VERTEX OFFSHORE SERVICES PRIVATE LIMITED,HYDERABAD vs. DICT, CIRCLE-8(1), HYDERABAD

5 ITA.No.204/Hyd./2021 services in IT and ITES services. Further, the TPO had also made adjustment towards notional interest receivable on delayed receivables from the AE by applying SBI short-term deposit rate and determined TP adjustment of Rs.2,26,608/-. Thus, the TPO has suggested total TP adjustment of Rs.2,30,96,605/- vide it’s order dated 20.11.2019 passed u/sec.144C(1) of the Income Tax Act, 1961.

2.3. The Assessing Officer in pursuance to the TP adjustment as suggested by the TPO vide order dated 20.11.2019 has passed Draft Assessment Order u/sec.143(3) r.w.s.144C of the Income Tax Act, 1961 and determined the total income of appellant company at Rs.6,22,95,025/-.

6 ITA.No.204/Hyd./2021 computation of PLI [OP/OC] by excluding provision for bad debt as non-operating cost. The assessee further agitated TP adjustment in respect of interest on delayed receivables from AE.

7 ITA.No.204/Hyd./2021 1961 and determined the TP adjustment of Rs.2,28,69,996/- to the total income of the appellant company.

TATA ELXSI LIMITED :

11.1. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee, referring to Tata Elxsi Limited submitted that, the above company is functionally different from the appellant-company. A perusal of page-6 of the annual report

9 ITA.No.204/Hyd./2021 shows that, Tata Elxsi Limited provides technology, consulting, product development and testing services for leading product companies, service providers and start-ups. Further, the company is into domain communication, consumer products, healthcare and retail. It carries huge R & D and IP development activities. There is no segmental information in respect of each segment of activity. Further, the above company has been excluded on functional dissimilarities by the ITAT, Hyderabad Bench, in the case of ADP Private Limited ITA.Nos.227 and 228/Hyd./2021 and also in the case of Infor India Pvt. Ltd., in ITA TP.No.198/Hyd./2021

10 ITA.No.204/Hyd./2021 profit margin of companies involved in similar line of business. The DRP/TPO after considering all the relevant facts, has rightly rejected the contention of the assessee and, therefore, the order of the DRP/TPO should be upheld.

11 ITA.No.204/Hyd./2021 view that, Tata Elxsi Limited cannot be compared with the appellant company which is engaged in providing software development services to it’s AE on cost+ mark-up basis. Further, Tata Elxsi Limited has been excluded by the ITAT, Hyderabad Benches in the case of ADP Private Limited ITA.Nos.227 and 228/Hyd./2021 where Tata Elxsi Limited has been excluded on two folds i.e., on turnover filter and also on functional dissimilarity. Therefore, we direct the Assessing Officer/TPO to exclude Tata Elxsi Limited from the list of final set of comparables.

PERSISTENT SYSTEMS LIMITED :

12 ITA.No.204/Hyd./2021 specialises in software products, services and technology innovation and offers complete product life cycle services. The nature of services provided are unique in contrast to a routine software development services provider like that of appellant company. He further submitted that, Persistent Systems Limited is also engaged in development of IPs and the company also owns huge intangible assets and it is engaged in the business of software products, software services and technology innovation which have been considered as unique business segment. Learned Counsel for the Assessee further submitted that due to absence of break-up of revenues and profits from software products, software services and technology innovation, it may not be possible to compute the operating margin from the rendering of software services alone. In view of the above services, Persistent Systems Limited has become a global leader in software product and technology services. Further, Persistent Systems Limited is a leader in outsourced product development and works with world's largest software product companies. He also submitted that 13 ITA.No.204/Hyd./2021 Persistent Systems Limited invested in future technology trends such as Internet of Things (IoT), wearable computing device and machine-to-machine and also built Google glass based applications. It has also invested in technology specialists in US to provide consultation services and advise on issues including technology strategy, platform and product vendors and architecture. Learned Counsel for the Assessee accordingly submitted that, Persistent Systems Limited is rendering multifaceted functions and, therefore, it cannot be compared with that of appellant company. He accordingly pleaded that Persistent Systems Limited may be deleted in the final set of comparables.

ASPIRE SYSTEMS (INDIA) PRIVATE LIMITED :

16 ITA.No.204/Hyd./2021 there is an extraordinary event of amalgamation i.e., Aspire Systems (India) Private Limited and PureApps Consulting Services Pvt. Ltd., are amalgamated with Aspire and, therefore, entire business including assets, liabilities, debtors, cash etc., stands transferred to Aspire Systems (India) Private Limited. He submitted that, though Aspire Systems (India) Private Limited operates under both onsite and off-shore model, the revenue break-up of the same is neither available in the income schedules nor is available under the segment reporting. He submitted that as per website, Aspire Systems (India) Private Limited has created various products/solutions/accelerators as part of it’s offerings. He further submitted that, on similar grounds the ITAT, Hyderabad Benches in the case of ADP Private Limited ITA.Nos.227 and 228/Hyd./2021 has excluded Aspire Systems (India) Private Limited on account of amalgamation. He further submitted that, in the case of Capco Technologies Private Limited IT (TP) A.No.204/Bang./2021, ITAT, Bangalore Bench has excluded Aspire Systems (India) Private Limited from the set of 17 ITA.No.204/Hyd./2021 comparables on account of it’s turnover exceeds 200 crores. In the case of Optiva India Technologies, the ITAT, Pune Bench in ITA.No.194/Pun./2021 has excluded Aspire Systems (India) Private Limited on account of amalgamation. In the case of Auriga Software Technologies Private Limited, the ITAT, Bangalore Bench in IT TP A.No.178/Bang./2021 has excluded Aspire Systems (India) Private Limited on account being a giant company. He, therefore, submitted that, rule of judicial consistency shall be followed by excluding the Aspire Systems (India) Private Limited from the final set of comparables.

19 ITA.No.204/Hyd./2021 respectfully following the judicial consistency and the decision of ITAT, Hyderabad Bench the case of ADP Private Limited in ITA.Nos.227 and 228/ Hyd./2021 direct the Assessing Officer to exclude Aspire Systems (India) Private Limited from the final set of comparables with the appellant’s company.

INFOSYS LIMITED :

20. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee submitted that, although, the TPO/DRP observed that it is functionally similar to appellant- company, but fact remains that going by nature of services provided by Infosys Limited, it is engaged in diversified activities which cannot be considered to appellant-company which is providing software development services to it’s AE on cost plus mark-up basis. Learned Counsel for the Assessee submitted that Infosys Limited carries huge brand value which is a key intangible asset of the company and as per the report of brand financials, the total value of brand of Infosys Limited was $USD3114 million. The company incurred significant amount for R & D activities which is 20 ITA.No.204/Hyd./2021 more than 1000% of the turnover of the appellant-company. Infosys Limited is a giant company and it’s size and scale of operations is several times higher than the appellant- company. Therefore, Infosys Limited cannot be compared to appellant-company which is the captive service provider to it’s AE on cost plus mark-up basis. In this regard, the Learned Counsel for the Assessee relied on the decision of ITAT, Hyderabad Bench in the case of ADP Private Limited ITA.Nos.227 & 228/Hyd.2021 wherein Infosys Limited has been excluded on account of diversified activities. Further, the Learned Counsel for the Assessee, in the case of Infor (India) Private Limited ITA TP.No.198/Hyd./2021, the ITAT, Hyderabad Bench has excluded Infosys Limited on account of huge turnover. In the case of OLF (India) Software Private Limited in IT TP A.No.182/Bang./2021, the ITAT, Bangalore Bench has excluded Infosys Limited on the ground that it is functionally different. In the case of Capco Technologies Private Limited IT TP A.No.204/Bang./2021 the ITAT, Bangalore Bench, has excluded Infosys Limited as it’s turnover exceeds 200 crores. In the case of Auriga Software

21 ITA.No.204/Hyd./2021 Technologies Private Limited in IT.TP.A.No.178/Bang./ 2021, the Bangalore Bench of the Tribunal has excluded Infosys Limited on account being a giant company. He accordingly submitted that, Infosys Limited cannot be compared with that of appellant’s company on account of turnover filter, functional dissimilarity and engaged in diversified activities. He, therefore, submitted that, Assessing Officer may be directed that, Infosys Limited may be excluded from the final set of comparables with that of appellant’s company in the interest of justice.

21. Ms. M. Narmada, Learned CIT-DR submitted that Infosys Limited is also into software development services and there is no evidence that it’s brand value does have any bearing on margins, because, in software development, the turnover is based on man hours. She further submitted that, the size and scale of operations does not matter when it comes to margins of a company which is engaged in similar activities of software development services because, software development services is an industry where the revenues are computed on the basis of 22 ITA.No.204/Hyd./2021 man hours, but, not on the basis of total assets employed in the business. Therefore, there is no merit in the arguments of the Learned Counsel for the Assessee that Infosys Limited is a giant company and it cannot be compared with appellant-company. She accordingly submitted that, the order of the TPO/DRP should be upheld.

THIRDWARE SOLUTIONS LIMITED :

24 ITA.No.204/Hyd./2021 Limited is functionally different and also owns intangible assets and that it’s segmental financial information is not available. Further, as per the annual reports of Thirdware Solutions Limited, it has primary reportable segments both in India and Abroad. Further, Thirdware Solutions Limited is engaged in emerging technology applications like SAP, Oracle, Peoplesoft, QAD, JD Edwards, Infor and other leading Cloud platforms and that, these activities are clearly distinct from routine software services. Further, in the case of ADP Private Limited ITA.Nos.227 & 228/Hyd./2021 the ITAT, Hyderabad Bench has excluded Thirdware Solutions Limited on account of functional dissimilarity and non- availability of segmental details and in the case of Infor (India) Private Limited ITA TP.No.198/Hyd./2021, the ITAT, Hyderabad Bench has excluded Thirdware Solutions Limited on account of functional dissimilarity having abnormally average high margin. In the case of OLF (India) Software Private Limited in IT TP A.No.182/Bang./2021, the ITAT, Bangalore Bench has excluded Thirdware Solutions Limited on the ground that it is engaged in diversified

25 ITA.No.204/Hyd./2021 activities and non-availability of segmental details. In the case of Capco Technologies Private Limited IT TP A.No.204/ Bang./2021 the ITAT, Bangalore Bench, has excluded Thirdware Solutions Limited as it’s turnover exceeds 200 crores. In the case of Auriga Software Technologies Private Limited in IT.TP.A.No.178/Bang./2021, the Bangalore Bench of the Tribunal has excluded Thirdware Solutions Limited on account being a giant company. He accordingly submitted that, Thirdware Solutions Limited cannot be compared with that of appellant’s company on account of turnover filter, functional dissimilarity and engaged in diversified activities. He, therefore, submitted that, Assessing Officer may be directed that, Thirdware Solutions Limited may be excluded from the final set of comparables with that of appellant’s company in the interest of justice.

26 ITA.No.204/Hyd./2021 for the Assessee. Further, revenue from software licence constitutes meagre of 0.04% of total operating revenue. Thus, Thirdware Solutions Limited is predominantly into sale of software services and hence can be taken as a comparable. Further, the intangible assets of Thirdware Solutions Limited does not matter when comes to comparing profit margin of companies involved in similar line of business. The DRP/TPO after considering all the relevant facts, has rightly rejected the contention of the assessee and, therefore, she submitted that, the order of the DRP/TPO should be upheld.

CYBAGE SOFTWARE PRIVATE LIMITED :

28 ITA.No.204/Hyd./2021 submitted that, Cybage Software Private Limited is functionally similar to the appellant company and it operates in only one business segment i.e., provision of software development services. With respect to product company and insufficient segmental details, she submitted that, it is quite evident that product engineering is nothing but software development and maintenance services only. They have just been termed as 'product'. The company is engaged in providing software development services only. Therefore, the company in entirely has been considered as a comparable by the TPO/DRP and therefore, should be upheld.

29 ITA.No.204/Hyd./2021 the turnover of Cybage Software Private Limited is having turnover of Rs.722.25 crores which is more than 10 times of appellant company. If we apply the turnover filter, then, Cybage Software Private Limited does not pass the turnover filter test. Therefore, we are of the considered view that, Cybage Software Private Limited cannot be considered as comparable to the appellant company which is engaged in providing software development services to it’s AE on cost plus mark-up basis. Thus, we direct the Assessing Officer/TPO to exclude Cybage Software Private Limited from the list of final set of comparables.

LARSEN & TOUBRO INFOTECH LIMITED :

31 ITA.No.204/Hyd./2021 8 of annual report and submitted that the size and scale of operations of L & T has its presence across the globe. Hence, it is clear that the scale of operations are clearly distinct from that of the assessee-company being a contract service provider to its AEs. He further submitted that, a perusal of page-5 of the annual report shows that L & T has been expanding its facilities and the total employees across India stands at 20,000+ as on March 31, 2016 which is much higher than the employee strength of the assessee company which clearly indicates the distinction between the two entities. He submitted that, L & T has been recognized with various awards for its performance and was selected in the "Innovation in Big Data Award at NetApp Innovation Awards, 2015". He submitted that, the nature of segmental information is not available. He submitted that L & T is also engaged in trading of goods which is apparent from its annual report. Further, L & T owns huge intangibles. He accordingly submitted that, in any event, Larsen & Toubro Infotech Limited cannot be compared with the appellant company. In support of his contentions, the Learned

32 ITA.No.204/Hyd./2021 Counsel for the Assessee relied on the decision of ITAT, Hyderabad Bench in the case of ADP Private Limited ITA.Nos.227 & 228/Hyd.2021 wherein Larsen & Toubro Infotech Limited has been excluded on account of extraordinary event of amalgamation. Further, the Learned Counsel for the Assessee submitted that, in the case of Infor (India) Private Limited ITA TP.No.198/Hyd./2021, the ITAT, Hyderabad Bench has excluded Larsen & Toubro Infotech Limited on account of huge turnover. In the case of OLF (India) Software Private Limited in IT TP A.No.182/Bang./ 2021, the ITAT, Bangalore Bench has excluded Larsen & Toubro Infotech Limited on the ground that there is an extraordinary event of amalgamation In the case of Capco Technologies Private Limited IT.TP.A.No.204/Bang./2021 the ITAT, Bangalore Bench, has excluded Larsen & Toubro Infotech Limited as it’s turnover exceeds 200 crores. In the case of Auriga Software Technologies Private Limited in IT.TP.A.No.178/Bang./2021, the Bangalore Bench of the Tribunal has excluded Larsen & Toubro Infotech Limited on account being a giant company. He accordingly submitted

33 ITA.No.204/Hyd./2021 that, Larsen & Toubro Infotech Limited cannot be compared with that of appellant’s company on account of turnover filter, functional dissimilarity and engaged in diversified activities. Further, although, the appellant-company has selected Larsen & Toubro Infotech Limited in their TP study as comparable to appellant-company, but, on verification of facts, it emerges that it is totally un-comparable to appellant-company on the basis of FAR analysis and, therefore, merely for the reason of inclusion of the said company by the appellant-company, there is no need to retain the above company in the final set of comparables when assessee has made-out a case that it is functionally different from appellant-company. He, therefore, submitted that, Assessing Officer/TPO may be directed that, Larsen & Toubro Infotech Limited may be excluded from the final set of comparables with that of appellant’s company in the interest of justice.

34 ITA.No.204/Hyd./2021 brand value does have any bearing on margins, because, in software development, the turnover is based on man hours. She further submitted that, the size and scale of operations does not matter when it comes to margins of a company which is engaged in similar activities of software development services because, software development services is an industry where the revenues are computed on the basis of man hours, but, not on the basis of total assets employed in the business. Therefore, there is no merit in the arguments of the Learned Counsel for the Assessee that Larsen & Toubro Infotech Limited is a giant company and it cannot be compared with appellant-company. She further submitted that, Larsen & Toubro Infotech Limited cannot be made as part of TP documentation of the appellant-company where the appellant-company itself has selected the above company on functional similarity and, therefore, subsequently without there being any change in facts, it cannot seek to exclude the above company based on decision of some Tribunals. She accordingly submitted that, the order of the TPO/DRP should be upheld.

35 ITA.No.204/Hyd./2021 29. We have heard both the parties and considered relevant arguments of the Learned Counsel for the Assessee and the learned CIT-DR. We have also carefully considered the annual reports of Larsen & Toubro Infotech Limited and the TP documentation of the appellant-company. Admittedly, Larsen & Toubro Infotech Limited is a part of comparable selected by the assessee-company in it’s TP documentation on the ground that it is functionally similar to appellant-company. No doubt, the appellant seeks to exclude Larsen & Toubro Infotech Limited from the list of comparables on functional dissimilarity, but, on perusal of functions performed by the appellant-company, when compared to Larsen & Toubro Infotech Limited, we find that largely the functions performed by both the companies are similar. Although, the Learned Counsel for the Assessee seeks to exclude the Larsen & Toubro Infotech Limited on the ground of significant intangibles/business rights and huge brand value, but, in our considered view, going by the value of IPR, they are miniscule and insignificant. Further, although the company has required 100% stake in M/s.

36 ITA.No.204/Hyd./2021 Information Systems Resources Centre Private Limited which also engaged in the provision of software development services. Further the appellant had failed to prove how the brand value effects the operating margin of the company. Therefore, in our considered view, once a particular company is a part of comparable selected in it’s TP documentation by the appellant-company, it cannot be excluded at subsequent stage merely on the basis of some decisions of Tribunal, unless the appellant-company makes- out a case that such company is functionally dissimilar to that of the appellant-company. Therefore, we are of the considered view, that there is no merit in the arguments advanced by the Learned Counsel for the Assessee for exclusion of Larsen & Toubro Infotech Limited from the list of comparables. In so far as the various case laws relied on by the Learned Counsel for the Assessee, we are of the considered view that the finding recorded by any Appellate Authority or Court has to be read in conjunction with the facts to make it applicable to another case. Since the appellant-company itself has selected Larsen & Toubro

37 ITA.No.204/Hyd./2021 Infotech Limited as comparable in it’s TP documentation, therefore, in our considered view, there is no reason to exclude Larsen & Toubro Infotech Limited from the list of comparables. Thus, we are inclined to uphold the order of the learned Assessing Officer/DRP and reject the arguments of the appellant-company.

INFOBEANS TECHNOLOGIES LIMITED :

39 ITA.No.204/Hyd./2021 of inclusion of the said company by the appellant-company, there is no need to retain the above company in the final set of comparables when assessee has made-out a case that it is functionally different from appellant-company. He accordingly pleaded that, Assessing Officer/TPO be directed to exclude Infobeans Technologies Limited from the list of comparables on functional dissimilarities with that of appellant company.

40 ITA.No.204/Hyd./2021 Technologies Limited cannot be made as part of TP documentation of the appellant-company where the appellant-company itself has selected the above company on functional similarity and, therefore, subsequently without there being any change in facts, it cannot seek to exclude the above company based on decision of some Tribunals. She accordingly submitted that the comparable selected by the TPO/DRP should be upheld.

41 ITA.No.204/Hyd./2021 and insignificant. We find that Infobeans Technologies Limited is engaged in the provision of software development services. Therefore, in our considered view, once a particular company is a part of comparable selected in it’s TP documentation by the appellant-company, it cannot be excluded at subsequent stage merely on the basis of some decisions of Tribunal, unless the appellant-company makes- out a case that such company is functionally dissimilar to that of the appellant-company. Therefore, we are of the considered view, that there is no merit in the arguments advanced by the Learned Counsel for the Assessee for exclusion of Infobeans Technologies Limited from the list of comparables. In so far as the various case laws relied on by the Learned Counsel for the Assessee, we are of the considered view that the finding recorded by any Appellate Authority or Court has to be read in conjunction with the facts to make it applicable to another case. Since the appellant-company itself has selected Infobeans Technologies Limited as comparable in it’s TP documentation, therefore, in our considered view, there is 42 ITA.No.204/Hyd./2021 no reason to exclude Infobeans Technologies Limited from the list of comparables. Thus, we are inclined to uphold the order of the learned Assessing Officer/DRP and reject the arguments of the appellant-company.

43 ITA.No.204/Hyd./2021 34.1. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee submitted that, although, the above companies are functionally comparable to appellant company because of their nature of business, but, the TPO/ DRP excluded the above companies only on the ground that those companies do not figure in TPO’s search matrix and thus, functionality is not required to be seen. However, the fact remains that the above companies are met with the TPO filters and search matrix applicable for selection of companies. Further, it has passed all the filters applied by the TPO. Although, the assessee has furnished relevant evidences and proved that, all these companies are passed the test-filters applied by the TPO, but, the TPO/DRP rejected the contention of the appellant company only on the ground that those companies do not figure in the search matrix of the TPO and, therefore, there is no question of examination of functionality for the purpose of inclusion. Therefore, he submitted that the above companies should be included in the list of comparables.

44 ITA.No.204/Hyd./2021 35. MS. M. Narmada, learned CIT-DR, on the other hand, supporting the order of the DRP/TPO submitted that, in order to select any company’s activities for the purpose of benchmarking analysis, the company should be available in the search matrix and also pass all the filters applied by the TPO. In the present case, the above companies do not figure in TPO search matrix and, therefore, the TPO has rightly not examined functionality analysis. The DRP after considering the relevant facts has rightly rejected the objections filed by the appellant company and thus, the order of the DRP/TPO should be upheld.

45 ITA.No.204/Hyd./2021 and the FAR analysis. In the present case, the TPO has simply rejected the above companies on the ground that those companies were not meeting the search matrix. The DRP upheld the reasons given by the TPO, even though, the appellant has furnished relevant evidences to prove that, the FAR analysis of the above companies is similar to the appellant company. Therefore, we are of the considered view that, the TPO/DRP erred in rejecting the above companies without examining the FAR analysis. Further, similar issue has been considered by the ITAT, Hyderabad Bench in the case of Benu Networks Packet Switch (P.) Ltd., vs., ACIT [2024] 166 taxmann.com 92 [Hyderabad-Trib.] where on similar grounds, the Tribunal directed the Assessing Officer /TPO to examine the functionality of the above companies and consider for the purpose of inclusion or exclusion. Similar view has been taken by ITAT, Hyderabad Bench in the case of IVY Software Development Services Private Limited, Hyderabad vs., ACIT, Circle-2(1), Hyderabad in ITA.No.1801/Hyd./2019 – A.Y. 2015-2016, order dated 06.03.2025 wherein it has been held that, once a particular

46 ITA.No.204/Hyd./2021 company is functionally similar to the appellant company, then, said company cannot be rejected on the ground of data not available in particular data searches/search matrix. Therefore, we are of the considered view that, the DRP/TPO erred in rejecting the above companies without examining the functionality test. Thus, we set-aside ground no.4 of assessee’s appeal and more particularly, 06 comparables argued by the learned CIT(A) to the file of Assessing Officer/TPO and direct the TPO to examine the contention of assessee in light of relevant evidences and decide the comparability of companies.

47 ITA.No.204/Hyd./2021 Bench in the case of Everest Business Advisory India Private Limited.

48 ITA.No.204/Hyd./2021 under consideration. The provision for bad and doubtful debts is only an accounting treatment and have no direct nexus to the operating income admitted for the year under consideration. Therefore, we are of the considered view that, there is no merit in the arguments of the assessee that bad debt is operating in nature and needs to be considered for the purpose of computation of PLI. This view is supported by the decision of ITAT, Mumbai Bench in the case of Thyssen Krupp. Industries India Pvt. Ltd., [2013] 33 taxmann.com 107 (Mum.Trib.). Similar view has been taken by the ITAT, Hyderabad Bench in the case of Foursoft India Limited [2011] 142 TTJ 358 (Hyd.Tribu.). Therefore, we are of the considered view that, at any stretch of imagination, the provision of bad debt cannot be considered as operating in nature. The DRP after considering all the relevant facts has rightly rejected the objections raised by the appellant company. Thus, we are inclined to uphold the findings of the DRP and reject the ground taken by the appellant company.

49 ITA.No.204/Hyd./2021 41. In the result, appeal of the assessee is partly allowed for statistical purposes.