIED UPON THE DECISIO N OF ITAT IN ITS OWN CASE FOR AY 2012-13 WHERE ENHANCEMENT MADE BY THE C IT(A) BY DISALLOWING THE WCA AS GRANTED BY THE AO WAS DELETE D. 69. THE LD. DR SUBMITTED THAT THE AO HAS GIVEN DETA ILED REASONING FOR NOT ALLOWING THE WCA TO THE APPELLANT. THE APPELLAN T HAS RELIED UPON DECISION OF ITAT IN ITS OWN CASE FOR AY 2012-13. A PERUSAL OF THE ORDER OF ITAT (PARA 15) SHOWS THAT IN THAT CASE THE TPO HAD ALLOWED WCA TO THE APPELLANT BY ACCEPTING THE CALCULATION GIVEN BY IT. THE ITAT OBSERVED (PARA 17) THAT THE CIT(A) HAD NOT FOUND ANY ERROR IN THE TPO'S WORKING OF WCA AND SO THE WCA AS WORKED OUT BY THE TPO NEEDED TO B E ALLOWED. HOWEVER ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 33 OF 42 THE FACTS OF THE PRESENT CASE ARE DIFFERENT. THE TP O HAS NOT ALLOWED ANY WCA. IT WAS SUBMITTED THAT BEFORE THE CIT(A) ASSE SSEE HAS NOT FURNISHED ANY CALCULATIONS RELATING TO THE WCA SO THAT ACCURA CY OF ITS CLAIM COULD HAVE BEEN EXAMINED. A PERUSAL OF THE TP STUDY OF TH E APPELLANT ALSO SHOWS THAT ASSESSEE HAS JUST GIVEN A THEORETICAL DISCUSSI ON ON THE ISSUE, WITHOUT QUANTIFYING THE AMOUNT OF WCA AND AS SUCH NO SUCH W CA HAS BEEN CLAIMED BY THE APPELLANT IN ITS OWN TP STUDY. THE A PPELLANT HAS NOT BROUGHT ON RECORD ANY DETAILS TO SHOW THAT THE RELEVANT DAT A FOR COMPUTATION OF WCA WAS PRODUCED BY IT BEFORE THE AO OR IT HAD MADE A SPECIFIC REQUEST TO THE AO TO COLLECT SUCH DATA AND PROVIDE SUCH AN ADJ USTMENT. THE APPELLANTS RELIANCE ON THE DECISION IN THE CASE OF MOBIS INDIA ITA NO 2112/MDS/2011(AY: 2007-08) [2013] 38 TAXMANN.COM IS NOT APPLICABLE TO IT. HOWEVER, AS DISCUSSED SUPRA, THE APPELLANT HAS NOT GIVEN ANY CALCULATION OF WCA. THIS IS IMPORTANT TO NOTE THAT THE FACTS WERE NOT SO IN APPELLANT'S CASE FOR AY 2012-13, AS THE ITAT HAD OB SERVED THAT SUCH CALCULATIONS WERE PROVIDED BY THE APPELLANT AND AS SUCH DECISION IN THE CASE OF MOBIS INDIA(SUPRA) COULD NOT BE APPLIED. HOWEVER ON THE FACTS OF THE PRESENT CASE, WHEN NO SUCH DETAILS HAVE BEEN PR OVIDED BY THE APPELLANT THE ABOVE DECISION IN THE CASE OF MOBIS INDIA (SUPRA) GETS SQUARELY APPLIED. IN THE CASE W M GLOBAL TECHNOLOGY SERVICES (INDIA) (P.) LTD. V. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCL E - 7(1)(2), BENGALURU OF [2018J 91 TAXMANN.COM 403 (BENGALURU TRIB) DT 28. 02.2018, THE ITAT HELD AS FOLLOWS:- 24. WE HAVE GONE THROUGH THE RECORDS AND PERUSED T HE ORDERS PASSED BY THE DRP AS WELL AS THE TPO. IN OUR VIEW, IT IS FOR THE ASSESSEE TO PROVE AS TO HOW THE WORKING CAPITAL HAD AN IMPACT ON ITS PROFIT AND IS REQUIRED TO FOLLOW THE ANALYSIS C IS MENTIONED IN PARA 12.1 OF THE DRP ORDER. NEEDFUL HAS NOT BEEN DO NE DESPITE OPPORTUNITY GRANTED BY THE DRP. HOWEVER CONSIDERING THE TOTALITY OF THE CIRCUMSTANCES, WE ARE REMITTING BAC K SIX COMPANIES FOR CONSIDERATION BY THE TPO. WE DEEM IT FIT TO ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 34 OF 42 REMAND THIS ISSUE AFRESH. NEEDLESS TO SAY THAT THE TPO SHALL BE BOUND BY THE DECISION OF THE ITAT, CHENNAI BENCHES IN MOBIS INDIA DD. V. DY. CIT [2013] 38 TAXMANN.COM 231/[201 4] 61 SOT 40. ACCORDINGLY THIS GROUND IS ALLOWED FOR STATISTI CAL PURPOSE.' 70. THE LD. DR SUBMITTED THUS ITAT HELD THAT IT WAS FOR THE ASSESSEE TO PROVE AS TO HOW THE WORKING CAPITAL HAD AN IMPACT O N ITS PROFIT. IN THE PRESENT CASE ALSO, THE APPELLANT HAS NOT PRODUCED ANY DETAILS TO SHOW THE SAME. SO THE DECISION IN THE CASE OF MOBIS INDIA(SUPRA) GETS APPLIED TO THE FACTS OF THE PRESENT CASE. SIMILARLY IN THE CASE OF SAME DEUTZ FAHR INDIA (P.) LTD. V. CIT [2017] 81 TAXMANN.COM 68 (CHENNAI - TRIB.), THE ITAT HELD THAT IN ABSENCE OF TERMS AND CONDITIONS RELATING TO PAYMENTS/RECOVERIES OF THE COMPARABLES AND ASSESSEE, WORKING CAPITAL ADJUS TMENT CANNOT BE GRANTED. THIS WAS ALSO OBSERVED BY THE ITAT THAT SU CH DETAILS WERE NOT FURNISHED BY THE ASSESSEE IN THE SAID CASE. IN THE CASE UNDER CONSIDERATION TOO, AS DISCUSSED SUPRA, THE RELEVANT DETAILS WERE NOT PRODUCED BY THE APPELLANT AND THERE IS NO MERIT IN THE GROUND OF TH E ASSESSEE. 71. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. SIMILAR ISSUE CAME UP FOR CONSIDERATION IN ASSESSEE S OWN CASE FOR AY 2012-13 IN IT(TP)A NO.1939/BANG/2017 DATED 31.10.2018 WHEREIN IT WAS HELD AS UNDER:- 15. IN THE PRESENT CASE THE TPO ALLOWED WORKING C APITAL ADJUSTMENT ACCEPTING THE CALCULATION GIVEN BY THE A SSESSEE. THE CIT(A) IN EXERCISE OF HIS POWERS OF ENHANCEMENT HEL D THAT NO ADJUSTMENT SHOULD BE MADE TO THE PROFIT MARGINS ON ACCOUNT OF WORKING CAPITAL DIFFERENCES BETWEEN THE TESTED PART Y AND THE COMPARABLE COMPANIES FOR THE FOLLOWING REASONS: (I) THE DAILY WORKING CAPITAL LEVELS OF THE TESTED PARTY AND THE COMPARABLES WAS THE ONLY RELIABLE BASIS OF DETERMIN ING ADJUSTMENT TO BE MADE ON ACCOUNT OF WORKING CAPITAL BECAUSE THAT WOULD BE ON THE BASIS OF WORKING CAPITAL DEPLOYED T HROUGHOUT THE YEAR. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 35 OF 42 (II) SEGMENTAL WORKING CAPITAL IS NOT DISCLOSED IN THE ANNUAL REPORTS OF COMPANIES ENGAGED IN DIFFERENT SEGMENTS AND THEREFORE PROPER COMPARISON CANNOT BE MADE. (III) DISCLOSE IN THE BALANCE SHEET DOES NOT CONTAI N BREAK UP OF TRADE AND NON-TRADE DEBTORS AND CREDITORS AND THERE FORE WORKING CAPITAL ADJUSTMENT DONE WITHOUT SUCH BREAK UP WOULD RESULT IN COMPUTATION BEING SKEWED. (IV) COST OF CAPITAL WOULD BE DIFFERENT FOR DIFFERE NT COMPANIES AND THEREFORE WORKING CAPITAL ADJUSTMENT MADE DISRE GARDING THIS DIFFERENT BASED ON BROAD APPROXIMATIONS, ESTIMATION S AND ASSUMPTIONS MAY NOT LEAD TO RELIABLE RESULTS. 16. THE CIT(A) ALSO PLACED RELIANCE ON A DECISION O F CHENNAI ITAT IN THE CASE OF MOBIS INDIA ITA NO.2112/MDS/201 1 (2013) 38 TAXMANN.COM. THAT DECISION WAS BASED ON THE FAC TUAL ASPECT THAT THE ASSESSEE WAS NOT ABLE TO DEMONSTRATE HOW W ORKING CAPITAL ADJUSTMENT WAS ARRIVED AT BY THE ASSESSEE. THEREFORE NOTHING TURNS ON THE DECISION RELIED UPON BY THE CI T(A) IN THE IMPUGNED ORDER. IN THE MATTER OF DETERMINATION OF A RMS LENGTH PRICE, IT CANNOT BE SAID THAT THE BURDEN IS ON THE ASSESSEE OR THE DEPARTMENT TO SHOW WHAT IS THE ARMS LENGTH PRICE. THE DATA AVAILABLE WITH THE ASSESSEE AND THE DEPARTMENT WOUL D BE THE STARTING POINT AND DEPENDING ON THE FACTS AND CIRCU MSTANCES 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 EXERCIS ED TO FIND OUT THE TRUTH THEN IT IS NO DEFENCE TO SAY THAT THE ASS ESSEE HAS NOT FURNISHED THE REQUIRED DETAILS AND ON THAT SCORE DE NY ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL DIFFERENCES. REGARDI NG APPLYING THE DAILY BALANCES OF INVENTORY, RECEIVABLES AND PA YABLES FOR COMPUTING WORKING CAPITAL ADJUSTMENT, THE DELHI BEN CH OF ITAT IN THE CASE OF ITO VS. E VALUE SERVE.COM (2016) 75 TAXMANN.COM 195(DEL-TRIB) HAS HELD THAT INSISTING O N DAILY ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 36 OF 42 BALANCES OF WORKING CAPITAL REQUIREMENTS TO COMPUTE WORKING CAPITAL ADJUSTMENT IS NOT PROPER AS IT WILL BE IMPO SSIBLE TO CARRY OUT SUCH EXERCISE AND THAT WORKING CAPITAL ADJUSTME NT HAS TO BE BASED ON THE OPENING AND CLOSING WORKING CAPITAL DE PLOYED. THE BENCH HAS ALSO OBSERVED THAT THAT IN TRANSFER PRICI NG 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 SA ME FOOTING. THEREFORE THERE IS LITTLE MERIT IN CIT(A)S OBJECTI ON ON WORKING ADJUSTMENT BASED ON UNAVAILABLE DAILY WORKING CAPIT AL REQUIREMENTS DATA. THERE IS ALSO NO MERIT IN THE O BJECTION OF THE CIT(A) REGARDING ABSENCE OF SEGMENTAL DETAILS AVAIL ABLE OF WORKING CAPITAL REQUIREMENTS OF COMPARABLE COMPANIE S CHOSEN AND ABSENCE OF DETAILS OF TRADE AND NON-TRADE DEBTO RS OF COMPARABLE COMPANIES AS THESE DETAILS ARE BEYOND TH E POWER OF THE ASSESSEE TO OBTAIN, UNLESS THESE DETAILS ARE AV AILABLE IN PUBLIC DOMAIN. REGARDING ABSENCE OF COST OF WORKING CAPI TAL FUNDS, THE OECD GUIDELINES CLEARLY ADVOCATES ADOPTING RATE(S) OF INTEREST APPLICABLE TO A COMMERCIAL ENTERPRISE OPERATING IN THE SAME MARKET AS THE TESTED PARTY. THEREFORE THIS OBJECTI ON 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 TPOS WORKING OF WORKING CAPITAL ADJUS TMENT, 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 A ND A COPY OF THE SAME IS AT PAGE 173 & 192 OF THE ASSESSEES PAP ER BOOK. NO DEFECT WHATSOEVER HAS BEEN POINTED OUT IN THESE WOR KING BY THE CIT(A). WE MAY ALSO FURTHER ADD THAT IN TERMS OF R ULE 10B(1)( E) (III) OF THE RULES, THE NET PROFIT MARGIN ARISIN G IN COMPARABLE UNCONTROLLED TRANSACTIONS SHOULD BE ADJUSTED TO TAK E INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS WHICH COUL D MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. IT IS NOT THE CASE OF THE CIT(A) THAT DIFFERENCES IN WORK ING CAPITAL REQUIREMENTS OF THE INTERNATIONAL TRANSACTION AND T HE UNCONTROLLED COMPARABLE TRANSACTIONS IS NOT A DIFFERENCE WHICH W ILL MATERIALLY ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 37 OF 42 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 W ILL HAVE TO BE TREATED AS NOT COMPARABLE IN TERMS OF RULE 10B(3) O F THE RULES, WHICH PROVIDES AS FOLLOWS: (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABL E TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPR ISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATER IALLY 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 COMPA RABLE UNCONTROLLED TRANSACTIONS FOR THE PURPOSE OF COMPAR ISON. THE TRANSFER PRICING EXERCISE WOULD THEREFORE FAIL. TH EREFORE IN KEEPING WITH THE OECD GUIDELINES, ENDEAVOR SHOULD B E MADE TO BRING IN COMPARABLE COMPANIES FOR THE PURPOSE OF BR OAD COMPARISON. THEREFORE THE WORKING CAPITAL ADJUSTME NT AS CLAIMED BY THE ASSESSEE SHOULD BE ALLOWED. WE HOLD AND DIRECT ACCORDINGLY. 72. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND THE MATERIAL ON RECORD, WE ARE OF THE OPINION THAT THIS ISSUE HAS TO BE REM ITTED BACK TO THE FILE OF AO/TPO FOR FRESH CONSIDERATION IN ACCORDANCE WITH T HE ABOVE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2012-13 REVENUES APPEAL 73. THE FIRST GROUND IS REGARDING EXCLUSION OF THE COMPARABLES VIZ., CIGNITI TECHNOLOGIES LTD. AND SQS INDIA BSFI LTD. ( THINKSOFT GLOBAL SERVICES LTD.) BY THE CIT(APPEALS). ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 38 OF 42 CIGNITI TECHNOLOGIES LTD. 74. THE LD. DR SUBMITTED THAT THE TPO NOTED THAT TH IS COMPANY IS INTO DEVELOPMENT OF COMPUTER SOFTWARE & SERVICES AND THE REFORE FUNCTIONALLY SIMILAR TO THE ASSESSEE. THE CONTENTION OF THE ASS ESSEE WAS THAT THIS COMPANY HAD ACQUIRED TO COMPANIES I.E. GALLOP SOLUT IONS INC AND GALLOP SOLUTIONS P. LTD. WHICH ARE EXTRA ORDINARY EVENTS. THE TPO OBSERVED THAT THESE TWO COMPANIES WERE SHOWN AS 100% OWNED SUBSID IARY OF THIS COMPANY AND WERE NOT MERGED. IN OTHER WORDS, THESE TWO COMPANIES STILL REMAINED AS SEPARATE LEGAL ENTITIES AND DO NOT IMPA CT THE STANDALONE PROFIT MARGIN OF THE COMPANY. WHEREAS THE ASSESSEE HAD ER RONEOUSLY COMPARED AND CONSIDERED THE CONSOLIDATED FIGURES OF THIS COM PANY. 75. THIS ISSUE WAS CONSIDERED BY THE TRIBUNAL IN T HE CASE OF MICROSOFT RESEARCH LAB INDIA PVT. LTD. (SUPRA) WHEREIN THIS COMPANY WAS EXCLUDED FROM COMPARABLES OBSERVING AS UNDER:- WE FOUND THIS COMPARABLE WAS EXCLUDED BY THE CO-O RDINATE BENCH OF THE TRIBUNAL IN THE CASE OF MARWELL INDIA PVT. LTD. VS. DCIT (SUPRA) AT PAGE 18 PARA 4.2 (A) OF THE ORDER A S UNDER : WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. WE HAVE ALSO PERUSED THE ANNUAL REPORT VERY CAREFULLY AND IS OBS ERVED THAT THIS COMPANY IS INVOLVED EXCLUSIVELY INTO SOFT WARE TESTING AND HAS CREATED INNOVATIONS IN THE SOFTWARE TESTING. IT IS ALSO OBSERVED THAT THIS COMPANY IS A CQUIRED HUNDRED PERCENT SHARES IN A U.S.-BASED SOFTWARE TES TING SERVICE COMPANY CALLED GALLOP SOLUTIONS INC BASED I N TEXAS USA. IT IS ALSO OBSERVED THAT THIS COMPANY HA S BEEN LISTED ON BOMBAY STOCK EXCHANGE, BANGALORE STOCK EXCHANGE AND MAYBE MADRAS STOCK EXCHANGE WITH A PAI D- UP CAPITAL OF RS. 22.92 CRORES. IT IS AN UNDISPUTED FACT THAT ENTIRE REVENUE HAS BEEN GENERATED BY THIS COMPANY F ROM SOFTWARE TESTING SERVICES RENDERED TO ITS INDEPENDE NT CLIENTS AS AGAINST SIMPLE TESTING CARRIED OUT BY AS SESSEE OF ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 39 OF 42 INTEGRATED CIRCUITS ALONG WITH DESIGNING, CUSTOMER SUPPORT OF INTEGRATED CIRCUITS RELATED ANCILLARY SERVICES P ROVIDED BY ASSESSEE ONLY TO ITS AE. CONSIDERING THE HOLISTIC A PPROACH HAVING REGARDS TO THE ANNUAL REPORTS OF THIS COMPAN Y AND THE SPECIALISED SERVICES PROVIDED BY THIS COMPANY T O ITS OWN CLIENTS IN THE FIELD OF SOFTWARE TESTING AS AGA INST CAPTIVE SERVICE PROVIDED BY ASSESSEE EXCLUSIVELY TO ITS AE, WE ARE OF CONSIDERED OPINION THAT THIS COMPANY CANN OT BE HELD AS A GOOD COMPARABLE WITH THAT OF ASSESSEE. THEREFORE WE DIRECT LD. AO/TPO TO EXCLUDE THIS COMP ANY FROM THE FINAL LIST OF COMPARABLES. FOLLOWING THE JUDICIAL PRECEDENCE, WE FOUND THE COM PANY IS IN SPECIALIZED AREA AND HAS TO BE EXCLUDED. ACCORDINGL Y, WE DIRECT THE TPO/A.O. TO EXCLUDE FROM THE FINAL LIST OF COMP ARABLES. 76. IN VIEW OF THE ABOVE DECISION OF THE TRIBUNAL, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(APPEALS) IN EXCLUSION OF THIS COMPANY FROM THE COMPARABLES. SQS INDIA BSFI LTD. (THINKSOFT GLOBAL SERVICES LTD. 77. THE LD. DR RELIED ON THE FINDINGS OF THE TPO. 78. THE LD. AR SUBMITTED THAT THIS COMPANY FAILS TH E RPT FILTER OF 25% AS APPLIED BY THE TPO. M/S THINKSOFT GLOBAL SOLUTIONS LTD HAS BEEN ACQUIRED BY S Q S SOFTWARE QUALITY SYSTEMS AG AND ITS NAME H AS BEEN CHANGED TO S Q S INDIA B F S I LTD. THIS WAS AN EXTRA ORDINARY EVENT AND AS SUCH THIS COMPANY WAS RIGHTLY EXCLUDED BY THE CIT(APPEALS) AS A COMPARABLE. 79. THE CIT(APPEALS) HAS OBSERVED THAT A PERUSAL OF THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT IT IS ENGAGED PRIMARILY IN DELIVERING SOFTWARE VALIDATION AND VERIFICATION SERVICES. SO FOR THE RE ASONS AS DISCUSSED FOR CIGNITI TECHNOLOGIES, THIS COMPANY CANNOT BE CONSID ERED AS A COMPARABLE AS IT IS FUNCTIONALLY DIFFERENT, ACCORDING TO THE C IT(APPEALS). ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 40 OF 42 80. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS P ER ANNUAL REPORT, THIS COMPANY IS IN THE PURE PLAY INDEPENDENT SOFTWA RE TESTING SPACE., PROVIDES SOFTWARE VALIDATION AND VERIFICATION SERVI CES TO THE BANKING AND FINANCIAL SERVICES INDUSTRY (BFSI) WORLDWIDE. THE C OMPANY IS AN INDIA BASED SOFTWARE SERVICE PROVIDER PRIMARILY DELIVERIN G SOFTWARE VALIDATION AND VERIFICATION SERVICES TO THE BANKING AND FINANCIAL SERVICES INDUSTRY WORLDWIDE. ACCORDING TO ASSESSEE, THIS COMPANY IS NOT COMPARABLE TO THE ASSESSEE ON ACCOUNT OF EXTRA ORDINARY EVENTS, IT FA ILS RPT FILTER AND MARGIN COMPUTATION. THE COMPANY HAS ACQUIRED MAJOR ITY STAKES IN THINKSOFT GLOBAL SERVICES LTD. BY ACQUIRING 53.35% OF ITS SHARES DURING THE YEAR. IT PERTAINS TO CHANGE IN MAJORITY STAKE OF TH E COMPANY (SHAREHOLDING PATTERN). THE ASSESSEE HAS NOT DEMONSTRATED AS TO HOW THE ABOVE INFORMATION HAS HAD ANY MATERIALISTIC IMPACT ON THE REVENUE OR THE PROFITS EARNED BY THE COMPANY DURING THE YEAR. THE ASSESSE E HAS SUMMED UP ALL THE RELATED PARTY TRANSACTIONS (I.E. BOTH ON REVENU E SIDE AS WELL AS EXPENSE SIDE) AND COMPUTED ITS PERCENTAGE OVER SALES. IN TH E FORMULA ADOPTED, WHILE THE NUMERATOR CONTAINS BOTH REVENUE AND EXPEN DITURE, THE DENOMINATOR CONTAINS ONLY REVENUE. HENCE, THERE IS NO PARITY BETWEEN THE DENOMINATOR AND NUMERATOR. IN CASE OF THE REVENUE BASED RELATED PARTY TRANSACTIONS. NET SALES CAN BE USED AS A BASE (I.E. (RPT)REVENUE/ SALES). CONVERSELY, FOR THE RELATED PARTY TRANSACTIONS ON T HE EXPENSE SIDE, THEN TOTAL EXPENDITURE SHOULD BE CONSIDERED AS A BASE. ( I.E. (RPT) EXPENSES / TOTAL EXPENDITURE. THUS, THE ASSESSEES PRACTICE OF COMBINING BOTH REVENUE AND EXPENSES ITEMS OF RELATED PARTY TRANSAC TIONS AND COMPARING IT AGAINST NET SALES, WOULD DISTORT THE APPLICATION OF THE PROPOSED RPT FILTER. IN THE CASE OF THE ASSESSEE AND THAT OF THE COMPAR ABLE, SIGNIFICANT REVENUE PARTY TRANSACTIONS ARE ON REVENUE SIDE AND HENCE (RPT)REVENUE/NET SALES WAS TAKEN AS THE APPROPRIATE FILTER. ACCORDINGLY, THE RPT/SALES FOR THIS COMPARABLE WORKS OUT TO 5.8% (I.E. RS. 1164LAKHS/ ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 41 OF 42 RS. 20060.8 LAKHS). HENCE, THE REVENUES GROUND IS ALLOWED AND THIS COMPANY IS DIRECTED TO BE INCLUDED IN THE COMPARABL ES. 81. THE NEXT GRIEVANCE OF THE REVENUE IS REGARDING INCLUSION OF CG VAK SOFTWARE & EXPORTS LTD. AS COMPARABLE. 82. THE LD. DR SUPPORTED THE FINDINGS OF THE TPO. THE LD. AR SUBMITTED THE COMPANY SATISFIES ALL THE FILTERS ADO PTED BY THE TPO AND THAT ITS MAJOR SHARE OF REVENUE WAS FROM SOFTWARE DEVELO PMENT SERVICES. THE APPELLANT SUBMITTED THAT REVENUE FROM BPO SERVICES WAS A MEAGER 1.88% AND AS SUCH THE COMPANY PASSES FILTER OF '75% REVEN UE FROM SOFTWARE DEVELOPMENT' AS APPLIED BY THE TPO. THE APPELLANT S UBMITTED THAT THE COMPANY WAS CONSIDERED AS FUNCTIONALLY COMPARABLE B Y THE TPO IN ITS OWN CASE FOR AY 2013-14 AND THE FUNCTIONAL PROFILE OF T HE COMPANY REMAINS THE SAME. 83. THE CIT(APPEALS) OBSERVED THAT THIS COMPANY WAS TREATED AS A PROPER COMPARABLE BY THE TPO IN ASSESSEES OWN CASE FOR AY 2013-14. DURING APPELLATE PROCEEDINGS FOR AY 2013-14, THE AP PELLANT HAD ARGUED FOR EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARAB LES, HOWEVER THIS GROUND OF APPEAL OF THE APPELLANT WAS DISMISSED BY THE CIT(A). A PERUSAL OF THE ANNUAL REPORT OF THIS COMPANY FOR THE YEAR U NDER CONSIDERATION SHOWS THAT THIS COMPANY HAD REVENUE FROM IT & ITES SERVICES, AND THE REVENUE FROM ITES WAS MEAGER 1.8% OF TOTAL OPERATIN G REVENUE. SO AS SUCH NO SEGMENTAL DATA IS REQUIRED TO BE CONSIDERED . HE THEREFORE DIRECTED THE TPO TO INCLUDE THIS COMPANY AS A COMPARABLE IF IT SATISFIES ALL THE OTHER FILTERS APPLIED BY THE TPO. AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, WE CONFIRM THE ORDER OF THE CIT (APPEALS) AS HE HAS REMITTED THE ISSUE FOR FRESH CONSIDERATION. ACCORD INGLY, THE TPO WILL RE- EXAMINE THE ISSUE IN THE LIGHT OF FRESH STUDY TO BE CONSIDERED BY HIM. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 42 OF 42 84. IN THE RESULT, BOTH THE APPEALS BY THE ASSESSE E AND REVENUE ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 22 ND DAY OF JULY, 2021. SD/- SD/- ( GEORGE GEORGE K. ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 22ND JULY, 2021. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE. IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER IT A NO. 339/BANG/2019 & ASSESSMENT YEAR : 2014 - 15 M/S. HUAWEI TECHNOLOGIES INDIA PRIVATE LTD., SYNO 37, 46, 45/3, 45/4, ETC, KNO 1540, DIVYASHREE PARK, NEAR EPIP INDUSTRIAL AREA, KUNDALAHALLI VILLAGE, BANGALORE 560 037. PAN: AAACH 8597L VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, SPECIAL RANGE 3, BANGALORE. APPELLANT RESPONDENT & IT(TP)A NO. 370/BA N G/2019 ASSESSMENT YEAR : 2014 - 15 THE JOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE 3, BANGALORE. VS. M/S. HUAWEI TECHNOLOGIES INDIA PRIVATE LTD., BANGALORE 560 037. PAN: AAACH 8597L APPELLANT RESPONDENT APPELLANT BY : MR. ALIASGER RAMPURAWALA, ADVOCATE RESPONDENT BY : MR. MUZAFFAR HUSSAIN, C IT(DR)(ITAT ), BENGALURU. DATE OF HEARING : 14 .0 7 .202 1 DATE OF PRONOUNCEMENT : 2 2 .0 7 .202 1 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE ARE CROSS APPEALS BY THE ASSESSEE AND THE R EVENUE AGAINST THE ORDER OF THE CIT(APPEALS)-3, BENGALURU DATED 24 .12.2018 FOR THE ASSESSMENT YEAR 2014-15. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS:- ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 2 OF 42 TRANSFER PRICING GROUND: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, LEARNED ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 3(1)(2) (LD. AO') / LEARNED ASSISTANT COMMISSIONER OF INCOME- TAX (TRANSFER PRICING)-1(3)(1) (`LD. TPO') IN MAKIN G AN ADJUSTMENT OF RS. 84,74,69,606 TO THE TRANSFER PRIC E OF THE APPELLANT'S INTERNATIONAL TRANSACTIONS IN RESPECT O F SOFTWARE DEVELOPMENT SERVICES. FURTHER, THE LEARNED COMMISSI ONER OF INCOME-TAX (APPEALS) -III, BANGALORE (`LD. CIT(A)') ERRED IN PARTIALLY CONFIRMING THE ACTION OF LD. AO/TPO. 2. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WITH RESPECT TO ADJUSTMENT TO THE TRANSFER PRI CE OF THE SOFTWARE DEVELOPMENT SERVICES, THE LD. CIT(A) ERRED IN UPHOLDING THE ACTION OF LD. AO/ TPO IN: 2.1. REJECTING THE TRANSFER PRICING (`TP') DOCUMEN TATION MAINTAINED BY THE APPELLANT UNDER SECTION 92D OF TH E ACT, IN GOOD FAITH AND WITH DUE DILIGENCE. 2.2. REJECTING THE COMPARABILITY ANALYSIS CARRIED OUT BY THE APPELLANT IN THE TP DOCUMENTATION AND IN CONDUCTING A FRESH COMPARABILITY ANALYSIS FOR THE INTERNATIONAL TRANSA CTION OF SOFTWARE DEVELOPMENT SERVICES BASED ON THE APPLICAT ION OF ADDITIONAL FILTERS FOR DETERMINING THE ARM'S LENGTH PRICE. 2.3. USING DATA, WHICH WAS NOT CONTEMPORANEOUS AND WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF PREPARING THE TP DOCUMENTATION. 2.4. NOT CONSIDERING THE MULTIPLE YEAR/PRIOR YEAR DATA OF COMPARABLE COMPANIES WHILE DETERMINING THE ARM'S LE NGTH PRICE IN RELATION TO THE APPELLANT'S INTERNATIONAL TRANSA CTIONS WITH ITS AES. 2.5. USING INFORMATION UNDER SECTION 133(6) OF THE ACT, WHICH TANTAMOUNT TO CHOOSING SECRET COMPARABLE COMPANIES WHOSE INFORMATION WAS NOT AVAILABLE IN PUBLIC DOMAIN WHIL E PREPARING THE TRANSFER PRICING DOCUMENTATION FOR THE RELEVANT FINANCIAL YEAR. 2.6. INCLUDING THE FOLLOWING COMPARABLE COMPANIES EVEN THOUGH THEY ARE FUNCTIONALLY DIFFERENT FROM OPERATI ONAL PROFILE OF THE APPELLANT: A) INFOSYS LTD.; ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 3 OF 42 B) LARSEN & TOUBRO INFOTECH LTD.; C) MINDTREE LTD.; D) PERSISTENT SYSTEMS LTD.; AND E) THIRDWARE SOLUTIONS LTD. 2.7. EXCLUDING THE FOLLOWING COMPANIES SELECTED BY THE APPELLANT IN ITS TP STUDY REPORT EVEN THOUGH THEY W ERE FUNCTIONALLY COMPARABLE TO THE APPELLANT AND PASSES ALL THE FILTERS APPLIED BY THE LD. TPO IN ITS ORDER: A) AKSHAY SOFTWARE TECHNOLOGIES LTD.; B) E-ZEST SOLUTIONS LTD.; C) SASKEN COMMUNICATIONS TECHNOLOGIES LTD. 2.8 NOT INCLUDING FOLLOWING ADDITIONAL COMPANIES P ROPOSED AS COMPARABLES TO THE APPELLANT DURING THE COURSE OF T P ASSESSMENT PROCEEDINGS AND WHICH PASSES ALL THE FILTERS APPLIE D BY THE LD. TPO IN ITS ORDER: A) SANKHYA INFOTECH LIMITED; B) I2T2 INDIA LIMITED; C) DAFFODIL SOFTWARE LIMITED; D) KIREETI SOFT TECHNOLOGIES LIMITED; E) EXILANT TECHNOLOGIES PRIVATE LIMITED; F) CELESTREAM TECHNOLOGIES PRIVATE LIMITED; G) MAVERIC SYSTEMS LIMITED; AND H) EVOKE TECHNOLOGIES PRIVATE LIMITED 2.9. NOT PROVIDING ADJUSTMENT FOR THE DIFFERENCES IN WORKING CAPITAL OF THE APPELLANT AND THE COMPARABLE I COMPA NIES. 2.10. NOT PROVIDING SUITABLE ADJUSTMENT TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VI S-A-VIS THE COMPARABLE COMPANIES. 2.11.COMPUTING INCORRECT OPERATING MARK-UP OF CERTA IN COMPARABLE COMPANIES. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 4 OF 42 DIRECT TAX GROUND: 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. AO ERRED IN LEVYING INTEREST UNDER SEC TION 234B OF THE ACT OF RS. 16,13,16,690. THAT THE APPELLANT CRAVES LEAVE TO ADD TO AND/OR TO ALTER, AMEND, RESCIND, MODIFY THE GROUNDS HEREIN ABOVE OR PRODUCE FURTHER DOCUMENTS BEFORE OR AT THE TUNE OF HEARING OF THIS APPEAL. 3. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS:- 1. THE ORDER OF THE LEARNED CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. WHETHER THE CIT(A) ERRED IN FACT IN REJECTING CI GNITI TECHNOLOGIES LTD & SQS INDIA BSFI LTD(THINKSOFT GLO BAL SERVICES LTD) AS A COMPARABLE ON THE GROUNDS THAT I T IS FUNCTIONALLY DIFFERENT WHEN THE PRIMARY SOURCE OF I NCOME OF THE COMPARABLES IS FROM PROVISION OF SOFTWARE DEVELOPME NT SERVICES. 3. WHETHER WHILE SEEKING THE EXACT COMPARABILITY ME NTIONED ABOVE, THE CIT(A) WAS RIGHT IN FACT AND IN LAW IN I MPOSING CONDITIONS BEYOND LAW WHEREAS THE REQUIREMENT OF LA W IS TO ACKNOWLEDGE ONLY THOSE DIFFERENCES THAT ARE LIKELY TO MATERIALLY AFFECT THE MARGIN. 4. WHETHER THE CIT(A) IS CORRECT IN FACT AND LAW IN DISREGARDING THE POSITION OF LAW THAT THERE COULD B E DIFFERENCES BETWEEN THE ENTERPRISES COMPARED UNDER THE TNMM MET HOD THAT ARE NOT LIKELY TO MATERIALLY AFFECT THE PRICE OR CO ST CHARGED OR THE PROFITS ACCRUING TO SUCH ENTERPRISES. 5 IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WHETH ER THE CIT(A) ERRED IN FACT IN DIRECTING THE TPO TO INCLUD E CG-VAK SOFTWARE & EXPORTS LTD AS A COMPARABLE COMPANY WITH OUT APPRECIATING THAT THE COMPANY IS ENGAGED INTO R&D A CTIVITIES AND THEREFORE HAS A DIFFERENT REVENUE MODEL AND THEREFO RE FUNCTIONALLY NOT COMPARABLE TO THE TAX PAYER. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED A T THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT( A) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND TH AT OF THE ASSESSING OFFICER MAY BE RESTORED. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 5 OF 42 7. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND / OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 4. THE ASSESSEE, HUAWEI INDIA, IS THE WHOLLY SUBSID IARY OF HUAWEI TECH. INVESTMENT COMPANY LIMITED, HONG KONG ('HUAWE I HONG KONG') WHICH IS IN-TURN A SUBSIDIARY OF HUAWEI CHINA. HUA WEI TECHNOLOGIES COMPANY LIMITED ('HUAWEI CHINA'), GLOBAL TELECOM SO LUTIONS PROVIDER BASED IN CHINA. HUAWEI CHINA IS ENGAGED IN THE BUSI NESS OF RESEARCH, DEVELOPMENT, MANUFACTURING AND MARKETING OF TELECOM MUNICATION EQUIPMENT. 5. HUAWEI INDIA RENDERS SOFTWARE DEVELOPMENT SERVIC ES TO ITS AES IN THE FIELD OF TELECOMMUNICATIONS. HUAWEI CHINA OWNS ALL THE VALUABLE INTELLECTUAL PROPERTY RIGHTS AND OTHER COMMERCIAL O R MARKETING INTANGIBLES AND IS INVOLVED IN COMPLEX OPERATIONS OF DEVELOPING PROPRIETARY TECHNOLOGIES AND MARKETING OF THE SAME. 6. THE ASSESSEE COMPANY HAS ENTERED INTO THE FOLLOW ING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES). I NTERNATIONAL TRANSACTION AMOUNT (IN RS.) RENDERING SOFTWARE DEVELOPMENT SERVICES 5,064,293,224 DRAWDOWN FROM ECB 1,2 5 6 ,256,730 PURCHASE OF FIXED ASSETS 212,808,168 PURCHASE OF CONSUMABLE 2,644,170 7. THE FINANCIAL OF ASSESSEE AS PER P&L ACCOUNT ARE AS UNDER:- PARTICULARS TOTAL OPERATING INCOME 5064293224 OPERATING COST 4578857490 OPERATING PROFIT 485435734 OP/OC 10.60% ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 6 OF 42 8. THE SEGMENTAL FINANCIALS OF ASSESSEE FOR FY 2013 -14 AS PER TPO ARE AS FOLLOWS:- PARTICULARS AMOUNT (INR) REVENUE FROM OPERATIONS 5,064,293,224 OTHER INCOME 14,303,508 TOTAL REVENUE (A) 5,078,596,732 LESS: NON-OPERATING INCOME INTEREST INCOME 0 PROFIT ON SALE OF FIXED ASSETS (NET) 1,024,746 TOTAL NON-OPERATING INCOME (B) 1,024,746 TOTAL OPERATING INCOME (C=A-B) 5,077,571,986 EMPLOYEE BENEFITS EXPENSE 2.960,266,267 DEPRECIATION & AMORTISATION EXPENSE 365,837,531 OTHER EXPENSES 1,252,753,692 TOTAL EXPENDITURE (D) 4,578,857,490 LESS: NON-OPERATING EXPENDITURE 0 TOTAL NON-OPERATING EXPENDITURE (E) 0 TOTAL OPERATING EXPENSES (F=D-E) 4,578,857,490 OPERATING PROFIT (G=C-F) 498,714,496 OP/OC 10.89 % 9. THE ASSESSEE SELECTED THE FOLLOWING COMPARABLES: - SL. NO. NAME OF THE COMPANY WT. AVG (%) 1. AKSHAY SOFT WARE TECHNO LOGIES LTD. 7.46 2. BELL SOFTECH LTD. 7.92 3. HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. 18.27 4. LO CUZ ENTERPRISE SOLUTIONS LTD. 6.91 5. CSS CORP P VT LTD. 20.01 6. E - Z E S T SOLUTIONS LTD. 12.60 7. SASKEN COMMUNICATION 10.31 ARITHMETIC MEAN 11.93 ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 7 OF 42 10. THE TPO SELECTED THE FOLLOWING COMPARABLES:- AMOUNTS IN RS. LAKH S NO NAME OF TAX PAYER OR/SALES OC OP OP/OC (IN %) 1 INFOSYS LTD. 46,91,700 32,77,700 11.84,200 36.13% 2 LARSEN & TOUBRO INFOTECH LTD. 4,54,360 3,64,619 89,741 24.61% 3 MINDTREE LTD. 2,99,010 2,48,290 5,072 20.43% 4 PERSISTENT SYSTEMS LTD. 1,18,412 87,649 3,07,625 35.10% 5 R S SOFTWARE (INDIA) LTD. 35,188 28,321 6,867 24. 25% 6 CIGNITI TECHNOLOGIES LTD. 5,563 4,359 1,204 27.62 % 7 S Q S INDIA BFSI LTD. 20,061 16,394 3,667 22.37% 8 THIRDWARE SOLUTION LTD. 19,883 13,742 6,140 44.68 % AVERAGE 29.40% 11. THUS, THE TPO MADE A TP ADJUSTMENT OF RS.84,74 ,69,606 RELATING TO SWD SEGMENT. CONSEQUENTLY THE AO PASSED ASSESSM ENT ORDER DATED 2.2.2018 U/S. 143(3) R.W.S. 92 OF THE ACT. 12. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT( APPEALS) WHO DIRECTED EXCLUSION OF THE COMPANIES VIZ., CIGNITI T ECHNOLOGIES LTD. AND SQS INDIA BFSI LTD. (THINKSOFT GLOBAL SERVICES LTD. ) AND INCLUSION OF CG VAK SOFTWARE & EXPORTS LTD. FINALLY, THE FOLLOWING COMPANIES REMAINED IN THE COMPARABLES:- (1) INFOSYS LTD. (2) LARSEN & TOUBRO LTD. (3) MINDTREE LTD. (4) PERSISTENT SYSTEMS LTD. (5) R S SOFTWARE (INDIA) LTD. (6) THIRDWARE SOLUTIONS LTD. (7) CG VAK SOFTWARE & EXPORTS LTD. 13. NOW THE ASSESSEE AND REVENUE ARE IN CROSS APPEA LS BEFORE US AGAINST THE ORDER OF CIT(APPEALS). ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 8 OF 42 14. FIRST WE WILL TAKE UP THE ASSESSEES APPEAL . THE ASSESSEE HAS NOT PRESSED GROUND NOS.2 TO 2.5, 2.7, 2.8, 2.10 AND 2.11. ACCORDINGLY THESE GROUNDS ARE DISMISSED AS NOT PRESSED. 15. GROUND NO.2.6 OF THE ASSESSEE IS REGARDING EXCL USION OF THE FOLLOWING COMPARABLES:- (I) INFOSYS LTD. (II) LARSEN & TOUBRO INFOTECH LTD. (III) MINDTREE LTD. (IV) PERSISTENT SYSTEMS LTD., AN (V) THIRDWARE SOLUTIONS LTD. (I) INFOSYS LTD. 16. THE LD. AR SUBMITTED THAT INFOSYS LTD. IS FUNCT IONALLY DIFFERENT FROM THE ASSESSEE AND HAS TO BE EXCLUDED FROM THE COMPAR ABLES ON ACCOUNT OF: HEAVILY ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUC TS DIVERSIFIED OPERATIONS AND NON-AVAILABILITY OF SE GMENT DATA SIGNIFICANT AMOUNT OF BRAND VALUE AND IPR SIGNIFICANT RESEARCH AND DEVELOPMENT EXPENSES BUSINESS RESTRUCTURING AND EXTRAORDINARY EVENT 17. IN ADDITION THE MARGIN OF THE COMPANY IS WRONGL Y COMPUTED BY TREATING PROVISION FOR BAD AND DOUBTFUL DEBT AS NON -OPERATING EXPENSE. INFOSYS LIMITED WAS CONSIDERED AS COMPARABLE BY THE TPO FOR AY 2011-12 AND AY 2012-13 BUT THE SAME WAS NOT CONSIDERED AS P ROPER COMPARABLE FOR AY 2013-14 BY HOLDING THAT SEGMENTAL DATA WAS N OT AVAILABLE. IT WAS SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION TOO THE SEGMENTAL DATA IS NOT AVAILABLE AND AS SUCH THIS COMPANY NEEDS TO BE EXCLUDED FROM THE LIST OF COMPARABLES. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 9 OF 42 18. AS REGARDS WRONG COMPUTATION OF MARGIN, THE LD. DR SUBMITTED THAT THE ISSUE OF TREATING PROVISION FOR BAD AND DOUBTFU L DEBT AS NON-OPERATING EXPENSE HAS BEEN DISCUSSED IN THE ORDER OF CIT(APPE ALS) AND THE ACTION OF THE AO IS TO BE UPHELD. SO THERE IS NO ERROR IN COM PUTATION OF MARGIN OF THIS COMPANY. 19. ON THE NEXT ARGUMENT OF THE ASSESSEE THAT THERE WAS BUSINESS RESTRUCTURING AND EXTRAORDINARY EVENT, THE MERGER O F INFOSYS CONSULTING INDIA LIMITED (ICIL) HAD BEEN ACCOUNTED FOR UNDER P OOLING OF INTEREST METHOD, AND THAT THE ASSETS AND LIABILITIES OF ICIL HAD BEEN TRANSFERRED TO INFOSYS LIMITED ON A GOING CONCERN BASIS, THEREFORE , INFOSYS LTD SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES; THE LD. DR SUBMITTED THAT A MERGER CAN BE CONSIDERED AS EXTRA ORDINARY EVENT IF IT HAD A SIGNIFICANT IMPACT ON THE PROFITS OR MARGINS OF SUCH OTHER COMPANY. THE ASSESSEE HAD NOT INDICATED THAT SUCH A MERGER HAD IMPACTED THE REVEN UE OF INFOSYS LTD. THERE IS NOTHING TO SHOW THAT ASSESSEE IS ADVERSELY IMPACTED IF THIS COMPANY IS SELECTED AS A COMPARABLE. THEREFORE THI S COMPANY CANNOT BE EXCLUDED ON THE REASON OF MERGER. 20. ANOTHER ARGUMENT OF THE LD. AR IS THAT INFOSYS LTD. IS ENGAGED IN DIVERSIFIED OPERATIONS SUCH AS BUSINESS CONSULTING, ENGINEERING AND OUTSOURCING SERVICES AND IT OFFERS SOFTWARE PRODUCT AND PLATFORMS. THE ANNUAL REPORT CLEARLY SPECIFY INCOME DERIVING FROM SALE OF PRODUCTS. SIGNIFICANT R&D, BRAND VALUE, SIZE AND SCALE OF OPE RATIONS OF INFOSYS LTD. MADE IT FUNCTIONALLY DISSIMILAR TO THE ASSESSEE. T HERE WAS NO SIGNIFICANT INFORMATION ON PRODUCTS AND SERVICES SEGMENT AS SEG MENTAL DATA WAS NOT AVAILABLE. 21. THE LD. AR NEXT CONTENDED THAT INFOSYS LTD. HAD HUGE BRAND VALUE AND CONTRIBUTED TO ITS GROWTH IN REVENUE AND HENCE NOT COMPARABLE. THE LD. DR SUBMITTED THAT BRAND IS NOT RESTRICTED TO P ARENT COMPANY BUT ALSO ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 10 OF 42 AVAILABLE TO ALL ASSOCIATED COMPANIES IF THEY ARE U SING BRAND NAME. IN THE CASE OF ASSESSEE ALSO, IT WAS USING THE BRAND HUAW EI IN ITS PRODUCTS AND ASSESSEE IS EXPECTED TO PROVIDE SERVICE COMMENSURAT E WITH THE BRAND IMAGE. THUS INFOSYS LTD. CANNOT BE EXCLUDED BECAU SE OF BRAND VALUE AND THE ASSESSEE IS ALSO AT THE SAME FOOTING. 22. THE LD. DR SUBMITTED THAT AS REGARDS THE RELIAN CE OF THE APPELLANT ON THE ORDER OF TPO FOR AY 2013-14, EACH YEAR NEEDS TO BE LOOKED INTO SEPARATELY AND THE COMPARABLES NEED TO BE SELECTED AFTER EXAMINING THE ISSUE OF FILTERS APPLIED AND THE FUNCTIONALITY OF T HE COMPANY BASED ON THE FINANCIALS OR THE OTHER DATA AVAILABLE WITH THE TPO . SO THIS ARGUMENT WAS REJECTED. 23. THE LD DR SUBMITTED THAT THE PLATFORMS/PRODUCTS AND SOLUTIONS OF THE COMPANY ARE NOT OFF THE SHELF PRODUCTS AS ARGUED BY THE ASSESSEE. THE COMPANY HAD REVENUE FROM SOFTWARE SERVICES OF RS.42 ,531 CRORES AND THAT FROM SOFTWARE PRODUCTS WAS ONLY RS.1,810 CORES. AS SUCH, THE PRODUCT REVENUE CONSTITUTED A MEAGRE 4.08% OF TOTAL OPERATI NG REVENUE. IT PASSED THE FILTER OF REVENUE FROM CORE SERVICES GREATER T HAN 75% AND FUNCTIONALLY COMPARABLE TO ASSESSEE. THE MEAGRE REVENUE FROM SOF TWARE PRODUCTS DOES NOT IMPACT THE MARGINS OF COMPANY FROM SOFTWAR E DEVELOPMENT AND SEGMENTAL DATA IS NOT REQUIRED TO BE CONSIDERED. 24. ON THE CONTENTION OF THE ASSESSEE THAT INFOSYS LTD. HAS A HUGE R&D EXPENDITURE, THE LD. DR SUBMITTED THAT COMPANY HAS INCURRED R&D EXPENDITURE OF RS.873 CRORE WHICH IS A MEAGRE 1.96% OF ITS TOTAL OPERATING REVENUE. FROM THE NOTE 1.1 OF THE ANNUAL REPORT AT PAGE 50, THE DEVELOPMENT OF INTANGIBLES AND ITS IMPACT ON THE RE VENUE AND PROFITABILITY CAN BE INFERRED AS MEAGRE. THE ASSESSEE HAS FAILED TO ESTABLISH THAT DIFFERENCES, IF ANY, ON ACCOUNT OF R&D, BRAND AND I NTANGIBLES HAVE MATERIAL EFFECT ON THE MARGIN OF THE SAID COMPANY. FURTHER THE ASSESSEE ITSELF ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 11 OF 42 CONSIDERED SUCH COMPANIES AS COMPARABLE WHICH HAD R &D EXPENDITURE TO SALES RATIO LESS THAN 3%. THE REASON GIVEN BY ASSE SSEE TO APPLY SUCH A FILTER WAS TO SELECT COMPANIES WHICH DO NOT OWN INT ANGIBLES AND ARE PURE SERVICE PROVIDERS. THUS THIS COMPANY CANNOT BE REJ ECTED AS A COMPARABLE BECAUSE OF R&D OR INTANGIBLES. 25. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ISSUE OF COMPARABILITY OF INFOSYS LTD. CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN THE CASE OF MICROSOFT RESEARCH LAB INDIA PVT. LTD. [IT(TP)A NO.3131/BANG/2018 FOR THE AY 2014-15 . VIDE ORDER DATED 05.02.2020 THE TRIBUNAL EXCLUDED THIS COMPANY FROM THE COMPARABLES HOLDING AS FOLLOWS:- (I) INFOSYS LIMITED : THE TURNOVER BEING RS.44,341 CRORES AND IT IS FUNCTIONALLY NOT COMPARABLE AS THE TURNOVER IS M ORE THAN 500 TIMES OF THE ASSESSEE TURNOVER OF RS.84.09 CRORES. THE COMPANY IS ENGAGED IN DEVELOPING SOFTWARE PRODUCTS PINNACLE AND WAS REJECTED BY THE DRP IN ASSESSEE OWN CASE FOR THE AS SESSMENT YEAR 2011-12. FURTHER HAS HIGH BRAND VALUE AND INCU RRED HUGE EXPENDITURE IN R & D WITH EXCEPTIONAL AREAS OF OPER ATION AND EARNED SUPER NATURAL PROFITS AND IS ENGAGED IN DIVE RSIFIED ACTIVITIES. WE FOUND THAT THE COMPARABLE WAS EXCLUD ED BY THE CO- ORDINATE BENCH DECISION OF THE TRIBUNAL IN THE CASE OF M/S. MARWELL INDIA P. LTD. VS. DCIT IN IT(TP)A NO.3082/B ANG/2018 FOR THE ASSESSMENT YEAR 2014- 15 DT.23.10.2019 AT P AGE 20 PARA 4.2 (B) WHICH READ AS UNDER: 4.2 (B). INFOSYS LTD: IT HAS BEEN SUBMITTED BY LD.COUNSEL THAT THIS COMPA RABLE HAS BEEN INCLUDED BY LD.TPO IN FINALIST. IT HAS BEE N SUBMITTED THAT THIS COMPARABLE IS NOT COMPARABLE DU E TO HIGH TURNOVER AND INTANGIBLES OWNED BY THIS COMPANY . IT HAS BEEN SUBMITTED THAT HONBLE DELHI HIGH COURT IN CASE OF CIT VS AGNITY INDIA TECHNOLOGIES REPORTED IN (20 13) 36 TAXMANN.COM 289 HAS HELD THIS COMPANY TO BE BAD COMPARABLE TO A COMPANY WHICH IS CAPTIVE SERVICE PROVIDER UNDER THE SEGMENT. IT HAS BEEN SUBMITTED T HAT THIS COMPANY PROVIDES END TO END BUSINESS SOLUTIONS THAT LEVERAGE TECHNOLOGY TO ENABLE CLIENTS TO ENHANCE BU SINESS PERFORMANCE. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 12 OF 42 LD. CIT DR PLACED RELIANCE UPON THE ORDER PASSED BY AUTHORITIES BELOW. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. ADMITTEDLY THIS COMPANY OWNS HUGE INTANGIBLES AND I S AN ENTREPRENEUR IN THE FIELD OF SOFTWARE SERVICE DEVEL OPMENT SERVICE SEGMENT. AT PAGE-1100 OF PAPER BOOK, VOL.II I IT IS OBSERVED THAT THIS COMPANY PRIMARILY DERIVES REVENU E FROM SOFTWARE DEVELOPMENT AND RELATED SERVICES AND FROM LICENSING OF PRODUCTS. IN SEGMENTAL DETAILS AT PAGE -1110, IT IS OBSERVED THAT REVENUE GENERATED FROM SOFTWARE SE RVICES IS RS.4253/- CRORES WHICH IS MUCH HIGH AND HENCE CA NNOT BE COMPARED TO A CAPTIVE SERVICE PROVIDER LIKE THAT OF ASSESSEE. RESPECTFULLY FOLLOWING DECISION OF ORDERABLE DELHI HIGH COURT (SUPRA) WE DIRECT LD. AO/TPO TO EXCLUDE THIS COMPARABLE FROM THE FINAL LIST. WE CONSIDERING THE FACTS, FUNCTIONAL PROFILE AND TH E DECISION OF THE CO-ORDINATE BENCH, DIRECT THE TPO TO EXCLUDE TH E COMPARABLE FROM THE FINAL LIST OF COMPARABLES FOR DETERMINATIO N OF ALP. 26. SINCE THE FACTS OF THE CASE ARE SIMILAR RELATIN G TO SWD SEGMENT TO THE CASE OF MICROSOFT RESEARCH LAB INDIA PVT. LTD. (SUPRA) , WE DIRECT EXCLUSION OF INFOSYS LTD. FROM THE COMPARABLES. (II) LARESEN & TOUBRO INFOTECH LTD. 27. THE LD. AR SUBMITTED THAT LARSEN AND TOUBRO INF OTECH LIMITED (L&T) SHOULD BE EXCLUDED FROM THE LIST OF THE COMPARABLES AS IT IS FUNCTIONALLY DIFFERENT FROM THE APPELLANT ON ACCOUNT OF FOLLOWIN G: SIGNIFICANT AMOUNT OF INTANGIBLE ASSETS INCLUDING I PR AND BUSINESS RIGHTS SIGNIFICANT BRAND VALUE EXTRAORDINARY EVENTS DURING THE YEAR SIGNIFICANT OVERSEAS STAFF COSTS AND SUB-CONTRACTIN G EXPENSES. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 13 OF 42 28. FURTHER ON THE ASSESSEES SUBMISSION THAT THIS COMPANY HAS SUBCONTRACTING EXPENSES, THE LD. DR SUBMITTED THAT IT IS VERY COMMON PRACTICE IN THE SOFTWARE DEVELOPMENT SECTOR THAT PE RSONNEL FOR THE CODING E.G. PROGRAMMERS ARE TAKEN ON CONTRACT BY THE COMPA NIES FOR THE DURATION OF THE PROJECT AND THEY ARE JUST LIKE EMPLOYEES OF THE DEVELOPER AS THEY FUNCTION UNDER CONTROL AND DIRECTION OF THE DEVELOP ER. SO SUB-CONTRACTING EXPENSES DO NOT MAKE L&T FUNCTIONALLY DIFFERENT FRO M THE APPELLANT. THIS IS ENTIRELY DIFFERENT FROM THE CASE WHERE THE SOFTWARE DEVELOPMENT WORK ITSELF IS OUTSOURCED TO THE SOFTWARE DEVELOPER E.G. THE AE OF THE APPELLANT HAS OUTSOURCED ITS WORK TO THE APPELLANT. SO THESE ARGU MENTS OF THE APPELLANT ARE TO BE REJECTED. 29. THE LD. DR SUBMITTED THAT THE ISSUE OF BRAND OF THIS COMPANY IS SIMILAR TO THE CONTENTIONS OF THE REVENUE IN INFOSY S LTD. AS REGARDS THE ARGUMENT THAT IT WAS A PRODUCT COMPANY, THE LD. DR SUBMITTED THAT FROM THE ANNUALS OF THE COMPANY IT IS EVIDENT THAT THE COMPA NY IS IN SOFTWARE DEVELOPMENT. ON PERUSAL OF THE 'DIRECTOR'S REPORT' (AS IN THE ANNUAL REPORT), UNDER THE SUB HEAD 'PERFORMANCE OF THE COM PANY', IT IS OBSERVED THAT THE COMPANY IS OPERATING IN THE SECTOR OF 'IT SERVICES'. THE IT SERVICE SECTOR REVENUE IS CATEGORIZED INTO THREE PARTS ON T HE BASIS OF THE NATURE OF BUSINESS OF THE CLIENTS. OF THE TOTAL IT SERVICES R EVENUE, 43.5% COMES FROM THE CLIENTS FROM SERVICES SECTOR, 48.6% FROM CLIENT S OPERATING IN MANUFACTURING SECTOR AND 7.9% (FOR NINE MONTHS) FRO M CLIENTS OPERATING IN THE TELECOM SECTOR. THE BASIC WORK OF L&T REMAINS T HE SAME I.E. PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS CLIENTS OPERAT ING IN DIFFERENT BUSINESS SEGMENTS. EARNINGS IN FOREIGN CURRENCY (NOTES FORMI NG PART OF ACCOUNTS ANNUAL REPORT) ALSO SHOWS THE MAJOR EARNINGS ARE FR OM SOFTWARE EXPORT. THE REVENUE RECOGNITION METHOD IN THE 'NOTES FORMING PA RT OF ACCOUNTS' ALSO REFERS TO SERVICES PERFORMED ON 'FIXED PRICE BASIS' OR 'TIME AND MATERIAL BASIS'. THUS THE FUNCTIONAL PROFILE OF THE COMPANY IS SAME AS THAT OF THE ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 14 OF 42 ASSESSEE COMPANY. THE ALP IN THE CASE OF THE ASSESS EE HAS BEEN DETERMINED BY TREATING TNMM AS THE MOST APPROPRIATE METHOD. THIS METHOD REQUIRES BROAD COMPARABILITY OF THE FUNCTION ALITY OF THE COMPARABLES. SO IN CASE THE COMPANY IS IN SOFTWARE DEVELOPMENT, IT WOULD NOT MATTER AS TO WHAT KIND OF CUSTOMER IT SERVES AS THE BROAD RANGE OF SERVICES REMAIN THE SAME AND THAT IS THE DEVELOPMEN T OF SOFTWARE. FURTHER, IT WILL NOT MATTER WHETHER THE COMPARABLE DEVELOPS COMPLETE SOFTWARE FOR ITS CLIENT E.G. DEVELOPS A FINAL PRODUCT AS PER DEMAND OF THE CLIENT OR DEVELOPS ONLY SOME SOFTWARE MODULES, AS PER THE REQUIREMENTS OF ITS CLIENT. THE FUNCTION REMAINS SAME. A COMPANY CAN BE CONSIDERED IN THE BUSINESS OF SOFTWARE PRODUCTS ONLY IF IT IS ITSELF DEVELOPING A ND SELLING THE PRODUCTS DEVELOPED BY IT AND NOT IF ITS CLIENT IS SELLING TH E PRODUCTS DEVELOPED FOR IT BY SUCH COMPANY. THE APPELLANT IS ALSO SIMILARLY PLACE D AS IT IS PROVIDING SERVICES TO ITS AE, WHICH USES THE SAME IN ITS OWN PRODUCTS. SO THESE ARGUMENTS OF THE APPELLANT DO NOT HAVE ANY MERIT AS THE COMPANY IS FUNCTIONALLY SIMILAR TO THE APPELLANT. AS THERE IS NO REVENUE STREAM ON ACCOUNT OF PRODUCT SALES, THERE IS NO MERIT IN THE ARGUMENT OF THE APPELLANT THAT THE COMPANY IS ENGAGED IN PRODUCT SALES. 30. AS REGARDS THE CONTENTION OF ASSESSEE THAT THE PRODUCT ENGINEERING BUSINESS SEGMENT OF L&T WAS TRANSFERRED TO L&T TECH NOLOGY SERVICES LTD AND THE SAME HAD AN IMPACT ON THE MARGINS OF THIS C OMPANY, THE LD. DR SUBMITTED THAT A PERUSAL OF THE ANNUAL REPORT OF L& T SHOWS THAT THE COMPANY HAD THREE BUSINESS SEGMENTS SERVICES CLUS TER, INDUSTRIALS CLUSTER AND TELECOM CLUSTER (PRODUCT ENGINEERING SE RVICES). W.E.F. JAN 1, 2014, THE PRODUCT ENGINEERING SERVICES (PES) WAS TR ANSFERRED TO L&T TECHNOLOGY SERVICES LIMITED, AND ACCORDINGLY ONLY T HE NINE MONTH REVENUE RESULTS FROM PRODUCT ENGINEERING SERVICES (PES) WER E CONSIDERED IN THE COMPANY'S FINANCIAL STATEMENT FOR THE YEAR. AS SUCH THERE WASN'T ANY IMPACT ON FUNCTIONAL COMPARABILITY. THE APPELLANT H AS NOT POINTED OUT ANY ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 15 OF 42 IMPACT ON REVENUE WHICH COULD HAVE INCREASED THE MA RGINS OF THIS COMPANY OR IMPACT ON THE FUNCTIONAL COMPARABILITY O N ACCOUNT OF SUCH BUSINESS TRANSFER. IN FACT, ON ACCOUNT OF SUCH TRAN SFER, THE QUANTUM OF REVENUE WILL BE LESS WHICH WILL ONLY LOWER THE MARG INS. 31. ON THE ASSESSEES ARGUMENT THAT L&T HAS SUBSTAN TIAL OVERSEAS STAFF COST AND SUB-CONTRACTING EXPENSES, THE LD. DR SUBMITTED AS IN THE CASE OF INFOSYS, NO SUCH GROUND OF APPEAL HAS BEEN RAISED BY THE APPELLANT THAT THERE SHOULD BE FILTER RELATING TO ONSITE WORK . NO SUCH FILTER WAS APPLIED BY THE APPELLANT ITSELF IN ITS TP STUDY. SO THIS AR GUMENT OF THE APPELLANT HAS TO BE REJECTED. 32. ON THE ARGUMENT OF THE ASSESSEE THAT L&T HAS IN TANGIBLES AND SO IT SHOULD NOT BE CONSIDERED AS AN APPROPRIATE COMPARAB LE IN ITS CASE, THE LD. DR SUBMITTED THAT ON PERUSING THE DETAILS OF INTANG IBLE ASSETS OF L&T, IT IS OBSERVED THAT THE ENTIRE VALUE OF THE GROSS BLOCK B EFORE DEPRECIATION IS ON ACCOUNT OF SOFTWARE USED FOR THE DEVELOPMENT PURPOS ES. A MEAGRE AMOUNT OF RS 9.8 CRORE IS SHOWN AS BUSINESS RIGHTS, WHICH IS NOT BEING DEVELOPED YEAR AFTER YEAR BUT IS A RIGHT WHICH HAS BEEN AMORT IZED OVER LAST FIVE YEARS AND THE NET BOCK OF THE SAME AS ON 31.03.2014 SHOWS NIL VALUE. INTANGIBLE ASSETS UNDER DEVELOPMENT, AS IN THE LIST OF INTANGI BLE ASSETS, IS SHOWN AS NIL. FURTHER, EVEN IF THERE IS ANY SELF-GENERATED I NTANGIBLE, NOT BEING ON ACCOUNT OF NORMAL PURCHASE AS IN CASE OF SOFTWARE, IN THE CASE OF APPELLANT TOO, WHILE IT IS PERFORMING ITS FUNCTIONS OF SOFTWA RE DEVELOPMENT, SUBSTANTIAL INTANGIBLES GET GENERATED AS ACTIVITY O F SOFTWARE DEVELOPMENT INHERENTLY GENERATES IPR. CONSIDERING ABOVE, THIS A RGUMENT OF THE APPELLANT CANNOT BE ACCEPTED. 33. FURTHER, L&T WAS CONSIDERED TO BE FUNCTIONALLY COMPARABLE TO A SOFTWARE SERVICE PROVIDER COMPANY BY THE ITAT BANGA LORE IN THE CASE OF M/S. ADVICE AMERICA SOFTWARE DEVELOPMENT CENTRE PRI VATE LIMITED (IN ITA ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 16 OF 42 (TP) NO. 2531/BANG/2017 DATED 23.05.2018 RELATING T O A.Y. 2013-14. IN THE CASE OF DCIT VS. TARGET CORPORATION OF INDIA PVT. LTD. IT(T .P.)A. NO.343/BANG/2015 (ASSESSMENT YEAR : 2010-11) TOO ITAT HAD OBSERVED THAT THE SAID COMPANY WAS FUNCTIONALLY COMPARABLE FOR SOFTWA RE DEVELOPMENT SERVICES. CONSIDERING ABOVE, THE LD. DR SUBMITTED THAT THE GROUND OF APPEAL IN RELATION TO LARSEN AND TOUB RO INFOTECH HAS TO BE REJECTED. 34. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. SIMI LAR ISSUE WAS DECIDED BY THE TRIBUNAL IN THE CASE OF MICROSOFT RESEARCH LAB INDIA PVT. LTD. (SUPRA) WHEREIN IT WAS OBSERVED AS FOLLOWS:- WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. IT IS OBSERVED THAT DELHI ITAT IN CASE OF AGINITY I NDIA TECHNOLOGIES INDIA PRIVATE LIMITED (SUPRA) HAS HELD AS FOLLOWS: LARSEN AND TOUBRO INFOTECH LTD WAS EXCLUDED FROM T HE LIST OF COMPARABLE COMPANIES BY RELYING ON THE DECI SION OF THE DELHI BENCH ITAT IN CASE OF SAXO INDIA D VS ACI T. THE DISCUSSION IS CONTAINED AT PARA 4 .8 TO 4.10 OF TRI BUNALS ORDER. THE TRIBUNAL HELD THAT LMT INFOTECH LTD WAS SOFTWARE PRODUCT COMPANY AND SEGMENTAL INFORMATION ON SWT SERVICES WAS NOT AVAILABLE. THE TRIBUNAL ALSO N OTICED THAT APPEAL FILED BY REVENUE AGAINST RIVALS ORDER W AS DISMISSED BY ORDERABLE DELHI HIGH COURT IN ITA NO. 682/2016. RESPECTFULLY FOLLOWING THE SAME WE ARE OF CONSIDERE D OPINION THAT THIS COMPANY DESERVES TO BE EXCLUDED F ROM THE FINAL LIST. WE RELY ON THE COORDINATE BENCH DECISION AND DIRECT THE TPO/A.O. TO EXCLUDE THE COMPARABLE FROM THE FINAL L IST FOR DETERMINATION OF ALP. 35. IN VIEW OF THE ABOVE DECISION, WE DIRECT EXCLUS ION OF LARSEN & TOUBRO INFOTECH LTD. FROM THE COMPARABLES. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 17 OF 42 (III) MINDTREE LTD. 36. THE LD. AR SUBMITTED THAT MINDTREE LTD. SHOULD NOT BE CONSIDERED AS A PROPER COMPARABLE FOR THE FOLLOWING REASONS:- TP ADJUSTMENTS HAVE BEEN MADE IN THE CASE OF MINDTR EE. OWNERSHIP OF INTANGIBLES AND DEVELOPMENT OF INTELLE CTUAL PROPERTY PRODUCT BUSINESS DIVERSIFIED OPERATIONS 37. THE LD. DR SUBMITTED THAT TP ADJUSTMENTS IN THE CASE OF MINDTREE DOES NOT DISTURB ITS FINANCIALS AND AS SUCH THE SAM E DOES NOT MAKE THE COMPANY AS FUNCTIONALLY INCOMPARABLE TO THE APPELLA NT. THE CONTENTION OF ASSESSEE THAT THIS COMPANY BEING FUNCTIONALLY DIFFE RENT HAS BEEN DISCUSSED BY THE TPO AND HIS FINDINGS HAS NOT BEEN CONTROVERT ED BY ASSESSEE. THE BASIS OF CLAIM THAT THE SAID COMPANY IS INTO DIVERS IFIED BUSINESS OR PRODUCT BUSINESS IS THE WEBSITE OF THIS COMPANY. HOWEVER TH IS REFERENCE OF APPELLANT TO WEBSITE OF THE COMPANY IS MISPLACED, A S THE ANNUAL REPORT OF THE MINDTREE IS MORE RELIABLE THAN THE WEBSITE AS T HE LATTER IS DYNAMIC IN NATURE AND MAY REPRESENT THE STATUS AT THE TIME OF ACCESSING THE SAME RATHER THAN THE STATUS DURING THE RELEVANT FINANCIA L YEAR. FURTHER THE PURPOSE OF WEBSITE IS TO ADVERTISE AND TO ATTRACT M ORE CLIENTS AND THUS IT MAY REFLECT THE CAPABILITIES OF THE COMPANY RATHER THAN THE ACTUAL FUNCTIONING DURING A SPECIFIC YEAR. SO RELIANCE CAN NOT BE PLACED ON THE WEBSITE OF THE COMPANY. THE ALP IN THE CASE OF THE ASSESSEE HAS BEEN DETERMINED BY TREATING TNMM AS THE MOST APPROPRIATE METHOD. THIS METHOD REQUIRES BROAD COMPARABILITY OF THE FUNCTION ALITY OF THE COMPARABLES. SO IN CASE THE COMPANY IS IN SOFTWARE DEVELOPMENT, IT WOULD NOT MATTER AS TO WHAT KIND OF CUSTOMER IT SERVES AS THE BROAD RANGE OF SERVICES REMAIN THE SAME AND THAT IS THE DEVELOPMEN T OF SOFTWARE. SO, ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 18 OF 42 ACCORDING TO THE LD. DR, THESE ARGUMENTS OF THE APP ELLANT DO NOT HAVE ANY MERIT AS THE COMPANY IS FUNCTIONALLY SIMILAR TO THE APPELLANT. 38. THE LD. DR SUBMITTED THAT ASSESSEE HAS ARGUED THAT MINDTREE IS INTO DEVELOPMENT OF INTELLECTUAL PROPERTY AND HAS I NTANGIBLES. THE ISSUE HAS BEEN DISCUSSED BY THE TPO WHICH HAS NOT BEEN CONTRO VERTED. THE CONTENTION OF ASSESSEE THAT AS PER THE ANNUAL REPOR T OF MINDTREE, IT HAS RECEIVED LONG TERM FUNDS FROM COUNCIL FOR SCIENTIFI C AND RESEARCH (CSIR) TO DEVELOP A PROJECT UNDER `DEVELOPMENT OF INTELLIG ENT VIDEO SURVEILLANCE SERVER SYSTEM'. THIS ARGUMENT DOES NOT CARRY ANY WE IGHT. FIRSTLY PAGE 109 OF THE ANNUAL REPORT OF MINDTREE RELATES TO CONSOLI DATED FINANCIALS OF THE GROUP. SECONDLY THE BORROWING FROM CSIR IS A MEAGER RS 2.70 CRORES AS AGAINST THE TURNOVER OF THE COMPANY WHICH IS 3031.6 0 CRORE. THIRDLY THERE IS NOTHING TO SUGGEST IN THE ANNUAL THAT THIS HAS RESU LTED IN GENERATION OF IP FOR THE COMPANY. THE TPO HAS RIGHTLY POINTED OUT TH AT TOTAL INTANGIBLES OF MINTREE ARE OF RS 6.7 CRORE, WHICH IS JUST 1% OF TH E TOTAL NON-CURRENT ASSETS AND THERE IS NOTHING TO SUGGEST THAT THESE INTANGIB LES HAVE DRIVEN THE REVENUE OF THIS COMPANY. THE REMAINING INTANGIBLES OF RS 69.80 CRORE ARE THE SOFTWARE USED FOR DEVELOPMENT. FURTHER, EVEN IF THERE IS ANY SELF- GENERATED INTANGIBLE, NOT BEING ON ACCOUNT OF NORMA L PURCHASE AS IN CASE OF SOFTWARE, IN THE CASE OF APPELLANT TOO, WHILE IT IS PERFORMING ITS FUNCTIONS OF SOFTWARE DEVELOPMENT, SUBSTANTIAL INTANGIBLES AR E GENERATED. CONSIDERING ABOVE, THE ARGUMENT OF THE APPELLANT CA NNOT NOT BE ACCEPTED. 39. THIS ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN THE CASE OF MICROSOFT RESEARCH LAB INDIA PVT. LTD. (SUPRA) WHEREIN THIS COMPANY WAS EXCLUDED FROM COMPARABLES OBSERVING AS UNDER:- 4.2(F) WE FOUND FOR THE ASSESSMENT YEAR 2014-15, THE COMPANY WAS EXCLUDED BY THE CO- ORDINATE BENCH DECI SION IN THE CASE OF MARWELL INDIA PVT. LTD. VS. DCIT (SUPRA) AT PAGE 24 PARA 4.2 (F) OF THE ORDER AS UNDER : ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 19 OF 42 4.2 (F). MINDTREE LTD THIS COMPARABLE HAS BEEN INCLUDED BY LD.TPO THE FIN AL LIST. LD. COUNSEL SUBMITTED THAT IT IS FUNCTIONALLY NOT SIMILAR WITH THAT OF ASSESSEE. IT IS SUBMITTED THAT ASSESSEE ENGAGED IN PROVIDING SERVICES SUCH AS AGILE, ANALYT ICS AND INFORMATION MANAGEMENT, APPLICATION DEVELOPMENT AND MAINTENANCE, BUSINESS PROCESS MANAGEMENT, BUSINESS TECHNOLOGY CONSULTING, CLOUD, DIGITAL BUSINESS, INDEPENDENT TESTING, INFRASTRUCTURE MANAGEMENT SERV ICES, MOBILITY, PRODUCT ENGINEERING AND SAP SERVICES. LD. AR REFERRED TO PAGE 1088 IN SUPPORT. IT IS FURTHER BEE N SUBMITTED THAT THIS COMPANY DOES NOT HAVE SEGMENTAL INFORMATION ON THE BASIS OF WHICH REVENUE EARNED FR OM DIFFERENT VERTICALS COULD BE IDENTIFIED. THIS COMPA NY ALSO OWNS HUGE INTANGIBLES AND THEREFORE DESERVES TO BE EXCLUDED. ON THE CONTRARY LD. CIT DR PLACED RELIANCE UPON ORD ERS PASSED BY AUTHORITIES BELOW. WE HAVE EXAMINED THE ANNUAL REPORTS OF THIS COMPANY AND IT IS OBSERVED THAT THIS COMPANY CARRIES OUT RE SEARCH AND DEVELOPMENT ACTIVITIES AND HAS CREATED LARGE INTANGIBLES. UNDER SUCH CIRCUMSTANCES WE DO NOT FIN D THIS COMPANY TO BE COMPARABLE WITH THAT OF A CAPTIVE SER VICE PROVIDER LIKE ASSESSEE. WE THEREFORE DIRECT THE LD. AO/TPO TO EXCLUDE THIS COMPARABLE FROM THE FINAL LIST. CONSIDERING THE FUNCTIONAL DISSIMILARITY AND HIGH T URNOVER CRITERIA AND JUDICIAL DECISION, WE DIRECT THE TPO/A.O. TO EX CLUDE THE COMPARABLE FROM THE FINAL LIST OF COMPARABLES FOR D ETERMINATION OF ALP. (IV) PERSISTENT SYSTEMS LTD. 40. THE LD. AR SUBMITTED THAT MINDTREE SHOULD NOT B E CONSIDERED AS A PROPER COMPARABLE FOR THE FOLLOWING REASONS:- ENGAGED IN PRODUCT DEVELOPMENT ENGAGED IN DIVERSIFIED BUSINESS INCLUDING INTELLECT UAL PROPERTY ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 20 OF 42 EXTRAORDINARY EVENTS ENGAGED IN R&D ACTIVITIES LARGE SCALE OF OPERATION 41. THE LD. DR SUBMITTED THAT THE REFERENCE OF ASS ESSEE TO WEBSITE OF THE COMPANY IS MISPLACED, AS THE SAME RELATES TO EN TIRE GROUP OF PERSISTENT SYSTEMS. FURTHER, THE ANNUAL REPORT OF THE COMPANY IS MORE RELIABLE THAN THE WEBSITE AS THE LATTER IS DYNAMIC IN NATURE AND MAY REPRESENT THE STATUS AT THE TIME OF ACCESSING THE SAME RATHER THAN THE S TATUS DURING THE RELEVANT FINANCIAL YEAR. FURTHER THE PURPOSE OF WEBSITE IS T O ADVERTISE AND TO ATTRACT MORE CLIENTS AND THUS IT MAY REFLECT THE CAPABILITI ES OF THE GROUP RATHER THAN THE ACTUAL FUNCTIONING DURING A SPECIFIC YEAR. ON P ERUSAL OF THE ANNUAL REPORT OF THIS COMPANY, IT IS OBSERVED THAT AT PAGE 158 [CLAUSE (IV)] OF THE UNCONSOLIDATED ANNUAL REPORT, IT IS MENTIONED THAT THE ACTIVITIES OF THE COMPANY DO NOT INVOLVE PURCHASE OF INVENTORY AND SA LE OF GOODS, AND ITS NATURE OF BUSINESS WAS RENDERING OF SERVICES. THE R EFERENCE OF APPELLANT TO PAGES 59, 60, 77 AND 105 OF ANNUAL REPORT IS ALSO M ISPLACED, AS THE SAME RELATE TO ENTIRE GROUP OF PERSISTENT SYSTEMS AND UN CONSOLIDATED REPORT STARTS FROM PAGE 155 OF THE ANNUAL REPORT. THE REVE NUE RECOGNITION METHOD IN THE 'NOTES FORMING PART OF FINANCIAL STATEMENTS' ON PAGE 166 OF THE ANNUAL REPORT ALSO REFERS TO 'INCOME FROM SOFTWARE SERVICES'. IT REFERS TO SERVICES PERFORMED ON 'FIXED PRICE BASIS OR 'TIME A ND MATERIAL BASIS'. AS PER PAGE 181, NOTE 21 OF THE ANNUAL REPORT, THE REVENUE FROM OPERATIONS IS STATED TO BE ON ACCOUNT OF SALE OF SOFTWARE SERVICE S AMOUNTING RS.11,841.16 MILLION. AS PER PAGE 195 OF THE ANNUAL REPORT, THE EARNINGS IN FOREIGN CURRENCY OF RS.10,606.23 MILLION, (CONSTITU TING 89.57%) WAS FROM SALE OF SOFTWARE; AND THERE IS NO REFERENCE TO SALE OF PRODUCTS. THUS IT IS EVIDENT THAT THIS COMPANY'S REVENUE FROM OPERATION WAS PREDOMINANTLY ON ACCOUNT OF SERVICES RENDERED. THERE IS NO MENTION O F ANY REVENUE STREAM ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 21 OF 42 FROM SALE OF PRODUCTS IN THE P& L ACCOUNT OR BALANC E SHEET. AT PAGE 183 OF THE ANNUAL REPORT, IT IS GIVEN THAT THE COMPANY'S O PERATIONS PREDOMINANTLY RELATE TO PROVIDING SOFTWARE PRODUCTS SERVICES AND TECHNOLOGY INNOVATION COVERING FULL LIFE CYCLE OF PRODUCTS TO ITS CUSTOME RS. THE PRIMARY REPORTING SEGMENTS ARE IDENTIFIED BASED ON REVIEW OF MARKET A ND BUSINESS DYNAMICS BASED ON RISK AND RETURNS AFFECTED BY THE TYPE OF C LASS OF CUSTOMERS FOR THE SERVICES PROVIDED. AS PER PAGE 164 (NOTE 1) OF THE ANNUAL REPORT, THE COMPANY IS SPECIALIZING IN SOFTWARE PRODUCTS SERVIC ES AND TECHNOLOGY INNOVATION AND OFFERS COMPLETE PRODUCT LIFE CYCLE S ERVICES. THIS INDICATES THAT THE COMPANY IS DEVELOPING SOFTWARE FOR ITS CUS TOMERS, WHO IN TURN ARE IN BUSINESS OF SOFTWARE PRODUCT DEVELOPMENT AND OUT SOURCING THE WORK OF SOFTWARE DEVELOPMENT TO THIS COMPANY. THUS THE APPE LLANT HAS WRONGLY INFERRED THAT M/S PERSISTENT SYSTEMS LTD ITSELF IS IN SOFTWARE PRODUCT DEVELOPMENT. IN FACT, THE APPELLANT ITSELF IS SIMIL ARLY PLACED AS IT IS DEVELOPING SOFTWARE FOR ITS AE, WHICH IN TURN IS FI NALLY USING IT IN ITS OWN PRODUCTS. ALTHOUGH THE 'NATURE OF OPERATIONS ' OF T HE COMPANY USE THE WORDS 'SPECIALIZING IN SOFTWARE PRODUCTS', `SERVICE S AND TECHNOLOGY INNOVATION', 'COMPLETE PRODUCT LIFE CYCLE SERVICES' ETC., HOWEVER AS BROUGHT OUT BY THE TPO IN HIS ORDER, THE COMPANY IS DEVELOP ING PRODUCTS FOR ITS CUSTOMERS AND NOT ITSELF SELLING THE PRODUCTS. THIS IS ALSO CONFIRMED BY THE COMPANY IN THE INFORMATION PROVIDED UNDER SECTION 1 33(6) OF THE ACT. IN FACT, THE BUSINESS STRATEGY OF THE ENTIRE GROUP IS TO PROVIDE SERVICES TO THE CLIENTS, WHICH ARE SOFTWARE PRODUCT COMPANIES. THUS THE FUNCTIONAL PROFILE OF THE COMPANY IS SAME AS THAT OF THE APPELLANT. TH E ALP IN THE CASE OF THE APPELLANT HAS BEEN DETERMINED BY TREATING TNMM AS T HE MOST APPROPRIATE METHOD. THIS METHOD REQUIRES BROAD COMPARABILITY OF THE FUNCTIONALITY OF THE COMPARABLES. SO IN CASE THE COMPANY IS IN SOFTWARE DEVELOPMENT, IT WOULD NOT MATTER AS TO WHAT KIND OF CUSTOMER IT SERVES AS THE BROAD RANGE OF SERVICES REMAIN THE SAME AND THAT IS THE DEVELOPMEN T OF SOFTWARE. FURTHER, ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 22 OF 42 IT WILL NOT MATTER WHETHER THE COMPARABLE DEVELOPS COMPLETE SOFTWARE FOR ITS CLIENT E.G. DEVELOPS A FINAL PRODUCT AS PER DEMAND OF THE CLIENT OR DEVELOPS ONLY SOME SOFTWARE MODULES FOR AS PER THE REQUIREME NTS OF ITS CLIENT. THE FUNCTION REMAINS SAME. THUS, A COMPANY CAN BE CONSI DERED IN THE BUSINESS OF SOFTWARE PRODUCTS ONLY IF IT IS ITSELF DEVELOPING AND SELLING THE PRODUCTS DEVELOPED BY IT AND NOT IF ITS CLIENT IS S ELLING THE PRODUCTS DEVELOPED FOR IT BY SUCH COMPANY. THE APPELLANT IS ALSO SIMILARLY PLACED AS IT IS ALSO INTO SOFTWARE DEVELOPMENT FOR THE PRODUC TS FOR ITS AE. SO THESE ARGUMENTS OF THE APPELLANT DO NOT HAVE ANY MERIT AS 'THE COMPANY IS FUNCTIONALLY SIMILAR TO THE APPELLANT. IN AGNITY INDIA TECHNOLOGIES PVT. (SUPRA) THE ITAT HELD PERSISTENT SYSTEMS LTD TO BE A PROPE R COMPARABLE FOR SOFTWARE DEVELOPMENT ACTIVITIES. 42. AS REGARDS EXPENDITURE INCURRED TOWARDS R&D, THE LD. DR SUBMITTED THAT AS PER PAGE 195 OF THE ANNUAL REPORT THE SAME WAS RS.39.61 MILLION, WHICH CONSTITUTE MEAGER 0.33% OF OPERATING REVENUE. AS DISCUSSED SUPRA WHILE DEALING WITH INFOSYS LTD AS A PROPER COMPARABLE, IN ITS TP STUDY THE APPELLANT HAS ITSELF ACKNOWLEDGED THAT R&D EXPENDITURE WHICH IS LESS THAN 3% OF THE SALES IS AN APPROPRIAT E FILTER TO REJECT COMPANIES WHICH ARE IN R&D OR IN DEVELOPMENT OF INT ANGIBLES. SO AS PER APPELLANT'S OWN YARD STICK THIS COMPANY CANNOT BE R EJECTED ON ACCOUNT OF R&D OR INTANGIBLES. FURTHER THE VALUE OF INTANGIBLE ASSETS OF PERSISTENT SYSTEMS WAS ONLY RS.162.85 MILLION CONSTITUTING 1.3 6% OF OPERATING REVENUE. THERE IS NO REFERENCE TO ANY INTANGIBLE AS SETS OR PATENT OWNED OR DEVELOPED BY THE COMPANY, IN THE STAND ALONE ANNUAL REPORT. THERE IS ALSO NO ACQUISITION OF INTANGIBLES DURING THE YEAR. THUS , IT CAN BE INFERRED THAT THE R&D AND INTANGIBLE ASSETS DO NOT HAVE IMPACT ON THE REVENUE AND PROFITABILITY OF THE COMPANY. ON PERUSING THE 'SUM MARY OF SIGNIFICANT ACCOUNTING POLICIES' IN THE ANNUAL REPORT (PAGE 164 OF ANNUAL REPORT) OF PERSISTENT SYSTEMS, IT IS OBSERVED THAT INTANGIBLE ASSETS ARE PRIMARILY THE ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 23 OF 42 SOFTWARE LICENSES PURCHASED AND CONTRACTUAL RIGHTS ACQUIRED' AND ARE VALUED ON THE BASIS OF 'PURCHASE PRICE AND ATTRIBUT ABLE COST OF BRINGING THE ASSET TO ITS WORKING CONDITION FOR INTENDED USE'. N OWHERE THERE IS REFERENCE TO THE IPR GENERATED BY THE COMPANY ITSELF AND ITS VALUATION. THUS THE INTANGIBLES IN THE FIXED ASSETS SCHEDULE ARE ON ACC OUNT OF SOFTWARE/CONTRACTUAL RIGHTS PURCHASED AND USED FOR THE DEVELOPMENT PURPOSES. FURTHER, EVEN IF THERE IS ANY SELF-GENERA TED INTANGIBLE, NOT BEING ON ACCOUNT OF NORMAL PURCHASE AS IN CASE OF SOFTWAR E, AS DISCUSSED SUPRA, IN THE CASE OF APPELLANT TOO, WHILE IT IS PERFORMIN G ITS FUNCTIONS OF SOFTWARE DEVELOPMENT, SUBSTANTIAL INTANGIBLES ARE GENERATED. THE APPELLANT HAS FAILED TO ESTABLISH THAT DIFFERENCES, IF ANY, ON AC COUNT OF R&D, BRAND AND IRPS HAVE MATERIAL EFFECT ON THE MARGIN OF THE ABOV E COMPANY, IN TERMS OF CLAUSE (I) OF SUB-RULE (3) OF RULE 10B, WHICH PROVI DES THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF NONE OF THE DIFFERENCES, IF ANY, BETWEEN ENTERPRISES ENTERI NG INTO BUSINESS TRANSACTIONS OR LIKELY TO MATERIALLY AFFECT THE PRO FIT ARISING FROM SUCH TRANSACTIONS IN THE OPEN MARKET. 43. THE CONTENTION OF ASSESSEE IS THAT THERE WAS OC CURRENCE OF EXTRAORDINARY EVENTS DURING THE YEAR UNDER CONSIDER ATION IN THE CASE OF THIS COMPANY AND SO IT SHOULD NOT BE CONSIDERED AS A COM PARABLE. THE LD. DR SUBMITTED THAT PAGE 27 OF ANNUAL REPORT RELATES TO THE CONSOLIDATED FINANCIALS OF THE GROUP AND THE EXTRA ORDINARY EVEN T RELATES TO ACQUISITION BY PERSISTENT SYSTEMS INC (PSI) AND NOT BY THE INDIAN ENTITY NAMELY PERSISTENT SYSTEMS LIMITED WHICH HAS BEEN CONSIDERED AS A COMP ARABLE BY THE TPO. THE APPELLANT HAS NOT EXPLAINED AS TO HOW THESE ACT S OF SUBSIDIARIES HAVE IMPACTED THE PROFIT MARGINS OF MIS PERSISTENT SYSTE MS. SO THIS ARGUMENT OF THE APPELLANT IS TO BE REJECTED. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 24 OF 42 44. ON THE SCALE OF OPERATIONS, THE LD. DR SUBMITTE D THAT THE TPO HAS USED EMPLOYEE COST FILTER OF 25% TO EXCLUDE THE COM PANIES NOT IN THE SOFTWARE DEVELOPMENT SEGMENT. THE APPELLANT HAS NOT EXPLAINED AS TO HOW MORE NUMBER OF EMPLOYEES AFFECTS THE MARGINS OF THIS COMPANY. 45. THE LD. DR FURTHER SUBMITTED THAT THIS COMPANY WAS UPHELD TO BE FUNCTIONALLY COMPARABLE TO A SOFTWARE SERVICE PROVI DER COMPANY BY THE HON'BLE ITAT BANGALORE IN THE CASE OF M/S. ADVICE AMERICA SOFTWARE DEVELOPMENT CENTRE PRIVATE LIMITED (IN ITA (TP) NO. 2531/BANG/2017 DATED 23.05.2018 (A.Y. 2013-14) . IN AGNITY INDIA TECHNOLOGIES PVT. LTD. (SUPRA) ALSO THE ITAT HAD HELD PERSISTENT SYSTEMS LTD TO BE A PROPER COMPARABLE FOR SOFTWARE DEVELOPMENT ACTIVITIES. 46. CONSIDERING ABOVE, THE LD. DR SUBMITTED THAT TH E GROUND RELATING TO THIS COMPARABLE HAS TO BE DISMISSED. 47. THIS COMPARABLE I.E., PERSISTENT SYSTEMS LTD. CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN THE CASE OF MICROSOFT RESEARCH LAB INDIA PVT. LTD. (SUPRA) WHEREIN THIS COMPANY WAS EXCLUDED FROM COMPARABLES OBSERVING AS UNDER:- WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. AT PAGE-1432 , IT IS OBSERVED THAT COMPANIES OPERATIONS PREDOMINANTLY RELATES TO PROVIDING SOFTWARE PRODUCTS SERVICES AND TECHNOLOGY, INNOVATI ON COVERING FULL LIFE CYCLE OF PRODUCT TO ITS CUSTOMERS. IT IS OBSERVED THAT DELHI ITAT IN CASE OF AGINITY I NDIA TECHNOLOGIES INDIA PRIVATE LIMITED (SUPRA) HAS HELD AS FOLLOWS: PERSISTENT SYSTEMS LTD WAS EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES ON THE GROUND THAT THIS COMPAN Y WAS A SOFTWARE PRODUCT COMPANY AND SEGMENTAL INFORMATION ON SWD SERVICES WAS NOT AVAILABLE. THE TRIBUNAL IN COMING TO THE ABOVE CONCLUSION REFERRED TO THE DECISIONS RENDERED BY ITAT DELHI BENCHES IN CASE OF CASH EDGE INDIA PRIVATE LIMITED VS ITU IN ITA NO. 64/DEL /2015 ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 25 OF 42 VIDE ORDER DATED 23/09/15 AND THE DETAILS OF ORDERA BLE DELHI HIGH COURT IN CASE OF SEXUAL INDIA PRIVATE LI MITED (SUPRA). THE FINDINGS IN THIS REGARD ARE CONTAINED IN PARAGRAPH 4.14 TO 4.16 OF ITS ORDER. RESPECTFULLY FOLLOWING THE SAME WE ARE OF CONSIDERED OPINION THAT THIS COM PANY DESERVES TO BE EXCLUDED FROM THE FINAL LIST. WE, RESPECTFULLY FOLLOW THE COORDINATE BENCH DECISI ON, AND DIRECT THE TPO TO EXCLUDE THE COMPARABLE FROM THE FINAL LI ST OF COMPARABLE FOR DETERMINATION OF ALP. 48. FOLLOWING THE AFORESAID DECISION, WE DIRECT TO EXCLUDE PERSISTENT SYSTEMS LTD. FROM THE LIST OF COMPARABLES. (V) THIRDWARE SOLUTIONS LTD. 49. THE LD. AR ON THE BASIS OF DETAILED SUBMISSION S STATED THAT THIS COMPANY IS ENGAGED IN SALE OF PRODUCTS AND HAS TO B E EXCLUDED. 50. THE LD. DR, ON THE OTHER HAND, SUBMITTED THAT A PERUSAL OF THE FINANCIALS OF THIS COMPANY SHOWS THAT THE REVENUE O F THIS COMPANY IS ONLY FROM SALE OF SOFTWARE DEVELOPMENT SERVICES AND NOT FROM SALE OF ANY PRODUCTS. AS PER PAGE 16 OF THE FINANCIALS, THE COM PANY IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND CONSULTANCY SE RVICE AND THAT THE OPERATION OF THE COMPANY COMPRISES OF SOFTWARE, DEV ELOPMENT, IMPLEMENTATION AND SUPPORT SERVICES. THOUGH AT PAGE 2 OF THE P&L A/C STATEMENT THE COMPANY HAS MENTIONED REVENUE FROM SA LE OF PRODUCTS AT RS.20675/- LAKHS, HOWEVER IT IS CLEARLY MENTIONED T HAT THE REVENUE WAS ON ACCOUNT OF EXPORT OF SOFTWARE SERVICES TO THE TUNE OF RS.20,194.37/- LAKHS, FROM SOFTWARE SERVICES FROM LOCAL UNIT RS.414.07/-L AKHS, FROM SUBSCRIPTION AND TRAINING RS.59.32/- LAKHS, FROM SALE OF LICENSE S 7.98 LAKHS. THE REVENUE FROM SOFTWARE LICENCE CONSTITUTES A MEAGER 0.03% OF TOTAL OPERATING REVENUE. THUS IT IS VERY CLEAR THAT THIS COMPANY IS PREDOMINANTLY INTO SALE OF SOFTWARE SERVICES AND HENCE CAN BE SAFELY TAKEN AS A COMPARABLE. FURTHER AT PAGE 7 OF ANNUAL REPORT IT IS MENTIONED THAT THE COMPANY HAS ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 26 OF 42 ACQUIRED INTANGIBLE ASSET RELATING TO SOFTWARE PURC HASED FOR COMPANY'S INTERNAL USE WHICH WAS CAPITALIZED AS THE COST OF A CQUISITION. THUS THIS COMPANY IS A PROPER COMPARABLE. 51. ON THE CONTENTION OF ASSESSEE THAT THE TPO HAS ERRONEOUSLY CONSIDERED FOREX LOSS AS NON-OPERATING EXPENSE, THE LD. DR SUBMITTED THAT THE TPO HAS CONSIDERED FOREX GAIN/LOSS AS OPERATING IN NATURE. THE CIT(APPEALS) DIRECTED THE TPO TO REVERIFY THIS ASPE CT IN RELATION TO THIS COMPARABLE ALSO AND IF THE FOREX LOSS IS NOT CONSID ERED AS OPERATING IN NATURE THEN HE SHOULD TREAT IT AS OPERATING AND REC OMPUTE THE MARGIN OF THIS COMPANY. 52. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE M ATERIAL ON RECORD. SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN THE CASE OF MICROSOFT RESEARCH LAB INDIA PVT. LTD. (SUPRA) WHEREIN THE TRIBUNAL HELD AS UNDER:- WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. ON PERUSAL OF THE ANNUAL REPORTS PLACED AT PAGE 573 OF PAPER BOOK VOLUME 2, IT IS OBSERVED THAT THIS COMPANY HAS DEVE LOPED ITS OWN PRODUCT BY THE NAME PAPA. IT IS OBSERVED THAT THI S COMPANY HAS INCURRED HUGE EXPENSES TOWARDS IMPORT OF SOFTWA RE SERVICES EVIDENCING OUTSOURCING OF SOFTWARE SERVICES UNLIKE THAT OF ASSESSEE. IT IS ALSO OBSERVED THAT THIS COMPANY IS INTO PRODUCTION OF SOFTWARE PRODUCT AND THEREFORE CANNOT BE FUNCTIO NALLY IS HELD SIMILAR TO A CONTRACT SERVICE PROVIDER UNDER THIS S EGMENT LIKE THAT OF ASSESSEE. LD.COUNSEL PLACED RELIANCE UPON DECISI ON OF COORDINATE BENCH OF THIS TRIBUNAL IN CASE OF NOMURA RESEARCH INSTITUTE FINANCIAL TECH (INDIA) PVT. LTD., VS DCIT IN ITA NO. 284/KOL/2016 VIDE ORDER DATED 26/10/2018. RESPECTFULLY FOLLOWING THE SAME WE DIRECT LD. AO/TP O TO EXCLUDE THIS COMPARABLE FROM THE FINALIST. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 27 OF 42 ACCORDINGLY, WE RELY ON THE TRIBUNAL AND DIRECT THE TPO TO EXCLUDE THIS COMPARABLE FROM THE FINAL LIST SELECTE D IN DETERMINING THE ALP. 53. FOLLOWING THE ABOVE DECISION OF THE TRIBUNAL, THIS COMPANY IS DIRECTED TO BE EXCLUDED FROM THE COMPARABLES. 54. THE ASSESSEE HAS ALSO SOUGHT INCLUSION OF THE F OLLOWING COMPARABLES:- (I) SANKHYA INFOTECH LTD. (II) I2T2 INDIA LTD. (III) EVOKE TECHNOLOGIES PVT. LTD. (I) SANKHYA INFOTECH LTD. 55. THIS COMPANY WAS NOT PART OF ASSESSEE'S OWN COM PARABLES IN ITS TP STUDY AND THE SAME WAS PROPOSED AS ADDITIONAL COMPA RABLE BEFORE TPO. THE TPO CONSIDERED IT AS FUNCTIONALLY DIFFERENT BY HOLDING THAT THE SAME IS ENGAGED IN DIVERSIFIED ACTIVITIES. 56. THE LD. AR MADE DETAILED SUBMISSIONS THAT THE C OMPANY IS FUNCTIONALLY SIMILAR TO ASSESSEE AND PASSES ALL THE FILTERS APPLIED BY THE TPO. 57. THE LD. DR SUBMITTED THAT THE COMPANY HAS AN IN -HOUSE RESEARCH AND DEVELOPMENT CENTRE INVOLVED IN THE DEVELOPMENT ACTIVITIES OF NEW PRODUCTS IN THE FIELD OF SIMULATION AND TRAINING. T HE COMPANY IS MAINLY INTO SOFTWARE PRODUCT DEVELOPMENT AND RELATED R&D ACTIVI TIES. DURING THE YEAR UNDER CONSIDERATION THE COMPANY HAS DEBITED AN EXPE NSE OF RS 8.17 CRORES ON ACCOUNT OF R&D, AND OF THIS RS 7.99 CRORE CONSTITUTES EMPLOYEE COST. THAT THE COMPANY IS IN RESEARCH AND DEVELOPME NT AND THUS DEVELOPING ITS OWN INTANGIBLES ALSO BECOMES EVIDENT FROM THE FACT THAT ITS TANGIBLE FIXED ASSETS ARE VALUED AT ONLY RS 53.48 L ACS AS AGAINST INTANGIBLE ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 28 OF 42 ASSETS OF RS 4848.47 LACS. THESE INTANGIBLES INCLUD E LEARNING MANAGEMENT PRODUCTS, TRAINING MANAGEMENT PRODUCTS, SIMULATOR P RODUCTS, KNOWLEDGE BASED CONTENT, OPTIMIZATION PRODUCTS ETC. AS AGAINS T NORMAL INTANGIBLE OF 'SOFTWARE PURCHASED' IN CASE OF ROUTINE SOFTWARE DE VELOPER. THIS MAKES IT EVIDENT THAT THE COMPANY IS MAINLY IN THE BUSINESS OF TECHNICAL TRAINING AND R&D RATHER THAN SOFTWARE DEVELOPMENT. NOWHERE IN TH E ANNUAL REPORT THERE IS ANY REFERENCE TO THE SOFTWARE DEVELOPMENT ACTIVI TIES OF THE COMPANY AND IT IS OBSERVED THAT THE COMPANY CATEGORIZES ITS ACT IVITIES AS SOFTWARE SERVICES AND SOFTWARE PRODUCTS. NATURE OF SOFTWARE SERVICES HAS NOT BEEN INDICATED SPECIFICALLY AND THUS HAS TO BE INTERPRET ED ON THE BASIS OF INFORMATION AVAILABLE IN THE ANNUAL REPORT. ALTHOUG H IN THE ANNUAL REPORT THE COMPANY REPEATEDLY REFERS TO REVENUE FROM ITS SOFTW ARE PRODUCTS AND SOLUTIONS ONLY, HOWEVER IN THE SEGMENTAL DATA IT HA S SHOWN ENTIRE REVENUE FROM SOFTWARE SERVICES, WITHOUT EXPLAINING THE NATU RE OF SOFTWARE SERVICES. SINCE COMPLETE SEGMENTAL DATA RELATING TO REVENUE F ROM MULTIPLE STREAMS AND THE EXPENSES ON THE SAME IS NOT AVAILABLE, SO T HIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE APPELLANT COMPANY. THE ASSESSEE HAS JUST RELIED ON THE SEGMENTAL DETAILS OF 'SOFTWARE SERVIC ES' AND 'SOFTWARE PRODUCTS' AS GIVEN IN THE ANNUAL REPORT WITHOUT EXP LAINING AS TO HOW SOFTWARE SERVICES CONSTITUTE SOFTWARE DEVELOPMENT S ERVICES ONLY AND THE DETAILS INDICATED IN THE ANNUAL REPORT ARE IRRELEVA NT. FURTHER, THIS COMPANY HAS ALREADY BEEN REJECTED AS A PROPER COMPARABLE FO R THE SOFTWARE DEVELOPMENT SEGMENT BY THE ITAT IN SEVERAL CASES AS UNDER:- SYSARRIS SOFTWARE (P.) LTD. V. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE- 12 (3), BANGALORE[2016] 67 TAXMANN.COM 243 (BANGALORE) DY. CIT V. KODIAK NETWORKS INDIA (P.) LTD. [IT (TP) APPEAL NO. 532 (BANG.) OF 2013, DATED 30-7-2013], A ND ITO V. SUNQUEST INFORMATION SYSTEMS (INDIA) (P.) LT D. [2015] 61 TAXMANN.COM 81 (BANG. - TRIB.). ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 29 OF 42 THE ITAT HELD THAT THIS COMPANY IS ENGAGED IN THE B USINESS OF DEVELOPMENT OF SOFTWARE PRODUCTS & SERVICES AND TRAINING. CONSIDERING ABOVE, THIS COMPANY CANNOT BE CONSIDERE D AS A PROPER COMPARABLE. 58. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, ALL COMPARABLE SEGMENT DETAILS ARE AV AILABLE. THIS COMPANY WAS CONSIDERED BY THE TRIBUNAL IN THE CASE OF BROCADE COMMUNICATIONS SYSTEMS PVT. LTD., IT(TP)A NO.79/BANG/2019 DATED 19.6.2020 WHEREIN THE ISSUE WAS REMITTED BACK TO TPO FOR FRESH CONSIDERAT ION OBSERVING AS FOLLOWS:- 34. THIS COMPANY WAS SELECTED BY THE ASSESSEE IN I TS TP STUDY AND CAME TO BE REJECTED BY THE TPO FOR THE REASON T HAT IT FAILS THE EXPORT REVENUE FILTER. WHILE THE ASSESSEE DEMONSTRA TED BEFORE THE DRP THAT THE COMPANY PASSES THE FILTER AND EARNED R EVENUE FROM EXPORT OF SERVICES COMPRISING 96.53% OF THE TOTAL R EVENUE, THE DRP UPHELD THE REJECTION OF THE COMPANY ON AN ALTOG ETHER NEW BASIS THAT THE COMPANY IS ENGAGED IN DEVELOPMENT OF SOFTWARE AND PRODUCTS, AND THAT IT HAD INCURRED SUBSTANTIAL R&D EXPENSES TO THE TUNE OF 5.9% OF TOTAL OPERATING REVENUE. 35. AT THE OUTSET IT WAS SUBMITTED THAT THE COMPANY IS FUNCTIONALLY COMPARABLE AND PASSES ALL THE FILTERS APPLIED BY THE TPO. IT WAS SUBMITTED THAT ACTION OF THE DRP IN UPH OLDING THE EXCLUSION OF THE COMPANY ON AN ALTOGETHER NEW BASIS WITHOUT FIRST PUTTING THE ASSESSEE ON NOTICE OF THE SAME IS WHOLL Y ERRONEOUS AND UNSUSTAINABLE. 36. WE ARE OF THE VIEW THAT THE COMPARABILITY OF TH E COMPANY SHOULD BE CONSIDERED AFRESH BY THE TPO BOTH ON THE EXPORT REVENUE FILTER AND THE FILTERS APPLIED BY THE DRP, BECAUSE ADMITTEDLY THE ASSESSEE WAS NOT CONFRONTED BY THE D RP ON THE NEW FILTER IT APPLIED NOR DID IT GIVE A FINDING ONE WAY OR THE OTHER ON THE EXPORT TURNOVER FILTER. 59. BEING SO, WE REMIT THE ISSUE TO THE TPO FOR FRE SH CONSIDERATION WITH A DIRECTION TO CONSIDER THE SEGMENT DATA. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 30 OF 42 (II) I2T2 INDIA LTD. 60. THE LD. AR SUBMITTED THAT THIS COMPANY WAS REND ERING SOFTWARE DEVELOPMENT SERVICES AND CONSULTING ACTIVITIES AND HENCE COMPARABLE TO IT, HOWEVER THE SAME HAD WRONGLY BEEN NOT ACCEPTED BY T HE TPO BY HOLDING THAT RPT INFORMATION WAS NOT AVAILABLE. IT WAS SUBM ITTED THAT THE COMPANY SATISFIED ALL THE FILTERS ADOPTED BY THE TPO AND HE NCE SHOULD NOT BE REJECTED AS COMPARABLE ONLY BECAUSE RPT INFORMATION IS NOT AVAILABLE IN THE FINANCIALS OF THIS COMPANY. 61. THE LD. DR SUBMITTED THAT PERUSAL OF THE ANNUAL REPORT OF THIS COMPANY (DIRECTORS REPORT- ACKNOWLEDGEMENTS) SHOWS THAT THE COMPANY IS IN THE ITES INDUSTRY AND HAS DONE TRANSACTION PROCE SSING WORK, WHICH IS NOT FUNCTIONALLY COMPARABLE. FURTHER RPT INFORMATIO N IS AN IMPORTANT ASPECT IN SELECTION OF COMPARABLES AND IN ABSENCE O F SUCH DATA A COMPANY CANNOT BE CONSIDERED AS A PROPER COMPARABLE. 62. THIS ISSUE WAS CONSIDERED BY THE TRIBUNAL IN T HE CASE OF LSI INDIA RESEARCH & DEVELOPMENT PVT. LTD. IN IT(TP)A NO.3170 /BANG/2018 DATED 7.10.2020 WHEREIN IT WAS HELD AS FOLLOWS:- 27. AS FAR AS INCLUSION OF I2T2 INDIA LTD. IS CONCERNE D, WE FIND THAT IN THE CASE OF LG SOFT INDIA (P.) LTD. ( SUPRA ) THIS COMPANY WAS DIRECTED TO BE INCLUDED. THE TRIBUNAL IN PARA 1 1 OF ITS ORDER HELD THAT THE TPO EXCLUDED THIS COMPANY FOR THE REA SON THAT THE RELATED PARTY TRANSACTION (RPT) HAD NOT BEEN DISCLO SED IN THE ANNUAL REPORT. THE TRIBUNAL HELD THAT IF THERE IS N O DISCLOSURE OF RPT IN THE ANNUAL REPORT, IT HAS TO BE CONCLUDED TH AT THERE WAS NO RPT AND THEREFORE THIS COMPANY SHOULD BE INCLUDED A S A COMPARABLE COMPANY. FOLLOWING THE AFORESAID DECISIO N, WE DIRECT INCLUSION OF I2T2 INDIA LTD. AS COMPARABLE COMPANY. 63. FOLLOWING THE AFORESAID DECISION, WE DIRECT FOR INCLUSION OF THIS COMPANY I.E., I2T2 INDIA LTD. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 31 OF 42 (III) EVOKE TECHNOLOGIES LTD. 64. THE LD. AR SUBMITTED THAT THIS COMPANY WAS NOT ACCEPTED BY THE TPO ON THE GROUND THAT STANDALONE FINANCIALS OF THI S COMPANY INCLUDED UNAUDITED REVENUE AND EXPENDITURE OF A BRANCH LOCAT ED OUTSIDE INDIA. THE COMPANY IS MAINLY IN SOFTWARE DEVELOPMENT AND HENCE THE SAME IS FUNCTIONALLY SIMILAR TO IT AND UNAUDITED FINANCIAL OF THE BRANCH OFFICE CANNOT BE A REASON TO REJECT THIS COMPANY AS A COMPARABLE. 65. THE LD. DR SUBMITTED THAT A PERUSAL OF THE STA TUTORY AUDITOR'S REPORT SHOWS THAT THE FINANCIAL STATEMENTS INCLUDE BRANCH REVENUE OF RS. 9,24,86,670/- AND PROFIT OF RS. 1,41,11,040/- BASED ON UNAUDITED FINANCIAL STATEMENT OF THE BRANCH OUTSIDE INDIA. SO THE DATA OF THIS COMPANY CANNOT BE CONSIDERED AS RELIABLE. AS SUCH THIS COMPANY CAN NOT BE CONSIDERED AS A PROPER COMPARABLE. FURTHER, AS PER THE GEOGRAPHIC S EGMENTATION INFORMATION, THE REVENUE FROM INDIA WAS GIVEN TO BE RS. 3621.72 LAKHS AND THAT THE REVENUE FROM US WAS GIVEN TO BE RS. 924.87 LAKHS. THUS IT CAN BE SEEN THAT THE EXPORT REVENUE CONSTITUTE ONLY 20.34% OF THE TOTAL REVENUE. THEREFORE THIS COMPANY CANNOT BE CONSIDERED AS COMP ARABLE. 66. THIS COMPANY WAS CONSIDERED BY THE TRIBUNAL I N THE CASE OF CITRIX R&D INDIA PVT. LTD. IN IT(TP)A NO.3134/BANG/2018 DA TED 29.01.2020 WHEREIN IT WAS HELD AS FOLLOWS:- 15. THE ASSESSEE SEEKS INCLUSION OF EVOKE TECHNOLO GIES PVT. LTD. WHICH WAS REJECTED BY THE TPO AS A COMPARABLE COMPANY FOR THE REASON THAT DATA RELATING TO THIS COMPANY W AS NOT AVAILABLE IN THE PUBLIC DOMAIN AND THAT IT HAD A DIFFERE NT FINANCIAL YEAR ENDING. BEFORE THE DRP ALSO, THE ASSESSEE DID N OT CHALLENGE THE ACTION OF THE TPO IN EXCLUDING THE AFORESAID COMPAN Y BECAUSE THE ASSESSEE DID NOT HAVE A DATA RELATING TO THIS C OMPANY. THE ASSESSEE IS NOW SEEKING INCLUSION OF THIS COMPANY O N THE BASIS OF DECISION RENDERED BY THE HYDERABAD BENCH OF ITAT IN THE CASE OF INFOR (INDIA) PVT. LTD. ITA NO.2307/HYD/2018 FOR AY 2014-15. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 32 OF 42 IN THE AFORESAID DECISION, THE HYDERABAD BENCH TOOK THE FOLLOWING VIEW :- 3. AS REGARDS EVOKE TECHNOLOGIES IS CONCERNED, THE CONTENTIONS OF THE ASSESSEE ARE THAT THIS COMPANY I S FUNCTIONALLY SIMILAR TO THE ASSESSEE, WHEREAS THE T PO & DRP HAVE HELD THAT THE FINANCIALS OF THIS COMPANY I NCLUDE THE REVENUE OF ONE BRANCH OUTSIDE INDIA WHICH ARE UNAUDITED AND HENCE ARE NOT RELIABLE. THE LEARNED C OUNSEL FOR THE ASSESSEE HOWEVER, DREW OUR ATTENTION TO PAG E 963 OF THE PAPER BOOK, WHICH IS PART OF THE ANNUAL REPO RT OF EVOKE TECHNOLOGIES LTD WHEREIN THE REVENUE OF INDIA N BRANCH OF ASSESSEE IS SEPARATELY SHOWN. TAKING THE SAME INTO CONSIDERATION, WE DIRECT THE AO/TPO TO RECONSI DER THE COMPARABILITY OF THIS COMPANY BY TAKING THE REV ENUE FROM INDIAN BRANCH ONLY. THUS, THE GROUND FOR MAVER IC SYSTEMS LTD IS REJECTED AND FOR EVOKE TECHNOLOGIES LTD IS ALLOWED FOR STATISTICAL PURPOSES. 16. WE ARE OF THE VIEW THAT IT WOULD BE APPROPRIATE TO DIRECT THE TPO/AO TO CONSIDER THIS ISSUE AFRESH, AFTER OPP ORTUNITY TO THE ASSESSEE AND IN THE LIGHT OF FACTS BROUGHT TO OUR N OTICE AS ABOVE. 67. FOLLOWING THE AFORESAID DECISION, WE REMIT THE ISSUE TO THE AO/TPO FOR FRESH CONSIDERATION AND DECISION ON SIMILAR LIN ES. 68. THE NEXT GROUND OF THE ASSESSEE IS WITH REGARD TO WORKING CAPITAL ADJUSTMENT (WCA). THE LD. AR SUBMITTED WCA OUGHT T O HAVE BEEN ALLOWED BY THE TPO AND ALSO RELIED UPON THE DECISIO N OF ITAT IN ITS OWN CASE FOR AY 2012-13 WHERE ENHANCEMENT MADE BY THE C IT(A) BY DISALLOWING THE WCA AS GRANTED BY THE AO WAS DELETE D. 69. THE LD. DR SUBMITTED THAT THE AO HAS GIVEN DETA ILED REASONING FOR NOT ALLOWING THE WCA TO THE APPELLANT. THE APPELLAN T HAS RELIED UPON DECISION OF ITAT IN ITS OWN CASE FOR AY 2012-13. A PERUSAL OF THE ORDER OF ITAT (PARA 15) SHOWS THAT IN THAT CASE THE TPO HAD ALLOWED WCA TO THE APPELLANT BY ACCEPTING THE CALCULATION GIVEN BY IT. THE ITAT OBSERVED (PARA 17) THAT THE CIT(A) HAD NOT FOUND ANY ERROR IN THE TPO'S WORKING OF WCA AND SO THE WCA AS WORKED OUT BY THE TPO NEEDED TO B E ALLOWED. HOWEVER ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 33 OF 42 THE FACTS OF THE PRESENT CASE ARE DIFFERENT. THE TP O HAS NOT ALLOWED ANY WCA. IT WAS SUBMITTED THAT BEFORE THE CIT(A) ASSE SSEE HAS NOT FURNISHED ANY CALCULATIONS RELATING TO THE WCA SO THAT ACCURA CY OF ITS CLAIM COULD HAVE BEEN EXAMINED. A PERUSAL OF THE TP STUDY OF TH E APPELLANT ALSO SHOWS THAT ASSESSEE HAS JUST GIVEN A THEORETICAL DISCUSSI ON ON THE ISSUE, WITHOUT QUANTIFYING THE AMOUNT OF WCA AND AS SUCH NO SUCH W CA HAS BEEN CLAIMED BY THE APPELLANT IN ITS OWN TP STUDY. THE A PPELLANT HAS NOT BROUGHT ON RECORD ANY DETAILS TO SHOW THAT THE RELEVANT DAT A FOR COMPUTATION OF WCA WAS PRODUCED BY IT BEFORE THE AO OR IT HAD MADE A SPECIFIC REQUEST TO THE AO TO COLLECT SUCH DATA AND PROVIDE SUCH AN ADJ USTMENT. THE APPELLANTS RELIANCE ON THE DECISION IN THE CASE OF MOBIS INDIA ITA NO 2112/MDS/2011(AY: 2007-08) [2013] 38 TAXMANN.COM IS NOT APPLICABLE TO IT. HOWEVER, AS DISCUSSED SUPRA, THE APPELLANT HAS NOT GIVEN ANY CALCULATION OF WCA. THIS IS IMPORTANT TO NOTE THAT THE FACTS WERE NOT SO IN APPELLANT'S CASE FOR AY 2012-13, AS THE ITAT HAD OB SERVED THAT SUCH CALCULATIONS WERE PROVIDED BY THE APPELLANT AND AS SUCH DECISION IN THE CASE OF MOBIS INDIA(SUPRA) COULD NOT BE APPLIED. HOWEVER ON THE FACTS OF THE PRESENT CASE, WHEN NO SUCH DETAILS HAVE BEEN PR OVIDED BY THE APPELLANT THE ABOVE DECISION IN THE CASE OF MOBIS INDIA (SUPRA) GETS SQUARELY APPLIED. IN THE CASE W M GLOBAL TECHNOLOGY SERVICES (INDIA) (P.) LTD. V. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCL E - 7(1)(2), BENGALURU OF [2018J 91 TAXMANN.COM 403 (BENGALURU TRIB) DT 28. 02.2018, THE ITAT HELD AS FOLLOWS:- 24. WE HAVE GONE THROUGH THE RECORDS AND PERUSED T HE ORDERS PASSED BY THE DRP AS WELL AS THE TPO. IN OUR VIEW, IT IS FOR THE ASSESSEE TO PROVE AS TO HOW THE WORKING CAPITAL HAD AN IMPACT ON ITS PROFIT AND IS REQUIRED TO FOLLOW THE ANALYSIS C IS MENTIONED IN PARA 12.1 OF THE DRP ORDER. NEEDFUL HAS NOT BEEN DO NE DESPITE OPPORTUNITY GRANTED BY THE DRP. HOWEVER CONSIDERING THE TOTALITY OF THE CIRCUMSTANCES, WE ARE REMITTING BAC K SIX COMPANIES FOR CONSIDERATION BY THE TPO. WE DEEM IT FIT TO ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 34 OF 42 REMAND THIS ISSUE AFRESH. NEEDLESS TO SAY THAT THE TPO SHALL BE BOUND BY THE DECISION OF THE ITAT, CHENNAI BENCHES IN MOBIS INDIA DD. V. DY. CIT [2013] 38 TAXMANN.COM 231/[201 4] 61 SOT 40. ACCORDINGLY THIS GROUND IS ALLOWED FOR STATISTI CAL PURPOSE.' 70. THE LD. DR SUBMITTED THUS ITAT HELD THAT IT WAS FOR THE ASSESSEE TO PROVE AS TO HOW THE WORKING CAPITAL HAD AN IMPACT O N ITS PROFIT. IN THE PRESENT CASE ALSO, THE APPELLANT HAS NOT PRODUCED ANY DETAILS TO SHOW THE SAME. SO THE DECISION IN THE CASE OF MOBIS INDIA(SUPRA) GETS APPLIED TO THE FACTS OF THE PRESENT CASE. SIMILARLY IN THE CASE OF SAME DEUTZ FAHR INDIA (P.) LTD. V. CIT [2017] 81 TAXMANN.COM 68 (CHENNAI - TRIB.), THE ITAT HELD THAT IN ABSENCE OF TERMS AND CONDITIONS RELATING TO PAYMENTS/RECOVERIES OF THE COMPARABLES AND ASSESSEE, WORKING CAPITAL ADJUS TMENT CANNOT BE GRANTED. THIS WAS ALSO OBSERVED BY THE ITAT THAT SU CH DETAILS WERE NOT FURNISHED BY THE ASSESSEE IN THE SAID CASE. IN THE CASE UNDER CONSIDERATION TOO, AS DISCUSSED SUPRA, THE RELEVANT DETAILS WERE NOT PRODUCED BY THE APPELLANT AND THERE IS NO MERIT IN THE GROUND OF TH E ASSESSEE. 71. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. SIMILAR ISSUE CAME UP FOR CONSIDERATION IN ASSESSEE S OWN CASE FOR AY 2012-13 IN IT(TP)A NO.1939/BANG/2017 DATED 31.10.2018 WHEREIN IT WAS HELD AS UNDER:- 15. IN THE PRESENT CASE THE TPO ALLOWED WORKING C APITAL ADJUSTMENT ACCEPTING THE CALCULATION GIVEN BY THE A SSESSEE. THE CIT(A) IN EXERCISE OF HIS POWERS OF ENHANCEMENT HEL D THAT NO ADJUSTMENT SHOULD BE MADE TO THE PROFIT MARGINS ON ACCOUNT OF WORKING CAPITAL DIFFERENCES BETWEEN THE TESTED PART Y AND THE COMPARABLE COMPANIES FOR THE FOLLOWING REASONS: (I) THE DAILY WORKING CAPITAL LEVELS OF THE TESTED PARTY AND THE COMPARABLES WAS THE ONLY RELIABLE BASIS OF DETERMIN ING ADJUSTMENT TO BE MADE ON ACCOUNT OF WORKING CAPITAL BECAUSE THAT WOULD BE ON THE BASIS OF WORKING CAPITAL DEPLOYED T HROUGHOUT THE YEAR. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 35 OF 42 (II) SEGMENTAL WORKING CAPITAL IS NOT DISCLOSED IN THE ANNUAL REPORTS OF COMPANIES ENGAGED IN DIFFERENT SEGMENTS AND THEREFORE PROPER COMPARISON CANNOT BE MADE. (III) DISCLOSE IN THE BALANCE SHEET DOES NOT CONTAI N BREAK UP OF TRADE AND NON-TRADE DEBTORS AND CREDITORS AND THERE FORE WORKING CAPITAL ADJUSTMENT DONE WITHOUT SUCH BREAK UP WOULD RESULT IN COMPUTATION BEING SKEWED. (IV) COST OF CAPITAL WOULD BE DIFFERENT FOR DIFFERE NT COMPANIES AND THEREFORE WORKING CAPITAL ADJUSTMENT MADE DISRE GARDING THIS DIFFERENT BASED ON BROAD APPROXIMATIONS, ESTIMATION S AND ASSUMPTIONS MAY NOT LEAD TO RELIABLE RESULTS. 16. THE CIT(A) ALSO PLACED RELIANCE ON A DECISION O F CHENNAI ITAT IN THE CASE OF MOBIS INDIA ITA NO.2112/MDS/201 1 (2013) 38 TAXMANN.COM. THAT DECISION WAS BASED ON THE FAC TUAL ASPECT THAT THE ASSESSEE WAS NOT ABLE TO DEMONSTRATE HOW W ORKING CAPITAL ADJUSTMENT WAS ARRIVED AT BY THE ASSESSEE. THEREFORE NOTHING TURNS ON THE DECISION RELIED UPON BY THE CI T(A) IN THE IMPUGNED ORDER. IN THE MATTER OF DETERMINATION OF A RMS LENGTH PRICE, IT CANNOT BE SAID THAT THE BURDEN IS ON THE ASSESSEE OR THE DEPARTMENT TO SHOW WHAT IS THE ARMS LENGTH PRICE. THE DATA AVAILABLE WITH THE ASSESSEE AND THE DEPARTMENT WOUL D BE THE STARTING POINT AND DEPENDING ON THE FACTS AND CIRCU MSTANCES 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 EXERCIS ED TO FIND OUT THE TRUTH THEN IT IS NO DEFENCE TO SAY THAT THE ASS ESSEE HAS NOT FURNISHED THE REQUIRED DETAILS AND ON THAT SCORE DE NY ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL DIFFERENCES. REGARDI NG APPLYING THE DAILY BALANCES OF INVENTORY, RECEIVABLES AND PA YABLES FOR COMPUTING WORKING CAPITAL ADJUSTMENT, THE DELHI BEN CH OF ITAT IN THE CASE OF ITO VS. E VALUE SERVE.COM (2016) 75 TAXMANN.COM 195(DEL-TRIB) HAS HELD THAT INSISTING O N DAILY ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 36 OF 42 BALANCES OF WORKING CAPITAL REQUIREMENTS TO COMPUTE WORKING CAPITAL ADJUSTMENT IS NOT PROPER AS IT WILL BE IMPO SSIBLE TO CARRY OUT SUCH EXERCISE AND THAT WORKING CAPITAL ADJUSTME NT HAS TO BE BASED ON THE OPENING AND CLOSING WORKING CAPITAL DE PLOYED. THE BENCH HAS ALSO OBSERVED THAT THAT IN TRANSFER PRICI NG 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 SA ME FOOTING. THEREFORE THERE IS LITTLE MERIT IN CIT(A)S OBJECTI ON ON WORKING ADJUSTMENT BASED ON UNAVAILABLE DAILY WORKING CAPIT AL REQUIREMENTS DATA. THERE IS ALSO NO MERIT IN THE O BJECTION OF THE CIT(A) REGARDING ABSENCE OF SEGMENTAL DETAILS AVAIL ABLE OF WORKING CAPITAL REQUIREMENTS OF COMPARABLE COMPANIE S CHOSEN AND ABSENCE OF DETAILS OF TRADE AND NON-TRADE DEBTO RS OF COMPARABLE COMPANIES AS THESE DETAILS ARE BEYOND TH E POWER OF THE ASSESSEE TO OBTAIN, UNLESS THESE DETAILS ARE AV AILABLE IN PUBLIC DOMAIN. REGARDING ABSENCE OF COST OF WORKING CAPI TAL FUNDS, THE OECD GUIDELINES CLEARLY ADVOCATES ADOPTING RATE(S) OF INTEREST APPLICABLE TO A COMMERCIAL ENTERPRISE OPERATING IN THE SAME MARKET AS THE TESTED PARTY. THEREFORE THIS OBJECTI ON 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 TPOS WORKING OF WORKING CAPITAL ADJUS TMENT, 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 A ND A COPY OF THE SAME IS AT PAGE 173 & 192 OF THE ASSESSEES PAP ER BOOK. NO DEFECT WHATSOEVER HAS BEEN POINTED OUT IN THESE WOR KING BY THE CIT(A). WE MAY ALSO FURTHER ADD THAT IN TERMS OF R ULE 10B(1)( E) (III) OF THE RULES, THE NET PROFIT MARGIN ARISIN G IN COMPARABLE UNCONTROLLED TRANSACTIONS SHOULD BE ADJUSTED TO TAK E INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS WHICH COUL D MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. IT IS NOT THE CASE OF THE CIT(A) THAT DIFFERENCES IN WORK ING CAPITAL REQUIREMENTS OF THE INTERNATIONAL TRANSACTION AND T HE UNCONTROLLED COMPARABLE TRANSACTIONS IS NOT A DIFFERENCE WHICH W ILL MATERIALLY ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 37 OF 42 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 W ILL HAVE TO BE TREATED AS NOT COMPARABLE IN TERMS OF RULE 10B(3) O F THE RULES, WHICH PROVIDES AS FOLLOWS: (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABL E TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPR ISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATER IALLY 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 COMPA RABLE UNCONTROLLED TRANSACTIONS FOR THE PURPOSE OF COMPAR ISON. THE TRANSFER PRICING EXERCISE WOULD THEREFORE FAIL. TH EREFORE IN KEEPING WITH THE OECD GUIDELINES, ENDEAVOR SHOULD B E MADE TO BRING IN COMPARABLE COMPANIES FOR THE PURPOSE OF BR OAD COMPARISON. THEREFORE THE WORKING CAPITAL ADJUSTME NT AS CLAIMED BY THE ASSESSEE SHOULD BE ALLOWED. WE HOLD AND DIRECT ACCORDINGLY. 72. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND THE MATERIAL ON RECORD, WE ARE OF THE OPINION THAT THIS ISSUE HAS TO BE REM ITTED BACK TO THE FILE OF AO/TPO FOR FRESH CONSIDERATION IN ACCORDANCE WITH T HE ABOVE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2012-13 REVENUES APPEAL 73. THE FIRST GROUND IS REGARDING EXCLUSION OF THE COMPARABLES VIZ., CIGNITI TECHNOLOGIES LTD. AND SQS INDIA BSFI LTD. ( THINKSOFT GLOBAL SERVICES LTD.) BY THE CIT(APPEALS). ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 38 OF 42 CIGNITI TECHNOLOGIES LTD. 74. THE LD. DR SUBMITTED THAT THE TPO NOTED THAT TH IS COMPANY IS INTO DEVELOPMENT OF COMPUTER SOFTWARE & SERVICES AND THE REFORE FUNCTIONALLY SIMILAR TO THE ASSESSEE. THE CONTENTION OF THE ASS ESSEE WAS THAT THIS COMPANY HAD ACQUIRED TO COMPANIES I.E. GALLOP SOLUT IONS INC AND GALLOP SOLUTIONS P. LTD. WHICH ARE EXTRA ORDINARY EVENTS. THE TPO OBSERVED THAT THESE TWO COMPANIES WERE SHOWN AS 100% OWNED SUBSID IARY OF THIS COMPANY AND WERE NOT MERGED. IN OTHER WORDS, THESE TWO COMPANIES STILL REMAINED AS SEPARATE LEGAL ENTITIES AND DO NOT IMPA CT THE STANDALONE PROFIT MARGIN OF THE COMPANY. WHEREAS THE ASSESSEE HAD ER RONEOUSLY COMPARED AND CONSIDERED THE CONSOLIDATED FIGURES OF THIS COM PANY. 75. THIS ISSUE WAS CONSIDERED BY THE TRIBUNAL IN T HE CASE OF MICROSOFT RESEARCH LAB INDIA PVT. LTD. (SUPRA) WHEREIN THIS COMPANY WAS EXCLUDED FROM COMPARABLES OBSERVING AS UNDER:- WE FOUND THIS COMPARABLE WAS EXCLUDED BY THE CO-O RDINATE BENCH OF THE TRIBUNAL IN THE CASE OF MARWELL INDIA PVT. LTD. VS. DCIT (SUPRA) AT PAGE 18 PARA 4.2 (A) OF THE ORDER A S UNDER : WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. WE HAVE ALSO PERUSED THE ANNUAL REPORT VERY CAREFULLY AND IS OBS ERVED THAT THIS COMPANY IS INVOLVED EXCLUSIVELY INTO SOFT WARE TESTING AND HAS CREATED INNOVATIONS IN THE SOFTWARE TESTING. IT IS ALSO OBSERVED THAT THIS COMPANY IS A CQUIRED HUNDRED PERCENT SHARES IN A U.S.-BASED SOFTWARE TES TING SERVICE COMPANY CALLED GALLOP SOLUTIONS INC BASED I N TEXAS USA. IT IS ALSO OBSERVED THAT THIS COMPANY HA S BEEN LISTED ON BOMBAY STOCK EXCHANGE, BANGALORE STOCK EXCHANGE AND MAYBE MADRAS STOCK EXCHANGE WITH A PAI D- UP CAPITAL OF RS. 22.92 CRORES. IT IS AN UNDISPUTED FACT THAT ENTIRE REVENUE HAS BEEN GENERATED BY THIS COMPANY F ROM SOFTWARE TESTING SERVICES RENDERED TO ITS INDEPENDE NT CLIENTS AS AGAINST SIMPLE TESTING CARRIED OUT BY AS SESSEE OF ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 39 OF 42 INTEGRATED CIRCUITS ALONG WITH DESIGNING, CUSTOMER SUPPORT OF INTEGRATED CIRCUITS RELATED ANCILLARY SERVICES P ROVIDED BY ASSESSEE ONLY TO ITS AE. CONSIDERING THE HOLISTIC A PPROACH HAVING REGARDS TO THE ANNUAL REPORTS OF THIS COMPAN Y AND THE SPECIALISED SERVICES PROVIDED BY THIS COMPANY T O ITS OWN CLIENTS IN THE FIELD OF SOFTWARE TESTING AS AGA INST CAPTIVE SERVICE PROVIDED BY ASSESSEE EXCLUSIVELY TO ITS AE, WE ARE OF CONSIDERED OPINION THAT THIS COMPANY CANN OT BE HELD AS A GOOD COMPARABLE WITH THAT OF ASSESSEE. THEREFORE WE DIRECT LD. AO/TPO TO EXCLUDE THIS COMP ANY FROM THE FINAL LIST OF COMPARABLES. FOLLOWING THE JUDICIAL PRECEDENCE, WE FOUND THE COM PANY IS IN SPECIALIZED AREA AND HAS TO BE EXCLUDED. ACCORDINGL Y, WE DIRECT THE TPO/A.O. TO EXCLUDE FROM THE FINAL LIST OF COMP ARABLES. 76. IN VIEW OF THE ABOVE DECISION OF THE TRIBUNAL, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(APPEALS) IN EXCLUSION OF THIS COMPANY FROM THE COMPARABLES. SQS INDIA BSFI LTD. (THINKSOFT GLOBAL SERVICES LTD. 77. THE LD. DR RELIED ON THE FINDINGS OF THE TPO. 78. THE LD. AR SUBMITTED THAT THIS COMPANY FAILS TH E RPT FILTER OF 25% AS APPLIED BY THE TPO. M/S THINKSOFT GLOBAL SOLUTIONS LTD HAS BEEN ACQUIRED BY S Q S SOFTWARE QUALITY SYSTEMS AG AND ITS NAME H AS BEEN CHANGED TO S Q S INDIA B F S I LTD. THIS WAS AN EXTRA ORDINARY EVENT AND AS SUCH THIS COMPANY WAS RIGHTLY EXCLUDED BY THE CIT(APPEALS) AS A COMPARABLE. 79. THE CIT(APPEALS) HAS OBSERVED THAT A PERUSAL OF THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT IT IS ENGAGED PRIMARILY IN DELIVERING SOFTWARE VALIDATION AND VERIFICATION SERVICES. SO FOR THE RE ASONS AS DISCUSSED FOR CIGNITI TECHNOLOGIES, THIS COMPANY CANNOT BE CONSID ERED AS A COMPARABLE AS IT IS FUNCTIONALLY DIFFERENT, ACCORDING TO THE C IT(APPEALS). ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 40 OF 42 80. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS P ER ANNUAL REPORT, THIS COMPANY IS IN THE PURE PLAY INDEPENDENT SOFTWA RE TESTING SPACE., PROVIDES SOFTWARE VALIDATION AND VERIFICATION SERVI CES TO THE BANKING AND FINANCIAL SERVICES INDUSTRY (BFSI) WORLDWIDE. THE C OMPANY IS AN INDIA BASED SOFTWARE SERVICE PROVIDER PRIMARILY DELIVERIN G SOFTWARE VALIDATION AND VERIFICATION SERVICES TO THE BANKING AND FINANCIAL SERVICES INDUSTRY WORLDWIDE. ACCORDING TO ASSESSEE, THIS COMPANY IS NOT COMPARABLE TO THE ASSESSEE ON ACCOUNT OF EXTRA ORDINARY EVENTS, IT FA ILS RPT FILTER AND MARGIN COMPUTATION. THE COMPANY HAS ACQUIRED MAJOR ITY STAKES IN THINKSOFT GLOBAL SERVICES LTD. BY ACQUIRING 53.35% OF ITS SHARES DURING THE YEAR. IT PERTAINS TO CHANGE IN MAJORITY STAKE OF TH E COMPANY (SHAREHOLDING PATTERN). THE ASSESSEE HAS NOT DEMONSTRATED AS TO HOW THE ABOVE INFORMATION HAS HAD ANY MATERIALISTIC IMPACT ON THE REVENUE OR THE PROFITS EARNED BY THE COMPANY DURING THE YEAR. THE ASSESSE E HAS SUMMED UP ALL THE RELATED PARTY TRANSACTIONS (I.E. BOTH ON REVENU E SIDE AS WELL AS EXPENSE SIDE) AND COMPUTED ITS PERCENTAGE OVER SALES. IN TH E FORMULA ADOPTED, WHILE THE NUMERATOR CONTAINS BOTH REVENUE AND EXPEN DITURE, THE DENOMINATOR CONTAINS ONLY REVENUE. HENCE, THERE IS NO PARITY BETWEEN THE DENOMINATOR AND NUMERATOR. IN CASE OF THE REVENUE BASED RELATED PARTY TRANSACTIONS. NET SALES CAN BE USED AS A BASE (I.E. (RPT)REVENUE/ SALES). CONVERSELY, FOR THE RELATED PARTY TRANSACTIONS ON T HE EXPENSE SIDE, THEN TOTAL EXPENDITURE SHOULD BE CONSIDERED AS A BASE. ( I.E. (RPT) EXPENSES / TOTAL EXPENDITURE. THUS, THE ASSESSEES PRACTICE OF COMBINING BOTH REVENUE AND EXPENSES ITEMS OF RELATED PARTY TRANSAC TIONS AND COMPARING IT AGAINST NET SALES, WOULD DISTORT THE APPLICATION OF THE PROPOSED RPT FILTER. IN THE CASE OF THE ASSESSEE AND THAT OF THE COMPAR ABLE, SIGNIFICANT REVENUE PARTY TRANSACTIONS ARE ON REVENUE SIDE AND HENCE (RPT)REVENUE/NET SALES WAS TAKEN AS THE APPROPRIATE FILTER. ACCORDINGLY, THE RPT/SALES FOR THIS COMPARABLE WORKS OUT TO 5.8% (I.E. RS. 1164LAKHS/ ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 41 OF 42 RS. 20060.8 LAKHS). HENCE, THE REVENUES GROUND IS ALLOWED AND THIS COMPANY IS DIRECTED TO BE INCLUDED IN THE COMPARABL ES. 81. THE NEXT GRIEVANCE OF THE REVENUE IS REGARDING INCLUSION OF CG VAK SOFTWARE & EXPORTS LTD. AS COMPARABLE. 82. THE LD. DR SUPPORTED THE FINDINGS OF THE TPO. THE LD. AR SUBMITTED THE COMPANY SATISFIES ALL THE FILTERS ADO PTED BY THE TPO AND THAT ITS MAJOR SHARE OF REVENUE WAS FROM SOFTWARE DEVELO PMENT SERVICES. THE APPELLANT SUBMITTED THAT REVENUE FROM BPO SERVICES WAS A MEAGER 1.88% AND AS SUCH THE COMPANY PASSES FILTER OF '75% REVEN UE FROM SOFTWARE DEVELOPMENT' AS APPLIED BY THE TPO. THE APPELLANT S UBMITTED THAT THE COMPANY WAS CONSIDERED AS FUNCTIONALLY COMPARABLE B Y THE TPO IN ITS OWN CASE FOR AY 2013-14 AND THE FUNCTIONAL PROFILE OF T HE COMPANY REMAINS THE SAME. 83. THE CIT(APPEALS) OBSERVED THAT THIS COMPANY WAS TREATED AS A PROPER COMPARABLE BY THE TPO IN ASSESSEES OWN CASE FOR AY 2013-14. DURING APPELLATE PROCEEDINGS FOR AY 2013-14, THE AP PELLANT HAD ARGUED FOR EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARAB LES, HOWEVER THIS GROUND OF APPEAL OF THE APPELLANT WAS DISMISSED BY THE CIT(A). A PERUSAL OF THE ANNUAL REPORT OF THIS COMPANY FOR THE YEAR U NDER CONSIDERATION SHOWS THAT THIS COMPANY HAD REVENUE FROM IT & ITES SERVICES, AND THE REVENUE FROM ITES WAS MEAGER 1.8% OF TOTAL OPERATIN G REVENUE. SO AS SUCH NO SEGMENTAL DATA IS REQUIRED TO BE CONSIDERED . HE THEREFORE DIRECTED THE TPO TO INCLUDE THIS COMPANY AS A COMPARABLE IF IT SATISFIES ALL THE OTHER FILTERS APPLIED BY THE TPO. AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, WE CONFIRM THE ORDER OF THE CIT (APPEALS) AS HE HAS REMITTED THE ISSUE FOR FRESH CONSIDERATION. ACCORD INGLY, THE TPO WILL RE- EXAMINE THE ISSUE IN THE LIGHT OF FRESH STUDY TO BE CONSIDERED BY HIM. ITA NO.339/BANG/2019 & IT(TP)A NO.370/BAG/2019 PAGE 42 OF 42 84. IN THE RESULT, BOTH THE APPEALS BY THE ASSESSE E AND REVENUE ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 22 ND DAY OF JULY, 2021. SD/- SD/- ( GEORGE GEORGE K. ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 22ND JULY, 2021. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.