IVY SOFTWARE DEVELOPMENT SERVICES PRIVATE LIMITED ,HYDERABAD vs. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-2(1), HYDERABAD

4 ITA.No.1801/Hyd./2019 interest on receivables on outstanding receivables by applying short term SBI deposit rate of 7.5% and proposed adjustment of Rs.38,33,317/-. Consequent to TP adjustment as suggested by the TPO the Assessing Officer has passed draft assessment order on 13.12.2018 u/sec.143(3) of the Act and made total addition of Rs.4,01,82,001/- on software development segment and also made addition towards TP adjustment on account of interest on receivables on outstanding receivables from AE at Rs.38,33,317/- and determined the total adjustments u/sec.92CA of the Act at Rs.4,40,15,318/-.

2.2. Aggrieved by the adjustment made by the learned Assessing Officer in the Draft Assessment Order, the appellant has filed it’s objections before the DRP-1, Bengaluru. The DRP vide it’s directions dated 06.09.2019 issued u/sec.144C(5) of the Act has allowed partial relief to the assessee-company by directing the learned Assessing Officer/TPO to exclude Thirdware Solution Limited from the list of comparables considered for the purpose of computing the ALP range and also included Cybage Software Private

5 ITA.No.1801/Hyd./2019 Limited; Inteq Software Private Limited and R S Software (India) Limited in the list of comparables for the purpose of computing ALP. The DRP also deleted adjustment on account of notional interest on outstanding receivables from AE. Thereafter, the learned Assessing Officer passed Final Assessment Order in pursuance to Directions of the DRP and determined the total income of the assessee-company at Rs.13,02,98,450/- by making addition of Rs.2,82,89,827/- towards TP adjustment on account of provision for software development services to AE vide order dated 16.10.2019 passed u/sec.143(3) r.w.s.144C(13) of the Income Tax Act, 1961.

4. The assessee has raised several grounds challenging the additions made by the Assessing Officer towards TP adjustment and software development services provided to it’s AE. Although the assessee has raised

6 ITA.No.1801/Hyd./2019 various grounds including grounds challenging rejection of TP documentation and use of additional filters, but the Learned Counsel for the Assessee, made a submission at Bar that the assessee-company wishes to confine it’s arguments only in respect of ground nos.3 and 4. Therefore, all other grounds raised by the assessee in the instant appeal has been treated as not pressed.

7 ITA.No.1801/Hyd./2019 TATA ELXSI LIMITED : 6. Learned Counsel for the Assessee Shri Nageswar Rao, Advocate on the issue of exclusion of comparables selected by the TPO for the purpose of arm’s length range submitted that the learned TPO has included Tata Elxsi Limited as comparable even though the said company is functionally different from assessee-company which is evident from the annual report of the said company where the company engaged in the business of providing product design and engineering services and derives 92% of it’s revenue from design and development of computer hardware and software. Further the company has incurred substantial expenditure for R and D purposes which is almost 2.75% of the total revenues of the company. The company had also carries significant intangible assets. Therefore, the Assessing Officer has erred in comparing Tata Elxsi Limited to the appellant-company which is providing services to it’s AE on cost plus mark-up basis. In this regard, he relied upon the decision of ITAT Hyderabad Bench, Hyderabad in assessee’s own case for the 8 ITA.No.1801/Hyd./2019 assessment year 2010-2011 in ITA.No.222/Hyd./2015 and ITA.No.334/Hyd./2015 order dated 29.11.2018 wherein the Tribunal has directed the Assessing Officer/TPO to exclude Tata Elxsi Limited.

9 ITA.No.1801/Hyd./2019 8. We have heard both sides and considered the relevant arguments of the Counsel for the Assessee for exclusion of Tata Elxsi Limited from the list of comparables in light of various evidences including the relevant annual reports of the company. We find that the appellant is a captive service provider to it’s AE on cost plus mark-up basis, whereas, Tata Elxsi Limited is engaged in providing product design and engineering services to different segments of business. The company generates 92.04% revenue from design and development of computer software and hardware. Further the company had also incurred substantial amount for in-house R and D project which is supported by technology partnerships, subscriptions and active participation in the standard and technology forums, trade shows and even go by the amount of expenditure incurred for R and D which is almost 2.75% of the total revenues of the company, whereas the assessee-company is a simple service provider to it’s AE without any expenditure for R and D projects. We further note that Tata Elxsi Limited owns significant intangible assets which contributes to its 10 ITA.No.1801/Hyd./2019 revenue. From the details filed by the assessee-company, we find that the assessee-company is a simple captive service provider to it’s AE, whereas, Tata Elxsi Limited is a company which provides a software development services to multiple segments and to different verticals of industry. Therefore, the said company i.e., Tata Elxsi Limited cannot be comparable to assessee-company. Further the ITAT Hyderabad Bench in appellants own case for the assessment year 2010-2011 in ITA.No.222/Hyd./2015 and ITA.No.334/Hyd./2015 order dated 29.11.2018 has directed the Assessing Officer/TPO to exclude Tata Elxsi Limited from the list of comparables on functional dissimilarities. We thus, direct the learned Assessing Officer/TPO to exclude Tata Elxsi Limited from the list of comparables.

PERSISTENT SYSTEMS LIMITED :

13 ITA.No.1801/Hyd./2019 11. We have heard both the parties. perused the material on record and the orders of the authorities below. We have also carefully considered relevant annual reports of Persistent Systems Limited with that of the appellant- company and we find that, the assessee-company is a captive service provider to it’s AE on cost plus mark-up basis in respect of one vertical of software development i.e., gaming solutions, whereas, the Persistent Systems Limited is engaged in providing IP and product business and also development of software products services and technology innovation. Further there is no segmental details in financials and annual report to compare this software development services segment to the appellant-company. Further the company has spent significant amount towards R and D and also acquired significant rights in the nature of intangible assets. From the details submitted by the assessee-company, we find that Persistent Systems Limited is engaged in diversified activities, whereas, the assessee company engaged in providing software development services to it’s AE on cost plus mark-up basis as a captive

14 ITA.No.1801/Hyd./2019 service provider and, therefore, in our considered view, Persistent Systems Limited cannot be compared with the appellant-company. At this stage we take support from the decision of ITAT Hyderabad Bench in assessee’s own case for the assessment year 2010-2011 in ITA.No.222/Hyd./ 2015 and ITA.No.334/Hyd./2015 order dated 29.11.2018 wherein the Tribunal has directed the Assessing Officer/TPO to exclude Persistent Systems Limited from the list of comparables on functional dissimilarities. Therefore, we direct the learned Assessing Officer/TPO to exclude Persistent Systems Limited from the list of comparables.

LARSEN & TOUBRO INFOTECH LIMITED :

15 ITA.No.1801/Hyd./2019 and amalgamation for the year under consideration, which significantly affect the operating margins. The company has made substantial investments in technology absorption. Therefore, the above company i.e., L & T Infotech Limited cannot be compared with the appellant-company which is a simple service provider to it’s AE on cost plus mark-up. In support of this contention he relied upon decision of ITAT Hyderabad Bench in assessee’s own case for the assessment year 2010-2011 in ITA.No.222/Hyd./2015 and ITA.No.334/ Hyd./2015 order dated 29.11.2018 wherein the Tribunal has directed the Assessing Officer/TPO to exclude Larsen & Toubro Infotech Limited from the list of comparables on functional dissimilarities. The assessee-company has also relied upon the decision of ITAT Bangalore Bench, in the case of Yahoo Software India Private Limited ITA.No.2365/ Bang./2019 dated 28.02.2020 for the assessment year 2015-2016 wherein the Bangalore Bench has directed to exclude Larsen & Toubro Infotech Limited on the ground that it had no segmental details and had substantial onsite revenue activity and that the company had incurred

16 ITA.No.1801/Hyd./2019 expenditure under the head cost of bought out items for resale which is a significant part of operating expenditure.

17 ITA.No.1801/Hyd./2019 14. 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.

18 ITA.No.1801/Hyd./2019 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

19 ITA.No.1801/Hyd./2019 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 :

21 ITA.No.1801/Hyd./2019 customised service to it’s offshore clients and own software licenses. He accordingly pleaded that Infobeans Technologies Limited be excluded from the list of comparables on functional dissimilarities.

22 ITA.No.1801/Hyd./2019 Technologies Limited is part of TP documentation of the appellant-company and the appellant-company has selected the above company as comparable with that of the functions performed by the appellant-company. No doubt, the appellant seeks to exclude Infobean Technologies Limited from the list of comparables on functional dissimilarity, but, on perusal of functions performed by the appellant- company, when compared to Infobean Technologies Limited, we find that largely the functions performed by both the companies are similar and the dissimilarities are miniscule 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

23 ITA.No.1801/Hyd./2019 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 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.

INFOSYS LIMITED :

26 ITA.No.1801/Hyd./2019 20. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. On perusal of annual reports of Infosys Limited, we find that the company provides business consulting, technology, engineering and outsourcing services which includes software products and platforms which are not limited only to routine software development. Further, the company also into product development which is evident from the annual report where it generates revenue from sale of ‘Finacle’ and “EdgeVerve’. Further, Infosys Limited is a giant company carries huge brand value which is evident from the report of brand financials where the total value of brand of Infosys Limited was at USD$ 3414 million. We further note that the company incurred significant amount of expenditure on R and D activities which is more than the 1000% of the turnover of the appellant-company. From the nature of services rendered by Infosys Limited and it’s scale of operations, in our considered view, it cannot be compared with appellant-company which is a capitive service provider to it’s AE on cost plus mark-up. It is 27 ITA.No.1801/Hyd./2019 relevant to refer to the decision of it Hyderabad bench in appellants own case for the assessment year 2010-2011 in ITA.No.222/Hyd./2015 and ITA.No.334/ Hyd./2015 order dated 29.11.2018 wherein the Tribunal has directed the Assessing Officer/TPO to exclude Infosys Limited from the list of comparables on functional dissimilarities. Therefore, we direct the learned Assessing Officer/TPO to exclude Infosys Limited from the list of comparables.

MINDTREE LIMITED :

28 ITA.No.1801/Hyd./2019 application development and maintenance, business process management, business technology consulting, cloud, digital business, independent testing, infrastructure management services, mobility, product engineering and SAP services. He submitted that Mindtree Limited has incurred INR 212 Million on R & D activity, sold 3,500 licenses of Gladius Software, sold 8000 licences of secure mind software and has filed 4 patents in India and US in the areas of Video Analytics. He submitted that this company has been named as overall leader zone by Zinnov, a leading globalization and market expansion advisory firm, in it’s global R & D service provider ratings 2014. Further, Mindtree Limited has significant intangible assets and it’s onsite activities are at 46% and onsite revenue of the company grew by 27.8% in the current year as compared to growth of 8.8% in offshore revenue. He further submitted that in response to notice u/sec.133(6) of the Act, Mindtree Limited has provided information that it has two business units i.e., (1) Information Technology services and (2) Product Engineering Services. He accordingly, submitted

29 ITA.No.1801/Hyd./2019 that Mindtree Limited is a giant company in the area of development of software, whereas, the appellant-company is a simple captive service provider to it’s AE on cost plus mark-up basis and that Mindtree Limited cannot be compared with that of the functions of the appellant- company. He accordingly, pleaded that Mindtree Limited be excluded from the list of comparables on functional dissimilarities.

30 ITA.No.1801/Hyd./2019 Limited is a giant company and it cannot be compared with appellant-company. He accordingly submitted that the order of the TPO/DRP should be upheld.

31 ITA.No.1801/Hyd./2019 which is more than the turnover of the appellant-company. From the nature of services rendered by Mindtree Limited and it’s scale of operations, in our considered view, it cannot be compared with appellant-company which is a captive service provider to it’s AE on cost plus mark-up. It is relevant to refer to the decision of it Hyderabad Bench in the case of Infor (India) Private Limited ITA.No.1689/Hyd/2019 dated 19.10.2020 for the assessment year 2015-2016 wherein the Coordinate Bench of Hyderabad Tribunal has directed to exclude Mindtree on the ground that it is a giant company in the area of development of software. Similar decision has been taken by the ITAT, Bangalore Bench in the case of Yahoo Software India Private Limited ITA.No.2365/Bang./2019 dated 28.02.2020 for the assessment year 2015-2016 wherein the Bangalore Tribunal directed to exclude Mindtree on the ground that 46% of revenue is from onsite activity which is over and above the threshold limit of 25% of total revenue. Considering the totality of the facts and circumstances of the case, we direct

32 ITA.No.1801/Hyd./2019 the Assessing Officer/DRP to exclude Mindtree Limited from the list of comparables on functional dissimilarities.

CYBAGE SOFTWARE PRIVATE LIMITED :

34 ITA.No.1801/Hyd./2019 submitted that merely for the reason that a particular company is providing software development services to a particular industry, it cannot be said that such company is not comparable to assessee-company. The DRP after considering all the relevant facts has rightly rejected the contention of the assessee-company for exclusion of Cybage Software Private Limited and, therefore, the arguments of the assessee-company should be rejected.

37 ITA.No.1801/Hyd./2019 27. Referring to ground no.4 of appellant-company, the Learned Counsel for the Assessee submitted that assessee seeks to include Akshay Software Technologies Limited, Maveric Systems Limited and Harbinger Systems Pvt. Ltd., on the ground of functional similarity. However, the learned TPO/DRP has rejected the same. Therefore, the Learned Counsel for the Assessee submitted that these three companies needs to be included in the list of comparables.

AKSHAY SOFTWARE TECHNOLOGIES LIMITED :

38 ITA.No.1801/Hyd./2019 submitted that Akshay Software Technologies fails onsite service filter which is evident from the observation of the DRP. Further, the company is engaged in providing ERP solutions which is multi-layer software that indicates different functions within an organisation. Therefore, the above company cannot be compared with the appellant- company which is providing simple software development services to it’s AE on cost plus mark-up basis.

39 ITA.No.1801/Hyd./2019 an organisation. ERP implementation requires expertise knowledge with functional domain and software domain. Therefore, ERP implementation and support involves personnel from professional domain and software domain and, therefore, when a company involved in providing ERP solutions, it cannot be compared with a company which is providing software services to it’s AE as captive service provider. We further note that the learned DRP observed that there is no segmental information available for comparison of software development services. Therefore, we are of the considered view that Akshay Software Technologies is not comparable to appellant-company and thus, we reject the arguments of the appellant-company.

MAVERIC SYSTEMS LIMITED :

40 ITA.No.1801/Hyd./2019 DRP in assessee’s own case for the assessment year 2017- 2018 wherein the DRP has included Maveric Systems Limited on the ground that it is functionally comparable to the appellant-company as software testing forms part of software development services.

41 ITA.No.1801/Hyd./2019 is functionally similar to the appellant-company for earlier years or subsequent years, then such company cannot be rejected on the ground of functionality and also on any filter. Although the learned DRP has observed that R and D expenditure is above tolerance limit, but, in our considered view, once the company is functionally similar to appellant company, the same cannot be rejected on the basis of one filter i.e., R and D expenditure above tolerance limit. Therefore, we are of the considered view that the DRP/TPO erred in not including Maveric Systems Limited from the list of comparables and thus, we direct TPO/Assessing Officer to include Maveric Systems Limited in the list of comparables.

HARBINGER SYSTEMS PVT. LIMITED :

43 ITA.No.1801/Hyd./2019 in not including Harbinger Systems Pvt. Limited as comparable company with the appellant-company. We find that Harbinger Systems Pvt. Limited is engaged in software development services. Once a particular company is functionally similar to the appellant-company, then such company cannot be rejected on the ground of data not available in prowess database/search matrix. Although the learned DRP/TPO has not included Harbinger Systems Pvt. Limited on the ground of data not available in prowess database/search matrix, but, in our considered view, once the company is functionally similar to appellant company, the same cannot be rejected on the basis of prowess database/search matrix. Therefore, we are of the considered view that the DRP/TPO erred in not including Harbinger Systems Pvt. Limited from the list of comparables and thus, we direct Assessing Officer/DRP to include Harbinger Systems Pvt. Limited in the list of comparables.

44 ITA.No.1801/Hyd./2019 Order pronounced in the open Court on 06.03.2025.

Sd/- Sd/- [K. NARASIMHA CHARY] [MANJUNATHA G] JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 06th March, 2025 VBP Copy to IVY software Development Services Private Limited, 5th Floor, 1. Divyasree Omega, Block-B, Plot No.13/E, Survey No.13 [Part], Kondapur, Hyderabad – 500 081. Telangana. The ACIT, Circle-2(1), 5th Floor, Signature Towers, Sy.No.6(P) of 2. Kondapur, Sy.No.37(P) of Kothaguda, Hyderabad – 500 084. Telangana. The Disputes Resolution Panel-1, Kendriya Sadan, 3. 4th Floor, C-Wing, Bengaluru – 560 034. Karnataka State.