OPEN TEXT TECHNOLOGIES INDIA PRIVATE LIMITED ,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX , CIRCLE-16(2), HYDERABAD

The assessee has raised the additional grounds as under : “10(c)(a). Choice of CUP as MAM in present case is unjustified. Without prejudice, application of CUP is not in compliance with provisions of Income Tax Act and Income Tax Rules, 1962.”

The additional ground so filed is admissible in view of judgment rendered by the Hon'ble Supreme Court in the case of filed its return of income for A.Y. 2014-15 on 30.11.2014 declaring total income of Rs.6,68,89,860/-. In view of the international transactions involved during the year under consideration, for determination of Arm's Length Price (“ALP”), the case was referred to Learned Transfer Pricing Officer ("Ld. TPO"). The Ld. TPO vide his order dt.30.10.2017 suggested upward adjustment of Rs.14,75,16,275/- on account of Provision of Software Development Service (“ S”) and Rs.1,65,98,428/- on account of outstanding trade receivables. Accordingly, the Ld. AO passed draft assessment order on 30.11.2017. Aggrieved with the draft assessment order passed by the Ld. AO, the assessee preferred objections before the Ld. DRP. In pursuance to the directions of Ld. DRP dated 27.08.2018, the Ld. AO finalized the assessment on 29.10.2018 by making total addition of Rs.16,21,20,521/- on account of upward adjustment of ALP.

Aggrieved with the final assessment order of Ld. AO, the assessee is in appeal before us.

At the outset, Ld. AR submitted that they are not pressing ground Nos.1 to 3, 6, 7, 9 and 10 of the grounds of appeal and ground nos.14 to 16 are consequential in nature. Therefore, the Ld. AR submitted that these grounds do not need separate adjudication. Accordingly, ground nos. 1 to 3, 6, 7, 9, 10 and 14 to 16 of the grounds of appeal are dismissed being not pressed.

Ground no.4 of the assessee is related to the seeking of exclusion of nine companies from the set of comparables namely, Tata Elxsi Limited, Mindtree Limited, R. S. Software (India) Limited, E-Infochips Ltd, Larsen & Toubro Infotech Limited, Infosys Ltd, Persistent Systems Limited, Infobeans Technologies Limited and Thirdware Solutions Limited. As far as the exclusion of all these companies except Mindtree Limited and R S Software (India) Limited is considered, the Ld. AR invited our attention to Para no.8.1 to 25.1 of the decision of this Tribunal in the case of M/s. Wave Crest Payment Technology Pvt. Ltd. Vs. DCIT in IT(TP)A No.2337/Hyd/2018 for A.Y. 2014- 15 dated 15.12.2021 and submitted that, this Tribunal has excluded these companies from the final set of comparables. He further submitted that the functional profile of M/s. Wave Crest Payment Technology Pvt. Ltd. is similar to the assessee. The Ld. AR also submitted that since the functional profile of the assessee and M/s. Wave Crest Payment Technology Pvt. Ltd. are similar and the assessment year under consideration is also the same, the reasoning adopted by this Tribunal in excluding these companies would squarely apply to the present case as well. Therefore, it was urged that these companies be excluded from the final set of comparables in the assessee's case by following the said decision.

1 Per contra, Ld. DR relied on the decision of Ld.AO / TPO.

2 We have heard the rival contentions and also gone through the record in light of submissions made by either side. In our considered view, the findings of this Tribunal in the case of M/s. following effect :

The assessee has declared international transaction in 3CEB report / TP document for the year under consideration as under:- Name of AE Nature of transaction Amount (Rs) Wave Crest Provision of software development and 20,19,96,429 Group Ltd. support services Wave Crest Provision of software development and 12,73,47,844 Holding Limited support services Total 32,93,44,273

3 We have also gone through the profile of M/s. Wave Crest Payment Technology Pvt. Ltd, which has been captured at para No.2 of the order of this Tribunal in the case of M/s. Wave Crest following effect :

WaveCrest India is a wholly owned subsidiary of WaveCrest Group Ltd. Gibraltor (“WaveCrest Group Ltd. along with its subsidiaries is collectively referred to as "WaveCrest Group"). WaveCrest India provides backend software development and support services to tis associated enterprise (AE in singular and AE's in aggregate). WaveCrest India has responsibility to develop & test new applications/enhancements and provide maintenance support for existing applications. The services are rendered on cost plus, basis, based on the services agreement entered with associated enterprise/s. The taxpayer mentions that as regards the services rendered to WaveCrest Holding Limited are concerned, these are in in the nature of IT support services. Considering that the online utility of the Form 3CEB does not specifically provide for reporting of support services with a specific services description code, the same has been mentioned as BPO services inadvertently."

4 On perusal of profile of M/s. Wave Crest Payment Technology Pvt. Ltd. and the assessee, we found that, the functional profile of the M/s. Wave Crest Payment Technology Pvt. Ltd. as well as the assessee are similar. Therefore, we are of the considered opinion that the findings given by this Tribunal in the case of M/s. Wave Crest Payment Technology Pvt. Ltd. Vs. DCIT (supra) can be squarely applied to the assessee. We have also gone through para No.8.1 to para No.25.1 of the order of this Tribunal in the case of M/s. Wave Crest Payment effect : "8.1 Tata Elxsi Limited The learned AR of the assessee has submitted that this company provides consulting and product design and engineering services to the consumer electronics communication and transportation entry and system integration and support services for enterprise customer. These areas of operations are completely different when compared to the assessee business profile which is a pure Software Development Services provider. He has further contended that the activities of Tata Elxsi Limited are in the nature of KPO Services and hence cannot be considered to be comparable of the assessee. He has relied upon the decision of Delhi Benches of the Tribunal dated 1st May, 2020, in the case of M/s Global Logic India Ltd. vs. DCIT in ITA No. 4740/Del/2018 and submitted that the Tribunal has rejected this company as comparable to a Software Development Company on the ground of functional dis similarity. He has also relied upon the decision of Hyderabad Benches of the Tribunal dated 6.8.2019 in the case of M/s Infor (India) P. Ltd. vs. DCIT in ITA Nos. 161 & 2307/Hyd/2018.

2 On the other hand, learned DR has submitted that as per annual report of this company, it provides Software Development Services and the activity under this segment is functionally comparable to the assessee and fulfil filters applied by the TPO. The TPO as well as DRP considers the segmental data only in respect of the Software Development Services and not in respect of product sales. He has referred to the directions of the DRP and submitted that the business of this company is primarily Software Development and Services and system integration and support. The Software Development and Services segment comprises of three divisions (a) Embedded Product Design (b) Industrial Design (c) Visual computing lab. Once the segmental financial data is available in the annual report then the other business activity of the company becomes irrelevant. He has relied upon the directions of the DRP.

3 We have considered the rival submissions as well as relevant material on record. Undisputedly, the Tata ELXSI Ltd., is a market leader in its field of services and having various segments of services as well as product sales. Even in the segment of Software Development and Services, there are various divisions comprising of a services provided for industrial design, visual computing labs and embedded product design. This company is also having R&D to the tune of 2.7% of the total turnover which was not considered as significant by the DRP. Further this company has also having internally generated intangibles of Rs. 5.30 Crores which was also considered as insignificant by the DRP. It is pertinent to note that the size of this company as well as turnover is manifold bigger than the assessee's size and Revenue. The Delhi Benches of the Tribunal in the case of M/s Global Logic India Ltd. vs. DCIT (supra) has considered the functional comparability of this company with a Software Development Services provider in para 8.2 to 8.3 as under:-

2 We have heard the rival submission of the parties on the issue in dispute and perused the relevant material including ITA No.4740/Del./2018 annual report of the company. The details of revenue from operations available on page 51 of the Annual Report (page 394 of PB-2), reproduced as under:-

Revenue From Operations Sale of traded goods [Refer None(i) below] Rendering on services [Refer None(ii) below] Total Year ended 31st March, 2014 4,700.51 72,509.25 77,209.76 (i) Sale of traded goods include sales of computers, networking and storage systems. ii. Rendering of services comprises: a) Product Design b) Graphics Animation and Gaming c) System Integration and Support 66,427,07 1,843,15 4,239.03 72,509.25

3 Out of the above revenue streams, we find that major revenue has been earned from rendering of product design services. Under Product design, the assessee has carried major project of design and developing of a complete electronic control unit (ECU) including hardware and software for hybrid electric vehicle, designed the control hardware for India's Mars orbiter Mission, worked with GVK to design the experiential services for various consumer touch points at Mumbai International Airport's new integrated terminal-2. The relevant part of the Annual Report has been reproduced by the learned TPO in his order. From the various achievements of the company mentioned in the Annual Report, we are of the opinion that the company has earned revenue from designing using softwares rather than software development services and software maintenance services. The other services of graphic animation and gaming includes major project for animation and visual effects for two feature films, which won the 59th Filmfare award and the star Guild Award 2014 for Best visual effects for it works in film “ Dhoom 3". The company also carried out visual effects for the film "Bhag Milka Bhag". The services under the revenue from graphics animation and gaming are also different from services of software development.” The Tribunal has noted that the company has earned Revenue from the designing using software than Software Development Services and software maintenance services. The other services of graphic animation and gaming includes major project for animation and visual effects for two feature films which are different from the services of the Software Development. These finding of the Tribunal are based on the factual details and financial data available in the annual report. Similarly, the Co- ordinate Bench of this Tribunal in the case of M/s Infor (India) P. Ltd. vs. DCIT (supra) for the assessment year 2014-15 vide order dated 6.8.2019 in para 77 to 78 has analyzed the functional comparability of this company as under:- "

As regards Tata Elxsi Ltd, Thirdware Solutions Ltd and Persistent Systems Ltd are concerned, we find that their comparability to the assessee has been considered in the assessee's own case for the A.Y 2007-08 and it is submitted that there is no change of activities of either the assessee or the comparables during the relevant A.Y before us i.e. A.Y 2014-15. 78. The learned DR has not rebutted this contention of the assessee. Therefore,

We have considered rival submissions and perused materials on record. The primary and fundamental reason on the basis of which assessee seeks rejection of the aforesaid comparable is, it is also engaged in the development of product and segmental details are not available. Notably, in case of LSI Technologies India (P.) Ltd. (supra), the Co-ordinate Bench while examining the comparability of the aforesaid company to a software development service provider, has rejected this company as a comparable considering the fact that it is engaged in product development and product design services. The same view has been reiterated by the Tribunal in the other decisions cited by the learned Authorized Representative. Since, many of these decisions pertain to the impugned assessment year, respectfully following the aforesaid decisions of the Tribunal, we direct the Assessing Officer to exclude this company from the list of comparables.

We have considered rival submissions and perused materials on record. On a perusal of the documents placed in the paper book it appears that this company is engaged in various activities including development of niche product and development services. Thus, the company is functionally different from the assessee. Considering the aforesaid aspect, the Co-ordinate Bench in case of Telcordia Technologies India (P.) Ltd. (supra), which is for the very same assessment year, has excluded this company as a ITA No. 1689/HYD/2019 and S.A.No.98/Hyd/2020, Α.Υ.2015-16 M/s Infor (India) Private Limited, Hyderabad comparable. Similar view has also been expressed in the other decisions cited by the learned Authorized Representative. Thus, keeping in view the decisions of the Tribunal referred to above, we hold that this company cannot be a comparable to the assessee.

We have considered rival submissions and perused materials on record. Though, it may be a fact that the assessee may not have objected to selection of this company before the Transfer Pricing Officer, however, the assessee raised objections against selection of this company before the DRP as well as before us. The grievance of the assessee is, the company being involved in development of products and since no segmental details are available in the annual report, it cannot be treated as comparable. The Co-ordinate Bench in Tech Mahindra Ltd. (supra) having found this company to be involved in development of software product and trading in software licenses has held that it cannot be a comparable to a software development service provider. Similar view has been expressed in the other decisions cited before us by the learned Authorised Representative. Since, many of these decisions relate to very same assessment year, following the ratio laid down in these decisions, we hold that this company cannot be a comparable to the assessee".

4 Hence, in view of the facts and circumstances of the case and particularly the business activity of Tata ELXSI Ltd., and following the decisions of this Tribunal cited (supra), we hold that this company is not functionally comparable to the assessee and accordingly the TPO is directed to exclude this company from the set comparables for determining the arm's length price. 9. e-Infochips Ltd. The Ld. AR of the assessee has submitted that this company is engaged in the business of providing Software Development in ITeS and product which is considered as only reportable business segment. This company is into product engineering and Software R & D Services with more than 500 products developed. It has eight various intellectuals properties and therefore, this company is a super profit of 81% therefore, this company cannot be considered as comparable to the assessee. He has relied upon the decision of co-ordinate Bench of this Tribunal dated 20.11.2019 in the case of M/s Kony IT Services Private Limited. vs. DCIT in ITA No. 2304/HYD/2018 as well as in the case of M/s. Infor (India) P Ltd. Vs. DCIT in ITA Nos. 161 & 2307/Hyd/2018.

1 On the other hand, the Ld. DR has submitted that as per the financial of this company and particularly profit and loss account it cannot be seen that the Revenue from sale of product is just 2.5% of the total operating Revenue. Thus, this company is predominantly having Software Services Business and functionally comparable to the assessee. The assessee has not brought any material on record to show that this company is having intellectual property rights/intangibles. The R&D activity does not have any effect on the margins of this company and therefore, in terms of clause (i) of Rule 10B (3) if none of these differences is likely to materially affect the profit arising from such transaction in open market such uncontrolled transactions shall be considered as comparable to an international transaction. He has relied upon the direction of the DRP.

We have considered the rival submission as well as relevant material on record. The DRP has accepted this fact that this company is generating Revenue from sale of product though the same is not considered as in significant in comparison to the Revenue from Software Development Services. Further the objection of the assessee regarding the R&D activities and I.P./Intangibles were rejected by DRP for want of any supporting material. At the outset we note that the co-ordinate Bench of this Tribunal in the case of M/s. Infor India Pvt. Ltd. vs. DCIT (supra) has considered the functional comparability of this company in para 85 as under: "As regards E-Infochips Ltd is concerned, the contention of the assessee is that it is functionally different as it is engaged to software develop ent of software products and ITeS and that there no segmental data. The TPO &DRP have rejected the objections of the assessee. The learned Counsel for the assessee has referred to the disclosure of segments explanatory wherein the company has disclosed itself as primarily engaged in software development and ITeS services and products, as reportable as per AS17. Further, at page 897, there is an inventory in the balance sheet and at page 899, there is classification of inventories. However, we do not find any revenue from sale of products. Therefore, it cannot be accepted that this company is into product development. The other objection of the assessee is that it has abnormal profit 79.76% during the relevant A.Y. and therefore, it has witnessed super normal profit of 38% on a year on year basis. This objection of the assessee is acceptable because, in the other cases of the Infosys Ltd. L&T Infotech Ltd. and Mindtree Itd. We have held that not only high turnover but even where the comparables have earned super normal profit, they also have to be excluded this company from the final list of comparables. Thus, the assessee's grounds of appeal on exclusion of the companies are partly allowed."

Following the earlier orders of the coordinate Bench of this Tribunal, we direct the TPO to exclude this company for the set of comparable while determining the ALP of international transaction of the assessee.

Larsen & Toubro Infotech Ltd. The Ld. DR of the assessee has submitted that as per the financials of this company it has shown as substantial number of intangibles in its asset base which constitute 23.37% of total asset. This company has created a brand name for itself in the market which has significantly impacted on profits of this company. He has relied upon the decision of co-ordinate Bench in the case of Infor (India) P. Ltd., M/s. Global Logic India Ltd. and M/s. M/s ARM Embedded Technologies Pvt. Ltd (supra).

1 On the other hand, the Ld. DR has submitted that Larsen & Toubro Infotech provides services of application, maintenance, development, ERP data, warehousing Business-intelligence, infrastructure management services which are functionally comparable to the assessee. It has reported 100% operation revenue from Software Development Services. The Id. DR has further submitted that the DRP has considered Note-2 of the annual report on Revenue recognition where the company recognize the revenue when the services are rendered and related cost is incurred which shows that there is no reference for any product sale or inventory in the financial statements. He has relied upon the directions of DRP.

We have considered the rival submissions and as well as relevant material on record. At the outset, we note that the Delhi Benches of the Tribunal in the case of M/s Global Logic India Ltd. vs. DCIT (supra) has considered the functional comparability of this company in para 6.4 to 6.7 as under:- “6.4 We have heard rival submission of the parties on the issue in dispute. The learned Counsel of the assessee submitted that the company owns significant intangibles (Rs.75,04,78,329/-) in the ITA No.4740/Del./2018 form of the software and intangible assets under development. On perusal of fixed assets schedule, available on page S-1245 of the Annual Report (page 116 of PB-2), we find that at the beginning of the year the assessee owned intangible assets of Rs.153,42,45,196/- which included software of Rs.143,61,95,196 ( 93 %), thus the intangible other than the software are insignificant. During the year, the company has sold/transferred the software and claimed depreciation, which resulted in net block of software at the end of the year to Rs.33,22,11,879/-. The assessee has also shown intangible assets under development of Rs.41,82,66,450/-, which makes the net intangibles owned by the company to Rs.75,04,78,329/- at the end of the year. But no depreciation has been claimed on the under developed intangibles, therefore there is no effect on the profitability of the company on account of the underdeveloped intangibles. Thus, the objection of the assessee of non- comparability of the assets is rejected.

5 Further, the learned Counsel submitted that operating expenses amounting to Rs.34,91,74,116/-and Rs.54,82,74,109/- on cost of the software packages for own use and cost of the bought-out items for resale during the year under consideration. Thus, according to the learned Counsel, the company was engaged in sale of the product and accordingly not comparable. On perusal of the profit and loss account of the company on page S-1237 of the Annual Report (Page 108 of PB-2), we find that company has shown two revenue streams. First, as revenue from the operations of Rs.46,439,403,178/-from overseas and Second as other income (loss of Rs.81,09,17,799/-). No revenue from sale of product has been shown. As regard to the objection of cost of ITA No.4740/Del./2018 software packages for own use under operating expenses, is concerned in our opinion, for a company engaged in software development, incurring expenses on purchase of the software for own use cannot term the assessee as engaged in sale of the product. Regarding the cost of the items for resale is concerned, the cost of purchase of inventory for resale will not impact on the profit and loss account because when goods are not sold, then it will appear in closing stock and resultant effect on profit and loss account is nil.

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."

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, 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. The Tribunal has noted that during the year this company has sold the Software and claimed the depreciation which resulted into net block of software at the end of the year to Rs. 33.22 Crores. There are also intangible assets under development to the tune of Rs. 81.4 which makes the net intangible owned by this company of Rs. 75.04 Crores at the end of the year. But not depreciation has been claimed on the underdeveloped intangibles. The Tribunal further noted that company has shown two revenue streams one from operations of overseas and second from other income. This company has also provided telecom engineering services distinct from the services of Software Development. The company cannot be considered as comparable even at segmental level because there are common expenses of Rs.

80 Crores not allocated into three segments and consequently results are distorted. Further during the year, extraordinary event of demerger of Product Engineering Services business has occurred which has also impacted the profit of the company at entity level. Similarly, the Bangalore Benches of the Tribunal in the case of M/s ARM Embedded Technologies Pvt. Ltd. (supra) has considered the functional comparability of this company at Page 11 and 12 as under:- "ii) L & T Infotech Limited - The company is not functionally comparable, as it has high brand value and market leader and also benefit from its parent brand. It has proprietary business and during the year extraordinary events like product engineering services business of the company was transferred to its subsidiary and has incurred expenses in foreign currency being 57.13% of its total expenditure. The company was excluded as comparable in the decision of co-ordinate Bench in the & 593 of Paper Book as under : " 6 (ii) L & T Infotech Limited : The company has a margin of 24.61% and has high brand value and is a market leader, high presence and the intangible income in proprietary products. Significant expenditure in foreign currency to the extent of 57.13%. During the year the product engineering business service of the company was transferred to its subsidiary. The company segments are divided into service cluster, industrial cluster and telecom business. As per the Annual Report of the company, the company has a significant capital work-in-progress and the company has developmental products. The comparable was excluded from the final list of comparable in assessee's own case for the Assessment Year 2011-12 by the DRP and further the comparable company was excluded by the co-ordinate Bench of Delhi Information Systems & Management Consultants (P) Ltd. Vs. ACIT (2018) 94 (Del). We found that the co-ordinate Bench of Tribunal in M.P. No.95/Bang/2019 in IT(TP)A No.3122/Bang/2018 for the Assessment Year 2014-15 has dealt on the issue at page 2 para 4 as under :

We heard Ld D.R and perused the record. We find merit in the miscellaneous petition filed by the assessee. Accordingly following paragraph is inserted after IT(TP)A No.3374/Bang/2018 paragraph 10 in the impugned order of the Tribunal, which will adjudicate the issue relating to "L & T Infotech Ltd":- "10A The assessee has sought exclusion of M/s L & T Infotech Ltd on the ground that there were extraordinary events during the year, it possesses brand and intangibles, it has not provided segmental information and it has got sub- contracting expenses. The Ld A.R submitted that the above said company has been excluded by the co- ordinate bench in the case of Metric Stream Infotech P Ltd (IT(TP)A No.1418 & 2735/Bang/2017) relating to AY 2013-14 and also in the case of Electronics for Imaging India P Ltd (IT(TP)A No.1506/Bang/2016 relating to AY 2011-12). The Ld. A.R submitted that there is no change in facts in this year also and accordingly prayed for exclusion of the above said company. 10A.1 We heard Ld D.R and perused the record. We notice that M/s L & T Infotech Ltd has been excluded by the co-ordinate bench in the case of Metric Stream Infotech P Ltd (supra) for AY 2013-14 and also in the case of Electronics for Imaging India P Ltd (supra) for AY 2011-12. The Ld A.R submits that there is no change in facts prevailing in the current year vis-a-vis the years considered by the co-ordinate benches in the above said cases. Accordingly, following the above said decisions, we direct exclusion of M/s L & T Infotech Ltd." We considering the functional dissimilarity and judicial decisions and various facts which are not similar to the assessee functional profile. Accordingly, we direct the TPO to exclude M/s. L & T Infotech Limited from the final list of comparable in determining the ALP.”

In view of the facts and circumstances as discussed above as well as following the earlier decisions of the Tribunal on the functional comparability of this Company, we direct the TPO to exclude this company from the set of comparables while computing arm's length price.

Infosys Ltd. The learned AR of the assessee has submitted that as per the financials of this company, it provides solutions that span the entire software life cycle encompassing consulting, design, development, re-engineering, maintenance systems integration, package evaluation and implementation. In addition, the company develops/owns proprietary products like Finacle, Infosys m-Connect. It has also earned revenue by sale of its products. This company derives substantial portion of its revenue from proprietary products (including its flagship banking product suite Finacle). In the segmental P&L has a segment of software services & products. However, the allocation of income for software services & product is not provided. He has further submitted that the company has created a brand name for it, in the market and this 'brand value' has significant impact on the profits of the company. He has relied upon the following two decisions as under:- i. M/s Kony IT Services Private Limited, I.T.A.T. Hyderabad, ITA No. 2304/Hyd/2018, for A.Y. 2014-15. ii. M/s Infor (India) P. Ltd., I.T.A.T., Hyderabad, ITA Nos. 161 and 2307/Hyd/2018 Α.Υ. 2014-15. 16. On the other hand, learned DR has relied upon the order of the DRP and submitted that the objections raised by the assessee regarding R & D expenditure and brand value are not having any impact on the operating profit of this company being insignificant so far as the quantum of the expenditure is concerned, therefore, this company is functionally comparable.

We have considered the rival submissions as well as the relevant material on record. At the outset, we note that the co-ordinate Bench of this Tribunal in the case of M/s Kony IT Services Private Limited (supra) has considered the functional comparability of this company at page 16 to 22 as under:- “ (iv) M/s. Infosys Limited: (a) From the profitability reported in the P & L Account (Page No. 324, 349 and 357 of PB-II) it is evident that the company had undergone extraordinary events as stated by the Ld. AR and this acquisition had substantial impact on the profitability of the company during the previous year. Extraction from Page 324 "Lodestone Holding AG On October 22, 2012. Infosys acquired 100%of the outstanding share capital of Lodestone Holding AG, a global management consultancy firm headquartered in Zurich, Switzerland. The acquisition was executed through a share purchase agreement for an upfront cash consideration of 1,187 crore and a deferred consideration of up to Rs. 608 crore. During the year, we invested in our subsidiaries, for the purpose of operations and expansion, as follows : Subsidiary In foreign Crore currency Infosys Americas, Inc. U 0.1 million 1 Lodestone Holding AG CHF 20 million 136 Infosys Public Services, Inc U 12.5 million 75 Edgeverve Systems Limited 1 (1) On April 15, 2014, the Board of Directors of Infosys authorized the Company to execute a Business Transfer Agreement and related documents with Edgeverve (Refer to Note 2.10.2 of the standalone financials). Refer to statement pursuant to Section 212 of the Companies Act, 1956 for the summary financial performance of our subsidiaries. The audited financial statements and related information of subsidiaries will be available on our website,www.infosys.com. Extraction from page 349 of PB-II 2.10.1 Investment in Lodestone Holding AG On October 22, 2012, Infosys acquired 100% of the outstanding share capital of Lodestone Holding AG, a global management consultancy firm headquartered in Zurich, Switzerland. The acquisition was executed through a share purchase agreement for an upfront cash consideration of Rs. 1, 87 crore and a deferred consideration of up to Rs. 608 Cr. The deferred consideration is payable to the selling shareholders of Lodestone on the third anniversary of the acquisition date and is contingent upon their continued employment for a period of three years. The investment in Lodestone has been recorded at the acquisition cost and the deferred consideration is being recognized on a proportionate basis over a period of three years from the date of acquisition. An amount of Rs. 228 Crore and Rs. 85 Cr representing the proportionate charge of the deferred consideration has been recognized as an expense during the years ended March 31, 2014 and March 31, 2013 respectively." Extraction from Page 357 of PB-II

26 Merger of Infosys Consulting India Limited The Honorable High Court of Karnataka sanctioned the scheme of amalgamation of Infosys Consulting India Limited (ICIL) with Infosys Limited with an effective date of August 23, 2013 and an appointed date of January 12, 2012 ICIL was a wholly- owned subsidiary of Infosys Limited and was engaged in software-related consultancy services. The merger of ICIL into Infosys Limited has been accounted for under pooling of interest method referred to in Accounting Standard 14. Accounting for Amalgamation (AS-14). All the assets and liabilities of ICIL on an after the appointed date and prior to the effective date have been transferred to Infosys Limited on a going concern basis. As ICIL was a wholly-owned subsidiary of Infosys Limited, no shares have been allotted to the shareholders upon the scheme becoming effective.

However, in the case of the assessee company there are no such events leading to super profits. (b) The company has a bumper turnover of Rs. 42,531 Crs which cannot be compared with the turnover of the assessee company which is only Rs. 41 Crs. (c) The company has recognised Intellectual property rights (IPRs) for Rs. 59 Crs as evident from Page 348 of PB-II. In the case of assessee company there is no accretion of such kind of assets. (d) The company has spent huge amount on R & D Activities amounting to Rs. 261 Crs during the previous year and also have filed 79 patterns in its name as pointed by the Ld. AR and apparent from the PB-II, page No.304 and 311. Extraction from Page 304 of PB-II "Our research and development efforts focus on the twin goals of improving productivity and quality of our services, alongside working towards technology driven innovation and differentiation that will deliver greater value to our clients. At Infosys Labs, Service innovation is being achieved through enhanced automation, optimization, prevention and effective collaboration among described teams. Infosys Labs has established a set of service innovation groups focused on enhancing quality and productivity of six dominant Infosys services-Business Process Outsourcing; Infrastructure Management Services; Independent Validation Services; Application Development and Maintenance including Large Deals; Consulting and Systems Integration; and Modernization. These groups work on service platforms with a focus on automation, optimization, consolidation, and on enhancing the effectiveness of contextual collaboration for distributed teams. Under its Client Innovation umbrella, Infosys Labs has established six Centres of Excellence (CoE), namely Modernization, Advanced Analytics, Security and Dependability, Advanced Mobility, Experience, and Innovation Co-Creation. The CoEs work towards establishing technology- based client innovation and differentiation through the establishment of Client Innovation Centres, publishing focused technology points of view, implementing proofs of concepts driven by our focus on client value, and conducting client workshops. Additionally, we have set up innovation centres with a number of our clients, university partners, and industry research consortia to drive co-creation. Infosys Labs focuses on developing significant new intellectual property to enhance the productivity and quality of our services while enabling differentiation in client offerings. During fiscal year 2014, Inlosys Labs filed 79 unique patent applications in the United States Patent and Trademark Office (USPTO), the Indian Patent Office and other juri ictions. On a standalone basis, our research and development expenses for fiscal years 2014, 2013 and 2012 were Rs. 873 crore, Rs. 907 crore and Rs. 655 crore, respectively." Extraction from Page 311 of PB-II "Research and development expenditure The R&D centers of the Company (Finacle and Infosys Labs) located at Bangalore, Bhubaneswar, Chandigarh, Chennai, Pune, Hyderabad, Mysore and Thiruvananthapuram have been accorded approval for weighted deduction by the Department of Scientific and Industrial Research (DSIR) effective November 23, 2011. The eligible R&D revenue and capital expenditure on a standalone basis are Rs 261 crore and Nil respectively for the year ended March 31, 2014 and Rs. 247 crore and Rs. 3 crore respectively for the year ended March 31, 2013. On a standalone basis, the total R&D expenditure, including eligible R&D expenditure discussed above for fiscal years 2014 and 2013 is as follows:- In crore 2014 2013 Revenue expenditure 873 907 Capital Expenditure 6 873 913 Total R&D expenditure / total revenue (%) 2.0% 2.5% (e) It is also apparent from page No.326 of PB-II that the company has incurred huge selling and marketing expenses of Rs. 2,390 Crs. Extraction from Page 326 of PB-II III Results of operations The function-wise classification of the Standalone Statement of Profit and Loss is as follows:- Year ended March 31 2014 % 2013 % Income from software services and products 44,341 100.0 36.765 100.0 Software development expenses 26,738 60.3 21,662 58.9 17,603 39.7

1 Gross profit Selling and marketing expenses 2,390 5.4 1,870

1 General and administration expenses 2,686 6.0 2,218 6.0 5,076 11.4 4,088

1 Operating profit before depreciation 12,527 28.3 11,015 30.0 While as in the case of the assessee company no such expenses have been incurred as it is catering only to its parent company.

Considering the above-mentioned factors, we are of the considered view that M/s. Infosys Limited is not a comparable company with respect to the assessee company for TP Adjustments. "We further note that the size of the company as well as having brand value and leader in the market has been considered by the Hon'ble Delhi High Court in the case Accordingly, following the decision of the co-ordinate Bench as well as the decision of Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd (supra), we direct the TPO to exclude this company from the set of comparables.

Persistent Systems Ltd., The learned AR of the assessee has submitted that as per the segmental information in the annual report of the company, it is into Telecom and Wireless. Life science and Healthcare and infrastructure and Systems. Further, it is engaged in rendering "software product development” services to its customers as against the contract software development services provided by the Assessee. No segmental information is available for this company. It has diversified operations, which inter alia includes Intellectual Property ('IP') led business. This company is focusing on product development activities and product vertical contribute significant amount of revenue.

On the other hand, the Ld. DR has submitted that as per the annual report of this company, it is specializing in software product services and technology. Though there is revenue from sale of software services however, predominately this company earns revenue from foreign currency from sale of software and there is no reference to sale of products. Thus, this company is mainly engaged in providing software services. The R&D expenditure is very meagre of 0.33% of the operating revenue. Similarly, intangible asset is only 1.36% of the operating revenue therefore, these are not having any significant impact on the operating profits of the company. DRP has followed the decision of the Bangalore Benches of the Tribunal in the case of M/s. Advice America Software vs. Income Tax Officer in ITA No. 2531/Bang/2017, dated 23.05.2018. 20. We have considered the rival submissions as well as relevant material on record. The DRP has accepted this fact that this company is having intangible assets as well as has incurred expenditure towards R&D though the same are not considered in significant. Further, this company is also having revenue from I.P. but the DRP noted that it does not pertain to Indian company. Once, this company is specialized in software products Services and Technology innovation and offers product life style services then these activities cannot be held to be functionally comparable with the assessee. The Coordinate Bench of this Tribunal in the case of M/s Kony IT Services assessee at page 22 to 24 as under:- “(v) M/s Persistent Systems Ltd:- (a) It is evident from Page No. 533 of PB-II that the company is mainly engaged in three areas such as products (IP Business), platforms (Solutions Integration) and services (Product Engineering) and is also selling its branded products. Extraction from Page 533 of PB-II "Business overview Your company specializes in building computer software products. Your company's business is organized with a focus on the following three areas: Products (IP Business), Platforms (Solutions Integration) AND Services (Product Engineering). Your company has decided to brand the product business separately from the Persistent brand and has named it 'Accelerite' (www.accelerite.com). Accelerite will be headquartered in the Silicon Vally and will help your Company provide clarity - the Persistent brand is for product development and the Accelerite brand is for products. Your company has organized the development and engineering teams around three strategies. Account-Led, Platform-Led and Product-Led. Further, Account-Led teams are organized as Named Accounts and Growth Accounts. Driven by growth in the platform based solutions and IP led business, the consolidated revenue of your Company recorded an increase of 15.2% in the US Dollar terms and 28.9% in the Rupee term during the year under review. The consolidated EBIDTA increased by 28.4% and the net profit after tax went up by 32.9% during the same period." (b) It is also evident from page no.701 of PB-II that the company is also engaged in R & D Activities and has incurred Revenue and Capital expenditure towards the same for Rs. 3.96 Crs. Extraction from Page 701 of PB-II "

Research and development expenditure. The particulars of expenditure incurred on in-house research and development centre approved by the Department of Scientific and Industrial Research (DSIR) are as follows:- For the year ended March 31, 2014 March 31, 2013 Capital 2.43 Capital Revenue For the year ended March 31, 2014 March 31, 2013 2.43 37.18 39.61 27.87

87 (c) Though the company's revenue flows from the three streams viz., products (IP Business), platforms (Solutions Integration) and services (Product Engineering), the main segments disclosed in the Annual Report are Telecom & Wireless, Life- sciences & Health care, and Infrastructure & systems. Thus, the segmental details in the annual report is absent. Extraction from Page 675 of PB-II "(m) Segment reporting (i) Identification of Segment The Company's operations predominantly relate to providing software products, services and technology innovation covering full life cycle of product to its customers. (ii) Allocation of income and direct expenses Income and direct expenses allocable to segments are classified based on items that we individually identifiable to that segment such as salaries and project related travel expenses. The remainder is considered as un-allocable expense and is charged against the total income. (i) Un allocated item Un allocated items include general corporate income and expense items which are not allocated to any business segment. Segregation of assets, liabilities, depreciation and other non-cash expenses into various reportable segments have not been presented except for trade receivables as these items are used interchangeably between segments and the company is of the view that it is not practical to reasonable allocate these items to individual segments and an adhoc allocation will not be meaningful.

From the above, it is evident that M/s. Persistent Systems Ltd is functionally dissimilar to the assessee company, it also has intangibles unlike the assessee company and further segmental data are not available. Hence, M/s. Persistent Systems Ltd cannot be treated as a comparable company with the assessee company for the purpose of TP adjustments.” 21. 30 ITA No. 233/H/2018 A.Y. 2014-15 Similarly, in the case of Infor (India) P. Ltd. vs. DCIT (supra), the Tribunal has excluded this company from the comparables of Software Development Service Provider in Para 7.7 as under:- "7. 7. As regards Tata Elxsi Ltd, Thirdware Solutions Ltd and Persistent Systems Ltd are concerned, we find that their comparability to the assessee has been considered in the assessee's own case for the A.Y 2007-08 and it is submitted that there is no change of activities of either the assessee or the comparables during the relevant A.Y before us i.e. A.Y 2014-15.” In view of the decision of the coordinate Bench of this Tribunal in the case M/s Kony IT Services Private Limited, we direct the TPO to exclude this company from the set of comparables.

Infobeans Technologies Ltd. The learned AR of the assessee has submitted that as per the Financials of the company it has revenue from sale of software products. The company has earnings in foreign exchange by export of goods calculated on F.O.B. basis. Further, the company also has MODVAT and sales tax deposits. Infobeans in engaged in Custom Application Development (CAD), content Management Systems (CMS), Enterprises Mobility (EM) and Big Data Analytics (BDA) which is high end service and distinct from routine software development services. These services also fall within the definition of knowledge process outsourcing (KPO) services as published in the Safe Harbour by CBDT. He has relied upon the decisions as under: (i) M/s Kony IT Services Private Limited. (ii) M/s. Alcatel Lucent India Ltd.

1 On the other hand, the learned DR has submitted that as per the annual report of this company, the entire Revenue drived by this company is from Software Services.

We considered the rival submissions as well as the relevant material on record. The co-ordinate Bench of this Tribunal in the case of M/s Kony IT Services Private Limited (supra) has considered the functional comparability of this company at page 15 and 16 as under: " (iii) M/s. Infobeans Technologies Limited: - (a) From the Annual Report Page No.276 of the PB-II it is apparent that the assessee has also been engaged in sale of goods along with rendering of services because the turnover is reported on export of goods / services calculated on FOB basis. (b) The company also has MODVAT deposits and sales tax deposit. (c) Therefore, the company is functionally dissimilar to the assessee company. (d) For reference the relevant portion of the Annual Report enclosed in paper book-II, page no.276 is extracted herein below:- Note-27 329,659883 216,854,891 EARNINGS IN FOREIGN EXCHANGE a. Export of goods / services calculated on F.O.B. basis Total 329,659883 216,854,891 LONG TERM LOANS & ADVANCES Security Deposit- Secured considered 9,400 9,400 Good Telephone Deposit 9,153 3,500 Other Deposit 10,000 10,000 Custom Deposit 140,850 73,150 Deposit with MPPKVVCL 10,000 Sales Tax Deposit (Kotak FDR) 25,000 25,000 Deposit (M-VAT) 10,121,460 M.P.S.E.D.C. Ltd Total 10,325,863 121,050 The Tribunal has noted the fact that this company has MODEVAT and Sales Tax deposits. Therefore, this company is engaged in the sale of goods alongwith rendering of services. Accordingly, following the earlier order of this Tribunal, we direct the TPO to exclude this company from the set of comparables while computing the arm's length price.

Thirdware Solution Limited The Ld. AR has submitted that the company earns revenue from development and sale of software products. Further it is also involved in earning revenue from subscription contracts and sale of user licenses for software applications. From the annual report of the company in notes to accounts it can be seen that 100% revenue is derived from sale of products and revenue from sale of service is nil. The company has reported “purchases of stock in trade” amounting to INR 40.21 crores as a cost in P&L A/c. Further, the company has acquired intangibles during the year. He has relied upon the following decisions as under:- i. M/s Infor (India) P. Ltd., I.T.A.T. Hyderabad, ITA Nos. 161 & 2307/Hyd/2018 ii. M/s ARM Embedded Technologies Pvt. Ltd., I.T.A.T. Bangalore, IT(TP)A No. 3374/Bang/2018.

1 On the other hand, the learned DR has submitted that as per the annual report of this company it is engaged in the business of Software Development and Consultancy Services. The company's revenue recognition disclosure shows the Revenue from services from Software Development and implementation. Though in the profit and loss account, the company has mentioned the Revenue from sale of products however in the foot note, it is clearly mentioned that the Revenue was on account of export of software services. The Revenue from sale of license is very meagre of 0.03% of total operating Revenue. He has relied upon the directions of the DRP.

We have considered the rival submissions as well as relevant material on record. The DRP has not disputed the fact that this company is generating Revenue from various activities which includes export of software services being sale of software and separately on account of software services sales subscription and training. This company has also shown Revenue from sale of licenses. The Bangalore Benches of the Tribunal in the case of M/s ARM Embedded Technologies Private Ltd. vs. Income Tax Officer, Bangalore (supra) has considered the functional comparability of this company at 15 & 16 as under:- “iv) Third ware Solutions Ltd. - The company is not functionally comparable as it has different diversified activities, and derives income from software development, income from subscription contract and from sale of user licenses. Further, no segmental details are available and has diverse services and also error in computation of margins. The company was excluded as comparable in the decision of co-ordinate Bench in the case of EMC Software and Services Pvt. Ltd. Vs. JCIT (supra) at para 6(iv) pages 594 & 595 of Paper Book as under : " 6 (iv) Thirdware Solutions Ltd. the company is functionally dissimilar and is engaged in rendering software development implementation and support services and engaged in the development of software products and earns revenue from sale of user licenses and purchase stock in trade during the year and has intangibles. Further the margins of the company fluctuate year on year basis due to different revenue recognition model which the company has adopted. The above comparable was excluded in assessee's own case on functional dissimilarity in the Assessment Years 2005-06 and 2007-08 and learned Authorised Representative also relied on Lime Labs (India) Pvt. Ltd. Vs. ITO 101 Taxman.com 201 (Delhi Trib.). We found the co-ordinate Bench of the No.3122/Bang/2018 dt.28.05.2019 for the Assessment Year 2014-15 has excluded the comparable as observed at paras 8 & 8.1 at page 4 as under :

We also notice that in A.Y 2008-09, the co-ordinate bench has excluded M/s. Thirdware Solutions Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s. Thirdware Solutions Ltd. is engaged in product development and earns revenue from sale of licenses and subscription. Further, the segmental details were not available.

1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in A.Y 2008-09, we direct exclusion of M/s. Thirdware Solutions Ltd." The comparable Thirdware Solutions Ltd. has to be excluded as it is predominant in activity and segmental details are not available. Accordingly we direct the TPO/A.O to exclude this comparable from the list of comparables for determining the ALP."

1 The Tribunal noted that this company is engaged in the development of software products and earns Revenue from sale of user license. There is purchase of stock during the year and also has intangibles. The coordinate Bench of this Tribunal in the case of M/s Kony I.T. Services Private Ltd., vs. DCIT, Hyderabad (supra) has also considered the functional comparability of this company at page 13 to 15 as under:- “(ii) Thirdware Solutions Limited: (a) As argued by the Ld. AR it is evident from the Annual Report (page No.235 of PB- II) that the company has derived revenue from sale of products amounting to Rs.

75 Crs. Further, there is no revenue from sale of services during the previous year. The assessee has also purchased stock amounting to Rs. 40.21 Crs. While as the assessee company is not engaged into any activity of producing physical goods. Page No.235 of PB-II (b) It is also apparent that the company is receiving revenue from various streams and none of them were pertaining to software development services. As apparent from page 237 of PB-II, the company has received Revenue from training and subscription amounting to Rs. 59.32 lakhs and sale of licenses Rs. 7.98 lakhs. The assessee company is only engaged in ITES. Extraction from page no.237 of PB-II: (c) It is also apparent from page no. 217 of PB-II that the company has not disclosed segmental details between software development services and products. The relevant portion is extracted hereinbelow for reference:- "34) Segment Reporting The Company's cooperation comprises of software development, implementation and support services. Primary segmental reporting is based on geographical areas viz., Domestic = India (Products & Services) and International = Rest of the world (Exports-software services). In primary segment, revenue and all expenses, which relates to a particular geographical segment, are reported. Fixed Assets, Current Assets, Loans and Advances, Current Liabilities and provisions are classified based on specific geographical segment's business. The company maintains separate books of account for the reported segments. Wherever the costs are directly identifiable with the reported segment, it has been booked to that segment. Wherever common expenses are incurred, those expenses have already been considered for allocation and relevant entries in the books of account have been passed. Hence there are no un-allocable expenses. Further, cash, investment (net of provision) and bank balances are reported at the enterprise level. Current assets and current liabilities relating to the specific business segments are identified and reported. Those, which are not identifiable, are reported as common assets / liabilities." (d) As disclosed in the annual account it is also apparent that the company has acquired intangibles during the year. Relevant portion of page 210 of PB-II is extracted hereinbelow for reference:- "d) Intangible Assets and Amortization Acquired intangible assets relating to software purchased for company's internal use are capitalized at the cost of acquisition and is amortized on the straight-line method over its estimated useful life of three years, as perceived by the management or useful life of asset as per contract whichever is earlier Depreciation on intangible assets is calculated on pro- rata basis with reference to date of addition over its useful life of three years, as perceived by the management or useful life of asset as per contract, whichever is earlier. The intangible assets acquired b the respective units of Thirdware Solution Limited are used in relation to the operation / services by the respective units only. Intangible assets internally developed by the company are capitalised at the total cost attributable towards the development of the product and is amortized on the straight-line method over its estimated useful life of three years, as perceived by the management." 10. 1. In the case of the assessee company neither such expenses are incurred, or any intangibles are acquired during the relevant period.

Since the assessee company is primarily engaged in custom-built mobile applications and software support and maintenance related services to M/s. Kony Group of Companies, we are of the considered view that M/s. Third-ware Solutions Limited cannot be considered as a comparable company because of the reasons stated hereinabove." Following the earlier orders of this Tribunal, we direct the TPO to exclude this company from the set of comparables.”

5 On perusal of the above, we found that, this Tribunal has very elaborately dealt with the issue and not find Tata Elexis Limited (Seg), E-Infochips Ltd, Larsen and Tourbo Infotech Limited, Infosys Ltd, Persistent Systems Limited, Infobeans Technologies Limited and Thirdware Solutions Limited as good comparables and directed the Ld. AO / TPO to exclude the same from the final set of comparables. Respectfully, following the decision of this Tribunal in the case of M/s. Wave Crest that, Tata Elexis Limited (Seg), E-Infochips Ltd, Larsen and , Tourbo Infotech Limited, Infosys Ltd, Persistent Systems Limited, Infobeans Technologies Limited and Thirdware Solutions Limited are not good comparables for the assessee. Accordingly, we direct the Ld. AO/TPO to exclude Tata Elexis Limited (Seg), E-Infochips Ltd, Larsen and Tourbo Infotech Limited, Infosys Ltd, Persistent Systems Limited, Infobeans Technologies Limited and Thirdware Solutions Limited from the set of comparables.

As far as, the exclusion of R S Software (India) Limited (“R S Software