SOFTLAYER TECHNOLOGIES INDIA PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE- 6(1)(2), BANGALORE

Per Laxmi Prasad Sahu, Accountant Member

This is an appeal filed by the assessee against the final order passed by the AO u/s 143(3), 144C(13) r.w.s 144B of the Income- tax Act dated 24/04/2021 for the assessment year 2016-17 on the various grounds of appeal and thereafter it filed two times

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additional grounds of appeal and later on it filed concise grounds of appeal. Theconsie grounds of appal is as under:-

“General Grounds 1. The orders passed by the Learned Deputy Commissioner of Income-tax Transfer Pricing, Circle - 1(2)(1) (‘Learned Transfer Pricing Officer’ or ‘Ld. TPO’) and Honorable Dispute Resolution Panel (‘Hon’ble DRP’) [collectively referred as "lower income tax authorities" for brevity] to the extent prejudicial to the Appellant are bad in law and liable to be quashed. [Ground of appeal no. 1(a) – Grounds of appeal filed on 22 June 2021]

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[Ground of appeal no. 1(c) – Grounds of appeal filed on 22 June 2021]

Information Technology (‘IT’) infrastructure support services

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FY 2013-14 in computing the weighted average NCP mark-up of R S Software (India) Ltd., even though the same fails the upper turnover limit of INR 200 crores for the above- mentioned years. [Ground of appeal no. 3 – Second additional grounds of appeal filed on 3 December 2021]

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Interest on delayed receivables 15. The lower income tax authorities erred in making the notional interest adjustment with respect to outstanding receivables of the Appellant for FY 2015-16.

(a) Re-characterisation of the net outstanding receivables as on 31 March 2016 as a deemed loan and benchmarking the same; (b) Not appreciating that the outstanding receivables were a consequence to the principal international transaction and could not be considered as a separate international transaction; (c) Benchmarking the outstanding receivables against the 6 Month LIBOR plus 450 basis points i.e, at the effective rate of 4.985%; (d) Adopting the State Bank of India (‘SBI’) short term deposit rate for benchmarking the outstanding receivables. However, the Hon’ble DRP had directed to apply the SBI short term deposit interest rate prevailing w.e.f. 8 June 2015 and the Ld. TPO adopted the weighted average rate; (e) Computing notional interest on receivables collected in 1 day from the due date of receipt of outstanding receivables;

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(f) Without prejudice, should interest be levied on the delayed receivables, LIBOR should be applied as the interest rate to compute the transfer pricing adjustment. Further, the interest rate should be restricted only to the LIBOR rate without adding any further basis points; and (g) Without prejudice, no separate adjustment for interest on delayed receivable is required where the NCP mark-up of the international transaction is held to be at arm’s length price. [Grounds of appeal no. 7 and 8 – Grounds of appeal filed on 22 June 2021; and Grounds of appeal no. 3 and 4 – First additional grounds of appeal filed on 6 October 2021]

2.1 After obtaining reference the TPO called information from the assessee and it was observed from the Form 3CB report and other documents that the assessee company M/s Softlayer India operates within worldwide IBM organization as an Information Technology Infrastructure Services [IT infrastructure Services]

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company, the assessee company started its operation in 2015 and offers cloud infrastructure services including providing a comprehensive set of cloud services. Viz. Assisting the customers with building custommzied dedicated MANAGED CLOUDS SERVICES. operation of CAD services. The assessee company is responsible for developing a thorough understanding of the local market conditions and the specific needs of its customers in order to devise and deliver complex solutions drawings upon the IBM portfolio of offerings and it leverages the value of the IBM brand, core IBM product and service offerings, IBM sales, marketing and technology intellectual properly (IP) and the company’s global presence, in addition to its own unique market and customer knowledge to market and sell products, service and solutions.

2.2 From the documents submitted in Form No.3CB, it was observed that the assessee has undertaken an international transactions with its AEs, which is as under:-

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2.3 As per letter issued by the TPO on12/02/2018 the documents were called with regard to documents maintained by the assessee in terms of sec.92D along with the financial statements. The same were furnished by the assessee vide letter dated 26/02/2019. The TP document contained 5 comparables in respect of software development services (SWD) which was selected by the tax payer and by applying certain filters and TNMM is applied as the most appropriate method. On 27/05/2019, a detailed show cause notice was issued to the assessee in respect of Software Development Services segment (SWS). The assessee submitted details on 27/06/2019 and information were also received as per sec. 133(6) of the Act from the companies proposed as comparables. On the determination of ALP, certain defects were observed by the TPO in the Transfer Pricing Report , thereafter, the TP study report was rejected and the final list of comparables considered by the TPO was also furnished to the taxpayer.

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1) Companies whose income was more than Rs.1 crore were excluded 2) Companies who have more than 25% related party transaction were excluded 3) Companies who have export service income less than 75% of the sales were excluded.’ 4) Companies with employees cost less than 25% turnover were excluded 5) Use of current year data where available. 6) Companies whose Software Development Service income is less than 75% of its total operating revenue were excluded. 7) Companies having positive net worth.

3.1 The ld.TPO after applying above filters, rejected the following companies :-

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3.2 As the 5 comparables selected by the assessee failed filers applied by the TPO and some filters of the tax payer has been rejected and some appropriate filers have been added by the TPO. The prowess database is used and freshly selected the final comparables based on the new set of filters and accordingly, the following 15 comparables were selected by the TPO under the SWD scheme:-

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rejected by the TPO by observing that the companies are not passing the appropriate filters. The PPO had also issued 133(6) to some of the comparable companies for calling information. He also holds that Principal of res judicatta is not applicable to the assessment proceedings as each assessment year is unique and, therefore different. After considering he detailed objections, the final set of comparables and ALP-OR of Rs.13,89,25,523/- considered by the TPO is as under:-

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4.1 Further, during the course of TP proceedings, the TPO observed that the assessee has receivables from the AE’s which has not been utilized during the financial year. The TPO dismissed in details for trading the receivable as international transactions in his order on relying some case laws, he uphold that there is receivables in the international transaction and appropriate adjustment should be made as capital financials. The assessee’s contention that no separate adjustments can be made towards interest on overdue receivables at the entity level results have already been considered by the TPO is not acceptable

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because of entity level results does not match with ALP. The TPO did not accept the contention of the assessee and held that adjustment still require to be made in respect of the transactions whether the price received was less than ALP. He further observed that the tax payer was not able to decide its operation of proof and substantiate its claim with adjustment was interest on overdue receivable is not justified. He also failed to demonstrate that the selected comparables had similar overdue receivable and no separate adjustment is required for interest on overdue receivable. The TPO relied on the following judgments: 1) Cotton Naturals, Delhi HC 2) CIT Vs. Tata Autocomp Systems Ltd., (2015-TH-04-HC- MUM-TP) 3) Advanta India Ltd. Vs. ACIT (2015-TH-294-ITAT-Bang- TP)

4.2 After considering the above judgments, the TPO observed as under:-

“23.26 Further. the Hon'ble Delhi High Court in Cotton Naturals have held that the interest rate used would depend on the currency of the transaction. Therefore, following the Hon'ble High Court decision. interest rate is being computed as under: if receivables are to be paid to the taxpayer in Indian Rupees, interest shall be computed taking the SBI base rate as on 30th June of the previous year plus ISO basis points if the receivables do not exceed Rs,50 Cr, and 300 basis points if the receivables exceed Rs,50 Cr, This is as per the Safe Harbour Rules and is in conformity with the decision in Cotton Naturals. This rate of interest shall also be applied lithe foreign exchange risk is borne by the AE, and not the taxpayer,

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because such an agreement results in the receivables being effectively denominated in Rupees, and not in a foreign currency. If receivables are to he paid to the taxpayer in foreign currency, the arm's length price shall be determined considering the following factors: The RBI Master Circular on External Commercial Borrowings and Trade Credits (No.l2/20l5-16 dated 01 .07.15), specifies a cost ceiling of 6 month LIBOR plus 450 basis points for cases where the average maturity period is between 3 and 5 years. The applicable rate of interest would depend oil credit rating of the borrower, the purpose, and the term of the loan, etc, in the present case, the taxpayer has not furnished details of the credit rating of the AEs where receivables are outstanding. The taxpayer has also not furnished data relating to any other comparable uncontrolled transaction. In view of these facts, it would be appropriate to take the ceiling rate of 6 month LIBOR plus 450 basis points as the most suitable CUP and then adjust it for other risks and costs. Since the RBI ceiling rate has been taken, no further mark-up is required towards the purpose and the term of the loan. In Cotton Naturals, the Hon'ble High Court have not accepted any mark-up towards transaction cost therefore, no further mark-up is required towards transaction cost. The adjustment for currency risk shall be made as follows: Currency risk arising from fluctuations in the US $ / Rupee rate. EUROs / rupee rate is borne b the taxpayer. If the receivables arc to be paid by the AE in US $ / EUROs. The taxpayer's costs are in Rupees and if the receivables are in foreign currency, the taxpayer heats a risk arising from' fluctuations in the US$ / Rupee rate. The taxpayer has not shown that it was compensated by the AF for this risk. III loan transaction, the risk is less because the period of loan is certain and taxpayer has the option of hedging to match the loan period. However, in the case of receivables which have remained outstanding. it would not be possible for the taxpayer to offset the currency risk from fluctuations in the

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foreign exchange rate, as it would not know when the receivables are going to be realized. In view of this being uncertain, the taxpayer could also not have factored in the price of this risk, in the price of goods/services sold to the AE. By not paying the receivables, the AE has burdened the taxpayer with not only the cost of funds blocked, but also the extended uncertainty arising from foreign exchange fluctuation risk. In view of these facts, tim arm's length price must include a mark-up for the currency risk arising from fluctuations in the foreign exchange rate, borne by the taxpayer. Considering the aforementioned facts, a mark-up of 100 basis points is appropriate towards the additional currency risk arising from fluctuations in the foreign exchange rate, borne by the taxpayer. This mark-up must he added to the interest rate discussed in para (i) above. (iv) Considering these facts and judicial decisions oil subject, 6 month LIBOR plus 450 basis points is the most appropriate CUP. As discussed in para (iii) above, a mark-up of IOU basis points is appropriate towards the currency risk arising from fluctuations in the foreign exchange rate, borne by the taxpayer. The LIBOR plus 450 basis points rate discussed in para (i) above compensates the remaining costs. (v) The 6 months LIBOR rate in March 2016 was 0.985% (Source: https://www.globalrates.com/interest- rates/libor/american-dollar/ therefore the benchmarking rate of interest shall be 4.985% (vi) The period for which interest has been calculated has been limited to the year under consideration as interest accrued in other years cannot be taxed this year. Similarly. interest accrued during the year under consideration, in respect of' invoices raised in earlier years which remained unpaid has also been charged. “

The ld. TPO considered in details in regard to the interest on delayed receivables proposed to be computed on invoices basis . To calculate the dealay the assessee was show caused on 27.05.2019 and asked to furnish the amount raised

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in invoice, date of invoice,date of receipt, delay in no. of ays, interest is calculated, using LIBOR-6months+450 basis points applicable for the FY 2015-16 and works out to 4.985%. Since the assessee had not submitted details for FY 2014-15 and therefore, the TPO computed on the basis of Trade Receivables and Trade Payables for the year ending 31.03.2015-16 as under;-

Receivables from AEs (A) 517205218.00 Payable to AEs(B) 111966120.00 ( C ) Balance Receivables 405239098.00 Interest Rate 4.985% Period of delays days 224 Interest amount 12397429.00

The total adjustment u/s 92CA of the Act was made for Rs.15,13,22,952/-(13,89,25,523+1,23,97,429/-) and accordingly he passed the order on 23/10/2019.

4.3 The AO passed draft assessment order u/s 144C on 18/12/2019 after making adjustment as proposed by the TPO.

4.4 Against draft assessment order by the AO, the assessee filed objections before the DRP in Form NO. 35A dated 16.01.2020. the ld. DRP accepted for inclusion of Microland Ltd. as comparable. The DRP after considering the detailed submissions, passed order on 22/03/2020 and accordingly the final assessment order was passed by the AO on 24/04/2021 after making TP adjustment of Rs.10,82,52,229/-.

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6.1. However during the course of hearing the ld.AR was asked to file written synopsis only on the basis of arguments which has been filed on 21/07/2022 bearing acknowledgment No.1386. The relevant part of written synopsis is as under:-

I. GROUNDS OF APPEAL BEFORE THIS HON’BLE BENCH The detailed grounds in the appeal which were argued by the authorised representative of the Appellant before your Hon’ble Bench, are as follows: (i) Ground of appeal with respect to turnover filter The lower income tax authorities erred in including the following companies, even though they fail the higher threshold limit of INR 200 crores for turnover filter: a) Infosys Ltd.;

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b) Larsen & Toubro Infotech Ltd.; c) Persistent Systems Ltd.; d) Aspire Systems (India) Pvt. Ltd. (for Financial Year (‘FY’) 2015-16); e) Thirdware Solution Ltd.; f) Cybage Software Pvt. Ltd.; g) Nihilent Ltd.; and h) R S Software (India) Ltd. (for FY 2013-14 and FY 2014-15) [Ground of appeal no. 4(g) – Grounds of appeal filed on 22 June 2021; and Ground of appeal no. 2 – Second additional grounds of appeal filed on 3 December 2021] The Appellant seeks for exclusion of the aforementioned companies since the same fails the higher threshold limit of INR 200 crores turnover filter. The Appellant submits that companies having varied turnovers cannot be compared to each other as the difference in their size and scale of operations have a direct impact on their profitability. As per Dun and Bradstreet analysis, software companies can be categorized as follows: “The IT industry has been logically divided into 3 categories based on the net sales turnover. Large size firms (> Rs 20,000 mn) Medium size firms (Rs 2,000 mn – Rs 20,000 mn) Small size firms (< Rs 2,000 mn)” Based on the above, companies having turnover less than INR 200 crores are classified as small companies. Accordingly, the Appellant submits that INR 200 crores may be adopted as the upper limit of turnover for choosing comparables.

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In this regard, the Appellant relies on the decision of the Hon’ble Bench in the following case laws: • M/s Genisys Integrating Systems (India) Pvt Ltd v DCIT [ITA No. 1231/Bang/2010] “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 are 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 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 are 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 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 turnover of Rs 1 crore to 200 crores have to be taken as a particular range and the assessee being in that range of Rs 32 crores, the companies which also have turnover of Rs 1 crore to 200

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crores only should be taken into consideration for the purpose of making TP Study.” • Autodesk India (P.) Ltd. vs DCIT, Circle 11(1) [IT(TP) Appeal Nos. 540, 541, 616, & 617 (BANG) of 2013, AY 2005-06 and AY 2008-09] “17.8….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).” • M/s Baracudda Networks India Private Limited vs DCIT, Circle 1(1)(1) [IT(TP) Appeal No. 229(Bang.) of 2021, AY 2016-17], wherein it has been held that the companies whose turnover in the current year is more than INR 200 crores should be excluded from the list of comparable companies. The relevant extract from the case law has been provided below: “14……. we hold that companies listed in Sl.No.(a) to (g) of Grd.No.4 raised by the Assessee whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies.” “20……. if at all RS.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

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because in those years they are to be regarded as not comparable. We hold accordingly.” (Refer case law binder – Page 2690 and 2700) The Appellant also relies on the additional case laws captured in the briefing chart shared with the Hon’ble Bench during the course of hearing on 12 July 2022. The same is attached herewith this synopsis again. In view of the above, the Appellant requests your Hon’ble Bench to exclude the following companies from the final list of comparables: • Infosys Ltd.; • Larsen & Toubro Infotech Ltd.; • Persistent Systems Ltd.; • Aspire Systems (India) Pvt. Ltd. (for Financial Year (‘FY’) 2015-16); • Thirdware Solution Ltd.; • Cybage Software Pvt. Ltd.; • Nihilent Ltd.; and • R S Software (India) Ltd. (for FY 2013-14 and FY 2014-15). (ii) Ground of appeal with respect to rejection of C G-Vak Software & Exports Ltd. The lower income tax authorities erred in including C G-Vak Software & Exports Ltd., even though it is not functionally comparable to the Appellant. [Grounds of appeal no. 4(j) – Grounds of appeal filed on 22 June 2021] The Appellant seeks exclusion of C G-V A K Software & Exports Ltd. (‘C G-V A K’) from the list of comparables as the same is functionally not comparable to the Appellant.

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The Appellant submits that C G The Appellant submits that C G-V A K is engaged in providing V A K is engaged in providing outsourced product development, which is dissimilar to the IT outsourced product development, which is dissimilar to the I outsourced product development, which is dissimilar to the I infrastructure support services provided by the infrastructure support services provided by the Appellant. Appellant. The Appellant would like to draw reference to Director’s Report The Appellant would like to draw reference to Director’s Report The Appellant would like to draw reference to Director’s Report in the Annual Report, wherein it has been disclosed that the in the Annual Report, wherein it has been disclosed that in the Annual Report, wherein it has been disclosed that company focuses on the niche areas of outsourced product company focuses on the niche areas of outsourced product company focuses on the niche areas of outsourced product development space space. The relevant extract from the annual . The relevant extract from the annual report of relevant years are provided below, for your Hon’ble report of relevant years are provided below, for your Hon’ble report of relevant years are provided below, for your Hon’ble Bench’s reference: Bench’s reference: • FY 2015-16

(Refer annual report compendium (Refer annual report compendium – Page 1446) Page 1446)

• FY 2014-15

(Refer annual report compendium (Refer annual report compendium – Page 1349) Page 1349)

• FY 2013-14

(Refer annual report compendium (Refer annual report compendium – Page 1268) Page 1268)

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In this regard, the Appellant places reliance on the principle laid down in the case of M/s. 3DPLM Software Solutions Ltd. Vs DCIT - [IT(TP)A No.1303/Bang/2012] – AY 2008-09 wherein it was held that Persistent Systems Ltd. is predominantly engaged in outsourced software product development and was accordingly excluded as a comparable. The relevant extract from the case law has been provided below: “‘17.2 ……submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that :(i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand.(ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in 'Outsourced Software Product Development Services' for independent software vendors and enterprises.(iii) Website extracts indicate that this company is in the business of product design services… 17.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly.”

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The Appellant also relies on the additional case laws captured in the briefing chart shared with the Hon’ble Bench during the course of hearing on 12 July 2022. The same is attached herewith this synopsis again. In view of the above, the Appellant requests that C G-V A K be excluded from the final list of comparables. (iii) Ground of appeal with respect to capacity utilization adjustment The lower income tax authorities erred in not factoring the under-utilized capacity of the Appellant thereby, not providing capacity utilization adjustment. [Ground of appeal no. 6 – Grounds of appeal filed on 22 June 2021] The Appellant submits that in the previous year, the Appellant was in the first year of operations. Hence, the installed server units of the Appellant had remained significantly under-utilized in terms of the actual utilized capacity vis-à-vis the total installed capacity. Due to its initial year of operation, to offset the extra ordinary conditions, the Appellant humbly submits to resort to the capacity utilisation adjustment. The Appellant submits that the detailed working on capacity utilisation adjustment of the Appellant is filed before the lower income tax authorities during the assessment proceedings (Refer page 590 to 595, 1016 to 1020 and 1068 to 1073 of paper book) and is also captured in the briefing chart shared with the Hon’ble Bench during the course of hearing on 12 July 2022. The same is attached herewith this synopsis again. The Appellant further submits that the details with respect to capacity utilisation of the comparable companies are not available in the public domain. The Appellant further submits that while the Indian transfer pricing regulations refer to the adjustments on uncontrolled transactions, however the same

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has to be read with Rule 10B(3) of the Income-tax Rules, 1962 which clearly emphasizes the necessity of undertaking adjustments. Hence, in case appropriate adjustments cannot be made to the uncontrolled transaction, due to lack of data, then the adjustments should be made on the tested party. This proposition was also accepted by the Hon’ble Bench in case of M/s Atmecs Technologies Private Limited vs ITO, Ward - 1(1)(1) [IT(TP)A No. 187 (BANG.) of 2021. The relevant extract from the case law has been provided below: “26… While the Indian transfer pricing regulations refer to the adjustments on uncontrolled transactions, however the same has to be read with Rule10B(3) of the Rules which clearly emphasizes the necessity and compulsion of undertaking adjustments. Hence in case appropriate adjustments cannot be made to the uncontrolled transaction, due to lack of data, then in order to read the provisions of transfer pricing regulations in harmony, the adjustments should be made on the tested party.” “27. We are of the view that it would be just and appropriate to set aside this issue to the AO/TPO by directing the assessee to furnish required details and in the event of the assessee not being in a position to get the required details, request the TPO to exercise his powers under section 133(6) of the Act and call for the required details form the comparable companies and if he finds that the capacity utilization differs between the assessee and the comparable companies, to allow appropriate adjustment as per the relevant provisions of law and in accordance with the guidelines laid down above.” The Appellant further relies on the decision of the Hon’ble Bench in the case of IKA India Pvt. Ltd. vs DCIT [IT(TP)A No.2192/Bang/2017. AY 2012-13] wherein it has been held that once it is accepted that the Appellant has underutilized capacity during the subject AY and is accordingly factually and legally eligible to an adjustment for the same, such a benefit

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cannot be denied to the Appellant only for the reason that the data about comparable companies is not available. The Appellant also relies on the additional case laws captured in the briefing chart shared with the Hon’ble Bench during the course of hearing on 12 July 2022. The same is attached herewith this synopsis again. In view of the above, the Appellant requests your Hon’ble Bench to allow capacity utilisation adjustment to account for the differences in capacity utilised by the Appellant and the comparable companies.

(iv) Ground of appeal with respect to interest on delayed receivable The lower income tax authorities erred in considering outstanding receivables as international transactions without acknowledging that the outstanding receivables pertains to provision of services and are not in the nature of any loans/ advances. [Ground of appeal no. 7(a) – Grounds of appeal filed on 22 June 2021] The Appellant submits that during FY 2015-16, the Appellant undertook international transactions with its AE resulting in receivables for the same. The arm’s length determination for the said consequential receivables is subsumed within the arm’s length price determination of the principal international transaction itself. Also, the said outstanding receivables are a result of the international transaction undertaken by the Appellant with its AE and are not a separate international transaction as per provisions of Section 92B of the Income-tax Act, 1961 (‘the Act’); and therefore, the same does not warrant determination of any separate arm’s length price under Section 92C of the Act.

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In this regard, the Appellant has relied on the decision of Hon’ble Bench in the case of Avnet India P Ltd v DCIT [2016] 65 taxmann.com 187 (Bangalore - Trib.); the relevant extract from the case law has been provided below: “8….we hold that there can be no separate international transaction of 'interest' in the international transaction of sale. Early or late realization of sale proceeds is only incidental to transaction of sale, but not a separate transaction in nature.” The Appellant also relies on the additional case laws captured in the briefing chart shared with the Hon’ble Bench during the course of hearing on 12 July 2022. The same is attached herewith this synopsis again. Without prejudice, it is submitted that even if delayed realisation of trade receivables were to be considered as an international transaction, the average realisation period of the trade receivables of the Appellant as on 31 March 2016 (viz. 53 days) should be compared with the average realisation period of the trade receivables of the final companies selected as comparables and adjustment should be made accordingly, if warranted. Assuming without admitting, the addition, if any, should be made at London Interbank Offered Rate plus 200 basis points.

On inclusion of various comparables: During the hearing, it was suggested that if the capacity utilisation adjustment is granted, the Net Cost Plus (‘NCP’) mark-up of the Appellant would be at arm’s length. Further, it is humbly requested that the grounds of appeal with respect to inclusion of additional comparables identified by the Appellant, may be restored to the file of the Ld. TPO to consider the same in the eventuality if the NCP mark-up of the Appellant do not meet the arm’s length test.

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In addition to the written synopsis the ld AR submitted that the TPO had not applied a cap on upper limit on the turnover/service revenue while selecting the companies comparable to the assessee and that application of turnover filter is a relevant criteria in choosing comparable companies. The ld AR also submitted that the difference in the scale of operations have a direct impact on the profitability and an increase in the size and scale of the operations leads to a decrease in the long run average cost of each unit or each service project delivered, and therefore, the per unit fixed cost of a small scale company would be much higher than that of a medium/large size organisation. The ld AR further submitted that medium/large size organisation operating in a particular industry also enjoys benefits of certain other market drivers and cost arbitrages. The ld AR drew our attention to the fact that the turnover of the assessee from rendering services is Rs. 62,24,84,118/- and therefore the TPO ought to have applied the upper turnover filter while selecting companies comparable to the assessee. The ld AR mainly relied on the decision of coordinate Bench of the Tribunal in the case of M/s Genisis Integrating Systems ( India) Pvt. Ltd. Vs DCIT in ITA NO. 1231/Bang/2010, Barracuda Networks India (P.) Ltd. v. Dy. CIT [2021] 131 taxmann.com 337 (Bang. - Trib.) and Autodesk India (P.) Ltd. v. Dy. CIT [2018] 96 taxmann.com 263 (Bang. - Trib.) in addition to several other decisions of the Hon'ble Tribunal.

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otherwise functionally comparable, it should be considered as a good comparable. In respect of interest receivables, the lower authorities have rightly treated the receivables which are not recovered beyond the prescribed time limit. As per the agreement, it is a findings of the AE’s and interest calculation done by the lower authorities are correct and they have applied correct rate as per RBI guide lines for the libor plus 450 bias points which is very clearly considered from the order of the TPO. The TPO and DRP has made detailed analysis of the case laws rendered in this regard. He further submitted in respect of capacity utilization that the lower authorities have rightly rejected and he pointed out that in the TP study report there was no reference made for justification given for capacity utilization. In software industries it would not be of any risk towards capacity utilization and the case law relied by the DRP is squarely applicable in the present facts of the case. and finally he submitted that the case law relied by the ld.AR are distinguishable on facts.

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cannot be considered as a good comparable as decided by the Hon’ble Bench in many cases and the assessee has relied on various case laws which is placed in the paper book. The assessee has submitted that the following components which cannot be considered as good comparable because of its turnover is more than 200.00/- crores even they are passing the filter supplied by the TPO and passes the FAR analysis, the name of the companies are as under:-

8.1 Considering the entire arguments and case law cited by the AR of the assessee, the issue raised by the assessee is squarely covered in favour of the assessee. A similar issue has been decided by the co-ordinate bench of Tribunal in the case of . Enstage Software (P.) Ltd. v.Deputy Commissioner of Income- tax (Exemptions) IT(TP) in Appeal No. 260 (BANG.) of 2021[Assessment Year 2016-17] , the relevant part is as under ;- “13. We heard the rival submissions and perused the materials on record. In so far as comparability of companies as per the list considered by the TPO is concerned, the admitted factual position is that the turnover of these companies (except R S

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software (India) Ltd) is more than Rs. 200 Crores and the Assessee's turnover is only Rs. 20,18,51,846/-. 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 Assessee raised objections before the DRP that while the TPO excluded companies with low turnover, whereas he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The TPO excluded the companies with less than Rs. 1 crore turnover is that such companies do not reflect the industry 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 rejected the contention of the assessee by analyzing the turnover vs the profitability of one of comparables Infosys Ltd for prior years, to conclude that there is no direct impact on margin on account of turnover. The DRP also relied on several Tribunal decision and also the decision of the Delhi High Court in the case Chryscapital Investment Advisors India (P.) Ltd. v. Dy. CIT [2017] 82 taxmann.com 167, 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.

8.2 We notice that the coordinate bench of the Tribunal in the case of Barracuda Networks India (P.) Ltd. v. Dy. CIT [2021] 131 taxmann.com 337 (Bang. - Trib.) has dealt in detail the application of the turnover filter and has held as under —

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'12. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the Assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P.) Ltd. v. DCIT (2018) 89 Taxmann.com 44 (Bang. - Trib.) order dated 13-10-2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt. Ltd. v. DCIT (2016) 67 Taxmann.com 243 (Bangalore - Trib.) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT v. Pentair Water India Pvt. Ltd., Tax Appeal No. 18 of 2015 dated 16-9-2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): '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 the contention of the learned counsel for the assessee that the size matters in business.

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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." 42. The Assessee's turnover was around Rs. 110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs. 200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon'ble High Courts of Bombay and Delhi and both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs. 200 crores from the list of comparable companies is held to correct and such action does not call for any interference.' 13. The Tribunal in the case of Autodesk India Pvt. Ltd. v. DCIT (2018) 96 Taxmann.com 263 (Banglore - Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover

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is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: 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 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 v. 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

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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). 14. In view of the aforesaid decision, we hold that companies listed in Sl. No.(a) to (g) of Grd.No.4 raised by the Assessee whose turnover in the current year is more than Rs. 200 Crores should be excluded from the list of comparable companies.'

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8.3 Respectfully following the decision of the coordinate bench of the Tribunal in the case of Barracuda Networks India Private Limited (supra) we hold that the companies whose turnover in the current year is more than Rs. 200 crores needs to be excluded for the purpose of comparable companies.

*figures in FY 2015- FY 2014- FY 2013- crores 16 15 14 Operating 171.41 345.50 351.89 revenue Operating cost 175.07 260.26 283.47 Operating -3.66 85.24 68.42 profit OP/OC -2.09% 32.75% 24.14%

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The ld AR argued that the wide fluctuations in profit suggest the existence of a peculiar economic circumstance, for which no appropriate adjustment could be made to mitigate the impact on the margin of the company and therefore the company cannot be selected as a comparable. 17. Without prejudice to the above submission the ld AR submitted that if the company were to be retained in the final list of comparables, the company's turnover for the financial years 2013-14 and 2014-15 is in excess of Rs. 200 crores, and therefore the margins for the said years ought to be excluded, and the margin of the company at -2.09% ought to be considered. In this regard reliance was placed on the decision of this Hon'ble Tribunal in the case of BORQS Software Solutions (P.) Ltd. v. Asstt. CIT [2022] 135 taxmann.com 337 (Bang. - Trib.).

9.1 We heard the DR who supported the decision of TPO/DRP. This issue of inclusion of R S software (India) Ltd has also been decided by the Hon'ble Tribunal in the case of Barracuda Networks India (P.) Ltd. (supra) and the relevant extract of the decision of the Tribunal is reproduced below:

“15. As far as company listed at Sl.No.(h) of Grd.No.4 and Grd.No.5 i.e., R.S.Software (India) Ltd., is concerned, the turnover of this company in the current year is less than Rs. 200 Crores but in the earlier two years its turnover was more than Rs. 200 crores and was liable to be excluded in those earlier two years. The question raised in the aforesaid grounds is as to: whether this company should also be excluded on the application of turnover filter by reason of its turnover in the earlier two years being more than Rs. 200 crores in the light of Rule 10CA of the rules which were applicable from AY 2014-15 onwards or

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whether in computing the weighted average profit margin of this company, the earlier two years profit margins have to be ignored because they fail the test of comparability in those two earlier years by reason of the application of the Rs. 200 Crore turnover filter. 16. To answer the above question, we need to look at the amendment to the rules that allow for introduction of a "range concept" for determination of ALP and "use of multiple year data" for undertaking comparability analysis in transfer pricing cases. The provisions of the Income-tax Act were amended through the Finance (No.2) Act, 2014 to facilitate alignment of Indian transfer regime with international best practices. The manner of computation of ALP is laid down under the Income- tax Rules. The Government has notified the amended Rules for determining ALP vide S.O. No. 2860 (E) dated 19/10/2015. The amended regime will be applicable for computation of ALP of international transactions and specified domestic transactions undertaken on or after 1/04/2014 i.e. on and after PY 2014-15. The amended rules allow for introduction of a "range concept" for determination of ALP and "use of multiple year data" for undertaking comparability analysis in transfer pricing cases. The use of range concept being a statistical tool enhances the reliability of analysis undertaken for computation of ALP. The range concept will be applicable in certain cases for determining the price and will begin with the 35th percentile and end with the 65th percentile of the comparable prices. Transaction price shown by the taxpayers falling within the range will be accepted and no adjustment will be made. The use of multiple year data allows for yearly variations to be averaged out and would therefore add value to transfer pricing analysis. The Amended Income-tax Rules, 1962 ('Rules') via Notification 83 of 2015 which is the 16th amendment to the originally drafted Indian Tax Rules, 1962, are applicable for transactions undertaken on or after 1 April 2014 (i.e. from FY 2014-15 and onwards). These amended provisions are applicable only when the determination of 'ALP' is done under the MAM being resale price method

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('RPM'), cost plus method ('CPM') or transactional net margin method ('TNMM'). The relevant provisions of Rule 10CA of the Rules, in so far as it relates to choice of comparable companies, read as follows: Computation of arm's length price in certain cases. 10CA. (1) Where in respect of an international transaction or a specified domestic transaction, the application of the most appropriate method referred to in sub-section (1) of section 92C results in determination of more than one price, then the arm's length price in respect of such international transaction or specified domestic transaction shall be computed in accordance with the provisions of this rule. (2) A dataset shall be constructed by placing the prices referred to in sub-rule (1) in an ascending order and the arm's length price shall be determined on the basis of the dataset so constructed: Provided that in a case referred to in clause (i) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction then,— (i) the most appropriate method used to determine the price of the comparable uncontrolled transaction or transactions undertaken in the aforesaid period and the price in respect of such uncontrolled transactions shall be determined; and (ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the current year and in the aforesaid period preceding it shall be included in the dataset instead of the price

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referred to in sub-rule (1): Provided further that in a case referred to in clause (ii) of sub- rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of the data relating to the financial year immediately preceding the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in the financial year immediately preceding the said financial year undertaken the same or similar comparable uncontrolled transaction then,— (i) the price in respect of such uncontrolled transaction shall be determined by applying the most appropriate method in a similar manner as it was applied to determine the price of the comparable uncontrolled transaction undertaken in the financial year immediately preceding the current year; and (ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the aforesaid period of two years shall be included in the dataset instead of the price referred to in sub-rule (1) : Provided also that where the use of data relating to the current year in terms of the proviso to sub-rule (5) of rule 10B establishes that,— (i) the enterprise has not undertaken same or similar uncontrolled transaction during the current year; or (ii) the uncontrolled transaction undertaken by an enterprise in the current year is not a comparable uncontrolled transaction, then, irrespective of the fact that such an enterprise had undertaken comparable uncontrolled transaction in the financial year immediately preceding the current year or the financial year immediately preceding such financial year, the price of comparable uncontrolled transaction or the weighted average of the prices of the uncontrolled transactions, as the

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case may be, undertaken by such enterprise shall not be included in the dataset. (3) Where an enterprise has undertaken comparable uncontrolled transactions in more than one financial year, then for the purposes of sub-rule (2) the weighted average of the prices of such transactions shall be computed in the following manner, namely:— (i) where the prices have been determined using the method referred to in clause (b) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of sales which has been considered for arriving at the respective prices; (ii) where the prices have been determined using the method referred to in clause (c) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs which has been considered for arriving at the respective prices; (iii) where the prices have been determined using the method referred to in clause (e) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs incurred or sales effected or assets employed or to be employed, or as the case may be, any other base which has been considered for arriving at the respective prices ** ** **

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arrive at the price of the comparable uncontrolled transaction undertaken by R.S. Software (India) Ltd., in the financial years 2013-14 and 2014-15. As per clause (ii) of 1st proviso to sec.10CA(2), weighted average of the prices of the 3 financial years have to be taken in accordance with rule 10CA(3) and the weighted average so taken shall be included data set instead of the price arrived at by using current year data alone. In the present case, if one sees the chart of comparables of TPO given in paragraph-4 of this order, the profit margins of the Company R.S. Software (India) Ltd., for the three financial years were 2013-14 to 2015-16 were 24.14%, 32.75% and -2.09% respectively and the weighted average margin of 24.83% has been considered by the TPO. 18. The second proviso to Sec.10CA(2) of the Rules provides for a situation where R.S. Software (India) Ltd., has undertaken comparable uncontrolled transaction only in Financial year 2014-15 & 2015-16, then the weighted average of the two financial year 2014-15 and 2015-16 has to be computed in the manner laid down in Rule 10CA(3) of the Rules and the margin so arrived at has to be included in the dataset. 19. The third proviso to Sec.10CA(2) of the rules provides that if in the current year i.e., financial year 2015-16 if R.S. Software (India) Ltd., has not undertaken any uncontrolled comparable transaction then that company can never be considered for inclusion in the dataset. 20. The submission of the learned Counsel for the Assessee was that as per the proviso to rule 10CA(2) of the Rules, R.S. Software (India) Ltd., cannot be regarded as comparable company for Financial Year 2013-14 and 2014-15 because in those years, the turnover of this company was more than Rs. 200 crores. Therefore as per the first and second proviso to rule 10CA(2) of the Rules, the profit margin of this company for Financial year 2013-14 & 2014-15 has to be ignored and the profit margin of the financial year 2015-16 alone should be taken. If one looks at rule 10CA(2) in isolation, we have to reject this argument

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because the 1st and 2nd proviso to rule 10CA(2) of the Rules refers to only R.S.Software (India) Ltd., (i.e., "where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction") undertaking uncontrolled transaction during the relevant previous year and if this condition is satisfied then the profit margin of R.S.Software for the 2 financial years immediately prior to the current financial year has to be taken. A plain reading of the 1st proviso would show that the question of comparability is not to be seen while applying the 1st and 2nd proviso to rule 10CA(2) of the Rules. The provisions of rule 10CA(2) have to be read harmoniously with the other provisions of rule 10B 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

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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]; ** ** **

(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; (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.

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(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. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction [or a specified domestic transaction] shall be the data relating to the financial year [(hereafter in this rule and in rule 10CA referred to as the 'current year')] in which the international transaction [or the specified domestic transaction] has been entered into : Provided that data relating to a period not being more than two years prior to [the current year] may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared: A reading of rule 10B(3) shows that comparison of an uncontrolled transaction to an international transaction can be done only if differences, if any, between the transactions that are 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 reasonably accurate adjustments can be made to eliminate the material effects of such differences. A reading of Proviso to Rule 10B(4) would show that use of data relating to a period of two years prior to the current year may also be considered but with a rider that "if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared". If by application of any filter an enterprise undertaking uncontrolled transaction similar to an international transaction

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is regarded as not being comparable in the earlier two years immediately preceding the current year and thereby attracting the provisions of rule 10B(2) or 10B(3) then the data for those years will not have any influence on the determination of transfer prices in relation to the transactions being compared for the current year and hence have to be ignored. On a harmonious reading of the provisions of rule 10CA, 10B(3) (4) of the Rules, we agree with the stand taken by the learned counsel for the Assessee. 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. 19. Respectfully following the decision of the coordinate bench of the Tribunal we hold that R.S. Software Ltd., should be excluded from the list of comparables. 20. Ground No. 4.12.1, 4.12.2, 4.12.4, 4.12.5, 4.12.6 raised contending the inclusion of RS Software (India) Ltd., Larsen and Toubro Infotech Ltd., Persistent Systems Ltd., Thirdware Solution Ltd., and Infosys Ltd. as a comparable have become academic in the light of the decision give in the aforesaid paras and hence dismissed as not pressed.

9.2 Respectfully following the above judgment, we direct to the TPO/AO for exclusion of the companies as noted above at para No.15 from (a) to (h) , accordingly this ground raised by the assessee is allowed for statistical purpose.

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Services Ltd., and Sasken Technologies Ltd., In the TP study report the assessee had chosen for the comparables to Akshay Software Technologies Ltd., but by the TPO after verifying the annual report, it was observed that the companies providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and overseas thus the functional profile of the company is different from the assessee hence, it was rejected. The ld.AR submitted that it passes all the filters applied by the TPO, therefore, it should be taken as a comparable, whereas the DRP has also not accepted and he also refer to page no,995 to 999 of the paper book and he relied on the decision of coordinate bench of this Tribunal in the case of of ARM Embeded Technologies Pvt. Ltd., in IT(TA)A No.1824/Bang/2017 for assessment year 2013-14 and in IT(TA)A No.3374/Bang/2018 for assessment year 2014-15. Further in respect of remaining two companies 8A Miles Software Services Ltd., and Sasken Technologies Ltd., he submitted that this issue has been decided by the ld.DRP at para No.30 and 31 of his order in which he has rejected the additional comparables files before him whereas these two companies passes all the filters as applied by the TPO, therefore he requested that the matter may be sent back to the file of AO/TPO.

10.1 On the other hand, the ld.DR relied on the order of the lower authorities and he vehemently submitted that the company Akshay

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Software Technologies Ltds., has rightly been rejected by the AO/DRP/TPO because it is not functionally comparable. IT is engaged in a different activities, which is clear from the annual report produced by the assessee. The assessee company is engaged in the cloud service activity whereas the Akshay Software is providing only services. IT is not in the I T Infrastructure Service , therefore, functionally not comparable and he further submitted that the case law referred by the ld.AR is for the assessment year 2013-14 and which is not the same assessment year as per the assessee. Therefore, the case law relied by the ld.AR is not applicable. Further in case of remaining two companies he submitted that before the TPO the assessee has not produced any data and did not argue for inclusion of these companies. Therefore, at this stage, it can be ascertained that the company is functionally comparable and passes all the filters applied by the TPO.

10.2 After considering rival submissions in case of Akshay Software Technologies Ltd., we observe that the assessee is engaged in various activities as noted by the DRP/TPO and the assessee company is engaged in cloud service providing to its AEs. We do not find any infirmity on the observations of ld.DRP. For the sake of convenience we are reproducing the same hereunder:-

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““32.0 Ground of Objections No.32: The Ld. TPO erred in rejecting Akshay Software Technologies Ltd. (‘Akshay’) selected by the Assessee as a comparable in the transfer pricing documental ion without considering the functional and risk analysis undertaken by the Assessee. The Ld. AO cried in up/in/ding the actions of the Ld. TPO.

32.1 Panel: The assessee contends that Akshay Software Technologies Limited should be accepted as a comparable for following reasons:

> Functionally similar > Qualifies all the filters applied by the TPO

32.2 Having considered the submissions, and on perusal of the annual report we note that, as per information given at page 18 of the annual report, the company is engaged in providing professional services and procurement, implementation and support of ERP products and services in India and Dubai. It is seen from its P&L account, that it has reported revenue from operations of Rs 2484 lakhs which comprised revenue from services of Rs 2399 lakhs and sales of software licence of Rs 85 lakhs As per Note 26 of annual report the revenue from export of software service was Rs2082 lakhs and as per Note 25. the foreign branch expenditure was Rs.2036 lakhs. As per information in the notes forming financial information of the annual report revenue mainly represent income front professional services from Dubai.

32.3 In this regard, it is relevant to note that ERP is a multi- layered software that integrates all the different functions within an organization. The ERP implementation requires professionals who have expertise in -

1) Functional domain (i.e. domain knowledge of the business, its operations & management).

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2) Software domain (i.e. technology expertise in software development)

32.4 Thus, ERP implementation & support involves personnel from professional domain and technology or software domain Therefore, such services cannot be strictly said to be software services as non-software personnel may play a dominant role in the implementation. The very fact that this company has described that it had rendered professional services in Dubai, indicate that it pertained to the non-software services; or it is also possible it may be a mix of software services and professional services. As segmental information is not available for the same, we consider it appropriate to hold that this company is not functionally comparable to the assessee. Accordingly, the exclusion this company is upheld.”

10.3 We also observe from the financial statement that the company is earning revenue from services of Rs.23,99,90,764/- and sale of software license is Rs.84,75,868/-. On observation of the note No.25, the foreign branch expenditures incurred by the comparable company on accrual basis is Rs.20,36,14,768/-, which will materially affect to the profit of the above company and this issue has not been examined by any of the authorities below, the AR of the asseseee relied on the decision cited supra, which is for the assessment year 2013-14 & 2014-15 of the coordinate bench of the Tribunal, which is not a impugned assessment year. As per director’s report the Technology Absorption (i) The assessee company does not import any technology during the year under review (ii) The company is a service provider and therefore has not set up a formal Research and Development unit whereas in the

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case of assessee company the Research and Development activity is done at the entity level as noted supra. As per director’s report the Akshay Software is a service provider. The assessee company is engaged for providing I. T. Infrastructure Services as narrated above. Considering the totality of the facts and as per our observations all these facts require consideration and reexamination by the TPO/AO. However the comparability of this company is sent back to the TPO/AO for fresh consideration.

10.4 Further in the case of 8A Miles Software Services Ltd., and Sasken Technologies Ltd., the assessee first time sought to be included for the comparable before the DRP as a good comparable because it passes all the filters and FAR analysis and the ld.DRP has without examining the functions and applying filters rejected. Considering to the file of assessee we are remitting back the issue to the file of TPO for de-novo consideration and the TPO will deicide the issue as per law.

10.5 This ground of the appeal of the assessee is allowed for statistical purposes.

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comparable and it is engaged in diversified activities and engaged in providing outsourced product development which is dissimilar to the IT infrastructure support services as engaged by the assessee and significant research and development activities has also been carried out by this company. He also relied on the Director’s report as quoted supra in his return synopsis. The markup is also wrongly calculated by te lower authorities. HE also objected that the ld.TPO has not provided the basis for preparation of markup and he relied on the decisions of ITAT Benches in the cae of M/s Aptean India Pvt. Ltd., in IT(TP)A No.2638/Bang/2017 for assessment year 2013-14, ARM Embeded Technologies Pvt. Ltd., in IT(TP)A No.1824/Bang/2017 and M/s Hewlett Packard India Software Operations Pvt. Ltd., in IT(TP)A No.2866/Bang/2017. In this regard he also reiterated the submissions made before the lower authorites as well as on the written synopsis.

11.1 The ld.DR relied on the order of the lower authorities and he further submitted that if company is incurring expenditure on R&D only for improving the process in delivering the software development services, then the said comparables cannot be rejected merely because it is incurring R&D expenditures. The assessee has not demonstrated as to how the R&D Expenditures being incurred by the company is the reason for the higher profit

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margins earned. He further submitted that incurring of R&D expenditure does not change the fact that for business software development. The ld.DR also referred to the order of the ld.DRP. The ld.DR submitted that the case law relied by the ld.AR is for the assessment year 2013-15 but the impugned case for the impugned assessment year 2015-16, therefore the case law relied on by the ld.AR is not applicable in the present facts of the case.

11.2 After hearing the rival submissions and examining the order of the authorizes below we do not find any substance on the submissions of ld.AR and we uphold that the lower authorities has rightly selected this company as good comparable company. The assessee has himself accepted in his TP study report that assessee is software development company and working on one segment for IT infrastructure service as per page no.239 and the assessee himself stated at para No.7; selection of comparables based on the new filters. SWD segment and as per para no.3.1 in which the company has stated business profile of the company at page no.3.1.1 at page no.234.

11.3 On going through the financial results of the CG Vak, the financial results are as under for three years.

Financial Year 2013-14 2014-15 2015-16

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Rs.in crores Revenue from operations 8.95 10.54 10.04 Foreign exchange gain 0.28 0.20 0.21 Other income 0.01 0.01 0.004 Operating income 9.24 10.74 10.25 Employee benefit exps. 6.25 7.02 6.88 Depreciation exps. 0.49 0.54 0.23

Other expenses 1.71 1.91 1.95 Operating exps. 8.45 9.47 9.07 Operating profit 0.79 1.27 1.18

11.4 As per page number 1359 annual report of 31.03.2015, which is significant accounting policy at sl.no.ix. and for the financial year 31.03.2016 at page no. 1456 at sl. No. ix In respect of segment reporting the auditor has reported as under:-

The company’s main business is providing of software services. There are no separate reportable segments as per Accounting Standard 17. Secondary segmental reporting is based on geographical location of customer and assets.

11.5 Further as per revenue recognition reported by the auditor at page no.1358 & 1456 for the financial year 31.03.2015 & 31.03.2016 is as under:-

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“Revenue from contract period on time are recognized when services are rendered and related costs are incurred”

11.6 Further we observe that as per page no.1365 & 1462 note no.4.02 which is a note annexed to forming part of accounts, which is as under:-

“Quantitative details are not furnished as the company is engaged in the development of computer software, providing services in IT and ITES.”

11.7 From the financial data it has also been observed that the CG Vak is incurring employee cost expenses which is 69.85%, 66.62% and 68.53% for three financial year – 31-03-2014, 31-03-2015 and 31-03- 2016 respectively. It clearly shows that the company is not incurring expenses on outsource product services. After considering the entire arguments from both the sides, auditors report and management reports the company is to be considered as CG Vak is a functionally comparable for the asseessee’s company. The ld.AR has also raised objections that the CG Vak is engaged in diversified activities as per page no.787 of the paper book, while going through the next page no.788 at the top of the continuation from the previous page the assessee has mentioned as – from the above extracts, it is pertinent to note that Mindtree Ltd ha substantial brand image in the market and earns significant brand profit ton account of the same. As a result, Mindtree Ltd

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cannot be conspired as a company comparable to the assessee. On going through the paper book page no.787 the activates narrated by the assessee does not match from the annual reports, therefore, the objections in regard to diversified activities need verification. For the sake of convenience we are reproducing the order of the DRP, in which he has upheld that the CG Vak is functionally comparable. The findings of the DRP is as under:-

“16.2 Having considered the submission of the assessee, we note that the company is predominantly engaged in SWD services. Less than one percent of the revenue is derived from ITes segment. As it derives revenue from predominantly software segment, segmental details discussed in para 11.2 above. The intangibles referred in the asset Schedule represent the computer software and a such does not refer to any IPR or licence owned by the said purposes. Therefore, such intangibles cannot be equated to have rights of software for coding by the assessee to provides specific enduring benefit. Also, the assessee has failed to establish that such differences have material effect on the margin of the above company. In terms of clause (i) of such-rule (3) of Rule 10B, which h provides that an unaccounted transaction shall be comparable to an international transaction if none of the difference, 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 are rejected. 16.3 On the plea of high fluctuating margin, we note that the assessee has not given any reason to how it affects functional comparability. WE are of the view that revenue fluctuation and margin variation in different years is a normal business incidence; and we also note that there is no information in the annual report to suggest that the fluctuation arose out of abnormal events. The assessee also could opt point to any such abnormal event in the annual report. Further, the fluctuations gets evened out as

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weighted average margin of all tile comparables for 3 years and the median of all the weighted average margins is reckoned for ALP determination. Thus, we note that fluctuation in profit margins s such cannot be a valid reason for rejecting a comparable when measures to ensure averaging out of fluctuations are already in-built in the overall process. 16.4 It satisfies all the filters applied by the TPO. Accordingly, we confirm the inclusion of this comparable. 11.7.1 We also from the TP study report in regard to the arguments of the ld.AR that the CG Vak is incurring significant R&D expenditures and having sufficient intangibles is rejected because the assessee company is a subsidiary of IBM and the IBM is worldwide organization and the business of the IBM is spread in more than 175 countries and the significant R&D expenditures are incurred by the IBM. The extract from the TP study report which is at paper book page no.94 is as under:-

“2.4.4.2 IBM’s research and development (“R&D”) operations differentiate the company from its competitors. IBM annually invest approximately 6 percent of total revenue for R&D competitors. IBM annually invests approximately 6 percent of total revenue for R&D, focusing on high-growth, high-value opportunities. IBM Research works with clients and the company’s business units through global labs on near-term and midterm innovations. It contributes many new technologies to IBM’s portfolio every year and helps clients address their most difficult challenges. IBM Research also explore s the boundaries of science and technology – from nanotechnology and future systems, to big data analytics, secure clouds and advancing the world’s first cognitive computing platform, IBM Waston.

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The company continues to actively seek IP protection for its innovations, while increasing emphasis on other initiatives deigned to leverage its IP leadership, some of IBM’s technological breakthroughs are used exclusively in IBM products, while others are licensed and may be used in IBM products and/or the products of its success, IBM believes its business as a whole is not materially dependent on any particular patent or license, or any particular group of patents or licenses. IBM owns or is licensed under a number of patents, which vary in duration, relating to its products.”

On further perusal of the page no.111 we observe as under:- “4.1 Activates undertaken by IBM US Specific functions of IBM U.S in support of its non-US Subsidiaries 4.1.1 Research and Development IBM US is the legal owner of technology-related intangibles arising from R&D activities undertaken throughout the IBM organization. R&D is performed both by IBM US as well as by certain non-US subsidiaries. For contract R&D activities performed outside the US., IBM US reimburses the entity performing the R&D function for its development expense plus an arm’s length mark-up and retains the ownership rights of technology intangibles arising from the R&D activity. Technology IP is then licensed to non-US subsidiaries for sale of solutions and performance of service in their jurisdictions.” The assessee company is also getting different support from its AEs. During the impugned assessment year the assessee has paid import of services of Rs.10,38,91,091/- but the assessee has

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not described why the payments has been made for import of services. As it is clear from the above paragraphs extracted from the TP study report that the R&D activities are taken by the IBM and 6% of the total revenue is spent and the intangibles created are lying with the IBM which are used by the AEs, therefore, objections raised by the ld.AR is not tanable.

11.8 The assessee submitted that there is error in the margin computation of this company. The TPO has calculated OP/OC is as under

Year 31.03.2015 31.03.2016 31.03.2017 AVERAGE

13.81% 19.87% 20.16% 18.05%

As per Assessee 9.38% 13.42% 13.06%

11.9 We consider it appropriate to direct the TPO to verify and adopt the figures as per the annual report of these companies and accordingly their PLI margin shall be recomputed. We, therefore, remand to TPO/AO, the question whether CG Vak is a comparable company functionally and also compute correct margin in the light of the above observations. Accordingly this ground is allowed for statistical purpose.

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dealt this issue at per para No. 34.1 to 34.19 and the DRP has directed to AO/TPO for recomputation of interest adjustments on the receivables for delayed period after allowing reasonable credit period of 30 days and applying the SBI short term deposit interest rate for the subject year. We are not accepting the direction of the DRP for applying short term SBI Interest rate because the interest on receivables are a separate international transactions as decided by the Hon.ble jurisdictional High Court in the case of DCIT vs.AMD India Pvt. Ltd. in ITA No. 274/2018 dated 31.08.2018 ( TS- 993-HC-2018-Kar-TP ), therefore, it requires separate bench are also rejecting marking. We also reject the arguments of the ld.AR that the interest on receivables is not international transactions. On going through the order of DRP we noted that the principles of natural justice have been violated since no opportunity of being heard was provided when DRP directed to adopt SBI short term deposit rate instead of Libor plus 450 basis points adopted by the TPO. Since the tax payer has not complied the notice issued by the ld.TPO on 27/05/2019 and the assessee has filed detailed chart in the case of delay receivables from the debtors. therefore, the matter needs reconsideration. We, also placed reliance on the recent order of the jurisdictional Tribunal in the case of Verifone India Technology (P.) Ltd. v. ACIT [IT (TP)A No. 290/Bang/2021, dated 25-4-2022] wherein the Tribunal has directed the lower authorities to benchmark the transactions by following any one of the methods prescribed under the Income-tax Rules. We are

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inclined to follow the same and direct the AO/TPO to benchmark the transaction as per the provisions of the Act and Rules formulated there under. It goes without saying that any proposed addition should result in an opportunity of being heard and adhere to the principles of natural justice and assessee is directed to follow the directions/ instructions and has to provided requisite details It is ordered accordingly.

This ground is allowed for statistical purpose.

Capacity Utilization:- 13. The ld.AR of the assessee in his written submissions, has submitted that the capacity utilization should be given and he requested that the matter may be sent back to the file of AO/TPO for the fresh consideration. As per Ld.DRP, the assessee had not included this issue in his T.P.Study report. We observe from the records that the assessee filed details for capacity utilization before the TPO on 22/10/2019 and the same were also filed before the DRP as annexure 35 in which it has contested that the total number of servers were available of 1232out of which 303 were utilized and 68% of the capacity was not utilized by the assessee, The ld.AR of the assessee also relied on the decision of the Tribunal in the case of M/s Atmecs Technologies Pvt. Ltd. VS. ITO in IT(TP)A No.187/Bang/2021 for the assessment ear 2016- 17. therefore he is eligible for under utilization capacity and

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submitted details and relying on some case law. We observe from the order of the DRP that he claimed first time before the ld. DRP. Since this is the first year of operation and if the assessee has underutilized his capacity and if he satisfied the provisions of the income tax act on this issue then the assessee is eligible for capacity utilization. On perusal of the documents/Financial Statements/ Copy of Income Tax Return filed before us, we observed that the assessee has claimed full depreciation on entire Fixed Assets as per section 32 of the I. T. Act. and the revenue has also allowed the Depreciation claimed, it shows that the entire assets were put to use during the impugned financial year i.e there was no under utilized capacity. If the claim of the assessee is accepted for under utilization sitting capacity i.e. the relevant assets which were kept idle for the year or sitting capacity were not utilized, therefore, in theses assets depreciation can not be claimed as per section 32 of the I.T. Act. because of it is the first year of operation. Since this issiue has not been examined by the lower authorites on this aspect also. Considering the entire observations and facts of the case of the assessee the TPO is directed to decide the issue denovo and decide the issue in accordance with law and the assessee is directed to provide requisite documents for early disposal of the case. The ld.AR relied on the decision of the Tribunal in the case of M/s Essentra (India) Pvt. Ltd. in IT(TP)A No.1610/Bang/2017 dated 05.06.2020.

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Bangalore, Dated, 10th October, 2022 / vms /

Copy to:

Asst. Registrar, ITAT, Bangalore.

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