DELIVERHEALTH SOLUTIONS INDIA PRIVATE LIMITED (EARLIER KNOWN AS NUANCE TRANSCRIPTION SERVICES INDIA PRIVATE LIMITED),BANGALORE vs. JOINT COMMISSIONER OF INCOME TAX, CIRC-2(1)(1), BANGALORE

Date of Hearing : 27-10-2023 Date of Pronouncement : 22-12-2023 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal arises out of order dated 28.01.2022 passed by the NFAC, Delhi on following revised grounds of appeal:

Page 2 of 59 IT(TP)A No. 342/Bang/2022 “Transfer pricing adjustment:

1. 1. That on the facts and circumstances of the case and in law, the AO / DRP / Transfer Pricing Officer ("TPO") have erred in making a transfer pricing adjustment of INR 18,34,63,116, in respect of information technology enabled services ("ITeS"), alleging that the services were not rendered at arm's length in terms of the provisions of sections 92C(1) and 92C(2) of the Act, read with Rule 10B of the Income-tax Rules,1962 ("the Rules").

2. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in arbitrarily selecting comparable companies based on incorrect appreciation of functional, asset and risk profile, and arbitrary filters. 2.1 That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in arbitrarily selecting the following companies based on incorrect appreciation of functional, asset and risk profile, and applying arbitrary filters: (i) Infosys BPM Ltd., (ii) S P I Technologies India Pvt. Ltd., (iii) Inteq BPO Services Pvt. Ltd., (iv) Manipal Digital Systems Pvt. Ltd., (v) CES Ltd., and (vi) Vitae International Accounting Services Pvt Ltd. 2.2 That on the facts and circumstances of the case and in law, the AO / TPO have erred in arbitrarily rejecting the comparable company, namely, R Systems International Ltd. (seg) on the ground that the same was not found in search matrix without appreciating that the same is functionally comparable. The DRP further erred in upholding the same basis the filter of different financial year ending. 2.3 That on the facts and circumstances of the case and in law, the AO / TPO have erred, in arbitrarily rejecting comparable company namely, Interglobe Technologies Pvt. Ltd. on ground that it fails the employee cost filter, without appreciating that the said company is functionally comparable and passed all the filters applied by TPO. The DRP further erred in upholding the same.

Page 3 of 59 IT(TP)A No. 342/Bang/2022 3. That on the facts and circumstances of the case and in law, the company namely Datamatics Financial Services Ltd. is not comparable to the Appellant as it has different functional, asset and risk profile.

4. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in arbitrarily rejecting the transfer pricing study of the Appellant and using arbitrary filters for benchmarking the international transaction pertaining to ITeS. 4.1 That on facts and circumstances of the case and in law, the AO/DRP/TPO have erred in applying the turnover filter with lower limit of INR 1 Crore without appreciating that the Appellant's turnover was INR 233.97 crore, and therefore, ought to have applied the turnover filter of INR 200 crores to INR 2000 crores.

5. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not granting economic / risk adjustments and working capital adjustment. Disallowance under section 14A: 6. That on the facts and circumstances of the case and in law, the AO / DRP have erred in disallowing an amount of INR 18,24,975 under section 14A of the Act read with amended Rule 8D(2)(ii) of the Income-tax Rules, 1962 ("the Rules"), being 0.25% (proportionate to investment period of Jan-March, 2017) of 1% of, annual average of, monthly average of opening and closing balances, of the value (INR 72,99,90,261) of investment in shares of the associate company (Nuance India Private Limited).

7. That on the facts and in the circumstances of the case and in law, the AO has erred in not recording satisfaction which is sine qua non for making disallowance under section 14A of the Act.

8. That on the facts and circumstances of the case and in law. the AO / DRP have erred in making disallowance without appreciating that no exempt income was earned by the Appellant during the relevant AY and thereby, no disallowance could have been made under section 14A of the Act.

Page 4 of 59 IT(TP)A No. 342/Bang/2022 9. That on the facts and circumstances of the case and in law, the AO / DRP have erred in making disallowance under section 14A without appreciating that the Appellant has not incurred any expenditure in earning the exempt income.

10. That on the facts and circumstances of the case and in law, the AO has erred in computing interest under section 234B and 234C of the Act. Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal.”

2.1 The Ld.AR has also filed an application dated 25.10.2023 seeking admission of following additional ground of appeal: “1. That on the facts and circumstances of the case and in law, the company namely Datamatics Financial Services Ltd. is not comparable to the Appellant as it has different functional. asset and risk profile.”

2.2 The Ld.AR submitted that the above comparable was left out to be considered in the original grounds of appeal though it was not contested before the DRP seeking exclusion. It is submitted that this does not estop assessee from raising this comparable before this Tribunal. The Ld.AR placed reliance on the decision of Special Bench in case of DCIT vs. Quark Systems Pvt. Ltd. reported in 42. DTR 414 and decision of Coordinate Bench of this Tribunal in case of Sterling Commerce Solutions India Pvt. Ltd. vs. DCIT in IT(TP)A No. 1410/Bang/2015. The Ld.AR also placed reliance on the decision of Hon’ble Supreme Court in case of Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688 and Page 5 of 59 IT(TP)A No. 342/Bang/2022 National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383.

2.3 The Ld.DR on the contrary opposed the admission of the additional ground as it has not been considered by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.

2.4 We note that the additional grounds are directly connected with the main issue of disallowance and no new facts needs to be investigated for adjudicating the same. Another issues alleged by the assessee is a legal issue that does not require investigation of any facts. Considering the submissions and respectfully following the decisions of Hon’ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional grounds raised by the assessee. Accordingly, we admit the additional grounds raised by the assessee.

Brief facts of the case are as under: 3. Assessee is a company engaged in providing information technology enabled services to Nuance Transcription Services Inc., USA being its associated enterprise of the assessee. It filed its return of income on 30.11.2017 declaring total income of Rs.41,20,13,200/- which was subsequently revised on Page 6 of 59 IT(TP)A No. 342/Bang/2022 21.06.2018 declaring total income of Rs.41,32,18,580/-. The Ld.AO observed that assessee was engaged in the services of medical transcription and the notice u/s. 142(1) was issued to assessee. In response to the statutory notices, the assessee filed various details as called for.

3.1 From the details filed, the Ld.AO noted that assessee had international transaction and accordingly a reference was made to the Ld.TPO u/s. 92CA to determine the ALP of such transaction.

3.2 On receipt of the reference, the Ld.TPO called upon assessee to file the economic details of the international transactions between the assessee and its AE. It was noted that assessee had following international transactions.

Page 7 of 59 IT(TP)A No. 342/Bang/2022 3.3 The Ld.TPO noted that assessee had computed its margin at 15.15% by considering OP/OC as the PLI and TNMM as the most appropriate method. It was noted that assessee had selected 8 comparables having a median of 14.23%, the details of which are as under:

3.4 The assessee thus computed its transaction to be at arms length. Dissatisfied with the analysis carried out by assessee, the Ld.TPO after carrying out search matrix came out with a new set of 8 comparables wherein 5 comparables of assessee were included and 3 new comparables were added with a median of 24.37%, the details of which are as under:

Page 8 of 59 IT(TP)A No. 342/Bang/2022

F.Year wise OP/OC (%) No. Company Name Wt. Average 2016-17 2015-16 2014-15 Sundaram Business 1 9.21 0.99 -3.95 2.08 Services Ltd. 2 Jindal Intellicom Ltd. 8.66 2.78 11.07 7.41 Fuzen Software Pvt. 3 15.07 16.06 16.98 15.93 Ltd 4 Microland Ltd.(seg) 18.72 14.02 19.30 17.53 Tech Mahindra 5 Business Services 18.51 19.09 29.92 22.37 Ltd. Datamatics 6 Business Solutions 6.21 33.46 36.22 22.64 Ltd. Infosys B P M 7 22.35 24.41 26.77 24.37 Services Pvt. Ltd. Vitae International No data 8 Accounting Services 27.00 27.25 27.13 available Pvt Ltd Manipal Digital 9 30.16 22.65 29.89 27.41 Systems Pvt. Ltd. 10 CES Ltd. 31.21 34.18 27.93 31.45 Ultramarine & 11 46.63 30.27 27.26 34.41 Pigment Ltd. (Seg.) S P I Technologies 12 37.61 40.70 32.18 36.95 India Pvt. Ltd. Inteq B P O Services 13 36.64 48.47 32.81 39.51 Pvt. Ltd.

35th Percentile 22.37 Median 24.37 65th Percentile 27.41 3.5 The Ld.TPO thus proposed an adjustment of Rs.18,99,71,894/- for the ITeS segment. On receipt of the transfer pricing order, the Ld.AO passed the draft assessment order in conformity with the proposed adjustment u/s. 92CA.

Page 9 of 59 IT(TP)A No. 342/Bang/2022 The Ld.AO further made disallowance u/s. 14A amounting to Rs.18,24,975/-.

Aggrieved by the order of the Ld.AO, assessee filed objections before the DRP.

3.6 The DRP after considering various submissions of the assessee excluded one comparable being Ultramarine & Pigment Ltd. With respect to the above on account of disallowance u/s. 14A, the Ld.AO’s action was upheld. On receipt of the order of the DRP, the Ld.AO passed the impugned order by making an addition in the hands of the assessee at Rs.59,85,06,670/-. Aggrieved by the order of the Ld.AO, the assessee is in appeal before this Tribunal.

4. The Ld.AR submitted that Ground no. 1 is general in nature and therefore do not require any adjudication.

4.1 Ground nos. 2-4.1 are in respect of the comparables sought for inclusion / exclusion. The Ld.AR submitted that assessee wish to argue only following 5 comparables raised in ground no. 2.1 for exclusion. a) Infosys BPM Ltd. b) SPI Technologies India Pvt. Ltd. c) Inteq BPO Services Pvt. Ltd. d) Manipal Digital Systems Pvt. Ltd.

Page 10 of 59 IT(TP)A No. 342/Bang/2022 e) CES Ltd. Assessee has directed the Ld.AR not to press Vitae International Accounting Services Pvt. Ltd. and accordingly, the same has been not pressed by the Ld.AR.

4.2 In Ground nos. 2.2 and 2.3, the assessee is seeking inclusion of two comparables being R Systems International Ltd. (seg) and Interglobe Technologies Pvt. Ltd. 4.3 The Ld.AR has submitted that Ground no. 4.1 has been raised by assessee seeking application of turnover filter which the assessee do not wish to argue. Accordingly, this ground has been not pressed by the Ld.AR. The additional ground raised by the assessee is seeking exclusion of Datamatics Financial Services Ltd. as functionally not similar.

4.3.1 Thus from the above, assessee is seeking following comparables for exclusion. 1. Infosys BPM Ltd. 2. SPI Technologies India Pvt. Ltd. 3. Inteq BPO Services Pvt. Ltd. 4. Manipal Digital Systems Pvt. Ltd. 5. CES Ltd. 6. Datamatics Financial Services Ltd. 4.3.2 The assessee is seeking inclusion of ; a) R Systems International Ltd. (seg)

Page 11 of 59 IT(TP)A No. 342/Bang/2022 b) Interglobe Technologies Pvt. Ltd.

4.4 Before we undertake the comparability analysis, it is sinequa non to understand the FAR of the assessee under the ITeS segment. The Ld.AR has referred to the transfer pricing study report placed at page 183 of the paper book wherein the FAR of the assessee has been submitted to be as under: Functions performed I. Nuance Communications Inc. Nuance Inc. is engaged in the development of voice, language, mobile text, document imaging and print management solutions for businesses and consumers.

NTS India is engaged in providing medical transcription services to Nuance Inc. Figure 14 below illustrates the Nuance Group's value chain: a) Marketing

Page 12 of 59 IT(TP)A No. 342/Bang/2022 Nuance Inc. is responsible for customer identification and also helps in entering into contract with the customers after the technical team reviews the requirements. The arrangement is such that the contracts are procured and entered into by Nuance Inc. and then the work is outsourced to NTS India.

NTS India does not directly engage in marketing services / front ending with the clients. b) Contracting NTS India acts as a limited risk back office service provider for Nuance Inc. while Nuance Inc is a front ending entity. It enters into contracts with customers and manages the customer relationships for the contracts entered in the US/other markets. c) Activity scheduling and day-to-day activities The project management team interacts with the customers and understands the requirements in terms of deliverables and other technical specifications. The activity schedules are prepared by Nuance Inc.. based on the turnaround time weekly and daily calls are held to assess the same. d) Quality Control Nuance Inc. has to ensure that quality of the service rendered should be at the level agreed with the clients Nuance Inc uses a defined quality assurance ("QA") process. Dedicated staff is maintained to perform test plan creation for automated testing.

Page 13 of 59 IT(TP)A No. 342/Bang/2022 manual and automated test plan execution, and stress, load and capacity testing and medical transcription work.

Nuance Inc. sets and manages all the standards used by NTS India and determines the policies, processes and controls to be used. Nuance Inc. also sets the deliverable quality standards and procedures_ Nuance Inc. has its own prescribed set of QA process which checks the program for quality. The same is delivered to the client only after it meets with the prescribed quality standard. e) Customisation and after-sales services Product customisation and product installation services are rendered to the end clients by Nuance Inc. wherever applicable. f) Customer relationship Nuance Inc. is responsible for maintaining the customer relationship with respect to the work outsourced to NTS India. As mentioned above. NTS India is not directly involved in any front- ending. g) Pricing policy with customers NTS India renders services to Nuance Inc_ under a fixed price arrangement. Pricing policy as regards end clients is determined by Nuance Inc.. and prices are to be negotiated with the end clients by Nuance Inc. only.

Page 14 of 59 IT(TP)A No. 342/Bang/2022 h) Billing and collection Nuance Inc. being the contracting entity is responsible for invoicing to the end customers. It is Nuance Inc.'s responsibility to ensure that the payments are received from the customers as per the billing milestones agreed. i) Recruitment and training Nuance Inc. is involved in the interview process of senior level employees of NTS India. The final round of interview for head of the departments are conducted by Nuance Inc. Nuance Inc. is also involved in framing the annual appraisal policy and review of the annual appraisal process.

Nuance Inc. provides basic guidelines with respect to the mandatory training to be conducted for employees of NTS India. Nuance Inc. also owns an online training platform called "Enrich", which is used by NTS India in training their employees. The training content is developed by Nuance Inc.

II. NTS India a) Medical transcription NTS India is engaged in rendering Medical transcription services to Nuance Inc.

The customers of Nuance Inc. such as hospitals purchase licenses of the platforms/software ("Nuance software") which is owned by Nuance Inc. These platforms help customers in Page 15 of 59 IT(TP)A No. 342/Bang/2022 converting the voice dictation into text. The customers use a recording device to record the patient details, records, history, conversations, case studies and then it is transferred to their computer which is already equipped with the Nuance software which converts the voice into text. It is then accessed by the team of professionals in NTS India, who review the voice file and the converted text and arrive at meaningful information for analysis, reports and other medical uses.

NTS India is engaged in rendering voice based transcription services. Even though different platforms are used for Medical transcription, the ultimate use and purpose of the platforms is to provide final report to the client.

The functions involved in the medical transcription services are as described in Figure 15:

Page 16 of 59 IT(TP)A No. 342/Bang/2022 Assets owned - tangible and intangible assets Every business requires assets (tangible or intangible) without which it cannot carry out its activities. Intangibles play a significant role in the functioning of a business and are accordingly more important. An understanding of the assets employed and owned by NTS India provides an insight into the resources deployed by NTS India and their contribution to the business processes /economic activities of NTS India.

Page 17 of 59 IT(TP)A No. 342/Bang/2022 NTS India possesses the necessary assets and infrastructure for providing aforesaid services to Nuance Inc. As at 31 March 2017, NTS India held the following assets:

TABLE 9: SUMMARY OF TANGIBLE AND INTANGIBLE ASSETS NTS India's Gross and Net assets as at 31 March 2017 Depreciation Particulars Gross Amount (INR) Net Amount (INR) (INR) Computers 94,090,946 32,516,204 61,574,741 Furniture and 16,721,080 4,201,601 12,519,479 fixtures Office equipment 56,995,924 29,489,415 27,506,509 Leasehold 180,334,128 44,584,426 135,749,702 Improvements Computer software 31,627,096 17,180,951 14,446,144 Total 379,769,173 127,972,597 251,796,576 Nuance Inc. owns the intangible property rights in the products sold to customers. Thus, NTS India has no ownership right, legal or economic, on any intangible generated or on the outcome of any intangible generated or arising during the course of rendering of medical transcription services. Risk Analysis This section provides a discussion of the risks that NTS India and the AE assume through their business operations related to international transactions. An understanding of the elements of risk is important as it helps to characterise the companies: a necessary step in understanding of the type of benchmarking data required. The degree of risk depends on several factors

Page 18 of 59 IT(TP)A No. 342/Bang/2022 including the service provided and parties involved, the markets targeted, competition and other general business risks.

A description of the risks borne by NTS India and its AE vis-a-vis the international transaction undertaken are discussed in Table 10 below: TABLE 10: RISK ANALYSIS NTS India Nuance Inc.

Page 19 of 59 IT(TP)A No. 342/Bang/2022 Nuance Inc. bears all the research and development risk associated with the NTS India does not carry out any R&D development of design. specification and therefore does not bear any such and final product. It is also risk. responsible for conceptualising new product ideas based on the inputs received from marketing channels.

6. Manpower risk This risk relates to scarcity of skilled professionals and high labour turnover in the industry that affects the fortunes and operations of any company. NTS India bears manpower risk. However, manpower related costs Nuance Inc. being the entrepreneur including training and recruitment forms bears the ultimate manpower risk part of the cost base of NTS India which since it has the responsibility to is billed to Nuance Inc. and therefore this ensure timely delivery to its clients. risk is mitigated.

8. Capacity utilization risk: This is the risk arising from under-utilization of the installed capacity. NTS India does not bear the risk of idle Nuance Inc. bears the capacity capacity as all its costs forms a part of utilization risk as all the cost of NTS the cost base while billing to its AE India forms a part of the total cost including a mark-up. marked up for invoicing.

Page 20 of 59 IT(TP)A No. 342/Bang/2022

Conclusion of the FAR analysis for NTS India's international transaction pertaining to medical transcription services with Nuance Inc.  NTS India performs all routine and normal functions undertaken by medical transcription service providers operating in India.  NTS India faces limited business risks with respect to transactions with Nuance Inc.  NTS India does not own any significant non-routine intangibles as the same are owned by Nuance Inc.

Economic characterization The purpose of this section is to provide information on the economic characterisation of NTS India and its AE, based on the functional analysis of the inter-company transactions. This is an important step to enable the execution of the benchmarking analysis.

Nuance Inc. performs critical functions of identification of projects, marketing and owns non-routine intangibles. It bears the entrepreneurial risks, being the contracting party.

Page 21 of 59 IT(TP)A No. 342/Bang/2022 Accordingly, AE can be characterised as the principal/entrepreneurial risk bearing entity because of its ultimate responsibility for marketing, contractual risks and client ownership.

On the other hand, NTS India can be characterised as limited risk back-office service provider while rendering medical transcription services. The summary of economic characterisation is provided in Table 11 below.

TABLE 11: SUMMARY OF ECONOMIC CHARACTERISATION Description of Name of the Characterisation of the services entity entity Principal / entrepreneurial Medical Nuance Inc. risk bearing entity transcription Limited risk back-office services NTS India service provider Based on the above, we shall consider the comparables sought for inclusion / exclusion.

Ground no. 2.1 5. At the outset, the Ld.AR has submitted that the Coordinate Bench of this Tribunal in case of Exxonmobil Services and Technology Pvt. Ltd. vs. DCIT in IT(TP)A No. 958/Bang/2022 vide order dated 12.07.2023 for A.Y. 2017-18 has considered the following comparables. 1. Infosys BPM Ltd. 2. SPI Technologies India Pvt. Ltd. 3. Manipal Digital Systems Pvt. Ltd.

Page 22 of 59 IT(TP)A No. 342/Bang/2022 4. CES Ltd. 5. Datamatics Financial Services Ltd.

5.1 It is submitted that the assessee in Exxonmobil Services and Technology Pvt. Ltd. vs. DCIT (supra) was a captive service provider like that of assessee and therefore it has been held that the above comparables are not functionally similar with that of a captive service provider like assessee. He thus prayed for exclusion of these comparables from the final list as it is not functionally similar with that assessee. He submitted that the analysis carried out in case of Exxonmobil Services and Technology Pvt. Ltd. vs. DCIT (supra) in respect of which all the above comparables are applicable to the present assessee also.

5.2 On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.

5.3 From the FAR analysis carried out by assessee, it is noted that assessee is a routine service provider of carrying out medical transcription services on behalf of its AE without any significant intangibles owned by it. Further the transfer pricing study also characterised assessee to be a limited risk back office service provider in the process of rendering such services. The characterisation of the assessee has not been disputed by the authorities below and that the same has been upheld by Page 23 of 59 IT(TP)A No. 342/Bang/2022 Coordinate Bench of this Tribunal in assessee’s own case for A.Y. 2016-17 in IT(TP)A No. 721/Bang/2021 vide order dated 16.02.2023. On perusal of the decision relied by the Ld.AR, we note that the above comparables have been excluded in case of Exxonmobil Services and Technology Pvt. Ltd. vs. DCIT (supra) by observing as under: “(I) Datamatics Business Solutins Ltd.

6. The ld. A.R. submitted that Datamatics fails the export filter applied by the learned TPO, lacks segmental data and therefore, should be rejected.  Fails export earnings filter proposed to be applied by the learned TPO for the two previous years, i.e. FY 2015-16 and FY 2014-15  Functionally different - Engaged in KPO services  No segmental details are provided 7. The ld. D.R. submitted that the Ld. DRP observed in his report that as per the Form No. MGT-9 forming part of the annual report, the principal activity of the company is described as IT enabled Services and BPM Service providers deriving income around 87.29%. Therefore, the company is functionally similar to the assessee as it is being predominantly into ITES Company. 7.1 In this case as ld. DRP pointed out earlier that difference in various segments i.e. low end to high end in ITES services is mainly on account of differences in the skill/qualification and pay structure of employees and, therefore, the main point to be considered is whether such differences between employees is going to materially affect the margin of the comparables. On the basis of billing rates / skills no conclusion could be drawn that margins in different segments of ITES services is also different. This is because if the billing rate is high in the high end services, the cost of the employees who are highly qualified/skilled also goes up steeply and, therefore, the margins are not much affected. Intact, no evidence has been produced before us to show that margins in the high end segments of ITES services is high compared to low end services. Therefore, ld. DRP was unable to accept the argument advanced by learned AR that the comparables belonging to high end segments such as KPO etc. should be excluded from the comparability list on this ground alone. In fact, KPO is a term given to a branch of BPO in which apart from processing data, knowledge is also applied. In view of the above, ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. Accordingly, the ld. DRP rejected this plea of the assessee. 7.2 The ld. D.R. further submitted that as regards, the export revenue as given in Note No. 18, the revenue is around Rs.50.43 Page 24 of 59 IT(TP)A No. 342/Bang/2022 crores as on 31.03.2017 as against total revenue of Rs.62.70 crores, which comes to 80.43%. As the company is functionally similar and satisfies the filters adopted by the TPO including export revenue filter of more than 75%, the company is considered as comparable. Therefore, the action of the TPO considering the company was upheld by the ld. DRP. 7.3 The ld. DR submitted that s regards lack of segmental information, the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. 7.4 She submitted that the assessee contended before the ld. DRP that this comparable has incurred significant selling, marketing expenses. From the perusal of the annual report, the ld. DRP noted that the expenses on this count is only 4.57% of the total sales and which is not at all significant to affect the profitability of the comparable. Further, during the previous year 2015-16 the assessee has incurred more selling and marketing expenses amounting Rs.326.33 lakhs as against total sales of Rs.6314.04 lakhs whereas the company has incurred Rs.299.46 lakhs during the previous year 2016-17 as against total sales of Rs.6544.60 lakhs. Thus, that though expenses are less this year the revenue has slightly gone up. This shows that there is no correlation between the expenses and the revenue. The assessee has failed to establish that such differences have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, these pleas were rejected by the ld. DRP. 7.5 The ld. D.R. submitted that as per the fixed asset schedule given in the annual report, the value of intangible assets as on 31-3-2017 was only Rs.256.67 lakhs as against total revenue of Rs.6544.60 lakhs constituting 3.92% of operating revenue. There is no reference to any IPR or patent owned or developed by the company, in the stand-alone annual report. There is also no acquisition of IPR during the year. The intangibles shown in the Asset Schedule are only computer software acquired for the business. Even the assessee has such computer software to the extent under the head intangible asset. The assessee also did not point to any information in the annual report to indicate that the intangibles have materially affected the profitability of the company as required in clause (i) of sub-rule (3) of Rule 10B. Taking into account all these aspects, we do not find any material difference so as to affect comparability. Hence, these pleas are rejected. 7.6 In view of the above, the pleas of assessee were rejected and selection of this company was upheld by the ld. DRP.

11. Upon the assessee's appeal, the ld. CIT(A) has accepted that the characterization by the transfer pricing officer of the assessee's functions as knowledge process outsourcing was not correct. Thereafter, the ld. CIT(A) contradicted himself by stating that the functions of the assessee are in alignment with the knowledge process outsourcing comparable dealt with by the transfer pricing officer. In this regard, the learned CIT appeals relied upon the ITAT decision in the case of Maersk Global Centers (India )(P) Ltd . Thereafter, the learned CIT (A) upheld the assessing officer’s action of selection of four of the comparables and accepted the assessee’s contention in rejection of two the comparables.

12. Now in appeal before us, the submission of the learned counsel of the assessee is that assessee's functions are that of ITES which has been duly accepted by the revenue as well as by the ITAT in earlier years. Hence, the re-characterisation of the assessee's functions as knowledge process outsourcing is not sustainable. We are in full agreement with this contention. Furthermore, we find that the ld. CIT(A) has clearly contradicted himself by stating both that assessee is not a KPO and at the same time accepting the comparables selected by the Transfer Pricing Officer from the database for knowledge process outsourcing companies.

13. As regards the rejection of four companies, it is the submission of learned counsel of the assessee that the functions of Eclerx Services Ltd. and Vishal Information Technologies Ltd. (earlier Coral Hub Ltd.) has been held to be not comparable to the assessee by the ITAT for the assessment Page 26 of 59 IT(TP)A No. 342/Bang/2022 year 2007 – 08. In this regard, we find that ITAT in the aforesaid order has observed as under: 32. As noted earlier the Id AR for the assessee submitted that the assessee submits that Eclerx Services Ltd. has not considered as a comparable in earlier years. Eclerx Services Ltd. is a Knowledge Process Outsourcing (KPO) Service provider which is not comparable to assessee; assessee is engaged in providing back office support services. In support of his submission, the Id. AR of the assessee relied upon the decision of Delhi High Court in Rampgreen Solution P Ltd Vs CIT (2015) ITR 533 (Delhi). The TPO included this comparable by taking his view that this company is in date process and analytical services. The Id CIT(A) confirmed the action of the TPO by taking his view that this comparable company is into the health care receivable management and therefore renders ITeS services. The Hon'ble Delhi Court in Rampgreen Solution (P) Ltd (supra) held entities rendering voice call center services for customer support and a KPO service provider employ IT-based delivery systems, but characteristics of services, functional aspects, business environment, risks and quality of human resource employed are materially different; and therefore, benchmarking international transactions on basis of comparison of PLI of high-end KPO service providers with PLI of Voice Call Centers, would be unreliable. Further, Mumbai Tribunal in Wills Processing Services (India) Ltd. vs. ACIT (supra) on considering similar contentions excluded this comparable.

14. Accordingly, following the aforesaid decision of the tribunal, we hold that the Eclerx Services Ltd. and Vishal Information Technologies Ltd. (earlier Coral Hub Ltd.) are liable to be rejected as invalid comparable. As regards the other comparables namely Crossdomain Solutions and Datamatics Financial Services, we find that the Transfer Pricing officer and the ld. CTI(A) have found their functions to be similar to that of KPO and that of E-clerx and Vishal technologies. Since, the ITAT has duly upheld the rejection of the aforesaid companies, i.e., these two companies are also liable to be rejected. Furthermore, Datamatics Financial Services also fails the export filter of 75% which has been adopted by the transfer pricing officer. Hence, in the background of aforesaid, we hold that following comparable are to be rejected:  Eclerx Services Ltd.  Vishal Information Technologies Ltd  Crossdomain Solutions  Datamatics Financial Services.” 7.1 Accordingly, we direct the AO to exclude this company M/s. Datamatics Business Solutions Ltd. from the list of comparables as this company is a KPO company and not comparable to assessee company.”

Page 28 of 59 IT(TP)A No. 342/Bang/2022 8.1 In view of the above, we direct the AO/TPO to exclude this company Datamatics Business Solutions Ltd. from the list of comparables. (II) Infosys BPM Services Pvt. Ltd.: 9. The ld. A.R. submitted that Infosys BPO Limited should be rejected as a comparable company as this company is functionally different and therefore ought to be rejected. Further, Infosys BPO had presence of intangibles, brand value, subcontracting expenses as compared to the Assessee who did not possess the same.  Functionally dissimilar - business process management  Ownership of intangible assets & IPs  Brand Value/ Marketing expenses  Consultancy expenses in the nature of Sub-contracting charges 10. The ld. D.R. submitted that the ld. DRP in his report observed that on perusal of the annual report, this company offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. Further, at Page 31 and 32 under Note 11 Segment Reporting, it was clearly stated that the company's operations primarily relate to providing business process management services, and accordingly revenues represented along with industry classes comprise the primary basis of segmental information. Thus, primary business activity of this company is business process management services, in various verticals such as FSI, MFG, RCL, ECS. At page 81 of annual report, Note 2.24, the report clearly states that as per function wise classification it has income from business process management services. The company's catering to a variety of industries does not change the nature of functions carried out as it is committed to provide best in class services to both horizontal and vertical focus areas. In view of the above information in the annual report, the ld. DRP did not find any merit in the plea that this company is functionally different, and that it has diversified activities, and hence these pleas were rejected by him. 10.1 The ld. D.R. further submitted that a plea was also raised before the ld. DRP by the assessee that this company is into high end ITES service provider, and hence not comparable. The ld. DRP was unable to accept such plea, as under TNMM, there is no requirement that the comparables should render the same or identical services. It would be sufficient, if the services fall under the broad industry segment ITES. In this regard, the ld. DRP observed that the Hon'ble Bangalore Tribunal in the case of GE India Technology Centre Private limited Vs. Dy. Director of Income Tax (ITA No. 789/Bang/2010 & & 925/Bang/2011 observed that TNMM requires only broad comparability. The relevant observation is as under: 'As per the principles of comparability, controlled and uncontrolled transactions are regarded as comparable if their economically relevant attributes and the circumstances surrounding them are sufficiently similar to provide a reliable measure of an arm's length result. However, in reality, two transactions are seldom completely alike. To Page 29 of 59 IT(TP)A No. 342/Bang/2022 be comparable does not mean that the two transactions are necessarily identical, but that either none of the differences between them could materially affect the arm's length price or, where such material differences exist, then reasonably accurate adjustments can be made to eliminate their effect. It is important to note that the type and attributes of the comparables available in a given situation typically determine the most appropriate transfer pricing method. In general, closely comparable products/services are required if the comparable uncontrolled price ('CUP') method is used for arms' length pricing; the resale price, cost-plus methods generally require a lesser degree of products or services comparability and may be appropriate if functional comparables are available. The TNMM requires only broad functional and product/services comparability. In many instances, it will be possible to use 'imperfect' comparables, e.g., comparables from another industry sector, possibly adjusted to eliminate or reduce the differences between them and the controlled transaction.' 10.2 Reliance was also placed in the case of PinoBisazza Glass Pvt. Ltd. Vs. ACIT C-5,Ahmedabad 2005-06 & 2007-08, ^& 1622/Ahd/2010 & 3201/Ahd/2011 wherein acceptance of broad comparables was upheld. The relevant extract has been reproduced below: "12 - Although the selection of "Industry Segment" is the start point but it is a broad selection, particularly if a finer or more close selection is available. We are aware about Para 1.41 of OECD guidelines which prescribes that it is acceptable to broaden the scope of the comparability analysis to include uncontrolled transaction involving products that are different, but where similar functions are undertaken. But the OECD guide fines have not stopped there and said that the acceptance of such an approach depends on the effects that the product differences have on the reliability of the comparison and on whether or not more reliable data are available. It is rather clarified that before broadening the search to include a large number of potentially comparable uncontrolled transactions based on similar functions being undertaken, thought should be given to whether such transaction are likely to offer reliable comparables for the controlled transaction. Therefore the Guidelines are unambiguously suggesting that 'comparability factor' do not restrict to 'functional analysis' and the importance of FAR as a major comparability factor can't be over emphasized but one needs to carry out the process again and again till the exactly reliable comparable is found." 10.3 In case of Aztec Software Technology Vs ACTT [2007] 294 ITR (A.T.) 32 (Bang), the ITAT has observed following with respect to TNMM: "The TNMM requires establishing comparability at a broad functional level. It requires comparison between net margins derived from the operation of the uncontrolled parties and net margin derived by an associated enterprise on similar operation" 10.4 The ld. DRP further observed that in the case of TCL holdings Pvt. Ltd., vs. Assistant Commissioner of Income Tax, (ITA No. 7129/Mum/2011), where in the ITAT held that:

Page 30 of 59 IT(TP)A No. 342/Bang/2022 ...................................... in TNMM method it is not necessary that the product should be exactly the same as dealt in by the assessee" 10.4 Therefore, the ld. DRP rejected these pleas of the assessee.

12. The DRP was of the view that just because the company is providing cloud based services over various mainframe computers, the company would not be functionally different as claimed by the assessee and rejected this plea of the assessee. Regarding the plea of the assessee that this company is into high end ITES service provider, and hence not comparable, the DRP held that under TNMM, there is no requirement that the comparables should render the same or identical services. It would be sufficient, if the services fall under the broad industry segment ITES. In this regard the DRP relied on the Bangalore Tribunal decision in the case of GE India Technology Centre (P.) Ltd. v. Dy.

13. DIT [2013] 30 taxmann.com 249/141 ITD 245 and other decisions wherein it was observed that TNMM requires only broad comparability.

14. The contention of the assessee that Infosys BPO has various Revenue Models and its revenues are generated principally on time and material basis, transaction basis and fixed price contracts and therefore, it should not be compared with the assessee, the DRP observed that as the assessed failed to demonstrate as to how the different methods of billing would affect the Functional comparability or impact the profitability. Unless the same is demonstrated with credible evidence, it remains a theoretical argument without any backing with facts and figures and hence rejected it. The assessee pointed out that this company has reported an 15. amount of Rs. 136 crore as 'cost of Technical sub-contractors' which constitutes about 4.45% of total revenue of the company during the year. The DRP observed that the annual report mentions that these sub- contractors are used for operational activities. This is a common practice in almost all the companies to give a small portion of the work to some other subcontractors for a variety of reasons. This may allow the company to focus on its core activities. Sometimes it may be to meet the mismatch in certain skill-sets that are required in various projects. These expenses are incurred in the routine course of business. This cannot be held to be a criteria to affect the functional comparability of a company and more so in the facts of this case, wherein the sub- Page 32 of 59 IT(TP)A No. 342/Bang/2022 contracting expenses are about 4.45% only. This objection was accordingly rejected. Regarding the lack of segment data to reject it as a comparable, 16. the DRP was of the view that when it has been held that all the services being done by this company falls in the category of ITeS, then the absence of segmental information remains a theoretical argument.

17. The assessee has also argued that this company has significant intangibles and brand and hence not functionally comparable. The DRP noted that the expenditure incurred towards brand was just Rs. 19 crore which is meagre considering its operating revenue of Rs. 3050 crores. Further, the assessee could not point to any information from the annual report to indicate brand has contributed to the revenue growth or profitability. Therefore, the presence of brand, as such, has not affected comparability. Further, there is no information in the annual report to indicate that the company has undertaken any major R&D initiatives & own intangibles. Therefore, the presence of intangible in the form of goodwill, which is also insignificant, as the value is only Rs. 19 crore compared to the revenue from operations of Rs. 3050 crores do not have any impact on the profits of the company. Hence, these pleas were rejected by the DRP. The assessee's contention that this comparable has incurred 18. significant selling and marketing expense was also not accepted by the DRP, since from the perusal of the annual report, the DRP noted that the expenses on this count is only 4.56% of the total expenditure and which is not at all significant to affect the profitability of the comparable. Thus, in view of the discussions held above, all the grounds 19. raised by the assessee were rejected and the action of the AO/TPO was upheld by the DRP.

Page 33 of 59 IT(TP)A No. 342/Bang/2022 Accordingly we direct this comparable to be excluded from finalist."

Page 34 of 59 IT(TP)A No. 342/Bang/2022 BPO, the objection was that the said company renders vide array of services and has high brand value and turnover is also very high. With reference to TCS E-serve Ltd., there was exceptional event as the company was taken over by Tata Consultancy Services in the year 2008-09 and heavy turnover is due to its takeover. Further, it was submitted that the company was functionally different as it has three different services and segmental information was not arrived. As far as E-clerx Services Ltd., it was submitted that this company caters to high end KPO services and cannot be compared to routine BPO services provided by assessee. The DRP vide para 3.10 has accepted the assessee's objections and accordingly, directed the TPO to exclude the above three companies. There are other directions of the DRP on TP adjustments on which neither party has raised grounds, except the Revenue on the above exclusion of three companies. Referring to the order of the TPO, it was the 7. contention of Ld.DR that DRP was not correct in excluding them on the basis of the turnover, whereas Ld. Counsel submitted that DRP has followed the decisions of the Co- ordinate Benches in excluding the above three comparables. We have considered the rival submissions and 8. perused the order of the DRP and Co-ordinate Benches. As far as M/s. TCS E-Serve Ltd., is concerned, the Co- ordinate Bench of ITAT in the case of M/s Hyundai Motors India Engineering P. ltd in (AY.2010-11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under: ITA No 2233 of 2018 ADP Private Ltd Hyderabad "TCS e-SERVE LIMITED 11.2.1. As regards TCS e-Serve Limited is concerned, we find that it possesses brand value as is evident from the Schedule-N (Operation and Other expenses) to the P & L A/c of the annual report for the financial year 2009-10 of Rs. 46,065 thousands and also that it possesses intangibles in the form of software licenses which have not been taken note of by the authorities below while adopting its margin. It is also the case of the assessee that this company has a turnover of Rs. 1405.10 crores which is 25 times of the turnover of the assessee and hence, is not comparable to the assessee. The Ld. Counsel for the assessee had also placed reliance upon the TPO's order in the case of M/s. IGS Imaging Services India Ltd., to hold that there are exceptional circumstances during the relevant financial year due to which this company is not comparable to the assessee. The Ld. Counsel for the assessee also submitted that the segmental details of this company are not available and hence, has to be excluded on this count also. 11.2.2 We find that the assessee's contentions about the presence of 'brand value' and owning of 'intangibles' is Page 35 of 59 IT(TP)A No. 342/Bang/2022 supported by the evidence on record. However, as regards the extraordinary event or exceptional circumstance there is no material placed before us by the Ld. Counsel for the assessee. Therefore, merely because the TPO in another case has held that there is an extraordinary event for which this company has to be excluded from the list of comparables, it cannot be excluded. Such claim has to be supported by evidence on record. As regards the functional dissimilarity and huge turnover and brand value is concerned, we find that this Tribunal in assessee's own case for A.Y.2009-10 while considering the comparability of the assessee with Infosys BPO Ltd., has taken note of the possession of the brand value and intangibles which influenced the financial results of this company. The Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies (P.) Ltd., [2013] 219 Taxman 26 (Del.), held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee therein. In the case before the Hon'ble High Court (supra), the turnover of the assessee was about Rs. 15.79 crores as against the turnover of Rs. 1016 crores of the Infosys. Considering these facts, the Hon'ble High Court had directed for exclusion of Infosys BPO because of its brand value and also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS e- Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs. 50 crores as against the turnover of TCS EServe Limited of Rs. 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables. Accordingly, assessee's grounds of appeal No. 6 is partly allowed. 8.1 Respectfully following the above decision of the Coordinate Bench, we confirm the order of DRP excluding the above company from the list of comparables.' We observe from the financial statements of this company, that this company is functionally dissimilar and use robotics automation and diversified activities. Therefore, following the decision of the coordinate bench, we direct the AO/TPO to exclude this company as comparable for determining ALP. 13.7 In view of the above order of the coordinate bench of Hyderabad, we direct the AO/TPO to exclude this company viz.

Page 36 of 59 IT(TP)A No. 342/Bang/2022 Infosys BPO Ltd. from the list of comparables from the final list of ITeS segment. ……………………………………………………………………………………… ……………………………………………………………………………………… ……………………………………………………………………………………… 11 In view of the above order of the Tribunal, which is a group company of the assessee, and having same profile of the assessee, we direct the TPO to exclude (i) Infosys BPO Limited, (ii) SPI Technologies India Private Limited, and (iii) Eclerx Services Limited from the list of comparables and recompute the ALP of the international transaction.” 12.1.21 In view of the above order of the Tribunal in assessee’s own case and having same profile of the assessee, we direct the AO/TPO to exclude Infosys BPO Ltd. from the list of comparables.” 11.1 In view of the above, we direct the AO/TPO to exclude this company Infosys BPM Services Pvt. Ltd. from the list of comparables. (III) Manipal Digital Systems Pvt. Ltd.

12. The ld. A.R. submitted that Manipal Digital Systems Private Limited should be rejected as a comparable company as it is functionally dissimilar and ought to be rejected. Further, the Company did not disclose segmental details with respect to its back office support services activity and also incurred advertisement/ promotional expenditure.  Functionally not comparable  No segmental details are available  Advertising and sales promotion expenses 12.1 The ld. D.R. submitted that the ld. DRP in his report observed that it is crystal clear from the annual report that the principal business activity of the company is given as IT enabled services which contributes 100% turnover of the company. On perusal of the breakup of the revenue given at page 41 of the annual report, the revenue earned from IT enabled services is Rs. 23.63 crores out of total revenue of 24.34 crores which comes to around 97.08%. The other activities like pre-media work, e-distribution contributes around Rs.0.70 crores which is a minor revenue. The assessee, based on the website information, argued that the company is into diversified activities that can be classified as KPO services as per the definition of safe harbour rules. At the outset, the ld. DRP observed that the information put in website cannot be given complete credence, as they are mere forward-looking information and statements with the motive of advertisement and other promotional gains. The functional aspect has to be determined by the information in the annual report which is based on audited financial statements and management reports, for qualitative analysis of comparability. The fact that the company is into ITES segment is corroborated by the corporate information given at page 45 of the annual report where it is lucidly stated that "the main business of the company is to provide information technology enabled services that means pre-press activities mainly to overseas as well as domestic customers".

Page 37 of 59 IT(TP)A No. 342/Bang/2022 Therefore, the ld. DRP observed that the pleas raised based on information said to be available in the website are liable to be rejected is in limine in view of the information given in the annual report on the functional aspect. 12.2 Further, the ld. DRP observed that this company operates under a single primary segment. The profit margins of various comparables will be averaged and a variation of 3% is also permitted. These aspects take care of some differences which are bound to be there between various comparables. In view of the above, he observed that ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM, functional similarity is more relevant than product similarity. It is a fact that this company falls in the category of ITeS. Hence, the objection on the functional dissimilarity of the company was rejected by the ld. DRP. 12.3 The ld. DRP further observed that that as regards lack of segmental information, the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. As stated above while discussing the functional profile the company derives its total revenue from the ITES activities only. This is further supported by the clarificatory note No. 27 at page 52 of the annual report that "the company was operating under one reportable geographical segment and one business segment. Therefore, the ld. DRP observed that disclosure as prescribed under AS 17- segment reporting is not applicable and hence, the objection on lack of segmental information is not valid and not acceptable. 12.4 The ld. DRP further observed that the assessee also contended that this comparable has incurred significant selling, marketing expense. From the perusal of the annual report, he observed that the expenses on this count is only 14.95% of the total sales and which is not at all significant to affect the profitability of the comparable. Accordingly, this plea was rejected and in view of the above, the pleas of assessee were rejected and selection of this company was upheld by the ld. DRP.

Page 38 of 59 IT(TP)A No. 342/Bang/2022 expenses at 6.50%, 7.19% & 8.78% of total expenditure in FY 2016-17, FY 2015-16 & FY 2014-15 respectively. 12.1.9 Further, the Tribunal in the case of Iron Mountain Services Ltd. in IT(TP)A No.307/Bang/2022 dated 20.9.2022 has held as under:- 16. “The next company the assessee seeks to exclude is Manipal Digital Systems Pvt. Ltd. In this regard, it was submitted that this company is engaged in provision of multiple high-end services including KPO activity like Design Services, Animation. It was submitted that no segmental details were available in the financial statements on the variety of services provided by this company like Design Services, Animation. Reliance was placed on the decision of the ITAT, Pune Bench in the case of Credence Resource Management Pvt. Ltd., (supra) wherein this company was excluded by the Pune Bench with the following observations: “8. The assessee submits that the Manipal Digital Systems Private Limited is functionally different from the assessee which is involved in provision of ITes services. As per the annual report of the company, the activity undertaken by the company is in the nature of pre-press activities which is not comparable to the assessee. That further in the website of the company, it is engaged in the diversified set of activities which involves graphic solutions, packaging brand management, digital publishing and digital content solutions. Therefore, the assessee submits that this company should be rejected from the final set of comparables companies. The TPO was of the opinion that in this company i.e. Manipal 9. Digital Systems Private Limited, 90% of the revenue is earned from ITes which is similar to that of the assessee company. The TPO further observed that most of the information provided by the assessee was from website and it cannot be said reliable source of information as any company while projecting itself in public domain tries to shows its diverse functioning and range of products so as to create a brand image of itself. With these observations, the contention of the assessee was rejected and the company was taken as comparable company. That before the Ld. DRP, objections have been raised by the 10. assessee which are at running Page No.34 of the appeal memo and therein, apart from reiterating the submissions made before the TPO, the assessee has stated that as per the online advertising laws and guidelines provided by the Advertising Standard Council of India, advertisements are based on principle of truthfulness and honesty of representation and there cannot be any misleading advertisement. That further, since the audited financial statements do not provide detailed description of operations/products in which the company deals, the website can be referred to for the analysis of functions performed by the company. The Ld. DRP vide Para (c) of Page No.67 to 70 of its order and as per reasoning therein, had upheld the findings of the TPO and Page 39 of 59 IT(TP)A No. 342/Bang/2022 included Manipal Digital Systems Private Limited in the final set of comparables companies. That again the prime observation of the Ld. DRP in this regard was that more than 90% of the total revenue of the operation of the company comes from ITes.

11. At the time of hearing, the Ld. Counsel for the assessee took us through the annual report of the company at Volume –II, Page 1279 onwards, Page 1302 having notes of accounts. The Ld. Counsel vehemently submitted that on perusal of the annual report, notes of accounts, nothing can be stated whether at all this company i.e. Manipal Digital Systems Private Limited is engaged in the business of call center or not. The realm of ITes involves various activities and on general principle the Revenue cannot say that since majority of the earning of the said company comes from ITes, it is comparable company with that of the assessee company.

Page 40 of 59 IT(TP)A No. 342/Bang/2022

13. The Ld. Counsel for the assessee further submitted therefore, it is clear that merely because two companies are doing ITes services, on general categorization comparability is not permitted and one has to look into the specific services rendered in the spectrum of ITes and for this reason, the said company i.e. Manipal Digital Systems Private Limited is not a Page 42 of 59 IT(TP)A No. 342/Bang/2022 comparable company with that of the assessee company since absolutely functionally different. The Ld. Counsel also submitted that the TPO should have specifically stated why he has selected this company as comparable with that of the assessee company since the onus is on him to give reason for such inclusion. The logic was shown from the decision of the Pune Bench of the Tribunal in the case of M/s. Tasty Bite Eatables Limited Vs. ACIT, for the assessment year 2014-15 dated 03.06.2021 wherein it was held that since the comparable chosen by the assessee, the onus is upon it to prove the functional comparability of this company. Extending the same logic, the Ld. Counsel submitted that it was also for the TPO to explain the reasons for inclusion of this company i.e. Manipal Digital Systems Private Limited since it was chosen as comparable by him.

(IV) CES Ltd. (seg): 14. The ld. A.R. submitted that CES Limited ("CES") is functionally different and therefore ought to be rejected. Functionally Different - engaged in KPO services 15. The ld. D.R. submitted that the ld. DRP in his report observed that the principal business activity of the company is IT enabled services-BPO/KPO. As per the details of business segment given at page 112 of the annual report, the revenue deriver, from IT enabled services out of the total revenue of 67.1 crores is 56.8 crores which comes to 84.64% of the total revenue. This clearly shows that the companies operations predominantly relate to IT enabled services, though it has minor IT services segment (10.29 crores - 15.33%). The assessee's argument that the comparable is into different activities is based on the website information. The ld. DRP observed that the assessee has raised pleas against functional comparability of the company, with reference to certain information said to be available in the company's website. At the outset, he observed that the information put in website cannot be given complete credence, as they are mere forward looking information and statements with the motive of advertisement and other promotional gains. Further, the information in website are dynamic and cannot be related to a particular period. There is no way to verify whether the said information has any relevance for the year under scrutiny or it totally related to subsequent current year developments. There is no way to verify the correctness of this information and the relevant period to which they may pertain to. Therefore, the information in the annual report which is based on audited financial statements and management reports is more reliable and authentic, for Page 44 of 59 IT(TP)A No. 342/Bang/2022 qualitative analysis of comparability. Therefore, the pleas raised based on information said to be available in the website are liable to be rejected is in limine. In view of the above, factual information, the contention of the assessee that the comparable company is functionally different is not correct. Therefore, the selection of the comparable by the TPO on the functional aspect was upheld by the ld. DRP.

17. The ld. A.R. submitted that SPI Technologies India Pvt. Ltd. is functionally dissimilar and ought to be rejected. He further submitted that the company had presence of extraordinary events, presence of intangibles and therefore ought to be rejected.

Page 45 of 59 IT(TP)A No. 342/Bang/2022 Functionally dissimilar - KPO services No segmental details are available Existence of extraordinary event Presence of intangibles 17.1 The ld. D.R. submitted that the ld. DRP in his directions observed that the assessee has relied on the website extract of this company for functional differences. The discussion on the comparability should be based on the Annual Report of the company for the relevant financial year. Having said that, the functionality of the company is analysed with reference to the annual report for F.Y. 2016-17. In page 1 and 2 of the annual report-that "Data base services including data processing & tabulation services, on-line information and data retrieval services, Electronic Data Interchange (EDI) service, web search portal content services, Code and protocol conversion services etc". All these activities are in the nature of ITES. On page 100 of the annual report while giving the additional information it is mentioned that the total revenue of Rs.391.54 crores is derived from information technology services. In the same page while giving the description of accounting policy for recognition of revenue it is stated that "revenue from data processing and related services is recognised based on the proportionate completion method with profit margins". Further, the company is in single segment of ITES as per segmental reporting reported in the Annual Report at page no.

Page 46 of 59 IT(TP)A No. 342/Bang/2022 the ld DRP observed that they have to examine whether difference in the skill/qualification of the employees or their payment structure is going to affect the comparability in any significant manner. TNMM method is tolerant to minor differences and, therefore, even if there are some differences unless they materially affect the margin, the comparables could not be excluded: This is clearly provided in the Rule 10 B (3) as per which an uncontrolled transaction has to be taken as comparable to the international transaction if none of the differences between the transactions compared or the enterprises entering into such transactions are likely to materially affect the price charged, cost incurred or profit earned and even if there are material differences, the uncontrolled transaction can still be considered as comparable if reasonably accurate adjustments could be made by eliminating the material affects of such differences. 17.2 In this case as the ld. DRP pointed out earlier that difference in various segments i.e. low end to high end in ITES services is mainly on account of differences in the skill/qualification and pay structure of employees and, therefore, the main point to be considered is whether such differences between employees is going to materially affect the margin of the comparables. On the basis of billing rates / skills no conclusion could be drawn that margins in different segments of ITES services is also different. This is because if the billing rate is high in the high end services, the cost of the employees who are highly qualified/skilled also goes up steeply and, therefore, the margins are not much affected. In fact, no evidence has been produced before us to show that margins in the highend segments of ITES services is high compared to low end services. Therefore, the ld. DRP was unable to accept the argument advanced by learned AR that the comparables belonging to high end segments such as KPO etc. should be excluded from the comparability list on this ground alone. In fact, KPO is a term given to a branch of BPO in which apart from processing data, knowledge is also applied. In view of the above, ITeS services cannot be further classified as BPO and KPO services for the purpose of comparability analysis. Under the TNMM functional similarity is more relevant than product similarity. Accordingly, the ld. DRP reject this plea of the assessee. 17.3 In view of the above factual information available in the annual report regarding the ITES activities performed by the company the contentions of the assessee that it is not clear from annual report extracts as to what services does the company engage in is totally baseless and factually incorrect. Accordingly, the company is functionally comparable. 17.4 The ld. DRP further observed that as regards lack of segmental information, the comparable company derives the whole revenue from sale of services and hence, there is no need of segmental reporting as per AS 17. As stated above while discussing the functional profile the company derives its total revenue from the ITES activities only. This is further supported by clarificatory note No. 2.14 at page 75 of the annual report that Segment

Page 47 of 59 IT(TP)A No. 342/Bang/2022 reporting. The Company's business comprise only of providing data processing and related services. Accordingly, there is no other reportable primary business segment as per Accounting Standard 17(Segment Reporting). Further, the Company operates only out of its premises in India. Hence, there are no reportable secondary segments. Hence the contention of the assessee that description of the services is not provided is factually incorrect. The company since operates in one single segment there is no need of reporting segmental information as per AS 17. 17.5 Hence, the objection on lack of segmental information is not valid and not acceptable by the ld. DRP. 17.6 The ld. DRP further observed that the amalgamation is of a wholly owned subsidiary. At page no 120 of the Annual Report F.Y. 2015-16 that "Laser Words Private Limited provides comprehensive pre-press data processing services like typesetting, composition and copyediting to educational and professional publication houses across the globe." Therefore, the amalgamated company is also in the similar line of business and the same will not have any demonstrable effect on the financials of the company. The assessee has simply pointed to increase in revenue but has failed to bring on record any evidence to suggest that the merger has impacted the profit margin of the company. This is further evidenced in the current year information given in the annual report at page 69 that the said amalgamation happened in previous years and there is no indication of reporting of any impact on the financials due to the amalgamation. Further, as per page 23 of the annual report there is no amounts involved on the structure of the share capital as a result of the amalgamation. 17.7 The ld. DRP further observed that the assessee has also argued that this company has significant intangibles and cannot be compared to the assessee which is a routine ITES service provider which does not holding non-routine intangibles and is not involved in development of intangibles. The company's annual report on page 20 gives the details of intangible assets amounting to Rs.5.50 crores and intangible assets under development or work in progress amounting to Rs.2.11 crores. The total of intangible assets is around Rs.7.62 crores as against total revenue of Rs.391.54 crores which comes to around 1.94% of the total revenue. This is a very insignificant compared to the turnover of the company and will not influence the profit margin. Further, the intangibles are internally developed intangible which have not been seem to have any potential deriving any substantial benefit. The company, as per information does not own any significant IPRs. Further, the ld. DRP observed that the assessee has failed to demonstrate its significant positive impact on the financials of the company. Further the ALP margin is determined with reference to the average profit margin of a comparable for three years and also taking into account the defined median value of the PLIs of the comparable. These will even out such differences. It will not be proper to reject a comparable only on account of intangibles which otherwise is functionally comparable.

Page 48 of 59 IT(TP)A No. 342/Bang/2022 17.8 Therefore, all these objections were rejected by the ld. DRP and this company was upheld to be a comparable.

5.5 Inteq BPO Services Pvt. Ltd.: The Ld.AR has submitted that this comparable has been excluded by Coordinate Bench of this Tribunal in case of Mindteck (India) Ltd. vs. DCIT in IT(TP)A No. 211/Bang/2022 for A.Y. 2017- 18 vide order dated 30.11.2022. He submitted that the assessee in Mindteck (India) Ltd. vs. DCIT (supra) has been considered to be Page 49 of 59 IT(TP)A No. 342/Bang/2022 a captive service provider. The Ld.AR submitted that the website information of this comparable reveals that it is into medical transcription however there is no segmental details available in respect of the same. He placed reliance on the annual report of this company placed in the paper book at page 377 of the paper book wherein this company has been identified to be carrying out a business process outsourcing that includes computer programming, consultancy and related services.

5.5.1 The Ld.AR submitted that based on the above, this comparable has been excluded by this Tribunal in case of Mindteck (India) Ltd. vs. DCIT (supra). He thus prayed for exclusion of this comparable from the final list as it is not functionally similar with that of assessee.

5.5.2 The Ld.DR on the contrary relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.

5.5.3 We note that this company has been excluded in Mindteck (India) Ltd. vs. DCIT (supra) by Coordinate Bench by observing as under: “(f) Inteq BPO Services Pvt. Ltd. 27. The Ld. A.R. for the assessee submitted that this company is engaged in providing services in the nature of Revenue Cycle Management, Claims processing services and document & data processing. The information available in the website of this company in support of the Page 50 of 59 IT(TP)A No. 342/Bang/2022 same was submitted before the TPO (He referred Page 572 of Paperbook). 27.1 He further submitted that this company earns income entirely from Business Process Management (BPM) related services and relevant extracts from its annual report in support of the same are as follows. Page 1493 of Annual Report Compilation

Page 1510 of Annual Report Compilation Page 1517 of Annual Report Compilation Page 1521 of Annual Report Compilation

27.2 He submitted that the ITAT in Vee Technologies (P.) Ltd. v PCIT [(2022) 139 taxmann.com 229 (Bang-Trib) – Page 1751-1752 of Case law compilation], following the decision of its co-ordinate bench in EMC Software and Services (P.) Ltd v JCIT (2020) 115 taxmann.com 293, held that a company involved in business process management services cannot be considered comparable to a company providing ITeS such as the assessee. 27.3 In view of the above, the assessee requested for exclusion of Inteq BPO from the final set of comparable companies. 27.4 The Ld. D.R. submitted that the ld DRP in his reported observed that the services offered by Inteq BPO are in Revenue Cycle Management, Claims Processing services and Document & Data Processing. The principal business activity

Page 51 of 59 IT(TP)A No. 342/Bang/2022 of the company at page 5 of the annual report is business process outsourcing (BPO). However, the assessee stated that business activities of the comparable company are more in the nature of business process management in the form of revenue cycle management, claims processing. It cannot be compared to Assessee Company which is rendering IT enabled services. In this regard, the contention and understanding of the assessee on the functional aspect of comparable company vis-a-vis IT enabled services is not correct. Information Technology Enabled Service (ITES) is defined as outsourcing of processes that can be empowered with information technology and covers diverse areas like finance,. HR, administration, health care, telecommunication, manufacturing etc. Armed with technology and manpower, these services are provided from e-enabled locations. This radically reduces costs and improves service standards. Some of the services offered include Medical Transcription, Document Processing, Data Entry and Processing, Data Warehousing, IT Help Desk Services, Application Development, Enterprise Resource Planning and Telecommunication Services. ITeS is a type of Outsource services which involves IT in various fields like Insurance, Finance & Banking, and so forth. These soft skills are mainly utilized in KPO (Knowledge Process Outsourcing) and BFO (Business Process Outsourcing) and LPO (Legal Process Outsourcing), rear office job and phone centres. Therefore, the functional profile of the comparable company is very much in the domain of ITES only. Therefore, the contention of the assessee that the functional profile of the company is dissimilar is that of company is not acceptable to the ld DRP. 27.5 We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that this comparable came for consideration in the case of Vee Technologies Pvt. Ltd. cited (supra), wherein held that this company is involved in business process management services and cannot be considered as a comparable to a company providing ITeS such as the assessee. Being so, we direct the AO/TPO to exclude Inteq BPO Services Pvt. Ltd. from the list of comparables. Directed accordingly.”

5.5.4 Nothing contrary to the above has been brought on record by the Ld.DR. We therefore do not find any reason to interfere with the above observations. Respectfully following the view

Page 52 of 59 IT(TP)A No. 342/Bang/2022 taken in Mindteck (India) Ltd. vs. DCIT (supra) by Coordinate Bench, we direct exclusion of this comparable from the final list. Accordingly, ground nos. 2.1 and additional ground raised by the assessee stands partly allowed.

6.1.1 The Ld.AR submitted that a comparable cannot be excluded unless there is dissimilarity based on the FAR analysis. He submitted that the authorities below has not considered the FAR analysis of assessee with that of this comparable.

6.1.2 On the contrary, the Ld.DR relied on the orders passed by authorities below. He also submitted that, in the case of Inteq BPO Services Pvt. Ltd., the assessee sought for exclusion because it did not have Page 53 of 59 IT(TP)A No. 342/Bang/2022 segmental details in respect of medical transcription though it was carrying various other services akin to ITeS. He compared the kind of services rendered by Inteq BPO Services Pvt. Ltd. with that of R Systems International Ltd. and submitted that there is not much difference in these functions carried out by these two comparables wherein the assessee has sought exclusion of one and is seeking inclusion of the other. The Ld.DR prayed that such cherry picking of the comparables should not be entertained. We have perused the submissions advanced by both sides in the light of records placed before us.

6.1.3 Admittedly, we agree with the argument advanced by the Ld.DR. However, the reason for it have excluded by the authorities below are not as per the principles of transfer pricing procedure. In the interest of justice, we remit this comparable to the Ld.AO/TPO to consider the FAR of assessee with that of this comparable and to consider the inclusion in accordance with law. Needless to say that proper opportunity of being heard must be granted to assessee.

6.2 Interglobe Technologies Pvt. Ltd.: The Ld.AR submitted that this comparable was rejected by the Ld.TPO as it fails employee cost filter. On an objection being raised before the DRP, it was held that this company is not reflecting in the search matrix of the TPO. The Ld.AR referred to the annual report placed at page 649 of the paper book and Page 54 of 59 IT(TP)A No. 342/Bang/2022 submitted that this company has an employee cost ratio of less than 25% and the objection of the Ld.TPO is therefore without any basis. He prayed for this comparable to be remanded for necessary verification in respect of the same. 6.2.1 On the contrary, the Ld.DR though objected however could not controvert the submissions of the assessee.

6.2.2 In the interest of justice, we remand this comparable back to the Ld.AO/TPO to consider its inclusion in accordance with law. Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly, ground nos. 2.2 and 2.3 raised by assessee stands allowed for statistical purposes.

7. Ground no. 4 is general in nature and therefore do not require any adjudication.

8. Ground no. 5 is raised by assessee for not granting working capital adjustment. 8.1 After hearing the contentions of both the sides, we are of the opinion that this issue is no longer resintegra as this issue is covered by the decision of Coordinate Bench of this Tribunal in case of Huawei Technologies India (P.) Ltd. v. Jt. CIT reported in (2019) 101 taxmann.com 313 wherein this Tribunal has held as under: “17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO’s Page 55 of 59 IT(TP)A No. 342/Bang/2022 working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the assessee and a copy of the same is at page 173 & 192 of the assessee’s paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 10B(1) (e)(iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows:- “(3) an uncontrolled transaction shall be comparable to an international transaction if – (i) None of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) Reasonably accurate adjustments can be made to eliminate the material effects of such differences.”

18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore, in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the assessee should be allowed. We hold and direct accordingly.

Page 56 of 59 IT(TP)A No. 342/Bang/2022 8.2 In view of the above order of the Tribunal, we inclined to remit the issue to the file of AO/TPO to determine the correct working capital adjustment. Accordingly, ground no. 5 raised by assessee stands allowed for statistical purposes.

9. Ground nos. 6-9 are in respect of the disallowance made u/s. 14A of the Act. The Ld.AR submitted that disallowance of 1% of the average value of the investment was disallowed by the Ld.AO. The Ld.AR submitted that assessee had made investment in its associated companies by purchasing compulsory convertible preference shares and that, there was no income earned from such investments. He placed reliance on the decision of Hon’ble Karnataka High Court in case of Biocon Ltd. vs. DCIT reported in 431 ITR 326, wherein it was held that, without any exempt income accrued to the assessee during a year no disallowance can be made u/s. 14A of the Act. He placed reliance on the following decisions in support of the contentions.  Schneider Electric IT Business India (P) Ltd. vs DCIT: [2022] 143 taxmann.com 66 (Bang - Tribunal)  CIT vs. Chettinad Logistics Pvt. Ltd., [2017] 248 Taxman 55 (Madras High Court) confirmed by the Hon'ble Supreme Court in [2018] 257 Taxman 2 (SC)  PCIT vs Era Infrastructure (India) Ltd. [2022] 448 ITR 674 (Delhi)  UB Infrastructure Projects Limited vs. DCIT in dated 22.12.2017 [Bang. Trib.]  DCIT vs Goldman Sachs Services Pvt. Ltd.: IT(TP)A No. 63/Bang/2014  Anriya Project Management Services (P) Ltd vs. DCIT: 1799/Bang/2013  CIT vs Corrtech Energy (P.) Ltd.: [2015] 372 ITR 97 (Guj)

Page 57 of 59 IT(TP)A No. 342/Bang/2022  CIT vs Shivam Motors Pvt. Ltd: [2014] 272 CTR 277 (All)  Siva Industries & Holdings Ltd vs. ACIT: [2012] 145 TTJ 530 (Chennai)

9.1 The Ld.AR further submitted that, the observations of the DRP at page 47 of the directions are not pertaining to the facts of the assessee. He submitted that the DRP has considered balance sheet of some other assessee wherein it has been noted that both non-current investment and current investment have been made as per notes 12 and 16. The DRP also refers to note 23 wherein a dividend income has been disclosed derived from such non- current and current investments.

9.2 The Ld.AR submitted that the above factual observation is wrong and does not pertain to the financials of the assessee. He referred to the annual report of the assessee at page 19 of the supplementary paperbook wherein note 12 and 16 are details of deferred tax assets and cash and bank balances. He also brought to our notice note 23 which are the details of the other expenses.

9.3 The Ld.DR in respect of the observations made by the DRP, could not controvert the arguments advanced by the Ld.AR. We have perused the annual reports vis-a-vis the observations of the DRP.

9.4 On perusal of the document, it is categorically clear that the following para has been extracted from facts of some other assessee and does not pertain to present assessee before us.

Page 58 of 59 IT(TP)A No. 342/Bang/2022 9.5 On examination of the balance sheet of the assessee for the F.Y. 2015-16 it is seen that the assessee has both noncurrent investments and current investments as per Notes 12 and 16 forming part of financial statements. As per Note 23 under the head other income the assessee has disclosed dividend income of Rs. 93,93,564 deriving from both current and noncurrent investments that include mutual funds and shares under current investments ant investments in equity shares of subsidiaries, joint ventures and associated companies. The assessee has nut provided any details with regard to dividend income from shares as well as from mutual funds.

9.6 The above observations are therefore being expunched holding it to be not pertaining to the present assessee before us.

9.7 On merits of the case, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. It is noted that admittedly there is no exempt income earned by assessee during the year under consideration. Hon’ble Delhi High Court in case of Cheminvest Ltd. vs. CIT reported in (2015) 61 taxmann.com 118 has held that in such circumstances, no disallowance u/s. 14A could be made. The disallowance therefore cannot be made in the hands of the assessee based on the above decision and the same is directed to be deleted.

Page 59 of 59 IT(TP)A No. 342/Bang/2022 Accordingly, ground nos. 6-9 raised by the assessee stands allowed.