SUBEX LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-6(1)(1), BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by the assessee is directed against order of the CIT(A), NFAC, Delhi passed u/s 143(3) r.w.s. 144C(13) & 144B of the Income-tax Act,1961 ['the Act' for short]. The assessee has raised following grounds of appeal:-

The grounds stated hereunder are independent of and without prejudice to one another. The Appellant submits as under: Assessment and reference to the Transfer Pricing Officer is bad in 1. law

ITA No.282/Bang/2022 Subex Limited, Bangalore

Page 2 of 45 1.1. The order dated February 21, 2022, passed under section 143(3) read with section 144C(13) and section 144B of the Income-tax Act. 1961 (Act), by the National Faceless Assessment Centre ('the NFAC'), be struck down as invalid, as the order is bad in law and on facts. 1.2. The Ld. Deputy Commissioner of Income-tax, Circle 6(1)(2)/ NFAC, erred in making a reference to the Ld. Deputy Commissioner of Income-tax, Transfer Pricing — 2(2)(1) (TP0') as the former has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The Hon'ble Dispute Resolution Panel ('DRP') erred in upholding the actions of the Ld. AO/ NFAC. 1.3. The Ld. Deputy Commissioner of Income-tax, Circle 6(1)(1) (the AO)/ NFAC/ Ld. TPO, erred in not providing an opportunity of being heard to the Appellant before rejection of the arm's length price computed in the Appellant's Transfer Pricing Study. The Hon'ble Dispute Resolution Panel ('DRP') erred in upholding the actions of the Ld. AO/ NFAC/ TPO. 1.4. The Ld. TPO/ NFAC erred in not demonstrating that the motive of the Appellant was to shift profits outside India by manipulating the prices charged in its international transactions, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. The Hon'ble DRP erred in upholding the actions of the Ld. NFAC/ TPO. 1.5. The Ld. TPO/ NFAC erred in not taking due cognizance of the facts and legal contentions provided by the Appellant and erred in adopting a biased and prejudiced approach to the transfer pricing assessment. The Hon'ble DRP erred in upholding the actions of the Ld. TPO/ NFAC. Transfer pricing order is void ab initio as transfer pricing proceedings were 2. not conducted in a faceless manner The transfer pricing order dated January 22, 2021, issued under section 9A(3) of the Act, is liable to be struck down, as the transfer pricing proceedings were not conducted in a faceless manner, as required vide CBDT Notifications dated August 13, 2020 read with Notification September 12, 2019. The Hon'ble DRP erred in upholding that transfer pricing assessment ought not to be conducted in a faceless manner.

Assessment order is bad in law as assessment was not completed in 3. conformity with the directions of the Hon'ble DRP 3.1. The final assessment order dated February 21, 2022 passed by the Ld. NFAC is bad in law as the assessment was not completed in conformity with the directions of the Hon'ble DRP as prescribed under section 144C(13) of the Act. 3.2. The Ld. NFAC/ Ld. TPO has erred in not following directions of the Hon'ble DRP wherein the Ld. TPO was directed to exclude the

ITA No.282/Bang/2022 Subex Limited, Bangalore

Page 3 of 45 margins of Aptus Software Labs Private Limited for FY 2014-15 and FY 2015-16 after verification of employee cost filter for FY 2014-15 and FY 2015-16. 3.3. The Ld. NFAC/ Ld. TPO has erred in not following directions of the Hon'ble DRP wherein the Ld. TPO was directed to exclude the margins of OFS Technologies Limited for FY 2014-15 after verification of export turnover filter and employee cost filter for FY 2014-15. Fresh comparability/ benchmarking analysis is liable to be quashed 4.

4.1. The Ld. TPO/ NFAC erred in arbitrarily rejecting Transfer Pricing Documentation ('TP Study') maintained by the Appellant as per Section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules') on account of mere difference of interpretation in selection of filters. The Hon'ble DRP erred in upholding the actions of Ld. TPO/ NFAC. 4.2. The Ld. TPO's/ NFAC's action of rejection of TP Study and conducting fresh search on the basis that comparable data would be available only after one year of assessment is erroneous and inconsistent with Rule 10B(5) of the Rules, as Rule 10B(5) only provides for updating of current year data and not for conducting a fresh search identifying new comparables. The Hon'ble DRP erred in upholding the actions of the Ld. TPO/ NFAC. 4.3. The Ld. TPO/ NFAC erred in conducting a fresh comparability/ benchmarking analysis using "non-contemporaneous" data and substituting the Appellant's analysis with the fresh benchmarking analysis on mere conjectures and surmises. The Hon'ble DRP erred in upholding the actions of the NFAC/ Ld. TPO. Application of arbitrary filters to arrive at a fresh set of companies 5. as comparables The Ld. TPO/NFAC in applying the following arbitrary filters to arrive at companies as comparables to the Appellant: 5.1 Application of software development services income to sales more than 75% as against qualitative filter of Companies engaged in software/ IT services applied by the Appellant. 5.2 Application of export services to sales more than 75% as against filter of insignificant foreign exchange applied by the Appellant. The Hon'ble DRP erred in upholding the actions of the Ld. TPO/ NFAC. Erroneous rejection of comparables selected in the Appellant's TP 6. Study

ITA No.282/Bang/2022 Subex Limited, Bangalore

Page 4 of 45 6.1. The Ld. TPO/ NFAC and the Hon'ble DRP erred in rejection of the following comparables selected by the Appellant in its TP Study: 6.1.1.Sankhya Infotech Ltd. • 6.1.2.Evoke Technologies Pvt. Ltd 6.1.3.Sasken Communication Technologies Ltd. 6.1.4.RS Software Ltd. 6.1.5.Nucleus Software Export Limited 6.2. The Hon'ble DRP erred in directing exclusion of Kals Information Systems Ltd. as a comparable to the Appellant.

ITA No.282/Bang/2022 Subex Limited, Bangalore

Page 5 of 45 7.5.2.Nihilent Limited 7.5.3.ThreeSixty Logica Testing Services Private Limited 7.5.4.Cybage Software Private Limited 7.5.5.Consilient Technologies Private Limited The Hon'ble DRP erred in upholding the actions of the Ld. TPO/ NFAC. Functionally not comparable 7.6. The Ld. TPO/ NFAC erred in selecting the following companies as functionally comparable to the Appellant. 7.6.1.Great Software Laboratory Private Limited 7.6.2.Mindtree Limited 7.6.3.R Systems International Limited 7.6.4.Persistent System Limited 7.6.5.1nfoBeans Technologies Limited 7.6.6.Aptus Software Labs Private Limited 7.6.7.Nihilent Limited 7.6.8.OFS Technologies Limited -..----- 7.6.9.Cygnet Infotech Private Limited 7.6.10. Infosys Limited 7.6.11. ThreeSixty Logica Testing Services Private Limited 7.6.12. Cybage Software Private Limited 7.6.13. Consilient Technologies Private Limited The Hon'ble DRP erred in upholding the actions of the Ld. TPO/ NFAC. Extra-ordinary events 7.7. The Ld. TPO/ NFAC in selecting Persistent Systems Limited, Nihilent Limited and OFS Technolo ies Limited as comparables even though there were certain extra-ordinary events d ring the relevant year. The Hon'ble DRP erred in upholding the actions of the Ld. TPO/ NFAC. Brand profits 7.8. The Ld. TPO/ NFAC erred in selecting Mindtree Limited and Infosys Limited as a comparable even though they earn brand profits unlike the Appellant. The Hon'ble DRP erred in upholding the actions of the Ld. TPO/ NFAC. Abnormally high margins 7.9. The Ld. TPO/ NFAC erred in selecting Threesixty Logica Testing ,.Services Private Limited. Infosys Limited, Cyba e Software Private Limited and Consilient Technologies Private Limited as comparables

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Page 6 of 45 even though they earn abnormally high margins. The Hon'ble DRP erred in upholding the actions of the Ld. TPO/ NFAC. Fluctuating margins 7.10. The Ld. TPO/ NFAC erred in selecting Infobeans Technologies Limited and OFS Technologies Limited as comparable even though they have earned fluctuating margins over a period of three years for which weighted average is computed. The Hon'ble DRP erred in upholding the actions of the Ld. TPO/ NFAC. Rectification of margins 7.11. Without prejudice to the above, the Ld. TPO/ NFAC erred in not rectifying the margin of Kals Information Systems Limited, Harbinger Systems Private Limited, Great Software Laboratory Private Limited, Mindtree Limited, R Systems International Limited, Persistent System Limited, Tata Elxsi Limited, InfoBeans Technologies Limited, Nihilent Limited, Cygnet Infotech Private Limited, Infosys Limited, Consilient Technologies Private Limited. The Hon'ble DRP erred in not adjudicating / upholding the margins computed by the Ld. TPO/ NFAC. Erroneous non-restriction of the adjustment value on software development 8. income to the proportionate value of international transaction The Ld. TPO/ NFAC erred in not restricting the adjustment value on software development income to the extent of the international transactions (i.e. proportionate adjustment) with the Associated Enterprises i.e., being 57.69% of the total software development income of the Company. The Hon'ble DRP erred in upholding the actions of the Ld. TPO/ NFAC. Erroneous non-set-off of brought forward business losses and 9. unabsorbed depreciation The Ld. NFAC has erred in not setting-off brought forward business losses and unabsorbed depreciation. Erroneous non-set-off of MAT credit entitlement 10.

The Ld. NFAC has erred in law in not setting-off MAT credit entitlement pertaining to earlier AYs. The Hon'ble DRP has erred in not adjudicating this ground of objection raised by the Appellant before it.

Erroneous non-grant of Foreign Tax Credit 11.

The Ld. NFAC has erred in law in not granting Foreign Tax Credit. The Hon'ble DRP has erred in not adjudicating this ground of objection raised by the Appellant before it.

ITA No.282/Bang/2022 Subex Limited, Bangalore

Page 7 of 45 12. Erroneous short grant of interest under section 244A of the Act. The Ld. NFAC has erred in short grant of interest under section 244A of the Act. Non-issuance of refund 13.

The Ld. NFAC/ AO, after having determined an income-tax refund due to the Appellant, has erred in not issuing the refund due to the Appellant. Initiation of penalty proceedings under section 274 read with section 14. 270A of the Act On the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 274 read with section 270A of the Act. Relief 15.

The Appellant prays that directions be given to grant all such relief arising from the preceding grounds as also all reliefs consequential thereto.”

“7.1. The Hon'ble DRP, after having upheld the application of different financial year filter and reaching at a finding that R Systems International Limited fails the different financial year filter, erroneously upheld R Systems as a comparable by wrongly mentioning that the Appellant has not objected the use of different financial year filter.”

3.1 The Ld. A.R. submitted that the Ld. DRP in para no.3.1.7 in page 6 & 7 of its order observed with regard to exclusion of comparables, which are having different ending of financial year as follows:

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Page 8 of 45 “3.1.7 The different financial year ending filter is applied to rule out the effect of differences in economic and market conditions at different time period. Further. there is no rationale in retaining such companies as comparables when the companies having same financial year are available for comparability analysis. On the rationale of the decision of the Hon'ble Delhi High Court, in the case of Chryscapital Investment Advisors (India) Pvt. Ltd. vs. DOT (ITA No.417/2014) also, the companies which have different financial year cannot be considered as comparable. The Hon'ble Delhi High Court, in the case of CIT vs. Mckinsey Knowledge Centre India Pvt. Ltd., in ITA No.217/2014, dated 27/03/2015, observed that if from the available data on record, the results for financial year can reasonably be extrapolated then the comparable cannot be excluded solely on the ground that the comparables have different financial year endings. In this regard, we are of the view that based on the Ant111111 Report available for two different financial years, the financial results for the relevant period cannot be reasonably extrapolated without probing the Annual Reports of the two financial years of the comparable. We are also of the view that when other comparables arc available (when even one comparable is sufficient for comparability analysis) having same account year ending. there is no rationale to select such companies by curling out the figures based on the quarterly reports of the two financial years, authenticity and correctness of which cannot be accepted without further probe. The ITAT, Bangalore, in the case of M/s Hewlett-Packard (India) Globalsoft Pvt Ltd. vs. DCIT in IT(TP)A No.1031(Bang)/2011 and in the case of Core Objects India Pvt Ltd. vs. ITO, in IT (TP)A No. 1229 (Hang)/2011, upheld exclusion of the companies by application of the above filter. A similar view is taken by the Hon'ble Bombay High Court, in the case of CIT-11 Pune v/s PTC Software (India) Pvt. Ltd., in IT appeal No 732/2014. Accordingly, we do not find any infirmity in application of the above filter and rejection of the above company, the same is accordingly upheld. Ground rejected.”

3.2 Further, it was observed by the Ld. DRP in page 16 with regard to R. Systems International Ld. as follows:- R. Systems International Limited (in ground No.7.1): 3.3 The Ld. DRP in his order observed that this company failed the different financial year filter adopted by the TPO. The assessee has not disputed this fact before the Ld. DRP. After detailed discussion with the assessee, the Ld. DRP upheld the applicability of the different financial yar filter. Accordingly, Ld DRP did not find merit in the objection and hence he rejected the same.

3.4 According to the Ld. A.R., the above findings of the Ld. DRP is contrary to its earlier findings in para 3.1.7 reproduced above and

ITA No.282/Bang/2022 Subex Limited, Bangalore

Page 9 of 45 prayed that R. Systems International Ltd. to be excluded from the list of comparables. 4. The Ld. D.R. supported the order of the lower authorities. 5. We have heard the rival submissions and perused the materials available on record. There is no dispute that R. Systems International Ltd. is following different financial year and the assessee objected inclusion of the comparable which is having different financial year. Being so, as recorded by the Ld. DRP itself, R. Systems International Ltd. fails the financial year filter. Accordingly, we direct the TPO/AO to exclude R. Systems International Ltd. as a comparable to the assessee’s case. Accordingly, this company R. Systems International Ltd. is to be excluded from the list of comparables. This ground No.7.1 of the appeal of the assessee is allowed.

ITA No.282/Bang/2022 Subex Limited, Bangalore

Page 10 of 45 6.1 In this ground, assessee wants only for exclusion of following 3 comparables on functional dissimilarity. The ld AR, at the time of argument submitted before us that other comparables are not pressed and dismissed accordingly. 1) Persistent Systems Ltd. 2) Nihilent Technologies Ltd. 3) OFS Technologies Ltd. Persistent Systems Ltd. 7. The ld. A.R. for the assessee submitted that Persistent Systems Ltd. is functionally dissimilar to the assessee. Persistent is inter-alia engaged in outsourced software development services. It builds software for Independent software vendor, platform partners and enterprise customers. The scope of services provided by Persistent includes Enterprise Digital Transformation, Product Engineering services and solution for Internet of Things, Product engineering and professional services to ISVs and enterprises, IP products. Further segmental data for Persistent is not available. Therefore, he prayed that this company Persistent Systems Ltd. should be excluded as comparable.

(Page 55 of Annual Report – FY 2016-17) In this regard, the assessee relied on the following rulings:

ITA No.282/Bang/2022 Subex Limited, Bangalore

Page 11 of 45 - SAP Labs India Pvt Ltd [TS-506-ITAT-2022(Bang)-TP]/ IT(TP)A No.606/Bang/2021 and IT(TP)A No.2510/Bang/2019 dated 21.7.2022 - SanDisk India Device Design Centre Pvt. Ltd., vs. JCIT IT(TP)A No. 288/Bang/2021 dated 30.06.2022. 8. The Ld. D.R. submitted that on perusal of the annual report, by the Ld. DRP, he noted that the company's core activity was rendering product development services i.e., providing services to business enterprise to develop software products. As per the information at page 265 of the annual report, it has reported income from software services of Rs.17201.52million and software licenses of Rs.128.12 million aggregating to Rs.17329.64 million. Thus, the income from software licenses constitutes a meagre 0.73% of its operating revenue.

8.1 The Ld. D.R. further submitted that the company during the previous year proceedings has also categorically clarified in its reply u/s 133(6) that it is predominantly engaged in software product development services only. The relevant extract of the reply is as under: -

"Persistent System Limited is predominantly engaged in the business of providing outsourced software product development services to customers across the globe from following industry verticals: Infrastructure and systems, 'Telecom and Wireless, Life science and Healthcare and Financial services. The company reports segment information based on the above industry verticals. The nature of services provided under each of these segments differs only in terms of the industry and specific requirements of customers in each of these industries. The essential activity across all business segments can be considered to be software product development services".

8.2 As could be seen from the information contained in the annual report of this company, and the clarification submitted by the company in its reply to the notice under section 133(6) of the Act, the

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Page 12 of 45 Ld. DRP found it very clear that the company is predominantly engaged in software product development services and hence it is functionally comparable to the assessee. The Ld DRP noted that the assessee by referring to the annual report of the company contended that this company is predominantly into product development. He noted that these discussions are made with reference to the consolidated results of the company, and which included the business profile and operations of its subsidiary companies and associate companies. The Ld. D.R. submitted that a careful perusal of the annual report by the Ld. DRP would indicate that the financial results of this stand-alone company is discussed only from page 228 onwards, and the discussion in the earlier pages related to the entire group. The ld DRP also noted that the information submitted under section 133(6) of the Act is totally in consonance with the information stated in the financial statements of this company. It would be totally incorrect to consider the information pertaining to the entire group as such, when the comparability is to be seen with reference to the stand-alone financials of Persistent Systems Ltd, which was examined and considered by us for comparable analysis and accordingly, the Ld. DRP found that this company is functionally comparable to the assessee.

8.3 In this regard it is the ld DRP noted that as per the consolidated annual report the revenue from software licence was Rs.688.99million for the entire group whereas, such revenue in the case of M/s Persistent Systems Ltd was only Rs.128.12 million (Ref. page 201 and page 265 of the annual report). It was also seen by the Ld. DRP that in the P&L account of the consolidated financial statement expenses were debited towards Royalty expenses of Rs.127.48 million (Referred page 202) and there is no

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Page 13 of 45 such debit in the stand-alone P&L account of the company M/s. Persistent Systems Limited.

8.4 Further, the ld. DR submitted that as per information at page 88 of the annual report for FY 2012-13, it was stated in the notes to the consolidated results that the increase of intangible block of assets during the year (2012-13), of Rs.262.84 million, was mainly on account of acquisition of various IPs during the year and the same is shown in the intangible Asset Schedule of the consolidated financial statement at page115 as under: -

(Intangible assets of Group 2012-13)

8.5 The ld DR stated that all these clearly show that the IP related and product revenue pertain to ether group entities and does not pertain to M/s. Persistent Systems Ltd, which is being compared. It is also to note that this company has clarified in its reply given u/s 133(6), that M/s Persistent Systems Ltd is predominantly engaged in the business of rendering software development services; the revenue reported is primarily on account of rendering of software development services only. The relevant extract is as under

"In respect of the information you have requested under 3(a) and 3(c) in respect of software products and innovations, overseas subsidiary companies of Persistent Group have acquired certain Intellectual Property (IP) products and generating some revenue from licensing and support of these products. In case of PSL India, which is predominantly engaged

ITA No.282/Bang/2022 Subex Limited, Bangalore

Page 14 of 45 in the business of rendering software development services, the revenue reported is primarily on account of rendering of software development services only"

The above clarification also makes it clear that this company is not into diversified activities.

8.6 Further, ld DR submitted that the ld DRP in his report observed that the expenditure incurred towards R&D as per page 287 of the annual report was Rs.543.76 million, which constitute meagre 3.13% of operating revenue. Further, the capital expenditure towards R&D was only Nil, which clearly show that the R&D activities are routine. The value of intangible assets as on 31-3-2017 was only Rs.222.04 million (page 236 of the annual report) constituting 1.28% of operating revenue. The intangible assets are computer software and licenses purchased for its business activity. There is no reference to any IPR or patent owned or developed by the company, in the stand-alone annual report. There is no acquisition of IPR during the year. Further as per note in page 243 of the annual report, costs are expensed as incurred unless the technical and commercial feasibility of the project enable to use or sell the software, they are not capitalized'. Such a development is not reflected in the Asset schedule. Thus, it can be inferred that the R&D activities and intangible assets owned are routine and do not have impact on the revenue and profitability of the company. The ld DRP also noted that, the assessee has failed to establish that such differences, if any, on account of R&D, and the presence of these intangible assets have materially affected the comparability or profitability as required in clause (i) of sub-rule (3) of Rule 10B of the Act. The said company also clarified u/s 133(6) that its intangible assets are in the nature of software licenses acquired for use in the operation of the company and it was seen that they are not in the nature of

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Page 15 of 45 inbuilt IPR generating revenue for the company. Hence, the intangible assets as such have not affected the profitability. Taking into account all these aspects, the ld DRP did not find any material difference so as to affect comparability. Hence, these pleas were rejected by the ld DRP.

8.7 A plea was raised before the ld DRP that this company fails the RPT filter of 25% and hence has to be excluded. On verification of the information in the annual report by the ld DRP, (pages 277- 279 of the annual report), he noted that this company does not fail the RPT filter adopted by the TPO. He further noted that the assessee has computed by aggregating the transactions, on the revenue and expense side, without taking corresponding parity in the denominator. Such a computation is totally skewed. The RPT if the revenue is considered on both numerator and denominator the percentage comes to 22.2%. On the other hand, the expenses are taken which comes to 5.2%. Thus, the company satisfies the RPT filter adopted by the TPO. Thus, ld DR stated that the ld DRP did not find merit in the plea raised and accordingly he rejected the same.

8.8 The ld DRP stated in his report that as the company is primarily engaged in software development services and earns the revenue from this activity there is no need of providing segmental information as per AS 17. With regard to the peculiar circumstances, at the outset, the ld DRP noted that there was no acquisition by this company, which is being compared. As per the information, both the acquisitions of PRM Cloud Solutions and Genwi are by its subsidiaries. Such acquisition by the subsidiary will not have any direct impact on the revenue or profit margins of this company. Besides, the assessee also did not point to any information in the annual report to indicate that the acquisition by the subsidiary had impacted the profit margin or revenue of

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Page 16 of 45 the company being-compared. These acquisitions would not make it functionally different. Hence, these pleas were rejected by the ld DRP. 8.9 The ld DR further stated that it was argued by the ld AR for the assessee before the ld DRP that this company has incurred significant expenses towards cost of technical professionals, and hence cannot be taken as comparable. But the ld DRP failed to understand the plea as to how it affects comparability. He noted that these are routine operating expenses incurred by the company for its operational activities, and does not affect comparability as such. Besides under the TNMM, the net profit margins are compared and there is no requirement to make item to item comparison of expenses of the enterprises. Thus, the ld DRP did not find merit in the plea and accordingly he rejected the same.

8.10 The ld DR further stated that the ld AR for the assessee pleaded before ld DRP that this company had incurred brand building expenses, however, on verification of the annual report, the ld DRP noted that the company had incurred advertisement and sponsorship expenses to the tune of Rs.49.43 million, which constituted meagre 0.28% of total revenue and thus it is insignificant to materially affect comparability or profitability. Besides, under TNMM methodology, there is no requirement to make item to item comparable analysis of expenditure. Hence, these pleas were rejected by the ld DRP.

8.11 The ld DR further stated that with regard to the peculiar circumstances, at the outset, the ld DRP noted that there was no acquisition by this company, which is being compared. As per the information, both the acquisitions of PRM Cloud Solutions and Genwi are by its subsidiaries. Such acquisition by the subsidiary

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Page 17 of 45 will not have any direct impact on the revenue or profit margins of this company. Besides, the assessee also did not point to any information in the annual report to indicate that the acquisition by the subsidiary had impacted the profit margin or revenue of the company being compared. These acquisitions would not make it functionally different. Hence, these pleas were rejected by the ld DRP.

6.2 The Ld.CIT.DR though objected, could not controvert the observations of this Tribunal in case of NXP India Pvt. Ltd., (supra). 7. We have perused submissions advanced by both sides in light of records placed before us. We note that the functional profile of this assessee and the assessee in the decision cited by the Ld.AR are same. Above comparables have been dealt with by this Tribunal as under:

PERSISTENT SYSTEMS LIMITED

ITA No.282/Bang/2022 Subex Limited, Bangalore

Page 18 of 45 assessment year 2012-2013, it is an abnormal year of operation and it is owning various intangibles. For this purpose, he relied on the order of the Bangalore Bench of the Tribunal in the case of NXP Semiconductor India Private Limited in IT(PA) No.1634/Bang/ 2014 for assessment year 2009-2010 — order dated 22nd July, 2015.

6.1 We have carefully gone through the order of the coordinate Bench in the case of NXP Semiconductor India Pvt. Ltd. (supra) for the assessment year 2009-2010, wherein it was observed that Persystent Systems Limited 'was engaged in product development and product design and analysis services is functionally different from a pure software service provider and therefore, excluded it from the list of comparables for software development services. The same view was taken in the case of Saxo India Pvt. Ltd. in ITA No.6148/Del/2015 — order dated 05th February, 2016, by observing that Persystent Systems Limited is engaged in running software development services as well as sale of software products. Albeit the percentage of software products in the total revenue is less, as has been noted by the TPO, and also there is no precise information about the contribution made by such small sale of software products to the total profits of the company. As no segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, it was directed to exclude Persystent Systems Limited from the list of comparables. In the present case also, it is noticed that Persystent Systems Limited is engaged in software products development. There is a difference between the outsourced software product development and IT services, which is evident from page nos. 973 and 974 of the paper book, as under:- "Outsourced Software Product Development (OPD) is different from IT services. Unlike a typical IT services project, where requirements are fixed while time and money are variable, a software product development project starts with fixed time and money, thus leaving requirements as the only variable. Essentially, the product development team's task is to produce the best set of requirements within a fixed time and budget. Persistent Systems has emerged as a leader in the OPD segment — a segment which is fast growing.

OPD and outsourced IT services: the difference.

How is OPD different from outsourced IT services is an oft asked question. In IT services, projects start with well-defined requirements, and vendors use time and money as variables to arrive at a reasonable cost estimate for-the project. After completion, the project goes into maintenance mode.

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Page 19 of 45 In product development, requirements are less clearly defined. Instead, most product developers are given ship-dates for the product that are typically determined by external factors. Once the ship-dates are identified, the budgets for the product are frozen. In product development projects, all requirements can never be completely fulfilled in a particular version. As a result, most product companies plan multiple product versions for their product. Every team member must contribute not only to building features for the .current release but must also contribute enhancements and provide feedback for future releases of the product."

6.2 Persystent Systems Limited having revenue of 8103.64 Million from software services and other income of 323.76 million from income from other sources. Assessment year 2012-2013 is an abnormal year of operation to Persystent Systems Limited, which is evident from the annual report placed on record by the assessee in its paper book. Further, Persystent Systems Limited is having intangibles to the tune of 2402.67 million as evident from its balance sheet ended on 31.03.2012. Being so, it is not comparable to assessee's case. We, therefore, direct the TPO to exclude Persystent Systems Limited from the list of comparables.

LARSEN & TOUBRO INFOTECH LIMITED

INFOSYS LIMITED

ITA No.282/Bang/2022 Subex Limited, Bangalore

Page 20 of 45 learned DR submitted that the nature of services remains the same irrespective of whether it is engaged in providing onsite / offsite services.

8.1 We have heard the rival submissions and perused the material on record. Similar issue came up for consideration before the Tribunal in the case of NXP Semi Conductors India Put. Ltd. u. DCIT in IT(TP)A No.1634/Bang/2014 — order dated 27.07.2015, wherein it was held as under:- "10.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a coordinate bench of the Tribunal in the case of Cisco Systems Services B. V., India Branch (supra). for Assessment Year 2009-10 had held that this company be excluded from the final set of comparables on the ground that it is functionally dissimilar and different from a purely software service provider and at Para 20 of the order has held as under :-

"20. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software services development etc. Though the said company was having other business also, with regard to its software development segment, this Tribunal held Bodhtree Consulting Ltd., Infosys Ltd., Kals Intbrmation Systems Ltd. and Tata Elxsi Ltd. to be not proper comparables. Relevant paras of the order dt.I4.8.2014 is reproduced hereunder :-

26.2 Infosys Technologies Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:-

"11.0 Infosys Technologies Ltd.

11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the

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Page 21 of 45 assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities. whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :-

(i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot he compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee

(ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/201() at pars i2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ;

(iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ;

(v) the company has incurred huge expenditure for research and development;

(vi) the company has made arrangements towards acquisition of IPRs in ‘AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability

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Page 22 of 45 cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this. the learned is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :-

(i) the co-ordinate bench of this Tribunal in the case of 24/7 Custonter.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agility India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ;

(vii) the company has generated several inventions and filed for many patents in India and USA ;

(viii) the company has substantial revenues from software products and the break up of such revenues is not available ;

(ix) the company has incurred huge expenditure for research and development;

(x) the company has made arrangements towards acquisition of IPRs in `AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that. this company i.e. Infosys Technologies Ltd.. be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies.

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Page 23 of 45 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E- Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly." The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies." 10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems Services BE, India Branch (supra). we direct the Assessing Officer/1110 to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider." 8.2 In the present case also, Infosys Limited is engaged in a leading global technology services corporation. The company provides business consulting, technology, engineering and outsourcing services to help clients build tomorrows enterprise. In addition, the company offers software products for the banking industry. It owns high brand value at Rs.56,286 crore in the year 2012 and percentage of brand value to revenue is 1.67% and brand value as a percentage of market capitalization is 34.2%, and also incur huge amount for research and development at Rs.5 crore as a capital expenditure and Rs.655 crore as a revenue expenditure for the year ended 31st March, 2012. Therefore, it cannot be said to be a comparable. We, therefore, direct the TPO to exclude Infosys Limited from the list of comparables.”

12.2 Further we note that Coordinate Bench of this Tribunal in case of LG Soft India Pvt. Ltd. vs. DCIT in IT(TP)A No. 2412/Bang/2019 dated 31/05/2022 observed as under:

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Page 24 of 45 “I. Mind Tree Limited:

5.1. We have heard the rival submissions and perused the materials available on record. This company Mind Tree Ltd. was considered as not comparable in the case of Yahoo Software Development India Pvt. Ltd. in IT(TP)A No.2657/Bang/2018 & 2365/Bang/2019 dated 28.2.2020 by Bangalore Bench of Tribunal, wherein it was held as under:-

“41. The next company sought to be excluded is Mindtree Ltd. The submissions made before us were as follows:-“Functionally dissimilar, diversified operation, significant R&D spend, ownership of intangibles. - Also engaged in business of rendering IP-Led revenue, infrastructure management, package implementation, consultancy services, etc. constituting 45% of overall revenue during FY 2014- 15.

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Page 25 of 45 - Diversified operation i.e. engaged in infrastructure management services, business process management, technology consulting, product engineering and SAP services. Also lacks segmental data

- Significant research & development activity. By incurring R&D expenses, it was able to deliver IP based video surveillance management, recording and analytic products and solutions. It has filed 4 patents in India and US so far in the area of Video analysis.

- Ownership of intangibles in the form of intangible property.

Significant onsite activity: - 46% of revenue earned under Onsite model.

- Incurred overseas branch office expenses amounting to INR 1582 crores - Receives incentives from State of Florida in relation to the development center located overseas. Lack of segmental data

- Does not maintain segmental information in respect of profitability reported from business activities in the nature of infrastructure management services, technology consulting and SAP services. – Acquisition of subsidiary – Discoverture Solutions LLC 42. The DRP while dealing with the aforesaid objections has merely taken the view that the presence of IPR revenue was insignificant and so also expenses of brand value, R&D & intangibles. More importantly, the DRP did not dispute the presence of 46% of revenue from onsite model, but went on to hold that the presence of revenue is not sufficient to exclude a company, when it is otherwise functionally comparable. On this aspect, we have already referred to the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. (supra) and in the light of this decision and the admitted factual position regarding presence of onsite revenue over and above the threshold limit of 25% of total revenue, we are of the view that this company should be excluded from the list of comparable companies. We hold and direct accordingly.”

5.2. In view of the above order of the Tribunal, we are inclined to direct the AO/TPO to exclude this company from the list of comparables. Directed accordingly.” Respectfully following the same, we direct the Ld.AO to exclude this comparable. “III. Infosys Ltd.:-

7.The Ld. A.R. submitted that this company has to be excluded

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Page 26 of 45 from the list of comparables on the following reasons:- • Infosys is functionally dissimilar and ought to be rejected. • No segmental details are available in the annual report and hence the company should be rejected. • The company also derives income from licensing of software products. • Infosys is engaged in R&D activities. • Infosys has presence of brand. • Infosys has invested in IP. • Infosys fails upper turnover filter. 7.1 Ld. DRP in his report observed that after having considered the submissions, and on perusal of the annual report of the company, this company is engaged in providing IT technology services comprising Application developing and maintenance Independent validation, testing services, Business service management, consulting and systems integration services. All these activities fall within the gamut of 'software services', though performed in five different business verticals. As per the P&L account, the company has revenue from 'software services' of Rs.45,658/- crores and from software products of Rs.1642/- crores (refer page 61 of the annual report), and that the product revenue constitute meagre 3.6% of total operating revenue. Therefore, taking into consideration the various information available in the annual report, and the fact that the company is predominantly having revenue from software services, Ld. DRP was of the considered view that this company can be considered as functionally comparable to the assessee. Accordingly, the plea that the company is engaged in diversified activities was rejected by Ld. DRP. 7.2 A plea was raised before Ld. DRP by the assessee that this company also provides data analytic services which is high end and hence, cannot be compared to the assessee. Ld. DRP did not find merit in the plea, as undoubtedly, provision of data analytic services is not functionally different from software development activity. The data analytic services also use only certain software and tools, write codes to perform certain tasks. Like any other software application, these tools also facilitate and enables business enterprises for informed management and decision. Therefore, Ld. DRP did not find merit in the plea. Further, there cannot be any distinction between high end software activity and low end activity, so long as it falls within the purview of software development services. Besides, under the TNMM, such differences are tolerable and there is no requirement that the services / activities performed are identical. It is enough that that the services are similar and fall within the same domain of software development. Accordingly, the pleas raised were rejected by the Ld. DRP.

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Page 27 of 45 7.3 It was pleaded by assessee that this company has a huge brand which has contributed to its growth in revenue and hence not comparable. A perusal of the annual report show that the growth in revenue was on account of various business initiatives taken to accelerate growth such as — internal re-organization, implementing cost effectiveness through reducing cost of operation, improving utilization percentage of employee, restricting the organization for agility by creating smaller and nimbler sales regions, redesigning supply chain functions, reducing attrition rate, increasing the offshore mix, improving delivery expertise etc., As per information in page 14 of annual report, 97.8% ' of revenues was from repeat business. At page 67 of the annual report, it is discussed, "-Clients often cite our industry expertise, comprehensive end-to-end solutions, ability to scale, superior quality and process execution, global delivery model, experienced management team, talented professionals, track record and competitive pricing as reasons for awarding contracts'. Thus, the growth in revenue is not on account of its brand or any exceptional event, and hence cannot be a reason for rejecting this company, which is otherwise found to be functionally comparable. 7.4The perusal of the details in the annual report by Ld. DRP showed that the company has incurred R & D expenditure to the tune of Rs.605 crores, which constitute meagre 1.3% of its total operating revenue, and which is much less than the generally acceptable tolerable limit of 3% of the total revenue. It was also noted that out of this, only Rs.15 crore was capital in nature and the remaining Rs.590 crore represented revenue expenditure, which go to show that the R&D initiative are substantially routine for immediate business purposes for developing expertise and improved process execution. It was also pleaded that the company has significant intangibles. However, on perusal of the information at page 86 of the annual report, Ld. DRP noted that the value of intangible assets as on 31.03.2015 was Nil and as on 31.0.2014 was Rs.13 crore, which is insignificant considering its turnover of Rs.47,300 crore and Asset portfolio of Rs.7347 crore. Ld. DRP noted that, the assessee has failed to establish that such differences, if any, on account of brand and intangibles have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Further, as discussed in para 2.6.2.3 above, the assessee also performs R&D functions. Hence, these pleas were rejected by Ld. DRP. 7.5 On the plea as to difference in the scale & size of operations and consequent abnormal profits, Ld. DRP noted that turnover does not influence the margins in the service sector: Ld. DRP already held that turnover cannot be a criteria for selection of comparables. In this regard

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Page 28 of 45 it is relevant to note that the coordinate bench of Bangalore in the case Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14) rejected the plea of the assessee to exclude a company comparable on the ground of size and level of operations. Hence, these pleas were rejected by the Ld. DRP.

7.6 In view of the above, Ld. DRP upheld this company as comparable to the assessee. 7.7 Against this assessee is in appeal before us.

7.8 We have heard the rival submissions, perused the materials available on record and gone through the orders of the authorities below. This comparable is considered as no comparable in the case of Yahoo Software Development India Pvt. Ltd. cited (supra) wherein it was held as under: “39. The next company which the assessee seeks to exclude is Infosys Ltd. As far as this company is concerned, it is seen that the following are the functional dissimilarities brought to our notice:-

“Functionally dissimilar - owns intellectual properties, incurs significant R&D costs & onsite activity. - Engaged in diversified business activities. - Involved in development of software products in addition to software services. - Owns intellectual property rights. - Incurs significant research and development costs. - Carries out significant activities based on onsite business. - Owns products such as Finacle, Edge Verve and other product based solutions. Extra-ordinary event of merger with Infosys Consulting India Ltd. Segmental profit & loss account not available. Commands substantial brand value 40. The DRP, however, has not thought it fit to exclude this company by observing that this company has substantial pre-dominant revenue from software services and the growth was not attributable to any brand value. Presence of onsite activity and the expenses on R&D have all been brushed aside. In our view, the difference pointed out by the ld. counsel for the assessee before us show that this company cannot be compared with that of the assessee basically because of its business model, presence of onsite revenue generation and other reasons cited before us. Besides, the reason that turnover of this company is huge and more than 10 times that of the assessee.”

7.9 In view of the above order of the Tribunal cited (supra) we direct the AO/TPO to exclude this company from the list of comparables.”

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Page 29 of 45

12.3 Infobeans Technologies Ltd. We note that this comparable has been considered by Coordinate Bench of this Tribunal in case of EIT Services India Pvt. Ltd. vs. ACIT in IT(TP)A No. 2498/Bang/2019 by order dated 03.09.2021 for A.Y. 2015- 16 observed as under:

“8. We notice that M/s. Infobeans Technologies Ltd. have been directed to be excluded by the coordinate bench in the case of Metric Stream Infotech (India) Pvt. Ltd. with the following observations: "14.3. Infobeans Technologies Ltd., Ld.AR submitted that this comparable was selected by authorities below as it passes all filters, based upon response received from this company under section 133 (6) of the act. He submitted that this observation is contrary to the facts and figures appearing in annual report. Referring to page 1015 Ld.AR submitted that this company is operating at CMMI Level 3 and-is a software service company specialising in business application development for web and mobile. In the company overview this company has been stated to be primarily engaged in providing custom developed services to offshore clients and it provides software engineering services primarily in custom application development, content management systems, enterprise mobility, Big Data analytics. Ld.AR thus submitted that this company is functionally not at all similar with a captive service provider like assessee that this providing Ltd services to its associated enterprises.

14.3.1. 0n the contrary Ld. CIT DR, referring observations of DRP in para 3.6.1 submitted that the activities of company fall under the gamut of software development has categorised by company itself and that the information obtained under section 133 (6) is sufficient enough to come to such conclusions. However he submitted that this comparable also may be sent back to learnt AO/TPO for verification.

14.3.2. We have perused submissions advanced by both sides in light of records placed before us.

It is observed that the annual report of this company categorises the diversify services provided by this company under software development segment. We also note that this company is basically into application development for web and mobile and provides customised services to its offshore clients comprising. Entire revenue received by this comparable ease under one single segment of sale of software. This company also owns software licenses.

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Page 30 of 45 14.3.3. In our considered opinion this comparable cannot be considered to be functioning in 100% risk mitigated environment and is a full- fledged enterprise. Such a comparable cannot be compared with a captive service provider like assessee.

Accordingly we direct this comparable to be excluded from finalist."”

12.4 The Ld.DR has not brought any distinguishing facts or any contrary decision in order to take a different view. Therefore respectfully following the above view, we direct the Ld.AO/TPO to exclude the following comparables. a) Mindtree Ltd. b) Persistent Systems Ltd. c) Infobeans Technologies Ltd. d) Larsen & Tubro Infotech Ltd. e) Infosys Ltd.

Accordingly ground no. 4.8 raised by assessee stands partly allowed.”

9.1 Keeping in view of the above order of the coordinate bench of the Tribunal, we direct the AO/TPO to exclude this company Persistent Systems Ltd. from the list of comparables. Nihilent Ltd. 10. The ld AR for the assessee submitted that this company Nihilent Ltd. is predominantly engaged in rendering of software services, business consulting in the area of enterprise transformation, change and performance management and providing related IT services. Nihilent in engaged in rendering diverse services. The Company intends to diversify and expand into various other areas such as analytics, big data, internet of things, etc. In this regard he referred page nos. 763 to 767 of the paperbook. 10.1 The assessee relied on the following rulings, wherein Nihilent Ltd. has been excluded as a comparable: - SanDisk India Device Design Centre Pvt. Ltd., vs. JCIT IT(TP)A No. 288/Bang/2021dated 30.6.2022 - Extracts from the annual report are provided below by the ld AR:

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Page 31 of 45

(Page 73 of Annual report – FY 2016-17)

(Page 20 of Annual report – FY 2016-17)

(Page 20 of Annual report – FY 2016-17)

(Page 20 of Annual report – FY 2016-17)

10.2 The Appellant also submitted screenshots from the official website of Nihilent Ltd., which evidences the fact that it is engaged into diverse activities other than software development services.

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Page 32 of 45

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Page 33 of 45 engaged in product development or to indicate that it has revenue stream from product sales. The assessee also could not point to any such information in the annual report. The ld DRP also noted at page 73 of the annual report, the independent auditor has certified, 'the company does not have any purchase of inventories or sales of goods since it is a service company primarily rendering software services'. In view of these, the ld DRP held that this company is functionally comparable to the assessee and the pleas raised in this regard were rejected by him. As the company is primarily engaged in software development services and earns the revenue from this activity there is no need of providing segmental information as per AS 17.

11.1 The ld DR further stated that the assessee has argued before the ld DRP that the Company acquired G Net Group LLC in the US and Intellect Bizware Services Pvt Ltd, which are engaged and specialised in ERP and SAP. On careful perusal of the information in the annual report, the ld DRP noted that "during the year, Gnet Group LLC, USA ("Gnet") has merged with its holding Company — Nihilent Technologies Inc.. USA ("NTI"), with effect from 1 January 2017 vide the Article of Merger filed in the State of Minnesota. As this merger was between a holding company and its wholly owned subsidiary, no consideration was payable". This acquisition was not made by Nihilent, which is being compared. During the year the Group through holding company i.e., Nihilent Technologies Limited has acquired 100% stake in a India base subsidiary Analytics Nihilent with effect from 8th October 2016. The acquisition by a subsidiary will not have any impact on the profitability of this company especially when it is acquired from O8 October 2016. Further, the group company through the holding company has acquired 51% stake in case of Intellect Bizware Services pvt Ltd, which would not affect the

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Page 34 of 45 profitability of the company in the near term. Further, the assessee also could not point to any information to show, that on account of such acquisition, the profit margin of this company was materially affected. The increase in business or turnover on account of such acquisition will be reflected in the financial statement of such subsidiary. Thus, the ld DRP was of the view that the acquisition as such has not materially affected the profitability of the company, and hence, it cannot he excluded as comparable.

11.2 The ld DR further stated that with regard to pleas of R&D, the ld DRP noted that the R&D activities are in the nature of routine activities to improve service delivery and there is no specific debit towards R & D in the P & L --account. These indicate that the R&D activities are towards routine business activity. The company does not own intangibles except for computer software licenses. Therefore, the ld DRP was of the view that this company is comparable to the assessee company. The ld DRP also noted that the assessee has failed to establish that such differences, if any, on account of R & D / intangibles, have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, these pleas were rejected by the ld DRP. In view of the above, the ld DRP upheld the selection of this comparable.

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Page 35 of 45 assessee’s case as held by the coordinate bench of the Tribunal in the case of M/s. SanDisk India Device Design Centre Pvt. Ltd. in IT(TP)A No.288/Bang/2021 dated 30.6.2022, wherein held as under: “17.9 In respect of Nihilent Ltd., Infobeans Technologies Ltd. and Aspire Systems (India) Pvt. Ltd., Hon’ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT (supra) observed as under: “Comparable Sought to be excluded by the assessee Aspire System India Pvt. Ltd. (Aspire)

Nihilent Ltd.

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Page 36 of 45 49. The assessee sought exclusion of Infobeans on the ground that it is also functionally dissimilar being into providing business IT services (CAD) (application development and maintenance, Big Data, UX and UI, Automation engineering services, including product engineering and lifestyle solutions and business process management) in verticals of storage and virtualization, media and publishing, HR and Payroll and e-commerce. It is also providing software engineering services primarily in Custom Application Development (CAM), enterprise mobility and Big Data Analytics (BDA).

17.10 Perusal of the annual report, filed before us in respect of the above two comparables, we note that the segmental financials are not available in respect of Nihilent and Infobeans and the RPT in respect of Aspire Systems India Pvt. Ltd. is more than 25% being the threshold limit considered by the Ld.TPO. Nothing has been placed before us by the Ld.DR in order to take a different view. Respectfully following the Hon’ble Mumbai Tribunal, we direct the Ld.TPO to exclude Nihilent, Infobeans and Aspire Systems from the final set.”

12.1 Keeping in view of the above order of the Tribunal, we direct the AO/TPO to exclude this company Nihilent Ltd. from the list of comparables. OFS Technologies Ltd. 13. The ld AR for the assessee submitted that this company OFS Technologies Ltd. is engaged in diversified activities. OFS is a software development and information technology outsourcing company, enriched its core expertise over the last financial year in Enterprise Application Development, Mobile Applications Development, Cloud Enablement, UI Development, DevOps Implementation and Data Analytics solutions. He submitted that OFS is engaged in outsourced product development which is different from software development activity carried out by the assessee. The Company is also engaged in independent testing. The assessee

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Page 37 of 45 further submitted that OFS is into diverse activities and there is no segmental data available in the financial statements. Accordingly, based on the above, the assessee submitted that OFS should be rejected as a comparable. Additionally, a. the assessee placed reliance on the following ruling wherein exclusion of the comparables engaged in outsourced product development was upheld: - SAP Labs India Pvt Ltd [TS-506-ITAT-2022(Bang)-TP]/ IT(TP)A No.606/Bang/2021 and IT(TP)A No.2510/Bang/2019 dated 21.7.2022. - The assessee placed reliance on the following ruling wherein it was upheld that testing services are distinct from the software development life cycle and cannot be considered to be akin to software development services and comparables engaged in testing services have been excluded: - M/s. Advice America Software Development Center Pvt. Ltd. vs. The Income Tax Officer, Ward 1(1)(1)(1) [IT(TP)A No.2531/Bang/2017 dated 23.5.2018] Extracts from the annual report are provided below:

(Page 47 of Annual report – FY 2016-17)

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Page 38 of 45

(Page 46 of Annual Report – FY 2016-17)

(Page 46 of Annual report – FY 2016-17)

(Page 47 of Annual report – FY 2016-17)

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Page 39 of 45

14.1 The ld D.R stated that at the outset, the company is functionally comparable to the assessee and also passes the employment cost filter. Therefore, the company has to be included in the list of comparables and the Panel upholds the inclusion of this comparable. However, considering the plea of the assessee that the company fails the employment cost filter for the F.Y. 2014-15, the ld DRP directed the TPO to verify the plea of the assessee. If it

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Page 40 of 45 fails the employment cost filter for the above year, the TPO was directed to consider the margin only for the F.Ys. 2015-16 and 2016-17.

14.2 The ld. DR further stated that the assessee argued before the ld DRP that the company fails export turnover filter for the F.Y. 2014-15 and hence if the company is considered as comparable the margins pertaining to F.Y. 2015-16 and F.Y. 2016-17 are only to be considered. On verification of the annual reports, it was seen that the company's export turnover is below the threshold limit of 75% adopted by the TPO. The TPO, was therefore directed by the ld DRP to verify and if the export turnover is below 75% for the F.Y. 2014-15 the margins pertaining to financial years 2015-16 and 2016-17 should be considered for determining the ALP.

14.3 The ld DR stated that a plea was also raised before the ld DRP that this company has incurred substantial expenditure towards R&D and hence not to be taken as comparable. However, perusal of the information in the annual report shown that there is no separate expenditure item under the head R&D in the profit and loss account statement. There is no indication in the annual report to show that the R&D had resulted in any distinct product development giving rise to source of separate revenue stream. The information on technology absorption on which the assessee relied states that R&D activities are integrated with software development process with objective of ensuring efficiency and quality. Therefore, they are to be taken as routine activities in enhancing the quality of delivery of services. In view of the above these pleas were rejected by the ld DRP. Subjected to the above discussion, the selection of this company was upheld by the ld DRP.

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Page 41 of 45 15. We have heard the rival submissions and perused the materials available on record. In our opinion, this comparable fails the functionality test and this company OFS Technologies Ltd. is not functionally similar and deserves to be excluded.

16.1 In this ground, the assessee wants exclusion of following 4 comparables on the reason of high margins: 1) Threesixty Logic Testing Services Pvt. Ltd. 2) Infosys Ltd. 3) Cybage Software Ltd. 4) Consilient Technologies Ltd. 16.2 As we have already decided Infosys Ltd. to be functionally not comparable with assessee and has directed to eliminate the same, we do not find it necessary to consider this comparable on the criteria of abnormally high margin. Accordingly, we are only considering following 3 comparables for having high margins: 1) Threesixty Logic Testing Services Pvt. Ltd. 2) Cybage Software Ltd. 3) Consilient Technologies Ltd.

Threesixty Logic Testing Services Pvt. Ltd. 17. The Ld. A.R. submitted that this company earns abnormally high margins and the margin as per TPO’s order is 41.94%. The company is engaged in the business of providing software testing and QA services. The annual report for FY 2016-17 was not available in

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Page 42 of 45 the public domain. Therefore, the ld. AR relied on the annual report for FY 2017-18, FY 2015-16 and FY 2014-15.

ITA No.282/Bang/2022 Subex Limited, Bangalore

Page 43 of 45 determining the Arm’s length margin by applying Rule 10CA of the I.T. Rules, 1961. On a challenge before this Tribunal, the assessee is seeking exclusion of 4 comparables by way of Ground No.7.1 & 7.6 in which we have already excluded one of the comparable sought for exclusion in ground No.7.1 herein above. Coming to the comparables sought for exclusion in ground No.7.6 on functionality, assessee is seeking exclusion of 3 comparables being Persistent Systems Ltd., Nihilent Ltd. & OFS Technologies Ltd. which was argued and the exclusion has been upheld herein above. Even these 3 comparables are excluded, there remains 16 comparables, and as per Rule 10CA of the I.T. Rules, there has to be minimum 6 comparables, which criteria stand satisfied in the present facts. 23.1 The Arm’s length range is then determined as the 35th Percentile and the 65th Percentile of the Data set arranged in an ascending order. The said process has been correctly applied by the Ld. TPO, for which we cannot find fault with. On academic, we also mention that if the transaction falls within the range, then it is deemed to be at arm’s length and if the transaction does not fall between this range, then the median of the Data set has to be calculated. It is only when the comparables are less than this or if the Most Appropriate Method (MAM) calculated by using the appropriate method that are applicable as per Rule 10B of the Act, then Rule 10CA of the I.T. Rules is not applicable and in such circumstances, arithmetic mean has to be calculated. 23.2 As there are sufficient comparables available in the present facts of the case for the year under consideration, we uphold the applicability of Rule 10CA of the I.T. Rules subject to our findings herein below and the question of excluding high margin companies cannot be agreed with. Accordingly, this ground of appeal of the assessee in Ground No.7.9 is dismissed.

ITA No.282/Bang/2022 Subex Limited, Bangalore

Page 44 of 45 24. At this juncture, we also note that the 3 comparables considered in ground No.7.9 has been challenged by the assessee on functionality in ground No.7.6, which has not been argued before us in view of ground No.7.9. Since we have decided ground No.7.9 against assessee on principle issue, we direct the AO/TPO to verify the functional similarities of these 3 comparables being 1) Threesixty Logica Pvt. Ltd. 2) Cybage Software Ltd. and 3) Concilient Technologies Ltd. and then to apply Rule 10CA of the I.T. rules in accordance with law. In the event these comparables found to be not functional, they may be excluded. Ordered accordingly.

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

ITA No.282/Bang/2022 Subex Limited, Bangalore

Page 45 of 45 Copy to:

Asst. Registrar, ITAT, Bangalore.