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M/S. NTT DATA GLOBAL SERVICES PRIVATE LIMITED,BANGALORE vs THE JOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE- 5, BANGALORE | BharatTax

M/S. NTT DATA GLOBAL SERVICES PRIVATE LIMITED,BANGALORE vs. THE JOINT COMMISSIONER OF INCOME TAX, SPECIAL RANGE- 5, BANGALORE

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ITA 2533/BANG/2019Status: DisposedITAT Bangalore23 February 2026AY 2015-1686 pages

AI SummaryPartly Allowed

Facts

The assessee challenged the Assessing Officer's final assessment orders which included transfer pricing adjustments and other additions for AY 2015-16. These adjustments pertained to software development services provided to associated enterprises (AEs) and other income.

Held

The Tribunal partly allowed the appeal, setting aside the addition of interest income on a loan for fresh adjudication and allowing credit for prepaid taxes. However, the appeal was dismissed regarding penalty proceedings as premature. The transfer pricing issues related to US AEs were withdrawn due to a Mutual Agreement Procedure resolution, leaving only issues concerning non-US AEs for adjudication.

Key Issues

Key issues include the selection of comparable companies in transfer pricing, adjustments for working capital and risk, taxability of interest income on loans to AEs, and credit for prepaid taxes.

Sections Cited

143(3), 144C(13), 92CA, 133(6), 271(1)(c)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “B” BENCH, BENGALURU

Per Rahul Chaudhary, Judicial Member:

The present appeal has been preferred by the Assessee challenging the Final Assessment Orders, dated 17/10/2019, passed by the Assessing Officer under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961[hereinafter referred to as `the Act'], as per the directions issued by Dispute Resolution Panel (2), Bengaluru [for short 'DRP'], on 09/09/2019 under Section 144C(5) of the Act.

The Assessee has raised following grounds of appeal : "Based on the facts and circumstances of the case and in law, NTT DATA Global Delivery Services Private Limited (hereinafter referred to as "NTT DATA GDS" or the "Company" or the "Appellant"), respectfully craves leave to prefer an appeal against the order passed by the Joint Commissioner of Income Tax, Special Range-5, (hereinafter referred to as "learned Assessing Officer" or the "learned AO"), dated 17 October 2019 for the Assessment Year (AY) 2015-16, under section 143(3) read with section 144C(13) of the Income-tax Act 1961 ('the Act') in pursuance of the directions issued by Dispute Resolution Panel (hereinafter referred to as the "Hon'ble DRP"), Bengaluru dated 09 September 2019 under section 144C(5) of the Act inter-alia on the following grounds which are without prejudice to each other. That on the facts and circumstances of the case and in law:

Impugned order of Ld. AO pursuant to directions of Hon'ble DRP, erred in assessing the total income at INR 3,093,153,514, as against returned income of INR 1,675,425,240; Transfer pricing grounds

Ld. AO/Transfer Pricing Officer (TPO) pursuant to the directions of the Hon'ble DRP, erred in making addition of INR 1,040,059,562 to total income of Appellant on pretext that price charged was lower than arm's length price determined for software development services rendered by the Appellant to its AEs and outstanding receivables thereon; 3 Ld. AO/TPO pursuant to the directions of the Hon'ble DRP erred, in law and facts, by not accepting economic analysis undertaken by Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 (the Rules'), and in conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length,

16.

The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act.” Grounds Nos. 1 to 13 raised by the Assessee are directed against the transfer pricing addition. During the relevant previous year the Assessee provided software development services and back office support services to NTT DATA Group Companies which were utilized by the latter for providing services to end customers. The services provided by the Assessee included (a) Application Development and Management Services, (b) Enterprise Application Services and (d) Network Infrastructure Services forming part of the Software Development (SWD) Segment. In addition, the Assessee also provided back office support services such as the claims processing, 2.1. 2.2. claims adjudication, project administration support, reconciliation services etc. which formed part of the Information Technology Enabled Services (ITeS) Segment. The Assessee provided SWD Services to Associated Enterprises (AEs) in United States of America [for short `US AEs'] and AEs in other countries (for short `Non-US AEs') for which the Assessee was compensated on cost plus mark-up basis. A Mutual Agreement Procedure (MAP) Resolution, dated 07/05/2025, was reached between the Indian Competent Authority [i.e. Foreign Tax & Tax Research Division-I, Central Board of Direct Taxes] and the US Competent Authority Internal Revenue Services (IRS), in respect of SWD Services provided by the Assessee to US AEs during the previous year relevant to the Assessment Year 2015-2016. The resolution was been accepted by the Assessee. A copy of the MAP Resolution was placed before the Tribunal and vide Order, dated 15/09/2025, Ground No. 1 to 13.3 raised in the present appeal to the extent the same related to International Transactions with US AEs covered by the aforesaid MAP Resolution were dismissed as withdrawn. As a result the issues raised in the present appeal requiring adjudication are limited to transactions with Non-US AE's and corresponding additions made in respect of provision of SWD, interest on delayed receivables and mark-up on reimbursement during the relevant previous year. As per the break-up furnished by the Assessee vide Letter dated 11/09/2025, the Assessee had entered International Transaction aggregating to with Non-US AEs in 17 different countries. As a result, subject matter of the challenge to transfer pricing adjustment mounted by the Assessee under Ground Nos. 1 to 13.3 raised in the present appeal is limited to the transfer pricing adjustment to the extent of the aforesaid International Transaction undertaken by the Assessee with Non-US AEs. The Assessee had, by way of a preliminary submission, contended that the MAP Resolution between Indian and US Competent Authorities for transactions with US-AE's for provision of SWD, interest on delayed receivables and mark-up on reimbursement be applied in respect of similar transactions undertaken by the Assessee with Non- US AE's. However, in our view, the aforesaid contention/submission advanced by the Assessee cannot be accepted in the facts and circumstances of the present case. It is admitted position that the Assessee had entered into International Transactions with Non-US AEs in 17 different juri ictions. In our view the material on record is not sufficient for us to conclude that the scope of services, and other terms of arrangement between the Assessee and each of the Non- US AEs was at par with the arrangement with US AEs of the Assessee. Further, MAP Resolution is reached by the Competent Authority of the treaty nations. An Assessee can either accept or reject the MAP resolution. In the case the Assessee accepts, the MAP resolution is binding only to that Assessee in respect of issues covered by the MAP Resolution. Such MAP Resolution reached in case of an assessee/nation under one tax treaty is not binding upon any other assessee/nation governed by a different tax treaty. Accordingly, in the facts and circumstances of the present case, the preliminary contention/submission of the Assessee cannot be accepted and therefore, we proceed to adjudicate ground raised in the present appeal.

3.2.

As per the TP documentation furnished by the Assessee, in relation to SWD Segment the Assessee-company was captive service provider remunerated by its AE on a cost-plus basis. The Assessee- company neither owned any intellectual property (IP) nor undertook any research and development (R&D) and bore limited operational risks. Accordingly, the Assessee-company had claimed its international transactions with is AEs in SWD Segment were at arm's length. The Assessee-company had earned an operating margin (OP/OC) of 14.52% in respect of SWD Segment. The Assessee had adopted TNMM as the most appropriate method with Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI) for benchmarking the SWD Segment. The arm's-length range determined by the Assessee-Company in its Transfer Pricing Study Report (TPSR) [after working capital adjustment], on the basis of 14 comparables selected by it, was 6.24% (35th percentile) to 20.31% (65th percentile), with a median of 14.52%. The TNMM analysis was undertaken by the Assessee in the following manner. (a) In order to identify companies which are comparable to the Assessee, search was conducted on Prowess (a database compiled and managed by The Centre for Monitoring Indian Economy), Capitaline Plus (a database compiled and managed by Capital Market Publishers) and ACE TP (a database compiled and managed by Fintech Private Limited) for obtaining publicly available financial information of companies in India engaged in similar business activity as the Assessee. (b) For the 14 companies identified as comparables for software development services, weighted average of operating profits earned on operating costs were computed using the financial data pertaining to FY 2012-13, FY 2013-14 and FY 2014-15 (wherever available) at the time of complying with the transfer pricing documentation requirements. (c) A working capital adjustment ie, adjustment resulting from the different levels of working capital accounts receivable, inventory and accounts payable between the Assessee/tested party and the comparable companies was performed. (d) Since the operating margin of 14.52% earned by the Assessee from the provision of software development services was is within the specified range of 35th percentile to 65th percentile (i.e., 6.24 percent to 20.31 percent), the transaction was considered to be at arm's length in accordance with the Indian transfer pricing regulations. (e) No adjustment was made to the margins of the comparable companies to take into consideration the difference in the risks assumed by the comparable companies vis-à-vis the Assessee given that the Assessee operated in a cost-plus risk mitigated environment, such lower risk could justify the net margins of the Assessee, as against the net margins of the comparable companies

4.3.

We have given thoughtful consideration to the rival submission and have perused the material on record. Before dealing with the issue of inclusion/exclusion of the comparables in question, we deem it appropriate to deal with submissions made by both the sides common to the issue of selection of comparables for determining ALP under TNMM. Section 92C of the Act contains provisions relating to computation of ALP. Section 92C(1) of the Act lists the methods of computing the ALP and Section 92C(2) of the Act mandates that the most appropriate method be applied for determination of ALP. Rule 10B of the Income Tax Rules, 1962 [for short `IT Rules'] provides for the determination of ALP using the most appropriate method. A co-joint reading of the relevant provisions shows that the exercise of determination of ALP of an International Transaction is aimed to determine the price which would have been charged for a products or service in case such international transaction was not executed between AEs. In order to impute ALP to a controlled transaction between AEs, it is essential to ensure that the instances of uncontrolled entities/transactions selected as comparables are similar in material aspects. Rule 10B(2) of the IT Rules clearly indicates that the comparability of controlled transactions would be judged with reference to the factors as indicated therein. Rule 10B(2)(a) & (b) of IT Rules expressly provides that the comparability of an International Transaction with uncontrolled transaction shall be judged with reference to the following: (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.

4.9.

The above OECD Guidelines, though not binding, does provide a good guidance for the approach to be adopted while selection of comparables for determining ALP under TNMM. We note that the said approach aligns with by Rule 10B(2)(a)&(b) of the IT Rules providing for consideration of specific characteristic of service and functions performed (taking into account the assets employed and risk assumed), as well as Rule 10B(1)(e)(iii) of the IT Rules (set out herein below) which specifically provides that to the extent possible the economic impact of the functional dissimilarities having impact on the price of product/service should be eliminated. “Determination of arm's length price under section 92C. Rule 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction 22[or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: (a) - (d) xx XX (e) Transactional Net Margin Method, by which,- (i) the net profit margin realised by the enterprise from an international transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction... and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length.” (Emphasis Supplied)

analysis of the assessee company as per its TP Study Report (TPSR) and other documents, reveals that the Assessee is part of NTT (Nippon Telegraph & Telephone) Group. The Assessee provided SWD Services and ITeS to its AEs. The transfer pricing issues raised in the present appeal pertain to the W Segment. As per paragraph 2.4.2 of TPSR [at page 1327 of the paper-book] the operational profile of the Assessee is as under: "2.4.2 Operational Profile of NTT DATA GDS The operational profile of NTT DATA GDS are categorised under the following two services: Software development services Back-office support services 2.4.3 Software Development Services NTT DATA GOS provides software development solutions and IT consultancy services to NTT DATA Group Companies which in turn use these services to provide services to end customers. The services provided by NTT DATA GDS include Application management and development, e-Business and total IT Management. NTT DATA GDS has software development centers i.e. ADC's situated in Bangalore, Chennai, Gurgaon, Noida, Kolkata, Mumbai and Hyderabad. NTT DATA GDS has a RMG which co-ordinates the utilisation of resources across the development centres within India by allocating projects appropriately. NTT DATA GDS is remunerated on a cost plus basis for the above services. Under Software Development, NTT DATA GDS performs .....: i. Application Development and Management Services NTT DATA GDS provides application development and systems integration, customer data integration, legacy modernization among other services. NTT DATA GDS also provides application support (service desk, production support, and user support), application maintenance and application enhancement and upgrades ii. Enterprise Application Services NTT DATA GDS provides ERP implementation services such as SAP/Oracle. iii. Network Infrastructure Services iv. Mobile technology services NTT DATA GDS provides development, porting and testing V. services for mobile applications on the J2ME & BREW platforms. Content management services NTT DATA GDS provides services relating to Web Content Management Systems (WCMS) and development of WCMS product itself, which inter-alia includes defining and designing content workflows, publishing and processing, re-engineering and testing.”

7.3.

We find that the DRP upheld the inclusion of Tata Elxsi Limited as a comparable by the TPO holding as under: “8.1.1 Panel: Having considered the submissions, and on perusal of the annual report of this comparable, we note that the software development and services segment of this company is functionally comparable to the assessee and passes the filters of the TPO. We also note that the revenue streams from this segment is on account of rendition of services and not on account of product sales. The company's business is primarily classified into two segments: (i) software development and services and (ii) systems integration and support. The software development and services segment comprise three divisions (1) Embedded product design (ii) Industrial design (ii) visual computing lab. As per information in the annual report, in the software development and services segment, this company helps its customers to create new products & experience to drive their growth. It is also seen that as per information in the annual report, the company provides consulting, product development and testing services to its customers and help customers to develop brands and products. Thus, this company essentially renders software development, system design and testing services for broadcast, consumer electronics, telecom & transportation industries and does not sell products. The VCL division renders animation services for the media and entertainment industry. Thus, this company can be characterised as a software development & design service provider and functionally, comparable to the assessee's activities. Therefore, the plea that this company is functionally different is rejected. XX XX 7.4. 8.1.5 We note that the inventory details as per page No. 53 of the annual report, relates to traded goods of the "System integration and support segment which was not taken for comparable analysis. Further, this amount of inventory is not significant. Accordingly, this plea is rejected. It was also pleaded that the 'system integration and support segment is also essentially engaged in software development activity and hence that segment may also be considered for comparable analysis and margin computation. It is noted from the Annual report, that the 'system integration and support segment includes income from sale of traded goods and was rightly excluded by the TPO for comparable analysis. Hence this plea is rejected.” (Emphasis Supplied) On perusal of above we find that there is no dispute as to the fact that the Tata Elxsi Limited had two different segments. We note that the TPO had only considered the 'Software Development and Services' Segment as a comparable. However, it is admitted position that even the 'Software Development and Services' Segment on this company provides consulting, product development & testing services to its customers and helps customers to develop brands and products. We are not in agreement with the stand taken by the Revenue that Tata Elxsi Limited 'Software Development and Services' Segment is comparable to the W Segment of the Assessee since both can be said to be engaged in providing software development services. We are of the view that the functional dissimilarities cannot be ignored in view of our observations in Paragraph 5 to 5.3 above. Therefore, we accept the contention of the Assessee that in absence of further segmental data/bifurcation, Bangalore [IT(TP)A No.2582/Bang/2019, Assessment Year 2015- 2016, dated 30/12/2022] cited on behalf of the Assessee during the course of the hearing. In that case also the Tribunal had, in appeal pertaining to the Assessment Year 2015-2016 (as in the case before us), directed exclusion of Tata Elxsi Limited 'Software Development and Services' Segment on account of functionally dissimilarity when compared with a captives software development service provider.

8.3.

We find that the DRP upheld the inclusion of Mind Tree Limited as a comparable by the TPO holding as under: "8.2.1 Panel: It was contended that this company is not functionally comparable as it is engaged in providing services in diverse areas such as analytics, information management, application development, business process management, business technology consulting, infrastructure management services, product engineering and SAP services. It was also contended that this company is engaged in sale of products and also engaged in out sourcing IT services in banking and financial services and insurance sector, and also has R&D operations and patents and hence not functionally comparable. 8.2.2 Having considered the submissions, on perusal of the annual report of this company we note that this company is engaged in rendering of software development services in different verticals and not engaged in product sales as contended. As seen from the annual report of this company, it is engaged in international information technology consulting and implementation delivering business solutions through global software development. Its software development is structured into five verticals. As per Note 2.8.1 (refer page 108 of annual report), it is stated. "that the company derives its revenue primarily from software services". Again, as per Note 3.9 of the annual report (refer page 122 of annual report) 'the company is engaged in software development services. Further, as per Note 3.1.2 of the annual report, the company's earnings in foreign currency from software development services was Rs.34.45 million. As per the Note on Revenue Recognition, it has stated the principles adopted in recognizing revenue from software development services and there is no reference to product sales. 8.2.3 All this information clearly indicate that this company is engaged in software development. Besides, it is also relevant to note that the IP led revenue constituted meager 2% of the consolidated revenue of the company for the F.Y. 2014-15 & 1% for F.Y. 2013-14 (refer page 90 of the annual report). Considering these information in the annual report, we note that this company is predominantly (i.e., 98%) engaged in software development activity and is functionally comparable to the assessee. The different services activities (referred in page 90 of annual report), in the form of consulting, maintenance, testing, management support services etc. clearly fall within the gamut of software development services, though it pertains to different verticals. That is the reason, the company has recognized a single business segment i.e., software development services, and which are categorized into five verticals. Besides, page 39, Annexure 4 of the annual report, the nature of the various services activities is given as under: SI. No. Name and Description of main products/services NIC Code of the Product/ Service % total turnover of the company

8.5.

We note that it is admitted position that this company is structured into five industry verticals – (i) Retail, CPG and Manufacturing [RCM], (ii) Banking, Financial Services and Insurance [BFSI], (iii) Hitech & Media Services [HTMS], (iv) Travel and Hospitality [TH] and (v) Others. The stand taken by the Revenue is that the five different verticals in which it operates form part of single segment (namely software development segment), and therefore, Mind Tree limited is engaged in software development. Even if the aforesaid contention of the Revenue is accepted for the sake of arguments, this company cannot be selected as a comparable in absence of further segmental data. The DRP has reproduced Annexure 4 of the Annual Report which gives that break-up of turnover. About 53.7% of the total turnover relates to “Other information technology and computer service activities”. Admittedly, there is no break-up or bifurcation available. In our view, the TPO could not have included this company in the list of comparables without taking into consideration “Other information technology and computer service activities” which contributes 53.7% of the total turnover. More so when the Assessee itself had an ITeS Segment ALP of which has been determined separately. Further, we note that in appeal pertaining to Assessment Year 2015-2016 (as the case before us), in the matter of M/s. 1(1)(1), Bangalore [IT(TP)A No.2582/Bang/2019, dated 30/12/2022] the Bangalore Bench of the Tribunal had directed exclusion of Mind Tree Limited on account of functional dissimilarity with a software service provider and for lack of segmental details holding as under: "H.3 We note that primarily the segmental details are not available in respect of the various services rendered by this comparable. Further the intangible asset has been valued at Rs.117 crs. thereby indicating the ownership of the software developed by the company. This also indicates the high brand value this company possess. In assessee's case being a captive service provider, there it does not own any intangibles. In our opinion this company deserved to be excluded."

9.3.

We find that the DRP upheld the inclusion of Persistent Systems Limited as a comparable by the TPO holding as under: “8.3.1 Panel: It was pleaded that this company is a product-based company and has revenue from software licenses; that it is also engaged in R&D activities with significant intangibles. It was pleaded that the company has diversified activities and it has no segmental information & hence cannot be considered as comparable. It was also pleaded that it has significant onsite expenses and RPT transactions. It was also argued that it has made certain acquisition and therefore, on account of such peculiar economic circumstances it has to be excluded as a comparable. 8.3.2 Having considered the submissions, and on perusal of the annual report, we note that the company's core activity was rendering product development services i.e. providing services to business enterprise to develop software products. As per the information at page 211 of the annual report, it has reported income from software services of Rs.12,353.53/- million and software licences of Rs.71.45/- million aggregating to Rs.12,424.98/- million. Thus, the income from software licences constitute a meagre 0.58% of its operating revenue. It is also noted that this company in response to the notice u//s 133(6) had given details of such licence income as under: Software product Category Revenue as per books of accounts eMee Internally developed 20,525,978 Radia Acquired for Distribution 34,21,402 activity GEMS Reselling activity 1,43,74,000 SAP Reselling activity 2,88,77,317 WCM connector Internally developed 10,46,640 (ECSC) eDocs DM Internally developed 8,76,282 connector (ESCS) AWS Reselling activity 7,90,500 Cloudsquad Acquired for Distribution 15,33,750 activity Grand Total 7,14,45,689 From the information in the above table it could be seen that only an amount of Rs.2.25 crore (i.e. 22.5 million) represent income on account of internally developed which constitute 0.18% of operating revenue, and all others licence revenue was from distribution or reselling activity. Besides, the company has also categorically clarified in its reply u/s 133(6) that it is engaged in software product development services only. The relevant extract of the reply is as under: "Persistent System Limited is predominantly engaged in the business of providing outsourced software product development services to customers across the globe from following industry verticals: Infrastructure and systems, Telecom and Wireless, Life science and Healthcare and Financial services. 8.3.3 The company reports segment information based on the above industry verticals. The nature of services provided that each of these segments differs only in terms of the industry and specific requirements of customers in each of these industries. The essential activity across all business segments can be considered to be software product development services". 8.3.4 Further, it is seen that the assessee based on certain information discussed in the consolidated annual report (which included discussion of financial results of Persistent Systems Ltd and its six subsidiaries associates) argued that this company is into product development and IP led revenue. We are of the view, it would be totally incorrect to consider the information pertaining to the entire group as such, when the comparability is to be seen with reference to the stand alone financials of Persistent Systems Ltd, which was considered for comparable analysis by the TPO. 8.3.5 In this regard it is pertinent to note as per the consolidated annual report the revenue from software licence was Rs.535.59 million for the entire group whereas, such revenue in the case of M/s Persistent Systems Ltd was only Rs.71.45 million (Ref page 168 and page 211 of the annual report). It is also seen that in the P&L account of the consolidated financial statement expenses were debited towards Royalty expenses of Rs.176.73 million (refer page 169) and such a debit is not to be noted in the P&L account of M/s. Persistent Systems Limited. 8.3.6 Further, as per information at page 88 of the annual report for FY 2012-13 it was stated in the notes to the consolidated results that the increase of intangible block of assets during the year (2012-13), of Rs.262.84 million, was mainly on account of acquisition of various IPs during the year and the same is shown in the intangible Asset Schedule of the consolidated financial statement at page 115 as under: Intangible assets of Group 2012-13)

23.

68 As at March 31, 2013 1,289.28 542.62 1,831.96 All these clearly show that the IP related and product revenue pertain to other group entities and does not pertain to M/s Persistent Systems Ltd, which is being compared. It is also relevant to note that this company has clarified in its reply given u/s 133(6), that M/s Persistent Systems Ltd is predominantly engaged in the business of rendering software development services; the revenue reported is primarily on account of rendering of software development services only. The relevant extract is as under: "In respect of the information you have requested under 3(a) and 3(c) in respect of software products and innovations, overseas subsidiary companies of Persistent Group have acquire certain Intellectual Property (IP) products and generating some revenue from licencing and support of these products. In case of PSL India, which is predominantly engaged in the business of rendering software development services, the revenue reported is primarily on account of rendering of software development services only" The above clarification also make it clear that this company is not into diversified activities. 8.3.7 Further, it is seen that the expenditure incurred towards R&D as per page 225 of the annual report was Rs.62.24 million, which constitute meagre 0.50% of operating revenue. Further, the capital expenditure towards R&D was only Rs.0.28 million, which clearly show that the R&D activities are routine. The value of intangible assets was only Rs.162.85 million constituting 1.31% of operating revenue. There is no reference to any intangible assets or patent owned or developed by the company, in the stand alone annual report. There is also no acquisition of intangibles during the year. Further as per note in of the annual report, software product developments costs are expensed as incurred unless the technical and commercial feasibility of the project enable to use or sell the software, they are not capitalized. Such a development is not reflected in the Asset schedule. Thus, it can be inferred that the R&D and intangible assets do not have impact on the revenue and profitability of the company. We also note that, the assessee has failed to establish that such differences, if any, on account of R&D, brand and IRPs have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an uncontrolled transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. The said company also clarified u/s 133(6) that its intangible assets are in the nature of software licences acquired for use in the operation of the company and are not in the nature of inbuilt software product generating revenue for the company. Hence, these pleas are rejected 8.3.8 Further, it is seen that this company was held to be engaged in software development and not a product company and hence functionally comparable to a software service provider company, by the Hon'ble ITAT Bangalore in the case of M/s. Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14). In view of the above, we uphold the selection of this comparable. We note that the approach of the TPO in treatment of related party transaction into two sets, are for revenue transactions and other for expense transaction is logical and correct. We also note that the RPT filter was adopted by the TPO was with the above conditions and has adopted consistently. Hence, we do not find any infirmity the approach. Hence, we reject the assessee's plea. We hold that onsite expenses do not adversely affect comparability and hence, such plea is rejected. On the plea of error in margin computation, we note that this is on account of liabilities and provisions written back which the TPO has rightly taken as non-operating. We hold these provisions as non- operating. Accordingly, we reject this plea. With reference to provision for doubtful debts and provision for warranty the TPO correctly considered them as non-operating. With reference to the claim the forex gain is reduced from unallocated cost, the same may be examined.” (Emphasis Supplied)

10.3.

We find that the DRP had upheld the inclusion of NTPL as a comparable by the TPO holding as under: “8.4.1 Panel: Having considered the submissions, and on perusal of the annual report, we note that this company is engaged in rendering software services and other related IT services. As per information at page 13 of the annual report, "The company derives its revenue primarily from rendering software service activities. Further at page 32 of the annual report, it is stated, 'the company's activities involve predominantly providing software related services, which is considered to be a single business segment, since these are subject to similar risks and returns". Thus, it is functionally comparable to the assessee which renders software development services und other allied services. Further, in response to the information gathered u/s 133(6), this company has clarified that it is engaged in software development and IT' consulting services and it is not engaged in product development. Thus, the contentions of the assessee that it is engaged in diverse activities and not functionally comparable is without merits. Besides, there is no information in the annual report to indicate that this company is engaged in product development or to indicate that it has revenue stream from product sales. The assessee also could not point to any such information in the annual report. We also note at page 6 of the annual report, the independent auditor has certified, 'the company does not have any purchase of inventories or sales of goods since it is a service company'. In view of these, we hold that this company is functionally comparable to the assessee and the pleas raised in this regard are rejected. 8.4.2 We note that the assessee has relied on certain information said to be available in the website of this company and argued that this company is engaged in product development and has diverse activities and hence not comparable to the assessee. At the outset, we are of the considered view that much credence cannot be given to the information said to be available on the website, as such information may be motivated towards advertisement and other promotional gains. Besides, it is impossible to correlate whether the information pertain to the year under scrutiny, or it relate to subsequent current period developments. Besides, as a Panel, we strictly go by the information stated in annual report for qualitative

13.3.

We find that the DRP upheld the inclusion of CSPL as a comparable by the TPO holding as under: “8.8.1 Panel: Having considered the submissions, and on perusal of the annual report, we note that as per information under Company's overview, it is stated that the company is engaged in the business of software development services. The Revenue Recognition Statement also discussed about the accounting principle adopted in recognizing revenue from software development services and not as to product sales. There is no discussion about any other revenue stream. Further, under Note 22, it is mentioned that the company had earnings from export of software development services. Under Segment Reporting, it is mentioned that the company operates in a single business segment namely software development services. The independent Audit Report specifies that the company is engaged in software services. There is no reference in the annual report to indicate that this company is engaged in ITES services. The assessee also could not point to any such information in the annual report. In view of the categorical information in the annual report that the company is engaged in software development services, we hold that this company is software service provider and functionally comparable to the assessee. 8.8.2 It was also contended that the company is engaged in functionally dissimilar activities and ITES activities with reference to certain information said to be available in the company's website. We note that the information put in website cannot be given much credence, as they are mere forward-looking statements with the motive of advertisement and other promotion. Further, the information in website are dynamic and cannot be related to a particular period. The information in the website in the year 2018-19 or 2019-20 will show the functionality for the current period which may be very much different from that existing in 2014-15, the year of scrutiny. There is no way to verify whether the said information have relevance for the year under scrutiny. Therefore, as a principle, this Panel strictly goes by the information in the annual report which is based on audited financial statements, which categorical mentions that the company is engaged in software services. Therefore, we reject the pleas raised and uphold the selection of this company. 8.8.3 Further, we note that from the information available in public database and information collected u/s 133(6), shared with the assessee, it is seen that the company is only engaged in a single segment of routine software development and consultancy and does not own any software product. Hence, we find that this is a comparable. Accordingly, we reject the assessee's plea and uphold this company as a comparable. Also the company in response to notice 133(6) has stated that it is engaged in providing software services and does not own any software product.”

14.3.

We find that the DRP upheld the inclusion of Infosys Limited as a comparable by the TPO holding as under: “8.9.1 Panel: Having considered the submissions, and on perusal of the annual report of the company, we note that this company is engaged in providing IT technology services comprising Application developing and maintenance, Independent validation, testing services, Business service management, consulting and systems integration services. All these activities fall within the gamut of 'software services", though performed in five different business verticals, As per the P&L account, the company has revenue from 'software services of Rs.45,658/- crores and from software products of Rs.1642/- crores (refer page 61 of the annual report), and that the product revenue constitute meagre 3.6% of total operating revenue. Therefore, taking into consideration the various information available in the annual report, and the fact that the company is predominantly having revenue from software services, we are of the considered view that this company can be considered as functionally comparable to the assessee. Accordingly, the plea that the company is engaged in diversified activities is rejected. 8.9.2 It was pleaded that this company has a huge brand which has contributed to its growth in revenue and hence not comparable. A perusal of the annual report show that the growth in revenue was on account of various business initiatives taken to accelerate growth such as internal re-organization, implementing cost effectiveness through reducing cost of operation, improving utilization percentage of employee, restricting the organization for agility by creating smaller and nimbler sales regions, redesigning supply chain functions, reducing attrition rate, increasing the offshore mix, improving delivery expertise etc., As per information in page 14 of annual report, 97.8% of revenues was from repeat business. At page 67 of the annual report, it is discussed, "clients often cite our industry expertise, comprehensive end- to-end solutions, ability to scale, superior quality and process execution, global delivery model, experienced management team, talented professionals, track record and competitive pricing as reasons for awarding contracts. Thus, the growth in revenue is not on account of its brand or any exceptional event, and hence cannot be a reason for rejecting this company, which is otherwise found to be functionally comparable. 8.9.3 The perusal of the details in the annual report show that the company has incurred R & D expenditure to the tune of Rs.605 crores, which constitute meagre 1.3% of its total operating revenue, and which is much less than the generally acceptable tolerable limit of 3% of the total revenue. It is also noted that out of this, only Rs. 15 crore was capital in nature and the remaining Rs.590 crore represented revenue expenditure, which go to show that the R&D initiative are substantially routine for immediate business purposes for developing expertise and improved process execution. It was also pleaded that the company has significant intangibles. However, on perusal of the information at page 86 of the annual report, we note that the value of intangibleconsidering its turnover of Rs.47.300 crore and Asset portfolio of Rs. 7347 crore. We also note assets as on 31.03.2015 was Nil and as on 31.0.2014 was Rs. 13 crore, which is insignificant that, the assessee has failed to establish that such differences, if any, on account of R&D, brand and intangibles have material effect on the margin of the above company, in terms of clause (1) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, these pleas are rejected. 8.9.4 On the plea as to difference in the scale of operations and consequent abnormal profits, we note that turnover does not influence the margins in the service sector. This issue is elaborately discussed at para 7. 3. The fixed costs in the IT industry are insignificant when compared to the manufacturing industry. The major cost in the service sector are variable cost such as salary, travelling expenses, communication expenses, etc. In the absence of any significant fixed costs, the margins in the IT are not linked to the turnover of the company. This can be seen from the fact that many smaller companies also have high profits in this sector. On this issue, the Hon'ble ITAT Delhi in the case of Calibrated Healthcare Systems India Pvt. Ltd (ITA No. 5271/Del/2012), held that 'when a company is a functionally similar to that of the assessee company, the same cannot be excluded merely because its turnover was at a higher or lower level. Here, it is important to mention that Section 92C(1) of the Income Tax Act, 1961 provide for computation of Arm's Length Price by one of the methods prescribed therein. First proviso to Section 92C(2) clearly provides that when more than one price are determined by the most appropriate method, then the Arm's Length Price shall be taken to be Arithmetic Mean of such prices. It does not talk of excluding companies with high or low turnover or high or low profit rate. Further, the Delhi Tribunal in Nokia India Pvt Ltd (ITA No.242/D/2010) has held that a potentially comparable company cannot be excluded for the reason of high or low turnover or high or low profit margin. In reaching this conclusion, the Delhi bench also considered a special bench order passed in the case of Maersk Global Centre India Pvt Ltd. Vs ACIT (2014) 147 ITD 83 (BOM)(SB)'. Similarly, the Hon'ble Mumbai Tribunal in Capgemini, took note of the ITAT, Bangalore decision in Genisys (supra), and other Tribunal decisions to conclude (in Para 5.3.5 & 5.3.6) that there was no such correlation of profit margins with the turnover of the IT companies, which is primarily based on skilled manpower and related costs, and that the classification based on turnover made in Dun and Bradstreet study was not based on prelit margins and hence not relevant. Now, this view also find support from the decision of the Hon'ble Delhi High Court in the (ITA No.417/2014), wherein the Hon'ble High Court in paragraph 33 of the decision held that 'mere circumstances of a company otherwise conforming to the stipulations in Rule 1018(2) in all details, presen.ing a peculiar feature - such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The Hon'ble ITAT, Bangalore, in a recent IT(TP) appeal No.1188(Bang) of 2011, dated: 22.04.2016, [2016] 69 Taxman.com 336(Bangalore Trib.) has also held that turnover cannot be a criteria for selection of comparables. 8.9.5 In its latest judgement dated 12/04/2017, the Honourable Income Tax Appellate Tribunal Β' Bench, Bengaluru in IT(TP)A No.502/Bang/2015 (Assessment year: 2010-11) and Cross Objn. No. 139/Bang/2015 (In IT(TP)A No.502/Bang/2015) (Assessment year: 2010-11) in the case of M/s Scancafe Digital Solutions Pvt. Ltd. Vs. Income-tax Officer, Ward 6(1)(1), Bengaluru.... IT(TP)A No.450/Bang/2015 (Assessment year: 2010-11) held as under while dealing with the issue of Turnover Filter:

17.

Ground Nos. 2 and 3 challenge the direction of the DRP applying turnover filter of Rs 1 to Rs.200 crores Though there are decisions to the effect that the companies with the turnover filter of of Rs.1 Rs 200 crores should alone be considered as comparables, this proposition was diluted by the Mumbai bench of IT(TP)A Nox.502 & 450/Rang/2015 Page 22 of 26 the Tribunal in the case of Willis Processing Services (1) P.Ltd. vs. DCIT [TS-49-ITAT-2013(Mum)-TP) wherein it was held that the turnover band of Rs. 1 to Rs 200 crores is bereft of any rationality as the application of this rule does not enable comparison of a company with Rs.200 crores with another company having a turnover of Rs.201 crores. It was further observed by the Hon'ble Tribunal that the turnover was also not a criteria prescribed under rule 10B for selection of comparables. We are also of the considered opinion that the turnover cannot be relevant criteria in a service sector where fixed overheads are nominal and the cost of service is in direct proportion to the services rendered. Following this reasoning we hold that the above companies cannot be excluded from the list of comparables 8.9.6 On the plea regarding high profits, this issue is elaborately discussed at para 7.5 above. It is relevant to refer to the case of Trilogy E-Business Software India Private Limited Vs. DCIT (2013) 29 in ITA No.1108/Bang/2010 and YodlonInfotech Pvt. Ltd. Vx. ITO (2013) 31 taxmann.com 2.30 (ITAT. BNG). In the case of ITO vs. Next Lino India Pvt. Ltd. TS-722-ITAT-2012-Bang-TP the Hon'ble ITAT Bangalore upheld the company with profit margin of 40% holding that in ITES sector this would not constitute extraordinary or super profits. 8.9.7 In the light of rationale laid down in the above decisions, we reject the plea raised by the assessee to exclude this company based on the size and level of operations. In this regard it is relevant to note that the Hon'ble ITAT Bangalore in the case Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14) rejected the plea of the assessee to exclude a company comparable on the ground of size and level of operations. In view of the above, we uphold this company as comparable to the assessee." During the course of hearing Learned Authorized Representative for the Assessee had placed reliance upon following decision of the Bangalore Bench of the Tribunal passed in appeals pertaining to Assessment Year 2015-2016 wherein Infosys Limited was excluded from the list of comparables selected by the TPO in case of tested party being captive software service provider bearing limited risk: - Synamedia India Pvt. Ltd vs The Deputy Commissioner of Income Tax, Circle 6(1)(2), Bengaluru [IT(TP)A No.2595/Bang/2019, dated 21/10/2022] - LG Soft India Pvt. Ltd. Vs. Deputy Commissioner of Income Tax Circle 4(1)(1) [IT(TP)A No.2412/Bang/2019, dated 31/05/2022]

16.3.

We find that the DRP had upheld the inclusion of Larsen & Toubro Infotech Ltd. as a comparable by the TPO holding as under: “8.11.1 Panel: It was contended that this company provides wide range of services and also engaged in sale of products and in the absence of segmental information, this company is not comparable. It was contended that L&T Infotech is a brand across globe which has impacted the margins of the company. It was further stated that the acquisition of Information Systems Resources Centre Private Limited, will have an impact on the margins of this company. It was further argued that the company is engaged in trading of goods which is evident from page 1364 of the annual report for F.Y. 2014-15. It was also argued that because of investment in technology absorption and R&D, it should not be considered as comparable. 8.11.2 Having considered the submissions, we note, at the outset, that had selected this company as functionally comparable in its TP study giving the following reasons, "Larsen & Toubro Infotech Limited is an IT service company. The company is engaged in providing Application Maintenance and Development, Enterprise Resource Planning and specialized services like Data Warehousing and Business Intelligence, Testing Services and Infrastructure Management Services. The services offerings are focused mainly towards four verticals namely manufacturing, utilities, financial services and telecom. For the period ended March 31, 2015, March 31, 2014 and March 31, 2013 100 percent of the operating revenues respectively were derived from software development services". However, without giving reasons, it has raised a plea that it is functionally different, when the TPO has selected this company as comparable. Further, we note that this company has two business segments services cluster and industrials cluster operating in software development services. The information in the annual report clearly show that the entire revenue is from provision of software services. As per Note 2, regarding Accounting principle on Revenue Recognition, it is stated that revenue is recognized when services are rendered and related costs incurred; and there is no reference to sale of products. The financial statements do not mention about any product sale or inventory. As there is no revenue stream on account of product sales, we do not find any merit in the argument that the company is engaged in product sales. Accordingly, we hold it as functionally comparable being a software service provider. 8.11.3 It was also contended that the company is engaged in diversified activities with reference to certain information said to be available in the company's web site. At the outset, we note that the information put in website cannot be given much credence, as they are mere forward-looking statements with the motive of advertisement and other promotion. Further, the information in website are dynamic and cannot be related to a particular period. The information in the website in the year 2018-19 or 2019-20 will show the functionality for the current period which may be very much different from that existing in 2014-15, the year of scrutiny. There is no way to verify whether the said information have relevance for the year under scrutiny. Therefore, as a principle, this Panel strictly goes by the information in the annual report which is based on audited financial statements. Even otherwise, the information only refers to software services rendered by the company to various industries and as such this company is functionally comparable. The assessee has also not pointed out specifically as to any non- software service undertaken by this company. Therefore, we reject the pleas raised. 8.11.4 On the pleas as to presence of brand, we note that, there is no specific information in the financial statements to indicate that the brand has contributed to re mue growth of the company. On the other hand, the reference in the annual report mentions that the company's efforts to be cost-effective and agile in contributing value to clients have strengthened its brand. In other words, its operational efficiency has contributed to its revenue growth and brand name and not the other way. There is no information to indicate that the brand has impacted the revenue or profit of the company. The intangibles referred in the Asset Schedule represent the computer software, and business rights and as such does not refer to any IPR or licence owned by the said company as argued. Certain developments are under way which has not crystallized into an intangible to be a source of revenue. Thus, the assessee has failed to establish that such differences have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 108, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to masterially affect the profit arising from such transactions in the open market. Hence, these pleas are rejected. 8.11.5 With regard to the acquisition of MIS Information Systems Resources Centre Private Limited, we note that this company has become wholly owned subsidiary operating in the related business of the comparable company. The scheme of amalgamation is yet to be approved by the High Court. As such there is no information in the annual report to indicate that such acquisition has affected the revenue of profit of this company. The financial results of the subsidiary Information System Resource Centre are separately given at page S-1340 of the annual report. Besides, there is no material related party transaction with this subsidiary company, as could be seen from the information at page S-1339 of the annual report. The assessee has not demonstrated, how this acquisition will have positive impact on the profitability of the comparable, if there is no material transaction between them. The TPO has considered standalone financials of this comparable. Hence, we do not find any merit in the assessee's pleas and are rejected. 8.11.6 Further, it is seen that this company was upheld to be functionally comparable to a software service provider company, by the Hon'ble ITAT Bangalore in the case of M/s. Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14). In view of the above, we uphold the selection of this (TP.) Α. Νο 343/ Bang/2015 & CO No 103/Bang/2015 AY 2010- 11 and DCIT vs. Oracle Solutions Services (India) Pvt. Ltd-TS- 663-ITAT-2017(bang)-TP-T(TP)A No. 880/hang/2013 dated 09.08.2017, the ITAT decided the issue of L&T against the assessee, by holding it to be proper comparable.” (Emphasis Supplied)

3 On the pleas as to presence of brand, Ld. DRP noted that, there is no specific information in the financial statements to indicate that the brand has contributed to revenue growth of the company. On the other hand, the reference in the annual report mentions that the company's efforts to be cost-effective and agile in contributing value to clients have strengthened its brand. In other words, its operational efficiency has contributed to its revenue growth and brand name and not the other way. There is no information to indicate that the brand has impacted the revenue or profit of the company. The intangibles referred in the Asset Schedule represent the computer software, and business rights and as such does not refer to any IPR or license owned by the said company. Certain developments are under way which has not crystallized into an intangible to be a source of revenue. Thus, the assessee has failed to establish that such differences have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, these pleas of assessee were rejected by the Ld. DRP. 9.4 On the plea as to difference in the scale & size of operations and consequent abnormal profits, Ld. DRP observed that turnover does not influence the margins in the service sector and held that turnover cannot be a criteria for selection of comparables. Hence, these pleas of assessee were rejected by Ld. DRP. 9.5 Further, Ld. DRP observed that this company was upheld to be functionally comparable to as software service provider company, by the coordinate bench of Bangalore in the case of M/s. Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14). In view of the above, Ld. DRP upheld the selection of this comparable.

38.

As far as L&T Infotech Ltd. is concerned, the Id. counsel for the assessee brought to our notice the decision of ITAT Delhi Bench in the case of Saxo India Pvt. Ltd. v. ACIT, ITA No.6148/Del/2015 for AY 2011- 12, order dated 5.2.2016, wherein the Tribunal took note of the fact that this company was also trading in software and owned insignificant intangible assets. The company was excluded from the list of comparable companies with reference to SWD services provider such as the assessee. The Id. Counsel pointed out that though this decision was rendered with reference to AY 2011-12, the same reasoning would apply to AY 2015-16 also and in this regard, he drew our attention to page 696 of assessee's PB, which gives the details of the revenue generated by this company without any segmental break-up. Our attention was also drawn to page 682 of PB which shows that there is substantial onsite revenue activity as well as cost incurred on onsite software development. We notice from page 676 of assessee's PB that this company as part of its operating profit in Schedule O of profit & loss account contains expenditure for 'cost of bought out items for resale' and this is a significant part of the operating expenditure. When we see the revenue in Schedule M of the profit & loss account, there is no break-up of the revenue with regard to software services and software product. In our opinion, this distinction is enough to exclude this company from the list of comparable companies as held by the Hon'ble Delhi ITAT in the case of Saxo India Pvt. Ltd. (supra) which decision was also confirmed by the Hon'ble Delhi High Court. Similar view was taken in the case of Yahoo Software Development India Pvt. Ltd. cited (supra), wherein, L&T Infotech Ltd. has been excluded from the list of comparables. Respectfully IT(TP)A No.2412/Bang/2019 M/s. LG Soft India Pvt. Ltd., Bangalore Page 29 of 33 following the above order, we direct the AO/TPO to exclude L&T Infotech Ltd. from the list of comparables.”

17.2.

We find that the DRP had upheld the exclusion of AST as a comparable holding as under: “10.1.1 Panel: Having considered the submissions, and on perusal of the annual report we note that, as per information given at page 18 of the annual report, the company is engaged in providing professional services and procurement, implementation and support of ERP products and services in India and Dubai. It is seen from its P&L account, that it has reported revenue from operations of Rs.21,78,73,073/- which comprised revenue from Rs.21,67,50,038/- Commission income of Rs.5,91,033/- and sales of software licence of Rs.5,32,002/-. As per Note 26 at p25 of annual report the revenue from export of software service was Rs19,48,38,068/- and as per Note 25, the foreign branch expenditure was Rs. 18,03,89,196/- As per information at page 2 of the annual report revenue mainly represent income from professional services from Dubai. 10.1.2 In this regard, it is relevant to note that ERP is a multi-layered software that integrates all the different functions within an organization. The ERP implementation requires professionals who have expertise in:- 1) Functional domain (i.e. domain knowledge of the business, its operations & management). 2) Software domain (i.e. technology expertise in software development) 10.1.3 Thus, ERP implementation & support involves personnel from professional domain and technology or software domain. Therefore, such services cannot be strictly said to be software services as non- software personnel may play a dominant role in the implementation. The very fact that this company has described that it had rendered professional services in Dubai, indicate that it pertained to the non- software services; or it is also possible it may be a mix of software services and professional services. As segmental information is not available for the same, we consider it appropriate to hold that this company is not functionally comparable to the assessee. Accordingly, the exclusion of this company is upheld.”

5 In the case of Sarubhai Chemicals, the issue of whether interest income is to be calculated on accrual basis or on actual receipt basis had come. The Hon'ble Gujarat High Court had stated that interest income should be computed on accrual basis. The Hon'ble Supreme Court had affirmed the order. Assessee has not raised the issue of real income. Even if we apply this test, income has accrued to assessee. Assessee has been paid interest by KAMCO in FY 2013-14 as well as in FY 2015-16. Income is accruing to assessee at 8% (in some cases 12%) of loan given to KAMCO. It is a liability on KАМСО. KAMCO is paying it. Hence, income is real. In this context, the judgment of Hon'ble Supreme Court in the case of State Bank of Travancore Vs. Commissioner of Income Tax [1986] Taxman 337 (SC), dated January 8, 1986 becomes important. The Apex court made the following remark: “The question of how far the concept of real income entered into the question of taxability in the facts and circumstances of this case and how far and to what extent the concept of real income should intermingle with the accrual of income will have to be judged in the light of the provisions of the Act, the principles of accountancy recognised and followed the feasibility. The earlier circulars, being executive in character, could not alter the provisions of the Act. An acceptable formula of correlating the notion of real income in conjunction with the method of accounting for the purpose of computation of income for the purpose of taxation is difficult to evolve. Besides, any strait- jacket formula is bound to create problems in its application to every situation. It must depend on the facts and circumstances of each case when and how income accrues and what consequently follow from the accrual of income. Whether an accrual has taken place or not must, in appropriate cases, be judged on the principles of real income theory. After accrual, non charging of tax on the same because of certain conduct based on the ipse dixit of a particular assessee cannot be accepted. In determining the question whether it is hypothetical income or whether real income has materialised or not, various factors will have to be taken into account. It would be difficult and improper to extend the concept of real income to all cases depending upon the ipse dixit of the assessee which would then become a value judgment only. What has really accrued to the assessee has to be found out, and what has accrued must be considered from the point of view of real income, taking the probability or improbability of realisation in a realistic manner and dovetailing these factors together, but once the accrual takes place, on the conduct of the parties subsequent to the year of closing, an income which has accrued cannot be made no income."

25.6.

During the course of hearing, the Learned Authorized Representative for the Assessee had placed reliance upon the following extract of written submissions, dated 11/09/2025: “The Appellant humbly submits before Hon'ble Tribunal that the learned AO has erred in making an addition of INR 364,064,448/- towards notional interest income without appreciating the fact that such interest income had not been accrued in the books in accordance with Accounting Standard -9 on Revenue Recognition ('AS9) The Appellant wishes to submit that it had extended total loans amounting to INR 4,115,805,603 (net of repayment of INR 358,440,647) at rates varying from 8% to 12% per annum to NTT DATA Victorian Ticketing System Pty Ltd (formerly known as Keane Australia Micropayment Consortium Pty Ltd or KAMCO) (hereinafter referred to as "NTT DATA VTS'), wherein it had 34.64% equity stake. During the period of November 2010 to May 2012, there were several events which led to the deterioration of the business of NTT DATA VTS. In view thereof, in the financial statements of FY 2011-12 and FY 2012-13, the Appellant had impaired the entire equity investment and created a provision for the entire outstanding loan amount of INR 4,115,805,603 The financial statements pertaining to FY 2011-12 and FY 2012-13 stating the reason for impairment is enclosed as Annexure 4 and Annexure 5 for your reference Further, with effect from January 2012, given the uncertainties around collection of loan and ability of NTT DATA VTS to pay for interest on the loan, the Appellant had not accrued any interest on such loan. The Appellant wishes to submit that the said treatment is in accordance with AS 9. AS 9 is enclosed as Annexure 6 for reference. The relevant paragraph is reproduced below: "Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc, revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made Additionally, we wish to submit before the Hon'ble Tribunal that the books of accounts have been duly audited and the auditor has not qualified the accounts, thereby confirming that the preparation of accounts is correct free from any technical infirmities and also compliant with Accounting Standards. Furthermore, it may be noted that in the assessments of AY 2013-14 and AY 2014-15, the learned AO did not raise this concern. Additionally, the Appellant wishes to submit before your Hon'ble bench that it had received a portion of interest amounting to INR 322,064,488 in FY 2013-14 and INR 39,369,863 in FY 2015-16 which has been offered to tax in the respective years.”

25.10.

We note that the Assessing Officer has recorded that the Assessee had received interest income from KAMCO and had offered the same to tax during the Assessment Year 2014-2015 and 2016-2017. The Assessing Officer took the aforesaid into consideration while concluding that the perception of the Assessee about uncertainty of realisation of interest income receivable from KAMCO after it's accrual could not delay recognition of such income during the relevant previous year. The fact that interest income was offered to tax by the Assessee on receipt basis during the Assessment Year 2014-2015 and 2016-2017 weighed heavily with the DRP as a DRP observed that the Assessee was following a hybrid system of accounting. However, we note that the authorities below failed to take into consideration the fact that during the Financial Year 2011- 12 and 2012-13 the Assessee had impaired the entire equity investment in KAMCO and had created a provision for the entire outstanding loan amount of INR.4,115,805,603/-. It has also been contended by the Assessee that the corresponding Assessment Years 2013-2014 and 2014-2015 no concerns were raised by the Assessing Officer. A perusal of record shows that the aforesaid facts were not properly disclosed by the Assessee before the authorities below. Therefore, neither the Assessing Officer nor the DRP could appreciate the correct facts under which the Assessee had opted to recognize interest income from KAMCO on receipt basis. We note while making the addition the Assessing Officer had placed reliance upon the judgment of the Hon'ble Supreme Court in the case of State Bank of Travancore Vs. Commissioner of Income Tax [1986] Taxman 337 (SC). In that case the Hon'ble Supreme Court has observed that in determining the question whether it is hypothetical income or whether real income has materialised or not, various factors will have to be taken into account. What has really accrued to the assessee has to be found out, and what has accrued must be considered from the point of view of real income, taking the probability or improbability of realisation in a realistic manner and dovetailing these factors together, but once the accrual takes place, on the conduct of the parties subsequent to the year of closing, an income which has accrued cannot be made no income. However, we find the Assessment Order does not contain any reference or discussion on the terms of arrangement/agreement relating to accrual of interest income. We have already noted herein above that the fact that the Assessee had impaired entire amount of equity investment in KAMCO and had created a provision for entire outstanding loan from KAMCO during the Financial Year 2011-2012 and 2012- 2013 did not came up for consideration before the authorities below.