VERTEX OFFSHORE SERVICES PRIVATE LIMITED,HYDERABAD V. DICT, CIRCLE-8(1), HYDERABAD

ITA 204/HYD/2021

AI Insights

Vertex Offshore Services Private Limited appealed against the final assessment order for the assessment year 2016-2017, which included TP adjustments based on the valuation of international transactions with its Associated Enterprises. The Tribunal examined the selection of comparables for the TP analysis and the treatment of provisions for bad debts. The Tribunal's decision involved a detailed examination of the functional similarities and differences of various companies considered as comparables, leading to the exclusion of some and the inclusion of others based on their operational and financial characteristics.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 315597 (ITAT-HYDERABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-05-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB-B
• Assessment Year: 2016-2017
• Other Referred Cases: ADP Private Limited ITA.Nos.227 and 228/Hyd./2021, Infor India Pvt. Ltd., in ITA TP.No.198/Hyd./2021, Capco Technologies Private Limited in IT (TP) A.No.204/Bang./2021, Auriga Software Technologies Private Limited in IT TP A.No.178/Bang.2021, Thyssen Krupp. Industries India Pvt. Ltd., [2013] 33 taxmann.com 107 (Mum.Trib.), Foursoft India Limited [2011] 142 TTJ 358 (Hyd.Tribu.), Benu Networks Packet Switch (P.) Ltd., vs., ACIT [2024] 166 taxmann.com 92 [Hyderabad-Trib.], IVY Software Development Services Private Limited, Hyderabad vs., ACIT, Circle-2(1), Hyderabad in ITA.No.1801/Hyd./2019 A.Y. 2015-2016, order dated 06.03.2025
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M. NARMADA; REVENUE
• Assessee Lawyers: NAGESWAR RAO
• Keywords: Transfer pricing; International transaction; Bad and doubtful debts; Notional interest
• Section: 133(6)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD “B” BENCH: HYDERABAD BEFORE SHRI VIJAY PAL RAO, VICE PRESIDENT AND SHRI MANJUNATHA G, ACCOUNTANT MEMBER ITA.No.204/Hyd./2021 Assessment Year 2016-2017 Vertex Offshore Services Private Limited, Hyderabad – 500 081. PAN AABCV8666R Telangana. vs. The DCIT, Circle-8(1), Hyderabad. (Appellant) (Respondent) For Assessee : Shri Nageswar Rao, Advocate For Revenue : MS. M. Narmada, CIT-DR Date of Hearing : 18.03.2025 Date of Pronouncement : 16.05.2025 ORDER PER MANJUNATHA G. : This appeal has been filed by the Assessee against the final assessment order dated 30.03.2021 passed by the Assessing Officer u/sec.143(3) r.w.s.144C(13) r.w.s. 143(3A) and 143(3B) of the Income Tax Act, 1961, in pursuance to the Directions of the Disputes Resolution Panel-1, Bengaluru-2, Bengaluru dated 04.03.2021, passed 2 ITA.No.204/Hyd./2021 u/sec.144C(5) of the Income Tax Act, 1961 [in short “the Act”]. 2. Brief facts of the case are that, the appellant company viz., M/s. Vertex Offshore Services Pvt. Ltd., is engaged in the business of providing Software Development Services dealing in IT and ITES services, filed its return of income for the assessment year 2016-17 on 25.11.2016 declaring total income of Rs.3,91,98,420/-. The appellant- company was established in the year 1989. Vertex US is global IT services provider and has partnerships with various leading computer companies such as Microsoft, etc. Vertex India is engaged in providing software development services to Vertex US. The company operates on cost plus margin model. During the financial year relevant to assessment year under consideration, the appellant has reported international transactions with it’s Associated Enterprises [in short “AE”] in respect of provision of ITES services of Rs.24,10,97,420/-. The appellant has conducted TP study and selected Transactional Net Margin Method [in short “TNMM”] as the most appropriate method. The 3 ITA.No.204/Hyd./2021 appellant has selected 16 comparables with margin of 11.09% to 22.26% and claimed that margin earned by the appellant company from providing 'Software Development Services' to it’s AE i.e., 15.41% is at Arm's Length Price [in short “ALP”]. 2.1. The case of the appellant company was selected for scrutiny through CASS and during the course of assessment proceedings, a reference u/sec.92CA has been made to the TPO for determination of the ALP of international transactions of the appellant company. The TPO has examined the TP documentation submitted by the appellant company and after considering the relevant filters applied for selecting comparables, the TPO has accepted 06 comparables out of 16 comparables selected by the appellant company. The TPO has also conducted fresh search in PROWESS Data Base and has selected 15 final set of comparables which includes 06 comparables selected by the appellant company in it’s TP documentation and arrived at a median of OP/OC at 26.36%. Further, since there was a deficiency in the TP study of the appellant company and 4 ITA.No.204/Hyd./2021 the ALP has not been determined by the appellant company in accordance with provisions of sec.92C(3) of the Act, a show cause notice was issued to the appellant company on 25.09.2019 and called for it’s objections, if any, for selection of the fresh comparables and proposed TP adjustment. 2.2. The taxpayer/appellant company has furnished response to the show cause notice vide it’s letter dated 10.10.2019 and raised objection for rejection of TP documentation including comparables and also selection of fresh comparables by the TPO. The appellant company has also challenged re-computation of Profit Level Indicator [in short “PLI”] [OP/OC] by excluding provision for bad debt as non-operating in nature. The TPO after considering the relevant objections filed by the appellant company and also taking note of FAR analysis of various comparables, rejected the objections filed by the appellant company and selected 15 final set of comparables with a median margin of 26.36%. Further, the TPO had also suggested TP adjustment of Rs.2,28,69,996/- in respect of price to be received from the AE for rendering software development 5 ITA.No.204/Hyd./2021 services in IT and ITES services. Further, the TPO had also made adjustment towards notional interest receivable on delayed receivables from the AE by applying SBI short-term deposit rate and determined TP adjustment of Rs.2,26,608/-. Thus, the TPO has suggested total TP adjustment of Rs.2,30,96,605/- vide it’s order dated 20.11.2019 passed u/sec.144C(1) of the Income Tax Act, 1961. 2.3. The Assessing Officer in pursuance to the TP adjustment as suggested by the TPO vide order dated 20.11.2019 has passed Draft Assessment Order u/sec.143(3) r.w.s.144C of the Income Tax Act, 1961 and determined the total income of appellant company at Rs.6,22,95,025/-. 3. On being aggrieved, the appellant company filed objections before the Disputes Resolution Panel-1 [in short “DRP”], Bengaluru and raised various objections including rejection of TP documentation maintained by the appellant company, selection of certain filters and also selection of fresh comparables. The assessee had also challenged re- 6 ITA.No.204/Hyd./2021 computation of PLI [OP/OC] by excluding provision for bad debt as non-operating cost. The assessee further agitated TP adjustment in respect of interest on delayed receivables from AE. 4. The learned DRP vide it’s Directions dated 04.03.2021 issued u/sec.144C(5) of the Income Tax Act, 1961, allowed partial relief to the appellant company, where the DRP has rejected objection raised by the appellant company in respect of rejection of TP documentation and selection of fresh comparables. However, allowed appeal in respect of TP adjustment made towards interest receivable on outstanding receivables from AE and directed the TPO/AO to adopt SBI short-term deposit rate after providing the credit period of 90 days from the date of invoice raised by the appellant company. 5. In pursuance to the Directions dated 04.03.2021 of the DRP, the Assessing Officer has passed Final Assessment Order dated 30.03.2021 u/sec.143(3) r.w.s. 144C(13) r.w.s.143(3A) and 143(3B) of the Income Tax Act, 7 ITA.No.204/Hyd./2021 1961 and determined the TP adjustment of Rs.2,28,69,996/- to the total income of the appellant company. 6. Aggrieved by the Final Assessment Order of the Assessing Officer, the assessee is now in appeal before the Tribunal. 7. Ground Nos. 1 and 2 raised by the appellant company are general in nature and the Learned Counsel for the Assessee at the time of hearing submitted that, the appellant company does not wish to challenge ground nos.1 and 2. Therefore, ground nos.1 and 2 are dismissed as not pressed. 8. Ground No.6 relates to adjustment for difference in working capital. Learned Counsel for the Assessee at the time of hearing submitted that, the appellant company does not wish to challenge ground no.6. Therefore, ground no.6 of the appellant company is dismissed as not pressed. 9. Ground No.7 relates to adjustment for risk difference. Learned Counsel for the Assessee at the time of 8 ITA.No.204/Hyd./2021 hearing submitted that, the appellant company does not wish to challenge ground no.7. Therefore, ground no.7 of the appellant company is dismissed as not pressed. 10. Ground No.3 relates to selection of non- comparable companies. 11. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee submitted that, out of 11 comparables challenged by the assessee, the assessee is not pressing exclusion of following three companies i.e., (1) Inteq Software Private Limited (2) Nihilent Limited and (3) RS Software (India) Limited. In so far as remaining 08 companies, Learned Counsel for the Assessee firstly taken- up Tata Elxsi Limited for exclusion from the final set of comparables with the appellant company. TATA ELXSI LIMITED : 11.1. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee, referring to Tata Elxsi Limited submitted that, the above company is functionally different from the appellant-company. A perusal of page-6 of the annual report 9 ITA.No.204/Hyd./2021 shows that, Tata Elxsi Limited provides technology, consulting, product development and testing services for leading product companies, service providers and start-ups. Further, the company is into domain communication, consumer products, healthcare and retail. It carries huge R & D and IP development activities. There is no segmental information in respect of each segment of activity. Further, the above company has been excluded on functional dissimilarities by the ITAT, Hyderabad Bench, in the case of ADP Private Limited ITA.Nos.227 and 228/Hyd./2021 and also in the case of Infor India Pvt. Ltd., in ITA TP.No.198/Hyd./2021 12. MS. M. Narmada, CIT-DR for the Revenue, on the other hand, supporting the order of the DRP and TPO submitted that, Tata Elxsi Limited is functionally similar to the appellant company which is evident from the brief description of services referred to in their annual report. Further, there is no information in the annual report that company has revenue from product sales. R & D and intangible assets does not matter when comes to comparing 10 ITA.No.204/Hyd./2021 profit margin of companies involved in similar line of business. The DRP/TPO after considering all the relevant facts, has rightly rejected the contention of the assessee and, therefore, the order of the DRP/TPO should be upheld. 13. We have heard both the parties, perused the material on record and the orders of the authorities below. We find that Tata Elxsi Limited has segmental revenue from IT services at Rs.1075.121 crores, whereas, the appellant company’s turnover from SDS segment is Rs.20.41 crores. If we apply 10 times lower and upper turnover median for exclusion of any company, then, on this ground itself, Tata Elxsi Limited shall be excluded from the list of final set of comparables because, the turnover of Tata Elxsi Limited is more than 50 times of the turnover of the appellant- company. Further, Tata Elxsi Limited is engaged in providing diversified activities including software development services for automotive, communications, consumer products, health-care and retail. It also provides animation and Visual Effects (VFX) services for feature films and episodic television. Therefore, we are of the considered 11 ITA.No.204/Hyd./2021 view that, Tata Elxsi Limited cannot be compared with the appellant company which is engaged in providing software development services to it’s AE on cost+ mark-up basis. Further, Tata Elxsi Limited has been excluded by the ITAT, Hyderabad Benches in the case of ADP Private Limited ITA.Nos.227 and 228/Hyd./2021 where Tata Elxsi Limited has been excluded on two folds i.e., on turnover filter and also on functional dissimilarity. Therefore, we direct the Assessing Officer/TPO to exclude Tata Elxsi Limited from the list of final set of comparables. PERSISTENT SYSTEMS LIMITED : 14. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee referring to Persistent Systems Limited submitted that, the above company is functionally different from the appellant-company. He submitted that Persistent Systems Limited is specifically focuses on cloud computing, Big-Data and analytics, enterprise collaboration and enterprise mobility which are different from the services provided by the appellant company. He submitted that, Persistent Systems Limited provides end-to-end services i.e., 12 ITA.No.204/Hyd./2021 specialises in software products, services and technology innovation and offers complete product life cycle services. The nature of services provided are unique in contrast to a routine software development services provider like that of appellant company. He further submitted that, Persistent Systems Limited is also engaged in development of IPs and the company also owns huge intangible assets and it is engaged in the business of software products, software services and technology innovation which have been considered as unique business segment. Learned Counsel for the Assessee further submitted that due to absence of break-up of revenues and profits from software products, software services and technology innovation, it may not be possible to compute the operating margin from the rendering of software services alone. In view of the above services, Persistent Systems Limited has become a global leader in software product and technology services. Further, Persistent Systems Limited is a leader in outsourced product development and works with world's largest software product companies. He also submitted that 13 ITA.No.204/Hyd./2021 Persistent Systems Limited invested in future technology trends such as Internet of Things (IoT), wearable computing device and machine-to-machine and also built Google glass based applications. It has also invested in technology specialists in US to provide consultation services and advise on issues including technology strategy, platform and product vendors and architecture. Learned Counsel for the Assessee accordingly submitted that, Persistent Systems Limited is rendering multifaceted functions and, therefore, it cannot be compared with that of appellant company. He accordingly pleaded that Persistent Systems Limited may be deleted in the final set of comparables. 15. MS. M. Narmada, CIT-DR for the Revenue, on the other hand, supporting the order of the DRP and TPO submitted that, Persistent Systems Limited is functionally similar to the appellant company which is evident from the brief description of services referred by the Learned Counsel for the Assessee. Further, there is no information in the annual report that company has revenue from product sales and intangible assets which does not matter when comes to 14 ITA.No.204/Hyd./2021 comparing profit margin of companies involved in similar line of business. The DRP/TPO after considering all the relevant facts, has rightly rejected the contention of the assessee and, therefore, the order of the DRP/TPO should be upheld. 16. We have heard both the parties, perused the material on record and the orders of the authorities below. We find that Persistent Systems Limited is involved in diversified activities, when compared to the appellant company. We find that, the appellant company is engaged in providing software development services to it’s AE on cost+ mark-up basis. Further, Persistent Systems Limited has been excluded by the ITAT, Hyderabad Benches in the case of ADP Private Limited ITA.Nos.227 and 228/Hyd./2021 wherein Persistent Systems Limited has been excluded on the ground of functionally different and engaged in diversified activities. The said order of the Tribunal has been followed in appellant’s own case for the assessment year 2014-2015. Further, in the case of Capco Technologies Private Limited in IT (TP) A.No.204/Bang./2021 for the 15 ITA.No.204/Hyd./2021 assessment year 2016-2017, the ITAT, Bangalore Tribunal has directed for exclusion of Persistent Systems Limited on account of it’s turnover exceedes 200 crores. And in the case of Auriga Software Technologies Private Limited in IT TP A.No.178/Bang.2021 for the assessment year 2016-2017 Persistent Systems Limited has been excluded on account being a giant company. In view of the above decisions of Coordinate Benches of the Tribunal in assessee’s own case and in other cases, Persistent Systems Limited has been excluded on account of functional dissimilarity, diversified activities, turnover filter and considering the activities being a giant company. We, therefore, direct the Assessing Officer/TPO to delete Persistent Systems Limited from the final set of comparables. ASPIRE SYSTEMS (INDIA) PRIVATE LIMITED : 17. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee referring to Aspire Systems (India) Private Limited submitted that, the above company is functionally different from the appellant-company. He submitted that, 16 ITA.No.204/Hyd./2021 there is an extraordinary event of amalgamation i.e., Aspire Systems (India) Private Limited and PureApps Consulting Services Pvt. Ltd., are amalgamated with Aspire and, therefore, entire business including assets, liabilities, debtors, cash etc., stands transferred to Aspire Systems (India) Private Limited. He submitted that, though Aspire Systems (India) Private Limited operates under both onsite and off-shore model, the revenue break-up of the same is neither available in the income schedules nor is available under the segment reporting. He submitted that as per website, Aspire Systems (India) Private Limited has created various products/solutions/accelerators as part of it’s offerings. He further submitted that, on similar grounds the ITAT, Hyderabad Benches in the case of ADP Private Limited ITA.Nos.227 and 228/Hyd./2021 has excluded Aspire Systems (India) Private Limited on account of amalgamation. He further submitted that, in the case of Capco Technologies Private Limited IT (TP) A.No.204/Bang./2021, ITAT, Bangalore Bench has excluded Aspire Systems (India) Private Limited from the set of 17 ITA.No.204/Hyd./2021 comparables on account of it’s turnover exceeds 200 crores. In the case of Optiva India Technologies, the ITAT, Pune Bench in ITA.No.194/Pun./2021 has excluded Aspire Systems (India) Private Limited on account of amalgamation. In the case of Auriga Software Technologies Private Limited, the ITAT, Bangalore Bench in IT TP A.No.178/Bang./2021 has excluded Aspire Systems (India) Private Limited on account being a giant company. He, therefore, submitted that, rule of judicial consistency shall be followed by excluding the Aspire Systems (India) Private Limited from the final set of comparables. 18. MS. M. Narmada, CIT-DR for the Revenue, on the other hand, supporting the order of the DRP and TPO submitted that, Aspire Systems (India) Private Limited is functionally similar to the appellant company which is evident from the brief description of services referred by the Learned Counsel for the Assessee. Simply because there was an amalgamation of Aspire Systems (India) Private Limited with PureApps Consulting Services Pvt. Ltd., does not matter when comes to comparing profit margin of 18 ITA.No.204/Hyd./2021 companies involved in similar line of business. The DRP/TPO after considering all the relevant facts, has rightly rejected the contention of the assessee and, therefore, the order of the DRP/TPO should be upheld. 19. We have heard both the parties, perused the material on record and the orders of the authorities below. We find that, there is an extraordinary event of amalgamation of Aspire Systems (India) Private Limited with PureApps Consulting Services Pvt. Ltd., and thereby, entire business was transferred to PureApps Consulting Services Pvt. Ltd. We find force in the submissions of the Learned Counsel for the Assessee that, taking into consideration of extraordinary event of amalgamation, turnover filter and being a giant company, Aspire Systems (India) Private Limited has been excluded by the ITAT, Hyderabad Bench in the case of ADP Private Limited in ITA.Nos.227 and 228/ Hyd./2021 and similar observations were made by ITAT, Pune Bench, Pune, ITAT Bangalore Bench, Bangalore cited (supra), for exclusion of Aspire Systems (India) Private Limited from the final set of comparables. We, therefore, 19 ITA.No.204/Hyd./2021 respectfully following the judicial consistency and the decision of ITAT, Hyderabad Bench the case of ADP Private Limited in ITA.Nos.227 and 228/ Hyd./2021 direct the Assessing Officer to exclude Aspire Systems (India) Private Limited from the final set of comparables with the appellant’s company. INFOSYS LIMITED : 20. Shri Nageswar Rao, Advocate-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 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 20 ITA.No.204/Hyd./2021 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 captive 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 the case of ADP Private Limited ITA.Nos.227 & 228/Hyd.2021 wherein Infosys Limited has been excluded on account of diversified activities. Further, the Learned Counsel for the Assessee, in the case of Infor (India) Private Limited ITA TP.No.198/Hyd./2021, the ITAT, Hyderabad Bench has excluded Infosys Limited on account of huge turnover. In the case of OLF (India) Software Private Limited in IT TP A.No.182/Bang./2021, the ITAT, Bangalore Bench has excluded Infosys Limited on the ground that it is functionally different. In the case of Capco Technologies Private Limited IT TP A.No.204/Bang./2021 the ITAT, Bangalore Bench, has excluded Infosys Limited as it’s turnover exceeds 200 crores. In the case of Auriga Software 21 ITA.No.204/Hyd./2021 Technologies Private Limited in IT.TP.A.No.178/Bang./ 2021, the Bangalore Bench of the Tribunal has excluded Infosys Limited on account being a giant company. He accordingly submitted that, Infosys Limited cannot be compared with that of appellant’s company on account of turnover filter, functional dissimilarity and engaged in diversified activities. He, therefore, submitted that, Assessing Officer may be directed that, Infosys Limited may be excluded from the final set of comparables with that of appellant’s company in the interest of justice. 21. Ms. M. Narmada, 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. She 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 22 ITA.No.204/Hyd./2021 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. She accordingly submitted that, the order of the TPO/DRP should be upheld. 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 besides incurred significant amount of expenditure on R and D activities which is more than the turnover of the appellant-company. From the nature of services rendered by 23 ITA.No.204/Hyd./2021 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. We find force in the submissions of the Learned Counsel for the Assessee that, on functional dissimilarity, huge turnover filter, brand value, Infosys Limited shall be excluded from the list of final set of comparables. Further, we find that, the ITAT, Hyderabad Bench, in the case of ADP Private Limited ITA.Nos.227 & 228/Hyd.2021 has excluded Infosys Limited on account of diversified activities and in the case of Infor (India) Private Limited ITA TP.No.198/Hyd./2021, the ITAT, Hyderabad Bench has excluded Infosys Limited on account of huge turnover. We, therefore, deem it appropriate to direct the Assessing Officer to exclude Infosys Limited from the final set of comparables with that of appellant’s company. THIRDWARE SOLUTIONS LIMITED : 21. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee submitted that, Thirdware Solutions 24 ITA.No.204/Hyd./2021 Limited is functionally different and also owns intangible assets and that it’s segmental financial information is not available. Further, as per the annual reports of Thirdware Solutions Limited, it has primary reportable segments both in India and Abroad. Further, Thirdware Solutions Limited is engaged in emerging technology applications like SAP, Oracle, Peoplesoft, QAD, JD Edwards, Infor and other leading Cloud platforms and that, these activities are clearly distinct from routine software services. Further, in the case of ADP Private Limited ITA.Nos.227 & 228/Hyd./2021 the ITAT, Hyderabad Bench has excluded Thirdware Solutions Limited on account of functional dissimilarity and non- availability of segmental details and in the case of Infor (India) Private Limited ITA TP.No.198/Hyd./2021, the ITAT, Hyderabad Bench has excluded Thirdware Solutions Limited on account of functional dissimilarity having abnormally average high margin. In the case of OLF (India) Software Private Limited in IT TP A.No.182/Bang./2021, the ITAT, Bangalore Bench has excluded Thirdware Solutions Limited on the ground that it is engaged in diversified 25 ITA.No.204/Hyd./2021 activities and non-availability of segmental details. In the case of Capco Technologies Private Limited IT TP A.No.204/ Bang./2021 the ITAT, Bangalore Bench, has excluded Thirdware Solutions Limited as it’s turnover exceeds 200 crores. In the case of Auriga Software Technologies Private Limited in IT.TP.A.No.178/Bang./2021, the Bangalore Bench of the Tribunal has excluded Thirdware Solutions Limited on account being a giant company. He accordingly submitted that, Thirdware Solutions Limited cannot be compared with that of appellant’s company on account of turnover filter, functional dissimilarity and engaged in diversified activities. He, therefore, submitted that, Assessing Officer may be directed that, Thirdware Solutions Limited may be excluded from the final set of comparables with that of appellant’s company in the interest of justice. 22. Ms. M. Narmada, Learned CIT-DR for Revenue, on the other hand, supporting the order of the DRP and TPO submitted that, Thirdware Solutions Limited is functionally similar to the appellant company which is evident from the brief description of services referred by the Learned Counsel 26 ITA.No.204/Hyd./2021 for the Assessee. Further, revenue from software licence constitutes meagre of 0.04% of total operating revenue. Thus, Thirdware Solutions Limited is predominantly into sale of software services and hence can be taken as a comparable. Further, the intangible assets of Thirdware Solutions Limited does not matter when comes to comparing profit margin of companies involved in similar line of business. The DRP/TPO after considering all the relevant facts, has rightly rejected the contention of the assessee and, therefore, she submitted that, the order of the DRP/TPO should be upheld. 23. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We find that, ITAT, Hyderabad Bench, in the case of ADP Private Limited ITA.Nos.227 & 228/Hyd./ 2021 has excluded Thirdware Solutions Limited on account of functional dissimilarity and non-availability of segmental details and in the case of Infor (India) Private Limited ITA TP.No.198/Hyd./2021, the ITAT, Hyderabad Bench has excluded Thirdware Solutions Limited on account of 27 ITA.No.204/Hyd./2021 functionally different having abnormally average high margin. We, therefore, deem it appropriate to direct the Assessing Officer to exclude Thirdware Solutions Limited from the final set of comparables with that of appellant’s company. CYBAGE SOFTWARE PRIVATE LIMITED : 24. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee submitted that, Cybage Software Private Limited is functionally different from the appellant company as per the website. Further, Cybage Software Private Limited is engaged in provision of digital product engineering services and that it has expertise in end-to-end life cycle management. He submitted that Cybage Software Private Limited is having turnover of Rs.722.25 crores which is more than 10 times of appellant company. Therefore, the above company needs to be excluded from the list of final comparables. 25. Ms. M. Narmada, learned CIT-DR for Revenue, on the other hand, supporting the order of the DRP and TPO 28 ITA.No.204/Hyd./2021 submitted that, Cybage Software Private Limited is functionally similar to the appellant company and it operates in only one business segment i.e., provision of software development services. With respect to product company and insufficient segmental details, she submitted that, it is quite evident that product engineering is nothing but software development and maintenance services only. They have just been termed as 'product'. The company is engaged in providing software development services only. Therefore, the company in entirely has been considered as a comparable by the TPO/DRP and therefore, should be upheld. 26. We have heard both the parties, perused the material on record and the orders of the authorities below. There is no dispute with regard to the fact that, turnover filler is one of the criteria for exclusion of a company for the purpose of TP analysis. Generally, turnover filter is applied on the basis of 10 times upper or lower turnover. In the present case, the appellant’s turnover from provision of software development services is rs.20.41 crores, whereas 29 ITA.No.204/Hyd./2021 the turnover of Cybage Software Private Limited is having turnover of Rs.722.25 crores which is more than 10 times of appellant company. If we apply the turnover filter, then, Cybage Software Private Limited does not pass the turnover filter test. Therefore, we are of the considered view that, Cybage Software Private Limited cannot be considered as comparable to the appellant company which is engaged in providing software development services to it’s AE on cost plus mark-up basis. Thus, we direct the Assessing Officer/TPO to exclude Cybage Software Private Limited from the list of final set of comparables. LARSEN & TOUBRO INFOTECH LIMITED : 27. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee submitted that, Larsen & Toubro Infotech Limited is functionally different as it provides wide range of services and sought for 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 30 ITA.No.204/Hyd./2021 acquisition 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. The Learned Counsel for the Assessee drew the attention of the Bench, the business engaged by the Larsen & Toubro Infotech Limited that, Banking, Financial services, Insurance, Media and Entertainment, Travel, Logistics and Healthcare sectors. Further, Larsen & Toubro Infotech Limited is also providing host of services and all these services are not compared to routine software development services. It has huge brand value which is evident from page-28 of the annual report states that L & T has been making efforts for a steady growth in the \"L & T Infotech\" Brand across the globe and that, L & T has capitalized on its brand value during the course of rendering services. The brand value has impacted the margins of L & T. He further drew the attention of page- 31 ITA.No.204/Hyd./2021 8 of annual report and submitted that the size and scale of operations of L & T has its presence across the globe. Hence, it is clear that the scale of operations are clearly distinct from that of the assessee-company being a contract service provider to its AEs. He further submitted that, a perusal of page-5 of the annual report shows that L & T has been expanding its facilities and the total employees across India stands at 20,000+ as on March 31, 2016 which is much higher than the employee strength of the assessee company which clearly indicates the distinction between the two entities. He submitted that, L & T has been recognized with various awards for its performance and was selected in the \"Innovation in Big Data Award at NetApp Innovation Awards, 2015\". He submitted that, the nature of segmental information is not available. He submitted that L & T is also engaged in trading of goods which is apparent from its annual report. Further, L & T owns huge intangibles. He accordingly submitted that, in any event, Larsen & Toubro Infotech Limited cannot be compared with the appellant company. In support of his contentions, the Learned 32 ITA.No.204/Hyd./2021 Counsel for the Assessee relied on the decision of ITAT, Hyderabad Bench in the case of ADP Private Limited ITA.Nos.227 & 228/Hyd.2021 wherein Larsen & Toubro Infotech Limited has been excluded on account of extraordinary event of amalgamation. Further, the Learned Counsel for the Assessee submitted that, in the case of Infor (India) Private Limited ITA TP.No.198/Hyd./2021, the ITAT, Hyderabad Bench has excluded Larsen & Toubro Infotech Limited on account of huge turnover. In the case of OLF (India) Software Private Limited in IT TP A.No.182/Bang./ 2021, the ITAT, Bangalore Bench has excluded Larsen & Toubro Infotech Limited on the ground that there is an extraordinary event of amalgamation In the case of Capco Technologies Private Limited IT.TP.A.No.204/Bang./2021 the ITAT, Bangalore Bench, has excluded Larsen & Toubro Infotech Limited as it’s turnover exceeds 200 crores. In the case of Auriga Software Technologies Private Limited in IT.TP.A.No.178/Bang./2021, the Bangalore Bench of the Tribunal has excluded Larsen & Toubro Infotech Limited on account being a giant company. He accordingly submitted 33 ITA.No.204/Hyd./2021 that, Larsen & Toubro Infotech Limited cannot be compared with that of appellant’s company on account of turnover filter, functional dissimilarity and engaged in diversified activities. Further, although, the appellant-company has selected Larsen & Toubro Infotech Limited in their TP study as comparable to appellant-company, but, on verification of facts, it emerges that it is totally un-comparable to appellant-company on the basis of FAR analysis and, therefore, merely for the reason of inclusion of the said company by the appellant-company, there is no need to retain the above company in the final set of comparables when assessee has made-out a case that it is functionally different from appellant-company. He, therefore, submitted that, Assessing Officer/TPO may be directed that, Larsen & Toubro Infotech Limited may be excluded from the final set of comparables with that of appellant’s company in the interest of justice. 28. Ms. M. Narmada, Learned CIT-DR submitted that Larsen & Toubro Infotech Limited is also into software development services and there is no evidence that it’s 34 ITA.No.204/Hyd./2021 brand value does have any bearing on margins, because, in software development, the turnover is based on man hours. She 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 Larsen & Toubro Infotech Limited is a giant company and it cannot be compared with appellant-company. She further submitted that, Larsen & Toubro Infotech Limited cannot be made as part of TP documentation of the appellant-company where the appellant-company itself has selected the above company on functional similarity and, therefore, subsequently without there being any change in facts, it cannot seek to exclude the above company based on decision of some Tribunals. She accordingly submitted that, the order of the TPO/DRP should be upheld. 35 ITA.No.204/Hyd./2021 29. 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. 36 ITA.No.204/Hyd./2021 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 37 ITA.No.204/Hyd./2021 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 : 30. Shri Nageshwar Rao, Advocate-Learned Counsel for the Assessee, submitted that, Infobeans Technologies Limited 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 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), which are high end services and non-comparable to the services provided by the 38 ITA.No.204/Hyd./2021 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 the case of ADP Private Limited ITA.Nos.227 & 228/Hyd.2021 wherein the Tribunal has excluded Infobeans Technologies Limited on account of functional dissimilarity and non- availability of segmental details and in the case of Infor (India) Private Limited ITA TP.No.198/Hyd./2021, the ITAT, Hyderabad Bench has excluded Infobeans Technologies Limited and directed the TPO to verify whether the company is engaged in providing diversified services. In the case of Optiva India Technologies, the ITAT, Pune Bench in ITA.No.194/Pune./2021, the Pune Tribunal excluded Infobeans Technologies Limited on account of functional difference and non-availability of segmental details. Further, although, the appellant-company has selected Larsen & Toubro Infotech Limited in their TP study as comparable to appellant-company, but, on verification of facts, it emerges that it is totally un-comparable to appellant-company on the basis of FAR analysis and, therefore, merely for the reason 39 ITA.No.204/Hyd./2021 of inclusion of the said company by the appellant-company, there is no need to retain the above company in the final set of comparables when assessee has made-out a case that it is functionally different from appellant-company. He accordingly pleaded that, Assessing Officer/TPO be directed to exclude Infobeans Technologies Limited from the list of comparables on functional dissimilarities with that of appellant company. 31. MS. M. Narmada, learned CIT-DR, on the other hand strongly relied on the orders of the Assessing Officer/TPO. She 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. She 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 like the appellant- company. She further submitted that, Infobeans 40 ITA.No.204/Hyd./2021 Technologies Limited cannot be made as part of TP documentation of the appellant-company where the appellant-company itself has selected the above company on functional similarity and, therefore, subsequently without there being any change in facts, it cannot seek to exclude the above company based on decision of some Tribunals. She accordingly submitted that the comparable selected by the TPO/DRP should be upheld. 32. We have heard both sides and perused relevant material available on record. Admittedly, Infobean 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 41 ITA.No.204/Hyd./2021 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 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 42 ITA.No.204/Hyd./2021 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. 33. Ground No.4 relates to rejection of comparable companies. 34. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee referring to ground no.4 of appellant company submitted that, although, the appellant seeks to include 10 companies in the list of comparables, however, not pressed Akshay Software Technologies Limited, (2) TVS Infotech Limited, (3) Celstream Technologies Limited and (4) Isummation Technologies Private Limited. If we exclude the above 04 companies, then, we left with 06 comparables viz., (1) Sagarsoft India Limited (2) Sasken Communication Technologies Limited (3) Maveric Systems Limited (4) Infomile Technologies Limited (5) Evoke Technologies Limited and (6) Harbinger Systems Private Limited. 43 ITA.No.204/Hyd./2021 34.1. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee submitted that, although, the above companies are functionally comparable to appellant company because of their nature of business, but, the TPO/ DRP excluded the above companies only on the ground that those companies do not figure in TPO’s search matrix and thus, functionality is not required to be seen. However, the fact remains that the above companies are met with the TPO filters and search matrix applicable for selection of companies. Further, it has passed all the filters applied by the TPO. Although, the assessee has furnished relevant evidences and proved that, all these companies are passed the test-filters applied by the TPO, but, the TPO/DRP rejected the contention of the appellant company only on the ground that those companies do not figure in the search matrix of the TPO and, therefore, there is no question of examination of functionality for the purpose of inclusion. Therefore, he submitted that the above companies should be included in the list of comparables. 44 ITA.No.204/Hyd./2021 35. MS. M. Narmada, learned CIT-DR, on the other hand, supporting the order of the DRP/TPO submitted that, in order to select any company’s activities for the purpose of benchmarking analysis, the company should be available in the search matrix and also pass all the filters applied by the TPO. In the present case, the above companies do not figure in TPO search matrix and, therefore, the TPO has rightly not examined functionality analysis. The DRP after considering the relevant facts has rightly rejected the objections filed by the appellant company and thus, the order of the DRP/TPO should be upheld. 36. We have heard both the parties, perused the material on record and the orders of the authorities below. We find that, if a particular company is functionally similar to the appellant company, then, merely for the reason of not appearing in the search matrix of TPO, the said company cannot be excluded from the list of comparables. Further, it is the duty of the TPO to examine the functions performed by the appellant company with that of comparables chosen by the appellant company in light of relevant annual reports 45 ITA.No.204/Hyd./2021 and the FAR analysis. In the present case, the TPO has simply rejected the above companies on the ground that those companies were not meeting the search matrix. The DRP upheld the reasons given by the TPO, even though, the appellant has furnished relevant evidences to prove that, the FAR analysis of the above companies is similar to the appellant company. Therefore, we are of the considered view that, the TPO/DRP erred in rejecting the above companies without examining the FAR analysis. Further, similar issue has been considered by the ITAT, Hyderabad Bench in the case of Benu Networks Packet Switch (P.) Ltd., vs., ACIT [2024] 166 taxmann.com 92 [Hyderabad-Trib.] where on similar grounds, the Tribunal directed the Assessing Officer /TPO to examine the functionality of the above companies and consider for the purpose of inclusion or exclusion. Similar view has been taken by ITAT, Hyderabad Bench in the case of IVY Software Development Services Private Limited, Hyderabad vs., ACIT, Circle-2(1), Hyderabad in ITA.No.1801/Hyd./2019 – A.Y. 2015-2016, order dated 06.03.2025 wherein it has been held that, once a particular 46 ITA.No.204/Hyd./2021 company is functionally similar to the appellant company, then, said company cannot be rejected on the ground of data not available in particular data searches/search matrix. Therefore, we are of the considered view that, the DRP/TPO erred in rejecting the above companies without examining the functionality test. Thus, we set-aside ground no.4 of assessee’s appeal and more particularly, 06 comparables argued by the learned CIT(A) to the file of Assessing Officer/TPO and direct the TPO to examine the contention of assessee in light of relevant evidences and decide the comparability of companies. 37. Ground No.5 of assessee’s appeal relates to determination of operating margin of comparable companies. 38. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee submitted that, provision of bad debt is operating in nature and, therefore, while computing PLI [OP/OC] the same should be considered as Operating Cost. In this regard, he relied upon the decision of ITAT, Delhi 47 ITA.No.204/Hyd./2021 Bench in the case of Everest Business Advisory India Private Limited. 39. MS. M. Narmada, learned CIT-DR for Revenue, on the other hand, supporting the orders of the DRP/TPO submitted that, provision of bad debt and provision for warrantee are non-operating in nature because they are not ascertained liability and cannot be conceived as operating expenses. Further, these expenses are not relates to income earned by the assessee. Therefore, the DRP has rightly rejected the arguments of assessee and, therefore, the order of the DRP should be upheld. 40. We have heard both the parties, perused the material on record and the orders of the authorities below. The provision for bad debt is not an ascertained liability unlike actual write-off of bad debt. Further, it is not an expenditure incurred for earning operating revenue besides provision relates to income already admitted as revenue in the earlier years and is in no way related to the operating revenue earned during the year and thus, cannot be taken into account in determining the operating profit for the year 48 ITA.No.204/Hyd./2021 under consideration. The provision for bad and doubtful debts is only an accounting treatment and have no direct nexus to the operating income admitted for the year under consideration. Therefore, we are of the considered view that, there is no merit in the arguments of the assessee that bad debt is operating in nature and needs to be considered for the purpose of computation of PLI. This view is supported by the decision of ITAT, Mumbai Bench in the case of Thyssen Krupp. Industries India Pvt. Ltd., [2013] 33 taxmann.com 107 (Mum.Trib.). Similar view has been taken by the ITAT, Hyderabad Bench in the case of Foursoft India Limited [2011] 142 TTJ 358 (Hyd.Tribu.). Therefore, we are of the considered view that, at any stretch of imagination, the provision of bad debt cannot be considered as operating in nature. The DRP after considering all the relevant facts has rightly rejected the objections raised by the appellant company. Thus, we are inclined to uphold the findings of the DRP and reject the ground taken by the appellant company. 49 ITA.No.204/Hyd./2021 41. In the result, appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 16.05.2025 Sd/- Sd/- [VIJAY PAL RAO] [MANJUNATHA G] VICE PRESIDENT ACCOUNTANT MEMBER Hyderabad, Dated 16th May, 2025 VBP Copy to 1. Vertex Offshore Services Private Limited, 4th Floor, Wing-II, Block-C, Cyber Gateway, Madhapur, Hyderabad – 500 081. Telangana. 2. The DCIT, Circle-8(1), Hyderabad. 3. The CIT-Disputes Resolution Panel, Bangalore-2, Kendriya Sadan, 4th Floor, Koramangala, BANGALORE – 560 034. Karnataka. 4. The Pr. CIT, Central Hyderabad 5. The DR ITAT “B” Bench, Hyderabad. 6. Guard File. //By Order// //True Copy// "