IVY SOFTWARE DEVELOPMENT SERVICES PRIVATE LIMITED ,HYDERABAD V. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-2(1), HYDERABAD

ITA 1801/HYD/2019

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The case revolves around the Transfer Pricing adjustments made by the Assessing Officer to IVY Software Development Services Private Limited, which engaged in international transactions with its Associated Enterprises. The primary contention was the selection and exclusion of various comparables used to determine the Arm's Length Price (ALP) for the services provided. The Tribunal examined the functional similarities and differences of the companies included as comparables by both the appellant and the TPO, leading to the decision to exclude some and include others based on detailed analysis of their business activities and financial metrics.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 471488 (ITAT-HYDERABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-03-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB-A
• Assessment Year: 2015-2016
• Other Referred Cases: ITAT Hyderabad Bench in assessee's own case for the assessment year 2010-2011 in ITA.No.222/Hyd./2015 and ITA.No.334/Hyd./2015 order dated 29.11.2018, ITAT Bangalore Bench in the case of Yahoo Software India Private Limited ITA.No.2365/Bang./2019 dated 28.02.2020, ITAT Hyderabad Bench in the case of Infor (India) Private Limited ITA.No.1689/Hyd./2019 dated 19.10.2020
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B BALAKRISHNA
• Assessee Lawyers: NAGESWAR RAO
• Keywords: Transfer pricing; International transaction; Notional interest; Related party transaction
• Section: 133(6)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD “A” BENCH : HYDERABAD BEFORE SHRI MANJUNATHA G, ACCOUNTANT MEMBER AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER ITA.No.1801/Hyd/2019 Assessment Year 2015-2016 IVY software Development Services Private Limited, Hyderabad – 500 081. PAN AADCI6283R vs. The ACIT, Circle-2(1), Hyderabad. (Appellant) (Respondent) For Assessee : Shri Nageswar Rao, Advocate For Revenue : Shri B Bala Krishna, CIT-DR Date of Hearing : 12.12.2024 Date of Pronouncement : 06.03.2025 ORDER PER MANJUNATHA G, A.M. : This appeal has been filed by the assessee against the final assessment order dated 16.10.2019 passed by the Assessing Officer u/sec.143(3) r.w.s.144C(13) in pursuance to the directions of the Disputes Resolution Panel-1, Bengaluru, dated 06.09.2019, passed u/sec.144C(5) of the Income Tax Act, 1961 [in short “the Act”]. 2 ITA.No.1801/Hyd./2019 2. Brief facts of the case are that, the appellant company is engaged in the business of providing Software Development and Management Services to it’s Associated Enterprises [in short “AE”] which are in the nature of development of modern gaming software and software maintaining services. The appellant undertakes software coding according to functional specifications and software requirement analysis agreed with AE. It receives technical assistance from it’s AE if required during coding coupled with regular reviews and feedback by the AE. It also generates and maintain documentation for the code generated. During the financial year relevant to assessment year under consideration, the appellant had entered into international transactions with it’s AE for providing software services. The appellant applied Transactional Net Marginal Method [in short ‘TNMM”] and Profit Level Indicator [in short “PLI”] Operating Profit/Operating Cost (in short “OP/OC”). The appellant computed the PLI at 16.69% while the PLI range of 14 comparables selected by the appellant were arrived at 4.84% to 18.89% with a median of 9.33%. 3 ITA.No.1801/Hyd./2019 Accordingly, the software development services of the appellant to it’s AE are concluded to be at Arm’s Length Price [in short “ALP”]. 2.1. The assessee had filed it's return of income for the assessment year 2015-2016 on 30.11.2015 declaring total income at Rs.10,20,08,630/- under normal provisions of the Income Tax Act, 1961. The case of the assessee company was selected for scrutiny and during the course of assessment proceedings, a Reference was also made to Transfer Pricing Officer [in short “TPO”] u/sec.92CA(1) of the Act for determination of ALP of international transactions of the assessee-company with it’s AE. During the TP proceeding, the learned TPO has rejected the TP study report maintained by the appellant and has conducted a fresh TP study and also selected 16 comparables with the arm’s length range of 20.55% to 37.9% with a median of 27.37% vis-à-vis the appellant’s margin at 16.69% and accordingly determined the differential adjustment to the price received by the appellant at Rs.4,01,82,001/-. The learned TPO had also computed 4 ITA.No.1801/Hyd./2019 interest on receivables on outstanding receivables by applying short term SBI deposit rate of 7.5% and proposed adjustment of Rs.38,33,317/-. Consequent to TP adjustment as suggested by the TPO the Assessing Officer has passed draft assessment order on 13.12.2018 u/sec.143(3) of the Act and made total addition of Rs.4,01,82,001/- on software development segment and also made addition towards TP adjustment on account of interest on receivables on outstanding receivables from AE at Rs.38,33,317/- and determined the total adjustments u/sec.92CA of the Act at Rs.4,40,15,318/-. 2.2. Aggrieved by the adjustment made by the learned Assessing Officer in the Draft Assessment Order, the appellant has filed it’s objections before the DRP-1, Bengaluru. The DRP vide it’s directions dated 06.09.2019 issued u/sec.144C(5) of the Act has allowed partial relief to the assessee-company by directing the learned Assessing Officer/TPO to exclude Thirdware Solution Limited from the list of comparables considered for the purpose of computing the ALP range and also included Cybage Software Private 5 ITA.No.1801/Hyd./2019 Limited; Inteq Software Private Limited and R S Software (India) Limited in the list of comparables for the purpose of computing ALP. The DRP also deleted adjustment on account of notional interest on outstanding receivables from AE. Thereafter, the learned Assessing Officer passed Final Assessment Order in pursuance to Directions of the DRP and determined the total income of the assessee-company at Rs.13,02,98,450/- by making addition of Rs.2,82,89,827/- towards TP adjustment on account of provision for software development services to AE vide order dated 16.10.2019 passed u/sec.143(3) r.w.s.144C(13) of the Income Tax Act, 1961. 3. Aggrieved by the Final Assessment Order of the Assessing Officer, the assessee-company carried the matter in appeal before the Tribunal. 4. The assessee has raised several grounds challenging the additions made by the Assessing Officer towards TP adjustment and software development services provided to it’s AE. Although the assessee has raised 6 ITA.No.1801/Hyd./2019 various grounds including grounds challenging rejection of TP documentation and use of additional filters, but the Learned Counsel for the Assessee, made a submission at Bar that the assessee-company wishes to confine it’s arguments only in respect of ground nos.3 and 4. Therefore, all other grounds raised by the assessee in the instant appeal has been treated as not pressed. 5. The Learned Counsel for the Assessee referring to ground no.3 of the appeal on selection of comparable companies submitted that the assessee-company has taken a ground of inclusion of 09 comparables, however, wants to restrict it’s arguments for inclusion of 07 comparables which includes 02 comparables i.e., Larsen & Toubro Infotech Limited and Infobeans Technologies Limited are comparables selected by the assessee-company in it's TP documentation and remaining 05 comparables are selected by the TPO. 7 ITA.No.1801/Hyd./2019 TATA ELXSI LIMITED : 6. Learned Counsel for the Assessee Shri Nageswar Rao, Advocate on the issue of exclusion of comparables selected by the TPO for the purpose of arm’s length range submitted that the learned TPO has included Tata Elxsi Limited as comparable even though the said company is functionally different from assessee-company which is evident from the annual report of the said company where the company engaged in the business of providing product design and engineering services and derives 92% of it’s revenue from design and development of computer hardware and software. Further the company has incurred substantial expenditure for R and D purposes which is almost 2.75% of the total revenues of the company. The company had also carries significant intangible assets. Therefore, the Assessing Officer has erred in comparing Tata Elxsi Limited to the appellant-company which is providing services to it’s AE on cost plus mark-up basis. In this regard, he relied upon the decision of ITAT Hyderabad Bench, Hyderabad in assessee’s own case for the 8 ITA.No.1801/Hyd./2019 assessment year 2010-2011 in ITA.No.222/Hyd./2015 and ITA.No.334/Hyd./2015 order dated 29.11.2018 wherein the Tribunal has directed the Assessing Officer/TPO to exclude Tata Elxsi Limited. 7. The learned CIT DR Shri B Bala Krishna, on the other hand, supporting the order of the DRP submitted that once TNMM is selected as the most appropriate method which is tolerant to various aspects including minor differences in services rendered by a company and the comparable company. Further software development services is an umbrella of all activities which includes providing software services to various industries. Therefore, merely for the reason that a particular company is providing software development services to a particular industry, it cannot be said that such company is not comparable to assessee-company. The DRP after considering all the relevant facts has rightly rejected the contention of the assessee-company for exclusion of Tata Elxsi Limited and, therefore, the arguments of the assessee-company should be rejected. 9 ITA.No.1801/Hyd./2019 8. We have heard both sides and considered the relevant arguments of the Counsel for the Assessee for exclusion of Tata Elxsi Limited from the list of comparables in light of various evidences including the relevant annual reports of the company. We find that the appellant is a captive service provider to it’s AE on cost plus mark-up basis, whereas, Tata Elxsi Limited is engaged in providing product design and engineering services to different segments of business. The company generates 92.04% revenue from design and development of computer software and hardware. Further the company had also incurred substantial amount for in-house R and D project which is supported by technology partnerships, subscriptions and active participation in the standard and technology forums, trade shows and even go by the amount of expenditure incurred for R and D which is almost 2.75% of the total revenues of the company, whereas the assessee-company is a simple service provider to it’s AE without any expenditure for R and D projects. We further note that Tata Elxsi Limited owns significant intangible assets which contributes to its 10 ITA.No.1801/Hyd./2019 revenue. From the details filed by the assessee-company, we find that the assessee-company is a simple captive service provider to it’s AE, whereas, Tata Elxsi Limited is a company which provides a software development services to multiple segments and to different verticals of industry. Therefore, the said company i.e., Tata Elxsi Limited cannot be comparable to assessee-company. Further the ITAT Hyderabad Bench in appellants own case for the assessment year 2010-2011 in ITA.No.222/Hyd./2015 and ITA.No.334/Hyd./2015 order dated 29.11.2018 has directed the Assessing Officer/TPO to exclude Tata Elxsi Limited from the list of comparables on functional dissimilarities. We thus, direct the learned Assessing Officer/TPO to exclude Tata Elxsi Limited from the list of comparables. PERSISTENT SYSTEMS LIMITED : 9. Learned Counsel for the Assessee submitted that Persistent Systems Limited fails Related Party Transaction [in short “RPT”] filter which is evident from the evidences filed before the TPO where the related party transactions are 11 ITA.No.1801/Hyd./2019 more than 30% on sales. Further the company is functionally different from the appellant company which is evident from the annual report wherein it’s specified services which includes IP and Product business and outsourced product development. The company is engaged into development and software products services and technology innovation and also earns income from royalty and branding. The company has spent significant amount towards R and D which is not comparable to that of the appellant-company. The company had also acquired significant rights in the nature of intangible assets. Therefore, going by the nature of services provided by Persistent Systems Limited, it is definitely not comparable to assessee-company which is captive service provider to it’s AE on cost plus mark-up. Therefore, he submitted that Persistent Systems Limited should be excluded from the list of comparables. In this regard, he relied on the decision of ITAT Hyderabad Bench in assessee’s own case for the assessment year 2010-2011 in ITA.No.222/Hyd./2015 and ITA.No.334/Hyd./2015 order dated 29.11.2018 wherein the 12 ITA.No.1801/Hyd./2019 Tribunal has directed the Assessing Officer/TPO to exclude Tata Elxsi Limited from the list of comparables on functional dissimilarities. 10. The learned CIT-DR Shri B Bala Krishna, on the other hand, supporting the order of the DRP submitted that once TNMM is selected as the most appropriate method which is tolerant to various aspects including minor differences in services rendered by a company and the comparable company. Further software development services is an umbrella of all activities which includes providing software services to various industries. Therefore, merely for the reason that a particular company is providing software development services to a particular industry, it cannot be said that such company is not comparable to assessee-company. The DRP after considering all the relevant facts has rightly rejected the contention of the assessee-company for exclusion of Persistent Systems Limited and, therefore, the arguments of the assessee- company should be rejected. 13 ITA.No.1801/Hyd./2019 11. We have heard both the parties. perused the material on record and the orders of the authorities below. We have also carefully considered relevant annual reports of Persistent Systems Limited with that of the appellant- company and we find that, the assessee-company is a captive service provider to it’s AE on cost plus mark-up basis in respect of one vertical of software development i.e., gaming solutions, whereas, the Persistent Systems Limited is engaged in providing IP and product business and also development of software products services and technology innovation. Further there is no segmental details in financials and annual report to compare this software development services segment to the appellant-company. Further the company has spent significant amount towards R and D and also acquired significant rights in the nature of intangible assets. From the details submitted by the assessee-company, we find that Persistent Systems Limited is engaged in diversified activities, whereas, the assessee company engaged in providing software development services to it’s AE on cost plus mark-up basis as a captive 14 ITA.No.1801/Hyd./2019 service provider and, therefore, in our considered view, Persistent Systems Limited cannot be compared with the appellant-company. At this stage we take support from the decision of ITAT Hyderabad Bench in assessee’s own case for the assessment year 2010-2011 in ITA.No.222/Hyd./ 2015 and ITA.No.334/Hyd./2015 order dated 29.11.2018 wherein the Tribunal has directed the Assessing Officer/TPO to exclude Persistent Systems Limited from the list of comparables on functional dissimilarities. Therefore, we direct the learned Assessing Officer/TPO to exclude Persistent Systems Limited from the list of comparables. LARSEN & TOUBRO INFOTECH LIMITED : 12. Learned Counsel for the Assessee, made a statement at Bar, that L & T was part of comparable selected by the appellant in it’s TP documentation. However, sought exclusion of the above company from the list of comparable before the TPO and DRP on the ground that the said company is functionally different from appellant company and there is an extraordinary event of acquisition 15 ITA.No.1801/Hyd./2019 and amalgamation for the year under consideration, which significantly affect the operating margins. The company has made substantial investments in technology absorption. Therefore, the above company i.e., L & T Infotech Limited cannot be compared with the appellant-company which is a simple service provider to it’s AE on cost plus mark-up. In support of this contention he relied upon decision of ITAT Hyderabad Bench in assessee’s own case for the assessment year 2010-2011 in ITA.No.222/Hyd./2015 and ITA.No.334/ Hyd./2015 order dated 29.11.2018 wherein the Tribunal has directed the Assessing Officer/TPO to exclude Larsen & Toubro Infotech Limited from the list of comparables on functional dissimilarities. The assessee-company has also relied upon the decision of ITAT Bangalore Bench, in the case of Yahoo Software India Private Limited ITA.No.2365/ Bang./2019 dated 28.02.2020 for the assessment year 2015-2016 wherein the Bangalore Bench has directed to exclude Larsen & Toubro Infotech Limited on the ground that it had no segmental details and had substantial onsite revenue activity and that the company had incurred 16 ITA.No.1801/Hyd./2019 expenditure under the head cost of bought out items for resale which is a significant part of operating expenditure. 13. The learned CIT-DR Shri B Bala Krishna, on the other hand, supporting the order of the DRP submitted that once TNMM is selected as the most appropriate method which is tolerant to various aspects including minor differences in services rendered by a company and the comparable company. Further software development services is an umbrella of all activities which includes providing software services to various industries. Therefore, merely for the reason that a giant company is providing software development services to a particular industry, it cannot be said that such company is not comparable to assessee-company. The DRP after considering all the relevant facts has rightly rejected the contention of the assessee-company for exclusion of Larsen & Toubro Infotech Limited and, therefore, the arguments of the assessee- company should be rejected. 17 ITA.No.1801/Hyd./2019 14. We have heard both the parties and considered relevant arguments of the Learned Counsel for the Assessee and the learned CIT-DR. We have also carefully considered the annual reports of Larsen & Toubro Infotech Limited and the TP documentation of the appellant-company. Admittedly, Larsen & Toubro Infotech Limited is a part of comparable selected by the assessee-company in it’s TP documentation on the ground that it is functionally similar to appellant-company. No doubt, the appellant seeks to exclude Larsen & Toubro Infotech Limited from the list of comparables on functional dissimilarity, but, on perusal of functions performed by the appellant-company, when compared to Larsen & Toubro Infotech Limited, we find that largely the functions performed by both the companies are similar. Although, the Learned Counsel for the Assessee seeks to exclude the Larsen & Toubro Infotech Limited on the ground of significant intangibles/business rights and huge brand value, but, in our considered view, going by the value of IPR, they are miniscule and insignificant. Further, although the company has required 100% stake in M/s. 18 ITA.No.1801/Hyd./2019 Information Systems Resources Centre Private Limited which also engaged in the provision of software development services. Further the appellant had failed to prove how the brand value effects the operating margin of the company. Therefore, in our considered view, once a particular company is a part of comparable selected in it’s TP documentation by the appellant-company, it cannot be excluded at subsequent stage merely on the basis of some decisions of Tribunal, unless the appellant-company makes- out a case that such company is functionally dissimilar to that of the appellant-company. Therefore, we are of the considered view, that there is no merit in the arguments advanced by the Learned Counsel for the Assessee for exclusion of Larsen & Toubro Infotech Limited from the list of comparables. In so far as the various case laws relied on by the Learned Counsel for the Assessee, we are of the considered view that the finding recorded by any Appellate Authority or Court has to be read in conjunction with the facts to make it applicable to another case. Since the appellant-company itself has selected Larsen & Toubro 19 ITA.No.1801/Hyd./2019 Infotech Limited as comparable in it’s TP documentation, therefore, in our considered view, there is no reason to exclude Larsen & Toubro Infotech Limited from the list of comparables. Thus, we are inclined to uphold the order of the learned Assessing Officer/DRP and reject the arguments of the appellant-company. INFOBEANS TECHNOLOGIES LIMITED : 15. Learned Counsel for the Assessee, made a statement at Bar, that Infobeans Technologies Limited was part of comparable selected by the appellant-company in it’s TP documentation. However, sought exclusion of the above company from the list of comparable before the TPO and DRP on the ground that the said company is functionally different from appellant-company Learned Counsel for the Assessee submitted that the above company viz., Infobeans Technologies Limited has been rejected by the TPO in previous years. He submitted that Infobeans Technologies Limited is engaged in the sale of products along with rendering of services and as per the annual reports, it has 20 ITA.No.1801/Hyd./2019 turnover on export of goods/services calculated on FOB basis. Further, the company is engaged in providing Custom Application Development (CAD), Content Management Systems (CMS), Enterprise Mobility (EM), Big Data Analytics (BDA), which are high end services and non-comparable to the services provided by the appellant-company which is engaged in providing software development services to it’s AEs. He also drew the attention of the Bench the decision of ITAT, Hyderabad Bench in assessee’s own case for the assessment year 2014-2015 in ITA.No.31/Hyd./2019 order dated 17.08.2021 wherein the Tribunal has directed the Assessing Officer/TPO to exclude Infobeans Technologies Limited from the list of comparables on functional dissimilarities. And also relied on the decision of ITAT, Bangalore Bench in the case of EIT Services India Private Limited ITA.No.2498/Bang./2019 order dated 03.09.2021 for the assessment year 2015-2016 wherein the Bangalore Tribunal has directed to exclude Infobeans Technologies Limited on the ground that this company is basically into application development for web and mobile, provides 21 ITA.No.1801/Hyd./2019 customised service to it’s offshore clients and own software licenses. He accordingly pleaded that Infobeans Technologies Limited be excluded from the list of comparables on functional dissimilarities. 16. The learned CIT-DR Shri B. Bala Krishna, on the other hand strongly relied on the orders of the Assessing Officer/DRP. He submitted that in TP comparability analysis, consistency is not a mandatory requirement in light of new information, one company may be chose as comparable even though it was rejected in previous years. He submitted that the Assessing Officer/TPO upon gathering information through Annual reports and 133(6) response and after analysing the same, Infobeans Technologies Limited was included as comparable as it is purely into software development with the appellant- company. He accordingly submitted that the comparable selected by the TPO/DRP should be upheld. 17. We have heard both sides and perused relevant material available on record. Admittedly, Infobean 22 ITA.No.1801/Hyd./2019 Technologies Limited is part of TP documentation of the appellant-company and the appellant-company has selected the above company as comparable with that of the functions performed by the appellant-company. No doubt, the appellant seeks to exclude Infobean Technologies Limited from the list of comparables on functional dissimilarity, but, on perusal of functions performed by the appellant- company, when compared to Infobean Technologies Limited, we find that largely the functions performed by both the companies are similar and the dissimilarities are miniscule and insignificant. We find that Infobeans Technologies Limited is engaged in the provision of software development services. Therefore, in our considered view, once a particular company is a part of comparable selected in it’s TP documentation by the appellant-company, it cannot be excluded at subsequent stage merely on the basis of some decisions of Tribunal, unless the appellant-company makes- out a case that such company is functionally dissimilar to that of the appellant-company. Therefore, we are of the considered view, that there is no merit in the arguments 23 ITA.No.1801/Hyd./2019 advanced by the Learned Counsel for the Assessee for exclusion of Infobeans Technologies Limited from the list of comparables. In so far as the various case laws relied on by the Learned Counsel for the Assessee, we are of the considered view that the finding recorded by any Appellate Authority or Court has to be read in conjunction with the facts to make it applicable to another case. Since the appellant-company itself has selected Infobeans Technologies Limited as comparable in it’s TP documentation, therefore, in our considered view, there is no reason to exclude Infobeans Technologies Limited from the list of comparables. Thus, we are inclined to uphold the order of the learned Assessing Officer/DRP and reject the arguments of the appellant-company. INFOSYS LIMITED : 18. Learned Counsel for the Assessee submitted that although, the TPO/DRP observed that it is functionally similar to appellant-company, but fact remains that going by nature of services provided by Infosys Limited, it is 24 ITA.No.1801/Hyd./2019 engaged in diversified activities which cannot be considered to appellant-company which is providing software development services to it’s AE on cost plus mark-up basis. Learned Counsel for the Assessee submitted that Infosys Limited carries huge brand value which is a key intangible asset of the company and as per the report of brand financials, the total value of brand of Infosys Limited was $USD3114 million. The company incurred significant amount for R & D activities which is more than 1000% of the turnover of the appellant-company. Infosys Limited is a giant company and it’s size and scale of operations is several times higher than the appellant-company. Therefore, Infosys Limited cannot be compared to appellant-company which is the capital service provider to it’s AE on cost plus mark-up basis. In this regard, the Learned Counsel for the Assessee relied on the decision of ITAT, Hyderabad Bench in assessee’s own case for the assessment year 2010-2011 in ITA.No.222/Hyd./2015 and ITA.No.334/ Hyd./2015 order dated 29.11.2018 wherein the Tribunal has directed the 25 ITA.No.1801/Hyd./2019 Assessing Officer/TPO to exclude Infosys Limited from the list of comparables on functional dissimilarities. 19. Learned CIT-DR submitted that Infosys Limited is also into software development services and there is no evidence that it’s brand value does have any bearing on margins, because, in software development, the turnover is based on man hours. He further submitted that the size and scale of operations does not matter when it comes to margins of a company which is engaged in similar activities of software development services because software development services is an industry where the revenues are computed on the basis of man hours but not on the basis of total assets employed in the business. Therefore, there is no merit in the arguments of the Learned Counsel for the Assessee that Infosys Limited is a giant company and it cannot be compared with appellant-company. He accordingly submitted that the order of the TPO/DRP should be upheld. 26 ITA.No.1801/Hyd./2019 20. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. On perusal of annual reports of Infosys Limited, we find that the company provides business consulting, technology, engineering and outsourcing services which includes software products and platforms which are not limited only to routine software development. Further, the company also into product development which is evident from the annual report where it generates revenue from sale of ‘Finacle’ and “EdgeVerve’. Further, Infosys Limited is a giant company carries huge brand value which is evident from the report of brand financials where the total value of brand of Infosys Limited was at USD$ 3414 million. We further note that the company incurred significant amount of expenditure on R and D activities which is more than the 1000% of the turnover of the appellant-company. From the nature of services rendered by Infosys Limited and it’s scale of operations, in our considered view, it cannot be compared with appellant-company which is a capitive service provider to it’s AE on cost plus mark-up. It is 27 ITA.No.1801/Hyd./2019 relevant to refer to the decision of it Hyderabad bench in appellants own case for the assessment year 2010-2011 in ITA.No.222/Hyd./2015 and ITA.No.334/ Hyd./2015 order dated 29.11.2018 wherein the Tribunal has directed the Assessing Officer/TPO to exclude Infosys Limited from the list of comparables on functional dissimilarities. Therefore, we direct the learned Assessing Officer/TPO to exclude Infosys Limited from the list of comparables. MINDTREE LIMITED : 21. Learned Counsel for the Assessee submitted that although, the TPO/DRP observed that it is functionally similar to appellant-company, but fact remains that going by nature of services provided by Mindtree Limited, it is engaged in diversified activities which cannot be considered to appellant-company. He submitted that Mindtree Limited is engaged in the area of software development services in different vertical's and also engaged in product sales. He submitted that Mindtree Limited is offers services in the areas of agile, analytics and information management, 28 ITA.No.1801/Hyd./2019 application development and maintenance, business process management, business technology consulting, cloud, digital business, independent testing, infrastructure management services, mobility, product engineering and SAP services. He submitted that Mindtree Limited has incurred INR 212 Million on R & D activity, sold 3,500 licenses of Gladius Software, sold 8000 licences of secure mind software and has filed 4 patents in India and US in the areas of Video Analytics. He submitted that this company has been named as overall leader zone by Zinnov, a leading globalization and market expansion advisory firm, in it’s global R & D service provider ratings 2014. Further, Mindtree Limited has significant intangible assets and it’s onsite activities are at 46% and onsite revenue of the company grew by 27.8% in the current year as compared to growth of 8.8% in offshore revenue. He further submitted that in response to notice u/sec.133(6) of the Act, Mindtree Limited has provided information that it has two business units i.e., (1) Information Technology services and (2) Product Engineering Services. He accordingly, submitted 29 ITA.No.1801/Hyd./2019 that Mindtree Limited is a giant company in the area of development of software, whereas, the appellant-company is a simple captive service provider to it’s AE on cost plus mark-up basis and that Mindtree Limited cannot be compared with that of the functions of the appellant- company. He accordingly, pleaded that Mindtree Limited be excluded from the list of comparables on functional dissimilarities. 22. Learned CIT-DR submitted that Mindtree Limited is also into software development services and it’s brand value does not effect with respect to software development and the turnover is based on man hours. He further submitted that the size and scale of operations does not matter when it comes to margins of a company which is engaged in similar activities of software development services because software development services is an industry where the revenues are computed on the basis of man hours, but, not on the basis of total assets employed in the business. Therefore, there is no merit in the arguments of the Learned Counsel for the Assessee that Mindtree 30 ITA.No.1801/Hyd./2019 Limited is a giant company and it cannot be compared with appellant-company. He accordingly submitted that the order of the TPO/DRP should be upheld. 23. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. On perusal of annual reports of Mindtree Limited, we find that the company provides analytics and information management, application development and maintenance, business process management, business technology consulting, cloud, digital business, independent testing, infrastructure management services, mobility, product engineering and SAP services. Further, Mindtree Limited is a giant company carries huge brand value which is evident from the report Zinnov, a leading globalization and market expansion advisory firm, in it’s global R & D service provider ratings 2014. We further note that Mindtree Limited has incurred significant amount of INR 212 Million on R & D activity, sold 3,500 licenses of Gladius Software, sold 8000 licences of secure mind software and has filed 4 patents in India and US in the areas of Video Analytics, 31 ITA.No.1801/Hyd./2019 which is more than the turnover of the appellant-company. From the nature of services rendered by Mindtree Limited and it’s scale of operations, in our considered view, it cannot be compared with appellant-company which is a captive service provider to it’s AE on cost plus mark-up. It is relevant to refer to the decision of it Hyderabad Bench in the case of Infor (India) Private Limited ITA.No.1689/Hyd/2019 dated 19.10.2020 for the assessment year 2015-2016 wherein the Coordinate Bench of Hyderabad Tribunal has directed to exclude Mindtree on the ground that it is a giant company in the area of development of software. Similar decision has been taken by the ITAT, Bangalore Bench in the case of Yahoo Software India Private Limited ITA.No.2365/Bang./2019 dated 28.02.2020 for the assessment year 2015-2016 wherein the Bangalore Tribunal directed to exclude Mindtree on the ground that 46% of revenue is from onsite activity which is over and above the threshold limit of 25% of total revenue. Considering the totality of the facts and circumstances of the case, we direct 32 ITA.No.1801/Hyd./2019 the Assessing Officer/DRP to exclude Mindtree Limited from the list of comparables on functional dissimilarities. CYBAGE SOFTWARE PRIVATE LIMITED : 24. Learned Counsel for the Assessee submitted that Cybage Software Private Limited is functionally different from the appellant-company which is evident from the annual report where the company involved in provision of wide range of services which includes product engineering services, test engineering/quality assurance services, UI design documentation, digital transformation etc., Further Cybage Software Private Limited also maintains support services. However, there is insufficient segmental information in respect of software development services and IT consulting. The Assessing Officer has obtained information u/sec.133(6) of the Act from the company. However, the said information has not been given to the appellant-company for it’s comments. He, therefore, submitted that Cybage Software Private Limited cannot be compared with the appellant-company and needs to be 33 ITA.No.1801/Hyd./2019 excluded. In this regard, the Learned Counsel for the Assessee relied upon decision of ITAT, Pune Bench in the case of Optiva India Technologies Private Limited for the assessment year 2016-2017 in ITA.No.194/Pun/2021, order dated 21.07.2022 and decision of ITAT, Hyderabad Bench in the case of Infor (India) Private Limited in ITA.No.1689/ Hyd./2019, order dated 19.10.2020 wherein the Tribunal directed to exclude Cybage Software Private Limited on the ground that it had abnormal profits and high margins. 25. The Learned CIT-DR, on the other hand, vehemently relied on the orders of the authorities below. He submitted that software development services is an umbrella of all activities which includes providing software services to various industries. He submitted that the Assessing Officer has called for information u/sec.133(6) of the Act and Cybage Software Private Limited stated that it operates only in one business segment i.e., provision of software development and IT consulting services. Therefore, the TPO has considered Cybage Software Private Limited in entirety as comparable company. The Learned DR further 34 ITA.No.1801/Hyd./2019 submitted that merely for the reason that a particular company is providing software development services to a particular industry, it cannot be said that such company is not comparable to assessee-company. The DRP after considering all the relevant facts has rightly rejected the contention of the assessee-company for exclusion of Cybage Software Private Limited and, therefore, the arguments of the assessee-company should be rejected. 26. We have heard both sides and perused the material on record and gone through the orders of the authorities below. On perusal of the annual report of the Cybage Software Private Limited, we find that it is predominantly engaged in the business of software and IT consultancy services. Although the description of the services provided in the annual report states various activities, but on perusal of the relevant services provided by the company, in our considered view, it is an umbrella of all the activities of software development services provided by a company. Further, the appellant-company contents that there is insufficient segmental information for comparison of 35 ITA.No.1801/Hyd./2019 software development services, but, in our considered view, since bundle of services provided by the company is coming under the umbrella of software development services, there is no question of requirement of segmental information as contended by the appellant-company. We further note that the independent audit report also specifies that the company i.e., Cybage Software Private Limited is engaged in software services. Further, there is no reference in the annual report which indicate that this company is engaged in IT consulting services. The appellant-company also could not point-out any such information in the annual report. Further, the information put in the website cannot be given much credence, as they are mere forward looking statements with the motive of advertising and other promotion. Therefore, based on information provided in annual report, it cannot be said that the functions performed by Cybage Software Private Limited is altogether different from the appellant-company, more particularly, when the broader services provided by both the companies are similar to software development services. Therefore, in 36 ITA.No.1801/Hyd./2019 our considered view, there is no merit in the arguments advanced by the Learned Counsel for the Assessee for exclusion of Cybage Software Private Limited from the list of comparables. We, therefore, reject the arguments of the appellant-company. Although the Counsel for the Assessee has relied on decision of ITAT, Pune Bench in the case of Optiva India Technologies Private Limited for the assessment year 2016-2017 in ITA.No.194/Pun./2021, order dated 21.07.2022 and decision of ITAT, Hyderabad Bench in the case of Infor (India) Private Limited in ITA.No.1689/ Hyd./2019, order dated 19.10.2020, in our considered view, as already stated in earlier part of this order, a reference to any judgement cannot be made in isolation with the facts and context under which such observation was made. Therefore, in our considered view, the case law relied upon by the Learned Counsel for the Assessee are not applicable to the facts of the present case and thus, rejected. We thus inclined to uphold the order of the DRP/TPO and reject the ground taken by the appellant- company. 37 ITA.No.1801/Hyd./2019 27. Referring to ground no.4 of appellant-company, the Learned Counsel for the Assessee submitted that assessee seeks to include Akshay Software Technologies Limited, Maveric Systems Limited and Harbinger Systems Pvt. Ltd., on the ground of functional similarity. However, the learned TPO/DRP has rejected the same. Therefore, the Learned Counsel for the Assessee submitted that these three companies needs to be included in the list of comparables. AKSHAY SOFTWARE TECHNOLOGIES LIMITED : 28. Learned Counsel for the Assessee referring to the financials of Akshay Software Technologies Limited submitted that the company is comparable to appellant- company which is evident from the nature of services referred to in the annual report. Therefore, he submitted that Akshay Software Technologies should be included in the list of comparables. 29. The Learned DR, on the other hand, supporting the order of the learned Assessing Officer/TPO/DRP 38 ITA.No.1801/Hyd./2019 submitted that Akshay Software Technologies fails onsite service filter which is evident from the observation of the DRP. Further, the company is engaged in providing ERP solutions which is multi-layer software that indicates different functions within an organisation. Therefore, the above company cannot be compared with the appellant- company which is providing simple software development services to it’s AE on cost plus mark-up basis. 30. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We find from the relevant evidences filed by the appellant-company including annual reports of Akshay Software Technologies and from the details furnished by the appellant-company, we find that Akshay Software Technologies fails onsite revenue filter which is evident from the annual report where it derives revenue from export of software services which is more than 90% of the total revenue than that of the appellant-company. Further, it also engage in providing ERP solutions which is a multi-layer software that indicates different functions within 39 ITA.No.1801/Hyd./2019 an organisation. ERP implementation requires expertise knowledge with functional domain and software domain. Therefore, ERP implementation and support involves personnel from professional domain and software domain and, therefore, when a company involved in providing ERP solutions, it cannot be compared with a company which is providing software services to it’s AE as captive service provider. We further note that the learned DRP observed that there is no segmental information available for comparison of software development services. Therefore, we are of the considered view that Akshay Software Technologies is not comparable to appellant-company and thus, we reject the arguments of the appellant-company. MAVERIC SYSTEMS LIMITED : 31. Learned Counsel for the Assessee submitted that Maveric Systems Limited is engaged in the business of software testing services which is similar to software development services and comparable to appellant- company. In this regard, he relied upon the order of learned 40 ITA.No.1801/Hyd./2019 DRP in assessee’s own case for the assessment year 2017- 2018 wherein the DRP has included Maveric Systems Limited on the ground that it is functionally comparable to the appellant-company as software testing forms part of software development services. 32. Learned CIT-DR, on the other hand, supporting the order of the Assessing Officer/DRP submitted that Maveric Systems Limited fails filters applied by the TPO which is evident from the discussion of the DRP wherein it;s R and D expenditure is more than 7.8% of the turnover which is beyond the general acceptable tolerance limit of 3% of the revenue and thus, rightly rejected as comparable. 33. We have heard both the parties, considered relevant arguments in light of the DRP directions in appellant’s own case for the assessment year 2017-2018. We find that the DRP has included Maveric Systems Limited on the ground that it is functionally comparable to the appellant-company as software testing forms part of software development services. Once a particular company 41 ITA.No.1801/Hyd./2019 is functionally similar to the appellant-company for earlier years or subsequent years, then such company cannot be rejected on the ground of functionality and also on any filter. Although the learned DRP has observed that R and D expenditure is above tolerance limit, but, in our considered view, once the company is functionally similar to appellant company, the same cannot be rejected on the basis of one filter i.e., R and D expenditure above tolerance limit. Therefore, we are of the considered view that the DRP/TPO erred in not including Maveric Systems Limited from the list of comparables and thus, we direct TPO/Assessing Officer to include Maveric Systems Limited in the list of comparables. HARBINGER SYSTEMS PVT. LIMITED : 34. Learned Counsel for the Assessee submitted that the learned TPO has rejected Harbinger Systems Pvt. Limited as a comparable company on the ground that it's data is not available in the search matrix. However, the fact remains that going through the annual report of the 42 ITA.No.1801/Hyd./2019 company, it is engaged in software development services and passes all the filters applied by the TPO. He, therefore, submitted that the TPO/DRP are erred in not including Harbinger Systems Pvt. Limited from the list of comparables and thus, requested to include Harbinger Systems Pvt. Limited in the list of comparables. 35. Learned CIT-DR, on the other hand, supporting the order of the TPO/DRP submitted that Harbinger Systems Pvt. Limited is not available in the prowess database/search matrix which is evident from search conducted by the TPO. Therefore, the TPO decided not to deal with this company on merits. He accordingly submitted that the order of the Assessing Officer/DRP/TPO be confirmed. 36. We have heard both the parties and considered relevant arguments in light of the DRP directions. We find that the DRP has excluded Harbinger Systems Pvt. Limited on the ground that it’s data is not available in prowess database/search matrix and uphold the findings of the TPO 43 ITA.No.1801/Hyd./2019 in not including Harbinger Systems Pvt. Limited as comparable company with the appellant-company. We find that Harbinger Systems Pvt. Limited is engaged in software development services. Once a particular company is functionally similar to the appellant-company, then such company cannot be rejected on the ground of data not available in prowess database/search matrix. Although the learned DRP/TPO has not included Harbinger Systems Pvt. Limited on the ground of data not available in prowess database/search matrix, but, in our considered view, once the company is functionally similar to appellant company, the same cannot be rejected on the basis of prowess database/search matrix. Therefore, we are of the considered view that the DRP/TPO erred in not including Harbinger Systems Pvt. Limited from the list of comparables and thus, we direct Assessing Officer/DRP to include Harbinger Systems Pvt. Limited in the list of comparables. 37. In the result, appeal of the assessee is partly allowed. 44 ITA.No.1801/Hyd./2019 Order pronounced in the open Court on 06.03.2025. Sd/- Sd/- [K. NARASIMHA CHARY] [MANJUNATHA G] JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 06th March, 2025 VBP Copy to 1. IVY software Development Services Private Limited, 5th Floor, Divyasree Omega, Block-B, Plot No.13/E, Survey No.13 [Part], Kondapur, Hyderabad – 500 081. Telangana. 2. The ACIT, Circle-2(1), 5th Floor, Signature Towers, Sy.No.6(P) of Kondapur, Sy.No.37(P) of Kothaguda, Hyderabad – 500 084. Telangana. 3. The Disputes Resolution Panel-1, Kendriya Sadan, 4th Floor, C-Wing, Bengaluru – 560 034. Karnataka State. 4. Pr. CIT-2, Hyderabad. 5. The DR ITAT “A” Bench, Hyderabad 6. Guard File //By Order// //True Copy// Sr. Private Secretary : ITAT : Hyderabad Benches, Hyderabad. "