M/s. Dell International Services India Pvt. Ltd., Bangalore V. Joint Commissioner of Income-Tax, Bangalore

ITA 659/BANG/2016

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 7028 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2021
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 28-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Principle of natural justice
• Section: 143(3); 133(6); 10B; 144C; 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(TP)A No.659/Bang/2016 Assessment year: 2011-12 M/s. Dell International Services India Private Ltd., (for the merged entity M/s. SonicWall InfoSecurity Pvt. Ltd.), 12/1, 12/2A, 13/1A, Divyashree Gardens, Challagutta Village, Varthur Hobli, Bangalore – 560 071. PAN: AAACH 1925Q Vs. The Joint Commissioner of Income Tax, Large Tax Payers Unit, Bangalore. APPELLANT RESPONDENT Appellant by : Smt. Tanmayee Rajkumar, Advocate Respondent by : Dr. Manjunath Karkaihalli, CIT(DR)(ITAT), Bengaluru. Date of hearing : 29.11.2021 Date of Pronouncement : 06.12.2021 O R D E R Per Chandra Poojari, Accountant Member This appeal by the assessee is directed against the order of the Assessing Officer passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 29.1.2016 for the assessment year 2011-12. 2. The grounds of appeal raised by the assessee are as follows:- “1. Order/Directions bad in law and on facts 1.1 The order issued by the Joint Commissioner of Income-tax (‘JCIT’), Large Tax Payers Unit (‘LTU’), IT(TP)A No.659/Bang/2016 Page 2 of 27 Bangalore [(‘Assessing Officer’) or (‘AO’)], under section 143(3) read with section 144C (13), pursuant to the directions issued by the Hon’ble Dispute Resolution Panel [‘DRP’/ Ld. Panel], is bad in law and on facts and is in violation of the principles of natural justice. 1.2 Without prejudice to the generality of the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Dell International Services India Private Limited (For the merged entity M/s SonicWall Info Security Private Limited) (‘DISPL’, ‘the Appellant or ‘the Company’), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 [‘the Act’]. 1.3 The directions issued by the Ld. Dispute Resolution Panel (‘DRP/Ld. Panel’) did not take cognizance of the objections raised by the Appellant in relation to the transfer pricing matters while issuing the directions under Section 144C(5). 1.4 On the facts and in the circumstances of the case and in law, the Ld. Panel and AO/TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside India by manipulating the prices charged in the international transaction, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. 2. Comparability Analysis adopted by the TPO for determination of arm’s length price for the Software Development Services segment (‘IT Services Segment’) and IT enabled services segment (‘ITeS Services Segment’). 2.1 The Ld. Panel and the AO/TPO erred in rejecting the value of international transactions as recorded in the books of account, as the arm’s length price. 2.2 The Ld. Panel and the AO/TPO erred in determining a new arm’s length price in substitution of the arm’s length price determined by the Appellant. IT(TP)A No.659/Bang/2016 Page 3 of 27 2.3 The Ld. Panel and the AO/TPO erred in law in holding that the fresh comparability analysis using non contemporaneous data conducted by the TPO and further substituting the Appellant’s analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus, the Appellant prays that the fresh benchmarking analysis conducted by the TPO is liable to be quashed. 2.4 The AO/TPO grossly erred on facts in benchmarking the transactions of the IT Services Segment and the ITeS Services Segment of the Appellant with companies operating as full-fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-à-vis comparable companies. The Ld. Panel erred in upholding the actions of the AO/TPO. 2.5 The AO/TPO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study without considering the functional and risk analysis of the Appellant and the Ld. Panel also erred in confirming the same. I. IT Services Segment 2.6 The Ld. Panel and the AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability, such as, (i) companies whose data for financial year (‘FY’) 2010-11 was not available, (ii) companies with software development services revenue less than 75% of total operating revenue, (iii) companies with related party transactions greater than 25% of sales (vi) companies with export sales less that 75% of total sales, (vii) companies with employee cost less than 25% of total revenues, (viii) companies with different financial year ending (i.e. other than 31 March 2011) and (ix) companies having persistent losses up to and including financial year 2010-11. IT(TP)A No.659/Bang/2016 Page 4 of 27 2.7 The AO/TPO also erred on facts in erroneously computing the margins of a certain companies identified as comparable by the TPO. 2.8 The AO/TPO erred in arbitrarily rejecting the comparable companies selected by the Appellant in the transfer pricing document, despite these companies being functionally comparable. The Ld. Panel also erred in confirming the same. 2.9 The AO/TPO erred in including Persistent Systems & Solutions Ltd, R S Software, Acropetal Technologies Limited, E-Zest Solutions, E-Infochips Limited, ICRA Techno Analytics Limited as comparable despite these companies being functionally dissimilar to the Appellant. The Ld. Panel also erred in confirming the same. II. ITeS Services Segment 2.10 The Ld. Panel and the AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability, such as, (i) companies whose data for financial year (‘FY’)2010-11 was not available, (ii) companies with ITeS revenue less than 75% of total operating revenue, (iii) companies with related party transactions greater than 25% of sales (vi) companies with export sales less that 25% of total sales, (viii) companies with different financial year ending (i.e other than 31 March 2011) and (ix) companies having persistent losses up to and including financial year 2010- 11. 2.11 The AO/TPO also erred on facts in erroneously computing the margins of a certain companies identified as comparable by the TPO. 2.12 The AO/TPO erred in arbitrarily rejecting the comparable companies selected by the Appellant in the transfer pricing document, despite these companies being functionally comparable. The Ld. Panel also erred in confirming the same. IT(TP)A No.659/Bang/2016 Page 5 of 27 2.13 The AO/TPO erred in including Accentia Technologies Limited, ICRA Online Limited, Acropetal Technologies Limited, Jeevan Scientific Technologies Limited as comparable despite these companies being functionally dissimilar to the Appellant. The Ld. Panel also erred in confirming the same. 3. Erroneous data used by the TPO 3.1 The Ld. Panel and the AO/TPO erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. 3.2 The Ld. Panel and the AO/TPO erred in law and on facts in disregarding the application of multiple-year data while computing the margins of comparable companies. 4. Non-allowance of appropriate adjustment to the comparable companies by the Ld. Panel and AO/TPO 4.1 AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (i) accounting practices, (ii) marketing expenditure adjustment, (iii) research and development expenditure adjustment, (iv) risk profile and (v) working capital adjustment to account between the Appellant and the comparable companies. 4.2 The Ld. Panel and the AO/TPO erred in law in not providing an opportunity to the Company before making an adjustment on account of negative working capital. 5. Variation of 5% from the arithmetic mean The AO/TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant. 6. Interest under Section 234C of the Act The levy of interest under section 234C of the Act is consequential in nature. IT(TP)A No.659/Bang/2016 Page 6 of 27 Relief The Appellant prays that the AO be directed to grant all such relief arising from the preceding grounds as also all relief consequential thereto. The Appellant desires leave to add or alter, by deletion, substitution or otherwise, any or all of the above grounds of objections, at any time before or during the hearing.” 3. The assessee is engaged by its AE, SonicWALL Inc., USA, to render contract software development services (also referred to as research and development services in the TP study) and post sales customer support services through the operation of customer contact centers. The said international transactions of provision of software development services (“SWD services”) and Information Technology Enabled services (“ITES”) were benchmarked by the assessee in its TP study and on reference to the TPO, a TP adjustment was made totalling to Rs. 4,26,36,462/- i.e., Rs. 1,97,53,267/- in the SWD segment and Rs. 2,28,83,195/- in the ITES segment. 4. Incorporating the said TP adjustment, the AO passed a draft assessment order dated 30.03.2015. Aggrieved, the Assessee filed its objections before the DRP, which, vide its directions dated 01.12.2015 rejected most of the contentions raised by the Assessee. 5. Pursuant to the directions of the DRP, the AO passed the final assessment order dated 29.01.2016 in which the TP adjustment was reworked to Rs. 4,80,93,927/- towards the SWD segment and ITES segment put together. 6. Aggrieved by the final assessment order, the Assessee has filed the above appeal before this Tribunal. IT(TP)A No.659/Bang/2016 Page 7 of 27 7. Ground Nos. 1 to 1.4 are general in nature which do not require adjudication. 8. Ground Nos.2.10 to 5 are not pressed and dismissed accordingly. Ground No.6 is consequential and mandatory in nature. 9. Now the issues left for adjudication is ground Nos. 2 to 2.9. Software development services (IT Services) Segment 10. In the Software development services segment, the assessee seeks exclusion of the following companies:- i) Acropetal Technologies Ltd. ii) E-Zest Solutions iii) E-Infochips Ltd. iv) ICRA Techno Analytics Ltd. v) Persistent Systems & Solutions Ltd. (i) Acropetal Technologies Limited (Acropetal) 11. The assessee seeks exclusion of this company on numerous grounds. It is submitted that Acropetal is functionally dissimilar to the Assessee and that it is engaged in providing high-end IT services. Acropetal provides end to end services to its customers in the nature of Enterprise Development Software and Product Development. No segmental details are available as regards its diverse functions. Further, it is submitted that the company fails the employee cost filter of 25% as applied by the TPO. The company is also operating in a different business model as it incurs cost towards onsite development and the said cost is incurred towards payment to sub-contractors as against the assessee, which earns its entire revenue from India and does not sub-contract its activities. The company also fails the IT revenue filter of 75% as applied by the TPO. Also, Acropetal has incurred expenses towards advertising and marketing expenses which accounts to 6.72% of the total operating IT(TP)A No.659/Bang/2016 Page 8 of 27 revenue. It is further submitted that Acropetal has an abnormal trend of profitability in the SWD segment over the years. Accordingly, Acropetal ought to be rejected from the final list of comparables. The details are placed at pages 286-289 and 450-457 of the paperbook. 12. Reliance is placed on this Tribunal’s decisions in Applied Materials India Pvt. Ltd. v. ACIT [TS-815-ITAT-2016(Bang)-TP] at paras 16.1 to 16.4, Electronics for Imaging India (P.) Ltd v. DCIT reported in [2017] 85 taxmann.com 124 (Bangalore - Trib.) at para 15, and Finastra Software Solutions (India) (P.) Ltd v. ACIT reported in [2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 17 where, in the case of similarly placed assessees, the exclusion of the said company from the list of comparables was upheld. (ii) E-Zest Solutions Ltd (E-Zest) 13. It is submitted that E-Zest Solutions Ltd. is engaged in end to end product development, including product design and development and also development of Intellectual Property. Thus, it is clearly incomparable to the Assessee. Further, it has significant inventory (nearly 15% of the income from its operations) which substantiates the assessee’s contention that it is a product development company, and thus incomparable to the Assessee which is engaged in rendering routine IT services. In addition, the services rendered by E-Zest are diverse such as specialized product development services, software services, web development, and support services. The company is also engaged in rendering business intelligence and analytical services, which are akin to IT enabled services [ITeS] / Knowledge Process Outsourcing (‘KPO’) services. Since there are no segmental details available in its Annual Report for the above diverse activities, it is apparent that the company is not comparable. Therefore, it is submitted that E-Zest ought to be excluded from the from the final list of comparables. The details are placed at pages 290-293 and 459-464 of the paperbook. IT(TP)A No.659/Bang/2016 Page 9 of 27 14. Reliance is placed on Applied Materials India Pvt. Ltd. v. ACIT [TS- 815-ITAT-2016(Bang)-TP] at para 9.1.1 to 9.1.3 and Electronics for Imaging India (P.) Ltd v. DCIT reported in [2017] 85 taxmann.com 124 (Bangalore - Trib.) at para 8 where, in the case of similarly placed Assessees for the same assessment year in question, the above company was remanded for fresh consideration to the TPO. (iii) E-Infochips Ltd: 15. It is submitted that although its selection was objected to by the Assessee before the TPO, the company was nevertheless selected by him. The DRP, too, negated the objections of the Assessee and retained it as a comparable. 16. In this regard, it is submitted that E-Infochips Ltd. fails the software service income filter at 75%. The above company not only provides software services but also engages in manufacturing and trading of printed circuit electronic boards and no separate segmental information is available in its Annual Report. On the contrary, the diverse activities of software development and the IT enabled services are considered and reported together in one segment. Thus, in the absence of such segmental details, the company is functionally not comparable to the Assessee which is a captive software development service provider. The company has also incurred significant amount of expenditure towards research and development as against the assessee, which does not undertake any research and development. 17. Further, the company also has presence of inventory and is, therefore, incomparable to the Assessee. It has also further been submitted that there has been an extraordinary/peculiar circumstances in view of high/major fluctuations in profit and turnover on year to year basis. Details in this regard are placed at pages 293-304 and 466-472 of the PB. IT(TP)A No.659/Bang/2016 Page 10 of 27 18. The Assessee placed reliance on the decisions of this Hon’ble Tribunal in Electronics for Imaging India (P.) Ltd v. DCIT reported in [2017] 85 taxmann.com 124 (Bangalore - Trib.) at para 8 and Finastra Software Solutions (India) (P.) Ltd v. ACIT reported in [2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 17 where, the exclusion of the said company from the list of comparables was upheld. Consequently, for the above reasons, E-Infochips ought to be excluded from the final list of comparables. (iv) ICRA Techno Analytics Ltd (ICRA): 19. It is submitted that ICRA is engaged in diversified activities such as software development, Consultancy services, Engineering services, Web development and hosting services, business analytics and business process outsourcing for which no separate segmental information is available. Further, it is submitted that ICRA concentrates in niche areas of business intelligence and analytics space. The annual report of ICRA clearly demonstrates that the company has significant growth in the Business Intelligence and Analytics space which shows that the activities carried out by ICRA are different from that of the Assessee. The revenue recognition policy of the company also shows that the company is engaged in rendering diverse services. The company is also engaged in licensing activity. Also, ICRA has high related party transactions amounting to 24.81% of the total sales. It is submitted that this company is consistently excluded from the final list of comparables in cases of assessees placed similar to the Assessee. Therefore, it is submitted that the ICRA ought to be excluded from the final list of comparables. The details are placed at pages 309-314 and 474-478 of the PB. 20. Reliance is placed on Applied Materials India Pvt. Ltd. v. ACIT [TS- 815-ITAT-2016(Bang)-TP] at para 17, Electronics for Imaging India (P.) Ltd v. DCIT reported in [2017] 85 taxmann.com 124 (Bangalore - Trib.) at para IT(TP)A No.659/Bang/2016 Page 11 of 27 10 and Finastra Software Solutions (India) (P.) Ltd v. ACIT reported in [2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 17 where, the said company was directed to be excluded from the final list of comparables. (v) Persistent Systems & Solutions Ltd (‘Persistent Systems & Solutions’) 21. It is submitted that although its selection was objected to by the Assessee before the TPO, the company was nevertheless selected by him. The DRP, too, negated the objections of the Assessee and retained it as a comparable. 22. The Assessee seeks the exclusion of this company on the ground that the same is functionally not comparable to the Assessee as Persistent Systems & Solutions generates revenue from providing software services, licensing of products, royalty on sale of products and maintenance services provided based on contracts, without there being separate segmental details for the aforesaid diverse activities. Further, the company is engaged in research and development activities. The Assessee also submits that the company is growing by over ten-times the industry average which would constitute a peculiar economic circumstance and, accordingly, it ought to be rejected as a comparable. The relevant details are placed at pages 327- 329 and 514-515 of the PB. 23. The Assessee places reliance on the decisions of this Hon’ble Tribunal in Applied Materials India Pvt. Ltd. v. ACIT reported in TS-815- ITAT-2016 (Bang.)-TP at para 9.2.1 and Electronics for Imaging India (P.) Ltd v. DCIT reported in [2017] 85 taxmann.com 124 (Bangalore - Trib.) at para 8 wherein, the said company was directed to be excluded. 24. On the other hand, the ld. DR supported the orders of the revenue authorities. IT(TP)A No.659/Bang/2016 Page 12 of 27 25. We have heard both the parties and perused the material on record. This issue came up for consideration before this Tribunal in the case of Electronics for Imaging India (P.) Ltd v. DCIT reported in [2017] 85 taxmann.com 124 (Bangalore - Trib.) wherein it was held as under:- “8. Having considered the rival submissions as well as the relevant material on record, first we will deal with the functional comparability of the six companies namely Acropetal Technologies Limited (Seg.), E-Zest Solutions Ltd., L&T Infotech Ltd., Persistent System & Solution Ltd., Persistent Systems Ltd. and Tata Elxsi Limited. The business activities of these six companies have been examined on the point of functional comparability in the software development services provider by the co-ordinate bench of this Tribunal vide decision dt. 21.9.2016 in the case of Applied Materials India (P.) Ltd. (supra) in paras 9.1.1 to 9.2.4; 16.1 to 16.4 and 19 to 20 as under: ' (i) E-Jest Solutions Ltd. 9.1.1 The learned Authorised Representative has submitted that the assessee raised the objection before the DRP for exclusion of this company from the set of comparables but the DRP has not adjudicated the objections of the assessee. He has referred the objections raised before the DRP at page No. 1373 of the paper book as well as referred the relevant part of the Annual Report of this company at page Nos. 39, 42 & 50 of the Annual Report. The learned Authorised Representative has submitted that this company is engaged in the diversified activity and reported the income under only one segment. Therefore it cannot be considered as a comparable of the assessee's software development services segment. He has relied upon the decision of the co-ordinate bench of this Tribunal dt.22.4.2016 in the case of Electronics for Imaging India (P.) Ltd. v. DCIT in IT (TP) A Nos. 227 & 285/Del/2013. 9.1.2 On the other hand, the learned Departmental Representative has submitted that the main activity of this company is software development services. Therefore the insignificant variation in activity if any cannot be a determinative factor while computing the ALP under Transactional Net Margin Method (TNMM). He IT(TP)A No.659/Bang/2016 Page 13 of 27 has relied upon the decision of the Delhi Bench of ITAT in the case of Toluna India (P.) Ltd. v. ACIT (2014) 151 ITD 177. 9.1.3 We have considered the rival submissions as well as the relevant material on record. We find that the assessee has raised objections against this company before the DRP. However the DRP did not adjudicate the objections raised by the assessee. The decision of this Tribunal in the case of M/s. Electronics for Imaging India (P.) Ltd. v. DCIT (supra) relied upon by the learned Authorised Representative is based on two aspects (i) The information received under Section 133(6) of the Act was considered by the TPO without sharing with the assessee and (ii) nature of the activity is KPO. It is pertinent to note that the question of BPO and KPO is relevant only in ITES segment and not for software development services segment. On the contrary, the decision in the case of Toluna India (P.) Ltd. v. ACIT (supra), pertains to the Assessment Year 2007-08, therefore the facts of the different year cannot be applied without verification. Accordingly, we set aside this issue of comparability of E-Jest Solutions Ltd. to the record of the Assessing Officer/TPO for deciding the same after verification of the relevant facts as well as considering the objections of the assessee. ........ 9.2.4 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the functional comparability of these two companies have examined by the co-ordinate bench of this Tribunal in the case of DCIT v. Electronics for Imaging India (P.) Ltd. (supra) in paras 60 and 61 & paras 24 to 26 as under: " Persistent Systems & Solutions Ltd. 60. The assessee has the grievance against rejection of this company by the DRP. The ld. AR has submitted that assessee did not raise any objection against this company, however, the DRP has rejected the said company. Therefore, the said company should be retained in the list of comparables. IT(TP)A No.659/Bang/2016 Page 14 of 27 61. Having considered the rival submissions as well as relevant material on record, at the outset, we note that the DRP has examined the functional comparability of this company by considering the relevant details as given in the annual report of this company. The DRP has given the finding that the entire revenue has been earned by this company from the sale of software services and products and in the absence of segmental details, it cannot be considered as comparable with software services segment. We find that this company has shown the income from sale of software services and products to the tune of Rs.6.67 crores. We further note that as per Schedule 11, the entire revenue has been shown under one segment i.e., sale of software services and products. Therefore, no separate segment has been given in respect of software services. Accordingly, the composite data of revenue as well as margins of this company pertaining to the sale of software services and products cannot be considered as comparable with the software development services segment of the assessee. In view of the above facts and circumstances, we do not find any error or illegality in the directions of the DRP in excluding this company from the list of comparables. This ground of CO is dismissed.” ..... E-Infochips Ltd. “9. The functional comparability of these two companies have been examined by the Delhi Bench of ITAT in the case of Saxo India (P.) Ltd. (supra) in paras 10.1 to 10.2 and 15.1 to 15.2 as under: " (i) E-Infochips Limited: 10.1 The Transfer Pricing Officer included this company in the list of comparables. On being called upon to explain as to why it should not be considered as a comparable, the assessee contended that there was functional dissimilarity inasmuch as this company was engaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenues of this company from Products was only 15% of total IT(TP)A No.659/Bang/2016 Page 15 of 27 revenue and hence the same qualified to be eligible for comparison. The DRP did not allow any relief. 10.2 After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at Rs. 3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that from the common pool of income from both the streams of software products and software services, one cannot deduce the revenue from software services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from software development services, we order to exclude this company from the list of comparables." ............ 10. Icra Technology Analytics Limited & Infosys Technologies Limited were rejected by the DRP on functional comparability and the revenue has not challenged the said directions of the DRP. Even otherwise we find that the functional comparability in these two companies was considered in the case of Applied Materials India Pvt. Ltd. (supra) wherein the Tribunal found that these two companies are not functionally comparable to the software development captive services provider on various reasons.” 26. Further, in the case of Finastra Software Solutions (India) (P.) Ltd v. ACIT reported in [2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 17 it was held as under:- IT(TP)A No.659/Bang/2016 Page 16 of 27 “17. The following 7 companies were excluded by the Tribunal ITAT Bangalore in the case of Applied Materials Pvt. Ltd. (supra), a company which is also engaged in providing software development services in IT (TP) A.No.17 & 39/Bang/2016 for AY 2011-12 order dated 21.9.2016. Following the said decision the ITAT Bangalore in the case of Commonscope Networks (India) (P.) Ltd. [IT (TP) A.No.166 and 181(Bang) of 2016, dated 22-2-2017] (vide Paragraph-9 of the said order). The seven companies so excluded were E-Infochips Ltd., ICRA Technologies Ltd., Infosys Ltd., Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., and Tata Elxsi Ltd. Respectfully following the said decisions, we direct exclusion of these 7 companies from the list of comparable companies. 27. Following the decision of the Tribunal in Electronics for Imaging India (P.) Ltd (supra), we hold that the four companies i.e., Persistent Systems Ltd., Acropetal Technologies Ltd., E-Infochips Ltd. & ICRA Techno Analytics Ltd. are to be excluded from the list of comparables and the comparability of E-Zest Solutions is remitted back to the AO/TPO for fresh decisions with similar directions therein. 28. Exclusion of R S Software Ltd. was not pressed before us, therefore this ground is dismissed as such. ITeS 29. The assessee in the ITeS segment has sought for exclusion of the following companies:- (a) Accentia Technologies Ltd. (b) ICRA Online Ltd. (c) Acropetal Technologies Ltd. (d) Jeevan Scientific Technologies Ltd. a) Accentia Technologies Limited (Accentia): 30. The assessee seeks exclusion of Accentia as the same is functionally dissimilar to the assessee and therefore ought to be rejected IT(TP)A No.659/Bang/2016 Page 17 of 27 from the final list of comparables. It is submitted that Accentia is engaged in providing e-prescription and document management including coding, billing, bills payments management and adhoc reporting. Coding etc. are high end services in the nature of Knowledge Process Outsourcing (‘KPO’) which is evident from its annual report, whereas, the assessee is engaged in rendering information technology enabled back-office services which are merely supportive. Further, the said company not only does medical transcriptions, but has also ventured into healthcare receivables cycle management and high end consultancy to start-ups requiring field experts. Further, the company has invested huge sums in the development of EMR software. Segmental details of its various activities are unavailable. The company further owns significant inventories and intangibles. The company also has several products and is into development of Software as a Service offering but no segmental details are available as regards the diverse activities. Detailed submissions in this regard are placed at pages 351-358 and 601-610 of the paperbook. 31. Reliance on the decision of this Hon’ble Tribunal in Finastra Software Solutions (India) (P.) Ltd. v. Assistant Commissioner of Income- tax, Circle (4) (1) (2) [(2018) 93 taxmann.com 460 (Bangalore - Trib.) at paras 24-25] where, in similar circumstances and for the same assessment year, this Hon’ble Tribunal directed the exclusion of Accentia Technologies Ltd. from the list of comparables. b) Acropetal Technologies Ltd (Acropetal): 32. It is submitted that the company operates under three business segments – Engineering design, information technology and health care. The TPO has compared the margin of the engineering design services segment to the Assessee. It is submitted that under the said segment, the company provides architectural, electrical, design engineering services etc., which cannot be compared to the assessee’s ITES segment. In any IT(TP)A No.659/Bang/2016 Page 18 of 27 event, the primary focus of the company is provision of software development services. The substantial onsite services undertaken by the company indicates a different business model. The company has also incurred substantial business promotion expenses and undertakes research and development activities. It is submitted that Acropetal is engaged in diverse activities for which no segmental information is available and that there is no segmental information. Further, it is submitted that Acropetal ought to be excluded as it has ITeS revenue of only 34.90% and thus fails the services revenue filter of 75% applied by the TPO. Detailed submissions in this regard are placed at pages 358-362 and 612- 618 of the paperbook. 33. The Assessee places reliance on the decisions of this Tribunal in ACIT v. Aon Specialist Services Pvt Ltd (order dated 20.02.2020 in IT(TP)A No. 440/bang/2016) at paras 13-14, DCIT v. C-Cube Solutions Pvt Ltd (order dated 06.02.2019 in IT(TP)A No. 475/Bang/2016) at para 4.3.1 and Finastra Software Solutions (India) (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle (4)(1)(2) [(2018) 93 taxmann.com 460 (Bangalore - Trib.) at paras 24-25] where, in similar circumstances and for the same assessment year, this Tribunal directed the exclusion of Acropetal Technologies Ltd. from the list of comparables. c) ICRA Online Ltd (ICRA): 34. It is submitted that ICRA Online Ltd. is engaged in outsourced services, information services and software products and services. The company provides services to clients in the areas of data extraction, aggregation, electronic conversion of financial statement, validation and analysis, accounting and finance research and analytics. ICRA Online Ltd. is a wholly owned subsidiary of ICRA Ltd., a leading credit rating agency. ICRA Online has two strategic lines of business : IT(TP)A No.659/Bang/2016 Page 19 of 27 • Knowledge Process Outsourcing; and • Information Services and Technology Solutions 35. It is submitted that the KPO segment of the company is different from the routine BPO services rendered by the Appellant. As stated above, the KPO segment of the Company is mainly engaged in providing services such as financial and analytical services, support to clients in the areas of data extraction, aggregation, electronic conversion of financial statement, validation and analysis, accounting and finance research and analytics. Also, the research and analytics functions of the company involve highly skilled manpower and tools which would therefore classify the services provided as high end services whereas the Assessee provides low end IT enabled services. The website of the company itself mentions that the company leverages on the knowledge and expertise of other ICRA group companies due to which it has an edge over other ITES companies. Also, during the year, the company has acquired new business for the provision of high-end services. Therefore, ICRA Online Ltd. cannot be held to be comparable to the Assessee. Further, it is submitted that ICRA Online Ltd. has related party transaction of 29.33% which exceeds the filter of 25% applied by the TPO himself. Details in this regard are placed at pages 364- 366 and 624-628 of the paperbook. 36. Reliance is placed on the decisions of the Tribunal in Sitel India Pvt Ltd v. DCIT (Order dated 03.05.2019 passed in ITA No. 1821/mum/2016) at para 5 where, the said company was directed to be excluded from the final list of comparables and Finastra Software Solutions (India) (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle (4) (1) (2) [(2018) 93 taxmann.com 460 (Bangalore - Trib.) at paras 24-26], where, in similar circumstances and for the same assessment year, this Tribunal remanded this company for verification of its comparability. IT(TP)A No.659/Bang/2016 Page 20 of 27 d) Jeevan Scientific Technology Ltd (Jeevan): 37. The exclusion of Jeevan is sought by the assessee from the final list of comparables as the same is functionally different from that of the Appellant and fails the filters applied by the TPO. 38. In this regard, it is submitted that the company has classified its business into 4 categories, one of them being BPO segment. However, the segmental details are unavailable and therefore it cannot be ascertained whether the services provided by the company in the BPO segment is same as that of the assessee. The mere fact that the segment has been classified as BPO does not mean that it would be comparable to the assessee and the company’s website does not throw light on the same either. Moreover, the BPO segment of the company has ceased to exist from FY 2011-12 onwards. Therefore, in the absence of information on this segment, the company ought to be deleted from the list of comparables. Jeevan’s service income from the BPO segment for the AY in question was Rs. 79 Lakh and the company therefore fails the TPO’s own filter of sales greater that Rs. 1 crore, which was not appreciated by the DRP. Further, the TPO has considered the ERP segment to be comparable to ITeS carried out by the assessee although the two services are not similar. Also, nearly 71% of the total revenue of the company is generated only from software development services. The inventory schedule from the annual report shows that the company trades in finished goods also. Thus, the Company cannot be considered as a comparable with the Assessee who is engaged in the provision of low end BPO services. Detail in this regards are placed at pages 366-369 and 646-650 of the paperbook. IT(TP)A No.659/Bang/2016 Page 21 of 27 39. The Assessee places reliance on the decisions of this Tribunal in ACIT v. Aon Specialist Services Pvt Ltd (order dated 20.02.2020 in IT(TP)A No. 440/bang/2016) at para 15 and DCIT v. C-Cube Solutions Pvt Ltd (order dated 06.02.2019 in IT(TP)A No. 475/Bang/2016) at para 5., the company was directed to be excluded. 40. The ld. DR on the other hand relied on the orders of lower authorities. 41. We have heard both the parties and perused the material on record. This Tribunal considered the comparability of all the above 4 companies in the case of Finastra Software Solutions (India) (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle (4) (1) (2) [(2018) 93 taxmann.com 460 (Bangalore - Trib.) wherein it was held as under:- “25. As far as Accentia Technologies Ltd., Accropetal Technologies Ltd., and Jeevan Scientific Technology Ltd., are concerned, ITAT Bangalore Bench in the case of Swiss Re Shared India Pvt. Ltd. v. Asstt. CIT [2016] 76 taxmann.com 22 (Bang-Trib), ( a company which is also engaged in providing ITES such as the Assessee), was pleased to hold that these three companies cannot be regarded as comparable companies with companies providing ITES. Following the said decision, we hold that these three companies have to be excluded from the comparable companies. 26. As far as the company ICRA Online Ltd. is concerned, this tribunal in the case of M/S. Zyme Solutions Pvt. Ltd. v. Asstt. CIT IT(TP) A.No.85/Bang/2016 for AY 2011-12 order dated 28.4.2017 in paragraph-26 of its order was pleased to remand to TPO/AO for fresh consideration, the comparability of this company with the Assessee. Following the said decision, we set aside the order of the AO in this regard and remand to the TPO/AO for fresh consideration the comparability of this company with the Assessee on the lines indicated in the order in the case of M/S.Zyme solutions Pvt.Ltd. (supra).” (emphasis supplied) IT(TP)A No.659/Bang/2016 Page 22 of 27 42. Sofaras ICRA Online Ltd. is concerned, the Mumbai Tribunal vide order dated 30.5.2019 in ITA No. ITA No. 1821/Mum/2016 held as under:- “5.4 We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. The TPO has considered the operations of the ‘Outsourced Services’ segment of ICRA as comparable to the operations of the appellant. However, we find that the annual report of the company does not provide any description as to the nature of the services contained in this segment. As per page 532 of the P/B, a reference may be made to the annual report of ICRA Ltd., the holding company of ICRA from where it can be seen that the outsourced segment of the company relates to KPO and online software services. Also page 8 of the annual report of ICRA Ltd. delineates the business of ICRA stating that the company is engaged in providing KPO and online software services. As per the description at page 532 of the P/B, the knowledge process outsourcing division provides financial and analytical services and support to clients in the area of data extraction, aggregation, electronic conversion of financial statements, validation and analysis, accounting and finance, research and analytics. Thus the appellant in the instant case performs routine ITeS comprising of contact/call centre services and hence is a routine BPO service provider and cannot be compared to a company providing KPO services such as ICRA. Also we find that the TPO has wrongly computed the margin of the company as 33.54% instead of the correct margin 22.32%, because the TPO has excluded foreign exchange income and other receipts (allocated basis revenue in each segment), whereas, the same is to be added for information service, outsource service and software service to arrive at the correct margin. In assessee’s own case for AY 2010-11, the ITAT ‘A’ Bench Bangalore has followed the Tribunal discussion in the case of Tesco Hindustan Service Centre Pvt. Ltd. (supra) to reject the companies functionally not comparable to the appellant i.e. companies not engaged in providing ITeS (BPO) service. In the IT(TP)A No.659/Bang/2016 Page 23 of 27 case of Tesco Hindustan Service Centre Pvt. Ltd. (supra), ICRA has been held to be non-comparable to an ITeS service provider. Accordingly, following the decision of Tesco Hindustan Service Centre Pvt. Ltd. (supra) and the observations in the Tribunal decision in appellant’s own case for AY 2010-11, we reject ICRA Online as a comparable.” 43. Following the aforesaid decision of the Tribunal in the case of Finastra Software Solutions (India) (P.) Ltd. (supra), we direct the AO to exclude Accentia Technologies Ltd., Acropetal Technologies Ltd., and Jeevan Scientific Technology Ltd. from the list of comparables 44. With regard to ICRA Online Ltd., following the decision in Finastra Software Solutions (India) (P.) Ltd. (supra), we remit the issue to the AO/TPO for fresh consideration with similar directions contained therein. 45. Ground No.4.2 is regarding adjustment on account of negative working capital. The ld. AR submitted that the TPO/DRP made a negative working capital adjustment without affording an opportunity to the Assessee. Such an adjustment was made without appreciating that the Assessee is a captive service provider and that it does not carry any working capital risk since it is always funded by its AEs. Working capital adjustment is made for the time value of money lost when credit time is given to the customers. The assessee, however, is not an entrepreneur but a captive service provider which is entirely funded by the AEs. Being so, the assessee does not stand to lose anything as it is compensated on a total cost plus basis. The Assessee is running the business without any working capital risk as compared to the comparables. Therefore, requirement for adjustment of negative working capital does not arise. Reliance is placed on the decisions of this Tribunal in Tivo Tech Private Limited v. DCIT (order dated 12.06.2020 in IT(TP)A No. 1619/Bang/2017), Lam Research India Pvt Ltd (ITA No. 1473 & 1385/2014) and Software AG Bangalore Technologies Pvt Ltd (ITA No. 1628/2014) where it has been IT(TP)A No.659/Bang/2016 Page 24 of 27 held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. 46. The ld. DR relied on the order of lower authorities. 47. We have heard both the parties and perused the material on record on this issue. This Tribunal in the case of Tivo Tech Private Limited (supra) regarding adjustment of working capital adjustment held as follows:- “15. As far as Gr.No.2.6 is concerned, the Assessee has contended that the TPO and the DRP erred in adding to the average arithmetic profit margin of the comparable companies chosen by the TPO, negative working capital adjustment. It was submitted that Working capital adjustment is made for the time value of money lost when credit time is given to the customers. The Assessee however is not an entrepreneur but a captive service provider which is entirely funded by the AEs. This being so, the assessee does not stand to lose anything as it is compensated on a total cost plus basis. The assessee is running the business without any working capital risk as compared to the comparables. Therefore, requirement for adjustment of negative working capital does not arise. It was submitted that in the Assessee's own case for assessment year 2012-13, the CIT(A) has reversed the order of the TPO making negative working capital adjustments. Detailed submissions in this regard are placed at pages 154-155 and 333-337 of the paperbook. 16. The Assessee also places reliance on Digital Juice Animation (P.) Ltd. v. Asstt. CIT [order dated 6-2-2020 in IT(TP) No. 215/Bang/2017], Lam Research India (P.) Ltd. [IT Appeal No. 1473 & 1385 (Bang.) of 2014, order dated 30-4-2015] and Dy. CIT v. Software AG Bangalore Technologies (P.) Ltd. in [IT Appeal No. 1628 (Bang.) of 2014, order dated 31-3-2016] passed by this Hon'ble Tribunal, where it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. The Tribunal in the aforesaid decisions have IT(TP)A No.659/Bang/2016 Page 25 of 27 followed decision of ITAT Hyderabad Bench in the case of Adaptec (India) (P.) Ltd. v. Asstt. CIT [2015] 57 taxmann.com 307. The learned DR relied on the order of the TPO/DRP on the issue. 17. On the above ground, it is undisputed that the Hyderabad Bench of the ITAT in case of Adaptec (India) (P.) Ltd. (supra) held that no such addition can be made for the following reasons:- 'Ground No. 8 pertains to the issue of negative working capital. As briefly stated above, after arriving at the arithmetic mean of all comparables at 22.03%, the A.O. worked out negative working capital adjustment of 3.22% thereby, making arms length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and directed the TPO as under : 14. Ground No. 11 : Negative Working Capital adjustment - Making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under : "The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as the company does not bear any working capital risk since it is been fully funded by it's A.E. from its inception and has no working capital contingencies. The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement." IT(TP)A No.659/Bang/2016 Page 26 of 27 We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 3-8- 2012 has given a finding as under : "7.7. 4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working capital adjustment is to be made to this situation, only a positive adjustment has to be made to the comparables so that they are brought on par with the applicant. In view of the same, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made." In view of the above, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made.' 18. In view of the above, we are of the opinion that assessee's case being similar, there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment.” IT(TP)A No.659/Bang/2016 Page 27 of 27 48. Following the aforesaid decision of the Tribunal, we direct the AO/TPO not to make any negative working capital adjustment. 49. In the result, the appeal by the assessee is partly allowed for statistical purposes. Pronounced in the open court on this 6 th day of December, 2021. Sd/- Sd/- ( GEORGE GEORGE K. ) ( CHANDRA POOJARI ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 06 th December, 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.