INTEVA PRODUCTS INDIA AUTOMOTIVE PRIVATE LIMITED,BANGALORE vs. DCIT, BANGALORE

Per Shri Vijay Pal Rao, J.M. : These cross appeals are directed against the assessment order dt.18.12.2014 passed under Section 143(3) r.w.s. 144C of the Income Tax

“ A .General grounds of appeal in respect of Transfer pricing adjustment Ground No. 1 –General ground related to Transfer pricing adjustment amounting to Rs.44,06,38,914 Erred in not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules and conducting a fresh economic analysis for the determination of the arm’s length price in connection with the international transaction pertaining to provision of design engineering support services and international transaction pertaining to manufacturing segment of Appellant and in respect of royalty and service charges paid by the Appellant; B. Grounds of appeal in relation to TP adjustment in manufacturing segment of Appellant Ground No. 2- Non grant of working capital adjustment The learned TPO and the learned AO have erred in facts and in law, by not making suitable adjustments to account for differences in the working capital employed by the comparable companies despite the mandatory directions given by Honourable DRP to allow the same and thus erred in violating provisions of section 144C of the Act. Ground No. 3- Abnormal expenditure considered as operating in nature Erred, in law and in facts, by considering certain abnormal expenditure as part of operating costs for computation of margins of the Appellant; Ground No. 4- Non-allowance of capacity utilisation adjustment Erred in facts and in law, by not allowing an adjustment to account for differences in the capacity utilized by the Appellant in view of its initial year of the manufacturing operations and the capacity utilized by the comparable companies; Ground No. 5- Arm’s length price of royalty and service charges considered as NIL. Erred, in law and in facts of the case, by considering the ALP of the royalty and service charges as NIL;

3 IT (TP) A Nos.83 & 136/Bang/2015 Ground No. 6- Double disallowance of royalty and service charges On a without prejudice basis, erred in facts and in circumstances of the case, by not reducing the value of royalty and service charges while computing the operating cost of the Appellant for determining the PLI, after considering the arm’s length price of the same as Nil; Ground No. 7- Incorrect computation of TP adjustment Erred in facts and in circumstances of the case, by reducing the amount of sales price received from the AE and not the operating revenues while computing transfer pricing adjustment; Ground No. 8- Proportionate TP adjustment Erred by making transfer pricing adjustment on the entire manufacturing segment of the Appellant rather than restricting the same to the value of international transactions pertaining to manufacturing operations of the Appellant; C. Grounds related to Design engineering support services segment: Ground No. 9- Non-consideration of contemporaneous data Erred in determining the arms’s length price using data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements; Ground No. 10 – Use of additional filters, rejection of filters and modification of filters Erred in inappropriately introducing additional filters (selection criteria’s), rejecting and modifying the filters adopted by the Appellant and therefore, inappropriately rejecting certain comparable companies and determining inappropriate companies as comparable to the Appellant; Ground No. 11 – Rejecting certain comparable companies Erred in law and in facts, by rejecting certain companies based on unreasonable comparability criteria; Ground No. 12 – Computation of operating margins Erred in wrongly computing the operating margins of the tested party and working capital adjusted margins of comparable companies considered in the TP order; Ground No. 13 – Adjustment for differences in function, asset and risk profile Erred in law and facts, by not making suitable adjustments for differences in function, asset and risk profile of the Appellant vis-à-vis the comparable; B. Corporate Tax grounds Ground No. 14 – Computation of losses and unabsorbed depreciation available for set- off

4 IT (TP) A Nos.83 & 136/Bang/2015 Erred in law and facts in computing the losses and unabsorbed depreciation available for set off, without considering the brought forward losses and unabsorbed depreciation of earlier years; C. Other grounds of appeal Ground No. 15 – Transfer pricing adjustment without giving benefit of +/- 5 per cent as available under proviso to section 92C(2) of the Act. Erred in computing the arm’s length price of the international transactions, without taking into account the benefit of +/- 5 per cent variation from the mean where it is within the range, which is permitted and opted for by the Appellant under the provisions of section 92C(2) of the Act; The Appellant prays that, while computing adjustment/relief, benefit of +/-5% should be provided as per section 92C(2) of the Act. Ground No. 16- Non consideration of multiple year data available at the time of preparing Transfer pricing study Erred in not allowing use of multiple year data for determining the arm’s length price for international transactions pertaining to manufacturing segment and the design engineering support services, available at the time of preparing the transfer pricing study. Ground No. 17 - Penalty proceedings Erred in initiating penalty proceeding under section 271(1)(c) of the Act and levying interest under sections 234A, 234B and 234D of the Act. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Honourable Income Tax Appellate Tribunal to decide this appeal according to law. Each of the above ground of appeal is independent and without prejudice to the other grounds of appeal preferred by the Appellant.” 2.1 The assessee has also raised an additional ground vide application dt.2.6.2015 which reads as under :

Ground 18 : The ld. A.O./TPO have erred inlaw and in facts, by excluding foreign exchange fluctuation and other income for the purposes of computation of operating margins of the tested party.

5 IT (TP) A Nos.83 & 136/Bang/2015 material on record on admission of the additional ground raised by the assessee. As it is clear that the additional ground raised by the assessee is only in respect of inclusion of foreign exchange fluctuation in the operating margins of the assessee as well as comparable companies. We find that this issue is now settled by various decisions of this Tribunal that if any gain or loss due to the foreign exchange fluctuation arising in respect of the sale proceeds, the same will be part of the operating margin of the assessee as well as comparable companies. Since the TPO / TPO has excluded the foreign exchange gain/loss from the operating margins of the assessee therefore it would be a serious injustice to the assessee if a parity treatment has not been given to the foreign exchange fluctuation gain/loss while computing the operating margins of the comparable companies. Accordingly, we find that the additional ground raised by the assessee is not in the form of fresh issue but it is part of the existing issue of the Transfer Pricing Adjustment and based on the principle of consistent treatment of operating margins of the tested party as well as comparables. Hence in the facts and circumstances of 6 IT (TP) A Nos.83 & 136/Bang/2015 the case, we admit the additional ground raised by the assessee for adjudication.

7 IT (TP) A Nos.83 & 136/Bang/2015 transactions for the year under consideration which are reproduced by the TPO in paras 2.1 and 2.2 as under :

Financial Results for the F.Y. 2009-10

Description Manufacturing Design Engineering (Rs.) Support Services (Rs.) Operating Revenues 44,61,73,339 14,97,96,555 Operating Expenses 72,72,93,085 15,05,00,593 Operating Profit/Loss (28,11,19,746) -7,04,038 - 38.65% - 0.47% Op. Profit on cost

International Transactions (as mentioned in Form 3 CEB Report)

Type of Transaction Amount (Rs.) Bangalore Unit Design Engineering Support 14,97,96,555 Services. Interest paid on ECB Loan 5,02,751 Reimbursement of expenses 68,53,925 Pune Unit Sale of automobile components. 40,14,72,387 Purchase of capital goods. 3,36,11,978 Royalty and service charges paid 4,51,95,098 Interest paid on ECB Loan 1,56,43,807 Reimbursement of expenses paid 10,85,34,438 Purchase of samples 23,90,616

8 IT (TP) A Nos.83 & 136/Bang/2015 7. The next grievance of the assessee (Ground No.2) is against the action of the TPO for not giving suitable adjustment on account of difference in the working capital employed by the comparable. The DRP directed the TPO/A.O. to allow the same however in the final assessment order, the TPO/A.O. has not granted the working capital adjustment.

“ 3.16 Objection 18 – Working Capital Adjustment.

9 IT (TP) A Nos.83 & 136/Bang/2015 Having heard the objection, on perusal of the order of the TPO, we do not find any abnormality in the Working Capital Adjustment allowed by the TPO. However, we are of the view that the working capital adjustment needs to be computed in respect of comparables retained without putting any restrictions. Accordingly, the TPO is directed to compute mean of working capital adjustment in respect of comparables retained, after giving effect to the directions contained in this order.”

Since the TPO has not complied with the directions given by the DRP therefore, we set aside this issue to the record of the TPO/A.O. for giving the proper working capital adjustment without any restriction as held by the co-ordinate bench of this Tribunal in the case of Citrix R & D India Pvt. Ltd. in IT(TP)A No.1289/Bang/2014 wherein it was held that the TPO cannot restrict the working capital adjustment artificially from the actual computation.

As regards the issue raised in the manufacturing segment for non-grant of working capital adjustment abnormal expenditure and non-allowance of capacity utilisation, we find that it is the first year of the assessee’s manufacturing activity then the issue of capacity utilisation adjustment is required to be examined by considering the level of capacity utilisation of the assessee as well as the comparable. Accordingly, we set aside this matter of TP Adjustment in manufacturing segment to the record of the TPO to consider the adjustment on account of capacity under-utilisation as well as excluding the abnormal expenditure. Needless to say that the assessee be given an appropriate opportunity of hearing before deciding the issue afresh.

11 IT (TP) A Nos.83 & 136/Bang/2015 S.No. Name of the Company Weighted Average of operating profits on operating costs (%) 1 Acropetal Technologies Ltd (Seg.) 29.34 2 Akshay Software Technologies Ltd. 14.92 - 3.72 3 Ancent Software International Ltd. 4 CG-VAK Software & Exports Ltd. (Seg.) 1.50 5 Goldstone Technologies Ltd. 14.56 - 1.44 6 Indium Software (India) Ltd. 7 KLG Systel Ltd. (Seg.) 33.38 8 LGS Global Ltd. 23.88 9 Neilsoft Ltd. 9.62 10 Quintegra Solutions Ltd. 8.55 11 R S Software (India) Ltd. 13.76 - 31.47 12 SIP Technologies and Exports LTd. 13 Softsol India Ltd. 16.89 14 Thinksoft Global Services Ltd. 19.20 - 9.48 15 TVS Infotech Ltd. Arithmetic Mean 9.30 The TPO rejected 11 companies selected by the assessee and accepted 4 which are given at S.Nos.1, 8, 11 & 14 of the above list. The assessee requested for inclusion of more comparable companies from the list as proposed by the assessee. The TPO accepted two more companies as requested by the assessee and accordingly the TPO included 6 companies from the list of the assessee. The TPO then added 4 more companies

12 IT (TP) A Nos.83 & 136/Bang/2015 into the set of comparables and thereby considering the 10 comparable companies for determining the ALP as under :

Sl.No. Name of the Company Margin % 1 Acropetal Technologies Ltd. (Seg.) 22.27 2 Evoke Technologies Ltd. 18.75 3 e-Zest Solutions Ltd. 16.79 4 Infosys Ltd. 45.01 5 Kals Information Systems Ltd. 38.37 6 LGS Global Ltd. 11.95 7 Persistent Systems Ltd. 30.35 8 R S Softwre (India) Ltd. 10.29 9 Tata Elxsi Ltd. 21.88 10 Thinksoft Global Services Ltd. 17.05 Average PLI 23.71 Thus the TPO has computed the average PLI at 22.27% and after granting working capital adjustment @ 2.18% the adjusted mean margin was arrived at 20.09%. Accordingly, the TPO proposed the adjustment under Section 92CA of the Act of Rs.3,24,44,613 in respect of the international transactions in software development segment. The assessee filed objections before the DRP. The DRP has excluded 6 comparable companies from the final set of the TPO which includes 2 companies viz.

R S Software Ltd. and LGS Global Ltd from the list of assessee and remanding 4 viz. Infosys Ltd., Tata Elxsi Ltd., KALS Information Systems

13 IT (TP) A Nos.83 & 136/Bang/2015 Ltd. and Persistent Systems Ltd. from the set of comparables added by the TPO. Thus both the assessee as well as revenue have challenged the exclusion of the comparables by the DRP.

“ 1. The directions of the Dispute Resolution Panel are opposed to law and facts of the case.

2. On the facts and in the circumstances of the case, the Dispute Resolution Panel erred in directing the TPOIAO to exclude the comparable Mis Infosys Ltd., Mis Tata Elxsi Ltd., Mis KALS Information Systems Ltd., Mis Persistent Systems Ltd., Mis RS Software (India) Ltd. & Mis LGS Global Ltd., even when these are functionally comparable companies and are qualifying all the qualitative and quantitative filters applied by the TPO.

3. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in directing the TPOI AO to exclude certain companies, which cannot be given effect to without reconsidering the original TP order, which actually amounts to setting aside of the draft order, which is beyond the mandate given to DRP vide provisions by Section 144C(8).

4. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed.

5. The appellant craves leave to add, alter, amend and I or delete any of the grounds mentioned above.”

Thus it is clear that the assessee as well as revenue are seeking inclusion of R S Software India Ltd. and M/s. LGS Global Limited. The only effective issue raised by the assessee is regarding the rejection of certain companies selected by the assessee and wrong computation of operating

14 IT (TP) A Nos.83 & 136/Bang/2015 margin of the assessee as well as working capital adjustment. At the time of hearing, the learned Authorised Representative has submitted that the assessee does not press Ground No.13 and the same may be dismissed as not pressed. Accordingly, the Ground No.13, regarding risk adjustment is dismissed being not pressed.

15 IT (TP) A Nos.83 & 136/Bang/2015 on how the Royalty rate is fixed and further to show the profitability from the future revenue stream before fixing the royalty rate. The TPO has also observed that there is no proof that the group concerns or third party are also charged identical royalty and the assessee has also failed to show that it derived any economic benefit from the know-how received from the AE. Accordingly, the TPO proposed the adjustment of the entire amount of royalty and service charges of Rs.4,51,95,098. As regards the manufacturing segment, the TPO accepted the transaction with AE at arm’s length. Thus the TPO did not accept the composite transaction of manufacturing segment including royalty and service charges paid but he has segregated the royalty from manufacturing transaction and treated the arm’s length of the royalty at Nil. The assessee challenged the action of the TPO/A.O. before the DRP but could not succeed as the DRP has confirmed the action of the TPO.

Under the license agreement the technology was transferred to the assessee for carrying out its manufacturing activity. Therefore, the royalty is paid in respect of the patented technology of the AE for which the assessee was granted license as per the terms of the license agreement. The learned Authorised Representative has further submitted that for the Assessment Year 2012-13, the TPO has accepted the royalty payment of Rs.2,76,87,745 to AE as it was bench marked under external CUP method. He has also relied upon various decisions of this Tribunal wherein it has been held that the TPO has no power to out- rightly reject the claim of royalty payment but he can determine the ALP by deciding the transaction with comparable price. Accordingly, the learned Authorised Representative has submitted that the order of the authorities below in determining the ALP at Nil be set aside.

per the license granted by the AE under the terms and conditions of the license agreement then the TPO is not allowed to outrightly reject the claim of royalty. The jurisdiction and power of the TPO is only to determine the ALP of the royalty in comparison to the comparable price.

The TPO has not made any endeavour or took any step to examine the royalty payment by considering with comparable prices. We further note that for the Assessment Year 2012-13, the TPO vide its order dt.12.2.2016 has accepted the royalty and service charges at in para 6 as under :

“6. Royalty & Service Charges Paid.

The taxpayer had paid royalty amounting to Rs.2,76,87,745 to its AE. The tax payer vide its submission dt.14.1.2016 submitted that it is royalty payment is 3% the net sales of the licensed products and servies of the Pune Unit. The taxpayer had undertaken a search in the Database Royaltystat. The taxpayer conducted a benchmarking analysis for the Royalty paid to the AE using the external CUP Method. The search resulted in 5 similar cases of royalty payments whose arithmetic mean was 9%. The taxpayer had paid Rs.2,76,87,745 against sales of Rs.129,37,31,949 which is 2.14% on sales.

19 IT (TP) A Nos.83 & 136/Bang/2015 In view of the above, no adverse inference is drawn in respect of the international transaction of royalty payment.”

As the assessee has produced the relevant evidence including the license agreement under which the Royalty has been paid to AE therefore, in the facts and circumstances of the case, we set aside this issue to the record of the TPO / TPO to re-examine the issue as per the provisions of transfer pricing and in the light of the evidence produced by the assessee as well as the T.P. order passed under Section 92CA for the Assessment Year 2012-13. Needless to say that the assessee be given an appropriate opportunity of hearing before deciding the issue.

The learned Authorised Representative has submitted that the TPO has excluded sub lease income from the operating margins however the corresponding lease expenses has not been excluded from the operating cost. Thus the learned Authorised Representative has contended that if the sub-lease income is excluded from the operating margin then the corresponding expenditure shall also be excluded from the operating cost for the purpose of computing the operating margin. Further the 20 IT (TP) A Nos.83 & 136/Bang/2015 TPO has made adjustment on the entire manufacturing segment instead of value of international transactions.

Accordingly, we set aside this issue to the record of the A.O./TPO to compute the operating margin of the assessee after excluding the corresponding lease expenditure from the operating cost. The TPO is also directed to confine the adjustment to the value of international transactions only.

(i) LGC Global Ltd. (ii) Akshay Software Technology Ltd. (iii) R S Software India Ltd.

21 IT (TP) A Nos.83 & 136/Bang/2015 As it is apparent from the grounds raised by the assessee as well as revenue that they are not disputing the comparability of two companies viz. R S Software India Ltd. and LGS Global Ltd.. Accordingly, in view of the fact that both the assessee as well as revenue are seeking inclusion of these two companies in the set of comparables, we restore these two companies to the set of comparables.

22 IT (TP) A Nos.83 & 136/Bang/2015 wherein it is stated that the company’s outsourcing business from clients in Dubai facing steep pricing pressure due to which the income for the year was lower in comparison to the earlier year. The assessee has specifically mentioned that the export income from Dubai accounted for 90% of total income. The learned Authorised Representative has submitted that the export income from Dubai is stated as income from operations of Dubai office. Thus the learned Authorised Representative has submitted that this company is functionally comparable with the assessee and shall be included in the set of comparables.

It appears that the TPO has considered the export income from Dubai clients of the company as income from Dubai operations. Accordingly,

23 IT (TP) A Nos.83 & 136/Bang/2015 we set aside the issue of comparability of this company to the record of the A.O./TPO for readjudication of the same after considering the correct and proper facts and details of the company.

(i) Infosys Ltd. 30.1 The learned Departmental Representative has submitted that the DRP has rejected this company on the ground of huge on site revenue as compared to the services rendered within India and further the company has valuable intangibles, brand value, selling and marketing expenses, etc. He has submitted that merely high turnover and size of the company cannot be a ground for exclusion or inclusion of a company in the list of comparables. In support of his contention, he has relied

24 IT (TP) A Nos.83 & 136/Bang/2015 upon the decision of the Mumbai Benches of this Tribunal in the case of Willis Processing Services India Pvt. Ltd. Vs. DCIT 57 SOT 339 and submitted that the economies of scales are not available in case of the services providing sector as there is no fixed cost impact on the price.

He has further contended that the revenue from the product sale is only less than 5% which is insignificant and further the R & D expenditure is only 2.1% of the sale. Therefore more than 95% of the revenue is from the service segment of this company.

30.2 On the other hand, the learned Authorised Representative has submitted that this company is having huge revenue from onsite services to the extent of 48.7%. He has referred page 27 of the Annual Report of the company in support of his contention. Thus the learned Authorised Representative has submitted that the company is functionally different as it offers software products like Pinacle for banking industry apart from having huge brand value and incurring huge selling and marketing expenses to the extent of 4.6%. In support of his contention he has relied upon the decision of this Tribunal in assessee's own case for the Assessment Year 2008-09.

25 IT (TP) A Nos.83 & 136/Bang/2015 30.3 We have considered the rival submissions as well as the relevant material on record. There is no dispute that this company is earning its revenue from the ‘on site’ services provided to the off shore clients.

Further this company is a leader in the industry and enjoyed a huge brand value and owns intellectual property. By considering all these facts, the co-ordinate bench of this Tribunal in assessee's own case (IT(TP)A No.1534/Bang/2012 vide order Dt.11.04.2014 for the Assessment Year 2008-09 has held in paras 11.2 to 11.4 as under : “ 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ;

26 IT (TP) A Nos.83 & 136/Bang/2015 (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in ‘AUTOLAY’, a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded from the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis- similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly.”

Accordingly, when no substantial difference in the business activity of the company for the year under consideration we do not find any error or illegality in the directions of the DRP for exclusion of this company.

(ii) KALS Information Systems Ltd.

27 IT (TP) A Nos.83 & 136/Bang/2015 31.1 We have heard the learned D.R. as well as Authorised Representative and considered the relevant material on record. At the outset, we note that the comparability of this company has been considered and decided by this Tribunal in assessee's own case for the Assessment Year 2008-09 in para 12.4 as under : “ 12.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the cases of Triology E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 and 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company’s Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 as per decisions of the co-ordinate benches (cited supra) also this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the list of comparable companies. It is ordered accordingly.”

We further note that the co-ordinate bench of this Tribunal in the case of Ikanos Communication India Pvt. Ltd. (IT(TP)A No.548/Bang/2015) for the Assessment Year 2010-11 has taken the same view. Accordingly,

28 IT (TP) A Nos.83 & 136/Bang/2015 when no substantial difference in the business activity of the company for the year under consideration we do not find any error or illegality in the directions of the DRP for excluding this company.

(iii) Persistent Systems Ltd. 32.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, which is functionally different and further the segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report of the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the information, the TPO included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion.

32.2 Before us, the learned Departmental Representative has submitted that the TPO has examined the relevant facts and information

29 IT (TP) A Nos.83 & 136/Bang/2015 obtained under Section 133(6) of the Act and found that this company is functionally comparable with the assessee. He has relied upon the order of TPO.

32.3 On the other hand, the learned Authorised Representative of the assessee has objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that :

(i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand.

(ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in ‘Outsourced Software Product Development Services’ for independent software vendors and enterprises.

(iii) Website extracts indicate that this company is in the business of product design services.

(iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration,

30 IT (TP) A Nos.83 & 136/Bang/2015 which is into product development and product design services and for which the segmental data is not available.

The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables.

32.4 We have heard the rival submissions and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis. We hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly.

Accordingly, we do not find any error or illegality in the directions of the DRP for exclusion of this company.

31 IT (TP) A Nos.83 & 136/Bang/2015 (iv) Tata Elxsi Ltd.

33.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on several counts like, functional dis-similarity, significant R&D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables.

33.2 Before us, the learned Departmental Representative supported the stand o the TPO in including this company in the list of comparables.

33.3 The learned A.R. of the assessee has reiterated that this company is not functionally comparable to the assessee as it performs a variety of functions under the software development and services segment namely (a) Product design services (b) Innovation design engineering and (c) visual computing labs. In the submissions made the assessee had quoted relevant portions from the Annual Report of the company to this effect.

In view of this, the learned Authorised Representative pleaded that this company be excluded from the list of comparables.

32 IT (TP) A Nos.83 & 136/Bang/2015 33.4 We have heard both parties and carefully considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment “software development services” relates to design services and are not similar to software development services performed by the assessee. The Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of that order is extracted and reproduced below :-

…. Tata Elxsi Ltd. is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm’s length price for the assessee, hence, should be excluded from the list of comparable portion.

33 IT (TP) A Nos.83 & 136/Bang/2015 As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi Ltd. have not changed from Assessment Year 2007-08 to Assessment Year 2008-09.

We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly.

Order pronounced in the open court on the 20th day of July, 2016.