M/S. VMWARE SOFTWARE INDIA PRIVATE LIMITED ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-2(2), BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against final assessment order passed by the Deputy Commissioner of Income-tax Central Circle-2(2), Bangalore u/s 143(3) r.w.s. 144C(13) of the Income-tax Act,1961 ['the Act' for short] dated 20.2.2023. 2. The brief facts of the case are as follows: (i) The Assessee, a company incorporated under ‘Software Technology Parks of India scheme, is a subsidiary of VMware International Unlimited Company, Ireland (erstwhile known as VMware International Limited - ‘VIL’) which in turn is an affiliate of VMware Inc., US.

(ii) During the previous year relevant to the assessment year 2017-18, the relevant international transactions that took place between the Assessee and its AEs were the provision of SWD services

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 2 of 76 by the Assessee for a price of Rs.578,30,55,985/-; the provision of ITeS by the Assessee for a price of Rs. 784,95,77,795/-; and the provision of MSS by the Assessee for a price of Rs. 1,42,35,69,547/- . The Assessee realized a profit margin1 of 13%, 17% and 8% in respect of the SWD, ITES and MSS segments, respectively. (iii) Upon a reference being made by the Assessing Officer to the TPO, the TPO determined a TP adjustment in respect of each of the above three segments. This was done inter alia by recomputing the profit margin of each of the segments, by artificially adding to the operating cost base notional expenses towards employee stock option plan.

(iv) Initially, a draft assessment order dated 29.03.2022 came to be passed by the Assessing Officer, in which the TP adjustment proposed by the TPO was incorporated.

(v) On the corporate front, the Assessing Officer proposed various adjustments. Aggrieved, the Assessee filed its objections before the DRP which, vide its directions dated 30.12.2022, disposed of the objections by granting partial relief to the Assessee.

(vi) Since, there were certain mistakes apparent from the record in the directions passed by the DRP, the Assessee filed a rectification application, which is pending consideration.

(vii) Pursuant to the directions issued by the DRP, the TPO passed an order giving effect to the said directions on 26.01.2023, by reworking the TP adjustment (later rectified vide order dated 31.01.2023).

(viii) Thereafter, the Assessing Officer passed the impugned final assessment order dated 20.02.2023.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 3 of 76

(ix) Aggrieved by the final assessment order, the Assessee has preferred the above appeal to this Hon’ble Tribunal.

2.1 SUBMISSIONS ON TRANSFER PRICING ADJUSTMENT: DETAILS OF THE ASSESSEE’S INTERNATIONAL TRANSACTIONS Particulars Amount in Rs. Outcome of the TP Order2 Provision of SWD services 578,30,55,985 Adjustment of Rs. 195,67,19,882/- which was reworked to Rs. 187,59,39,046/-pursuant to DRP directions. Provision of ITeS 7,84,95,77,79 Adjustment of 5 Rs. 220,86,59,592/- which was reworked to Rs. 213, 24,06,929/- pursuant to DRP directions. Provision of MSS 142,35,69,547 Adjustment of Rs. 53,78,51,879/-. Purchase of fixed assets 18,04,80,973 Accepted to be at arm’s length Receipt of Services 50,84,498 Accepted to be at arm’s length Reimbursement of 68,20,01,695 Accepted to be at arm’s length expenses received Reimbursement received 40,51,42,880 Accepted to be at arm’s length towards ESSP Payment for services 24,83,58,287 Accepted to be at arm’s length (deemed International Transaction) Issue of shares 11,650 Accepted to be at arm’s length Reimbursement of 6,92,865 Accepted to be at arm’s length severance cost

2.2 SOFTWARE DEVELOPMENT SEGMENT A. ANALYSIS OF THE TP STUDY OF THE ASSESSEE AND THE TPO:

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 4 of 76 A.1. Net mark-up on cost earned by the Assessee as computed by the Assessee: Operating Income Rs. 578,30,55,985/- Operating Cost Rs. 512,35,32,593/- Operating Profit (Op. Income – Op. Rs. 65,95,23,392/- Cost) Operating/Net mark-up (OP/TC) 13%

A.2. Net mark-up on cost as computed by the TPO: Operating Income Rs. 578,30,55,985/- Operating Cost* Rs. 607,37,47,051/- Operating loss (Op. Income – Op. Cost) (Rs. 29,06,91,066/-) Operating/Net mark-up (OP/TC) -4.79% *the TPO added notional cost related to share based compensation (‘SBC’) to the cost base.

A.3. Filters applied by Assessee in its TP study: Step Description 1. Data for the period between 01.04.2014 and 31.03.2017 – selected 2. Companies with sales > 0 and other operating income/total sales > 50% - selected 3. Companies with ratio of average net fixed assets to sales <= 200% - selected 4. Companies having sales >= Rs. 1 crore in the previous year- selected 5. Companies with average net worth >= 0 – selected 6. Companies which have more than 25% related party transactions of the sales- excluded. 7. Companies with ratio of R&D expenses to sales <=3% - included 8. Companies which are functionally similar- accepted.

A.4. Comparables selected by Assessee and the range of weighted average OP/TC of comparable companies:

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 5 of 76 Sl. Company Name Weighted No. Average in % 1. Maveric Systems Ltd. 0.95 2. Melstar Information Technologies Ltd. 1.21 3. Kireeti Soft Technologies Ltd. 1.44 4. Rheal Software Ltd. 2.66 5. Isummation Technologies Pvt. Ltd. 2.74 6. Sagarsoft (India) Ltd. 3.22 7. Evoke Technologies Pvt. Ltd. 3.68 8. Yudiz Solutions Pvt. Ltd. 4.08 9. E-zest Solutions Ltd. 8.48 10. Happiest Minds Technologies Pvt. Ltd. 11.82 11. CG-VAK Software & Exports Ltd. 11.97 12. R S Software (India) Ltd. 19.25 13. Exilant Technologies Pvt. Ltd. 20.21 14. Tata Elxsi Ltd. 25.16 15. R Systems International Ltd. 26.56 35th Percentile 3.22 Median 4.08 65th Percentile 11.82

A.5. Filters applied by the TPO: Step Description 1. Companies whose data is not available for FY 2016-17 - excluded. 2. Companies having different financial year ending (i.e., not March 31 2017) or data of the company does not fall within 12 month period i.e., 01-04-2016 to 31-03-2017 – excluded. 3. Companies whose income was less than Rs. 1 Crore – excluded. 4. Companies having negative net worth – excluded 5. Companies having persistent losses for any 2 out of 3 years - excluded 6. Companies whose software development service income is less than 75% of the total operating revenues – excluded. 7. Companies which have more than 25% related party transactions of the sales or 25% of the expenses – excluded. 8. Companies which have export service income less than 75% of the sales – excluded. 9. Companies with employee cost less than 25% of turnover – excluded. 10. Companies incurring R&D expenses- included * *The TPO proceeded to recharacterize the SWD services as being R&D in nature. Accordingly, the TPO applied an R&D expense filter to

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 6 of 76 select comparables incurring R&D expense without proposing any specific threshold.

A.6. Comparables selected by TPO and the mean of weighted average OP/TC of the companies: Sl. Name of the Company Weighted Average in % No.

A.7. Computation of arm’s length price by the TPO and the adjustment made: Taxpayers operating revenue Rs. 5,78,30,55,985/- Taxpayer operating cost Rs. 6,07,37,47,051/- Mean margin of comparable set 27.43% Arm’s length price Rs. 7,73,97,75,867/- Price received Rs. 5,78,30,55,985/- Shortfall being adjustment u/s 92CA Rs. 1,95,67,19,882/-

2.3 DIRECTIONS ISSUED BY THE DRP: The directions of the DRP in brief are as under: 2.3.1 The DRP accepted the contention of the Assessee as regards recharacterization of SWD services as contract R&D services and directed the TPO to remove the R&D filter. This resulted in inclusion of 27 comparables from the TPO’s set which were earlier rejected by the TPO due to application of the R&D filter.

2.3.2 However, the DRP rejected the contentions of the Assessee seeking exclusions of the companies. As regards the Assessee’s contentions seeking inclusion of comparable companies, the DRP directed the inclusion of (i) Rheal Software Ltd.; (ii) Maveric Systems

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 7 of 76 Limited; (iii) Sagarsoft(India) Limited; (iv) CG VAK Software & Exports; and (v) Exilant Technologies Pvt. Ltd.

2.4 FINAL ASSESSESMENT ORDER The Assessing Officer passed the final assessment order incorporating the TP adjustment of Rs. 1,87,59,39,046/-.

2.5 LIST OF COMPARABLES POST THE DRP’S DIRECTIONS: Upon giving effect to the above directions issued by the DRP, the final list of comparables as per the order dated 26.01.2022, giving effect to the DRP directions is as follows: Sl. No. Company Name Weighted Average in % 1. Rheal Software Ltd. -1.85 2. Kals Information Systems Ltd. 3.62 3. Sagarsoft (India) Ltd. 4.25 4. Maveric Systems Ltd. 6.02 5. Infomile Technologies Ltd. 10.43 6. Harbinger Systems Pvt. Ltd. 14.1 7. CG-VAK Software & Exports Ltd. 15.09 8. Tech Mahindra Ltd. 16.51 9. X S Cad India Pvt. Ltd. 19.78 10. Exilant Technologies Pvt. Ltd. 20.03 11. Larson and Tuobro Infotech Ltd. 21.14 12. Great Software Laboratory Pvt. Ltd. 21.24 13. Mindtree Ltd. 24.17 14. R Systems International Ltd. 24.4 15. Persistent Systems Ltd. 26.19 16. Tata Elxsi Ltd. 26.19 17. Aptus Software Labs Pvt. Ltd. 26.32 18. Cygnet Infotech Pvt. Ltd. 28.55 19. Infobeans Technologies Ltd. 28.92 20. Nihilent Ltd. 29.84 21. Cadsys (India) Ltd. 30.22 22. OFS Technologies Ltd. 30.8 23. Threesixty Logica Testing Services 36.64 24. Pagetraffic Web-Tech Pvt. Ltd. 38.31 25. Infosys Ltd. 39.50 26. Cybage Software Pvt. Ltd. 64.79 27. Consilient Technologies Pvt. Ltd. 65.14 28. Dun & Bradstreet Technologies & Data Services Pvt. 90.18 Ltd. 29. E-Infochips Pvt. Ltd. 92.03 35th Percentile 21.14 Median 26.19 65th Percentile 28.92

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 8 of 76 3. Ground Nos.1 to 3 of the assessee’s appeal are general in nature, which do not require any adjudication. Hence, dismissed as not pressed.

Treatment of notional costs related to share based compensation (SBC)

4.1. Facts of this issue are that the TPO increased the operating cost base of the Assessee by adding notional share-based compensation (‘SBC’) costs.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 9 of 76 4.2 At the outset, the ld. A.R. for the assessee submitted that no portion of the expenses pertaining to the share based compensation were incurred by the Assessee, and therefore the same cannot be added to the operating cost base of the Assessee. He submitted that the grant of SBC to the employees of the Assessee is in accordance with VMware Group’s global policies, and is extended to qualifying employees of its subsidiaries all over the world and including the Assessee. Hence, it cannot be construed that the SBC is issued at the discretion of the Assessee. It is submitted that the costs in this regard are entirely borne by the AE and no portion of the same is incurred/cross charged to the Assessee. Therefore, he submitted that in the absence of the Assessee “incurring” any expenses, the action of the TPO in adding the same to the operating cost base, in a notional manner, is wholly erroneous, and contrary to the provisions of the Act. He submitted that even as per the definition of “operating expenses” as per Rule 10-TA of the Safe Harbour rules, only expenses which are “incurred” are to be included in the operating cost base, meaning that expenses actually incurred alone can be considered as operating expenses and not notional expenses.

Reliance in this regard is placed by him on the following decisions:

● Radisys India Limited v. DCIT (Order dated 18.11.2022 passed in IT(TP)A No. 190/Bang/2022); ● Pfizer Ltd. v. ACIT [Order dated 08.03.2013 in ITA No. 3098/Mum/2006]; ● Li and Fung India Pvt. Ltd. v. CIT (reported in (2013) 40 taxmann.com 300 (Delhi)]; and ● Mitsubishi Corporation India Pvt. Ltd. v. DCIT [reported in (2014) 50 taxmann.com 379 (Delhi - Trib.)].

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 10 of 76 4.3 He further submitted that it is also pertinent to note that the Assessee has not claimed such expenses in the return of income, given their notional nature and hence, inclusion of such expenses in the cost base would tantamount to double taxation of the same income which is not permissible.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 11 of 76 required to be invoiced to the service recipient by the taxpayer. The cost of Stock Incentive Plan/Employee Stock Option Plan (ESOP) /restricted stock units (RSU) and/or similar plan granted by the AEs to the employees of the taxpayer, is the cost that is incurred as an incentive to the employee of the taxpayer, and instead of the taxpayer bearing the cost, it is borne by the AE as it issues its shares. But, the award of such stocks is to give incentive to the employee and retain them in employment as valuable employees and forms part of their salary, this cost is required to be treated as salary and thereby part of operating cost. In two cases, Supreme Court of Israel held that whatever an Israeli company is remunerated at cost plus mark up by foreign affiliate for services the cost base should include ESOPs issued by foreign affiliate to Israeli company. In the instant cases, the foreign affiliate was directly issuing ESOPs to the employees of the Israeli company. The Israeli company did not route the ESOPs cost through P&L account due to which these expenses did not appear in the cost base. It is seen from the note No. 44 of the audited financial for FY 2017-18, the taxpayer company has received the benefit of ESOP of Rs. 247.40 Crores from the parents company VIL Inc. and on the cost of ESOP, the VIL Inc shall pay the cost plus markup on such share based 'payment cost on the performance of the company. The TPO has considered this ESOP cost as operating in nature and calculated the operating cost of the taxpayer as above.

5.1 He further submitted that the ld DRP has agreed with the conclusions drawn by the TPO that these options are given to the employees to retain them and hence they were in the nature of salary and perks which should form part of the cost base. Hence, he submitted that these grounds may be dismissed.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 12 of 76 6. We have heard the rival submissions and perused the materials available on record. In our opinion, this issue is squarely covered by the order of the Tribunal in the case of Radisys India Ltd. Cited (supra), wherein held as under:

15.7 “From the above it is clear that, no cost is charged to the assessee, and that the employees of the assessee is informed regarding the taxability of the option exercised by the employee. On perusal of the financials, it is noticed that, nothing has been debited as ESOP expenses.

15.8 We note that, the Ld. TPO has mentioned regarding treatment of ESOP’s cost by an Israili company as under:

“In two cases, Supreme Court of Israel held that whatever an Israeli company is remunerated at cost plus mark up by foreign affiliate for services the cost base should include ESOPs issued by foreign affiliate to Israeli company. In the instant cases, the foreign affiliate was directly issuing ESOPs to the employees of the Israeli company. The Israeli company did not route the ESOPs cost through P&L account due to which these expenses did not appear in the cost base.”

15.9 We fail to understand the inference drawn by the Ld.AO/TPO by referring to the above example. The Ld.TPO has not drawn the complete facts of the case and has also not provided complete details of the decision by the Supreme Court of Iserael. The Ld.TPO has recorded that the Israeli company is remunerated at cost plus mark up by foreign affiliate for services. In the present facts, the re is no mark up paid by the AE to the assessee. Such abstract reference by the revenue authorities is least expected. 15.10 In our view the Ld.TPO failed to consider the basic fact that, purchase cost of the shares of foreign AE is charged from the employees of the assessee directly and the assessee deducts TDS on the 15% discount received by such employees, who have opted for the scheme. In our view, based on the option scheme and the “Employee Information Supplement India”, the 15% discount received by such employees of the assessee cannot be treated as operating in nature. Accordingly, this ground raised by the assessee stands allowed.”

6.1 Applying the above analogy, we are of the opinion that the cost incurred by Associate Enterprises and not charged the assessee in line with the inter company agreement and it is a mere book entry recognised

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 13 of 76 pursuant to additional disclosure requirement as per the Accounting Standard and there is no liability or obligation on the assessee to pay or reimburse such cost to the AE. Hence, such cost should not be included in the operating cost of the assessee for computing margins of the assessee. Since no cost incurred towards ESOP/RSU granted to its employees same to be excluded from the operating cost. Accordingly, the ground nos.4 to 7 are allowed.

“12. Without prejudice to ground no. 11, the Learned TPO erred in including the following companies in the final list of comparable companies even though such companies:

12.1 fail the ‘Related Party Transaction > 25%’ as adopted by the Learned TPO: i. Tech Mahindra Ltd. ii. Persistent Systems Ltd. 12.2 fail the ‘Employee Cost > 25% of sales filter’ as adopted by the Learned TPO: i. Aptus Software Labs Pvt. Ltd. ii. OFS Technologies Ltd. 12.3 are functionally dissimilar to the SWD services provided by the Appellant: i. Tech Mahindra Ltd.; ii. X S Cad India Pvt. Ltd.; iii. Great Software Laboratory Pvt. Ltd.; iv. Aptus Software Labs Pvt. Ltd.; v. Cygnet Infotech Pvt. Ltd.; vi. Infobeans Technologies Ltd.; vii. Nihilent Ltd.; viii. Cadsys (India) Ltd.; ix. OFS Technologies Ltd.; x. Threesixty Logica Testing Services Pvt. Ltd.; xi. Pagetraffic Web-Tech Pvt. Ltd.; xii. Cybage Software Pvt. Ltd.; xiii. Consilient Technologies Pvt. Ltd.;

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 14 of 76 xiv. Dun & Bradstreet Technologies & Data Services Pvt. Ltd.; xv. E-Infochips Pvt. Ltd.Larsen & Turbo Infotech Ltd.; xvi. Mindtree Ltd.; xvii. Persistent Systems Ltd.; xviii. Tata Elxsi Ltd.; and xix. Infosys Ltd. 13. The Hon’ble Panel / Learned TPO erred in excluding the following companies even though the same are functionally comparable to the SWD services provided by the Appellant: i. Melstar Information Technology Ltd., ii. Kireeti Soft Technologies Ltd.; iii. Isummation Technologies Pvt. Ltd.; iv. Yudiz Solutions Pvt. Ltd.; v. Evoke Technologies Pvt. Ltd.; vi. R S Software Ltd.; vii. E-Zest Solutions Ltd.; viii. R Systems International Ltd (Segmental); and ix. Happiest Mind Technologies Pvt. Ltd.

8.1 With regard to the above grounds, the ld. A.R. submitted that the TPO proceeded to recharacterize the SWD services as being R&D in nature. Accordingly, TPO applied R&D expenses filter to select comparables incurring R&D expenses without specifying any specific threshold. The assessee carried the issue to the ld. DRP. The ld. DRP accepted the contention of the assessee as recharacterization of SWD services as contract R&D services and directed the TPO to remote the R&D filter. This resulted in inclusion of 27 comparables from the TPO’s stay which were earlier rejected by the ld. TPO due to application of the R&D filter. Being so, there is violation of principles of natural justice while inclusion of additional comparables by ld. TPO without giving opportunity of commenting on this by assessee. Hence, in the interest of justice, we remit the entire issue in ground Nos.12 & 13 to the file of ld. TPO/AO for fresh consideration to grant an opportunity of hearing on this issue for inclusion of additional comparables by ld. TPO.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 15 of 76 14. Without prejudice to the other contentions of the Appellant, the Learned TPO erred in the operating mark-up on cost computation of the following comparable companies: i. Rheal Software Pvt. Ltd. ii. Kals Information Systems Ltd. iii. Infomile Technologies Ltd. iv. Harbinger systems Pvt. Ltd. v. CG-VAK Software & Exports Ltd. vi. X S Cad India Pvt. Ltd. vii. Exilant Technologies Pvt. Ltd. viii. Great Software Laboratory Pvt. Ltd. ix. Mindtree Ltd. x. R Systems International Ltd. – Seg xi. Tata Elxsi Ltd. xii. Aptus Software Labs Pvt. Ltd. xiii. Cygnet Infotech Pvt. Ltd. xiv. Infobeans Technologies Ltd. xv. Nihilent Ltd. xvi. Infosys Ltd. xvii. OFS Technologies Ltd. xviii. Pagetraffic Web-Tech Pvt. Ltd. xix. Cybage Software Pvt. Ltd. xx. Consilient Technologies Pvt. Ltd. xxi. Dun & Bradstreet Technologies & Data Services Pvt. Ltd. xxii. Infochips Pvt. Ltd.

9.1 We direct the ld. TPO/AO to take correct margin while passing consequential order. Directed accordingly.

ITES segment

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 16 of 76 such companies are functionally dissimilar to the ITES provided by the Appellant: i. Fuzen Software Pvt. Ltd.; ii. Tech Mahindra Business Services Ltd.; iii. Datamatics Business Solutions Ltd.; iv. Infosys BPM Services Pvt. Ltd.; v. Vitae International Accounting Services Pvt. Ltd.; vi. Manipal Digital Systems Pvt. Ltd.; vii. CES Ltd.; viii. SPI Technologies India Pvt. Ltd.; and ix. Inteq BPO Services Pvt. Ltd.; x. Eclerx Services Ltd.

10.1 These grounds are with regard to exclusion of following comparables:

i.Fuzen Software Pvt. Ltd.

10.2 This comparable is not pressed, hence dismissed.

ii.Tech Mahindra Business Services Ltd.

10.3 The ld. A.R. submitted that the company is functionally dissimilar to the Assessee and cannot be considered as a comparable. It is submitted that Tech Mahindra is a Business Process Outsourcing service provider delivering high end diversified support services across various industries in the nature of voice, chat, email, and social media-based call centre services. The company also held significant quantum of intangibles during the financial years 2014- 15 to 2016-17. Further, considering its expenses in foreign currency towards onsite operations, it is evident that Tech Mahindra BS has a different business model wherein the delivery of the services is undertaken from its Indian as well as overseas offices. He submitted that the Tech Mahindra BS has a huge brand name which commands a higher premium in the market and therefore cannot be compared to a captive service provider such as the Assessee. Thus, Tech Mahindra is liable to be excluded from the list of comparables. 10.4 The ld. D.R. submitted that in the annual report at page No.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 17 of 76 510 stated that the principal business activity of the company is information technology enabled services- voice-based call centre services. Further it is indicated that there is only a single segment. The assessee argued that the company is dissimilar to the functions of the assessee as the comparable company is in the business of providing voice-based call centre services based on website information. At the outset, we note 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. Therefore, as a principle, ld. DRP strictly gone by the information in the annual report which is based on audited financial statements and management reports, for 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. The argument of the assessee lacks credence as the annual report as indicated the nature of voice-based call centre services as IT enabled services only. Hence the company is into ITeS and functionally comparable to assessee company. In view of the above, the pleas of assessee were rejected by the ld. DRP and selection of this company was upheld. 11. We have heard the rival submissions and perused the materials available on record. In this case, the main contention of ld. A.R. is that this is not functionally comparable to the assessee’s case. It is engaged in the BPO service provider delivering high end diversification support services and there was presence of significant intangibles and have high grant value. We have carefully gone through the financials of M/s. Tech Mahindra Business Services Ltd. Both the assessees are engaged in providing Voice based call centre services. However, the contention of the assessee’s counsel is

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 18 of 76 that they are functionally different and Tech Mahindra Business Services Ltd. is having high grant value and significant intangibles. In our opinion, these facts required to be examined at the end of ld. TPO/AO by comparing the financials of both these companies. Accordingly, this issue is remitted to the file of ld. TPO/AO to examine these two issues specifically and decide afresh. iii.Datamatics Business Solutions Ltd.

Fails export filter of 75% 12. The ld. A.R. submitted that the company fails the export turnover filter and the computation of the same is as below: Particulars FY 2014-15 FY 2015-16 FY 2016-17 Domestic revenue 16,21,27,000 16,41,40,000 12,27,09,000 Export revenue 33,05,25,000 45,79,97,000 50,43,25,000 Other operating income 4,18,42,000 4,93,15,000 8,22,07,000 Total operating income 53,44,94,000 67,14,52,000 70,92,41,000 % of export to total 61.84% 68.21% 71.11% revenue

Functional comparability 12.1 He submitted that Datamatics is involved in diversified activities like provision for marketing services, analytics, strategic research, market intelligence, technology solutions and business process transformation and these services do not fall within the definition of ITeS. Significant advertisement, marketing and sales promotion cost(‘AMP’) Cost

12.2 He further submitted that Datamatics incurs significant AMP expenses which are not akin to the transactions of the Appellant as a captive service provider. The assessee does not undertake any

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 19 of 76 marketing or advertising activity as the assessee provides contract ITeS under which the AEs are contractually obliged to obtain services from the assessee and therefore the Appellant is guaranteed of regular workflow. Further, he submitted that the marketing and advertising activities carried out by companies akin to Datamatics result in creation of marketing intangibles and thereby a return on such investment made in creation of such intangible. Therefore, return of such companies would include an embedded return towards marketing activities or efforts and related investments and risks.

12.3 In this regard, he placed reliance on the decision of this Hon’ble Tribunal in the case Eurofins IT Solutions India (P.) Ltd. v. DCIT [reported in [2023] 147 taxmann.com 471 (Bangalore - Trib.)] for the assessment year 2017-18. Thus, he submitted that M/s. Datamatics is liable to be excluded from the list of comparables.

12.4 The ld. D.R. relied on the order of ld. DRP.

“6. The ld. A.R. submitted that this company fails export earnings filter in last two years. Moreover, it is functionally different and engaged in KPO services providing B2B intelligence, sales and marketing, business process transformation and technology outsourcing solutions to its clients. Further, the company is engaged in rendering wide array of high-end services such as business research and analytics, content moderation solutions, registrar and transfer agent and other services. The key products and services it deals include (i) Business research and analytics (ii) content moderation solutions (iii) registrar and transfer agents (iv) market intelligence, innovation and technology intelligence. No segmental information – Aforementioned services do not fall within the ambit of ITES/BPO and the annual report does not provide either the segmental details or the broad classification of the income.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 20 of 76 6.1 The CIT(A), NFAC observed 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. As regards, the export revenue as given in Note No. 18, the revenue is around Rs.50.43 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 NFAC.

6.2 In this case as the NFAC has 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 NFAC to show that margins in the high end segments of ITES services is high compared to low end services. Therefore, NFAC 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, NFAC concluded 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. Accordingly, the NFAC rejected this plea of the assessee. As regards lack of segmental information, the comparable company derives the whole revenue from sale of services and hence, NFAC decided that there is no need of segmental reporting as per AS 17. In view of the above, the pleas of assessee were rejected and selection of this company was upheld by the CIT(A), NFAC. 7. We have heard the rival submissions and perused the materials available on record. Similar issue was considered in the case of Morgan Stanley Advantage Services P. Ltd. in ITA No.6523/Mum/2014 dated 23.7.2020 for the AY 2008-09, wherein held as under:

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 21 of 76 made general comments on the selection systems adopted by the assessee. He proceeded to reject the same. He did not specify as to which of the comparables is being rejected for which specific reasons thereof. Thereafter, the transfer pricing officer mentioned his own criteria and proceeded to select comparables and accordingly made the transfer pricing adjustment. 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.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 22 of 76 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. 38. The Id. AR submitted as we recorded earlier that Coral Hubs Ltd. was outsourcing its significant part of its operation as evident from its low employee cost and have substantial different business model compared to assessee and prayed for exclusion. The ld. DR has supported the inclusion. The TPO while making benchmarking taking his view that this comparable company is in the business of IT enabled services to overseas markets and included in the list of comparable. The Id. CIT(A) confirmed the action of TPO holding that the TPO conducting benchmarking after calling information under section 133(6) and is benchmarking analysis are correct. We have noted that, though the Id. AR has relied upon a number of decisions of Tribunal/co-ordinate bench. We have noted that in a recent decision of Tribunal in Wills Processing Services (I) Pvt. Ltd. (supra) on comparability, the Tribunal held as under:

We though in light of our aforesaid observations had partly disagreed with certain grounds as had been averred by the Ld. A.R to facilitate exclusion of the aforesaid comparable, however as observed by us hereinabove that the aforesaid comparable viz. Coral Hub Limited (earlier known as Vishal Information Technology Limited) had a business model where services are outsourced, as ' against the business model of the assessee where services are rendered by employing own employees and using one's own infrastructure, on the basis of which we are of the considered view that it can safely be concluded that the said comparable was functionally different, and as such was liable to be excluded from the final list of comparables. That our aforesaid view stands fortified by the aforesaid order passed by the Tribunal while disposing of the appeal of the assesses own appeal for A.Y. 2005-06, as well as the judgment of the Hon'ble High Court of Delhi in the case of : Rampgreen Solutions (P.) Ltd. (supra). Thus as there has been no material shift in the facts involved in the case of the assessee for the year under consideration, as observed by us hereinabove, we are thus of the considered view that as the business model of the aforesaid comparable, viz. Coral Hub Ltd. (supra) is substantially different from that of the assessee, therefore the same cannot be accepted as a

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 23 of 76 comparable and hence is directed to be excluded from the list of comparables.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 24 of 76 Platform(BP), Business Transformation Services (BTS), Human resources Outsourcing (HRO), Technology Solution Optimization (TSO), while Vertical (Industry) solutions include FSI (Financial Services & Insurance), MFG (Manufacturing), ECS (Energy, Utilities, Communication and Services) and RCL (Retail, Consumer packaged goods, Logistics and Life Sciences). These services cannot be compared to the ITeS provided by the Appellant. The company focuses of delivering solutions to its clients which goes beyond rendering routine ITeS. From the above, it is evident that Infosys BPO is engaged in rendering business solutions and consultancy to its customers which is different from the Appellant’s functional profile.

Significant Brand Value 14.1 Also, he submitted that Infosys BPO enjoys huge brand value and has also made significant investments in creating intangibles and owns significant intangible assets. In view of its substantial brand value, the company enjoys an advantage in the market and has high bargaining power. As a result of the brand value, the company receives a premium in the market.

Outsourcing Costs 14.2 Further, he submitted that the company has incurred significant expenses towards subcontracting charges and onsite operations, which demonstrates that the business model followed by the company is different from that of the Appellant. It is, therefore, submitted that Infosys BPO is not comparable to the Appellant.

14.3 In this regard, he relied on the order dated 03.01.2018 of the Hon’ble High Court of Delhi in PCIT v. H & S Software Development and Knowledge Management Centre Pvt. Ltd. (ITA No.912/2017 at internal page 2 of the order) upholding its exclusion and on the decision of this Hon’ble Tribunal in the case of Global E-Business Operations (P.) Ltd v. DCIT [ reported in [2022] 145 taxmann.com

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 25 of 76 413 (Bangalore - Trib.)], for the assessment year 2016-17. Thus, he submitted that Infosys BPO is liable to be excluded from the list of comparables.

14.4 The ld. D.R. relied on the order of ld. DRP.

“i. Infosys BPO Ltd. 13.1The Ld. A.R. submitted that that Infosys BPO offers business process outsourcing solutions to its global clients by leveraging process, domain and people management expertise. The nomenclature in the profit and loss account indicates that the income is earned from ‘Revenue from business process management services’ which suggests that the company is engaged in consultancy and management services unlike the Appellant which is involved only in providing ITES as a captive service provider entity. 13.2 Further, Infosys BPO Limited has been excluded in the case of Swiss Re Global Business Solutions India (P.) Ltd. [2022] 137 taxmann.com 417 (Bangalore - Trib.) AY 2016-2017 (He referred Page 162-163 of the Case Law Compilation, Para 11 - 21). Below is the relevant extract from the order for ready reference: 11.The ld. AR submitted that Infosys BPM Ltd. should be rejected as a comparable because it is functionally not comparable, has diversified activities and lack of segmental data, different business model, brand profits, various revenue models, presence of intangibles, outsourcing costs, marketing expenses and turnover. It offers business outsourcing solutions to several clients and span across multiple industry segments. 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. 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. 13. 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,

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 26 of 76 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. 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. 15. The assessee pointed out that this company has reported an 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-contracting expenses are about 4.45% only. This objection was accordingly rejected. 16. Regarding the lack of segment data to reject it as a comparable, 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. 18. The assessee's contention that this comparable has incurred significant selling and marketing expense was also not accepted by the DRP,

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 27 of 76 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. 19. Thus, in view of the discussions held above, all the grounds raised by the assessee were rejected and the action of the AO/TPO was upheld by the DRP. 20. We have heard both the parties and perused the material on record. This comparable has been considered as not comparable in SwissRe Global Business Solutions India (P.) Ltd. v. Dy. CIT [2020] 116 taxmann.com 716 (Bang. - Trib.) wherein it was observed as under :— "We have perused submissions advanced by both sides in light of records placed before us. We note that this company is providing services in various areas of sourcing and procurement, customer services, finance and accounting legal process outsourcing, sales and fulfilment, analytics, business platforms, business transformation services, human resource outsourcing and technology solution optimisation. It is noted that this comparable also provides services in financial services and insurance, manufacturing, energy utilities communications and services and retail, consumer packaged foods, logistics and life services. Further in the annual report it has been mentioned that this comparable provides services that are different from routine back- office services. This noting itself makes this comparable not functionally similar with that of assessee. Accordingly we direct this comparable to be excluded from finalist." 21. In view of the above order of the Tribunal, we are inclined to hold that this company should be excluded from the list of comparables. 13.3 The company has also been excluded in the case of ADP (P.) Ltd. [2022] 135 taxmann.com 44 (Hyderabad - Trib.) AY 2016-2017 by the Hyderabad Tribunal. 13.4 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment. 13.5 Ld. D.R. relied on the order of Ld. DRP. 13.6 We have heard the rival submissions and perused the materials available on record. This company has been considered as in the case of ADP Pvt. Ltd. cited (supra and held that this company cannot be included by observing as under:- “16.1 Infosys BPO Ltd.: The ld. AR submitted that this company may be excluded from the final set of comparables for the reason that this company has incurred outsourcing costs for FY 2013-14, FY 2014-15 and FY 2015-16 and the outsourcing cost incurred by this company reflects a different operating model and hence cannot be compared with the assessee company. Further, he submitted that while this company operates under various

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 28 of 76 revenue model as per the assignments i.e., proportional completion method on rendering services, whereas the assessee charges a mark-up on the cost incurred to provide the services. Further, he submitted that since the cost structure and revenue model of this company is different with that of the assessee, this company ought to be rejected as a comparable company. He relied on the decision of the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) wherein the coordinate bench excluded this company as comparable. 16.2 The ld. DR, on the other hand, submitted that presence of outsourcing cost/subcontracting cost does not affect functional comparability. Further, it reduces the operating margin of the company, which is beneficial to the assessee. He, therefore, submitted that the TPO/DRP has rightly included this company as comparable. 16.3 We have considered the rival submissions and perused the material on record as well as the orders of TPO/DRP. We find that the co-ordinate bench in assessee's own case ADP (P.) Ltd. (supra) has excluded this company as comparable by observing as under: '38. Having regard to the rival contentions and the material on record, we find we find that the Co-ordinate Bench of this Tribunal in the assessee's own case not only for the A.Ys 2009-10 for the A.Y 201011 has also considered this issue at Paras 6 to 9 in ITA No. 221/Hyd/2015 which reads as under: "6. The TPO has selected many comparables and among them M/s. Infosys BPO Ltd., TCS E-serve Ltd., and Eclerx Services Ltd., were objected to on the reason of high turnover and functionally different. With reference to Infosys 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. 7. Referring to the order of the TPO, it was the 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. 8. We have considered the rival submissions and 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 ITA Nos. 1743/Hyd/2014 (AY.2010-11) & ITA No. 1917/Hyd/2014 (AY.2010-11) dt. 13-11-2015, has decided the issue as under:

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 29 of 76 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 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

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 30 of 76 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. Infosys BPO Ltd. from the list of comparables from the final list of ITeS segment.

15.1 In view of the above order of the Tribunal, we direct the ld. TPO/AO to exclude this company M/s. Infosys BPM Ltd. from the list of comparables.

v.Vitae International Accounting Services Pvt. Ltd.

Functional comparability

16.1 The ld. D.R. relied on the order of ld. DRP. The contention of the ld. A.R. is that this company is global staffing service provider involved in a provision of services related to tax, accounting and audit services, which were not similar to the service provided by the assessee and he drew our attention to the relevant details of that company kept on record at paper book pages 4185, 4200 & 4208.

16.2 The ld. D.R. submitted that the activities carried on by this company M/s. Vitae International Accounting Services (VITAE) namely book keeping and Accounting services and they are back office operations or support services and they are very much fall under the ITeS segment.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 31 of 76 Development Services including contract and R&D services, IT enabled services and marketing services. Accordingly, in our opinion, it is appropriate to remit the issue to the file of ld. TPO/AO to examine whether assessee has carried on any activities like that of VIASP Ltd. The impugned issue is remitted to the file of ld TPO/AO for fresh consideration after giving an opportunity of hearing to the assessee.

vi.Manipal Digital Systems Pvt. Ltd.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 32 of 76 submitted that segmental details as regards the varied services are not available.

- Significant intangibles: Manipal Digital owns significant intangibles (Total Intangibles/Total Assets) for FY 2015-16 (5.83%) and 2016-17 (12.08%).

- Marketing activities: Manipal Digital is engaged in marketing activities, which are not undertaken by the Appellant. The expenses (Total Marketing expenses/Total costs) incurred are - FY 2014-15 (7.08%), 2015-16 (6.20%), 2016-17 (5.08%).

18.2 He also placed reliance on the decision of this Hon’ble Tribunal in the case of Eurofins IT Solutions India (P.) Ltd. v. DCIT [reported in [2023] 147 taxmann.com 471 (Bangalore - Trib.)], for the assessment year 2017-18. Thus, he submitted that the company ought to be excluded.

“8. The ld. A.R. submitted that this company is functionally different. He submitted that apart from ITES services Manipal Digital is also engaged in providing multiple other services such as pre-media services, web-development services and e-book distribution and various publishing services and no segmental information is available. It is engaged in multiple high end services including conceptualization, designing, analytics, etc., which could not be compared with the low end BPO support services provided by the assessee.

8.1 The CIT(A), NFAC having considered issue observed that it was 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 (page 13 of the annual report). On perusal of the breakup of the revenue given

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 33 of 76 at page 41 of the annual report, the revenue earned from IT enabled services is Rs. 23.63 crores out of total revenue of Rs.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 CIT(A) noted 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". Therefore, the ld. CIT(A), NFAC 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.

8.2 Further, the ld. CIT(A) 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, 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. CIT(A).

8.3 As regards lack of segmental information, the ld. CIT(A) observed that 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, disclosure as prescribed under AS 17- segment reporting is not applicable. Hence, the objection on lack of segmental information is not valid and not acceptable by the ld. CIT(A). 8.4 On perusal of the annual report by the ld. CIT(A), it was observed that M/s. Manipal Technologies Limited is the promoter and holding company of the assessee. As per the information given under share holding pattern, it was seen by the ld. CIT(A) that there is no change shown under the head Change in Promoter's holding. On the other hand, during the year under review, Manipal

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 34 of 76 Venture Gmbh and Medien Fabrik GmbH has been merged and named as Medienfabrik GMbH. Under the head material changes and commitments affecting financial position of the company, it was reported as under:-

No material changes and commitments affecting the financial position of the Company has occurred between the end of the financial year to which this financial statement related and the date of this report 8.5 In view of the above, the ld. CIT(A) observed that the assessee has wrongly mentioned about new share holding pattern of the company instead of the above information reported in the annual report. In fact, there are no material changes affecting the financial position of the company. Further, the assessee also could not point to any information to show, that on account of such acquisition, merger or change in the share holding pattern materially affected the profit margin of this company. Thus, the ld. CIT(A) was of the view that there are no material changes affecting the financial position of the company as per the information in the annual report. Hence, the plea raised by the assessee was rejected by the ld. CIT(A). 9. We have heard the rival submissions and perused the materials available on record. Similar issue was considered by this Tribunal in IT(TP)A No.174/Bang/2022 dated 16.11.2022 for the AY 2017-18 in the case of M/s. Global E-Business Operations Pvt. Ltd. wherein it was held as under: 12.1.8 We have heard the rival submissions and perused the materials available on record. As per the annual report of the company, it is also in end-to-end content services across the value chain. From the website and annual report, it is clearly evident that the company is also engaged in web development, mobile application development. The company also provides publishing editorial & composition services, which includes creating layout & artwork for advertisements and brochures, typesetting services and proof reading. As per revenue from operations, it includes “Revenue from web development and other services” (INR 2.18 Cr) and “income from e-book Distribution” (INR 69 lakhs), without providing the segmental revenue and profitability with respect to ITES segment. Advertising and sales promotion 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

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 35 of 76 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.

Placing strong reliance on the decision of the Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. Vs. CIT, ITA No.102/2015 dated 10.08.2015 copy of which is placed before us, the Ld. Counsel brought to our notice at Para 31 wherein the Hon’ble Delhi High Court observed that the Tribunal had held that once a service falls under the category of ITes then there is no subclassification of segment. Thus, according to the Tribunal, no

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 36 of 76 differentiation could be made between the entities rendering ITes. The Hon’ble Delhi High Court rejecting such view of the Tribunal had held that such a view, if upheld,

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 37 of 76 international transactions with uncontrolled transactions to attain relatively equal degree of comparability.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 38 of 76 characteristics, functions undertaken, assets used, risks assumed. This is essential to ensure the efficacy of the exercise. There is sufficient flexibility available within the statutory framework to ensure a fair ALP.”

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 39 of 76 and therefore the decisions cited above are applicable to Assessment Year 2017-18 also. 18. We have given a careful consideration to the rival submissions and are of the view that it would be just and appropriate to set aside the question of comparability of Manipal Digital Systems Pvt. Ltd., to the TPO/AO to examine as to whether the functional profile of the assessee and the assessees in the decisions cited by the learned AR remains the same in Assessment Year 2017- 18 as it was in Assessment Year 2016-17.”

12.1.10 Accordingly, the above comparable i.e. Manipal Digital Systems Pvt. Ltd. is directed to be excluded from the list of comparables.

9.1 In view of the above, taking a consistent view, we direct the AO/TPO to exclude Manipal Digital Systems Pvt. Ltd. as comparable on the similar lines.”

20.1 Accordingly, in view of the above order of the Tribunal, we direct the ld. TPO/AO to exclude this company M/s. Manipal Digital Systems Pvt. Ltd. from the list of comparables.

vii.CES Ltd.

21.1 He placed reliance in this regard on the decision of this Hon’ble Tribunal in the case of Eurofins IT Solutions India (P.) Ltd. v. DCIT

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 40 of 76 [reported in [2023] 147 taxmann.com 471 (Bangalore - Trib.)] for the assessment year 2017-18. Thus, he submitted that the company ought to be excluded.

8.2 The Annual report of this company shows that it is engaged in both the IT and IT enabled services. As the company has segmental accounts, the TPO has considered only IT enabled services segment for the purposes of comparability. However, what is important to note in the instant context is that the assessee is rendering only translation services etc., which fall within the overall domain of the BPO services. As against this, CES Limited is engaged in providing both BPO and KPO services as has been reported by it to the Registrar of companies in the requisite form. The Pune Benches of the Tribunal in Credence Resource Management Pvt. Ltd. Vs. ACIT (ITA No.133/PUN/2021) vide its order dated 18- 06-2021 has noted that CES Limited is rendering both BPO and KPO services, discussing this issue at page 19 of the order. In view of the fact that the assessee is engaged in rendering only BPO services, CES Limited providing both BPO and KPO services, cannot therefore be held as comparable. We, therefore, direct to delete this company from the list of comparables. 11.1 In view of the above order of the Tribunal, we direct the AO/TPO to exclude CES Limited from the list of comparables. 23.1 In view of the above order of the Tribunal, we direct the ld. TPO/AO to exclude this CES Ltd. company from the list of comparables. viii.SPI Technologies India Pvt. Ltd.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 41 of 76 transformation of unedited manuscripts into final print-ready files, supply of structured data for electronic publishing and providing end to end project management services. The services of the company as described on the website are content solutions data processing, customer relationship management, KPO services, etc., which are not entirely comparable to the services of the Appellant. Segmental details as regards the varied services rendered by the company are not available, and therefore the company ought to be excluded from the final list of comparables. He further submitted that the company had abnormal growth patterns- during financial year 2014-15 32.13%, financial year 2015-16 40.70% and during the financial year 2016-17 37.43%, which is not in line with the average industry growth rate. He submitted that the company had substantial amounts of intangibles. The company also had significant expenditure in foreign currency. SPI Technologies trades in certain tangible goods and assumes significant inventory risk as well, which is not similar to the case of the Appellant.

24.1 Peculiar economic circumstance: During the FY 2014-15, the Madras High Court passed the order confirming the amalgamation of SPI Technologies India Private Limited and Laserwords Private Limited, a wholly owned subsidiary of SPI Technologies.

24.2 In this regard, he placed reliance on the decision of this Tribunal in the case of Global E-Business Operations (P.) Ltd v. DCIT [ reported in [2022] 145 taxmann.com 413 (Bangalore - Trib.)], for the assessment year 2016-17. In view of the above, he submitted that SPI Technologies is liable to be excluded from the list of comparables.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 42 of 76 14. The Ld. A.R. submitted that the company is into diversified business activities. The Company is engaged in data processing and related services, primarily in the typesetting business, including transformation of unedited manuscripts into final print-ready files, supply of structured data for electronic publishing and providing end-to-end project management services. 14.1 SPI Technologies India Private Limited has been excluded in the case of Entercoms Solutions Private Limited [TS-548-ITAT-2021(PUN)-TP] Page 10 of the order – AY 2015-2016. Below is the relevant extract from the order for ready reference: “10. We, place reliance on the afore-stated judicial precedents where there is an emerging consistent view in this regard that if an extraordinary event has taken place by way of amalgamation that company cannot be considered as a comparable one and following the same parity of reasoning, we direct the Assessing Officer/TPO to exclude SPI Technologies India Pvt. Ltd. from the final set of comparables while computing international transactions in respect of the Assessee in ITes segment.” 14.2 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to exclude this comparable from the final list of ITeS Segment. 14.3 Ld. D.R. relied on the order of Ld. DRP. 14.4 We have heard the rival submissions and perused the materials available on record. This company has been considered as not a comparable in the case of Entercoms Solutions Pvt. Ltd. in assessment year 2015-16 in ITA No.1826/Pune/2019 dated 25.10.2021 wherein held as under:- 8. We find the Hon’ble Jurisdictional High Court in the case of Pr. Commissioner of Income Tax Vs. PTC Software (I) (P) Ltd. (2019) 101 taxmann.com 117 (Bombay) has held that in case the assessee rendering ITES services to AE, a company in whose case extraordinary event of amalgamation took place during relevant year, could not be accepted as comparable and was decided in favour of the assessee. Similarly in the case of Pr. Commissioner of Income Tax Vs. J.P Morgan India (P) Ltd. (2019) 102 taxmann.com 335 (Bombay) , the Hon’ble Jurisdictional High Court on the same issue has held as follows:

“(iv) Mr. Percy Pardiwalla, learned senior counsel appearing on behalf of the respondent invited our attention to the final decision of this Court in Pr. CIT v. Aptara Technology (P.) Ltd. [2018] 92 taxmann.com 240 and Pr. CIT v. PTC Software (I) (P.) Ltd. [2019] 101 taxmann.com 117 (Bom.). In both the above decisions this Court has taken a view that merger/amalgamation is an extra ordinary event and would have an impact /effect on the financial results of the company. Thus, in both the aforesaid decisions, this Court upheld the view of the Tribunal that where merger/amalgamation have taken place and it is not a normal event then such a company would cease to

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 43 of 76 be comparable. This of course is subject to the Revenue being able to show that amalgamation/merger did not have any effect of the profitability of the company. This has not been shown by the Revenue either to the Tribunal or before us. Therefore, this issue stands covered by the decision of this Court in Aptara Technology (P.) Ltd.'s case (supra) and PTC Software (I) (P.) Ltd.'s case (supra) in favour of the respondent. This more particularly in view of the absence of the Revenue even attempting to show that the merger and amalgamation that took place in the case of comparable M/s. Keynote Corporate Securities Limited was such that it would not have any impact on its profitability. It is true that in case of PTC Software (I) (P.) Ltd. case (supra) this question has been admitted, however, the admission was on the facts and circumstances of that case. In any case the issue now stands concluded by final orders of this Court in case of Aptara Technology (P.) Ltd. (supra) and PTC Software (I) (P.) Ltd.'s case (supra) and it is being followed. (v) In view of the above, as the proposed question is covered by the decision of this Court, no substantial question of law arises. Thus, not entertained.” 9. That even the Pune Bench of the Tribunal in the case of Brintons Carpets Asia (P) Ltd. Vs. Deputy Commissioner of Income Tax, ITA No.1312 & 1349/PN/2015 dated 29th March, 2019 observed that the assessee before the Tribunal had first claimed that Accentia echnologies Ltd. cannot be selected in the final list of comparables as during the year under consideration, there was an extraordinary event of amalgamation. Thereafter, the Tribunal has analyzed how and what extraordinary event took place in that case and in such scenario, the company cannot be considered as comparable one and the relevant extracts in this regard are as follows: “13. ............. The learned Authorized Representative for the assessee has pointed out that though the CIT (A) says that there is no such amalgamation but his finding is totally incorrect. In this regard, reliance was placed on the ratio laid down by Pune Bench of Tribunal in Dover India (P.) Ltd. v. Dy. CIT [2017] 88 taxmann.com 115 (Pune - Trib.), wherein for assessment year 201011 itself, the said concern Accentia Technologies Ltd. was excluded being high end KPO service provider. Further, the Tribunal in BNY Mellon International Operations (India) (P.) Ltd. (supra) have noted the extraordinary event of acquisition and also amalgamation of another concern and held that the said concern could not be selected as comparable. The relevant findings of Tribunal are in paras 12 and 13, which read as under:—

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 44 of 76 amalgamation of Asscent Infoserve Pvt. Ltd. with the said concern and because of these extraordinary events, the margins of said companies should not be included in the final set of comparables. The Pune Bench of Tribunal in Aptara Technologies Pvt. Ltd. v. ACIT (2016) 72 taxmann.com 352 (Pune - Trib) and Cummins Turbo Technologies Ltd. v. DCIT (2017) 79 taxmann.com 260 (Pune - Trib) has held that the said concern cannot be accepted as comparable. The Tribunal in Aptara Technologies Pvt. Ltd. v. ACIT (supra) held as under:— "14. We find that the Tribunal in assessee's own case in assessment year 2008-09 in ITA No.2235/PN/2012, order dated 02.02.2015 had held that the said concern could not be considered as comparable because of certain extraordinary events. The said ratio was also applied in assessee's own case while benchmarking the international transaction of assessee with its associate enterprises in assessment year 2009-10 in ITA No.267/PN/2014, order dated 29.04.2015. The Tribunal vide order dated 02.02.2015 had held that the concern Accentia Technologies Ltd. could not be included in the final set of comparables holding as under:— "13. Next, assessee had contended that Accentia Technologies Ltd. has been wrongly included by the TPO as a comparable concern. As per the assessee, the said concern was engaged in functionally different activities. It was pointed out that the said concern is engaged in providing medical transaction, billing and coding services, application development & customization (segmental data not available). Moreover, it was contended that the sales/turnover of the said concern was more than Rs. 50 crores for the year under consideration which did not meet with turnover filter applied by the assessee. On this point, it was pointed out that the assessee had selected sales/turnover filter of 1-50 crores i.e. any concerns having a turnover exceeding Rs. 50 crores were excluded. Thirdly, it was pointed out that the activities of the said concern were not comparable to the activities of the assessee. 11. The TPO has noted the aforesaid objections of the assessee in para 18.1 of his order and has rejected the same by merely noticing that 75% of the revenue/income of the said concern is from ITES and therefore it is to be considered as a comparable. Before us, the Ld. Representative for the assessee has reiterated the submissions put- forth before the TPO in order to justify exclusion of the said concern from the list of comparables. In particularly, it has been pointed out that for the very same assessment year, the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. v. ITO, (2013) 38 taxmann.com 55 (Bang.) has excluded the said concern from the list of comparables in a similar situation following the decision of the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited v. DCIT, (2013) 32 taxmann.com 21 (Hyd.).

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 45 of 76 15. We have considered the submissions of the Ld. Representative for the assessee and also the stand of the Revenue as emerging from the order of the TPO. In our view, the ratio laid down by the Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Private Limited (supra) and by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) is squarely applicable to the present case also. The aforesaid Benches of the Tribunal found that during the year under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable." 15. Further, similar proposition has been laid down by different Benches of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been held that because of extraordinary events during the year, the concern Accentia Technologies Ltd. was not comparable to the entities engaged in ITES. Following the same parity of reasoning, we hold that Accentia Technologies Ltd. is to be excluded from the final set of comparables." 13. Following the same parity of reasoning as in Aptara Technologies Pvt. Ltd. v. ACIT (supra) and Cummins Turbo Technologies Ltd. v. DCIT (supra), we hold that Accentia Technologies Ltd. cannot be compared as comparable because of extraordinary events of acquisition and amalgamation during the year. Accordingly, we direct the Assessing Officer/TPO to exclude Accentia Technologies Ltd. from final list of comparables.” 10. We, place reliance on the afore-stated judicial precedents where there is an emerging consistent view in this regard that if an extraordinary event has taken place by way of amalgamation that company cannot be considered as a comparable one and following the same parity of reasoning, we direct the Assessing Officer/TPO to exclude SPI Technologies India Pvt. Ltd. from the final set of comparables while computing international transactions in respect of the assessee in ITes segment.” 14.5 In view of the above order, we direct the AO/TPO to exclude SPI Technologies Pvt. Ltd. from the list of comparables selected for ITeS segment.” 26.1 In view of the above, we direct the ld. TPO/AO to exclude this company M/s. SPI Technologies Ltd. from the list of comparables. ix.Inteq BPO Services Pvt. Ltd.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 46 of 76 scenarios, executing improvements, monitoring the improved process and continually optimizing it. The website of Inteq indicates that within BPM, it is engaged in provision of revenue cycle management (RCM’), claims processing services and document and data processing activities primarily to healthcare industry. Further, he submitted that Inteq is into providing healthcare management support services which requires extensive domain knowledge to render the same. Further, Inteq acts as a revenue enabler to its clients by improving a business process (viz., RCM) by providing end- to-end integrated services such as identifying, analyzing, documenting, modifying the claims as per established policies and requirements, medical coding, etc. In view of the above, it is submitted that the services offered by Inteq are high end services, akin to a KPO, requiring highly skilled professionals with higher qualifications in comparison to an ITeS provider. In view of the above, he submitted that this company ought to be excluded from the final list of comparables. 27.1 The ld. D.R. relied on the order of ld. DRP. 28. We have heard the rival submissions and perused the materials available on record. In our opinion, in view of the above argument of ld. A.R., it is appropriate to remit the issue to the file of ld. TPO/AO to consider the above arguments of the assessee’s counsel and decide it afresh.

x.Eclerx Services Ltd.:

Functionally different:

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 47 of 76 to its customers. However, segmental information as regards the varied products are unavailable.

Significant intangibles:

29.1 He further submitted that the company is engaged in developing its own intangible assets. Eclerx has invested significantly in the development of its proprietary digital asset called FLUiiD4.

Significant marketing expenses. Incurs subcontracting costs. Peculiar economic circumstances: 29.2 He submitted that during the assessment year 2016-17, the company acquired a European based company which significantly contributed to its customers and revenue base. It is submitted that this acquisition is a peculiar economic circumstance, which is bound to have an impact on the margin of the company. In the absence of any reasonably accurate adjustments capable of being made to mitigate the impact, the company ought to be excluded from the final list of comparable.

Abnormal profits:

29.3 He further submitted that the company has shown abnormal growth patterns from FY 2005-06 to FY 2014-15and has grown inorganically. The operating profit of the company during the aforesaid years fluctuates between 41 crores to 408 crores, demonstrating that the company is growing rather inorganically and therefore cannot be selected as a comparable.

29.4 He further submitted that this company is consistently excluded from the final list of comparables in cases of similarly placed assessees. Reliance is placed on the decision of this Hon’ble Tribunal in the case of in NTT Data Information Processing Services Pvt. Ltd. v. DCIT (order dated

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 48 of 76 07.07.2022 passed in IT(TP)A No. 297/Bang/2021) for AY 2016-17. Further reliance is placed on the decisions of the Hon’ble High Court of Bombay in PCIT v. PTC Software (I) (P.) Ltd. (reported in [2019] 101 taxmann.com 117 (Bombay)) and PCIT v. BNY Mellon International Operations (India) (P.) Ltd. (reported in [2018] 93 taxmann.com 363 (Bombay)), decision of the Hyderabad Bench of this Hon’ble Tribunal in ADP Pvt. Ltd. v. DCIT (order dated 03.02.2022 passed in ITA Nos. 227&228/Hyd/2021) and the decision of this Hon’ble Tribunal in the case of Global E-Business Operations (P.) Ltd v. DCIT [ reported in [2022] 145 taxmann.com 413 (Bangalore - Trib.)], for the assessment year 2016- 17.

29.5 In view of the above, the ld. A.R. submitted that this company ought to be excluded from the final list of comparables. Thus, Eclerx Solutions Ltd. is liable to be excluded from the list of comparables.

“6. The company provides a wide range of activities including financial services (contract risk review, consulting services etc.), digital marketing (web analytics, CRM and business intelligence etc.), digital branding (content creation, digital asset management etc.) and cable and telecom services (tiered technical support). Eclerx was also the 2015 MAKE [Most Admired Knowledge Enterprise] winner for both Asia and India. Eclerx is a specialist KPO company and also India's first publicly listed KPO company Extraordinary events 6.1 Eclerx has been amalgamated with Agilyst Consulting Private Limited ("ACPL") with effect from 01 April 2015. As per RPT schedule, the services of all employees and other employee benefits of ACPL have been transferred to Eclerx w.e.f 01 April 2015

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 49 of 76 6.2 The learned TPO in the order has mentioned that as per Annual Report for FY 2016-17, the HC of Bombay approved the scheme of amalgamation between ACPL and Eclerx with effect from the appointed date of April 01, 2015, which became effective from August 22, 2016 and hence, the results for FY 2015-16 are not impacted by such amalgamation 6.3 However, in financials for FY 2016-17, it is mentioned that the HC has sanctioned the scheme of Amalgamation with an appointed date of 01 April 2015. The scheme has been given effect to in the books of accounts of Eclerx w.e.f 01 April 2015, thus affecting the financials for FY 2015-16.

Outsourcing/sub-contracting charges and expenses towards sales & marketing services 6.4 The company incurs subcontracting charges and selling & marketing expenses for INR 2.85 crores and INR 157.89 crores respectively. However, the Assessee does not incur such charges implying that Eclerx's business model is different from the Assessee.

Premium pricing and high margins 6.5 The premium that Eclerx commands on account of the distinguished nature of services offered can be demonstrated by high profit margins earned by the company historically.

Judicial precedents relied upon: Functional comparability/ High-end KPO service uncomparable- 1. Swiss Re Global Business Solutions India Pvt. Ltd., vs. The Addl./Jt./Dy./Asst. Commissioner of Income Tax/ITO, National Faceless Assessment Centre (NFAC)- IT(TP)A No.397/Bang/2021- AY 2016-17 2. Rampgreen Solutions private Limited Vs Commissioner of Income tax(ITA 102/2015)

In view of above, the Ld. A.R. contended that the above companies are therefore not comparable to the Assessee and should be excluded from the list of comparable companies.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 50 of 76 analysis. Under the TNMM, functional similarity is more relevant than product similarity. 7.1 Further, this company operates under a single primary segment i.e., data analytics and process outsourcing services and neither the assessee nor the TPO has gone into the verticals/ horizontals and high end or low-end distinction of the comparable companies. Finally, under TNMM only broad comparability is required. Further, 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, 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 and hence, the objection is rejected. 7.2. The Annual report of the comparable mentions that Eclerx is a specialist KPO/BPO (Knowledge and Business Process Outsourcing) company providing critical business operations services to more than 301 global Fortune 500 clients, including many of the world’s leading financial services firms, online retail and distributors, interactive media, luxury brands and entertainment, high tech and industrial manufacturing, travel and leisure and software vendors, through operational support, data management and analytics solutions. Thus, it’s not purely a KPO company. 8. We have heard the rival submissions and perused the materials available on record. This comparable has been considered in the case of Swiss Re Global cited (supra), wherein it was held as under: “29. We have heard both the parties on the issue. This company has also been considered as not comparable in assessee’s own case for AY 2014-15 & IT(TP)A No.3181/Bang/2018 dated 21.5.2020 wherein it was observed as under:- "It is noted that this company is involved in high-end KPO services whereas assessee is providing IT enabled services by rendering remote data processing in the field of reinsurance. In our opinion functions performed by this company is not similar to that of assessee even though assessee before us also carries out certain services on contract basis. Ld.AR has placed reliance upon decision of Hon'ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. v. CIT [2015] 60 taxmann.com 355/234 Taxmann, 573/377 ITR 533 Hon'ble court had held that once a company falls into the category of high-end KPO, it cannot be functionally comparable with a BPO service provider like that of assessee. Applying this reissue in the present case, we direct Ld.AO to eliminate this comparable from final list."

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 51 of 76 30. In view of the above order of the Tribunal, we are inclined to direct the Eclerx Services Ltd. be excluded from the list of comparables”.

8.1 In view of the above order of the Tribunal, we direct the AO/TPO to exclude this company from the list of comparables.”

31.1 In view of the above, we direct the ld. TPO/AO to exclude this company M/s. Eclerx Services Ltd from the list of comparables.

i. Suprawin Technologies Ltd.; ii. Crystal Voxx Ltd; and iii. Surevin BPO Services Ltd

Further, the Hon’ble Panel erred in surmising that the companies do not feature in the search matrix of the Learned TPO without appreciating the fact that the Learned TPO did not provide the entire search process to the Appellant.

i. Suprawin Technologies Ltd. 32.1 Vide this ground, the the ld. A.R. for the assessee is seeking the inclusion of Suprawin Technologies Ltd., Crystal Voxx Ltd. and Surevin BPO Services Ltd. The ld. A.R. submitted that Suprawin is involved in provision of business process outsourcing services and IT Infrastructure management services which services are comparable to the services rendered by the Appellant. Business process outsourcing services provides solution for productive legal process outsourcing, content management services and infrastructure management services. IT Infrastructure management services provides IT Infrastructure solutions, maintenance solutions, security solutions, other IT Solutions and services. Further, it is submitted that the company passes all filters

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 52 of 76 applied by the TPO. It is submitted that the exclusion of this company on the sole ground that it does not feature in the search matrix is whole erroneous. Reliance in this regard is placed on Prism Networks Private Limited v. ACIT (Order dated 11.02.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 349/Bang/2021). Therefore, he submitted that the company ought to be included in the final list of comparables.

32.2 The ld. D.R. relied on the order of ld. DRP

“We heard the rival submissions. It is clear from the order of the DRP that the DRP has not considered the plea of the Assessee in proper perspective. The fact that the TPO rejected the TP study of the assessee cannot be the basis not to consider the claim of the assessee for inclusion of comparable companies. The TPO excluded these companies only on the ground that information related to these companies was not available in the public domain and this fact was shown to be an incorrect assumption by the Assessee in the submissions before the DRP. In such circumstances, it was incumbent on the part of the DRP to have adjudicated the question of inclusion of these companies as comparable companies. The fact that these companies do not figure in the search matrix of the TPO is not and cannot be a ground not to consider inclusion of these companies as comparable companies. Since the DRP has failed to do so, we are of the view that the issue regarding inclusion of the aforesaid companies as comparable companies should be set aside to AO/TPO for fresh consideration in the light of the information available in public domain. Thus ground no.7 is treated as allowed for statistical purposes.”

33.1 In view of the above, we remit this comparable i.e. Suprawin Technolgies Ltd. issue to the file of ld. TPO/AO for fresh consideration in the ITeS segment.

ii. Crystal Voxx Ltd

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 53 of 76 and IT solutions. It offers medical billing, denial management, medical coding, kareo billing, speech recognition, accounting services, EHR/PM development and interface development which fall within the ambit of ITeS. It is submitted that the company passes all filters applied by the TPO. It is submitted that the exclusion of this company on the sole ground that it does not feature in the search matrix is whole erroneous. He place reliance in this regard on Prism Networks Private Limited v. ACIT (Order dated 11.02.2022 passed by this Tribunal in IT(TP)A No. 349/Bang/2021). Therefore, he submitted that the company ought to be included in the final list of comparables.

34.1 The ld. D.R. relied on the order of ld. DRP.

iii. Surevin BPO Services Ltd: 36. The ld. A.R. submitted that this company is engaged in providing BPO services (outbound & inbound call center services), digital and social marketing, skill development & training, etc which are akin to the services provided by the Appellant. He submitted that the exclusion of this company on the sole ground that it does not feature in the search matrix is whole erroneous. In this regard, he placed reliance on Prism Networks Private Limited v. ACIT (Order dated 11.02.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 349/Bang/2021). Therefore, he submitted that the company ought to be included in the final list of comparables.

36.1 The ld. D.R. relied on the order of ld. DRP

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 54 of 76 37. After hearing both the parties, we are of the opinion that as discussed in earlier para, this comparable viz. Surevin BPO Services Ltd. Is also remitted to the file of ld TPO/AO to carry out fresh TP study on this issue and decide accordingly.

Sl. Company Name Correct No. margin (%) 1. Sundaram Business Services Ltd. 0.73 2. Fuzen Software Pvt. Ltd. 15.81 3. VITAE International Accounting Services Pvt. Ltd. 23.51 4. Manipal Digital Systems Pvt. Ltd. 26.76 5. CES Ltd. 30.46

38.2 The ld. D.R. relied on the order of ld. DRP.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 55 of 76 MSS Segment: 20. The Learned AO / Learned TPO:

20.1 erred in interpreting the functional profile of the Appellant without taking cognizance of the fact that the functions performed by the Appellant are MSS as specified in the TP documentation;

20.2 erred in law in adopting an adhoc methodology of revenue split without documenting any rationale for the same and not adopting any of the prescribed methods as per Section 92C of the Act;

20.3 erred in adopting a methodology of revenue split without appreciating the fact that the sales made by Associated Enterprise in India have already been subject to tax in India, and such an adjustment proposed by the Learned TPO would result in double taxation of the same amount in India;

20.4 The Hon’ble Panel erred in upholding the same.

40.1 The ld. A.R. submitted vide this ground that the Appellant is challenging the action of the TPO in determining an adjustment by misunderstanding and recharacterization the routine MSS functions performed by the Appellant, and by rejecting the TNMM method and adopting an erroneous method as the most appropriate method.

40.2 He submitted a brief of the services rendered by the Appellant which are set out as under:

a. Description of overall Value Chain of VMware Group for sale of products

● VMware US is responsible for managing the company's global sales and marketing efforts for all VMware product offerings. The most important part of the marketing process is the development of VMware's global marketing strategy, product focus and identification of customer/market segments by the global marketing team. The US global marketing team along with the APAC and EMEA regional marketing teams are

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 56 of 76 responsible for developing marketing policies, programs, activities related to market research, product/brand management, product development and pricing which are designed to increase products sales growth and expand market share.

● The most important part of the sales process is development of central pricing guidelines aimed at optimizing sales and the management of relationships with channel partners to ensure on time delivery of products to end customers. VMware Group has a comprehensive sales strategy provided by VMware US for its product lines.

● VMware Group's routine marketing efforts focuses on promoting the benefits of VMware solutions and educating customers and channel partners about the advantages of virtualization technology based on strategies developed by VMware US.

40.3 He submitted that the Appellant, however, is engaged in providing routine marketing support services in accordance with the guidelines set by VMware Group’s corporate marketing team. For the same, the Appellant, based on a contractual arrangement, provides marketing support services to VIL that includes certain promotional, marketing and support services related to

● VMware products in India and is renumerated on a cost-plus mark-up. The scope of marketing support services rendered by the Appellant includes:

● Promotional and Marketing Support Activities: The aim of the Appellant is to identify, market and maintain local communication with Channel Partners and end customers in

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 57 of 76 India. Promotional activities include general marketing activities and specific marketing via presentations or demos. The Appellant operates as a liaison between third party end customers and the third party Channel Partner, and provide appropriate contact and support to the customers, including attending to enquiries on VMware products and services.

● The Appellant provides coordination between VMware Group and the Partner Channel Network and facilitates the rendering of the services. VMware India is not entitled or authorized to negotiate or conclude sales and contracts of VMware products and services. As such, the Appellant does not recognize any India territory revenue and does not bear any contractual and non-payment risks. The Channel Partners are entrusted and authorized for undertaking sales to customers in India and assuming all corresponding risks.

● The Appellant provides periodic update and feedback to VMware Group in the form of reports or statistics on local condition and customer needs.

● Upon VMware’s Group request, the Appellant provides limited technical assistance, consulting and software integration services related to VMware products to VMware’s customers.

40.4 Based on the above, the ld. A.R. submitted that it is engaged in rendering only support services for managing and marketing the products of VMware in India. The Appellant is not engaged in distribution functions as alleged by the TPO as VMware Group undertakes sales through authorized Distributors and Partners (collectively referred to a “VMware Partner Network” or “Channel Partners”). The channel partners purchase software licenses and software related services from VMware Group for resale to end-user

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 58 of 76 customers directly or via resellers. Channel partners are also responsible for maintaining primary relationship with the end-user customers. The corresponding profits related to this distribution function in the value chain are captured by these third party distributors and/or Channel partners.

The diagram below represents a typical route to market for VMware products to end-user:

Hence, he submitted that the Appellant is not engaged in distribution activities but only provides the following services: ● General administrative, marketing, and promotional services relating to facilitating of sale process for Channel Partners, providing an understanding of the VMware products to customers, etc. ● Assist in developing and expanding the customer base in India, for VMware products. ● Liaison between customers and Channel Partners. ● Maintain contact with existing and potential customers (channel partners and distributors), including attending to their enquiries on range of products and services of VMware Group. ● Providing periodic update and feedback to VIL in the form of reports or statistics on local condition and customer needs. ● Providing consultancy services in the nature of development projects, implementation projects, validation projects, etc.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 59 of 76 and training services to facilitate VIL sales. ● Supporting customers with product adoption guidelines, resolution of any escalations relating to queries by customers etc.

40.5 Given the above, the ld. A.R. submitted that a cost-plus based compensation is best suited for the functions performed by the Appellant. The Appellant submits that no margin should be applied on Sales of VIL in India since the sales are predominantly made through authorized Distributors and Partners in India. In real sense, the third party authorized Distributors and Partners, based in India, in essence are undertaking the ‘distribution’ functions for the VMware products in India and earning the corresponding compensation for those functions. Further, the Appellant submits that the income earned by VIL in India is subject to withholding taxes in India, and revenues/ profits earned by the Channel Partners and Distributors are taxable in India. In line with the functional roles, the TPO would appreciate that the AE’s determine the go to market strategy plan and the targets to be achieved. VMware India has no/ limited say on this matter, and accordingly the taxpayer is shielded from the risks associated with the VMware go to market strategy. Given the above, the ld. A.R. submitted that it is a contract service provider; and therefore, it would not be appropriate to classify the Appellant as a distributor.

40.6 (b) Additional functions of training services

● The Appellant, as a part of its MSS activities also provides training services as may be sub-contracted by VIL. Upon receipt of request from the customers of VIL for training services, the reseller communicates the requirement to VIL. VIL in turn, outsources the work of the Appellant for overall facilitation and supervision of the imparting of training

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 60 of 76 programme to ensure that the training is imparted based on laid-down standards.

● In order to avail the services from the channel/training partners, Appellant would raise a purchase order on the channel/training partners. Upon completion of the services, the channel/training partners would raise an invoice on the Appellant.

● In case of direct sale by VIL, the training requirement is outsourced to the Appellant. Based on the availability of resources, the training would be imparted by the Appellant to the customers of VIL based in India. In case of non-availability of the resources, the Appellant sub-contracts the work to the channel/training partners.

● The entire cost incurred by VMware India towards training services provided in-house or through sub-contracting to channel/training partners forms part of the cost base for these training services, and is remunerated by VIL with requisite mark-up in accordance with service arrangement. Typical process

It is n

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 61 of 76 40.7 The ld. A.R. submitted the step-by-step truncation flow between the customers, channel partners, VIL and Appellant, along- with sample documents, as below:

● Step 1A/B – Indian customer requests channel/training partner or VIL for training services.

● Step 2 – The channel/training partner would reach out to VIL to provide the necessary training services.

● Step 3 – VIL outsources the training services to Appellant and the same is intimated to the authorized personnel of Appellant through outline portal.

● Step 4 – In case of direct sale, Appellant to deliver the services to the customers of VIL or engage channel partners as appropriate.

● Step 5 – The Appellant to sub-contract the services to channel/training partners (where required). The Appellant to raise a PO on the channel/training for training services.

● Step 6 – The channel partner to deliver the services.

● Step 7 – The channel/training partners would raise an invoice on the Appellant.

● Step 8 – The Appellant would include all costs incurred towards training services (including cost incurred for providing services directly to the customers of VIL) in its cost base and apply the mark-up in accordance with the service agreement with VIL.

40.8 Further, any training expenses (i.e. amount paid by the Appellant to channel/ training partners) is revenue earned by channel/ training partners and liable to tax in India.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 62 of 76 40.9 He submitted that training services is not a separate segment, but rather a part of marketing support services rendered by the Appellant to its AE i.e., it is subsumed in the MSS segment as the purpose of rendering such training services is to increase the user base of VMware products.

40.10 Further, TPO in the order has accepted the factual position that the Appellant is not the legal selling entity, but rather a marketing service provider.

40.11 The ld A.R. further submitted that the TPO in the order has proceeded on the erroneous footing that the income in the financial statement is reflected as management services, when in fact the income in the financial statements is rightly reflected as income from marketing services.

40.12 (c) Ad-hoc methodology of revenue split without providing any rationale for the same

● It is submitted that the TPO has determined the adjustment without applying any method prescribed under the Act. The revenue split method applied by the TPO to artificially allocate revenue to the Appellant cannot even be construed as 'other method' as contemplated under Rule 10AB of the Rules. The ad hoc approach adopted by the TPO does not consider any uncontrolled transactions as prescribed by law. Therefore, it is submitted that the approach adopted the TPO is contrary to the provisions of the Act and unsustainable.

● The TPO has used certain data from the financials of VIL and VMware Group (consolidated financials) to derive certain percentages which have been relied upon to compute the adjustment under MSS segment of the company. The Appellant submits that the said approach is erroneous for the following

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 63 of 76 reasons:

a. This methodology has altogether disregarded the role of Partner Channel Network (third party Channel Partners/ Distributors) and VMware Group’s support to India territory sales in the supply chain thereby assigning profits related to distributions to the Appellant.

b. The TPO has not appreciated that Appellant does not make / facilitate any sales to third party customers on behalf of VMware Group and is merely involved in rendering certain marketing support services.

c. The TPO has not brought any evidence on record to demonstrate that the Appellant is undertaking activities in excess of what has been stated in the TP Study. The TPO has indirectly alleged that the Appellant is making sales in India on behalf of the Group, which is not a true fact.

d. Further, the specific component - “Payment towards so called marketing support services by the VMware group to VSIPL (the taxpayer)” as considered to derive the proportionate expenditure made in India is unjustified as it is actually the remuneration received by India on a cost plus mark-up basis from VIL for the MSS functionality.

e. Further, the functions performed and risk assumed are different for VIL and VMware Group as a whole (on a consolidated basis) and hence, the sales made by VIL in India cannot be said to have the same functional profile as VMware US. Therefore, the TPO’s application of VMware US’s Gross Profit ratio is not consistent with the basic tenets of transfer pricing (i.e., consideration of FAR profile) and is erroneous and bad in law.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 64 of 76 f. Further, the amount brought to tax through the ad hoc approach adopted by the TPO, has already been subject to tax in the hands of VIL, as is amply evident from the Form 26AS of VIL. The action of the TPO has resulted in double taxation, which is impermissible.

Working Capital adjustment

43.1 After hearing both the parties, we direct the ld TPO/AO to grant actual working capital adjustment while determining the ALP of the international transactions. Ordered accordingly.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 65 of 76 Disallowance of deduction under section 80G of the Act

45.1 The ld. A.R. submitted that during the year under consideration, the Appellant had contributed an amount of Rs. 2,27,69,309/- to various charitable organizations towards its CSR obligation. The said amount was added back to the taxable income in terms of the provisions of the Act and since the donations were made to certain institutions which were eligible for deduction under 80G of the Act, 50% of the donation amounting to Rs. 1,13,84,655/- was claimed as deduction. The Assessing Officer disallowed the claim and the DRP upheld the disallowance.

45.2 He further submitted that in terms of the Explanation 2 to Section 37 of the Act, deduction of donation under section 80G of the Act is to be determined independent of Explanation 2 to section 37 of the Act. The Explanatory Memorandum to the said Explanation also states that the CSR expenditure which is of the nature described in section 30 to 36 of the Act shall be allowed as a deduction under those sections subject to fulfilment of conditions, if any specified therein. Hence, the disallowance of CSR expenditure is restricted only to section 37(1) of the Act and does not flow automatically to other sections. In other words, CSR expenditure is eligible for deduction under other sections subject to fulfilment of conditions specified in the respective sections. As per the provisions of section 80G of the Act, an assessee shall be eligible to claim

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 66 of 76 deduction from its total taxable income, of an amount paid as donation to the parties specified/eligible under this section. The provisions of section 80G of the Act permits deduction for the contributions made by the assessee to certain relief funds and charitable institutions for the categories mentioned therein. It is submitted that the restriction in Section 37 of the Act cannot be read into the provisions of section 80G of the Act. In view of the above, he submitted that the said amount is eligible for deduction under Section 80G of the Act as long as the conditions specified in the said Section have been fulfilled. He placed reliance on the following decisions:

● Goldman Sachs Services Pvt. Ltd. v. JCIT (Order dated 15.06.2020 passed by this Tribunal in IT(TP)A No.2355/Bang/2019)

● First American India Pvt. Ltd. vs. ACIT [Order dated 29.04.2020 passed by this Tribunal in ITA No. 1762/Bang/2019]

Disallowance of expenditure under section 37 of the Act

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 67 of 76 computer peripherals which mainly comprises of purchase of headsets and speakers do not provide benefit of an enduring nature and hence, are not capital in nature.

47.1 The ld. A.R. submitted that during the assessment year 2017- 18, the Appellant had incurred an amount of Rs. 4,59,47,571/- towards purchase of Computer peripherals and accessories, which it claimed as an expenditure under Section 37 of the Act. The Assessing Officer disallowed the same, by holding it to be in the nature of capital expenditure.

47.2 In this regard, he submitted that said amount was incurred in relation to purchase of such computer accessories and peripherals, which cannot be used independently, and is for the purpose of the business of the Appellant. Such expenses formed part of the cost base of the Appellant on which applicable mark-up has been charged. The expenses so incurred is revenue in nature and not towards creation of any asset. Hence, the same should be allowable as a deduction under the provisions of section 37(1) of the Act. This expenditure neither provides enduring benefit to the Appellant nor results in creation of a capital asset and hence, the expense is not capital in nature. The accessories such as RAM, mouse, keyboards, CD, DVD, pen drives, headphones, etc. cannot be used independently without any need of Laptop or computer. Therefore, the expenses ought to be treated as being revenue in nature.

47.3 In this regard, he placed reliance in Appellant’s own case for assessment year 2009-10, wherein this Tribunal held that the

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 68 of 76 accessories which can be used independently without any need of laptop or computer would be construed as capital in nature as new asset come into existence. Otherwise, such expenditure on accessories and spares shall be in the nature of revenue expenditure.

47.4 Without prejudice, he further submitted that the computer peripherals and accessories such as RAM, mouse, keyboards, CD, DVD, pen drives, headphones, etc are integral parts and therefore they form part of peripherals of the computers. Therefore, depreciation on computer peripherals and accessories ought to be granted at 60% as against 15%.

Non-grant of depreciation on the disallowances made in the preceding previous years 28. That on the facts and in circumstances of the case and in law, the Learned AO and the Hon’ble DRP erred in not granting depreciation under section 32 of the Act amounting to INR 84,805 on purchase of monitors and desktops, which was disallowed in the AY 2009-10, AY 2010-11 and AY 2011-12, treating it as capital in nature. 50.1 The ld. A.R. submitted that during the assessment proceedings for assessment years 2009-10, 2010-11 and 2011-12, purchase of monitors and desktops expensed by the Appellant in the profit and loss account under the head “Repairs and Maintenance” totalling to Rs.2,18,91,676/- were disallowed treating it as capital in nature. Accordingly, depreciation on such monitors and desktops

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 69 of 76 was claimed by the Appellant. The said claim was allowed by this Hon’ble Tribunal in Appellant’s own case for assessment year 2009- 10. For assessment years 2010-11 and 2011-12, the Commissioner of Income-Tax (Appeals), Bangalore had relied on the order of this Tribunal and upheld the adjustment for the said years. Further, the aforementioned decision has not been contested before the higher appellate authorities. Subsequent to orders of the appellate authorities, the office of the assessing officer had issued the order giving effect factoring the above orders.

50.2 In this regard, he submitted that for assessment years 2009- 10 to 2011-12, the authorities had concluded that the assets are eligible for depreciation and the Revenue authorities till date has not contested these decisions. As such, the ruling has been accepted by the Appellant as well as by the Revenue authorities. In such a situation it is imperative that the depreciation claim should be granted to the Appellant based on Explanation 5 of Section 32 of the Act, pursuant to which depreciation allowance is mandatorily available whether the assessee claims it or not. In view of this, the ld. A.R. requested this Tribunal to grant depreciation under section 32 of the Act amounting to Rs. 84,805/-.

50.3 The ld. D.R. relied on the order of ld. DRP

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 70 of 76 Disallowance of expenses under section 36(1)(va) of the Act

52.1 The ld. A.R. submitted that the Central Processing Centre (‘CPC’) vide its intimation made a disallowance of Rs. 51,49,036/- on account of delay in remitting the employees’ contribution to provident fund by the due date specified under the Employees’ Provident Fund and Miscellaneous provisions Act, 1952 under Section 36(1)(va) of the Act. In the draft assessment order, the Assessing Officer upheld the said disallowance without providing any opportunity to the Appellant to submit its contentions against such disallowance. Upon obtaining a remand report and upon accepting the contentions of the Appellant, the DRP directed deletion of the disallowance. In the final assessment order, an amount of Rs. 54,064/- only was considered as the disallowance under Section 36(1)(va) of the Act. However, the CPC while computing the assessed income has considered the entire disallowance of Rs. 51,49,036/- and the disallowance of Rs. 54,064/- was also considered once again while computing the assessed income resulting in double disallowance to the extent of Rs. 54,064/-. In this regard, the ld. A.R. prayed that the Assessing Officer may be directed to give effect to the directions of the DRP by deleting the disallowance.

52.3 The ld. D.R. relied on the orders of ld. DRP.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 71 of 76 53. After hearing both the parties, we remit this issue to the file of ld TPO/AO for fresh consideration after giving an opportunity of hearing to the assessee.

Addition of income towards sub-lease rental income

54.1 The ld. A.R. submitted that during the assessment year 2017- 18, the Appellant had earned lease rental income of Rs. 5,93,90,936/- by sub-leasing the property to Practo Technologies Pvt. Ltd. The Appellant incurred rental expenses of equivalent amount on such property. Accordingly, the net sub-lease rental income to the Appellant from such property let out is NIL.

54.2 The ld. A.R. submitted that the Appellant reduced such sub- lease rental income from Profits and Gains from Business in the return of income for the year under consideration and the corresponding rental expenses of equivalent amount were disallowed while computing business income. The said sub-lease rental income was offered to tax and corresponding rental expenses of equivalent amount was claimed as deduction under Section 57 of the Act. However, the CPC vide its intimation made an addition of the said amount without considering the expenditure claimed which was suo moto disallowed, which is incorporated in the final

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 72 of 76 assessment order. In this regard, it is submitted that in view of the Appellant already having offered the relevant income to tax, the impugned action of bringing the income to tax once over again has resulted in double addition, which is wholly impermissible.

54.3 That apart, he submitted that the action of the Assessing Officer in making the disallowance for the first time in the final assessment order, without proposing the same in the draft assessment order is wholly without jurisdiction and unsustainable. Therefore, he prayed that the disallowance made may be directed to be deleted.

54.4 The ld. D.R. relied on the order of ld. DRP.

Disallowance under section 40(a)(ia) of the Act

56.1 The ld. A.R. submitted that the Appellant had paid an amount of Rs. 5,20,107/- towards professional fees in connection with the amalgamation. Since the said amount was in the nature of capital expenditure, the Appellant suo moto disallowed the entire expense under Section 37 of the Act. In this regard, he submitted that the

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 73 of 76 in view of the Appellant already having disallowed the expenses, the impugned action of disallowing the same once over again has resulted in double addition, which is wholly impermissible. Therefore, it is prayed that the disallowance made may be directed to be deleted. That apart, he submitted that the action of the Assessing Officer in making the disallowance for the first time in the final assessment order, without proposing the same in the draft assessment order is wholly without jurisdiction and unsustainable.

56.2 The ld. D.R. relied on the order of ld. DRP.

Non-consideration of the consolidated revised return of income

58.1 The ld. A.R. submitted that the Assessing Officer erred in not considering the consolidated revised return of Income filed by the Appellant pursuant to its amalgamation with Arkinnet Software Private Limited effective from 27.06.2016. In view of the same, he prayed to direct the Assessing Officer to consider the consolidated revised return of income.

58.2 The ld. D.R. relied on the order of ld.DRP

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 74 of 76 59. After hearing both the parties, we remit this issue also to the file of ld TPO/AO to consider revised return of income in accordance with law. Ordered accordingly.

60 Ground Nos.37 & 38 of the assessee’s appeal are reproduced as under:

Short grant of credit of Advance tax and TDS

60.1 The ld. A.R. for the assessee submitted that the Appellant had claimed Rs. 81,25,00,000/- in the return of income towards credit of advance tax paid. However, the Assessing Officer, while passing the Final Assessment Order has erroneously allowed Rs. 77,00,00,000/- instead of Rs. 81,25,00,000/-. Therefore, he prayed that the Assessing Officer be directed to allow the entire amount of Rs. 81,25,00,000/-. In respect of credit of taxes deducted at source, the Assessing Officer has erroneously allowed Rs. 59,39,098/- instead of Rs. 61,71,170/-. Therefore, he requested that the Assessing Officer be directed to allow an amount of Rs. 61,71,170/-

60.2 The ld. D.R. relied on the order of ld. DRP.

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 75 of 76 Others (Interest and penalty)

62.1 The ld. A.R. submitted that the Assessing Officer has erred in charging interest under Section 234B of the Act amounting to Rs. 112,68,31,273/-, interest under Section 234C of the Act amounting to Rs. 1,87,315/- & interest under Section 234D of the Act amounting to Rs. 3,27, 268/-.Therefore, the ld. A.R. humbly prayed that this Tribunal may direct the Assessing Officer to delete the interest levy.

62.2 The ld. D.R. relied on the order of ld. DRP.

Order pronounced in the open court on 20th Sept, 2023

Sd/- Sd/- (Madhumita Roy) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 20th Sept, 2023. VG/SPS

IT(TP)A No.276/Bang/2023 M/s. VMware Software India Pvt. Ltd., Bangalore Page 76 of 76

Copy to:

Asst. Registrar, ITAT, Bangalore.