ARM EMBEDDED TECHNOLOGIES PRIVATE LIMITED,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 1(1)(1), BENGALURU

ORDER

PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by the assessee against order dated 07/04/2021 by the National e-Assessment Centre, Delhi for A.Y. 2016-17 on following grounds of appeal: “The grounds mentioned herein by the Appellant are without prejudice to one another.

2. That on the facts and in the circumstances of the case, the learned Panel and the learned AO erred in upholding the learned TPO's approach of determining the arm's length price for the provision of software development MOW ('SWD') services and provision of marketing and sales support services (MSS') segments of the Appellant by: 2.1 Rejecting the value of international transaction of provision of SWD and provision of MSS, as recorded in the books of account. as the arm's length price. 2.2 Rejecting the TP documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence. 2.3 Applying the provisions of Rule 10B(5) read with Rule 10CA(2) and Rule 10CA(4) of the Income-tax Rules, 1962 ('the Rules') while undertaking the fresh benchmarking analysis. 2.4 Rejecting the Company's contentions against that the use of information under section 133(6) of the Act, which tantamounts to choosing secret comparable companies whose information were not available in public domain while undertaking the TP study for the respective financial year and without prejudice. not sharing the responses received under section 133(6) with the Appellant. 2.5 Conducting a fresh comparability analysis by rejecting certain filters applied by the Appellant in the TP documentation as below:  Research and development (R&D) > 3% of sales  Net fixed assets > 200% of sales 2.6 Applying additional / modified filters in the fresh comparability analysis undertaken as below:  Companies with export service income > 75% of sales were selected  Companies whose income from core service > 75% of sales were selected (the Appellant had also applied this filter with a lower threshold of 50%)  Companies with employee cost > 25% of operating cost were selected  Companies with different financial year ending were rejected

Page 3 of 51 IT(TP)A No. 235/Bang/2021 2.7. Using data, which was not contemporaneous, and which was not available in the public domain at the time of preparing the TP documentation. 2.8 Application of related party transaction ('RPT') filter by applying an inappropriate interpretation of computing the filter and thereby accepting Persistent Systems Ltd., Aspire Systems (India) Pvt. Ltd. and Thirdware Solution Ltd. as comparable companies to the SWD services segment of the Appellant, though they fail the RPT filter. 2.9 Holding that decisions of this Hon'ble Tribunal cannot be relied upon while adjudicating the comparability of certain companies and that companies cannot be rejected for non-availability of segment information. SWD services segment 2.10 Including the following companies even though such companies are functionally different (such as engaged in R&D activities, presence of intangibles, significant onsite revenue, etc.) from the Appellant.  R S Software (India) Ltd.  Larsen & Toubro Infotech Ltd.  Nihilent Ltd.  Inteq Software Pvt. Ltd.  Persistent Systems Ltd.  Infobeans Technologies Ltd.  Thirdware Solution Ltd.  lnfosys Ltd.  Aspire Systems (India) Pvt. Ltd.  Cybage Software Pvt. Ltd. 2.11 Excluding the following companies even though the same are functionally comparable to the Appellant.  Akshay Software Technologies Ltd.  Sasken Communication Technologies Ltd.  Evoke Technologies Pvt. Ltd.  Yudiz Solutions Private Ltd.  Smartcloud Infoservices Pvt. Ltd. MSS segment 2.12. Including the following companies even though such companies are functionally different (such as engaged in commission activities, intermediary and outsourcing functions, technology and litigation support, etc.) from the Appellant.  Killick Agencies & Marketing Ltd.  Scarecrow Communications Ltd.  iRunaway India Pvt. Ltd.

Page 4 of 51 IT(TP)A No. 235/Bang/2021 2.13 Excluding the following companies even though the same are functionally comparable to the Appellant and data is available in the public domain.  Cheers Interactive India Pvt. Ltd.  MCI Management India Pvt. Ltd.  Showhouse Event Management Pvt. Ltd.  Competent Automobiles Co. Ltd.  Empire Industries Ltd. (Trading and Indenting) 2.14 Not considering certain expenses such as provision for doubtful debts, provision for warranties, provision for doubtful deposits, miscellaneous expenditure written off as operating, on the premise that these are not the C routine operating cosfs to be for determining the mark-up of the comparable companies 3. That on the facts and in the circumstances of the case, the learned Panel and the learned AO erred in making an adjustment of INR 1,954,655 in respect of notional interest on outstanding receivables from associated enterprises (`AEs') to the income of the Appellant by considering overdue receivables from AEs as a separate international transaction under the provisions of section 92B of the Act. 3.1 That without prejudice, the learned AO / Panel ought to have considered the weighted average realization period of receivables for the Appellant, which is only 28 days in respect of the SWD services segment and 29 days in respect of the MSS segment. 3.2 That without prejudice, the learned AO / Panel erred in ignoring that, if at all a TP adjustment has to be sustained with respect to notional interest on overdue receivables. interest should be computed using LIBOR as against SBI short term deposit rate.

4. That on the facts and in the circumstances of the case, the learned Panel and the learned AO erred in not providing working capital adjustment for determining the arm's length price while relying on the judicial precedents based on a fact pattern, which is not applicable to the Appellant 5. Not providing suitable adjustment to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies.

Page 5 of 51 IT(TP)A No. 235/Bang/2021 6. That on the facts and in the circumstances of the case, the learned AO and the learned TPO erred in not conforming with the directions of the learned Panel while computing the mark-up on operating cost of certain comparable companies.

7. That on the facts and in the circumstances of the case, the learned AO erred in not granting consequential relief in the computation of interest of INR 1,206,532 u/s 234A, INR 36,799,226 u/s 234B and INR 4,086 u/s 234C of the Act while computing the tax payable.

8. That on the facts and in the circumstances of the case, the learned AO has erred in serving notice under section 271(1)(c) of the Act and initiating penalty proceedings for concealment of income and for furnishing inaccurate particulars of such income. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this appeal.” Brief facts of the case are as under : 2.1 The assessee is a subsidiary of Arm Limited, UK. The Appellant is engaged in providing contract SWD and MSS services to its AEs. It filed its return of income for the A.Y. 2016- 17 on 11/11/2016 declaring total income of Rs.32,01,14,040/-. Subsequently, the case was selected for scrutiny. Statutory notice u/s 143(2) of the Act along with notice u/s 142(1) were issued and served on the assessee. 2.2 The Ld.AO noted that, during the F.Y. 2015-16, the assessee company had international transactions as per Section 92 of the Income-tax Act, 1961. According to Section 92CA of the Income- tax Act, 1961, the case was referred to the Transfer Pricing Officer in order to determine the Arm's Length Price after obtaining necessary approval.

Page 6 of 51 IT(TP)A No. 235/Bang/2021 2.3 The Ld.TPO observed that the assessee had following international transaction with its AE for the year under consideration: Particulars Amount in Rs. Receipts from provision of contract SWD 254,51,50,802/- services Receipts from provision of contract MSS 3,56,17,182/- services Receipts from provision of resource 8,29,521/- augmentation services Reimbursement of travel expenses 20,38,151/- Reimbursement of expenses received 74,61,814/- Resource augmentation services Reimbursement of expenses received – others 52,63,595/- Remittance made on behalf of employees 12,74,20,517/- towards RSU Reimbursement of expenses paid towards Rs.5,90,21,834/- ESPP 2.4 The Ld.TPO noted that the assessee used TNMM as the most appropriate method and OP/OC as PLI to compute its margin under SWD and ITES segment. The assessee computed its margin at 11.4% for SWD segment and 7.99% for MSS segment. The assessee used following comparables under both the segments having SWD Segment: Sl.No. Name of the company Weighted average 1. CG-VAK Software & Exports 9.83 Ltd.

2. Cigniti Technologies Ltd. 10.97 3. Kals Information Systems Ltd. 10.76 4. Melstar Information -3.43 Technologies Ltd.

5. Mindtree Ltd. 20.84 6. Persistent Systems Ltd. 31.06

Page 7 of 51 IT(TP)A No. 235/Bang/2021 7. RS Software (India) Ltd. 28.85 8. TVS Infotech Ltd. 3.58 9. Tata Elxsi Ltd. 18.46 10. Tera Software Ltd. 13.14 11. Akshay Software Technologies 0.04 Ltd. 12. Evoke Technologies Pvt. Ltd. 5.47 13. R Systems International Ltd. 24.36 14. Sasken Communication 27.83 Technologies Ltd. 35th Percentile 9.83 Median 12.06 65th Percentile 20.84 MSS segment: Sl. Name of the company Weighted No. average Majestic Research Services & 19.01 Solutions Ltd. . 1. Mig Media Neurons Ltd. 11.76 2. Cheers Interactive India Pvt. Ltd. 1.77 3. MCI Management India Pvt. Ltd. 6.40 4. Showhouse Event Management 4.48 Pvt. Ltd. 5. Competent Automobiles Co. Ltd. 8.22 6. Empire Industries Ltd. 3.98 7. Priya International Ltd. 17.68 35th Percentile 4.48 Median 7.31 65th Percentile 11.76 Page 8 of 51 IT(TP)A No. 235/Bang/2021 2.5 As the 35th percentile of the comparables under both the segment was within +/- 5% range, the assessee concluded its transaction under SWD and MSS segment to be at arms length. Dissatisfied with the approach by the assessee the Ld.TPO applied following filters: SWD segment: Filters applied by the Ld.TPO 1. Companies for which financial information for 1 out of 3 years was not available – rejected.

2. Companies having different financial year ending (i.e. not March 31,2016 or data of the company which does not fall within 12-month period i.e. 01-04-2015 to 31- 03-2016 – rejected.

3. Companies whose SWD service income is less than 75% of its total operating revenues – excluded.

6. Companies with employee cost less than 25% of turnover – excluded.

7. Companies having positive net worth- selected.

8. Companies making persistent losses (loss for any 2 years out of last 3 years)- excluded.

9. Companies with turnover > 1 crore- selected MSS segment: Filters applied by the Ld.TPO 1. Companies having different financial year ending (i.e. not March 31,2016 or data of the company which does not fall within 12-month period i.e. 01-04-2015 to 31- 03-2016-rejected Page 9 of 51 IT(TP)A No. 235/Bang/2021 2. Companies whose income was less than Rs. 1Crore – excluded 3. Companies whose MSS service income is less than 75% of its total operating revenues – excluded 4. Companies who have more than 25% related party transactions – excluded 5. Companies who have negative net worth – excluded.

SWD Segment: Sl. Name of the Company Weighted No. average (in %) 1. Kals Information Systems Ltd. 8.60 2. E-Zest Solutions Ltd. 10.87 3. Rheal Software Pvt. Ltd. 14.50 4. CG-VAK Software & Exports Ltd. 18.50 5. R S Software (India) Ltd. 20.87 6. Larsen & Toubro Infotech Ltd. 24.83 7. Nihilent Technologies Ltd. 26.36 8. Cigniti Technologies Ltd. 27.34 9. Inteq Software Pvt. Ltd. 28.20 10. Persistent Systems Ltd. 30.89 11. Infobeans Technologies Ltd. 32.42 12. Thirdware Solution Ltd. 36.90 13. Infosys Ltd. 38.61 Page 10 of 51 IT(TP)A No. 235/Bang/2021 14. Aspire Systems (India) Pvt. Ltd. 39.28 15. Cybage Software Pvt. Ltd. 66.45 35th Percentile 24.83 Median 27.34 65th Percentile 30.89 MSS Segment: Sl. No. Name of the Company Mark-up on Total Costs (WC–unadj) (in %) 1. Quadrant Communications Ltd. -0.34 2. Esha Media Research Ltd. -1.60 3. Goldmine Advertising Ltd. 5.94 4. Pressmine Advertising Ltd. 12.99 5. Ugam Solutions Pvt. Ltd. 17.75 6. Majestic Research Services & Solutions 20.94 Ltd.

3. The Ld.AR submitted that the assessee wish to argue on following grounds wherein comparable mentioned herein are only pressed:

4. Ground No.2.10: That RS Software (India) Ltd., Larsen & Toubro Infotech Ltd., Nihilent Ltd., Inteq Software Pvt. Ltd., Persistent Systems Ltd., Infobeans Technologies Ltd., Thirdware Solution Ltd., Infosys Ltd., Aspire Systems (India) Pvt. Ltd. and Cybage Software Pvt. Ltd. ought to be excluded on account of the companies being functionally dissimilar to the assessee.

5. Ground No. 2.11: That the Ld.TPO erred in excluding Akshay Software Technologies Ltd, Sasken Communication Technologies Ltd. and Evoke Technologies Pvt. Ltd., even though the same are functionally comparable to the assessee.

Page 13 of 51 IT(TP)A No. 235/Bang/2021 6. Ground No. 2.12: That Killick Agencies & Marketing Ltd., Scarecrow Communications Ltd. and iRunway India Pvt. Ltd. ought to be excluded from the final list of comparables as the companies are functional dissimilar to the assessee.

7. Ground No. 2.13: That Cheers Interactive India Pvt. Ltd., MCI Management India Pvt. Ltd. and Showhouse Event Management India Pvt. Ltd., ought to be included in the final list of comparables as the companies are functionally comparable to the assessee.

Risk Assumed:

Page 16 of 51 IT(TP)A No. 235/Bang/2021 Page 17 of 51 IT(TP)A No. 235/Bang/2021 Page 18 of 51 IT(TP)A No. 235/Bang/2021 Characterisation: Based on the facts as presented in the above analysis of functions performed, assets employed and risks assumed by ARM India, it is possible to characterize ARM India as a contract service provider engaged in the provision of contract software development services predominantly to ARM UK and a small portion of the software development services to ARM US. Based on the facts as presented in the functional analysis, ARM India can be characterized as a service provider engaged in rendering marketing and sales support services to ARM UK. ARM India bears limited risks associated with undertaking such activities. The functions performed by ARM India, risks assumed and assets used, do not lead to development or creation of any non-routine intangibles by ARM India.

14. Infobeans Technologies Ltd.: It is submitted that this company is functionally dissimilar to the assessee on various counts and therefore deserves to be rejected. The Ld.AR submitted that, this comparable is functionally not similar with that of assessee, as it is specialised in business applications development for web and mobile. This company provides software engineering services primarily in Custom Application Development, Content Management Systems, Page 21 of 51 IT(TP)A No. 235/Bang/2021 Enterprise Mobility, Big Data Analytics. He placed reliance on page 1668 of annual report paper book. The services rendered by this company are different from the routine low end software development services rendered by the assessee as a captive service provider to its AE. The Ld.AR further submitted that, segmental details of such diverse activities carried on by this company are not available. He thus prayed for exclusion of this company from the final list.

16. We note that the decision of Hon’ble Delhi Tribunal in case of Global Logic India Ltd.,(supra) considered these comparables for assessment year 2016-17 and has held them to be functionally not similar with a captive service provider like that of the assessee before us. Further The assessee in Global Logic India Ltd.,(supra) is also as captive service provider as observed by Hon’ble Delhi Tribunal therein. Hon’ble Tribunal observed as under: COMPARABLE COMPANIES SOUGHTTO BE EXCLUDED BY THE TAXPAYER LARSEN & TOUBRO INFOTECH LTD. (L&T) 14. The taxpayer sought to exclude L&T from the final set of comparables chosen by the ld. TPO for the purpose of benchmarking its international transactions qua SDS on the grounds inter alia that it is functionally dissimilar; that its segmental data is not available; that L&T is a huge brand with ownership of intangibles and on account of extra ordinary event; and on the ground that this company was rejected in taxpayer's own case in Global Logic India Ltd. v. Dy. CIT [2020] 117 taxmann.com 39 (Delhi - Trib.).

15. However, on the other hand, ld. DR for the Revenue opposed the contentions raised by the taxpayer to exclude L&T as a comparable on the grounds inter alia that this comparable was chosen by the taxpayer itself and in case of TNMM applied for benchmarking the international transactions minor dissimilarities are not to be taken into account; that the taxpayer cannot be taken as a captive entity as its spectrum is much more and it is also a global brand having presence in many countries and relied upon the order passed by the ld. TPO/ld. DRP.

Page 23 of 51 IT(TP)A No. 235/Bang/2021 17. When we examine Notes forming Parts of Accounts at page 116 of the paper book, it is evident that L&T is having two segment accounts, namely, (i) Services Cluster Segment which includes Banking and Financial Services, Insurance, Media & Entertainment, Travel & Logistics and Healthcare, and (ii) Industrial Cluster Segments which consists of Hi Tech and Consumer Electronics, Consumer Retail & Pharma, Energy & Process, Automobile & Aerospace, Plant Equipment & Industrial Machinery, Utilities and E&C. But aforesaid various segments do not indicate profit earned from provisions of SDS. Apart from it, L&T is a huge brand having ownership of significant intangibles to the tune of Rs. 7.42 millions, as is evident from its financials at pages 8 and 103 of the paper book.

18. Coordinate Bench of the Tribunal rejected L&T in taxpayer's own case for AY 2014-15 (supra), available at pages 61 to 63 of the case law paper book, by returning following findings :— "6.6 The next objection of the assessee is regarding multiple segments. From segment reporting on page S-1258 of the Annual Report (page 129 of PB-2), we find that the assessee has reported three business segments. The first segment is service cluster which includes banking, financial services, insurance, media and entertainment, travel and logistics and healthcare. The second segment industry cluster which includes Hi Tech and consumer electronics, consumer, retail and Pharma, energy and process, auto Mobile and aerospace, plant equipment and industrial machinery, utilities and E &C. The third segment, is telecom segment which refers to product engineering services (PES) which has been discontinued in this year. Regarding the PES, in Director's report, (available on page S-1225 of the Annual Report or page 96 of PB-2), it is reported as under : "TRANSFER OF PRODUCT ENGINEERING SERVICES (PES) BUSINESS TO L&T TECHNOLOGY SERVICES LIMITED (LTTSL) AND WINDING UP OF GDA TECHNOLOGIES INC. (GDA INC.) As part of business restructuring undertaken within L&T Group, it was decided to consolidate the engineering services business under a separate subsidiary of L&T, L&T Technology Services Ltd. (LTTSL). Pursuant to this, the Company initiated and completed transfer of its Product Engineering Services (PES) Business Unit to LTTSL effective January 1, 2014, PES Business Unit was transferred by way of slump sale for total sales consideration of Rs. 489.53 crs based on ITA No. 4740/Del./2018 fair valuation, GDA Technologies Inc., USA (GDA Inc.), a wholly owned subsidiary of the Company was part of PES business with synergy in terms of the end customers they serve, primarily the semiconductor companies. Over last few years, the performance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, certain IPs (Intellectual Properties) owned by GDA Inc. were transferred to LTTSL, the Company was wound up during the year." 6.7 In view of the above reporting, it is clear that under the telecom segment, the assessee was engaged in providing engineering services, which is distinct from the services of the software development. Thus, Page 24 of 51 IT(TP)A No. 235/Bang/2021 at entity level, the company cannot be considered functionally similar to the assessee. The company cannot be considered comparable at the segment level also because of there are expenses of Rs. 205,80,17,445/- ( page 129 of PB-2) , which has not been allocated into three segments, and thus the segmental result are distorted. 6.8 During the year, the extraordinary event of demerger of product engineering service business (PES) has occurred with effect from 01/01/2014, which has also impacted the profit of the company at the entity level. In the decision of the Tribunal in case of Xchanging Technology Service India Private Limited (ITA No. 1897/Del./2004), which has been approved the Hon'ble High Court in , the company is held to be not valid comparable on account of extraordinary events. Thus, In view of the extraordinary event in the year under consideration also, this company is liable to be excluded from the set of the comparable."

20. In view of the facts inter alia that L&T is into various segments having no segmental financials, having huge brand value and intangibles is not a suitable comparable vis-à-vis taxpayer which was working as a captive entity and that contention raised by the ld. DR that under TNMM minor dissimilarities do not affect the overall comparability is not sustainable because though it is a taxpayer's own comparable but there being no estoppel against statute and that taxpayer can rectify its mistake at any stage of the proceedings. Secondly, it is not a case of minor dissimilarities rather it is a case of functional dissimilarity and non-availability of segmental financials to provide the clear picture qua profit earned by the company from provisions of SDS. L&T is a big brand having ownership of huge Page 25 of 51 IT(TP)A No. 235/Bang/2021 intangibles which ought to provide competitive advantage to the taxpayer in the form of premium pricing and huge volume of business ultimately leading to the higher profitability. So, we are of the considered view that L&T is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded. THIRDWARE SOLUTION LTD. (THIRDWARE) 40. The taxpayer sought exclusion of Thirdware on the ground that it is functionally dissimilar vis-à-vis the taxpayer. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld. DRP to retain this comparable.

45. The taxpayer also brought on record profile of the Infobeans at pages 58 to 60 of the appeal memo wherein it is claimed by the Infobeans that it is providing wide range of services under four verticals i.e. services, automation, enterprise and industries and under the automation services verticals, the company is providing advanced robotic process automation services. Since Infobeans is into diversified activities it cannot be a suitable comparable vis-à- vis the taxpayer which is a routine software development services provider. Infobeans has been excluded as a comparable on account of functional dissimilarity vis-à-vis routine software development service provider by the coordinate Bench of the Tribunal in case of Pub Matic India (P.) Ltd. (supra).

Page 26 of 51 IT(TP)A No. 235/Bang/2021 So, in view of the matter, we order to exclude Infobeans from the final set of comparables. INTEQ SOFTWARE LTD. (INTEQ) 46. The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services.

18. Respectfully following the view taken by the coordinate bench of this Tribunal in Global Logic India Ltd. (supra), we direct Ld. AO/TPO to exclude Inteq Software Pvt.Ltd, L&T Infotech Ltd., Infobean Technologies Ltd., Thirdware Solutions Ltd. from the final list of comparable for SWD segment.

19. Persistent Systems Ltd. : It is submitted that this company is functionally dissimilar to the assessee on various counts and therefore deserves to be rejected. The Ld.AR submitted that, this comparable is functionally not similar with that of assessee, as it is engaged in, rendering Enterprise Digital Transformation, product engineering and solutioning for Internet of Things (IoT), product engineering and professional services to ISVs and enterprises, IP products, IT Page 27 of 51 IT(TP)A No. 235/Bang/2021 services, development of software products and offers complete product life cycle services without there being separate segmental information disclosed in its Annual Report for such activities . He placed reliance on page 1421, 1592, 1608, 1641 of the annual report paper book. It is submitted that Persistent Systems made significant investments towards research and development activities in the relevant previous year. Persistent has collaborated with researchers from IGIB, JNU, IISER-Pune and NCL to develop SanGeniX - an DNA sequencing using Next Generation Sequencing (NGS) technology), eSkIN-will help discovery of new pharmaceutical and cosmetic products to empower pharmaceuticals and cosmetic companies to predict the effects of their products on human skin). He placed reliance on page 1421 of the annual report paper book. Persistent has established “persistent labs” which focuses on latest technologies viz., gesture computing, machine learning etc. Using the innovations of Persistent labs. The Ld.AR further submitted that this company partnered with IBM and have added an engineering team that is building products and tools for continuous lifecycle management and for digital transformation and has partnerships with various leading platform providers in Analytics, Big Data, Cloud, Mobile, Machine Learning, and IoT. He placed reliance on page 1420, 1421, 1422, 1391 of the annual report paper book. The Ld.AR submitted that as a part of Aepona acquisition, this company acquired development centers in Belfast, UK and in Colombo, Sri Lanka during the year under consideration. He placed reliance on page 1420, 1421 of the Page 28 of 51 IT(TP)A No. 235/Bang/2021 annual report paper book. He thus prayed for exclusion of this company from the final list. The Ld.AR submitted thus submitted that Persistant Systems Ltd, is not functionally similar with that of assessee who is a captive service provider to its AE.

Page 29 of 51 IT(TP)A No. 235/Bang/2021 The Ld.AR submitted that, this company does not have segmental data in respect of rendering software services and development of products. It is submitted that this company has significant intangibles as a part of its fixed assets in the nature of intellectual property. He placed reliance on 1904, 1944, 1984 of annual report paper book. The company owns significant brand value and focuses immensely on brand building. The Ld.AR submitted that, this company heavily focuses on research and development activity and incurs significant expenditure for this account and for the financial year relevant to assessment year under consideration, the company incurred research and development expenses of Rs. 415 crores. He placed reliance on page 1942 of annual report paper book. The Ld.AR submitted that, this company for the year under consideration has earned abnormally high profit with margin of 38.61%, which makes it incomparable with the assessee. The Ld.AR submitted thus submitted that this company is not functionally similar with that of assessee who is a captive service provider to its AE. It is also submitted that these comparables are not functionally similar with that of the assessee as has been observed by Coordinate Bench of this Tribunal in following cases:

1. 1. Decision of Hon’ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT reported in (2022) 136 taxmann.com 52.

2. Decision of coordinate bench of this Tribunal in case of OLF India Software Pvt.Ltd. vs. ACIT in IT(TP)A No.182/2021 by order dated 28/09/2022 for A.Y. 2016-17.

3. Decision of Hon’ble Hyderabad Tribunal in case of Infor (India) Pvt. Ltd. vs. DCIT in ITA-TP.No. 198/Hyd/2021 by order dated 06.10.2021 for A.Y. 2016- 17.

Page 30 of 51 IT(TP)A No. 235/Bang/2021 On the contrary, the Ld.CIT.DR placed reliance on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.

Page 35 of 51 IT(TP)A No. 235/Bang/2021 The company is engaged in development of platform services and is rendering data analytics services, which are different from the routine SWD services rendered by the assessee. The data analytics services rendered by the company will fall within the definition of KPO services, which are incomparable to the services rendered by the assessee. It is submitted that this company conducts research and development work in the areas of real time analytics, MDM, proximity, payments, digital commerce, mobile payments, testing, automation, personalised loyalty in payments and merchant management in payments laboratory. On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. We note that this company is a full fledged entrepreneur and assumes all the risks attributable to the various business segments for which details are not available. In our view, under such circumstances, this company cannot be held to be functionally comparable with that of assessee which is a captive service provider that caters only to its AE. We therefore direct the Ld.AO/TPO to exclude R.S Software (I) Pvt.Ltd, from the final list. Accordingly this ground raised by the assessee stands allowed.

26. Ground No. 2.11: That the Ld.TPO erred in excluding Akshay Software Technologies Ltd, Sasken Communication Page 36 of 51 IT(TP)A No. 235/Bang/2021 Technologies Ltd. and Evoke Technologies Pvt. Ltd., even though the same are functionally comparable to the assessee. It is submitted that this company is engaged in providing software development services. It is submitted that these comparables were not considered by the Ld.TPO as they did not appear in the search matrix carried out by him, which has been upheld by the DRP. He placed reliance on the decisions of coordinate bench of this Hon’ble Tribunal in the case of Prism Networks Pvt. Ltd. reported in (2022) 141 taxmann.com 163. On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. We note that this Tribunal in case of Prism Networks Pvt. Ltd.(supra) observed and held as under: 18. We heard the rival submissions. It is clear from the order of the DRP that the DRP has not considered the plea of the Assessee in proper perspective. The fact that the TPO rejected the TP study of the Assessee cannot be the basis not to consider the claim of the Assessee for inclusion of comparable companies. The TPO excluded these companies only on the ground that information related to these companies was not available in the public domain and this fact was shown to be an incorrect assumption by the Assessee in the submissions before the DRP. In such circumstances, it was incumbent on the part of the DRP to have adjudicated the question of inclusion of these companies as comparable companies. The fact that these companies do not figure in the search matrix of the TPO is not and cannot be a ground not to consider inclusion of these companies as comparable companies. Since the DRP has failed to do so, we are of the view that the issue regarding inclusion of the aforesaid companies as comparable companies should be set aside to AO/TPO for fresh consideration in the light of the information available in public domain. Thus ground No. 7 is treated as allowed for statistical purposes. Respectfully following the above view, we remit the comparables back o the Ld.AO/TPO for fresh consideration in the light of information available in public domain. Accordingly this ground stands allowed for statistical purposes.

Page 37 of 51 IT(TP)A No. 235/Bang/2021 27. Ground No. 2.12: That Killick Agencies & Marketing Ltd., Scarecrow Communications Ltd., and iRunway India Pvt. Ltd., ought to be excluded from the final list of comparables under the IteS segment, as these companies are functional dissimilar to the assessee.

Page 38 of 51 IT(TP)A No. 235/Bang/2021 As observed by coordinate bench in case of this Tribunal in the case of DCIT v. Electronics for Imaging India (P.) Ltd.(supra) this company is functionally not similar with that of the assessee. We therefore direct exclusion of this company from the final list.

by the assessee stands partly allowed.

31. Ground No. 2.13 is in respect of following comparables that the assessee is seeking to include under the MSS segment:  Cheers Interactive India Pvt.Ltd.,  MCI Management India Pvt.Ltd. and  Showhouse Event Management India Pvt. Ltd., It is submitted that these companies are engaged in providing MSS services. It is submitted that these comparables were not considered by the Ld.TPO, as they did not appear in the search matrix carried out by him, which has been upheld by the DRP. The both sides relied on the submission made in respect of comparables sought for inclusion under SWD segment. On similar situation, we have remanded the comparable to the Ld.AO/TPO for fresh consideration herein above following the decision of coordinate bench of this Hon’ble Tribunal in the case of Prism Networks Pvt. Ltd. reported in (2022) 141 taxmann.com 163.

Page 40 of 51 IT(TP)A No. 235/Bang/2021 Respectfully following the above view mutatis mutandis, we remit the comparables back o the Ld.AO/TPO for fresh consideration in the light of information available in public domain. Accordingly this ground stands allowed for statistical purposes.

Page 41 of 51 IT(TP)A No. 235/Bang/2021 32.2 The Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare Pvt.Ltd vs. ACIT reported in (2015) 62 Taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd., reported in (2017) 398 ITR 66 (Del), held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6 which subsequently upheld by Hon'able Delhi High Court vide order dated 21/07/16 in also upheld by Hon'ble Supreme Court vide order dated 21/07/17, in CC No. 4956/2017. 32.3 It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. She argued that, the working capital adjustment takes into account the factors related to delayed receivables and therefore no separate adjustment is required in such circumstances. 32.4 On the contrary Ld.CIT.DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of her contentions, she placed reliance on decision of Hon’ble Delhi Tribunal order in Ameriprise India Pvt. Ltd. vs. ACIT in 2015- TII-347-ITAT-DEL-TP, wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He Page 42 of 51 IT(TP)A No. 235/Bang/2021 stated that Finance Act, 2012 inserted Explanation to Section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that: (i) the expression "international transaction" shall include-- ...... (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;....' . 32.5 Ld.CIT.DR submitted that expression 'debt arising during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non- payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case noted a decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.), dealt with question of law:

Page 43 of 51 IT(TP)A No. 235/Bang/2021 (c) `Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?' 32.6 The Ld.AR submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under- charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. In so far as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. We have perused the submissions advanced by both the sides in the light of the records placed before us. 32.7 Ld.TPO computed interest on outstanding receivables at the rate equal to 4.985% on the receivables that exceeded 6 months. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its Page 44 of 51 IT(TP)A No. 235/Bang/2021 AE's, by holding outstanding receivables to be an independent international transaction. 32.8 This Bench referred to decision of Special Bench of Kolkotta Tribunal in case of in case of Instrumentation Corpn. Ltd. v. Asstt. DIT in and 1549 (Kol.) of 2009, dated 15- 7-2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR. 32.9 Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loan and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 has observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing Page 45 of 51 IT(TP)A No. 235/Bang/2021 in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions." In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly these ground raised by assessee stands allowed for statistical purposes.

33. Ground No.4 is raised as the Ld.AO/TPO did not grant the working capital adjustment for computing the margin of the comparables. 33.1 The contention of Ld.AR is that, the Ld.AO/TPO/DRP erred in not providing appropriate adjustments towards the difference in the working capital between the assessee and the companies selected as comparables. He submitted that in view of the following judgements, the assessee is entitled for working capital adjustment and prayed that the same may be granted:-

1. Huawei Technologies India Pvt. Ltd. (AY 2012-13) IT(TP) No.1939/Bang/2017

2. IKA India (P) Ltd. vs. Deputy Commissioner of Income-tax (AY 12- 13) IT(TP)A No.2192/Bang/2017.

3. Deputy Commissioner of Income-tax V. Apotex Pharmachem India (P) Ltd. in IT(TP)A No.156/Bang/2014 & 2200/Bang/2016 (AY 09-10 & 11-12). 33.2 We have heard the submissions of both sides on this issue based on the records placed before us. 33.3 We note that, this issue has been considered by this coordinate bench of this Tribunal in the case of Huawei Page 46 of 51 IT(TP)A No. 235/Bang/2021 Technologies India P. Ltd. in IT(TP)A No.1939/Bang/2017 dated 31.10.2018, wherein, it was held as under: “10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT(A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submisSions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C . 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :--- (a) to (d)…………. (e)transactional net margin method, by which,— (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by 'the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable. uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; the net profit margin realised by the enterprise and referred to (iv) in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the, international transaction [or the specified domestic transaction]; (f) ...... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; Page 47 of 51 IT(TP)A No. 235/Bang/2021 (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets.in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs. of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if - none of the differences, if any, between the transactions (i) 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.

Page 48 of 51 IT(TP)A No. 235/Bang/2021 "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect.

14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect.

15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest sate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) of by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that:  A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers)  This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers — (less) the period granted to pay debts to suppliers."

15. In the present case the TPO allowed working capital adjustment accepting the calculation given s by the Assessee. The CIT(A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (vi) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (vii) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16.The CIT(A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India (2013) 38 taxmann.com. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT(A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO Vs. E Value Serve.com (2016) 75 taxmann.com 195(Del-Trib) has held that insisting on daily Page 50 of 51 IT(TP)A No. 235/Bang/2021 balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Anal is there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT(A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is Also no merit in the objection of the CIT(A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT(A) is also not sustainable.

17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at page 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of 1ule 10B(1)( e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is, not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or Page 51 of 51 IT(TP)A No. 235/Bang/2021 (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences."