M/S. TANGOE INDIA SOFTEK SERVICES PRIVATE LIMITED,BANGALORE vs. NATIONAL FACELESS ASSESSMENT, DELHI

The assessee is a company engaged in the business of providing software development (SWD) services and Business Process Outsourcing (BPO) services to its AE. The assessee filed its return of income for AY 2018-19 on 30.11.2018 declaring a total income of Rs.23,30,99,280. The case was selected for scrutiny under CASS and statutory notices were duly served on the assessee. The case was referred to the TPO for determination of ALP in respect of the international transactions reported by the assessee during the year under consideration. The TPO passed an order whereby he proposed TP adjustment of Rs.3,56,94,963 in SWD segment and Rs.3,60,01,206 in ITeS segment. The AO passed a draft assessment order incorporating the TP adjustment. Aggrieved, the assessee filed its objections before the DRP. The DRP gave partial relief to the assessee whereby the TP adjustment was reduced to Rs.2,58,52,294 in SWD segment and Rs.2,07,51,281 in ITeS segment. The assessee is in appeal before the Tribunal against the final order of assessment passed by the AO pursuant to the directions of the DRP.

The issues contended by the assessee before the Tribunal through various grounds are as under:- • Ground Nos. 1 to 4, 5.1 to 5.2, 7.2 & 7.3, 11 & 12 are general. • Ground No.6 (6.1 to 6.15) – inclusion of certain comparables by the TPO in SWD segment. • Ground No. 7 (7.1) – exclusion of the comparable selected by the assessee in the TP study by the TPO in SWD segment. • Ground No. 8 (8.1 to 8.9) - – inclusion of certain comparables by the TPO in ITeS segment. • Ground No. 9 (9.1 & 9.2) – exclusion of the comparable selected by the assessee in the TP study by the TPO in ITeS segment.

The assessee with respect to the international transactions in SWD and ITeS segments provided to AE has applied TNMM as the most appropriate method for determining the ALP of the transaction. The operating profit to operating cost ration (OP/OC) has been taken as the Profit Level Indicator in TNMM analysis.

The margins of the assessee as per the financials are as given below: SWD ITeS Particulars (Amount in in Total in Rs INR) INR) Revenue Total revenue 706106132 487551923 1193658055 Total Operating Revenue 706106132 487551923 1193658055 Expenses Total Expenses employee benefits expense 418111464 289619768 707731232 Depreciation and 43446444 30094724 73541168 amortization expense other expenses 139968176 96953932 236922108 Total Operating Expenses 601526084 416668424 1018194508 Operating Profit 104580048 70883499 175463547 OP/OC 17.39% 17.01%

The TPO recomputed the profits of the assessee as under:- Particulars ITeS Total in INR SWD (Amount (Amount in in INR) INR) Revenue Total revenue 706106132 487551923 1193658055 Total Operating Revenue 706106132 487551923 1193658055 Expenses

The assessee therefore concluded that the price charged by the assessee with respect to the international transactions are within arm’s length. The TPO rejected the filters applied by the assessee and accordingly applied the revised filters to choose the following fresh set of comparables:- F.Year wise OP/OC (%) Sl. Wt. Company Name No. Average 2015-16 2016-17 2017-18 1 Infomile Technologies Ltd. 9.86 11.06 8.64 9.69 2 Harbinger Systems Pvt. Ltd. 12.69 12.80 9.46 11.65 3 Exilant Technologies Pvt. Ltd. 25.82 17.27 8.50 17.17 4 Tech Mahindra Ltd. 17.5 18.06 20.03 18.57 5 Larsen & Toubro Infotech Ltd. 20.78 19.21 17.14 18.94 6 Great Software Laboratory Pvt. Ltd. 17.88 23.87 17.31 19.73 7 Elveego Circuits Pvt. Ltd. 8.3 40.17 6.75 20.19 8 Black Pepper Technologies Pvt. Ltd. 9.63 13.84 24.83 20.62 9 Mindtree Ltd. 26.11 20.12 18.41 21.21 10 Aptus Software Labs Pvt. Ltd. 27.67 24.83 15.16 22.70 11 AcewinAgriteck Ltd. 26.54 23.23 22.73 24.51 12 Persistent Systems Ltd. 23.9 24.44 26.94 24.98 13 Wipro Ltd. 27.27 26.38 27.03 26.83 14 Tata Elxsi Ltd. 24.9 29.13 30.56 28.24 15 Infobeans Technologies Ltd. 34.98 23.89 27.82 28.52 16 Nihilent Ltd. 24.46 30.8 35.11 30.17 17 Thirdware Solution Ltd. 30.18 33.36 29.27 30.94 18 ThreesixtyLogica Testing Services 48.46 36.63 26.2 36.58 Pvt. Ltd. 19 Infosys Ltd. 38.29 38.79 35.27 37.38 20 Cybage Software Pvt. Ltd. 62.04 61.40 47.78 56.81 35th percentile 20.19 Median 23.60 65th percentile 26.83

Accordingly, the TPO computed the TP adjustment as below:- SWD SEGMENT Particulars Formula Amount (in Rs.) Taxpayers operating revenue OR 70,61,06,132 Taxpayers operating cost OC 60,01,62,698 Taxpayers operating profit OP 10,59,43,434 Taxpayers PLI PLI=OP/OC 17.65% 35th Percentile Margin of comparable set 20.19 Adjustment Required (if PLI< 35th Percentile) Yes Median Margin of comparable set M 23.60 Arm's Length Price ALP=(1+M)*OC 74,18,01,095 Price Received OR 70,61,06,132 Shortfall being adjustment ALP-OR 3,56,94,963

Aggrieved, the assessee filed objections before the DRP. The DRP gave partial relief to the assessee with respect to certain inclusions and exclusions and accordingly the final set of comparables was arrived at by the TPO in the order giving effect as listed below:- F.Year wise OP/OC (%) Sl. Wt. Company Name No. Average 2015-16 2016-17 2017-18 1 Isummation Technologies Pvt Ltd 3.54 4.18 -0.01 2.46 2 Infomile Technologies Ltd. 9.86 11.06 8.64 9.69 3 Harbinger Systems Pvt. Ltd. 12.69 12.8 9.46 11.65 4 Exilant Technologies Pvt Ltd 25.82 17.27 8.5 17.17 5 Tech Mahindra Ltd. 17.5 18.06 20.03 18.57 6 Larsen & Toubro Infotech Ltd 20.78 19.21 17.14 18.94 7 Great Software Laboratory Pvt Ltd 17.88 23.87 17.31 19.73 8 Elveego Circuits Pvt Ltd 8.3 40.17 6.75 20.19 9 Black Pepper Technologies Pvt Ltd 9.63 13.84 24.83 20.62

Accordingly the TP adjustment was reworked as under:- SWD SEGMENT Particulars Formula Amount (in Rs.) Taxpayers operating revenue OR 70,61,06,132 Taxpayers operating cost OC 60,01,62,698 Taxpayers operating profit OP 10,59,43,434 Taxpayers PLI PLI=OP/OC 17.65% 35th Percentile Margin of comparable set 20.19 Adjustment Required (if PLI< 35th Percentile) Yes Median Margin of comparable set M 21.96% ALP=(1+M)*OC Arm's Length Price 73,19,58,426 Price Received OR 70,61,06,132 Shortfall being adjustment ALP-OR 2,58,52,294

We heard the rival submissions and perused the material on record. We notice that the coordinate Bench of the tribunal has been consistently holding that while applying the turnover filter, the upper turnover should be considered at Rs.200 crores by relying on the decision of the Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), wherein the Tribunal took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations:-

Through ground No.6.11, the assessee is contending inclusion of Elveego Circuits P. Ltd. In this regard, the ld AR submitted that the

The ld. AR further submitted that the DRP failed to give any specific finding with regard to the exclusion of the company based on RPT filter. The ld. DR relied on the order of the DRP.

We heard the parties and perused the material on record. We notice that the TPO has included the company in the list of comparables by stating that the data pertaining to the company is available in public data base and same was provided in the search matrix and the company is functionally comparable to the assessee. We also notice that though the assessee has raised objections before the

Through ground No.6.12, the assessee is seeking exclusion of Black Pepper Technologies P. Ltd. The ld AR submitted that the company is into product design and development and cannot be compared with the assessee who is into software development. The ld. AR further submitted that the fixed assets schedule of the company (pg. 1103 of PB) includes intangible assets with respect to software under development and also that as per Note 17 (pg 1108 of PB) intangible assets include R&D expenditure incurred towards new product design. The ld. AR accordingly submitted that the assessee is not functionally comparable.

The ld DR supported the order of the DRP.

We heard the parties and perused the material on record. We notice that the DRP while considering the functionality of the comparable with the assessee has given a finding that – “6.26 Black Pepper Technologies Pvt. Ltd:- Having considered the submissions, on perusal of Note 18 forming part of financial- statement of the annual report, the company is engaged In

Through ground No.6.13, the assessee is seeking the exclusion of Aptus Software Lab P Ltd. The ld AR in this regard submitted that the majority of the income of the company is generated from the branch operations outside India, the ld AR further submitted that the assessee does not have any branch office in other country and the entire operation takes place only from India. It is therefore contended that the comparable should be rejected on the plea of functional dissimilar.

The ld DR in this regard submitted that the export filter of more than 75% is already applied by the TPO and the comparable has cleared the filter and therefore cannot be excluded on the ground that majority income is derived from branch outside India.

We heard the parties and perused the material on record. We notice that as per the Annual Report the company is deriving revenue from both domestic and foreign operations. Further, the DRP has given a clear finding that the principle activity of the company is software development and the revenue is generated from such operations. The only basis on which the exclusion is sought by the ld AR is that the company is having a foreign branch which contributes to the revenue, which in our view, is not the correct reason for seeking exclusion given that otherwise the company is functionally comparable with the assessee in terms of rendering SWD services. We therefore reject the ground for exclusion of the company.

Ground No.6.14 is with regard to exclusion of Infobean Technologies Ltd. The ld AR submitted that as per the annual report (pg 1162 PB), the company is into offering product engineering, digital information and automation. The ld AR further submitted that the company is into diversified operations where the segmental details with regard to the various operations are not available. It is therefore submitted that Infobean cannot be considered as a comparable.

The ld. DR relied on the order of the DRP.

We heard the parties and perused the material on record. We notice that Global Logic India Ltd. v. Dy. CIT [2020] 117 taxmann.com 39 (Delhi - Trib.). the Tribunal has considered the issue of inclusion of Infobean and held that – INFOBEANS TECHNOLOGIES LTD. (INFOBEANS) The taxpayer sought exclusion of Infobeans as a comparable again on ground of functional dissimilarity, it also being into providing services viz. software engineering services primarily in Custom Application Development (CAD), Content Management Systems, Enterprise Mobility, Big Data Analytics, UX & UI, Automation Engineering Services, as is evident from its financials, available on page 123 of the annual report paper book. The taxpayer also brought on record profile of the Infobeans at pages 58 to 60 of the appeal memo wherein it is claimed by the Infobeans that it is providing wide range of services under four verticals i.e. services, automation, enterprise and industries and under the automation services verticals, the company is providing advanced robotic process automation services. Since Infobeans is into diversified activities it cannot be a suitable comparable vis-à- vis the taxpayer which is a routine software development services provider. Infobeans has been excluded as a comparable on account of functional dissimilarity vis-à-vis routine software

Ground No.6.15 is with regard to exclusion of 360 Logica Testing Services P. Ltd. The ld AR submitted that the company is engaged primarily in the business of software testing for which it has patented licenses / processes like SAQAMA which has been developed by it. Accordingly the ld AR submitted that the company is functionally not comparable to the assessee. We notice that the DRP with regard to the comparable has given the finding that – “6.32 ThreesixtyLogica Testing Services private Limited:- Having considered the submissions, and on perusal of the annual report (page 2 & 3 of the AR standalone) the company derives 100% income from writing, modifying, testing of computer program to meet the needs of a particular client excluding web gage. designing. As per the revenue recognition (page 95 of the annual report) the Company derives revenue primarily from software testing, QA and related services. As per the information under Note 1 company overview (pages 65 & 79 of the annual; report), the company is primarily engaged in providing information technology services viz. Software testing and QA services. As per the segmental reporting and operating segment details (page 183) there are no other reportable segments doing any other business and deriving income. In view of the above information the company is into software development services as software testing forms very much part of software development services only. The information from the annual report does not Indicate that it provides high end software testing programs-as alleged by the assessee. It is seen that the assessee has raised pleas against functional comparability of the company, with reference to certain information said to be available in the group company's website. At the outset, we note that the

Ground No.7.1 is relating to the TPO rejecting the comparable selected by the assessee in SWD segment. The relevant ground reads as follows:-

We heard the ld DR.

We notice that the coordinate bench of the tribunal in the case of Prism Network (P.) Ltd. v. ACIT [2022] 141 taxmann.com 163 (Bang. - Trib.) has considered a similar issue and remanded the issue to the TPO/AO for fresh consideration with the following observations:- "18. 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

Since the margin of the assessee as per TP study in ITeS is 17.01%, the assessee concluded that the international transaction with respect to the segment is within arms length. The TPO rejected the filters applied by the assessee and accordingly chose the following fresh comparables by applying revised filters. SI. Name of the Comparable F. Year wise OP/OC (%) No 2017-18 2016-17 2015-16 Wt. Avg. 1 Jindal Intellicom Ltd. -5.35 8.66 2.78 7.41 2 Microland Ltd. 9.83 5.85 10.17 8.58 3 Datamatics Business Solutions Ltd. 3.19 8.88 34.85 13.41 4 Fuzen Software Pvt. Ltd 16.1 15.07 16.06 15.75 5 Tech Mahindra Business Services Ltd. 18.95 18.51 19.09 18.85 6 Infosys B P M Services Pvt. Ltd. 16.65 22.35 24.41 20.95 7 CES Ltd. (seg) 12.50 26.48 31.90 21.77 8 Manipal Digital Systems Pvt. Ltd. 20.93 28.91 21.04 23.54 9 Domex E Data Pvt Ltd 35.61 35.97 13.77 26.34 10 Vitae International Accounting 26.35 26.63 28.75 27.35 Services Pvt Ltd 11 A G S Health Pvt. Ltd. 30.19 36.06 14.7 27.64 12 Ultramarine & Pigment Ltd. (Seg.) 24.61 46.63 30.27 33.28 13 Access Healthcare Services Pvt. Ltd 37.37 41.27 Fails 39.03 RPT filter 14 Inteq B P O Services Pvt. Ltd. 31.68 36.64 48.47 39.15 15 Motif India InfotechPvt. Ltd. 47.89 48.99 38.8 45.72 16 Eclerx Services Limited 39.94 49.55 55.38 46.85 17 MPS Ltd 56.89 62.2 66.53 61.83 35th 20.95 Median 26.34 65th 33.28

Accordingly, the TPO imputed the TP adjustment as given below:- ITES SEGMENT Particulars Formula Amount (in Rs.) Taxpayers operating revenue OR 48,75,51,923 Taxpayers operating cost OC 41,44,00,134 Taxpayers operating profit OP 73151789 Taxpayers PLI PLI=OP/OC 17.15% 35th Percentile Margin of comparable set 20.95 Adjustment Required (if PLI< 35th Percentile) Yes Median Margin of comparable set M 26.34 Arm's Length Price ALP=(1+M)*OC 52,35,53,129 Price Received OR 48,75,51,923 Shortfall being adjustment ALP-OR 3,60,01,206

On further objections before the DRP, partial relief was granted to the assessee whereby M/s. AGS Health P Ltd., M/s. Ultramine & Pigment Ltd. and M/s. Axis Healthcare Services P Ltd. were excluded. In the order giving effect by the TPO the final list of comparables is as given below:- SL. Name of the Comparable F. Year wise OP/OC (%) No 2017-18 2016-17 2015-16 Wt. Avg. 1. Jindal Intellicom Ltd. -5.35 8.66 2.78 7.41 2. Microland Ltd. 9.83 5.85 10.17 8.58 3. Datamatics Business Solutions Ltd. 3.19 8.88 34.85 13.41 4. Fuzen Software Pvt. Ltd 16.1 15.07 16.06 15.75 5. Tech Mahindra Business Services Ltd. 18.95 18.51 19.09 18.85

Infosys B P M Services Pvt. Ltd. 16.65 22.35 24.41 20.95 7. CES Ltd. (seg) 12.50 26.48 31.90 21.77 8. Manipal Digital Systems Pvt. Ltd. 20.93 28.91 21.04 23.54 9. Domex E Data Pvt Ltd 35.61 35.97 13.77 26.34 10. Vitae International Accounting 26.35 26.63 28.75 27.35 Services Pvt Ltd 11. Inteq B P 0 Services Pvt. Ltd. 31.68 36.64 48.47 39.15 12. Motif India InfotechPvt. Ltd. 47.89 48.99 38.8 45.72 13. Eclerx Services Limited 39.94 49.55 55.38 46.85 14. MPS Ltd 56.89 62.2 66.53 61.83 35th 20.95 Median 26.34 65th 33.28

Accordingly the TP adjustment was revised as given below:- ITES SEGMENT Particulars Formula Amount Taxpayers operating revenue OR 48,75,51,923 Taxpayers operating cost OC 41,44,00,134 Taxpayers operating profit OP 7,31,51,789 Taxpayers PLI PLI=OP/OC 17.15 35th Percentile Margin of comparable set 18.85% Adjustment Required (if PLI< 35th Percentile) Yes Median Margin of comparable set M 22.66% Arm's Length Price ALP=(1+M)*OC 50,83,03,204 Price Received OR 48,75,51,923 Shortfall being adjustment ALP-OR 2,07,51,281

Through ground 8.1 to 8.6, the assessee is seeking exclusion of certain comparables based on upper turnover filter. the ld AR submitted that out of the final set of comparables, the following should

We have, while considering the exclusion of certain comparables in SWD segment, already directed the AO exclude the companies whose turnover is more the Rs.200 crores by relying on the decision of the coordinate bench in the case of Auto desk (supra). In our considered view the same ratio is applicable for the ITeS segment also and that the turnover of assessee in ITeS segment being Rs.48.75 crores we direct the TPO to exclude the above companies from the list of comparables based on upper turnover filter.

Through ground 8.7, the assessee is seeking exclusion of Domex E Data P Ltd. The ld AR in this regard submitted that the company is in the business of knowledge processing services (KPO) as can be seen from the Annual Report (pg. 1859 of PB). The ld AR therefore submitted that company is not functionally comparable to the assessee which is into pure BPO services such as service delivery, expense management and asset management.

We heard both the parties and perused the material on record. We notice that the coordinate Bench in the case of Altair Engineering India P. Ltd. v. ACIT, IT(TP)A No.1025/Bang/2022 dated 9.1.2023 has considered the exclusion of Domex E Data P. Ltd. and held that – “34. In so far as comparability of Domex E Data Pvt. Ltd., is concerned, the argument was that this company is engaged in providing KPO and therefore cannot be compared with an ITeS such as the assessee. On this objection, the DRP again held that ITeS and KPO have to be regarded as one and the same. Learned Counsel has pointed out that in the following decisions, Tribunal has taken the view that companies rendering KPO services cannot be regarded as a comparable company with an ITeS company. Transperfect Solutions India Pvt. Ltd vs ACIT [[TS-497- ITAT2022(PUN)-TP]] AY 2016-17 Schlumberger India Technology Centre (P.) Ltd. Vs DCIT [TS- 473ITAT- 2022(PUN)-TP] AY 2016-17 Credence Resource Management (P.) Ltd vs ACIT [2022] 138 taxmann.com 543 (Pune - Trib.), for AY 2016-17 35. In the light of the aforesaid decisions, we are of the view that Domex E Data Pvt. Ltd., should be excluded from the list of comparable companies.”

We notice that the profile of the assessee is providing SWD and ITeS services which is similar to Altair Engg. Therefore in our considered view, the ratio laid down by the coordinate Bench is applicable to assessee’s case also and accordingly, we direct the TPO to exclude Domex E Data P. Ltd. from the list of comparables.

Ground No.8.8 is with regard to exclusion of Manipal Digital Systems P. Ltd. The contention of the ld AR in this regard is that the company is into the business of ITeS of pre-media work and e- book/other book distribution and that there is no segmental information available. The ld AR drew our attention to the Annual Report of the company in page 1985 of PB in this regard. The ld AR relied on the decision of the Pune Bench of the Tribunal in the case of Credence Resources Management P Ltd. v. ACIT [2022] 138 taxmann.com 543 (Pune Trib) where the Tribunal has held that in the wide spectrum of ITeS if 2 companies are to be comparables, one has to look into the characteristic of service or business provided under ITeS by them. Accordingly, the ld AR submitted that Manipal Digital needs to be excluded from the final set of comparables.

The ld DR on the other hand submitted that under TNMM, there is no requirement to go into the peculiarity of the services rendered under ITeS segment and that Manipal Digital being in ITeS services cannot be excluded on this ground.

We heard the parties and perused the material on record. We notice that as per the Annual Report of the company, it is into providing ITeS services that is pre-press activities mainly to overseas as well as domestic customers. We further notice that the DRP though has rejected the contention that the company is functionally dissimilar, has given a direction to the TPO to verify the information with regard to the export earnings and if it fails the export turnover, the DRP

Ground No.8.9 is with regard to exclusion of Vitae International Accounting Services P Ltd. The ld AR in this regard submitted that the company is into the business of facilitating working space to its client and no segmental information is not available. Therefore, the ld. AR prayed that the company needs to be excluded from the list of comparables.

The ld DR relied on the order of the DRP.

We heard the parties and perused the material on record. We notice that the DRP has given a finding with regard to this comparable that the company is carrying on the business of processing data, handling back office functions and rendering ITeS. The DRP has also given a finding that the claim of the assessee that insufficient data is available in the public domain is not correct and that the annual report for all years are available in public domain. Since the assessee is contending the exclusion based on functional dissimilarity and has also submitted before the DRP that the data is not fully available due to which the annual report of the company could not be verified to counter the findings of the DRP. We therefore deem it fit to remit this

Ground No.9.1 is relating to the TPO rejecting the comparable selected by the assessee in BPO segment. The relevant ground reads as follows:- “9.1 The Hon'ble DRP erred in upholding the decision of Ld TPO to reject 4 comparables (i.e., Blue Cloud Softech Solutions Ltd, Infomile Technologies Ltd, Cyfuture India Pvt Ltd and Surevin BPO Services Ltd) selected by the Assessee merely on the basis of non-availability of data even though the annual reports of such comparables were furnished during course of proceedings and the said comparables were functionally similar to Assessee and passed all filters.”

The ld AR submitted that the reason for rejection of the above comparable is that there is no data available for these companies when the TPO ran the search process for comparable. The ld AR further submitted that the comparables not appearing in the search matrix cannot be the reason for rejection and therefore prayed for inclusion of the company on the ground that these companies are functionally comparable with that of the assessee.

We heard the ld. DR. We have in the earlier part of this order already that a company cannot be excluded for the reason that the same is not appearing in search matrix of TPO by relying on the decision of the coordinate bench in the case of Prism Networks (supra). The reason

Ground No. 9.2 is with regard to exclusion of Sundaram Business Services Ltd. The ld AR submitted that the TPO in the order giving effect has rejected the comparable by stating that it fails net worth filter whereas as per the annual report (pg. 2140 of PB), the net worth of the company is positive and accordingly should not be rejected on this ground.

We heard the parties and perused the material on record. We notice that the DRP in para 9.4 with regard to the exclusion of Sundaram Business Services has directed the TPO to include the company in the list of comparables for benchmarking provided it passes all the filters adopted by the TPO. We further notice that the TPO during the TP proceedings has not applied the net worth filter while selecting the comparables and that the TPO has applied this filter newly in the order giving effect and accordingly rejected the comparable. In our view, therefore the TPO has not followed the directions of the DRP correctly and therefore we remit the issue back to the TPO with a direction to apply the same filter adopted during the TP proceedings and decide the inclusion/exclusion of the comparable accordingly. This ground is allowed for statistical purposes.

In the result, the appeal is partly allowed.

Pronounced in the open court on this 29th day of March, 2023.