M/S. TRANSWORLD ICT SOLUTIONS (P) LTD.,,BANGALORE vs. DCIT, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI B. R. BASKARAN, ACCOUNTANT MEMBER IT(TP)A Nos.1305 to 1308/Bang/2010 Assessment Years : 2002-03, 2003-04, 2004-05, 2005-06 DCIT, M/s. Transworld ICT Solutions Pvt. Ltd., Vs. No.15, Hoody, Whitefield Road, Central Circle – 2(1), Mahadevapura Road, Bengaluru. Bengaluru – 560 048. PAN : AABCT 3824 F ASSESSEE RESPONDENT Assessee by : Shri. G. S. Prashanth, CA Revenue by : Shri. Dilip, Advocate, Standing Counsel for Department Date of hearing : 03.03.2022 Date of Pronouncement : 11.03.2022 O R D E R Per N V Vasudevan, Vice President

These are appeals by the assessee against four final Orders of Assessment all dated 22.09.2010 passed by the DCIT, Central Circle – 2 (Bengaluru) under section 143(3), 144 C and 153A of the Income Tax Act, 1961(hereinafter called ‘the Act’) and are in relation to Assessment Years 2002-03, 2003-04, 2004-05 and 2005-06.

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Netherlands. The assessee company carried out software development service and Information Technology enabled Services (ITeS) to its Associate Enterprise (AE).

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3.1 The reference to TPO is bad in law as the mandatory conditions have not been satisfied or complied with as the reasons have not been recorded before the matter was referred to the TPO. 3.2 The order is further bad in law as the appellant was denied of opportunity of being heard before reference to the TPO which is against the principles of natural justice. The authorities below are not justified in holding that the amendment 4. to proviso to section 92C(2) of the Act is effective from 1-10-2009 was clarificatory and denied the 5% rebate which ought to have been given as per the existing proviso for the respective years. Appropriate Transfer Pricing Methodology: 5. 5.1 The authorities below failed to appreciate that CPM is the appropriate methodology for determining the transfer pricing for IT and ITES services. The authorities below are not justified in rejecting the Cost plus Methodology without assigning any cogent reasons under the facts and circumstances of the case. 5.2 Without prejudice, the authorities below were not justified in law in rejecting the revised Transfer Pricing Study submitted by the appellant company under TNMM methodology is not in accordance with law under the facts and circumstances of the case. 5.3 The authorities below ought not to have used a separate database (PROWESS) for conducting the TNMM study and further the authorities below failed to consider the details and database considered by the appellant under the facts and circumstances of the case. 5.4 The authorities below have deviated from functional analysis, OECD guidelines and other conditions which are necessary for selecting comparables under the facts and circumstances of the case. 5.5 The authorities below are not justified in law in not limiting the turnover to Rs.50 crores for the purpose of arriving at comparables since the turnover of the appellant company had not crossed more than Rs.10 crores under the facts and circumstances of the case.

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5.6 The authorities below are not justified in rejecting an higher employee cost filter (40% rather than 25% of the Turnover) adopted by the appellant under the facts and circumstances of the case. The authorities below are not justified in law in not normalizing the operating profit by not considering for ESOP (Employee Stock Options) costs based upon fair market value which is the realistic approach to arrive at the true "employee" cost under the facts and circumstances of the case. 5.7 The authorities below further not justified in combining all the purchases, sales and other transactions and comparing them only with turnover (and not against the sum of turnover and purchases) while applying Related Party Transactions filter under the facts and circumstances of the case. 5.8 The authorities below are not justified in law in summarily rejected all the Companies which made losses for last 3 years without ascertaining any facts. On the other hand the authorities below have included all companies with abnormal profit margins. 5.9 The authorities below are not justified in law in rejecting the companies having minor variations during the end of the financial year under the facts and circumstances of the case. 5.10 The authorities below have rejected all companies only when the onsite revenues are more than 75% and have failed to appreciate that the appellant company had zero onsite revenue. Without prejudice, the authorities below ought to have considered companies with at most 5-10% onsite revenues under the facts and circumstances of the case. 5.11 The learned authorities below failed to understand the risk-insulated environment in which the appellant operated and the nature of services provided by it to the AE while determining the ALP. Further the authorities failed to consider the lower risk companies receive lower returns while computing the mark-up under the facts and circumstances of the case.

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5.12 The authorities below are further not justified in law in holding that the appellant company has not provided the computation before seeking for working capital adjustment. 5.13 The order of the authorities below has various factual errors and further the authorities below have not followed a consistent Policy in adopting the filters under the facts and circumstances of the case. 6. Without prejudice the authorities below ought to have considered the objections raised by the appellant regarding the companies selected by the TPO and the justification provided for the companies selected by the appellant The authorities below ought to have at least taken the average of companies which the appellant and the TPO did not dispute. 7. Without prejudice the authorities should have adopted the income by taking into account the average of the comparables which have been accepted by both the appellants and the revenue and ignored all other comparables on the facts and circumstances of the case. 8. Disallowance under Section 10A 8.1 The authorities below are not justified in reducing the delivery charges from the export turnover and thereby restricting the claim of the appellant under section 10A of the Income-tax Act, 1961 under the facts and circumstances of the case. 8.2 Without prejudice the authorities below are not justified in law in disallowing the claim of exemption under section 10A of the Act for the additions made by the TPO under the facts and circumstances of the case. 9. The authorities below are not justified in levying interest under Sec 234(A), (B), (C) on the facts and circumstances of the case. The levy is further bad in law as the computation of the interest and the amount, period and interest rate calculations are not explained.

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without any tangible evidence on record and thus the same is liable to be deleted under the facts & circumstances of the case. The mandatory condition of recording of satisfaction 17. regarding an inference of liability is not complied with and thus the notice issued under section 153A of the Act is bad in law and consequently, the assessment completed on such an invalid notice is void ab initio & liable to be quashed on the facts of the case.

The additional grounds that are sought to be raised by the assessee are 6. purely legal grounds. The additional grounds that are sought to be raised by the assessee in ground Nos.10 to 13, 16 and 17 are legal grounds which can be adjudicated based on the facts already on record and they are admitted for adjudication, keeping in mind the law laid down by the Hon’ble Supreme Court in the case of NTPC Ltd., 229 ITR 383 (SC). As far as ground Nos.14 and 15 are concerned, they are nothing but an elaboration of ground Nos.5.4 and 5.5 already raised by the assessee in the main grounds of appeal.

At the time of hearing, learned Counsel for the assessee made 7. submissions on ground Nos.3.1 and 3.2. In these grounds, it has been submitted that the AO, before making a reference to Transfer Pricing Officer (TPO) under section 92CA of the Act, has not complied with the mandatory conditions laid down in the said section and has not afforded opportunity of being heard to the assessee before making a reference to the TPO. Though the learned Counsel for the assessee did not spell out as to what are the mandatory conditions that have not being satisfied or complied with by the AO while making a reference to the TPO, a plain reading of section 92CA of the Act shows that once an assessee enters into an international transaction,

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the AO has to make a reference to the TPO and the fact that he made a reference in the present case can only go to show that the AO is satisfied that it was necessary or expedient to make a reference to the TPO for determination of ALP of international transaction entered into by an assessee. The order passed in section 92CA of the Act clearly spells out that prior approval of the CIT, Karnataka Central Bengaluru, dated 10.09.2008 has been obtained by the AO before making a reference under section 92CA of the Act to the TPO. In these circumstances, we are of the view that there is no merit in ground No.3.1 raised by the assessee. Consequently, grounds 3.1 is held to be without any merit and is dismissed. As far as Grd.No.3.2 is concerned, Section 92CA(1) requires an Assessing officer to refer an International Transaction for determination to the TPO if he considers it "necessary or expedient" to refer the mater to the TPO. The exercise of finding out whether any income arises and/or is affected or potentially arises and/or is affected by the International Transaction would certainly be a factor to determine whether or not it is necessary or expedient to refer the matter to the TPO. Since no objection was raised by the assessee to the applicability of Chapter X then the prima facie view of the Assessing officer would be sufficient before referring the transaction to the TPO for determining the ALP. Consequently, there is no merit in Grd.No.3.2 raised by the Assessee.

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“Explanation.—For the removal of doubts, it is hereby declared that the reason to believe, as recorded by the income-tax authority under this sub-section, shall not be disclosed to any person or any authority or the Appellate Tribunal.”

In view of the above, we do not find any merit in ground Nos.10 as without calling for the reason to believe recorded u/s.132 of the Act before issuing an authorization to search a person and property, one cannot come to a conclusion whether the condition precedent for issue of warrant of authorization to search u/s.132 of the Act are satisfied or not.

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international transaction of rendering software development services by the assessee to its AE. As we have already seen the assessee has rendered software development services to its AE. To substantiate the price it received from the AE for the services so rendered as at arm’s length, the assessee filed transfer pricing study in which it adopted Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining the ALP. The operating revenue of the assessee was Rs.3,27,91,449/- and the operating expense was Rs.2,85,13,962/-. The operating profit was Rs.42,77,487/- giving a profit margin of 15%. The assessee chose OP/OC as the profit level indicator for comparing its margin with the comparable companies. The TPO rejected the TP analysis of the assessee whereby the assessee compared its profit margin with its comparable companies and claimed that the margin it earned in the international transaction was comparable with the profit margins of the comparable companies. The TPO to whom the reference was made by the AO under section 92CA of the Act, rejected the TP analysis and chose 17 comparable companies with an arithmetic profit margin of 29.30% which is as follows:

SI. Company Name Sales OP to No (Rs.cr.) Total . Cost% 1 Lanco Global Systems Ltd * 6.09 19.10 2 Infotech Enterprises Ltd 97.44 43.22 3 Aviation Software Development Consultancy Ltd 14.21 46.70 4 Flextronics Software Systems Ltd 234.88 24.06 5 Geometric Software Solutions Ltd 57.21 19.69 6 I-Flex Solutions Ltd 165.07 24.13 7 Infosys Technologies Ltd 50.79 2603.59 8 L&T Infotech Limited 266.69 15.82 9 Mphasis Ltd 180.76 30.59

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10 Quinnox Consultancy Services Ltd 54.52 29.75 11 Satyam Computer Services Ltd 1731.94 36.56 12 Virinchi Technologies Ltd 4.25 22.63 13 Visualsoft Technologies Ltd 94.09 42.42 14 Xcel Vision Technologies Ltd 2.37 35.43 15 Eonour Technologies Ltd 66.58 20.70 16 Kshema Technologies Ltd . 53.72 24.00 17 Orient Information Technologies Ltd 52.03 12.54 Avg. 29.30

Arithmetic mean PLI : 29.30%

Arm's Length Price Operating Cost Rs.3,06,46,199/- Arm’s Length Margin 29.30% of the Operating Cost Arm’s Length Price @ 129.30% of Rs.3,96,25,535/- operating cost

14.7. Price Received vis-à-vis the Arms Length Price : The price charged by the taxpayer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price @,129.30% of operating cost Rs. 3,96,25,335/- Price received Rs. 3,52,43,127/- Shortfall being adjustment u/s 92CA Rs. 43,82,208/-

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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. Vs. 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. Vs. 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 Vs. 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

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

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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).” 18. Following the aforesaid decisions, we hold that the 4 comparable companies whose turnover is above Rs.100 crores should be excluded from the list of comparable companies.

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functionally comparable. The 6 companies seeks to exclude on the basis of functional comparability are as follows:

(i) Infotech Enterprises : As far as this company is concerned, this Tribunal in the case SAP Labs India Ltd., Vs. ACIT (2011) 44 SOT 156 (Bengaluru) a case in which the Assessee was a software development company such as the assessee in this appeal. The said decision was rendered for Assessment Year 2003-04. The tribunal took the view that the functions of Infotech Enterprises are different and that the said company operated in several segments, GIS Services, Engineering Services and Software Development Services. The Tribunal also found that the turnover of the said company from SWD services was less than 50 Crores and therefore the Tribunal directed exclusion of this company. The observations of the Tribunal are in paragraph 77 of the aforesaid order. The Delhi Tribunal in the case of the Motorolla Services Pvt. Ltd., 97 taxmann.com 487 (Delhi Tribunal) for Assessment Year 2002-03 however remanded the question of comparability of company for fresh consideration to consider the segmental margin of this company. We are of the view that since the decision of the Tribunal for Assessment Year 2002-03 is directly applicable to the present appeal which is in relation to Assessment Year 2002-03. It would be appropriate to remand the issue to the TPO/AO for fresh consideration to consider the segmental margin in the software services in the SWD service segment alone. We hold and direct accordingly.

(ii) Aviation Software Development Consultancy Ltd., (iii) Quinnox Consultancy Services Ltd., and (iv) Xcel Vision Technologies Ltd., : As far as the comparability of these companies are concerned, this Tribunal in

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the case of ACI Worldwide Solutions Pvt. Ltd., Vs. ACIT 64 taxmann.com 450 (Bengaluru Tribunal) rendered for Assessment Year 2002-03 considered the issue of comparability of these companies with a company rendering software development services such as the assessee in this appeal. On the question of accepting these companies as comparable companies by applying the Related Party Transaction (RPT) filter, the Tribunal remanded to the TPO/AO to see if the related party transaction is more than 15% of the total revenues and if so, exclude these companies from the list of comparable companies. Following the said decision we remand the question of comparability of these companies to the TPO/AO as directed in the aforesaid order of the Tribunal.

(v) Mphasis Ltd., : As far as comparability of this company is concerned, the ITAT, Delhi Bench, in the case of Alcatel Lucent Portugal SA, Vs. DCIT (2014) 45 taxmann.com 244 (Delhi – Trib.) rendered for AY 2006-07 in the case of an Assessee which rendered SWD services such as the Assessee in this appeal, remanded the question of excluding this company from the list of comparable companies on the ground that this company was engaged in diversified IT services segment offering business process operations, application development and maintenance, etc., and hence not comparable with a software development service provider such as the assessee. The Tribunal remanded the question of comparability of this company in the light of the aforesaid factors that were pointed out by the assessee before the Tribunal. We are of the view that it would be appropriate to set aside the question of comparability of this company for a fresh consideration by the TPO/AO on the lines indicated in the decision referred to above.

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(vi) Visual Softechnologies Ltd., : As far as this company is concerned, this Tribunal in the case SAP Lab India Pvt. Ltd., (supra) rendered for the Assessment Year 2003-04 in paragraphs 7 to 8 took the view that this company was engaged in ITeS and cannot be compared with a software development service provider such as the assessee. Since the aforesaid case relates to Assessment Year 2003-04, we deem it fit to remand the question of comparability of this company to the TPO/AO for consideration afresh in the light of the observations referred to above for AY 2002-03.

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on this issue is therefore reversed and the ground of appeal of the Assessee in this regard is allowed.

The grounds of appeal raised by the assessee are as follows: The order of the authorities below in so far as it is against the 1. appellant is opposed to law weight of evidence, natural justice, probabilities, facts and circumstances of the appellant's case. 2. The appellant denies itself liable to be assessed on a total income of Rs. 77,60,683/- as against the returned income of Rs. 6,64,159/- under the facts and circumstances of the case. Legal Grounds: 3. 3.1 The reference to TPO is bad in law as the mandatory conditions have not been satisfied or complied with as the reasons have not been recorded before the matter was referred to the TPO. 3.2 The order is further bad in law as the appellant was denied of opportunity of being heard before reference to the TPO which is against the principles of natural justice. The authorities below are not justified in holding that the 4. amendment to proviso to section 92C(2) of the Act is effective from 1-10-2009 was clarificatory and denied the 5% rebate which ought to have been given as per the existing proviso for the respective years. Appropriate Transfer Pricing Methodology: 5.

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5.1 The authorities below failed to appreciate that CPM is the appropriate methodology for determining the transfer pricing for IT and ITES services. The authorities below are not justified in rejecting the Cost plus Methodology without assigning any cogent reasons under the facts and circumstances of the case. 5.2 Without prejudice, the authorities below were not justified in law in rejecting the revised Transfer Pricing Study submitted by the appellant company under TNMM methodology is not in accordance with law under the facts and circumstances of the case. 5.3 The authorities below ought not to have used a separate database (PROWESS) for conducting the TNMM study and further the authorities below failed to consider the details and database considered by the appellant under the facts and circumstances of the case. 5.4 The authorities below have deviated from functional analysis, OECD guidelines and other conditions which are necessary for selecting comparables under the facts and circumstances of the case. 5.5 The authorities below are not justified in law in not limiting the turnover to Rs.50 crores for the purpose of arriving at comparables since the turnover of the appellant company had not crossed more than Rs.10 crores under the facts and circumstances of the case. 5.6 The authorities below are not justified in rejecting an higher employee cost filter (40% rather than 25% of the Turnover) adopted by the appellant under- the facts and circumstances of the case. The authorities below are not justified in law in not normalizing the operating profit by not considering for ESOP (Employee Stock Options) costs based upon fair market value which is the realistic approach to arrive at the true "employee" cost under the facts and circumstances of the case. 5.7 The authorities below further not justified in combining all the purchases, sales and other transactions and comparing them

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only with turnover (and not against the sum of turnover and purchases) while applying Related Party Transactions filter under the facts and circumstances of the case. 5.8 The authorities below are not justified in law in summarily rejected all the Companies which made losses for last 3 years without ascertaining any facts. On the other hand the authorities below have included all companies with abnormal profit margins. 5.9 The authorities below are not justified in law in rejecting the companies having minor variations during the end of the financial year under the facts and circumstances of the case. 5.10 The authorities below have rejected all companies only when the onsite revenues are more than 75% and have failed to appreciate that the appellant company had zero onsite revenue. Without prejudice, the authorities below ought to have considered companies with at most 5-10% onsite revenues under the facts and circumstances of the case. 5.11 The learned authorities below failed to understand the risk-insulated environment in which the appellant operated and the nature of services provided by it to the AE while determining the ALP. Further the authorities failed to consider the lower risk companies receive lower returns while computing the mark-up under the facts and circumstances of the case. 5.12 The authorities below are further not justified in law in holding that the appellant company has not provided the computation before seeking for working capital adjustment. 5.13 The order of the authorities below has various factual errors and further the authorities below have not followed a consistent Policy in adopting the filters under the facts and circumstances of the case. 6. Without prejudice the authorities below ought to have considered the objections raised by the appellant regarding the

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companies selected by the TPO and the justification provided for the companies selected by the appellant The authorities below ought to have at least taken the average of companies which the appellant and the TPO did not dispute. 7. Without prejudice the authorities should have adopted the income by taking into account the average of the comparables which have been accepted by both the appellants and the revenue and ignored all other comparables on the facts and circumstances of the case. 8. Disallowance under Section 10A 8.1 The authorities below are not justified in reducing the delivery charges from the export turnover and thereby restricting the claim of the appellant under section 10A of the Income-tax Act, 1961 under the facts and circumstances of the case. 8.2 Without prejudice the authorities below are not justified in law in disallowing the claim of exemption under section 10A of the Act for the additions made by the TPO under the facts and circumstances of the case. 9. The authorities below are not justified in levying interest under Sec 234(A), (B), (C) on the facts and circumstances of the case. The levy is further bad in law as the computation of the interest and the amount, period and interest rate calculations are not explained. 24. Additional Grounds raised by the assessee are as follows: 10. The entire assessment based upon the search proceedings which itself is bad in law as the mandatory conditions for being a valid search did not exist nor are they discernable from the facts. The conditions prescribed under Sec 132(1)(A),(B),(C) are not satisfied and consequently the issue of notice under Sec 153(A) is to be set aside. 11. The proceedings on the grounds of transfer pricing is bad in law as there was no attempt by appellant company to shift profits outside of India. The basic intention behind introducing the

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transfer pricing provisions in the Act is to prevent shifting of profits outside India. 12.The appellant craves leave to add, alter, delete or substitute any of the grounds urged above. 13.In view of the above and other grounds that may be urged at the time of the hearing of the appeal, the appellant prays that the appeal may be allowed in the interest of justice and equity. 14. a) The authorities below ought to have restricted the upper limit of turnover at 10 times that of the appellant under the facts and circumstances of the case. b) Without prejudice, the authorities below ought to have applied the turnover filter of Rs.1 crore to Rs.200 crores for selection of comparables under the facts and circumstances of the case. 15. The authorities below erred in selecting the following functionally dissimilar companies as comparable for Software Development Services segment under the facts and circumstances of the case: a. Infotech Enterprises Ltd. b. Visual Soft Technologies Ltd. 16. The authorities below erred in selecting the following functionally dissimilar companies as comparable for Information Technology Enabled Services segment under the facts and circumstances of the case: Fortune Infotech Limited a. Tricom India Limited (Seg) b. Wipro Business Solutions Limited c.

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circumstances. For the reasons stated while deciding identical grounds in the appeal for AY 2002-03, these grounds are dismissed.

Company Name PBDIT PBIT Expenses % to Sl. No. Operating Depreci cost ation Income 1 59.07 15.47 4.52 10.95 22.75 Geometric Software 43.6 Solutions Co. Ltd 2 56.37 Kshema Technologies 1.td 46.66 9.71 2.94 6.77 13.64 3 Zylog Systems Ltd., 46. I3 16.25 3.25 15.24 30.86 64.62 4 Infoteeh Enterprises Ltd 120.89 76.6 44.29 15.1.3 29.16 31.78 5 Sasken Communication 113.59 7.1 86.04 27.55 25.21 2.34 Technologies [Ad 6 Visualsoft Technologies 122.04 82.37 39.67 10.29 29.38 31.7 Ltd.,

17.6 Computation of Arms Length Price :

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The arithmetic mean of the Profit Level indicators is taken as the arms length margin (Please see Annexure-B for details of computation of PLI of the comparables). Based on this. the arms length price of the software services rendered by you is computed as under: Arithmetic mean PLI 22.14% Arm's Length Price Operating Cost Rs.4,26,39,655/- Arm’s Length Margin 22.14% of the Operating Cost Arm’s Length Price @ 122.14% Rs.5,20,80,074/- of operating cost 17.7 Price Received vis-à-vis the Arms Length Price The price charged by the taxpayer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price @ 129.30% of Rs.5,20,80,074/- operating cost Price received Rs.4,91,92,995/- Shortfall being adjustment under Rs.28,87,079/- section 92CA The difference of Rs.28,87,079/- as determined above is the transfer pricing adjustment under section 92CA.

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of this company for Assessment Year 2003-04 was already discussed while deciding the appeal of the assessee for Assessment Year 2002-03 and this company was rejected as being in ITeS services in the aforesaid decision. Following the same, we direct exclusion of this company also in the list of comparable companies.

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The arithmetic mean of the Profit Level indicators is taken as the arms length margin (Please see Annexure-B for details of computation of PLI of the comparables). Based on this. the arms length price of the software services rendered by you is computed as under: Arithmetic mean PLI 55.44% Arm's Length Price Operating Cost Rs.1,04,77,921 /- Arm’s Length Margin 55.44% of the Operating Cost Arm’s Length Price @ 122.14% Rs.1,62,14,086/- of operating cost 17.7.Price Received vis-à-vis the Arms Length Price The price charged by the taxpayer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price @ 129.30% of Rs.1,62,14,086/- operating cost Price received Rs.1,20,83,072/- Shortfall being adjustment under Rs.41,31,014/- section 92CA The difference of Rs. 41,31,014/- as determined above is the transfer pricing adjustment under section 92CA.

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has developed unique software from which it would derive substantial benefits advantage, it was held that this company cannot be compared with a pure ITeS service provider such as the assessee. Following the aforesaid decision and accepting the submission of the Counsel for the assessee with the profile Fortune Infotech Ltd., in Assessment Year 2003-04 is also similar, We exclude Fortune Infotech Ltd., from the list of comparable companies. As far as Tricom India Ltd., is concerned which the assessee seeks exclusion, in the very same decision of the ITAT, Bengaluru Bench, this Tribunal in paras 15.33 held that this company has a unique software developed and renders specialized services in its area of specialization and has a competitive edge and advantage, therefore not comparable with the service provider such as the assessee. The profile of the company being identical in Assessment Year 2002-03 as stated before us, this company is directed to be excluded from the list of comparable companies. As far as Wipro Business Solution is concerned, in the case of HSBC Electronic Data Processing India Pvt. Ltd., Vs. ACIT 166 CTJ 790 (Hyd. Trib.) rendered for Assessment Year 2003-04, the comparability of this company was remanded to the AO/TPO. Vide 14 of the aforesaid order. We are of the view that the facts and circumstances being identical, the issue with regard to comparability of this company is remanded to TPO/AO for consideration as directed by the Tribunal in the case of HSBC Electronic Data Processing India Pvt. Ltd., (supra). We hold and direct accordingly.

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The Grounds of appeal raised by the assessee are as follows: 1. The order of the authorities below in so far as it is against the appellant is opposed to law weight of evidence, natural justice, probabilities, facts and circumstances of the appellant's case. The appellant denies itself liable to be assessed on a total 2. income of Rs. 83,16,488/- as against the returned income of Rs. 93,292/- under the facts and circumstances of the case. 3. Legal Grounds: 3.1 The reference to TPO is bad in law as the mandatory conditions have not been satisfied or complied with as the reasons have not been recorded before the matter was referred to the TPO.

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3.2 The order is further bad in law as the appellant was denied of opportunity of being heard before reference to the TPO which is against the principles of natural justice. 4. The authorities below are not justified in holding that the amendment to proviso to section 92C(2) of the Act is effective from 1-10-2009 was clarificatory and denied the 5% rebate which ought to have been given as per the existing proviso for the respective years. 5. Appropriate Transfer Pricing Methodology: 5.1 The authorities below failed to appreciate that CPM is the appropriate methodology for determining the transfer pricing for IT and ITES services. The authorities below are not justified in rejecting the Cost plus Methodology without assigning any cogent reasons under the facts and circumstances of the case. 5.2 Without prejudice, the authorities below were not justified in law in rejecting the revised Transfer Pricing Study submitted by the appellant company under TNMM methodology is not in accordance with law under the facts and circumstances of the case. 5.3 The authorities below ought not to have used a separate database (PROWESS) for conducting the TNMM study and further the authorities below failed to consider the details and database considered by the appellant under the facts and circumstances of the case. 5.4 The authorities below have deviated from functional analysis, OECD guidelines and other conditions which are necessary for selecting comparables under the facts and circumstances of the case. 5.5 The authorities below are not justified in law in not limiting the turnover to Rs.50 crores for the purpose of arriving at comparables since the turnover of the appellant company had not crossed more than Rs.10 crores under the facts and circumstances of the case.

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5.6 The authorities below are not justified in rejecting an higher employee cost filter (40% rather than 25% of the Turnover) adopted by the appellant under the facts and circumstances of the case. The authorities below are not justified in law in not normalizing the operating profit by not considering for ESOP (Employee Stock Options) costs based upon fair market value which is the realistic approach to arrive at the true "employee" cost under the facts and circumstances of the case. 5.7 The authorities below further not justified in combining all the purchases, sales and other transactions and comparing them only with turnover (and not against the sum of turnover and purchases) While applying Related Party Transactions filter under the facts and circumstances of the case. 5.8 The authorities below are not justified in law in summarily rejected all the Companies which made losses for last 3 years without ascertaining any facts. On the other hand the authorities below have included all companies with abnormal profit margins. 5.9 The authorities below are not justified in law in rejecting the companies having minor variations during the end of the financial year under the facts and circumstances of the case. 5.10 The authorities below have rejected all companies only when the onsite revenues are more than 75% and have failed to appreciate that the appellant company had zero onsite revenue. Without prejudice, the authorities below ought to have considered companies with at most 5-10% onsite revenues under the facts and circumstances of the case. 5.11 The learned authorities below failed to understand the risk-insulated environment in which the appellant operated and the nature of services provided by it to the

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AE while determining the ALP. Further the authorities failed to consider the lower risk companies receive lower returns while computing the mark-up under the facts and circumstances of the case. 5.12 The authorities below are further not justified in law in holding that the appellant company has not provided the computation before seeking for working capital adjustment. 5.13 The order of the authorities below has various factual errors and further the authorities below have not followed a consistent Policy in adopting the filters under the facts and circumstances of the case. 6. Without prejudice the authorities below ought to have considered the objections raised by the appellant regarding the companies selected by the TPO and the justification provided for the companies selected by the appellant The authorities below ought to have at least taken the average of companies which the appellant and the TPO did not dispute. Without prejudice the authorities should have adopted the income 7. by taking into account the average of the comparables which have been accepted by both the appellants and the revenue and ignored all other comparables on the facts and circumstances of the case. 8. Disallowance under Section 10A 8.1 The authorities below are not justified in reducing the delivery charges from the export turnover and thereby restricting the claim of the appellant under section 10A of the Income-tax Act, 1961 under the facts and circumstances of the case. 8.2 Without prejudice the authorities below are not justified in law in disallowing the claim of exemption under section 10A of the Act for the additions made by the TPO under the facts and circumstances of the case.

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Development Services segment under the facts and circumstances of the case: a) Exensys Software Solutions b) Bodhtree Consulting c) Sankhya Infotech d) Thirdware Solutions e) Visual Soft Technologies

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Sales Operating OP to Total Sl. Company Name (Rs.cr.) Profit (Rs. Cost% No. Cr) 1 VMF Technologies Ltd 2.00 0.08 4.37% 2 Lanco.Global Systems ltd 2.88 0.28 10.70% 3 Exensys Software Solutions ltd. 3.02 1.13 60.09% I3odhtrec consultim2, ltd 4.26 4 0.57 15.29% - 5 Sankhya lnfotech ltd 12.41 3.21 34.96% 6 Thirdware Solution limited 23.88 9.17 62.28% Geometric Software Solutions 7 63.67 8.99 16.44% Co.ltd Tata Elxsi Limited (seg) 94.1 I 16.20 8 20.80% 9 Sasken Communication 123.78 14.36 13.13% Technologies ltd (seg) 10 Visual soft Technologies ltd 153.86 37.66 32.41% 11 L&T Infotech 364.60 .36.77 11.22% 12 Satyam Compute'r Services Ltd 2541.54 582.18 29.71% 13 Infosys technologies Ltd 4760.89 1352.75 39.69% avg. 27.01% .

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excluded on the ground that the turnover of these companies are more than Rs.100 Crores.

(i) Exensys Software Solutions Ltd., : This Tribunal in the case of ITO Vs. M/s. Vendio Technologies (India) Pvt. Ltd., (2015) 62 taxmann.com 210 (Bang. Trib.) rendered for Assessment Year 2005-06 held that this company operates in 3 business segments i.e., provision SWD services, ITeS and software products and therefore not comparable with anx assessee providing software services. Though the decision relates to Assessment Year 2005-06, the profile of the company remains the same as submitted by the parties before us and therefore this company is directed to excluded from the list of comparable companies.

(ii) Bodhtree Consulting Ltd., and (iii) Sankhya Infotech Ltd., : The Bengaluru Bench of the Tribunal in the case of Sysarris Software Pvt. Ltd., Vs. DCIT (2016) 67 taxmann.com 243 (Bang. Trib.) held that Bodhtree Consulting Ltd., cannot be regarded as a comparable vide para 16 of this Order and also held that Sankha Infotech Ltd., is not comparable vide paragraph 24 of the said order and excluded the aforesaid 2 companies from the list of comparable companies in the case of a SWD services provider. Though the decision relates to Assessment Year 2005-06, the functional profile of these 2 companies is stated to be similar for Assessment Year

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2004-05 and therefore following the aforesaid decision, we hold that the aforesaid 2 companies should be excluded from the list of comparable companies.

(iv) Thirdware Solutions Ltd., : In the case of Dell International Services Pvt. Ltd., 83 taxmann.80 (Bang. Trib.) rendered for Assessment Year 2004- 05, this company was regarded as not comparable with a software services company vide para 14.3 of this order for the reason that this company was in the software design and consultancy and also there was no segmental information available. Following the said decision, we direct exclusion of this company.

(v) Visual soft Technologies Ltd., : As far as this company is concerned in the case of SAP Lab India Pvt. Ltd., (supra), this company was directed to be excluded for Assessment Year 2003-04 on the ground that this was purely an ITeS company. Though this decision relates to Assessment Year 2003- 04, the parties agreed that the profile of the company remains same in AY 2004-05. Hence, we direct exclusion of this company. TPO is directed to compute the ALP in accordance with the directions contained in this order in the SWD service segment, after affording the assessee opportunity of being heard.

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Sl. No. Name of the Company Sales (in Op Profit to Rs.) Total Cost % 1 Allsec Technologies Ltd. 24,94,00,000 3.44%

2 Fortune Infotech Ltd 11,38,00,000 40.84% 3 Nucleus Netsoft & GIS India Ltd. 1,94,00,000 16.87% 4 Spanco Telesystems and Solutions 15,44,00,000 40.10% Ltd. 5 Ultramarine Pigments Ltd 10,09,00,000 63.27% 6 Vishal Information Technologies 13,88,00,000 48.31% Ltd. 7 Tricom India Ltd. 9,24,00,000 45.74% 8 Wipro BPO Ltd. 4,30,31,00,000 33.51%

Average Margin 36.51% Assessee's Margin 16.95% Assessee's Turnover 2,45,12,060

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of operating cost 17.7.Price Received vis-à-vis the Arms Length Price The price charged by the taxpayer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price @ 136.49% of Rs.2,86,05,720/- operating cost Price received Rs.2,45,12,060/- Shortfall being adjustment under Rs.40,93,660/- section 92CA The difference of Rs. 40,93,660/- as determined above is the transfer pricing adjustment under section 92CA.”

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performing specialised services in medical transcription and patient record management with unique software developed by it and hence not comparable with a ITeS company such as the assessee. As far as Tricom India Ltd., is concerned, this company vide para 17.5 of the order was directed to be excluded on the ground of related party transaction being more than 15%.

(iii) Vishal Information Technologies Ltd., was also directed to be excluded vide para 17.3 of this order on the ground that this company outsources its work and therefore cannot be considered as a comparable company. Following the aforesaid decision, these 3 companies are directed to be excluded from the list of comparable companies.

(iv) Spanco Telesystems and Solutions Ltd.,(Spanco) and (v) Ultramarine Pigments Ltd.,(ultramarine) : As far as these companies are concerned, the ITAT, Hyderabad Bench, in the case of Brigade Global Services Pvt. Ltd., Vs. ITO (2013) 33 taxmann.com 618 (Hyderabad) rendered for Assessment Year 2004-05 held that Spanco cannot be regarded as comparable for absence of segmental data for determining employee cost and applying the employee cost filter of more than 25% of the revenue and cannot be compared with the assessee. Ultramarine Pigments Ltd., was excluded in the aforesaid decision on the ground of abnormal profits due to abnormal circumstances.

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Grounds of appeal raised by the assessee are as follows: The order of the authorities below in so far as it is against 1. the appellant is opposed to law weight of evidence, natural justice, probabilities, facts and circumstances of the appellant's case. The appellant denies itself liable to be assessed on a 2. total income of Rs. 85,80,257/- as against the returned income of Rs. 96,450/- under the facts and circumstances of the case. Legal Grounds: 3. 3.1 The reference to TPO is bad in law as the mandatory conditions have not been satisfied or complied with as the reasons have not been recorded before the matter was referred to the TPO. 3.2 The order is further bad in law as the appellant was denied of opportunity of being heard before reference to the TPO which is against the principles of natural justice.

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The authorities below are not justified in holding that the 4. amendment to proviso to section 92C(2) of the Act is effective from 1-10-2009 was clarificatory and denied the 5% rebate which ought to have been given as per the existing proviso for the respective years. 5. Appropriate Transfer Pricing Methodology: 5.1 The authorities below failed to appreciate that CPM is the appropriate methodology for determining the transfer pricing for IT and ITES services. The authorities below are not justified in rejecting the Cost plus Methodology without assigning any cogent reasons under the facts and circumstances of the case. 5.2 Without prejudice, the authorities below were not justified in law in rejecting the revised Transfer Pricing Study submitted by the appellant company under TNMM methodology is not in accordance with law under the facts and circumstances of the case. 5.3 The authorities below ought not to have used a separate database (PROWESS) for conducting the TNMM study and further the authorities below failed to consider the details and database considered by the appellant under the facts and circumstances of the case. 5.4 The authorities below have deviated from functional analysis, OECD guidelines and other conditions which are necessary for selecting comparables under the facts and circumstances of the case. 5.5 The authorities below are not justified in law in not limiting the turnover to Rs.50 crores for the purpose of arriving at comparables since the turnover of the appellant company had not crossed more than Rs.10 crores under the facts and circumstances of the case. 5.6 The authorities below are not justified in rejecting an higher employee cost filter (40% rather than 25% of the Turnover)

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adopted by the appellant under the facts and circumstances of the case. The authorities below are not justified in law in not normalizing the operating profit by not considering for ESOP (Employee Stock Options) costs based upon fair market value which is the realistic approach to arrive at the true "employee" cost under the facts and circumstances of the case. 5.7 The authorities below further not justified in combining all the purchases, sales and other transactions and comparing them only with turnover (and not against the sum of turnover and purchases) while applying Related Party Transactions filter under the facts and circumstances of the case. 5.8 The authorities below are not justified in law in summarily rejected all the Companies which made losses for last 3 years without ascertaining any facts. On the other hand the authorities below have included all companies with abnormal profit margins. 5.9 The authorities below are not justified in law in rejecting the companies having minor variations during the end of the financial year under the facts and circumstances of the case. 5.10 The authorities below have rejected all companies only when the onsite revenues are more than 75% and have failed to appreciate that the appellant company had zero onsite revenue. Without prejudice, the authorities below ought to have considered companies with at most 5-10% onsite revenues under the facts and circumstances of the case. 5.11 The learned authorities below failed to understand the risk- insulated environment in which the appellant operated and the nature of services provided by it to the AE while determining the ALP. Further the authorities failed to consider the lower risk companies receive lower returns

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while computing the mark-up under the facts and circumstances of the case. 5.12 The authorities below are further not justified in law in holding that the appellant company has not provided the computation before seeking for working capital adjustment. 5.13 The order of the authorities below has various factual errors and further the authorities below have not followed a consistent Policy in adopting the filters under the facts and circumstances of the case. Without prejudice the authorities below ought to have 6. considered the objections raised by the appellant regarding the companies selected by the TPO and the justification provided for the companies selected by the appellant The authorities below ought to have at least taken the average of companies which the appellant and the TPO did not dispute. Without prejudice the authorities should have adopted the 7. income by taking into account the average of the comparables which have been accepted by both the appellants and the revenue and ignored all other comparables on the facts and circumstances of the case. Disallowance under Section 10A 8. 8.1 The authorities below are not justified in reducing the delivery charges from the export turnover and thereby restricting the claim of the appellant under section 10A of the Income-tax Act, 1961 under the facts and circumstances of the case. 8.2 Without prejudice the authorities below are not justified in law in disallowing the claim of exemption under section 10A of the Act for the additions made by the TPO under the facts and circumstances of the case. 9. The authorities below are not justified in levying interest under Sec 234(A), (B), (C) on the facts and circumstances of the case. The levy is further bad in law as the computation of the interest

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and the amount, period and interest rate calculations are not explained.

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e. Tata Elxsi Limited (Seg) Thirdware Solutions f. 16. The authorities below erred in selecting the following functionally dissimilar companies as comparable for Information Technology Enabled Services segment under the facts and circumstances of the case: a. Vishal Information Technologies Limited b. Nucleus Netsoft & GIS Limited c. Maple E Solutions Limited

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Unadjusted Adjusted SI Margin (%) Margin (%) Particulars No.

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Arithmetic mean PLI : 26.59% Less: Working capital adjustment (As per annexure C) (-) 0.65% Adjusted Arithmetic Mean PLI 25.95% Arm's Length Price Operating Cost Rs.5,50,61,198/- Arm’s Length Margin 25.95% of the Operating Cost Arm’s Length Price @ 125.95% Rs.6,93,49,579/- of operating cost 17.7.Price Received vis-à-vis the Arms Length Price The price charged by the taxpayer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price @ 125.95% of Rs.6,93,49,579/- operating cost Price received Rs. 6,36,43,445/- Shortfall being adjustment u/s 92CA Rs.57,06,134/- The difference of Rs.57,06,134/- as determined above is the transfer pricing adjustment under section 92CA.

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and with no segmental profits available for comparison. As far as Thirdware Solutions is concerned, vide paragraph 31 of the aforesaid order, this company was excluded on the ground that it was engaged in SWD services as well as sale of licences and related services and not a pure service provider. Following the aforesaid decision, we direct the exclusion of the above said 6 companies from the list of comparable companies.

Sl. Company Sales OP to Export % of RPT as Sales & No. Name (Rs.cr.) Total (Rs.Cr.) exports % of Marketing Cost% over revenue exp. (Cr.) Sales 1. Allsec 57.76 29.85 56.15 97.2% -- 7.60 Technologies Ltd., 2. Saffron 27.78 24.88 27.78 100% -- 0.12 Global Ltd., 3. Vishal 20.82 45.62 20.82 100% -- -- Information Tech. Ltd.,

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Cost Arm’s Length Price @ 124.31% Rs.3,61,04,181/- of operating cost 17.7.Price Received vis-à-vis the Arms Length Price The price charged by the taxpayer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price @ 125.95% of Rs.3,61,04,181/- operating cost Price received Rs. 3,35,60,241/- Shortfall being adjustment u/s 92CA Rs.25,43,940/- The difference of Rs.25,43,940/- as determined above is the transfer pricing adjustment under section 92CA.”

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identical in Assessment Year 2005-06 and therefore following the aforesaid decision, we direct exclusion of Vishal Information Technologies Ltd. As far as Nucleus Netsoft and GIS Ltd., and Maple e-Solutions Ltd., is concerned, the learned Counsel for the assessee has brought to our notice decision of the ITAT, Bengaluru Bench, in the case of DCIT Vs. Genesis Integrating Systems India Pvt. Ltd., [2016] 66 taxmann.com 20 (Bang. Trib.) rendered for Assessment Year 2005-06, vide para 21 of this order, Nucleus Netsoft and GIS Ltd., was excluded on the ground that this company outsourced its work and therefore cannot be regarded as a comparable company. Similarly, Maple e-Solutions Ltd., was excluded that the results of this company were tainted due to mismanagement vide para 30 of this order. Following the aforesaid decision, we direct the exclusion of Maple e- Solutions Ltd., from the list of comparable companies.

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Pronounced in the open court on the date mentioned on the caption page.

Sd/- Sd/- (B. R. BASKARAN) (N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 11.03.2022. /NS/*

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Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order

Assistant Registrar, ITAT, Bangalore.