TDS under Section 195 shall not be subjected to disallowance under S. 40(a)(i): ITAT

Applied Material India Private Limited Vs ACIT (ITAT Bangalore)

Conclusion: In present facts of the case, the Hon’ble Tribunal remanded the matter to AO to reconsider disallowance made under Section 40(a)(i) pertaining to whether the assessee has made TDS under section 192 with respect the salary paid to the seconded employees in its entirety. If assessee is able to prove that it had made TDS with regard to the salary payment of the seconded employees in its entirety, the AO shall not make any disallowance under section 40(a)(i) of the Act for non-deduction of tax under section 195 of the Act.

Facts: This appeal at the instance of the assessee was directed against the Final Assessment Order dated 27.01.2022, passed under section 143(3) r.w.s. 144(13) r.w.s. 144B of the Income Tax Act, 1961. The relevant AY is 2017-18. Assessee is a private limited company engaged in the business of providing software development and support services to its holding company. For the Assessment Year 2017-18, the return of income was filed on 30.11.2017 declaring a total income of Rs.82,01,04,400/-.

In present facts of the case, the ground relates to disallowance made by the AO under section 40(a)(i) of the Act. The brief facts in relation to the above ground are that the assessee had seconded employees from its AE viz., AMAT Material Inc., (seconder). It is claimed that seconded employee was working for the assessee and for facilitating its business operation in India. The terms and conditions as per the secondment / deputation agreement dated 10.03.2009 is placed on record submitted by assessee. The AO held that there is no employer employee relationship between the assessee and the employee seconded by AMAT Material Inc., and the seconded employees who were rendering services in India was on behalf of the assessee’s AE and the payment made by the assessee to its AE was not reimbursement of salary cost but Fees for Technical Services (FTS) as per explanation 2 to section 9(1)(vii) of the Act. Therefore, it was concluded by the AO, since the assessee had not deducted tax at source under section 195 of the Act, the payments made to the AE amounting to Rs.9,67,88,064/- is disallowable under section 40(a)(i) of the Act. The CIT(A) concurred with the view of the AO as regards the disallowance made under section 40(a)(i) of the Act.

Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the issue in question is squarely covered by the various judgments of the Karnataka High Court as well as the orders of the Tribunal.

The Hon’ble Tribunal after taking into consideration, submissions of both sides observed that on identical facts, the Bangalore Bench of the Tribunal in the case of M/s. Scania CV AB Vs. DCIT in IT(IT)A No.3432/Bang/2018, order dated 06.07.2022, restored the matter to the files of the AO to consider the issue afresh in light of the subsequent judgment of the Hon’ble High Court in the case of Flipkart Internet Pvt. Ltd., Vs. DCIT (IT) in W.P. No.3619/2021 (T-IT), order dated 24.06.2022.

In view of the Order of the Tribunal, the matter was remanded to the files of the AO. The AO was directed to consider the issue afresh by taking into account the principles laid down by the Hon’ble jurisdictional High Court in the case of Flipkart Internet Pvt. Ltd., Vs. DCIT (supra). The AO was further directed to examine whether the assessee has deducted tax at source under section 192 of the Act with respect the salary paid to the seconded employees in its entirety. If assessee is able to prove that it had deducted tax at source with regard to the salary payment of the seconded employees in its entirety, the AO shall not make any disallowance under section 40(a)(i) of the Act for non-deduction of tax under section 195 of the Act.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal at the instance of the assessee is directed against the Final Assessment Order dated 27.01.2022, passed under section 143(3) r.w.s. 144(13) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2017-18.

2. The brief facts of the case are as follows:

Assessee is a private limited company engaged in the business of providing software development and support services to its holding company. For the Assessment Year 2017-18, the return of income was filed on 30.11.2017 declaring a total income of Rs.82,01,04,400/-. The assessment was selected for scrutiny and notice under section 143(2) of the Act, dated 10.08.2018, was duly served on the assessee. During the course of assessment proceedings, the matter was referred to the TPO to determine the ALP of the international transaction undertaken by the assessee with its AEs. The TPO passed an order under section 92CA(3) of the Act on 26.01.2021 proposing a TP adjustment of Rs.87,65,49,142/-. Pursuant to the TPO’s order, the draft Assessment Order was passed under section 143(3) r.w.s. 144C of the Act, on 3 1.03.2021 assessing a total income at Rs.179,34,41,606/-.

3. Assessee filed objections before the DRP on 27.04.202 1. The DRP passed an order giving its directions on 29.12.202 1. Pursuant to the DRP’s directions, the impugned Final Assessment Order was passed on 27.01.2022 after making the following additions / disallowances :

i. TP adjustment –	77,83,81,568/-
ii. Disallowance under section 40a(i) –	9,67,88,064/-

4. Aggrieved by the impugned Final Assessment Order, assessee has filed the present appeal before the Tribunal. Assessee has filed 7 grounds and various sub-grounds. However, during the course of hearing, the learned AR had pressed for adjudication of only ground Nos.3.7, 4.1 to 4.6 and 5. In ground No.3.7, although the assessee had sought for exclusion of 15 companies from the comparable list, during the course of hearing, the learned AR restricted his submission to the exclusion of nine companies. The surviving grounds namely ground 3.7 (regarding exclusion of nine companies from the comparable list) ground Nos.4.1 to 4.6 and ground No.5 reads as follows:

3.7. Including the following companies even though such companies are functionally different (such as engaged in R&D activities, presence of intangibles,) Significant onsite revenue, etc.) from the Appellant:

i. Mindtree Limited

ii. Tata Elxi Limited

iii. Cygnet Infotech Pvt. Ltd.,

iv. Infobeans Technologies Limited

v. Nihilent Limited

vi. Infosys Limited

vii. Consilient Technologies Private Limited

viii. Larsen and Toubro Infotech Ltd.,

ix. Threesixty Logica Testing Services Pvt. Ltd.,

4.1. That on the facts and in the. circumstances of the case, the Learned Panel and Learned AO have erred in disallowing reimbursement of salary costs amounting to INR 9,67,88,064 paid by the Appellant to Applied Inc. by alleging non-deduction of tax at source u/s 195 of the Act.

4.2. That on the facts and in the circumstances of the case, the Learned Panel and Learned AO erred in concluding that reimbursement of salary cost is Fees for Technical Service [`FTS’J as per Explanation 2 to Section 9(1) (vii) of the Act; without appreciating that the Appellant had not availed any ‘service’ from Applied Inc.

4.3. That on the facts and in the circumstances of the case, the Learned Panel and Learned AO erred in concluding that reimbursement of salary cost is taxable as Fees for Included Services [`FIS’J under the Double Taxation Avoidance Agreement [‘DTAA ’J between India and United States [India-US DTAA’ or `India-US tax treaty’J by alleging that the employees of Applied Inc. had ‘made available’ technical skill, experience or knowledge, etc. to Appellant’ s employees.

4.4. That on the facts and in the circumstances of the case, the Learned Panel and Learned AO erred in disregarding the fact that the salary costs were already subjected to tax deduction at source u/s 192 of the Act and therefore, could not be made liable for tax deduction, once again, u/s 195 of the Act.

4.5. That on the facts and in the circumstances of the case, the Learned Panel and Learned AO failed to appreciate that the amounts paid by the Appellant to Applied Inc. were towards ‘at-cost’ reimbursement of salary costs.

4.6. That on the facts and in the circumstances of the case, the Learned Panel and Learned AO has erred in rejecting the Appellant’s reliance on the decision of the Hon ‘ble Karnataka High Court in DIT v. Abbey Business Services India Pvt. Ltd. [2020] 122 taxmann.com 174 (Karnataka), which is squarely applicable based on the facts and circumstances of the current case.

5. That on the facts and in the circumstances of the case, the Learned AO has erred in considering total assessed income of INR 1,714,279,930 in the computation sheet issued along with the assessment order dated January 27, 2022 as against INR 1,695,274,032 determined in the final assessment order, leading to erroneous levy of the tax demand.

5. The assessee has also raised additional grounds viz., ground Nos.8 to 10. During the course of hearing, the learned AR did not press grounds 9 and 10, hence the same are dismissed. Vide ground No.8, assessee is seeking to exclude four companies from the comparable list. However, during the course of hearing, learned AR had only sought for exclusion of two companies (out of four companies). The additional ground No.8 seeking exclusion of two companies reads as follows:

8. On the facts and in the circumstances of the case and in law, the Ld. DRP/AO/TPO erred in not excluding the following four companies from the final list of comparables even though the companies do not satisfy comparability, on account of functional dissimilarity and failing to meet one of the filter criteria adopted by the Ld. TPO —

i. Cybage Software (P) Ltd.,

ii. Persistent Systems Ltd.,

6. We shall adjudicate the above grounds as under:

Ground No.3.7 and additional ground 8 (grounds relating to TP adjustment)

Vide the above grounds, assessee is seeking to exclude 11 companies from the list of comparable companies (9 companies in ground No.3.7 and 2 companies in additional ground). Pursuant to the directions of the DRP, the TPO reworked the TP adjustment to Rs.77,83,81,568/- (the TPO originally proposed TP adjustment of Rs.87,65,49, 142/-). The final list of comparable companies pursuant to the DRP’s directions are 23 companies and the details of the same are mentioned in pages 3 and 4 of the impugned Final Assessment Order. Hence, the same is not reproduced here. Out of 23 companies selected in the comparable list, assessee is seeking to exclude the following 11 comparables :

i. Larsen and Toubro Infotech Ltd.,

ii. Mindtree Limited

iii. Persistent Systems Ltd.,

iv. Infosys Limited

v. Tata Elxi Limited

vi. Cygnet Infotech Pvt. Ltd.,

vii. Infobeans Technologies Limited

viii. Nihilent Limited

viii. Consilient Technologies Private Limited

ix. Threesixty Logica Testing Services Pvt. Ltd.,

x. Cybage Software (P) Ltd.,

7. We shall adjudicate each of the contentions with regard to the above companies as to whether it is functionally comparable or not. First, we shall adjudicate Larsen and Toubro Infotech Ltd., Mindtree Limited, Persistent Systems Ltd., and Infosys Limited, since common contentions were raised for exclusion of these four companies :

(i) Larsen and Toubro Infotech Ltd., (ii) Mindtree Limited, (iii) Persistent Systems Ltd., and (iv) Infosys Limited

8. With regard to Larsen and Toubro Infotech Ltd., the assessee contended that this company is functionally dissimilar and it is engaged in infra management services, sale of products and licenses and there was no segmental data available. It was also submitted that it had amalgamation during the year and had significant onsite activity and R&D expenditure. The TPO rejected the contentions of the assessee and held that this company is into software development services, because principal business is computer programming, consultancy and related activities and functionally similar to assessee. It was also stated by the TPO that compared to the offshore, the profit margin is less and there is no impact of R&D expenditure. On objections filed by the assessee, the DRP held that from the Annual report information 10% revenues are from software development services and the plea that this company has diversified services has no basis. There was no mention of product sale or inventory. The amalgamation has no effect in the same line of business. The expenditure does not relate to onsite activity and the margins are less. The R&D expenditure is only 0.3% against the generally acceptable tolerable limit of 3%. Therefore the DRP rejected the contentions of the assessee for exclusion of this company.

9. So far as Mindtree Ltd., is concerned, the assessee contended that the company provides consulting package, implementation, and significant revenue is from such services. It was also submitted that there is significant R&D expenditure and onsite activity as well as presence of non-routine intangibles. The TPO observed that the entire revenue of the company is derived from software development services, R&D is just 0.6% of the total expenditure, intangibles forming very small part of total assets, it had no significant impact and profit margin of onsite services is less compared to offshore and therefore rejected the assessee’s submissions. The DRP held that the company is into software development services and there is nothing like high end or low end software development services. The IP led revenue is only 1% of total revenue and the R&D expenditure is routine in nature and rejected the plea that the data analytics cannot be compared with software development services of the assessee.

10. As regards Persistent Systems Ltd., the assessee contended that the RPT of this company is 39.29% and fails the RPT filter. It is into diversified business activities and functionally different. The revenue was from software licences and there was lack of segmental data. It had significant R&D activity and presence of intangible assets and therefore this company has to be excluded from The TPO was of the view that the company’s RPT is 23.56% and fulfils RPT filter. The entire revenue is from software development services. The significant intangible and R&D spend does not have impact on the margins of the company. The DRP upheld the TPO’s action in retaining the company by stating that it passes the RPT filter. The company clarified in its reply u/s. 13 3(6) that it is into software development services only. The income from software licences is meagre 0.73% of the operating revenue. Significant intangible and R&D expenditure does not impact the margin of the company. Existing IP are software licences and not inbuilt IP for generating revenue and there was no acquisition of IPR during the year. The IP & product revenues pertained to group entities. There was no debit of royalty in the standalone financials. The product development is only with reference to consolidated results of the company.

11. With regard to Infosys Ltd., the assessee submitted for exclusion of this company on the grounds that it has diversified business activities and is functionally dissimilar. It was also contended that Infosys Ltd., has significant R&D activities, onsite activity and lack of segmental data. It focused on branding. The TPO was of the view that this company is in business of software development and therefore comparable functionally. He rejected the assessee’s arguments on brand, investment in R&D, IP and onsite activity. The DRP upheld the order of the TPO.

12. The ld. AR reiterated the submissions made before the TPO and DRP in respect of the above four companies and submitted that the said company was excluded in the assessee’s own case in Assessment Year 2015-16 as well as in earlier Assessment Years in regard to some of these comparables. It was further stated for the very same Assessment Year 2017-18, the Bangalore Bench of the Tribunal in the case of Yahoo Software development India P. Ltd. in ITA(TP)A No. 178/Bang/2022, order dated 11.7.2022 these companies were excluded.

13. The ld. DR relied on the orders of TPO and DRP.

14. We have heard both the parties and perused the material on record. We notice that this company has been excluded in assessee’s own case for the earlier assessment years as submitted by the assessee. Further, this Tribunal in Yahoo Software development India P. Ltd. (supra) considered this issue for the AY 2017-18 and directed exclusion of these above four companies from the comparables with the following observations:-

“4. The Ld.AR submitted that Coordinate Bench of this Tribunal in assessee’s own case in IT(TP)A No. 2657/Bang/2018 & IT(TP)A No. 2365/Bang/2019 for A.Ys. 2014-15 & 2015-16 by order dated 28.02.2 020 excluded Infosys Ltd., Mindtree Ltd., L&T Infotech Ltd. and Persistent Systems Ltd. by observing as under:

“32. At the time of hearing, the ld. counsel for the assessee has prayed for exclusion of 4 comparable companies that remain after the order of the DRP viz., Persistent Systems Ltd., Infosys Ltd., Mindtree Ltd. and L&T Infotech Ltd. He brought to our notice that as far as Persistent Systems Ltd. is concerned, the reasoning given for excluding this company for AY 2014-15 will equally hold good for the present year as well. In this regard, our attention was drawn to page 601 of the assessee’s PB wherein in the annual report of this company, Notes forming part of financial statement in Note (i) which gives the description of income from software services, there is a reference to revenue from licensing & software, which sufficiently indicates that the assessee is not a pure SWD services provider. It was also brought to our notice that the profit & loss account which is at page 596 read with Notes forming part of the financial statement at page 604 wherein the segmental reporting is not based on different segments and the statement presents a consolidated financial statement without any segmental reporting. This company has also significant RPT transaction of 25% on sales. He pointed out that the TPO & DRP on the application of RPT filter has not expressed any opinion. The ld. DR relied on the order of DRP wherein the DRP has made extensive reference to each of the objections regarding absence of segmental revenue in the accounts and has also noticed that the software products segment had an insignificant revenue and that the ownership of intangibles by the assessee has had no effect whatsoever. 33. We have considered the rival submissions. We find that on the question of application of RPT filter, the assessee had made the following submission before the DRP:-

4. Fails the Related Party Transaction to Sales filter applied by the learned TPO In the show-cause notice issued, the learned TPO has excluded companies for which the ratio of RPT to sales exceeds 25% during the current year i.e., during FY 2014-15. The relevant extract from the show-cause notice is reproduced below for ease of reference:

e) Companies who have more than 25% related parry transactions of the sales were excluded. Companies having related party transactions of more than 25% are proposed to be excluded. A threshold of 25% is being applied following the provisions of Section 92A(2)(a) which provides a limit of 26% of the equity capital carrying voting rights for treating an enterprise as Associated Enterprise. if the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. Therefore, on a balancing note, 25% is a proper threshold limit for related party transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. The Hon’ble IT.AT has upheld the application of this filter by the TPO in its order in the case of M/s. Supporisoft India Pvt. Ltd for AY 2005- G6 in IT (TP)A 1372/B/11 & 20/2012 dated 28.03.2013 following its own decision in the case of M/s. Actis Advertisers Pvt. Ltd vide ITA No.5277/De1/2011 dated 12.10.2012.

On perusal of the Annual Report of Persistent, we observe that the company has RPT in excess of 25% of the sales. The calculation of the same has been provided below for your ease of reference:

RPT to Sales ratio for FY 2014-1 5 Particulars	Amount (INR Million)
Sale of services	2,410.02
Commission received	10.26
Purchase of software	1.49
Cost of technical professional	1,339.1
Commission paid on sales	111.79
Traveling and conveyance	19.27
Total related party transactions (A)	3,891.93
Total Sales (B)	12,424.98
RPT % of Sales (A/B)	31.32%

From the above computation, it is clear that the contro controlled transactions of Persistent constitutes 31.32% of sales. Based on the above, it can be seen that Persistent fails the `RPT to sales ratio’ filter applied by the learned TPO and should therefore not be considered as a comparable.”

34. This argument has been addressed by the DRP in its order as follows:-

“4.4.9 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.”

35. Further, the assessee had also raised plea with regard to onsite revenue filter by pointing out that onsite revenue is substantial and therefore this company should not be regarded as a comparable company with a company which does not have any onsite revenue. In this regard, the ld. counsel for the assessee placed reliance on the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. v. DCIT, ITA No.1054/Bang/2011 for AY 2007-08 dated 23.11.2012 wherein this Tribunal took the following view:-

“64. The next objection of the Assessee is that when the most appropriate method selected for determining ALP is the TNMM there is no reason as to why one should look at price difference in offshore software development and onsite software development. It is no doubt true that in TNMM it is only the margins in an uncontrolled transaction that is tested with reference to the controlled transaction but it is not possible to ignore the fact that pricing will have an effect on the margins obtained in a transaction. The argument that if pricing structure were to be considered as criteria, then it will have to be seen as to what is the pricing structure of all the comparable for various projects cannot be accepted because the TPO has not chosen any other onsite software service provider with a revenue composition of more than 75% from onsite software services as comparable. As rightly observed by the TPO, the pricing is different in onsite when compared to offshore operations. The further observations of the TPO that the reasons for the same lie in the fact that while in the case of OFFSHORE projects most of the costs are incurred in India; an ONSITE project has to be carried out abroad significantly increasing the employee cost and other costs.

65. The next objection of the Assessee is with regard to Assets employed. The companies, which predominantly generate revenues from onsite activity, do not have significant assets as most of the work is carried on the site of customer outside India. The argument that the TPO has himself observed that software service providers do not require much assets cannot be basis to accept the Assessee ‘s plea. Those observations are made by the TPO in the context of application of turnover filter and have been quoted out of context by the Assessee.

66. The next argument of the Assessee is that TPO has held that margins are lower in onsite software services and that margin is not a criteria to select or reject a comparable under Rule I0B(2) of the T. Rules. We are of the view that this argument again ignores the fact that the approach of the TPO has been to highlight the fact that there can be no functional comparability, if the assets employed and risks assumed are taken into consideration. It is in that context the TPO has referred to the margins.

67. The companies who generate more than 75% of the export revenues from onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since, the entire operations of the tax payer are taking place offshore i.e. in India; it is but natural that it should be compared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model. As already stated the Assessee has limited its analysis only to functions but not to the assets, risks as well as prevailing market conditions in which both the buyer and seller of services located. Hence, the companies in which more than 75% of their export revenues come from onsite operations are to be excluded from the comparability study as they are not functioning in similar economic circumstances to that of the tax payer. Hence, it is held that this filter is appropriately applied by the TPO.

68. Admittedly the onsite revenue in the case of the following comparable companies identified by the Assessee was more than 75% of its export revenues viz., a) Visu International Ltd. b) Maars Software International Ltd. c) Akshay Software Technologies Ltd. d) VJIL Consulting Ltd. e) Synfosys Business Solutions Ltd. The above companies were therefore rightly not considered as comparable by the TPO. We hold accordingly.”

36. It is seen that the TPO in coming to the conclusion that the onsite revenue filter is not applicable has placed reliance on the decision of the ITAT Mumbai Bench in the case of Capegemini as quoted in para 16 in para 14 of the TPO’s order, but that decision does not deal with a case of onsite revenue filter and the decision was rendered on the facts of its own case.

37. On the issue of RPT filter, we notice that the TPO in para 16 has accepted that the RPT filter should be @ 25%. In the case of Persistent Systems Ltd., the RPT is at 31.32% as extracted in the earlier part of this order and therefore this company should be excluded by application of RPT filter. In view of the above, we do not wish to go into other grounds on which this company is sought to be excluded viz., that it is a product company and there is no segmental data between product and services segment, presence of onsite activity and the impact of extra-ordinary event of acquisition during the relevant previous year. Therefore, this company is directed to be excluded from the list of comparable company.

38. As far as L&T Infotech Ltd. is concerned, the ld. 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 ld. 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 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.

39. The next company which the assessee seeks to exclude is Infosys Ltd. As far as this company is concerned, it is seen that the following are the functional dissimilarities brought to our notice:- “Functionally dissimilar – owns intellectual properties, incurs significant R&D costs & onsite activity.

– Engaged in diversified business activities.

– Involved in development of software products in addition to software services.

– Owns intellectual property rights.

– Incurs significant research and development costs.

– Carries out significant activities based on onsite business.

– Owns products such as Finacle, Edge Verve and other product based solutions.

Extra-ordinary event of merger with Infosys Consulting India Ltd.

Segmental profit & loss account not available. Commands substantial brand value.

40. The DRP, however, has not thought it fit to exclude this company by observing that this company has substantial pre-dominant revenue from software services and the growth was not attributable to any brand value. Presence of onsite activity and the expenses on R&D have all been brushed aside. In our view, the difference pointed out by the ld. counsel for the assessee before us show that this company cannot be compared with that of the assessee basically because of its business model, presence of onsite revenue generation and other reasons cited before us. Besides, the reason that turnover of this company is huge and more than 10 times that of the assessee.

41. The next company sought to be excluded is Mindtree Ltd. The submissions made before us were as follows:- “Functionally dissimilar, diversified operation, significant R&D spend, ownership of intangibles. – Also engaged in business of rendering IP-Led revenue, infrastructure management, package implementation, consultancy services, etc. constituting 45% of overall revenue during FY 2014-15. – Diversified operation i.e. engaged in infrastructure management services, business process management, technology consulting, product engineering and SAP services. Also lacks segmental data. – Significant research & development activity. By incurring R&D expenses, it was able to deliver IP based video surveillance management, recording and analytic products and solutions. It has filed 4 patents in India and US so far in the area of Video analysis. – Ownership of intangibles in the form of intangible property. Significant onsite activity: – 46% of revenue earned under Onsite model. – Incurred overseas branch office expenses amounting to INR 1582 crores – Receives incentives from State of Florida in relation to the development center located overseas. Lack of segmental data – Does not maintain segmental information in respect of profitability reported from business activities in the nature of infrastructure management services, technology consulting and SAP services. – Acquisition of subsidiary – Discoverture Solutions LLC.

42. The DRP while dealing with the aforesaid objections has merely taken the view that the presence of IPR revenue was insignificant and so also expenses of brand value, R&D & intangibles. More importantly, the DRP did not dispute the presence of 46% of revenue from onsite model, but went on to hold that the presence of revenue is not sufficient to exclude a company, when it is otherwise functionally comparable. On this aspect, we have already referred to the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. (supra) and in the light of this decision and the admitted factual position regarding presence of onsite revenue over and above the threshold limit of 25% of total revenue, we are of the view that this company should be excluded from the list of comparable companies. We hold and direct accordingly.”

5. The revenue has not placed anything on record contrary to the above observations. Further admittedly the functions, assets owned and risks assumed by the assessee under the segment is similar with A. Ys. 2014-1 5 & 2015-16 (supra). Respectfully following the above view, we direct the Ld.AO to exclude Infosys Ltd., Persistent Systems Ltd., Mindtree Ltd. and L&T Infotech Ltd. from the final list.”

15. In the present case, the functional profile, assets, risks and activities of the assessee company are admittedly similar to the previous assessment years. Following the earlier years orders in the assessee’s own case and the order of the Tribunal in the case of Yahoo Software development India P. Ltd. (supra), we direct exclusion of the above four companies from the final list of comparables.

(v) Tata Elxsi Ltd.

16. The ld. AR submitted that it was urged that this company is providing high end services in niche area other than routine SWD services. It was further submitted that Tata Elxsi has significant R&D activities and presence of non-routine intangibles. The TPO rejected contentions of the assessee. The DRP held that the software development segment of this company provides design and engineering services to its customers and functionally comparable to the asses see. The revenue streams are on account of rendition of services and not on product sales. It does not own intangibles in the form of license and the R&D expenditure of this company is only 1.9% of total revenue and therefore it is a

17. The ld. AR reiterated the submissions made before the revenue authorities for its exclusion and submitted that this company was excluded by the Tribunal in assessee’s own case for AYs 2010-11, 2011-12 & 2015-16 in IT(TP)A 180(Bang)2015 (order dated 26.08.2016), IT(TP)A No.17/Bang/2016 (order dated 21.09.2016) and IT(TP)A No. 2582/Bang/2019 (order dated 30.12.2022) respectively on functional dissimilarity.

18. The ld. DR relied on the orders of lower authorities.

19. We have heard both the parties and perused the material on record. We note that this issue was considered by the Tribunal in earlier assessment years e., AYs 2010-11 to 2011-12 and 2015-16 and excluded from the comparables. The Tribunal in AY 2015-16 in assessee’s own case held as follows:-

“Tata Elxsi Ltd.,

A. 1 The Assessee sought exclusion of this company inter alia for the reasons that:

(i) it performs diverse dissimilar functions and segmental details regarding the same are not available;

(ii) there is presence of intangibles and inventory; and

(iii)     it performs onsite activities.

A.2 The Ld.AR submitted that the TPO rejected the contentions of the Assessee and the DRP upheld the same. The Ld.AR submitted that this company provides product design and engineering services. It also provides digital content creation for media and entertainment industry. She submitted that the operations of the company are classified into two business segments., i.e., software development & services and systems integration & support. It is submitted that the company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration and services segment for which no segmental details are available. A.3 Further, the Ld.AR submitted that this company has been consistently being excluded from the final list of comparables in assessee ’s own case for the previous years. It is submitted that for the assessment year 2011-12, coordinate bench of this Tribunal excluded Tata Elxsi from the final list reported in (2016)73 taxmann.com 160 and for the assessment years 2012- 13 to 2014-1 5, the Ld. TPO himself did not considered the same to be comparable to the Assessee.

On the contrary, the Ld.DR relied on the observations of the DRP/TPO. We have perused the submission advanced by both sides in light of records placed before us. A.4 We note that this comparable has been excluded in assessee ’s own case by observing as under:

(6) Tata Elxsi Ltd. 30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. v. A CIT, 137 ITD 1 (Mum). 31. The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra). 32. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We find that this company even in the software development segment is engaged in diversified activities of product design services, innovation design, engineering services, visual computing labs, etc. We further note that in the case of Telcordia Technologies Pvt. Ltd. (supra), the Mumbai Bench of the Tribunal vide its order dated 11.5.2012 in para 9.7 has held as under:-

“7.7 From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi 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 AR 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 parties.”

33. No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly, in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra), we do not find any reason to interfere with the finding of the DRP’.

Respectfully following the above view we direct exclusion of Tata Elxsi Ltd., from the final list.”

20.Respectfully following the above decision, we hold that this company is not comparable with pure SWD services provider like the assessee this Assessment Year also. Therefore the same is directed to be excluded from the

vi) Cygnet Infotech

21. The assessee submitted that this company is to be excluded since as per website it offers solutions, engineering & technical services and products. It lacks segmental data. The TPO was of the opinion that the entire revenue is from operations in SWD services, intangibles form only 2% of total assets and there was no evidence of functional dissimilarity. The DRP confirmed the order of the TPO.

22. The learned AR reiterated the submissions made before the Revenue authorities and submitted that this issue was considered in favour of assessee for Assessment Year 2017-18 in the case of Radisys India Ltd., IT(TP)A No.190/Bang/2022, order dated 18.11.2022.

23. The ld. DR supported the orders of revenue authorities.

24. Having considered the rival submissions and after perusal of the material on record, we are of the view that this company is not functionally comparable with the assessee. Further, it is noticed that this company was excluded by this Tribunal in Radisys India Ltd. (supra) observing as under:-

“8.5. The Ld. A.R. submitted that this company is engaged in the business of providing Enterprise Solutions, Application Content Management Services and IT Enabled Services. This has been observed by the DRP also. The Ld.AR thus submitted that, the activities performed by this comparable is basically in the ITES segment, and therefore cannot be compared with the software development service provider. In support the Ld.AR relied IT(TP)A No. 190/Bang/2022 M/s. Radisys India Limited, Bangalore Page 26 of 50 on page 2033 of the paper book where the annual report of his company is placed.

8.6. On the contrary the Ld.DR relied on the order passed by the authorities below. We have perused the submissions by both sides in light of records placed before us.

8.7. In the annual report it is mentioned that this company derives revenue various services by providing Enterprise Solutions, Application content, Management services etc. It is also mentioned that the revenue recognition is by providing man power support to its customers. AT page 2033 of the paper book, we note that this company bares all the risks attributable to a full fledged entrepreneur. In our view this company cannot be considered as a good comparable.”

25. Respectfully following the above decision of the Tribunal (supra), we hold the functional profile of this company is dissimilar with the assessee company and excluded from the comparables.”

vii) Infobeans Technologies Ltd.

26. The assessee sought exclusion of this company for the reason that it provides software engineering services, big data analytics and content management services. It renders high end KPO services and no segmental data is available. The TPO was of the view that it a software services company involved in business app development and the entire revenue is from SWD services and therefore comparable.

27. The DRP upheld the order of the TPO by observing that the Annual Report clearly depicts revenue is from software services. The information on the website is dynamic and cannot be related to a particular period. Regarding high end data analytics, DRP was of the view that there cannot be high or low end SWD activities.

28. The ld. AR made submissions as contended before the revenue authorities and submitted that it is functionally dissimilar with assessee and in the earlier Assessment Years 2015-16 & 2016-17, this company was excluded by the Tribunal in IT(TP)A Nos. 2582/Bang/2019 (order dated 30.12.2022) and 209/Bang/2021 (order dated 30.11.2022) respectively. Further, the Tribunal for the same Assessment Year 2017-18 in the case of Radisys India Ltd. in IT(TP)A No.190/Bang/2022 excluded this company as a comparable.

29. The ld. DR relied on the orders of the TPO and DRP.

30. We have heard both the parties and perused the material on record. We find that this company was excluded by this Tribunal in assessee’s own case for earlier years (supra). Further for AY 2017-18, the Tribunal in Radisys India Ltd. (supra) directed exclusion of this company with the following observations:-

“Infobean Technology Ltd.,

8.2 The Ld.AR submitted that, this company is engaged in Automation Engineering, Customized Software, Custom Application Development (CAD), Content Management Systems, Enterprise Mobility and Big data Analytics. It is the submission of the Ld.AR that this comparable is functionally not similar to the assessee. He also submitted that, there is no segmental details available in respect of the revenue generated by this company and that the content management, Analytic services are considered to be KPO as per safe harbour rules. This comparable was decided to be excluded from the list of comparables by the coordinate bench of Tribunal vide IT(TP)A No.210/Bang/2021 in the case of EIT Services India Pvt. Ltd. Vs. Deputy Commissioner of Income-tax for the AY 2016- 17, wherein held as under:

“5.7 We have heard the rival submissions and perused the materials available on record. Infobeans Techonologies Ltd. was considered as comparable in the case of ADP Pvt. Ltd. by the coordinate bench of Hyderabad cited (supra) wherein it was held as under:-

“7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The co-ordinate bench of this Tribunal in ADP (P.) Ltd. (supra), directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under:

“21. Having regard to the rival contentions and the material on record, we find that the Co-ordinate Bench of the Tribunal in the following case has considered similar objections of the assessee therein to direct exclusion of this company from the final list of comparables. For the purpose of ready reference, the relevant paragraph is reproduced below:

” 18. We have heard the rival contentions and perused the record. The first aspect is the functional comparability of concern which has been finally selected to be comparable. In respect of Infobeans Systems Pvt. Ltd., the financials of said concern clearly reflect that in addition to providing software development services to its associated enterprises, it had also earned foreign exchange from export of goods on FOB basis. The event of export of goods was also mentioned in notes and also in the Profit and Loss Account, where revenue from sale of software was declared. The segmental details of two activities carried on by the said concern were not available and in the absence of the same, the concern could not be equated as functionally comparable to a concern which was providing software development services to its associated enterprises. Applying the same set of reasoning as in the paras hereinabove, we hold that Infobeans Systems Pvt. Ltd. is not comparable to the assessee”.

22. Respectfully following the same, we direct that Infobeans be excluded from the final list of comparables in this case also.

7.4 On perusal of the order of the co-ordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the co-ordinate bench did not consider this company as comparable in assessee’s own case for AYs 2014-15 & 2015- 16. Respectfully following the decision of the co-ordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables.”

5.8. In view of the above decision of the Tribunal, we are inclined to hold that Infobeans Technologies Ltd. cannot be considered as a comparable and to be excluded from the list of comparables.”

8.3. On verification of the financials of this company for AY 201 7-18, we note that in the Annual Report at page 2343 placed in paper book Volumes 4 of 6, this has been stated to be catering into vide range of segments as under: “INFOBEANS TECHNOLOGIES LIMITED Founded in 2000, InfoBeans Technologies is a leading player offering Customized Software, Digital, Transformation and Enterprise Mobility solutions for clients across the globe. With two state-of-the-art facilities in India, the CMMI level 3 certified Company caters to Fortune 100 clients in USA, Germany and Middle East markets. The Company caters to a wide range of segments in the industry, including distributed storage systems, multi-format multimodal content and e-commerce web and mobile platforms for diverse sectors. The Company’s transparent operations, professional team of over 700 employees and high customerfocus has enabled it to grow a blue-chip client base with over 90% repeat business.”

8.4. Further, at page 2320 of the paper book, this company is said to be providing computer programming, consultancy and related activities as per NIC code. A combined reading of this makes it clear that this company is engaged in not only SWD service but other allied services to various industrial segments. Whereas on perusal of financial statement at page 12367 of the paper book and Note 20 at page 2378 of the paper book, we note the revenue recognition is only under one head being “Expert” amounting to Rs. 66,12,31,773/-. We also notice that at page 2408, in Related Party Transaction details this company has earned revenue of Rs. 8,00,53,350/- from it’s AE. From this it is clear that this company is rendering services to non-AE customers also, whereas the assessee before us is a captive service provider only catering to the requirements of its AE. Under such circumstances we do not deem it fit to be considered in the final set of comparables.

Accordingly, this comparable is directed to be excluded.”

31. Respectfully following the above decisions of the Tribunal in assessee’s own case for earlier AYs and in the case of Radisys India Ltd. (supra), we direct exclusion of this company on functional dissimilarity.

viii. Nihilent Ltd.

32. The assessee contended that Nihilent Ltd. is functionally dissimilar to assessee on the grounds of business activities, enterprise transformation, change and performance management and other IT services. There is extraordinary event of investment in subsidiary and no segmental data is available.

33. The TPO held that entire revenue is from SWD services and amalgamation will have no effect. The DRP confirmed the TPO’s order by holding that it does not hold any inventory and assessee could not point out that profit margin was affected due to acquisition.

34. The ld. AR reiterated the submissions made before the lower authorities and submitted that it was excluded in assessee’s own case for earlier years i.e., Assessment Years 2015-16 & 2016-17 (supra). Further the Tribunal in the case of Subex Ltd. for Assessment Year 2017-18 in IT(TP)A No.282/Bang/2022 (order dated 30.11.2022) considered this issue and excluded it.

35. The ld. DR supported the orders of lower authorities.

36. We have heard both the parties and perused the material on record. We find that this company was excluded by this Tribunal in assessee’s own case for earlier years (supra). Further for AY 2017-18, the Tribunal in Subex Ltd. (supra) excluded this company by holding as under:-

12. We have heard the rival submissions and perused the materials available on record. This comparable fails the functionality test and this company Nihilent Ltd. is not functionally similar to assessee ’s case as held by the coordinate bench of the Tribunal in the case of M/s. SanDisk India Device Design Centre Pvt. Ltd. in IT(TP)A No.288/Bang/2 021 dated 30.6.2022, wherein held as under:

“17.9 In respect of Nihilent Ltd., Infobeans Technologies Ltd. and Aspire Systems (India) Pvt. Ltd., Hon ’ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT (supra) observed as under:

“Comparable Sought to be excluded by the assessee Aspire System India Pvt. Ltd. (Aspire) 40. The assessee sought exclusion of Aspire from the final set of comparables for benchmarking SDS segment on the ground that it fails Related Party Transaction (RPT) filters as its RPT/ sales ratio is more than 25%. The assessee computed the significant related party transactions at 37.58% whereas the Ld. TPO computed it at 23.55%. The TPO is directed to recalculate the RPT/sales ratio by providingof the Income-tax Act, 1961 [‘the Act’ for short] of the Income-tax Act, 1961 [‘the Act’ for short]of the Income-tax Act, 1961 [‘the Act’ for short] of the Income-tax Act,1961 [‘the Act’ for short] of the Income-tax Act,1961 [‘the Act’ for short] g opportunity of being heard to the assessee. So this comparable is remitted back to the Ld. TPO to decide afresh.”

……………………

……………………

Nihilent Ltd.

44. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-à-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 & A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 & A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis-à-vis assessee which is a routine software development service provider working on cost + markup model, hence ordered to be excluded.”

“Infobeans Technologies Ltd. (Infobeans)

49. The assessee sought exclusion of Infobeans on the ground that it is also functionally dissimilar being into providing business IT services (CAD) (application development and maintenance, Big Data, UX and UI, Automation engineering services, including product engineering and lifestyle solutions and business process management) in verticals of storage and virtualization, media and publishing, HR and Payroll and e-commerce. It is also providing software engineering services primarily in Custom Application Development (CAM), enterprise mobility and Big Data Analytics (BDA).

50. Perusal of financials available at page A303, A418 to A421, Infobeans shows that it is into diversified services but its segmental financials are not available without which it is difficult to compute the correct profit margin of the relevant segment. So Infobeans is also ordered to be excluded as a comparable being not a comparable to the assessee.” 17.10 Perusal of the annual report, filed before us in respect of the above two comparables, we note that the segmental financials are not available in respect of Nihilent and Infobeans and the RPT in respect of Aspire Systems India Pvt. Ltd. is more than 25% being the threshold limit considered by the Ld. TPO. Nothing has been placed before us by the Ld.DR in order to take a different view. Respectfully following the Hon ’ble Mumbai Tribunal, we direct the Ld. TPO to exclude Nihilent, Infobeans and Aspire Systems from the final set.”

12.1 Keeping in view of the above order of the Tribunal, we direct the AO/TPO to exclude this company Nihilent Ltd. from the list of comparables.”

37. Respectfully following the above decisions of the Tribunal in assessee’s own case for earlier AYs and in the case of Subex Ltd. (supra), this company is excluded based on functional dissimilarity.

ix. Consilient Technologies (P) Ltd.

38. According to the assessee, this company is provider of licensable software products for speech, video, fax and analog modern communication market and not comparable with the assessee. The TPO and DRP held that there was no information in the annual report of the company to indicate that it is engaged in product development and rejected the assessee’s plea.

39. After hearing both the parties, we find that this issue was considered by the Tribunal in the case of Mindteck (India) Ltd. for AY 2017-18 in IT(TP)A No.21 1/Bang/2022 (order dated 30.11.2022), wherein it was held as follows:-

“Consiient Technologies (F) Ltd.

15. The Ld. A.R. submitted as follows: 15.1 Significant intangibles: The ld AR for the assessee referred to an extract from page 44 of the Annual report (Page 831 of Annual Report Compilation) extracted below shows existence of intangible assets:

Non-current assets (Abstract)
Fixed assets (Abstract)
Tangible assets	12,54,977	5,54,036	6,32,229
Intangible assets	20,58,342	51,75,034	82,91,724
Total fixed assets	33,13,319	57,29,070

15.2 He further referred page 65 of the annual report (Page 853 of Annual Report Compilation) which states the class of the intangible assets to be ‘copyrights’. 15.3 Revenue from royalties: He further referred to an extract from page 82 of the annual report (Page 869 of Annual Report Compilation), reproduced below, which states that the company earns revenue from royalties.

Revenue software development	3,92,54,100	4,18,94,889
Revenue royalties	22,12,299	14,29,516
Total gross income from services rendered	4,14,66,399	4,33,24,415

15.4 The ld AR submitted that the TPO, at internal page 39 of his order (Page 149 of ITAT Appeal set), records his comments on the objections raised by the assessee on this company, in the following words: “Given below is the extract of the annual report, from the page number 2 of the PDF, it is evident, which unambiguously states the description of the products to be “Information Technology Design and Development Service” which fits straight into the ambit of software development services itself”.

15.5 The ld AR stated that on perusal of the above, this company being a “product company” is functionally different from the Appellant.

15.6 Thus, he argued that the company has intangible asset and earns royalties from licensing of such asset. In view of the same, the assessee requested for exclusion of Consilient Technologies from the final set of comparable companies.

16. The Ld. D.R. submitted that the Ld. DRP noted that 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 focussed mainly towards four verticals namely manufacturing, utilities, financial services and telecom. For the period ended March 31, 2016, March 31, 2015 and March 31, 2014, as per the information, in the annual reports, 100 percent of the operating revenues respectively were derived from software development services. The activities- Application maintenance and Development, Enterprise Resource Planning and Testing are all software development activities and fall within the umbrella 1T services, as per NASSCOM. As per the annual report information for the year ended 31.03.2017, the main object of the assessee company is to carry on the business of designing software development, software maintenance and support services the areas of computer networks, computer software and hardware, data communication equipment, electronic equipment, radio and wireless communication product and equipment and wireless telecommunication equipment of every description. Thus, the activities of L&T are functionally comparable to the assessee company, as evident from the nature of services rendered by it. Therefore, the Ld. DRP in his report observed that the plea that this company performs different functions has no basis. The nature of activity performed by this company is given at page 115 of the annual report, as under:

“We offer an extensive range of IT services like application development, maintenance and outsourcing, enterprise solutions, infrastructure management services and testing and digital solutions to clients in diverse industries”.

16.1 In view of the above information, Ld. DRP observed that it is very clear that this company is engaged in software development services only and hence functionally comparable. As the company is primarily engaged in software development services and earns the revenue from this activity, the Ld. DRP opined that there is no need of providing segmental information as per AS 17. Thus, the plea of the assessee was not accepted by the ld. DRP. Against this, assessee is in appeal before us.

17. We have heard the rival submissions and perused the materials available on record. In our opinion, it is appropriate to remit this issue to the file of AO/TPO to consider it afresh in the light of submissions made by the Ld. A.R. with regard to functionality of the comparable. This issue is accordingly remitted to the file of AO/TPO for fresh consideration.”

40. In view of the above order of the ITAT, we restore the issue of exclusion of Consilient Technologies (P) Ltd., from the list of comparables to the files of the AO/TPO.

x. Threesixty Logica Testing Services (P) Ltd.

41. The assessee sought exclusion of this company since it provides high end software testing services unlike the assessee. The TPO was of the view that it is integral part of SWD services. The DRP upheld the TPO’s order stating that software testing forms very much part of SWD services.

42. Before us, the ld. AR reiterated the submissions for exclusion of this company and relied on the decisions of Triology E-Business Software India (P) in ITA No.1054/Bang/201 1 (Bang. Trib.) and Lionbridge Technologies (P) Ltd. in ITA No.6791/Mum/2018 (Mum. Trib).

43. Learned DR supported the orders of the TPO and DRP.

44. We have heard the rival submission. Tribunal in the case of Triology E-Business Software India (P) Ltd., and Lionbridge Technologies (P) Ltd., (supra) had clearly brought out the distinction between the company which is engaged in the business of providing software testing services and a company which is engaged in software development. The Tribunal, in the above cases, had clearly held that a software development company cannot be compared with a software testing services. In light of the above mentioned orders of the Tribunal, we restore the issue of exclusion of Threesixty Logica Testing Services (P) Ltd., to the files of the AO/TPO to consider whether the said company can be compared with that of the assessee company.

xi. Cybage Software (P) Ltd.

45. The assessee submitted that the above company mainly focused on product engineering services, engaged in BPO and lacks segmental data and therefore not comparable with the assessee. The TPO and the DRP held that the entire operations is from SWD services and there was no inventory held by this company and hence comparable with assessee.

46. The ld. AR submitted that the Tribunal dealt this issue in the earlier years e., AYs 2015-16 to 2016-17 (supra) where it was held to be excluded from the comparables and hence sought for its exclusion.

47. The ld. DR relied on the orders of lower authorities.

48. We have heard both the parties and perused the material on record. We find that this company was excluded by this Tribunal in assessee’s own case for earlier years (supra) where it was held as under:-

20“8. It is submitted by the Ld.AR that in the similar circumstances, in case of ARM Embedded Technologies Pvt. Ltd. vs. DCIT in IT(TP)A No. 2353/Bang/2021, Coordinate Bench of this Tribunal vide order dated 3 0/08/2 022 had analysed all the above alleged comparables on functionality and had excluded them from being compared with a captive service provider.

24. Cybage Software Pvt. Ltd.

It is submitted that this company is engaged in the provision of diversified services which include product engineering, testing & quality assurance services, specialized services, support services, etc. It is submitted that this company is engaged in product development and has developed a product called ‘excelshore’ apart from providing spectrum of services including ITeS and BPO services and that segmental information of the diverse business functions undertaken by the company is not available. The Ld.AR submitted that this company is making super normal profits and that it is not reflective of the performance of the industry in which it operates.

Particulars	FY 2013-1 4	FY 2014-15	FY 2015-1 6
OP/OC	68.82%	67.75%	62.04%

Reliance in this regard is placed on the decision of the Hon ’ble Hyderabad Tribunal in Infor (India) Pvt. Ltd. v. DCIT (supra). On the contrary, the Ld.DR relied on the orders passed by the authorities below.

We have perused the submissions of both sides in light of records placed before us.

Primarily we note that this company is a product company and has diversified business segments. We note that this company is a full fledged entrepreneur and assumes all the risks attributable to the various business segments for which details are not available. In our view, under such circumstances, this company cannot be held tobe functionally comparable with that of assessee which is a captive service provider that caters only to its AE.

Respectfully following the above view, we direct the Ld.AO/TPO to exclude Cybage Software Pvt.Ltd., from the final list.

49. We have perused the financial of Cybage Software Pvt. Ltd., for Assessment Year 2016-17 and the relevant year. The functional profile of this company remains the same for both the Assessment Years. Therefore, respectfully following the above decision of the Tribunal in assessee’s own case for earlier AYs, this company is held to be functional dissimilar and excluded from the comparables.

Grounds 4.1 to 4.6 (Corporate Tax)

50. The above ground relates to disallowance made by the AO under section 40(a)(i) of the Act. The brief facts in relation to the above ground are that the assessee had seconded employees from its AE viz., AMAT Material Inc., (seconder). It is claimed that seconded employee was working for the assessee and for facilitating its business operation in India. The terms and conditions as per the secondment / deputation agreement dated 10.03.2009 is placed on record at pages 681 to 687 of the Paper Book submitted by assessee. The AO held that there is no employer employee relationship between the assessee and the employee seconded by AMAT Material Inc., and the seconded employees who were rendering services in India was on behalf of the assessee’s AE and the payment made by the assessee to its AE was not reimbursement of salary cost but Fees for Technical Services (FTS) as per explanation 2 to section 9(1)(vii) of the Act. Therefore, it was concluded by the AO, since the assessee had not deducted tax at source under section 195 of the Act, the payments made to the AE amounting to Rs.9,67,88,064/- is disallowable under section 40(a)(i) of the Act.

51. Aggrieved by the disallowance, assessee raised this issue before the CIT(A). The CIT(A) concurred with the view of the AO as regards the disallowance made under section 40(a)(i) of the Act.

52.Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the issue in question is squarely covered by the various judgments of the Karnataka High Court as well as the orders of the Tribunal. The learned AR reiterated the submissions made before the CIT(A).

53. The learned DR supported the orders of the Income Tax authorities.

54. We have heard the rival submissions and perused the material on record. On identical facts, the Bangalore Bench of the Tribunal in the case of M/s. Scania CV AB Vs. DCIT in IT(IT)A No.3432/Bang/201 8, order dated 06.07.2022, restored the matter to the files of the AO to consider the issue afresh in light of the subsequent judgment of the Hon’ble High Court in the case of Flipkart Internet Pvt. Ltd., Vs. DCIT (IT) in W.P. No.3619/2021 (T-IT), order dated 24.06.2022. The relevant finding of the Tribunal in the case of M/s. Scania CV AB Vs. DCIT (supra) reads as follows:

“2. At the outset, the Ld.AR submitted that the only issue alleged before this Tribunal is non-deduction of TDS on reimbursement of salary expenses made on behalf of the seconded employees as fee for technical services.

2.1 The Ld.AR submitted that TDS has been deducted on the entire salary paid by assessee to the seconded employees and what is reimbursed is the payment which has been partly made by the AE to the families of such seconded employees. The Ld.AR submitted that though the 100% salary has been subjected to TDS assessee has paid only part of the salary to the seconded employees in India and balance of such salary has been reimbursed to the AE as the same has been paid by the AE to the employees. The Ld.AR submitted that all the details relevant in respect of the salaries and the TDS deduction which were submitted before the authorities below which has not been considered.

2.2 The Ld.AR relied on the following decisions:

•  Decision of Hon ’ble Karnataka High Court in case of DIT(IT) vs. Abbey Business Services India (P.) Ltd. reported in [2020] 122 taxmann.com 174
• Decision of Hon ’ble Karnataka High Court in case of M/s. Flipkart Internet Pvt. Ltd. vs. DCIT (IT) in W.P. No. 3619/2021(T-IT) by order dated 24.06.2022
•  Decision of Hon ’ble Pune Tribunal in case of M/s. Faurecia Automotive Holding vs. DCIT (IT) in ITA No. 784/P UN/2015 by order dated 08.07.2019
• Coordinate Bench of this Tribunal in case of M/s. Toyota Boshoku Automotive India Pvt. Ltd. vs. DCIT in IT(TP)A No. 1646/Bang/2017 by order dated 13.04.2022 and
• Coordinate Bench of this Tribunal in the case of Goldman Sachs Services Pvt. Ltd. vs. DCIT in IT(IT)A Nos. 362 to 369 & 338 to 345/Bang/2020 by order dated 29.04.2022.

2.3 It is submitted that identical issue has been considered at length and in detail in the above decisions. The Ld.AR referred to the recent decision of Hon ’ble Karnataka High Court in case of M/s. Flipkart Internet Pvt. Ltd. vs. DCIT (IT) (supra) wherein Hon ’ble Court observed as under:

“(viii) The Revenue has relied upon the judgment of the Apex Court in C. C., C.E. & S. T. -Bangalore (Adjudication) etc. v. M/s.Northern Operating Systems Pvt. Ltd. 12 where the Apex Court has interpreted the concept of a secondment agreement taking note of the contemporary business practice and has indicated that the traditional control test to indicate who the employer is may not be the sole test to be applied. The Apex Court while construing a contract whereby employees were seconded to the assessee by foreign group of Companies, had upheld the demand for service tax holding that in a secondment arrangement, a secondee would continue to be employed by the original employer.

(ix) The Apex Court in the particular facts of the case had held that the Overseas Co., had a pool of highly skilled employees and having regard to their expertise were seconded to the assessee and upon cessation of the term of secondment would return to their overseas employees, while returning Civil Appeal Nos.2289-2293/2021 such finding on facts, the assessee was held liable to pay service tax for the period as mentioned in the show cause notice.

x) It needs to be noted that the judgment rendered was in the context of service tax and the only question for determination was as to whether supply of man power was covered under the taxable service and was to be treated as a service provided by a Foreign Company to an Indian Company. But in the present case, the legal requirement requires a finding to be recorded to treat a service as ‘FIS’ which is “make available” to the Indian Company.

(xi) Accordingly, any conclusion on an interpretation of secondment as contained in the M.S.A. to determine who the employer is and determining the nature of payment by itself would have no conclusive bearing on whether the payment made is for ‘FIS’ in light of the further requirement of “make available.””

3. On the contrary, the Ld.DR placed reliance on orders passed by authorities below.

4. We have perused the submissions advanced by both sides in the light of records placed before us.

4.1 We note that the evidences filed by assessee has not been considered by the revenue authorities.

4.2 We therefore remand this issue to the Ld.AO to consider the claim in accordance with the decision of Hon ’ble Karnataka High Court in case of M/s. Flipkart Internet Pvt. Ltd. vs. DCIT (IT) (supra) and Coordinate Bench of this Tribunal in the above referred cases M/s. Toyota Boshoku Automotive India Pvt. Ltd. vs. DCIT (supra) Goldman Sachs Services Pvt. Ltd. vs. DCIT(supra) having regard to the evidences filed by the assessee.

Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law

Accordingly this ground raised by assessee stands allowed for statistical purposes.”

55. In view of the above order of the Tribunal, we restore the matter to the files of the AO. The AO is directed to consider the issue afresh by taking into account the principles laid down by the Hon’ble jurisdictional High Court in the case of Flipkart Internet Pvt. Ltd., Vs. DCIT (supra). The AO is directed to examine whether the assessee has deducted tax at source under section 192 of the Act with respect the salary paid to the seconded employees in its entirety. If assessee is able to prove that it had deducted tax at source with regard to the salary payment of the seconded employees in its entirety, the AO shall not make any disallowance under section 40(a)(i) of the Act for non-deduction of tax under section 195 of the Act. It is ordered accordingly.

53. The learned DR supported the orders of the Income Tax authorities.

Ground No.5

57. In the above ground, the assessee contends the AO has erred in the final Assessment Order by adopting a figure Rs.171,42,79,925/- instead of 169,52,74,032/-.

58. We have heard the rival submissions and perused the material on record. We find the difference of Rs. 1,90,05,893/- (Rs. 171 ,42,79,925-Rs. 165,52,74,032) has arisen on account of rectification order dated 10.05.2019 passed under section 154 of the Act. Therefore, if the assessee has grievance with regard to adoption of figure Rs.171,42,79,925/- the cause of action arises out of the rectification order dated 10.05.2019 passed under section 154 of the Act and not out of the present proceedings. In the event, assessee is above to modify the figure Rs.171,42,79,925/- in appeal against the rectification order dated 05.2019, the same modified figure shall be adopted by the AO in the Final Assessment Order also. With the above observation, ground No.5 is restored to the file of the AO.

59. In the result, appeal of the assessee is partly allowed.

Pronounced in the open court on the date mentioned on the caption page