MINDTECK (INDIA) LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(1)(1), BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against final assessment order passed u/s 143(3) r.w.s. 144C(13) & 144B of the Income-tax Act,1961 ['the Act' for short] dated 31.1.2022 for the assessment year 2017-18. The assessee has raised following main grounds of appeal and also additional grounds of appeal:-

IT(TP)A No.211/Bang/2022 M/s. Mindteck (India) Limited, Bangalore

Page 2 of 53 1. General Grounds:

1.1 The orders passed by the learned Deputy Commissioner of Income-tax Transfer Pricing 2(1)(1) (Transfer Pricing Officer/ TPO); and Honorable Dispute Resolution Panel [collectively referred as "lower income tax authorities" for brevity] to the extent prejudicial to the assessee are bad in law and liable to be quashed.

1.2 The learned Assessing Officer has erred in making a reference to TPO for determining arm's length price without demonstrating as to why it was necessary and expedient to do so. The Honorable DRP has erred in partially confirming the action of the Assessing officer.

1.3 The lower income tax authorities have erred in: a) making transfer pricing adjustment of Rs. 5,91,00,534 (Software Development Segment) and Rs. 1,17,44,791 (ITeS Segment); not appreciating that there is no amendment to the definition of b) "income" and charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law; and passing the orders without considering all the submissions c) and/or without appreciating properly the facts and circumstances of the case and the law applicable. Segmental Profit and loss 2. Grounds relating to Segmental Profit and loss Accounts

2.1 The Learned TPO erred in not considering the submission of segmental profit and loss account with its associated enterprises under false and erroneous reasons. 2.2 The Learned TPO/ Hon'ble DRP erred in:

not appreciating that the margins of the Appellant in the SWD a) segment are to be benchmarked only against the transactions entered into with the associated enterprises b) not considering Finance Cost as a non-operating expense. c) mentioning that the allocation of expenses was arbitrary without appreciating the fact that the direct expenses attributed to each segments are at actuals and indirect expenses have been allocated in the proportion of revenue.

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Page 3 of 53 3. Grounds relating to Software Development (IT') Segment

3.1 The Learned TPO/Hon'ble DRP erred in including the following companies, even though they fail the higher threshold limit of INR 200 crores for turnover filter: (a) Infosys Ltd. (b) Larsen & Toubro Infotech Ltd (c) Persistent Systems Ltd (d) Thirdware Solution Ltd. (e) Cybage Software Pvt Ltd. (f) Nihile Ltd. (g) R Systems International Limited (h) Tech Mahindra Limited

3.2 The Learned TPO/Hon'ble DRP erred in including the following companies, even though they are not functionally comparable to the appellant:

(a) Great Software Laboratory Pvt. Ltd (b) Mindtree Ltd. (c) Persistent Systems Ltd` (d) Aptus Software Labs Pvt. Ltd. (e) Consilient Technologies Pvt. Ltd. . 3.3 The Learned TPO/Hon'ble DRP erred in facts and in law: (a) by calculating the RPT percentage by separately considering RPT Sales over Total Sales and RPT expenses over Total expenses notwithstanding that RPT percentage is to be calculated by adopting a common denominator of total operating sales. (b) by adopting the RPT filter at 25% instead of 15% of operating sales.

3.4 The Learned TPO/Hon'ble DRP erred in excluding the following companies, even though they are functionally comparable to the appellant: (a) Maveric Systems Ltd (b) Sagarsoft (India) Limited. (c) Evoke Technologies Limited. (d) Sankya Infotech Limited.

4.1 The Learned TPO/Hon'ble DRP erred in including the following companies, even though they fail the higher threshold limit of INR 200 crores for turnover filter:

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Page 4 of 53 (a) Microland Ltd (b) Tech Mahindra Business Services Ltd (c) Infosys BPM Ltd (d) SPI Technologies India Pvt Ltd (e) Ultramine & Pigment Ltd. 4.2 The Learned TPO/Hon'ble DRP erred in including the following companies, even though they are not functionally comparable to the appellant:

(a) Datamatics Business Solutions Ltd (b) Ultramine & Pigment Ltd. (c)InfosygBPM Ltd (d) SPI Technologies India Pvt Ltd (e)Tech Mahindra business services Ltd (f) Inteq BPO Services Pvt. Ltd. 4.3 The Learned TPO/Hon'ble DRP erred in facts and in law:

(a) by calculating the RPT percentage by separately considering RPT Sales over Total Sales and RPT expenses over Total expenses notwithstanding that RPT percentage is to be calculated by adopting a common denominator of total operating sales. (b) by adopting the RPT filter at 25% instead of 15% of operating sales. 4.4 The Learned TPO/Hon'ble DRP erred in excluding the following companies, even though they are functionally comparable to the appellant:

(a) Suprawin Technologies Ltd (b) Cosmic Global Ltd (c) Allsec Technologies Ltd (d) iSN Global Solutions Pvt Ltd (e) R Systems International Ltd 4.5 The Learned TPO/Hon'ble TPO erred in facts and in law:

(a) by modifying the comparable filter of persistent losses filter by excluding companies with operating losses in at least two out of three years as against the filter adopted by the Appellant of excluding companies with operating losses in all the three years. (b) by excluding Cyfuture India Pvt. Ltd on the basis of the persistent I4ses filter.

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Page 5 of 53 5. Other Grounds

5.1 The Learned TPO/Hon'ble DRP erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (i) accounting practice; (ii) positive working capital adjustment; (iii) risk profile between the Appellant and the comparable companies. 5.2 The Appellant craves for consequential relief of interest under section 234B & 234C under the Act. 5.3 The appellant craves leave to add to, alter and/or amend all or any of the foregoing grounds.

Software Development Segment (‘SWD’)

1) The appellants prays for the inclusion of the following companies as being functionally comparable: a) ACE Software Exports Ltd. b) Sagarsoft India Ltd. c) Issumation Technologies Pvt. Ltd. d) Inteq Software Private Ltd. e) Kumaran Systems Private Ltd. f) Synerzip Softech India Pvt. Ltd.

Information Technology Enables Services (‘ITES’)

2) The appellants prays for the inclusion of the following companies as being functionally comparable: a) I Services India Pvt. Ltd. b) Crystal Voxx Ltd. c) ISN Global Solutions Ltd. d) E-Zest Solutions Ltd. e) Cyfuture India Pvt. Ltd. 3) The appellants prays for the exclusion of the following companies as being functionally different: a) Infobeans Technologies Ltd. b) OFS Technologies Ltd, c) Cygnet Infotech Pvt. Ltd.

The appellant prays accordingly.

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04.04.2021 incorporating the adjustment amounting to Rs. 7,75,16,397 proposed by TPO. The total income was assessed at Rs. 17,00,63,230. 2.6 Aggrieved by the adjustment proposed by AO in draft order, the assessee filed the objections before the Dispute Resolution Panel (‘DRP’) in Form 35A on 29.04.2021. The DRP vide its order dated 28.12.2021 directed certain modifications to the adjustment made by the TPO in its order under section 92CA(3) of the Act. Accordingly, the TPO gave effect to the directions of the DRP vide order passed on 25.01.2022 and reduced the TP adjustment to Rs. 7,08,45,325/-. 2.7 The Assessing Officer then issued the Final Assessment order dated 31.01.2022 under section 143(3) of the Act. The assessed income was determined at Rs. 16,33,92,150 post the proposed transfer pricing adjustment.

Software Development (IT Segment):

“3.1 The Learned TPO/Hon'ble DRP erred in including the following companies, even though they fail the higher threshold limit of INR 200 crores for turnover filter: a) Infosys Ltd. b) Larsen & Toubro Infotech Ltd

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Page 8 of 53 c) Persistent Systems Ltd d) Aspire Systems (India) Pvt. Ltd. e) Thirdware Solution Ltd. f) Cybage Software Pvt Ltd. g) Nihilent Ltd. h) R Systems International Limited i) Tech Mahindra Limited”

3.1 At the time of hearing, the assessee has not pressed sl.no.(d) i.e. Aspire Systems (India) Pvt. Ltd. Accordingly, this ground is dismissed as not pressed.

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4.2 The Ld. A.R. for the assessee further submitted that the ITAT in assessee’s own case for AY 2016-17 in IT(TP)A No. 252/Bang/2021 dated 11.07.2022 has held that companies whose turnover exceeded Rs. 200 crores during the relevant year should be excluded from the list of comparable companies. The relevant observations of the Tribunal are noted at paras 11 to 14 (internal page 9 to 14) of the order. The finding of the Tribunal as noted in para 14 of the order was extracted below by the Ld. A.R.:

“ 14. In view of the aforesaid decision, we hold that 7 companies listed in grd.No.4 of the concise grounds whose turnover in the current year is more than Rs. 200 crores should be excluded from the list of comparable companies.”

4.3 The details of turnover of comparable companies which the assessee seeks to exclude as specified in ground no. 3.1 are as follows:

Name of the company Turnover for 2017 Paperbook (in crore Rs.) reference Persistent Systems Ltd 1,828.43 Page 81 of ITAT Appeal Set Larsen & Toubro Infotech 6,381.20 Page 81 of ITAT Ltd. Appeal Set Cybage Software Pvt Ltd. 766.33 Page 81 of ITAT Appeal Set Infosys Ltd. 62,893.00 Page 81 of ITAT Appeal Set Tech Mahindra Ltd 24,324.20 Page 81 of ITAT Appeal Set R S Software (India) Ltd 7613.03 Page 36 of ITAT Appeal Set Nihilent Ltd. 2,593.77 Page 546 of Paperbook R Systems International Ltd 263.75 As per chart filed Note: This company was not forming part of the original grounds of appeal raised. It was inadvertently included in the concise ground of appeal. Hence, the ld AR stated that the comparability of these companies need not be adjudicated.

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4.4 For AY 2017-18, in the following decisions, it has been held that companies having turnover of more than 200 crores have to be excluded.

a) ACI Worldwide Solutions Private Limited v ACIT [IT(TP)A No. 106/Bang/2022 dated 13.05.2022 – Page 1887-1890 of Case law compilation, Para 4-4.3 of the order b) Quicklogic Software (India) Pvt. Ltd. v DCIT [IT(TP)A No. 210/Bang/2021 dated 22.08.2022 – Page 1906-1920 of Case law compilation, Para 11-12.1 of the order

4.5 In view of the above, the ld AR for the assessee requested that the aforesaid companies stated in ground no. 3.1 be excluded from the list of comparable companies as they fail the higher turnover filter of Rs. 200 crores.

11.As far as comparability of companies listed as (a) to (g) in Grd.No.4 raised by the assessee is concerned, the admitted factual position is that the turnover of these companies is more than Rs.200 Crores and the assessee’s turnover is only Rs. 82,52,62,269/-. The TPO excluded from the list of comparable companies chosen by the assessee in its TP study companies whose turnover was less than Rs.1 Crore. The contention of the assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry

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Page 11 of 53 trend as their low cost to sales ratio made their results less reliable. The contention of the assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The DRP primarily relied on the decision rendered by the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The DRP therefore held that a company which is otherwise functionally comparable cannot be excluded only on the basis of high turnover. The Assessee has raised Grd.No.4 before the Tribunal challenging the aforesaid view of the DRP.

“41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet’s analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:-

“9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with

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Page 12 of 53 the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study.”

17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the

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Page 13 of 53 nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee.

17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon’ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra).

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Page 14 of 53 14. In view of the aforesaid decision, we hold that 7 companies listed in grd.No.4 of the concise grounds whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies.”

6.1 In view of the above decision of the coordinate bench, the Tribunal consistently holding that when the turnover exceeding Rs.200 crores is to be excluded from the list of comparable to determine the ALP of International transaction with the A.E. In view of the above, we direct the AO/TPO to exclude Infosys Ltd. from the list of comparables.

6.2. On the similar lines, the following companies’ turnover as mentioned in ground No.3.1 above are exceeding Rs.200 crores. Hence, these comparables are excluded from the list of comparables:

(b) Larsen & Toubro Infotech Ltd – Rs. 618.29 crores (c) Persistent Systems Ltd - Rs. 287.84 crores (e) Thirdware Solution Ltd. - Rs. (f) Cybage Software Pvt Ltd. - Rs. 758.87 crores (g) Nihilent Ltd. - Rs. 259.38 crores (h) R Systems International Limited - Rs. 263.75 crores (i) Tech Mahindra Limited - Rs.24,058.30 crores

6.3 In view of the above, we are of the opinion that the turnover of the assessee company from software development (IT) segment is only Rs.75.43 crores. Being so, following the decision in the case of Mindteck (India) Ltd. cited (supra), above companies are directed to be excluded from the list of comparables.

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7.1 The assessee seeks exclusion of following companies on the basis of functionality: (a) Great Software Laboratory Pvt. Ltd. 7.2 The Ld. A.R. submitted that this company is functionally different. For this, he referred an extract from page 7 of the Annual Report (Page 920 of Annual Report Compilation filed on 19.08.2022) which reads as follows: “The CTO-Office has full-time dedicated staff now, part of whom are working to create an opensource vector processing language for data analytics applications, in conjunction with a customer. The Company has also deployed its own private cloud for production use and has also adopted a homegrown provisioning framework to manage user accounts across various cloud applications.” 7.3 As it may be observed, Great Software is engaged in developing an opensource language which falls under ‘contract research and development services’ and not under ‘software development services’. The ld A R for the assessee referred the relevant extract of the definition of ‘contract research and development services’ as per rule 10TA of the Income Tax Rules, 1962, which is reproduced as below:

[(aa)] "contract research and development services wholly or partly relating to software development" means the following, namely:—

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Page 16 of 53 (i) research and development producing new theorems and algorithms in the field of theoretical computer science; (ii) development of information technology at the level of operating systems, programming languages, data management, communications software and software development tools; (Emphasis supplied) 7.4 The Ld. A.R. submitted that the ld. DRP, at internal page 24 of its order, noted that the principal business activity for the company is computer programming consultancy and related activities. In view of the above, he submitted that the business carried on by Great Software is not similar to that of the assessee. Accordingly, the ld. A.R. for the assessee requested for exclusion of Great Software from the final set of comparable companies.

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also goes up steeply and, therefore, the margins are not much affected. In fact, no evidence has been produced before Ld. DRP to show that margins in the high end segments of SWD services is high compared to low end services. Therefore, Ld. DRP was unable to accept the argument advanced by the assessee that this comparable company belonging to high end segments should be excluded from the comparability list on this ground alone. In fact, the skill set and the languages that required for both programming and developing software applications are broadly similar. Computer programmers and software developers share a similar work atmosphere. Both roles lean heavily on problem-solving ability, teamwork, planning and communication. Under the TNMM, functional similarity is more relevant than product similarity. Accordingly, TPO's action of selecting this comparable was upheld by the Ld. DRP. Against this assessee in appeal before us.

(b) Mind Tree Ltd. 10. The Ld. A.R. submitted that this company is functionally different on the following reasons: 10.1 He referred page 14 of the annual report of the company, wherein the key products/services of the company are highlighted, the extract of which is as follows:

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List three key products/services that the Company manufactures/provides (as in balance sheet) Digital: Cloud, Data Analytics. The other services include Application Development & Maintenance, Infrastructure Management, EAI, R&D, Testing, Consulting, Salesforce and SAP. 10.2 Further, he referred page 115 of the annual report, wherein the overview of the company is highlighted, the relevant extract of which is as follows:

The Company offers services in the areas of agile, analytics and information management, application development and maintenance, business process management, business technology consulting, cloud, digital business, independent testing, infrastructure management services, mobility, product engineering and SAP services. 10.3 He further referred an extract from page 93 of the Annual report which shows the revenue spread from various services that the company offers

10.4 As it may be observed, the ld. AR submitted that Mindtree has income from various business lines apart from software development. These functions are not performed by the assessee. Software development constitute only 22% of the revenue whereas the balance 78% relate to those functions that are not comparable to the assessee.

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10.5 The above submissions were made before the TPO by the ld AR in response to the show cause notice and the same is available at page 541-542 of the paperbook.

10.6 Further, this company was held to be not a comparable company to the case of a software development services provider in Yahoo Software Development India P. Ltd. v JCIT [(2020) 115 taxmann.com 60 (Bangalore – Trib.) – Para 41-42 of the order]. In view of the above, the ld AR for the assessee requested for exclusion of Mindtree from the final set of comparable companies. Incidentally, the turnover of this company is more than Rs. 200 crores.

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and is functionally comparable to the assessee. Having considered the submissions of the assessee, the Ld. DRP noted that M/s Mindtree Ltd has acquired 3 companies Bluefin Sol, Relational Sol and Magnet 360 LLC all of which provide software development services. Thus, he concluded that this acquisition will not have any effect on the comparability of M/s Mindtree Ltd. Against this assessee is in appeal before us.

12.1 The Ld. A.R. for the assessee referred the Annual Report of the company (Page 640 of Annual Report Compilation) which states that the principal business activity of the company is ‘Information technology services’. There is no further business description available in the annual report. In the absence of the same, the aforesaid business activity would ideally fall either under ‘information technology enabled services’ or under ‘contract research and development services’. As per the definition (extracted above), development of information technology at various levels specified

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therein, would fall under ‘contract research and development services’. Therefore, since the company is not into software development services per se, the ld AR requested that it should be excluded as being functionally different.

12.2 Without prejudice, it fails employee cost filter for two years: The ld AR further submitted that the TPO has applied a filter for including companies having employee cost of more than 25% of turnover. The assessee, in its reply to the show cause notice issued by the TPO, had submitted the following calculation to support that the company fails the aforesaid filter for two years (He referred Page 544-545 of Paperbook):

Particulars 2017 2016 2015 Employee Cost 1,61,45,378 69,80,436 38,84,756 Operating 3,86,03,935 4,29,59,630 4,19,86,023 Revenue Employee 41.82% 16.25% 9.25% Cost/Operating Revenue Paperbook Page 656 of Page 656 of Page 545 of reference Annual Annual Paperbook Report Report Compilation Compilation Compilation

12.3 In this connection, the assessee relied on the decision of the ITAT in assessee’s own case for AY 2016-17 in IT(TP)A No. 252/Bang/2021 dated 11.07.2022 [He referred Page 1713 to 1746 of compilation filed on 02.09.2022], wherein it has been held that if a company fails a particular filter for any one or more years, the margins for such years have to be excluded if the company is selected as a comparable. The relevant observations of the Tribunal recorded at para 15 (internal page 14 to 19) of the order are reproduced as under:

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Page 22 of 53 Respectfully following the aforesaid decision, Therefore, if at all R.S.Software Ltd., is to be regarded as a comparable company, then the margins for AY 2014-15 and 2015-16 of the company have to be ignored because in those years they are to be regarded as not comparable. We hold accordingly. We hold that the RPT filter has to be applied adopting the threshold limit of 15%.

12.4 In view of the above, the ld. AR for the assessee submitted that if this company is regarded as a comparable company, the margins of this company for AY 2016-17 and AY 2015-16 have to be ignored, as it fails the employee cost filter in those two years.

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total sales of Rs.3,86,03,935/- which comes to 41.82%. Ld. DRP concluded that the company is functionally comparable to the assessee and also passes the employment cost filter. Therefore, he opined that the company has to be included in the list of comparables and the Panel upholds the inclusion of this comparable. Against this assessee is in appeal before us.

15.2 He further referred page 65 of the annual report (Page 853 of Annual Report Compilation) which states the class of the intangible assets to be ‘copyrights’.

15.3 Revenue from royalties: He further referred to an extract from page 82 of the annual report (Page 869 of Annual Report

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Compilation), reproduced below, which states that the company earns revenue from royalties.

15.4 The ld AR submitted that the TPO, at internal page 39 of his order (Page 149 of ITAT Appeal set), records his comments on the objections raised by the assessee on this company, in the following words: “Given below is the extract of the annual report, from the page number 2 of the PDF, it is evident, which unambiguously states the description of the products to be “Information Technology Design and Development Service” which fits straight into the ambit of software development services itself”.

15.5 The ld AR stated that on perusal of the above, this company being a “product company” is functionally different from the Appellant.

15.6 Thus, he argued that the company has intangible asset and earns royalties from licensing of such asset. In view of the same, the assessee requested for exclusion of Consilient Technologies from the final set of comparable companies.

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information, in the annual reports, 100 percent of the operating revenues respectively were derived from software development services. The activities- Application maintenance and Development, Enterprise Resource Planning and Testing are all software development activities and fall within the umbrella 1T services, as per NASSCOM. As per the annual report information for the year ended 31.03.2017, the main object of the assessee company is to carry on the business of designing software development, software maintenance and support services the areas of computer networks, computer software and hardware, data communication equipment, electronic equipment, radio and wireless communication product and equipment and wireless telecommunication equipment of every description. Thus, the activities of L&T are functionally comparable to the assessee company, as evident from the nature of services rendered by it. Therefore, the Ld. DRP in his report observed that the plea that this company performs different functions has no basis. The nature of activity performed by this company is given at page 115 of the annual report, as under:

"We offer an extensive range of IT services like application development, maintenance and outsourcing, enterprise solutions, infrastructure management services and testing and digital solutions to clients in diverse industries".

16.1 In view of the above information, Ld. DRP observed that it is very clear that this company is engaged in software development services only and hence functionally comparable. As the company is primarily engaged in software development services and earns the revenue from this activity, the Ld. DRP opined that there is no need of providing segmental information as per AS 17. Thus, the plea of

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the assessee was not accepted by the ld. DRP. Against this, assessee is in appeal before us.

(a) by calculating the RPT percentage by separately considering RPT Sales over Total Sales and RPT expenses over Total expenses notwithstanding that RPT percentage is to be calculated by adopting a common denominator of total operating sales. (b) by adopting the RPT filter at 25% instead of 15% of operating sales.”

19.1 At the time of hearing, this ground is not pressed. Accordingly, dismissed as not pressed.

(a) Maveric Systems Ltd (b) Sagarsoft (India) Limited. (c) Evoke Technologies Limited. (d) Sankya Infotech Limited”

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20.1 The assessee wants inclusion of following comparables:-

(a) Maveric Systems Ltd. 20.2 This ground is not pressed at the time of hearing, hence, dismissed as not pressed. (b) Sagarsoft (India) Limited 20.3 The Ld. A.R. submitted that Sagarsoft is engaged in the business of software development services. In the following decisions, the ITAT has held it to be a comparable company in the case of software development services provider. a) EIT Services India Pvt. Ltd. v DCIT [IT(TP)A No. 210/Bang/2021 dated 22.08.2022 – AY 2016-17] – It was included as a comparable company for AY 2016-17 for the reason that the DRP had directed its inclusion in AY 2017- 18 – Page 1957-1958 of Case law compilation – Para 9.7-9.12 of the order b) Quicklogic Software (India) Pvt. Ltd. v DCIT [IT(TP)A No. 181/Bang/2022 dated 27.07.2022 – AY 2017-18 - Page 1921-1922 of Case law compilation – Para 13.4 of the order] c) M/s. Hewlett Packard (India) Software Operation Pvt. Ltd. v DCIT [IT(TP)A No.213/Bang/2021 dated 03.10.2022 – AY 2016-17] – Filed during the course of hearing on 21.11.2022 – Para 20-22.1, Page 42-43 of the order

20.4 The ld AR for the assessee further submitted that the ITAT in assessee’s own case for AY 2016-17 in IT(TP)A No. 252/Bang/2021 dated 11.07.2022 [He referred Page 1713 to 1746 of compilation filed on 02.09.2022] has included this company as comparable subject to the fact that the company has made a profit in any one out of the 3 financial years. He extracted the relevant observations of the

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Tribunal recorded at para 20 (internal page 21-22) of the order which are as follows:

“The TPO will verify if this company suffered financial loss in all the earlier Financial Years and even if in one Financial Year, the company has made a profit, it has to be regarded as a comparable company”

20.5 In view of the above, the assessee requested for inclusion of Sagarsoft in the final set of comparable companies.

“9.7 Ld. A.R. submitted that the learned TPO in in the TPO order (Page 49) has erroneously rejected Sagarsoft by stating that it fails service revenue filter. To this the Ld. A.R. stated that Sagarsoft has

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Page 29 of 53 an IT service income to sales percentage of 100% and hence passes the aforesaid filter and must be accepted as a comparable company.

9.8 The Ld. A.R. further submitted that Sagarsoft is engaged in software development services. The relevant extract from the annual report is provided at page 2017 of the paper book which makes it evident that the company is engaged in rendering software services. The Appellant also submits that the company qualifies the quantitative filters applied by the learned TPO. (He referred page 2017 of the paper book) 9.9 Further, the comparable has been accepted by the Ld. DRP in AY 2017-18 in Appellant's own case. (He referred Page 63 of the Case Law Compilation).

9.10 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to include this comparable to the final list of SWD/IT Segment.

9.11 Ld. D.R. relied on the order of Ld. DRP. 9.12 We have heard the rival submissions and perused the materials available on record. It was the contention of Ld. A.R. that in the year 2017-18, the Ld. DPR itself included this comparable while determining the ALP in that assessment year. In our opinion, there is no reason to not include this company as a comparable in the A.Y. 2016-17. Accordingly, we direct the AO/TPO to include Sagar Soft (India) Ltd. in the assessment year 2016-17 also.”

22.1 In view of the above order of the Tribunal, we are inclined to direct the AO/TPO to include this “Sagarsoft (India) Limited” in the list of comparables. (c) Evoke Technologies Limited: 23. At the time of hearing, this ground was not pressed by the ld. AR for the assessee and hence, this ground of appeal is dismissed as not pressed.

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25.1 The Ld. A.R. seeks exclusion of above comparables on the basis of turnover filter, which is as follows in respect of each company: a) Microland Ltd - Rs.530.55 Cr. b) Tech Mahindra Business Services Ltd - Rs.709.00 Cr. c) Infosys BPM Ltd - Rs.2940.00Cr. d) SPI Technologies India Pvt Ltd - Rs.391.55 Cr. e) Ultramine & Pigment Ltd.” - Rs.31.63 Cr.

25.2 After hearing both the parties, we are of the opinion that the companies which are having more than Rs.200 Crores are to be excluded in view of the decision of the Tribunal in the case of Mindteck (India) Pvt. Ltd. cited (supra). Further, we make it clear that M/s. Ultramine & Pigment Ltd., the turnover is only Rs.31.63 crores, which is within Rs.200 Crores. Hence, on the turnover basis, this company

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Page 31 of 53 cannot be excluded. Thus, other than this, only 4 comparables i.e. sl.nos.(a) to (d) above are excluded on the basis of turnover filter. 26. Now ground No.4.2 of the assessee’s appeal is reproduced below: “4.2 The Learned TPO/Hon'ble DRP erred in including the following companies, even though they are not functionally comparable to the appellant:

(a) Datamatics Business Solutions Ltd (b) Ultramine & Pigment Ltd. (c)Infosys BPM Ltd (d) SPI Technologies India Pvt Ltd (e)Tech Mahindra business services Ltd (f) Inteq BPO Services Pvt. Ltd.”

26.1 The assessee wants exclusion of following comparables on the basis of functionality basis.

(a) Datamatics Business Solutions Ltd (b) Ultramine & Pigment Ltd. (c) Infosys BPM Ltd (d) SPI Technologies India Pvt Ltd (e) Tech Mahindra business services Ltd (f) Inteq BPO Services Pvt. Ltd.”

26.2 At the time of hearing, the Ld. A.R. has not pressed sl.nos.(c), (d) & (e) above and hence, these comparables are dismissed as not pressed.

(a) Datamatics Business Solutions Ltd.

26.3 The Ld. A.R. submitted that this company provides essential business services to fortune 1000 companies and enterprises across the globe. This company provides fully integrated services and innovative solutions which cover the length and breadth of essential business needs across customers facing front-office functions and

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critical back-office operations. The information available in the website of this company in support of the above was submitted before the TPO (He referred Page 564-566 of Paper book).

26.4 The ld AR submitted that in the following decisions, the ITAT has held that this company is not a comparable company in the ITES segment.

a) Akamai Technologies India (P.) Ltd. v DCIT [2016] 74 taxmann.com 188 (Bangalore - Trib.) – AY 2006-07 b) Tesco Hindustan Service Centre (P.) Ltd. v DCIT [2015] 60 taxmann.com 51 (Bangalore - Trib.) – AY 2006-07

26.5. He further submitted that there is no significant change in the activities of Datamatics for the year under consideration as compared to the years considered in the aforementioned decisions. In view of the same, the assessee requested for exclusion of Datamatics from the final set of comparable companies.

26.6 The Ld. D.R. submitted that the ld DRP 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. On perusal of the submissions of the assessee, ld DRP noted that the comparable may be into many activities but the undisputed fact remains that its major revenue is from information technology enabled services. Thus, the ld DRP upheld the action of the TPO. Against this assessee is in appeal before us.

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26.7. We have heard the rival submissions and perused the materials available on record. We have carefully gone through the paper book submitted by the assessee in pages 1331 & 1332 wherein annual report of the above company has been shown, which is as follows:

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26.8 Further, the assessee has made significant investment which can be seen from the paper book at page Nos.1336 & 1359 and the assessee is engaged in diversified range of activities. In our opinion, these are to be relooked into by the AO/TPO while examining

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the functionality of the comparable. Accordingly, this issue is remitted to the file of AO/TPO for fresh consideration. (b) Ultramine & Pigment Ltd. 26.9 The Ld. A.R. submitted that this company should be excluded based on upper turnover filter of Rs.200 crores.

26.10 The Ld. D.R. submitted that the ld DRP on perusal of the annual reports noted that page 73 clearly mentions that M/s Ultramarine & Pigment Ltd is into IT enabled services. Hence the ld DRP opined that the company is functionally comparable and the plea of assessee was rejected. As per the pleas of assessee on employee cost filter and export filter, the ld DRP noted that the assessee has failed to point out as to how this comparable fails these filters. In absence of the specifics, ld DRP rejected the contentions of the assessee. However, keeping the principles of fairness and in the interest of justice in mind ld DRP directed the TPO to once again verify the computations of employee cost and export turnover filters. Against this assessee is in appeal before us.

26.11 We have heard the rival submissions and perused the materials available on record. The contention of the Ld. A.R. is that the functionality of this company is different and also it fails the export turnover filter and employee cost filter. In our opinion, it is appropriate to remit this issue to the file of AO/TPO for fresh consideration and re- examine it afresh in the light of above submissions of Ld. A.R. Accordingly, this issue is remitted back to the file of AO/TPO for fresh consideration.

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(f) Inteq BPO Services Pvt. Ltd. 27. The Ld. A.R. for the assessee submitted that this company is engaged in providing services in the nature of Revenue Cycle Management, Claims processing services and document & data processing. The information available in the website of this company in support of the same was submitted before the TPO (He referred Page 572 of Paperbook).

27.1 He further submitted that this company earns income entirely from Business Process Management (BPM) related services and relevant extracts from its annual report in support of the same are as follows.

Page 1493 of Annual Report Compilation

Page 1510 of Annual Report Compilation

Page 1517 of Annual Report Compilation

Page 1521 of Annual Report Compilation

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27.2 He submitted that the ITAT in Vee Technologies (P.) Ltd. v PCIT [(2022) 139 taxmann.com 229 (Bang-Trib) – Page 1751-1752 of Case law compilation], following the decision of its co-ordinate bench in EMC Software and Services (P.) Ltd v JCIT (2020) 115 taxmann.com 293, held that a company involved in business process management services cannot be considered comparable to a company providing ITeS such as the assessee.

27.3 In view of the above, the assessee requested for exclusion of Inteq BPO from the final set of comparable companies.

27.4 The Ld. D.R. submitted that the ld DRP in his reported observed that the services offered by Inteq BPO are in Revenue Cycle Management, Claims Processing services and Document & Data Processing. The principal business activity of the company at page 5 of the annual report is business process outsourcing (BPO). However, the assessee stated that business activities of the comparable company are more in the nature of business process management in the form of revenue cycle management, claims processing. It cannot be compared to Assessee Company which is rendering IT enabled services. In this regard, the contention and understanding of the assessee on the functional aspect of comparable company vis-a-vis IT enabled services is not correct. Information Technology Enabled Service (ITES) is defined as outsourcing of processes that can be empowered with information technology and covers diverse areas like finance,. HR, administration, health care, telecommunication, manufacturing etc. Armed with technology and manpower, these services are provided from e-enabled locations. This radically reduces

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costs and improves service standards. Some of the services offered include Medical Transcription, Document Processing, Data Entry and Processing, Data Warehousing, IT Help Desk Services, Application Development, Enterprise Resource Planning and Telecommunication Services. ITeS is a type of Outsource services which involves IT in various fields like Insurance, Finance & Banking, and so forth. These soft skills are mainly utilized in KPO (Knowledge Process Outsourcing) and BFO (Business Process Outsourcing) and LPO (Legal Process Outsourcing), rear office job and phone centres. Therefore, the functional profile of the comparable company is very much in the domain of ITES only. Therefore, the contention of the assessee that the functional profile of the company is dissimilar is that of company is not acceptable to the ld DRP.

27.5 We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that this comparable came for consideration in the case of Vee Technologies Pvt. Ltd. cited (supra), wherein held that this company is involved in business process management services and cannot be considered as a comparable to a company providing ITeS such as the assessee. Being so, we direct the AO/TPO to exclude Inteq BPO Services Pvt. Ltd. from the list of comparables. Directed accordingly.

(a) by calculating the RPT percentage by separately considering RPT Sales over Total Sales and RPT expenses over Total expenses notwithstanding that RPT percentage is to be calculated by adopting a common denominator of total operating sales. (b) by adopting the RPT filter at 25% instead of 15% of operating sales.”

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28.1 At the time of hearing, the Ld. A.R. has not pressed this ground. Hence, this ground is dismissed as not pressed. 29. Ground No.4.4 of the assessee’s appeal is reproduced below: “4.4 The Learned TPO/Hon'ble DRP erred in excluding the following companies, even though they are functionally comparable to the appellant: (a) Suprawin Technologies Ltd (b) Cosmic Global Ltd (c) Allsec Technologies Ltd (d) iSN Global Solutions Pvt Ltd (e) R Systems International Ltd” 29.1 The assessee wants inclusion of following comparables on the basis of functionality basis: (a) Suprawin Technologies Ltd (b) Cosmic Global Ltd (c) Allsec Technologies Ltd (d) iSN Global Solutions Pvt Ltd (e) R Systems International Ltd”

(a) Suprawin Technologies Ltd., (b) Cosmic Global Ltd. & (c) Allsec Technologies Ltd. 29.2 At the time of hearing, the Ld. A.R. has not pressed sl.nos.(a) Suprawin Technologies Ltd., (b) Cosmic Global Ltd. & (c) Allsec Technologies Ltd. and hence, the ground raised on these comparables is dismissed as not pressed. (d) ISN Global Solutions Pvt. Ltd. 29.3. The Ld. A.R. submitted that ISN Global is primarily engaged in the business of data processing services including financial document services, sales support services and contact centre such as 24/7 Customer Service Desk, after hours support, etc. (He referred Page 1642 and 1656 of Annual Report Compilation). This company was rejected by the TPO as it failed export revenue filter of 75%. The assessee contended that functional analysis is more

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important while identifying comparable companies as the functions performed in rendering services, both domestic and overseas remain the same. The DRP relied on a number of decisions wherein export revenue filter had been impliedly approved. Thus, the action of the TPO was upheld. 29.4 In this connection, the assessee submitted that the total turnover of the company for the year amounted to Rs. 3,90,39,287. The FOB value of exports amounted to Rs. 3,44,38,025. The ratio of export revenue therefore is 88% (Rs. 3,44,38,025/3,90,39,287) which satisfies the export revenue filter of 75%. The extracts from the annual report of the company in support of the above are as follows:

For turnover – Page 1654 of the Annual Report Compilation

For export turnover – Page 1663 of the Annual Report Compilation

29.5 In view of the above, the ld. AR for the assessee submitted that since the company satisfies the export revenue filter of 75% as adopted by the TPO, the assessee requests for inclusion of the same in the final set of comparable companies.

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transaction shall be judged with respect to conditions prevailing in markets in which respective parties to the transactions operate, including the geographical location and size of the market......'. Further, para 4.43 of the OECD Transfer Pricing Guidelines 2010 provide 'foreign sales/total sales' as one of the quantitative filter. When tested party's international transaction is compared, then it is implicit that comparison should be made with the entity having similar transaction. Therefore, if two transactions were to be substantially similar, the export sales should be substantially similar if not same. The amount of substantial similarity by convention is accepted as 75% export sales to total sales. In this connection, ld DRP presumed that net margin from export sales irrespective of market it is exported to, is similar. Therefore, market differences do not make significant impact as far as export transactions are concerned. Therefore, ld DRP agreed with the TPO on this filter. Moreover, he opined that export revenue filter is impliedly approved in the following cases: 1. Cisco Stems (India) P Ltd v DC1T(2014) 50 taxmann.coni 280 (bang) para 27.4 Motorola Solutions Pvt Ltd (TS-240-1TAT-(2014) (Del)-TP) 2. Hyundai Motors _India Engg (P) Ltd vs ITO (2014) 44 taxmann.com 34 (Hyd) para 7(x)

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Page 43 of 53 17, the Tribunal held that the comparability of the company requires to be examined afresh. It was submitted by the learned Counsel for the assessee that this company did not suffer losses in all the 3 years and submitted that in one of the 3 Financial Years, the assessee made profit. The learned Counsel placed reliance on the decision of the Bengaluru Bench of the Tribunal in the case of KBACE Technologies Pvt. Ltd., Vs. DCIT (2020) 118 taxmann.com 231 (Bengaluru) wherein it was held that for a company to be excluded on the ground that it was persistently making losses, the comparable company should have suffered losses in all the 3 previous Financial Years and even if in one Financial Year it makes a profit, then that company has to be regarded as a comparable company if it is otherwise a comparable company. In the light of the aforesaid decision and in the light of the facts brought to our notice, we are of the view that the comparability of this company has to be considered afersh by the AO/TPO in the light of the facts brought to our knowledge as above. The TPO will verify if this company suffered financial loss in all the earlier Financial Years and even if in one Financial Year, the company has made a profit, it has to be regarded as a comparable company.

In view of the above, the ld AR for the assessee contended that the action of the TPO in modifying the persistent losses filter is incorrect.

33.1. As discussed above, this company has not included in the search matrix conducted by the AO/TPO. Being so, at this stage,

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it is not possible to include this company in the list of comparables. Hence, it is rejected for exclusion from the list of comparables. 34. Ground No.4.5 of the assessee’s appeal is reproduced below: “4.5 The Learned TPO/Hon'ble TPO erred in facts and in law:

(a) by modifying the comparable filter of persistent losses filter by excluding companies with operating losses in at least two out of three years as against the filter adopted by the Appellant of excluding companies with operating losses in all the three years.” (b) by excluding Cyfuture India Pvt. Ltd on the basis of the persistent I4ses filter.

34.1 At the time of hearing, the Ld. A.R. has not pressed this ground. Hence, this ground of appeal is dismissed as not pressed. 35. Ground No.5.1 of the assessee’s appeal is reproduced below:

“5.1 The Learned TPO/Hon'ble DRP erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (i) accounting practice; (ii) positive working capital adjustment; (iii) risk profile between the Appellant and the comparable companies.”

35.1 At the time of hearing, Ld. A.R. argued only with regard to granting of working capital adjustment. After hearing both the parties, we are of the opinion that this issue came for consideration before this Tribunal in the case of Huawei Technologies India Pvt. Ltd. in IT(TP)A No.1940/Bang/2017 dated 4.8.2021 wherein held as under:

“15. The learned counsel for the Assessee brought to our notice the decision of the Tribunal in Assessee’s own case for AY 2012-13 wherein on an identical issue, the Tribunal held that working capital adjustment cannot be denied to the Assessee, in IT (TP) A.No. 1939/Bang/2017 Huawei Technologies India Pvt. Ltd. v. JCIT [2019] 101 taxmann.com 313 (Bang. Trib.).

“10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT(A) in not allowing any adjustment towards working

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Page 45 of 53 capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C . 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a) to (d)

(e)transactional net margin method, by which,— (i)the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;

(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii)the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub- clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction];

(f) ..... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction;

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Page 46 of 53 (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.

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• Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called “comparability adjustments.

“13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory)

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Page 48 of 53 • This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers – (less) the period granted to pay debts to suppliers.”

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Page 49 of 53 on the decision relied upon by the CIT(A) in the impugned order. In the matter of determination of Arm’s Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm’s Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences.

Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO Vs. E Value Serve.com (2016) 75 taxmann.com 195(Del-Trib) has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opeing and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an excact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT(A)’s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT(A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT(A) is also not sustainable.

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Page 50 of 53 transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows:

“(3) An uncontrolled transaction shall be comparable to an international transaction if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.”

35.2 In view of above order of the Tribunal, we remit this issue to the file of AO/TPO to calculate working capital adjustment and grant the same accordingly.

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Additional grounds: 37. Now coming to the additional grounds, the assessee has submitted a petition for admission of additional grounds. We have heard the both the parties on admission of additional grounds. In our opinion, all the facts are already on record and there is no necessity of investigation of any fresh facts for the purpose of adjudication of above ground. Accordingly, by placing reliance on the judgement of Hon’ble Supreme Court in the case of NTPC Vs. CIT 229 ITR 383 (SC) we inclined to admit the additional grounds for the purpose of adjudication as there was no investigation of any fresh facts otherwise on record and the action of the assessee is bonafide. 38. The assessee wants inclusion of following comparables:

a) ACE Software Exports Ltd. b) Sagarsoft India Ltd. c) Issumation Technologies Pvt. Ltd. d) Inteq Software Private Ltd. e) Kumaran Systems Private Ltd. f) Synerzip Softech India Pvt. Ltd.

38.1 At the time of hearing, the assessee has pressed only inclusion of following 3 comparables:

(a) ACE Software Exports Ltd. (c) Issumation Technologies Pvt. Ltd. (d) Inteq Software Private Ltd.

38.2 After hearing both the parties, we are of the opinion that this issue is appropriate to remit to the file of AO/TPO for fresh consideration as we have no occasion to examine these comparables

IT(TP)A No.211/Bang/2022 M/s. Mindteck (India) Limited, Bangalore

Page 52 of 53 at the time of passing the order. Hence, this issue is remitted to the file of AO/TPO for fresh consideration.

a) I Services India Pvt. Ltd. b) Crystal Voxx Ltd. c) ISN Global Solutions Ltd. d) E-Zest Solutions Ltd. e) Cyfuture India Pvt. Ltd.

39.1 After hearing both the parties, we are of the opinion that the AO/TPO have no occasion to examine these comparables. Hence, in the interest of justice, we remit these 5 comparables to the file of AO/TPO for fresh consideration so as to conduct TP study on these comparables and decide accordingly.

40.1 After hearing both the parties, we are of the opinion that the AO/TPO have no occasion to examine these comparables. Hence, in the interest of justice, we remit these 3 comparables to the file of AO/TPO for fresh consideration so as to conduct TP study on these comparables and decide accordingly.

IT(TP)A No.211/Bang/2022 M/s. Mindteck (India) Limited, Bangalore

Page 53 of 53 41. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 30th Nov, 2022

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 30th Nov, 2022. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.