Gautam Jain for the Assessee. T.V. Bhaskar Reddy, CIT for the Revenue.

This appeal preferred by the assessee emanates from the directions of the Ld. Dispute Resolution Panel (DRP) dated 29.06.2018 for the assessment year 2014-15 u/s.144C(5) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟) as per the grounds of appeal on record.

2. At the very outset, the Ld. Counsel for the assessee appraised the Bench that grounds raised in the appeal memo by the assessee is with regard to “Transfer Pricing Adjustment” as well as “Corporate Tax”. That apart there are certain additional grounds also raised by the assessee which have to be adjudicated.

3. That so far as the “Transfer Pricing Adjustment” is concerned, the submissions of the Ld. Counsel for the assessee is that there are four comparables i.e. (i) Persistent Systems Ltd. (ii) Thirdware Solutions Ltd. (iii) Cigniti Technologies Pvt. Ltd. & (iv) Mindtree Ltd. taken by the Ld. Transfer Pricing Officer (TPO) which the assessee pleads that they should be excluded from the final list of comparable since they are functionally or segmental wise not comparable company.

That apart, the assessee has also prayed for inclusion of one company i.e. Akshay Software Technologies Ltd. With regard to the company i.e. R.S. Software Ltd., the Ld. Counsel for the assessee submitted that this company was initially taken by the assessee as comparable company which is accepted by the TPO but now, the assessee wants this company to be excluded from the final list of comparable and therefore, this issue also will be adjudicated.

First, we would take up “Transfer Pricing Adjustment” ground regarding exclusion of certain comparable companies i.e. (i) Persistent Systems Ltd. (ii) Thirdware Solutions Ltd. (iii) Cigniti Technologies Pvt. Ltd. & (iv) Mindtree Ltd.

EXCLUSION OF COMPANIES AS COMPARABLES TO SOFTWARE DEVELOPMENT SERVICE SEGMENT (A) Persistent Systems Limited:-

4. The TPO has applied the modified filter of 1/10th to 10 times of the assessee‟s turnover. Therefore, this company qualifies the turnover filters since the turnover of the company is 1184 crores whereas the turnover of the assessee is 353.13 crores. Further, the company is upheld by the Ld. CIT(A) in assessee‟s own case and thereafter, the Annual Report of the assessee company was taken into consideration where segment reporting and segment information were looked into by the TPO. Thus, the TPO held this company as comparable to that of the assessee company.

5. Similarly, the Ld. DRP at Page 45 Para (iii) has dismissed the objection of the assessee regarding exclusion of this company from the final list of comparables by holding as follows:

“This entity qualifies for the turnover filter applied by the TPO and is upheld by the learned CIT(Appeals) in assessee‟s own case. Further, the employee cost is around 62% of the total cost and therefore, apparently, it is a software services provider. The assessee however, contends that this company is specializing in software products, services and technology innovation and is excluded as a comparable in the case of the assessee in AY 2008-09. However, as noted by the TPO, the entire revenue as per details is from software services only. Inventory is nil. Looking to the facts, therefore, this objection is dismissed.”

6. The Ld. Counsel for the assessee submitted that for the very fact of relevant assessment year 2014-15, in the case of Symantec Software India Private Limited. Vs. DCIT (2020) 114 taxmann.com 435 (Pune-Trib), the question of comparability of this company i.e. Persistent Systems Limited was considered and it was held by the Tribunal as follows:

“11. We have perused the case records and heard the rival contentions. We observe that the company i.e. Persistent Systems Limited is functionally different as it is engaged in rendering IT services and in the development of software products without there being support segmental information. During the year the company made acquisitions. We observe that the Hon‟ble Delhi High Court in the case of Pr. CIT Vs. Saxo India Pvt. Ltd. ITA No.682/2016 has held as follows:

“10. On a comparison with the data available and made available undoubtedly, the object of the statute is to “pull in transactions which otherwise escaped the radar of tax assessment under one head or the other. The transfer pricing methodology-shorn of its details is an attempt by each nation to locate the incidents of income which would be subjected to levy within its jurisdiction where international transactions are involved. This exercise does not compare with other income assessments where the methodology adopted in their domestic jurisdiction will differ”. The TNMM method depends on accurate data with respect to all the three elements- wherever they apply. In the Comparable Uncontrolled Price (CUP) method-which is premised upon the elements in Rule 10B(1)(a), the methodology adopted in the price charged or paid for property transfer or services provided in the Comparable uncontrolled transaction. Therefore, the nature of the transaction and the appropriate filter determines the elements that are to be considered in TNMM. Therefore, the costs, sales and assets employed wherever relevant are to be applied. From this perspective, the revenue‟s contention that segmental data was available cannot be accepted. The mere availability of proportion of the turnover allocable for software product sales per se cannot lead to an assumption that segmental data for relevant fats was available to determine the profitability of the concerned comparable.”

12. We further find in the case of EMC Software and Services India Private Limited Vs. JCIT (ITA No.3375/Bang/2018), the Co-ordinate Bench of the Tribunal, Bangalore has directed the Assessing Officer to exclude the Persistent Systems Limited from the final list of comparable for determination of ALP by observing as follows:

“(iii) Persistent Systems Ltd. : The company is functionally different as it is engaged in rendering IT services and in the development of software products without there being support segmental information and engaged in IP led solutions and undertakes significant R & D activities, owns IP. During the year the company made acquisitions. The company has made significant investment in IP and their solutions and has a dedicated team for Research and IP development. The learned Authorised Representative relied on decision of Tribunal in the case of CGI Information & Management Systems Pvt. Ltd. Vs. ACIT 94 Taxman.com 97 and PCIT Vs. Saxo India Pvt. Ltd. 74 taxmann.com 88 (Delhi). We relied on the decision of CGI Information Systems & Management Consultants Pvt. Ltd.(supra) at paras 28 to 30 as under :

We rely on judicial decisions and facts in respect of comparable Persistent Systems Ltd. and direct the Assessing Officer to exclude from the final list of comparable for determination of ALP.” 13.The Co-ordinate Bench of the Tribunal, Cochin in the case of US Technology International Private Limited Vs. ACIT in ITA No.592/Coch/2018 has held as follows:

“10. Persistent Systems Ltd. The TPO obtained information u/s. 133(6) based on which it was concluded that the comparable is predominantly engaged in the business of rendering software development to various customers world wide. The TPO observed that the company is engaged in developing products which have been outsourced by clients and the company does not own IP to these products and the product development is nothing but software development services. With respect to the intangibles of the comparable company, it was found that overseas subsidiary companies have acquired certain IP products and that the comparable is predominantly engaged in the software development services. Further, the intangibles with the comparable are in the nature of software license acquired for use in the operation of the company and they are not the software products generating revenue. The disclosure in the annual report regarding the acquisition of the products relate to the group as a whole and not to the stand alone as entity whose financials are compared. The R&D expenditure of the comparable relates to cross improvements and not to innovate on new products or earning additional revenue. Hence, the R&D is not affecting the margin of the company. The TPO had applied related party filter of greater than 25% and clearly this company passed the filters. Hence, the TPO rejected the contentions of the assessee and held the company as comparable. The DRP held that the company is functionally similar to the assessee.

10.1 Against this, the assessee is in appeal before us. The Ld. AR submitted that it was not functionally comparable as it was engaged in significant product development. The Ld. AR relied on the order of the ITAT, Chennai in the case of Symantec Software & Services India (P) Ltd. vs. DCIT 79 taxmann. com (Chennai–Trib.) wherein it was held as follows:

“10. We heard the rival submissions, perused the material on record. We found that the company is engaged in product development and cannot be comparable to the software development services and has income from license fee. The Revenue Recognition Policy in notes of accounts and segmental information is available in respect of infrastructure and systems, telecom and wireless life sciences and Health care. Further, it renders services in cost plus to its Associate Enterprise and sail with partnership and alliances, intellectual property led solutions and end-to end solutions, strategic acquisitions and financial year 2010-11 is an exceptional year of operation of Persistent Systems. We find support from the decision of 3DPLM Software Solutions Ltd. (supra) at para 17 Page 13 of the paper book as under:

“17. Persistent Systems Ltd.

17.1.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reason that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee‟s objections on the ground that as per the Annual Report for 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 u/s. 133(6) of the Act, software development constitutes 90% of its revenue. In this view of the matter, the Assessing Officer included this company, i.e., Persistent Systems Ltd. in the list of comparables as it qualified the functionality criterion.

17.1.2 Before us, the assessee 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 ld. 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 Service‟ for independent software vendors and enterprises.

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

iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) 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, 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, the company, i.e. Persistent Systems Ltd. be omitted from the list of comparables.

17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables.

17.3 We have heard the rival submissions and perused 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.”

We rely on the above facts and Tribunal decision and we direct the TPO to exclude Persistent Systems Ltd. from the list of comparable companies”.

10.2 Further, the Ld. AR relied on the order of the ITAT, Delhi in the case of M/s. Alcatel-Lucent India Ltd. vs. Addl. CIT in ITA No.6979/Del/2017 dated 09/05/2019 wherein it was held as under:

“We are of the view that a company engaged in development of the software products cannot be compared with the assessee who is engaged in contract software development services. Accordingly, we direct the Ld.A.O./TPO to exclude the company from the final set of the comparables.

10.3 Further, the Ld. AR relied on the on the order of the ITAT, Bangalore in the case of GXS India Technology Centre vs. ITO in ITA No. IT(TP)A No. 1444/Bang/2012 dated 31/07/2015 wherein it was held as follows:

“13.2 We have considered the rival submissions as well as the relevant material on record. As pointed out by the learned AR of the assessee that the functional comparability of the company has been examined by the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions (Supra) in para 17.3 as under:

“17.3 We have heard the rival submissions and perused 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 services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated 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 comparable 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.”

13.3 It is clear from the finding of this Tribunal that this company is engaged in the product developing and product design services which is similar with the software development services provided by the assessee.

Accordingly, following the decision of the co-ordinate bench of this Tribunal (supra) we direct the TPO/A.O. to exclude this company from the list of comparables.”

10.4 The Ld. AR relied on the order of the ITAT, Bangalore in the case of MetricStream Infotech (India) Pvt. Ltd. vs. DCIT in IT(TP)A Nos. 1418 & 2735/Bang/2017 dated 27/02/2019 which we have discussed in earlier para.

10.5 We have heard the rival submissions and perused the material on record. In view of the above orders of the ITAT cited in para 10.1 to 10.4 of this order, we direct the AO/TPO to exclude this company from the list of comparables on the same reason given by the co-ordinate Bench of Bangalore.”

14. In view of the matter and following the decisions of the Hon'ble Delhi High Court as well as various Tribunals, Persistent Systems Limited cannot be treated as comparable company and the AO/TPO is directed to exclude Persistent Systems Limited from final list of comparable companies with regard to its software development service segment.”

7. We observe that the findings of the Pune Bench of the Tribunal pertains to the assessment year 2014-15 which is relevant to the assessment year under consideration before us as well and therefore, the facts, circumstance and reasons given by our earlier decision with regard to this company shall mutatis-mutandis apply. Thus, following our earlier decision, the AO/TPO is directed to exclude Persistent Systems Limited from the final list of comparable companies.

(B) Thirdware Solutions Limited :-

8. The assessee before the TPO has raised the following objections stating that the company i.e. Thirdware Solutions Limited is not functionally comparable to that of the assessee company and the same are extracted as follows:

“Thirdware offers Comprehensive Application Implementation services (AIS), Application Development Services (ADS) and Application Management Support Services (AMS) in Enterprise Application space. Application implementation services includes implementation services and implementation methodology. Application management services include training and education and on demand and maintenance & enhancement services. Application development services include application portfolio rationalization, legacy modernization, rapid development & photo-typing and service enabling the enterprise. Thirdware serves various industries and verticals as Manufacturing, Automotive, Industrial Electronics, Pharmaceuticals, Consumer Packaged Goods (CPG), Chemicals, BFSI, Public Sector Units (PSUs), Retail and Travel. The company is engaged in diversified business activity as per website and separate business segments are not reported in the financials”. Thereafter, the TPO at Para (vii) of his order held that revenue of this company is mainly from software services and hence, assessee‟s contention is not acceptable and this company is retained in the final list of comparables.

9. Similarly, the Ld. DRP at running Pages 42 to 45 of its order had upheld the findings of the TPO while rejecting the objection raised by the assessee.

10. The Ld. Counsel for the assessee invited our attention again to the decision of the Co-ordinate Bench of the Tribunal, Pune in the case of Symantec Software India Private Limited. Vs. DCIT (supra.), wherein the Tribunal regarding this company has held as follows:

“16. We have perused the case records and heard the rival contentions. We observe that Thirdware Solutions Limited is functionally dissimilar and is engaged in rendering software development implementation and support services and engaged in the development of software products and earns revenue from sale of user licenses. Further, the margins of the company fluctuate year on year basis due to different revenue recognition model which the company has adopted. We find in the case of M/s. EMC Software and Services India Pvt. Ltd. Vs. JCIT (supra.), the Co-ordinate Bench of the Tribunal, Bangalore exclude Thirdware Solutions Limited from the list of comparable for determining the ALP by observing as follows:

“(iv) Thirdware Solutions Ltd. the company is functionally dissimilar and is engaged in rendering software development implementation and support services and engaged in the development of software products and earns revenue from sale of user licenses and purchase stock in trade during the year and has intangibles. Further the margins of the company fluctuate year on year basis due to different revenue recognition model which the company has adopted. The above comparable was excluded in assessee's own case on functional dissimilarity in the Assessment Years 2005-06 and 2007-08 and learned Authorised Representative also relied on Lime Labs (India) Pvt. Ltd. Vs. ITO 101 Taxman.com 201 (Delhi Trib.). We found the co-ordinate Bench of the Tribunal in the case of LG Software India Pvt. Ltd. Vs. DCIT in IT(TP)A No.3122/Bang/2018 dt.28.05.2019 for the Assessment Year 2014-15 has excluded the comparable as observed at paras 8 & 8.1 at page 4 as under :

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

8.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in A.Y 2008-09, we direct exclusion of M/s. Thirdware Solutions Ltd.”

The comparable Thirdware Solutions Ltd. has to be excluded as it is predominant in activity and segmental details are not available. Accordingly we direct the TPO/A.O to exclude this comparable from the list of comparables for determining the ALP.”

17. We further find the same view has been taken by the Co-ordinate Bench of the Tribunal, Pune in the case of M/s. John Deere India Pvt. Ltd. Cybercity Vs. ACIT (supra.) wherein the Co-ordinate Bench of the Tribunal has exclude Thirdware Solutions Limited from the list of comparable for determining the ALP by observing as follows:

“10. We have heard the rival submissions and gone through the relevant material on record. The Annual report of this company is available at page 415 onwards of the paper book. Profit and loss account of this company shows `Sales‟ of Rs.67,56,06,505/-. Break-up of such sale has been given in Schedule 12, which records `Export from SEZ units‟ – Rs.47,58,40,447/-; `Export from STPI units‟ – Rs.11,20,90,633; `Revenue from subscription‟ – Rs.1,53,13,736/-; `Sale of licence‟ – Rs.1,51,38,618/-; and `Software Services‟ – Rs.5,72,23,072/-. This company has segments only on geographical basis and not on functional level. As such, there is no bifurcation of operating profit from Software Services and others including Sale of licence and Revenue from subscription etc. Even the first two major items of `Exports from SEZ units‟ and `Export from STPI units‟ do not show as to whether these were exports of Software products or Software Services. In the absence of the availability of any concrete information in respect of Software Services, we fail to comprehend as to how this company, also having software products in its portfolio, can be construed as comparable. The same is accordingly directed to be excluded.”

18. We also observed in the case of M/s. ION Trading India Private Limited Vs. ITO (supra.) wherein the Co-ordinate Bench of the Tribunal, Delhi has exclude Thirdware Solutions Limited from the list of comparable for determining the ALP by observing as follows:

“56. We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the functions of Thirdware are in contrast with the assessee which only provides software development in the finance domain as per the instruction of its AE. Also, Thirdware has incurred expenses towards import of software services, evidencing outsourcing of software services unlike the assessee. Since it is also engaged in outsourcing its activities as it has incurred expenses towards imports of software services, evidencing outsourcing of software services unlike the appellant company. Hence, it is functionally not comparable and cannot be treated as a comparable to assessee. We order accordingly.”

Respectfully, following the plethora of decisions of various Tribunals as referred hereinabove, Thirdware Solutions Limited cannot be treated as comparable company and the AO/TPO is directed to exclude Thirdware Solutions Limited from final list of comparable companies with regard to its software development service segment.”

11. We observe again that our aforesaid findings pertains to the assessment year 2014-15 which is relevant assessment year under consideration before us at this present moment. It is therefore, natural that all parameters regarding this company would be same and respectfully, following our findings in Symantec Software India Private Limited. Vs. DCIT (supra.), we direct the TPO/AO to exclude this company i.e. Thirdware Solutions Limited from the final list of comparables.

(C) Cigniti Technologies Limited :-

12. Before the TPO, the assessee has raised following objections stating that this company i.e. Cigniti Technolgies Limited is functionally not comparable and the same is extracted as follows:

“The company is engaged in providing Independent Software Testing Servies. Cigniti‟s test offering include Quality Engineering, Advisory & Transformation, Digital Assurance and Quality Assurance solutions. The review of the Annual Report of Cigniti Technologies Ltd. shows that no segmental data is available pertaining to the software development activity due to which the margins cannot be drawn up.”

Thereafter, the TPO vide Para (ii) of his order has rejected the contentions of the assessee by observing as follows:

“The assessee has requested for rejection of Cigniti from the final set of comparable on the basis that the company is engaged in providing Independent Software Testing Services. Cigniti‟s test offerings include Quality Engineering, Advisory & Transformation, Digital Assurance and Quality Assurance solutions. However, the assessee has not provided any material impact in support of its claim and therefore, the contention of the assessee is rejected. Furthermore, the company was upheld as comparable by the Ld. CIT(A) for AY 2012-13 also. Thus, the company stands selected for comparable set.”

13. The Ld. DRP similarly at running pages 39 to 40 as per reasons appearing in that order upheld the findings of the TPO and rejected the objection raised by the assessee.

14. The Ld. Counsel for the assessee submitted that this issue is also decided in favour of the assessee by the Co-ordinate Bench of the Tribunal, Delhi in the case of Avaya India (P) Ltd. Vs. ACIT, (2019) 112 taxmann.com 301 ( Delhi-Trib) wherein, the Tribunal has held and observed as follows:

“11. Cigniti Technologies Ltd.

11.1 The learned DRP observed that the company was included by the DRP in assessment year 2012-30 and, therefore, should be retained in the year under consideration also for the same reasons. The learned counsel of the assessee referred to Page No. 293 of the paper-book and submitted that the company has acquired 'Gallop Solutions Inc., USA' during the year under consideration and due to which, total Revenue has increased by 72% by way of addition of more than 50 new clients. He submitted that in view of this extraordinary event, the company is liable to be excluded from the set of the comparables. He also referred to page 295 of the paper book and submitted that the company was engaged in software testing business. The Ld. counsel relied on the decision of the tribunal in the case of Mercedes-Benz research and development India Private Limited in IT(TP)A No. 1645/Bang/2016, wherein it is held that software testing company cannot be compared with software development company.

11.2 The Ld. DR, on the other hand, submitted that the ground of acquisition and an extraordinary event was not contested before the learned DRP.

11.3 We have heard the rival submission and perused the relevant material on record. The fact that of extraordinary event resulted into rise in revenue of the company, has not been ITA No.7290/Del/2018 disputed. In our opinion, if any fact, which is evident from the record, then any party cannot be prohibited to present the said fact in pleading to support its claim. The Tribunal the case of Hyundai motors India engineering Private Limited in ITA no. 255/Hyd/2014 has excluded the company from set of the comparables on account of extraordinary event of acquisition. Respectfully, following the same ratio, in view of extraordinary event during the year under consideration, we direct the Ld. AO/TPO to exclude the company from the set of the comparables.”

14.1 The Ld. Counsel for the assessee further placed reliance on the decision of the Co-ordinate Bench of the Tribunal, Bangalore in the case of M/s. Mircrosoft Research Lab India Pvt. Ltd. Vs. DCIT in ITA (TP) A No.3131/Bang/2018 for assessment year 2014-15 decided on 05.02.2020 wherein the Tribunal has held as follows:

“(vi) Cignity Technologies Limited, the comparable is engaged in Software Development Services and is a captive service provider to its AEs on Cost Plus IT(TP)A No.3131/Bang/2018 basis. Further company has applied for global patents for its igenerate Test, Scenarios Tool part which is a part of SMART Tools Portfolio and has specialized services in the field of software testing. We found this comparable was excluded by the co- ordinate Bench of the Tribunal in the case of Marwell India Pvt. Ltd.

Vs. DCIT (supra) at page 18 para 4.2 (a) of the order as under :

4.2 (a). Cignity Technologies Ltd: Ld.TPO held this company to be comparable as it is engaged in software development services. Ld. Counsel submitted that Ld.TPO treated this company to be comparable assessee, irrespective of different verticals of SWD. He submitted that assessee before us was a captive service provider rendering exclusive services to its AE and works on a cost plus markup basis. He submitted that assessee renders services under SWD segment on the basis of specifications provided by the AE. Whereas this comparable for the year under consideration has Ld. counsel placed before us the annual report of this company in support of his submissions to establish that this company has outgrown independently in software testing and has been awarded Automated Software Testing Services by Frost & Sullivan. He also submitted that this company has applied global/U.S. patents for its iGenerate Test Scenarios tool part which is a part of SMART tools portfolio. Whereas assessee before us has been submitted to be providing various services in which testing of integrated circuit is one of the small activity carried out by assessee for its AE. Ld. counsel submitted that from the profile of the comparable in the annual report one can hold this company to be a pioneer in software testing market catering to clients all over the world in different geographies. On the contrary, Ld.CIT DR submitted that this is no different function than what assessee has been carrying out for its AE and therefore is a perfect comparable. We have perused submissions advanced by both sides in the light of the records placed before us. We have also perused the annual report very carefully and is observed that this company is involved exclusively into software IT(TP)A No.3131/Bang/2018 testing and has created innovations in the software testing. It is also observed that this company is acquired hundred percent shares in a U.S.-based software testing service company called Gallop Solutions Inc based in Texas USA. It is also observed that this company has been listed on Bombay stock exchange, Bangalore stock exchange and maybe Madras stock exchange with a paid-up capital of Rs. 22.92 crores. It is an undisputed fact that entire revenue has been generated by this company from software testing services rendered to its independent clients as against simple testing carried out by assessee of integrated circuits along with designing, customer support of integrated circuits related ancillary services provided by assessee only to its AE. Considering the holistic approach having regards to the annual reports of this company and the specialised services provided by this company to its own clients in the field of software testing as against captive service provided by assessee exclusively to its AE, we are of considered opinion that this company cannot be held as a good comparable with that of assessee. Therefore we direct Ld. AO/TPO to exclude this company from the final list of comparables. Following the judicial precedence, we found the company is in specialized area and has to be excluded. Accordingly, we direct the TPO/A.O. to exclude from the final list of comparables.”

15. We have heard the rival contentions and perused the case records. We have also analyzed the facts and circumstances in this case. We find that this company i.e. Cignity Technologies Ltd. has been directed to be excluded from the final list of comparables by our decisions of the Co-ordinate Bench of the Tribunal, Delhi/Bangalore pertaining to the assessment year 2014-15 which is relevant assessment year under consideration before us. Respectfully following the decisions of the Co-ordinate Bench of the Tribunal referred hereinabove, we direct the TPO/AO to exclude this company i.e. Cignity Technologies Ltd. from the final list of comparables.

(D) Mindtree Limited :-

16. The assessee has raised following objections stating that the Mindtree Limited is not functionally comparable and the same is extracted as under: “Mindtree Limited is strcuted into five verticals- Manufacturing, BFSI, Hitech, travel and transportation and others. It offers services in the area of agile, analytics and information management, application development and maintenance, business process management, business technology consulting, cloud, digital business, independent testing infrastructure management services, mobility, product engineering and SAP services. Mindtree Limited is engaged in diversified business activities. As per the Annual report, the company operates in four business segments. Further the company has a high turnover of INR 3,031.60 crores which is 8.58 times the turnover of the assessee and companies having varied turnovers cannot be compared to each other as the difference in their size and scale of operations have a direct impact on their profitability.”

Thereafter, the TPO has given his findings at Para (v) of his order which reads as follows:

“v. Mindtree Limited:

The assessee has requested for rejection of Mindtree Limited from the final set of comparable on the basis that the company is structured into five verticals- Manufacturing, BFSI Hitech, Travel & transportation and Others. It offers services in the areas of agile, analytics and information management, application development and maintenance, business process management, business technology consulting, cloud, digital business, independent testing, infrastructure management services, mobility, product engineering and SAP services. Further, the company has a high turnover of INR 3,031.60 crores which is 8.58 times the turnover of the Assessee and companies having varied turnovers cannot be compared to each other as the difference in their size and scale of operations have a direct impact on their profitability.

The objection of the assessee is not acceptable. The assessee company and its group IS basically engaged in the business of information technology consulting and implementation group that which delivers the business solutions through global software development. However this company has restructured its above business into five verticals from FY 2013- [4. However the main business is remained the same i.e. software development. The relevant portion in the annual report is reproduced as under:-

“Background

Mindtree Limited ( „Mindtree‟ or „the Company‟) together with its subsidiary Mindtree Software ( Shanghai) Co. Ltd. collectively referred to as „the Group‟ is an International Information Technology consulting and implementation Group that delivers business solutions through global software development. The Group is structured into five verticals- Manufacturing, BFSI Hitech, Travel & transportation and Others. It offers services in the areas of agile, analytics and information management, application development and maintenance, business process management, business technology consulting, cloud, digital business, independent testing, infrastructure management services, mobility, product engineering and SAP services. Further from the notes to account, the details of revenue recognition are as under:

Revenue recognition

2.8.1 The company derives its revenues primarily from software services. Revenue from software development on time and material basis is recognized as the related services are rendered. Revenue from fixed price contracts is recognized using the proportionate completion method which is determined by relating actual project cost of work performed to date to the estimated total project cost for each contract. Unbilled revenue represents cost and earnings in excess of billings while unearned revenue represents the billing in excess of cost and earnings. Provision for estimated losses, if any, on incomplete contracts are recorded in the period in which such losses become probable based on the current contract estimates.

Further it is noticed that the employee cost of this company is 1782.00 crores out of total expenses of Rs.2502.30 crores. In terms of percentage it comes to 71.21%. From the above it is clear that this company is engaged in providing software development services the client base of this company has been divided into five verticals which does not mean that this company doing business in those 5 segments.

In view of the above, the contention of the assessee is not acceptable.”

17. Similarly, the Ld. DRP at Page 41 vide Para (iv) of his order as per its findings on record had upheld the decision of the TPO and dismissed the objection raised by the assessee by holding as follows:

“iv) Mindtree Ltd.

The contents that this entity is structured in 5 different verticals. However, the TPO found that the employee cost is around 71.21% of the total cost and through from AY 2013-14 the client base of the company is divided into 5 verticals, the notes to the account on the details of revenue recognition says that the company derives its revenues primarily from software services. Therefore, looking to the facts, this objection is dismissed.”

18. The Ld. Counsel for the assessee referred to the decision of the Co- ordinate Bench of the Tribunal, Delhi in the case of M/s. Alcatel- Lucent India Ltd. Vs. Addl. CIT, ITA No.6979/Del/2017 for the assessment year 2013-14 wherein the Tribunal directed the TPO/AO to exclude this company from the final set of the comparables by observing as follows:

“3. Minded Tree Ltd.

(i) The learned counsel submitted that the company is engaged in diverse business activities like IT consulting, data warehousing, product architecture design engineering embedded software, technical support testing and infrastructure management services. He submitted that company is also engaged in providing software delivery platform. He submitted that the company was engaged in research and development activities and owns significant intangibles and has applied for several patents, whereas the assessee is engaged in contract software development at low-level. Accordingly, he submitted that company might be excluded from the set of the final comparables.

(ii) The learned DR, on the other hand, relied on the order of the learned DRP and submitted that under TNMM, broad functional similarity should be seen and a small variation should be ignored as it is difficult to find exact replica of the assessee as comparable. He also submitted that the assessee failed to demonstrate effect of the intangibles on the net margin of the comparable.

(iii) We have heard the rival submissions and perused the relevant material on record. Inclusion of the comparable was not challenged by the assessee before the learned TPO. The assessee first time challenged the inclusion of the company before the learned DRP. The learned DRP on the grounds, firstly, that there is no effect of intangibles and R&D expenses on the margins of the company, secondly, that the broad nature of TNMM would cover a small variation of functions and, thirdly, that not disputed before the TPO, approved the company as one of the valid comparable. However, we find from the pages 434 of the Annual Report compendium that the company offers services which includes IT strategy consulting, data warehousing, business intelligence, technical support, infrastructure management services etc. The relevant part of the director's report is reproduced as under:

"We have developed a comprehensive range of services allowing us to offer end-to-end IT Services to our clients. With delivery centers in India and overseas, we offer IT strategy consulting, application development and maintenance, data warehousing and business intelligence, package implementation, product architecture, design and engineering, embedded software, technical support, testing infrastructure management services etc. to our customers. We believe that our comprehensive portfolio of service offerings helps our customers achieve their key business objectives."

(iv)Further, on perusal of the page 442 of the Annual Report compendium, we find that the company has used expertise in research and development to provide technology consulting services to its customers.

(v) On page, 480 of the Annual Report compendium under significant accounting policies and notes to account for the year ended 31/03/2013, the company has been treated as consulting and Implementation Company. The relevant part of the notes to account is reproduced as under: "Mindtree Limited ('Mindtree' or 'the Company') is an international Information Technology consulting and implementation company that delivers business solutions through global software development. The Company is structured into two business units - Information Technology {'IT') Services and Product Engineering {'PE') Services. IT Services offer consulting and implementation and post production support for customers in manufacturing financial services, travel and leisure and other industries, in the areas of e- business, data warehousing and business intelligence, supply chain management, ERR and maintenance and re-engineering of legacy mainframe applications PE Services provides full life cycle product engineering, professional services and sustained engineering services. It also enables faster product realization by leveraging the expertise in the areas of hardware design, embedded software, middleware and testing and through Mindtree's own IP building blocks in the areas of Bluetoot/VOIP, IVP6, iSCSI and others in datacom, telecom, wireless, storage, industrial automation, avionics, consumer products and computing."

(v) In view of the above observation, it is evident that the services rendered by the company are not limited to software development, but also are in the field of consulting and technical support, management etc. In our opinion the software development services rendered by the assessee cannot be compared with a whole basket of services of consulting, technical support or management services rendered by the company. As there is no separate segment of software development services available in the financial statement of the company, the company at entity level cannot compare functionally with the CSD Segment of assessee and accordingly, we direct the Ld. AO/TPO to exclude the company from final set of the comparables.”

18.1 The Ld. Counsel for the assessee further drew our attention to the another decision of the Co-ordinate Bench of the Tribunal, Delhi in the case of NXP India Private Limited Vs. Asst. Commissioner of Income Tax, ITA No.5140/Del/2018 for the assessment year 2014-15 which is also relevant assessment year under consideration before us wherein regarding the Company i.e. Mindtree Limited, the Tribunal has held as follows:

“13.6 We have heard the rival submissions and perused the relevant material on record. The page 90 of the compendium of Annual Reports, which is annexed to the Director's Report, We find that the company along with software development services, carried out research and development in a specific areas viz. social, mobile, analytics and cloud (SMAC) computing. The Company has developed mobile apps for retail/CPG and transport and logistics, which were adjudged the best in their category at the SAP mobile apps challenge at Techd Las Vegas, October 2013. The company achieved capabilities in Hadoop, NoSQL and allied Big Data technologies and also focusing on memory databases. This annexure further mention this focused HANA services offering now will include consulting services to identify HANA use-cases.

13.7 In this Annexure 2 to the Director's report, on page 91 of the Annual Report compilation it is mentioned that in the financial year 2013-14 i.e. previous year corresponding to the assessment year under consideration, the company filed a patent application for integrated radio-frequency front-end circuit. Thus the thrust of the company on the R&D activities and earning from mobility apps in retail /CPG and transport and logistics, makes its functionally different from the assessee who is a low- end chip designing software developer. Accordingly, we direct the AO/TPO to exclude the company from the final set of the comparable being functionally not comparable even at the segment level.” Respectfully, following our decisions referred hereinabove pertaining to the same assessment year i.e. 2014-15 with regard to this company i.e. Mindtree Limited, we direct the TPO/AO to exclude this company i.e. Mindtree Limited from the final list of comparables.

19. The assessee in the “Transfer Pricing Adjustment” ground has also prayed for inclusion of one comparable i.e. Akshay Software Technologies Ltd. in the final set of comparables.

INCLUSION OF COMPANY AS COMPARABLES TO SOFTWARE DEVELOPMENT SERVICE SEGMENT

(E) Akshay Software Technologies Ltd :-

20. The TPO has not considered this company as comparable at running Page 214 Para (i) by observing as follows:

“i. Akshay Software Technologies Ltd.: The submission of the assessee is considered but not acceptable. As per the notes to the financial statements it is mentioned that Akshay Softare Solutions Limited („the Parent') is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and overseas. During the course of TP proceedings for A Y 2012-13 & 2013-14 Hon'ble DRP observed that Professional Services being rendered by the assessee are clearly in the nature of Staffing Services by which the company employs IT professionals and provides them to various clients in the IT industry on a contract staffing / permanent staffing basis Hence, it was then held that the revenues of the company derived from Professional Services cannot be categorized as revenue from software services. There is no change in facts for A Y 2014-15 as compared to A Y 2012-13 & 2013-14 and therefore the finding of DRP is applicable to A Y 2014-15 also. Further it is also held by the Hon'ble DRP during TP proceedings for AY 2012-13 & 2013-14 that the business model of the assessee is onsite service provider which is not comparable with off shore software development service provider. There is no change in facts for A Y 2014- 15 as compared to A Y 2012-13 & 2013-14 and therefore the finding of DRP is applicable to AY 2014-15 also. Since the directions of the Hon,ble DRP are now binding on the AO/TPO, the contention of the assessee cannot be accepted. Therefore the ASTL is' not considered as comparable”

21. Similarly, the Ld. DRP at running page 34 to 38 of its order upheld the findings of the TPO by holding as follows:

“i) Akshay Software Technologies Ltd. It was noted that there is no change in the functions performed by this entity in AY.2014-15, compared to AYs.2012-13 and 2013-14, wherein the DRP rejected this company as a comparable. It was found that the professional services rendered by the assessee company were definitely not in the nature of software services, as the assessee s basically providing professionals to the clients on contract staffing /permanent staffing basis. Further, the assessee, being an on-site service provider, is not comparable with offshore software development service provider.

We have considered the submission and also examined the financials of this entity for AY 2014-15. The P&L account shows that revenue from operations is Rs.22,75,79,199/- and in note 19, this income is shown from software services. There is a reference to note 28 as well which says Export of software services (earning in foreign exchange) is Rs 21,05,20,116/- Thus evidently almost the entire revenue from the software services is out of export. Now coming to the expenses part, the major expense is on employee benefit amounting to Rs.20,02,82,870/- out of total expense of Rs.22,73,59,827/- i.e almost 88% .The operational expense is only Rs.2,43,57,929/- In note 27 the foreign branch expense incurred on accrual basis ( net of recovery) stands at Rs.19,31,86,280/-. i.e 85%. Thus the picture that emerges is that 88% is manpower expenses and 85% expense is in foreign exchange. It is therefore clear that that substantial revenue is generated onsite. Even assuming that all expenses other than manpower expenses (i.e 12%) in incurred in foreign exchange, then also 73% of manpower expense is incurred in foreign exchange. So the business model of revenue generation is surely from onsite. In the case of Trilogy E-Business Software vs. DCIT [TS 748 ITAT 2012 (Bang.) TP], the Hon'ble Bangalore ITAT upheld the onsite Revenue Filter adopted by the TPO and held that the said company which had onsite revenue of more than 75% of the total revenue cannot be considered as a comparable with the assessee who was an offshore service provider. However, without prejudice, we have further examined the annual accounts and the website of the company. In this connection, extract of the Director's report is reproduced as under:

"Operating Results and Business operations Revenue from services and sale of products on standalone basis grew by 14.12% to Rs.2275.79 lacs compared to RS.1994.14 lacs during the previous year. Like in previous year, export income from professional services business continued to maintain its share of 85 % of operating revenue. During the year, the company however witnessed pricing pressure in export business as billing rates remained stagnant."

In the Director's report, the company is stated to be a service provider.

Now the question arises as what is the nature of professional services rendered by the assessee. In this connection, the website of the company is also examined. The reporting under Home button is as under:

"Akshay's solutions and services are focused on the principle of enabling the customer to focus on core business activities. Thus, for Small & Medium Enterprises, Akshay offers SAP Business One ERP along with the associated services, which will ensure higher growth and profits for these organizations without the need for an in-house software team. Akshay's Staffing Solutions for Organizations across the spectrum, ensure, timely availability of resources, thereby eliminating the need to have in-house recruitment teams.”

In today's rapidly changing times, a key challenge that all organizations face is in building an organization that is 'future- ready'. Such an organization can only be possible through the people who make up the organization - its human capital. Thus talent acquisition becomes one of the most important factors in ensuring enduring success of an organization. And finding the appropriate resource possessing the desired skills at the right time is highly critical. Akshay partners with its clients in this process of building future-ready organizations by facilitating acquisition of talent, which is not only competent to address the present challenges but which will also upgrade its skillsets to address potential challenges in the future. With over 200 man-years of recruitment experience across multiple domains and technologies in UAE and India, combined with a robust recruitment process, Akshay through its team of recruiters is better placed to understand diverse requirements.

Akshay understands that sourcing and recruiting the right talent is tough - it's like finding a needle in a haystack. We believe in Ken Robinson's quote - "Human resources are like natural resources; they're often buried deep. You have to go looking for them, they're not just lying around on the surface. You have to create the circumstances whereby they show themselves. " In line with this philosophy, our recruitment process is based on a structured & systematic approach, which while being proactive, detailed and target oriented also ensures short •. Turn- Around- Time (TAT). This process begins with understanding the client's need, mapping position specific requirements, devising a sourcing strategy, designing a recruitment message, establishing contact with potential candidates, validation, negotiation and assisting in hiring/deployment formalities. This can also be customized based on the client specific needs. Thus our recruiters are focused and aligned to deliver the best talent to our client organizations. Our track record in this business is evidenced by the long term relationships that we enjoy with our clients whose requirements we have been servicing since the last several years. Akshay has delivered more than 1,000 man-years of services to its various clients in the last 20+ years and many consultants who were on our pay-roll and deputed to client locations on- site were later absorbed by the clients on their payrol/. This is a testimony to the quality of our recruitment process. Presently we have about 200 consultants placed with various prestigious clients in India and UAE.

Akshay's services in talent acquisition includes Recruitment Process Out-sourcing, Contract Staffing and Permanent Placement. We Offer.'

Contract Staffing & Permanent Staffing

When it comes to Staffing needs count on Akshay. Here are a few res sons wily?

• 25+ years of experience across diverse technologies and domains

• Robust recruitment process leading to identification of appropriate talent

 Involvement in Technical Evaluation before CV submission by qualified HR Professionals well trained in various HR skills, recruiting Tools & Techniques

 Faster turn-around time

 Proven IT staffing methodology

90% repeat business from prestigious clients who rely on us to deliver top talent and services

Akshay offers skilled personnel the opportunity to flourish in an open, entrepreneurial culture that encourages teamwork and personal contribution



Low Attrition rate 

Objective Yearly Apprisal of depute consultant 

Motivation, Mentoring, Training, Empathetic HR Managers who carefully manage the consultants 

Financially stable company with adequate reserves ensuring timely payout of salaries.

Thus, on detailed examination it appears that the software services is actually out of proving skilled manpower related to software to the clients as per their requirements. Part of this is also for the SAP solution i.e ERP related work. However income out of sale of software licenses is only Rs.27,28,760/- i.e miniscule compared to professional services. The Director's report also says that about 85% revenue is out of professional services. Therefore, we hold that Akshay Technologies cannot be held as a appropriate comparable in this case as it does not match the assessee functional profile.”

22. We have perused the case records and heard the rival contentions. The Ld. Counsel for the assessee submitted that for assessment year 2011-12 in assessee‟s own case, it was held by the Tribunal that this company should be included in the final list of comparables. However, for assessment year 2014-15 before us, the facts demonstrates as appearing in the order of the Ld. DRP where after detailed examination, the Ld. DRP held that the software services is actually out of proving skilled manpower related to software to the clients as per their requirements. Part of this is also for the SAP solution i.e ERP related work. However income out of sale of software licenses is only Rs.27,28,760/- i.e miniscule compared to professional services. The Director's report also says that about 85% revenue is out of professional services. Hence, the Ld. DRP held that Akshay Software Technologies Ltd. is not an appropriate comparable and hence, the said company cannot be included in the final list of comparables. We do not find any infirmity with the findings of the Ld. DRP and the same is, therefore, upheld. Thus, this ground of appeal raised by the assessee is dismissed.

23. The Ld. Counsel for the assessee further submitted that another company i.e. R.S. Software Ltd. was originally taken by the assessee as it is a comparable which was accepted by the TPO. But, now the assessee objected that this company should not be in the list of final comparables company or companies with that of the assessee.

(F) R.S. Software Ltd :

24. The observation of the TPO with regard to the company i.e. R.S. Software Limited is as follows:

“(a) R.S. Software

This comparable company is selected by the assessee and retained by the TPO in the final set of comparable. It is observed from the page 30 of the Annual report of this company for F.Y. 2013-14 as under:

Financial institutions, payment network providers, payment processors and software companies providing products to the payment industry need a development partner who understands the complexities of their industry. RS Software is the leading custom software development house for the payments industry. With more than20 years in the payments industry, we have participated in and helped create the products and services that have transformed this marketplace.

Our proven RS GEMTM, comprehensive set of services and continuing innovation are focused specifically on the needs of the space we have served exclusively since we opened our doors in 1991.

No other provider in our space can deliver more industry knowledge and experience.

Page-52 of Annual report for FY 2013-14 gives the following description:-

Over the years, RS Software has distinguished itself by emerging as one of the specialized payment service providers in the world. This specialization has been derived from the institutionalization of various competencies. This institutionalization, in turn, has been driven by the RS School of Payments (RSSOP) and the RS Payments Lab (RS'PL) with the objective to develop domain-based and technology-based payment solutions. These institutions have strengthened the Company's global brand, not just as a competent service provider but as a thought leader.

The above description shows this company also engaged in product and specialized services. However in the profit and loss account the entire revenue is shown under the head software services only. This shows that RS software is engaged in predominantly in software services which have been accepted by the TPO. However, the assessee has objected the comparables engaged in similar services or whose revenue is predominantly from software the functional difference. Thus the approach of the assessee is contradictory.”

25. The Ld. Counsel for the assessee submitted that this ground was not raised before the Ld. DRP.

26. We have heard the rival contentions and perused the material available on record. Taking into consideration, the totality of facts and circumstances on the issue, in the interest of justice, we consider it deem and proper to restore this issue to the file of the AO/TPO for fresh consideration as per principles of natural justice whether this company will be included in the final list of comparables or not. We order accordingly. Thus, this ground raised by the assessee in appeal is allowed for statistical purposes.

Adjudication of Additional Ground-Working Capital Adjustment

27. The assessee has also preferred additional ground which pertains to “Working Capital Adjustment” of comparable companies.

28. The Ld. Counsel for the assessee submitted that this adjustment always has to be positive and working capital adjustment cannot be negative. In support of his contentions, the Ld. Counsel for the assessee relied upon the decision of the Co-ordinate Bench of the Tribunal, Hyderabad in the case of Adaptec (India) P Ltd. Vs. ACIT, ITA No.206/Hyd/2014 for assessment year 2009-10 wherein on the issue, the Tribunal has held as follows:

“10. Ground No.8 pertains to the issue of negative working capital. As briefly stated above, after arriving at the arithmetic mean of all comparables at 22.03%, the A.O. worked out negative working capital adjustment of 3.22% thereby, making arms length price at 25.25%. Even though, DRP refused to interfere with the objections of the assessee in its order, we were informed that DRP has directed the TPO/A.O. not to make any negative working capital adjustment in some of the cases in the next assessment year, in the cases of Market Tools Research P. Ltd., and Mega Systems Worldwide India P. Ltd., assessee placed on record copies of orders of DRP. In that DRP considered the issue and directed the TPO as under:

"14. Ground No.11: Negative Working Capital adjustment - Making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks. On this issue, the assessee submitted as under:

"The learned TPO determined the ALP for the international transactions with A.Es by making a negative working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as:

• The company does not bear any working capital risk since it is been fully funded by it's A.E. from its inception and has no working capital contingencies. • The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement."

We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in the case of Cordys Software India P. ltd., for A.Y. 2008-09 in its directions dated 03.08.2012 has given a finding as under :

"7.7. 4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working capital adjustment is to be made to t his situation, only a positive adjustment has to be made to the comparables so that they are brought on par with the applicant. In view of the same, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made."

In view of the above, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made."

11. In view of the above, we are of the opinion that assessee's case being similar, there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment.

12. TPO is directed to examine the comparability of the two companies directed above and delete rest of the companies as objected by the assessee and re-workout the arithmetic mean. He should also consider the proviso to section 92C(2) as per law. For this purpose the orders to that extent are set aside for re- doing the same as per facts and provisions of law.”

28.1 This judgment was further relied upon by the Co-ordinate Bench of the Tribunal, Bangalore in the case of Lam Research (India) Private Limited Vs. DCIT, ITA No.1437/Bang/2014 & ITA No.1385/Bang/2014 for assessment year 2009-10 wherein the Tribunal on the issue has held as follows:

“26. This Tribunal had held that negative working capital adjustment cannot be carried out where the assessee was a captive service provider. Here also it is an admitted position that assessee was a captive service provider and its services were entirely rendered to its AE abroad. Its share capital was entirely sourced from its AE abroad. Therefore, in our opinion, the view taken by this Tribunal in the case of Adaptec (India) P. Ltd. will squarely apply here. We, therefore, direct that no negative working capital adjustment shall be carried forward out on the average PLI of the final set of comparables.”

28.2 Further, the Ld. Counsel for the assessee has relied on the decision of the Co-ordinate Bench of the Tribunal, Hyderabad in the case of Intoto Software India P. Ltd. Vs. Income Tax Officer, ITA No.1810/Hyd/2012 for the assessment year 2008-09 wherein the assessee has raised an additional ground to the fact that the TPO has erred in making a negative working capital adjustment of -3.84% while computing the adjustment u/s.92CA of the Act. The contention of the Ld. Counsel for the assessee was as under:

“It is the contention of the Ld. Counsel for the assessee that the Tribunal in the case of Adaptec India P. Ltd. has held that negative working capital adjustment should not be made in the case of captive service provider, while computing the adjustment under section 92CA of the Act. The Ld. Counsel for the assessee has filed a copy of the decision of this Tribunal in the case of Adaptec India P. Ltd. wherein at page No.20 at Para 11 of the order such a direction was given by the Tribunal.”

The Tribunal on the issue has held as follows:

“Having regard to the rival contentions, we deem it fit and proper to remit this issue also to the file of the TPO for reconsideration in accordance with the judicial precedents on the issue. The additional ground of the appeal is accordingly allowed for statistical purposes.”

29. We have perused the case records and heard the rival contentions. We find though the case laws relied upon by the Ld. Counsel for the assessee supports his case, however, there are other decisions of the Co-ordinate Bench of the Tribunal which supports the case of the Revenue. That further, in ITA No.1810/Hyd/2012 (supra.), the Co-ordinate Bench of the Tribunal, Hyderabad has restored the matter to the file of the TPO for reconsideration in accordance with judicial precedents. That again the judicial precedent has to be tallied with facts in the assessee‟s case and then a decision has to be taken as per law. In the interest of justice, the matter is restored to the file of the TPO/AO to consider the decisions relied on by the assessee vis-à-vis the facts and circumstances of the case and adjudicate the issue in compliance with the principles of natural justice. Thus, this ground of appeal raised by the assessee is allowed for statistical purposes.

30. The assessee has also raised ground relating to disallowances /additions other than transfer pricing adjustment which reads as under:

“9. The learned DRP erred on facts and in law in directing the Ld. AO in adding amount of INR 25,84,042 appearing in Income Tax System database as interest on income tax refund granted to Appellant and ignoring the Appellant‟s submission that the said amount was not taxable in captioned year since no intimation was received by Appellant qua said refund adjustment and also said amount was not recognized as income in the books of accounts”.

31. With regard to this ground, the Ld. Counsel for the assessee contends the direction of the Ld. DRP wherein it had directed the Assessing Officer in adding amount of INR 25,84,042 appearing in Income Tax System database as interest on income tax refund granted to assessee and ignoring the assessee‟s submission that the said amount was not taxable in captioned year since no intimation was received by assessee qua said refund adjustment. The Ld. Counsel for the assessee further submitted that this addition should not stand since there was no intimation regarding adjustment of interest on the refund amount and that the said amount was not taxable in the relevant assessment year under consideration.

32. We have perused the case records and heard the rival contentions. We observe that the interest on refund either it can be directly given by the Department to the assessee or as in the present case, suppose if some tax liability is arising with regard to the assessee in respect of the earlier years then the interest on the refund amount if adjusted vis-à-vis those outstanding tax liability i.e. also deemed payment of interest. It has been held in the case of Avada Trading Co. (P.) Ltd. vs Assistant Commissioner Of Income Tax, (2006) 100 ITD 131 (Mum) that interest on refund under Section 244A(1) would be assessable in the year in which it is granted and not in the year in which proceedings under Section 143(1)(a) attain finality. The Special Bench of the Tribunal in this case on the issue has further held as follows:

“9. The main contention of the assessee's counsel is that such right is contingent as the interest so received can be varied or withdrawn after the assessment under Section 143(3). We are unable to accept such contention of assessee for the reasons given hereafter. According to the dictionary meaning, a right or an obligation can be said to be contingent when such right or obligation is dependent on something not yet certain. According to Section 244A, the only condition for grant of interest is that there must be a refund due to assessee under any provision of the Act. There is no other condition in the said provision affecting such right. Therefore, the moment a refund becomes due to assessee, an enforceable debt is created in favour of assessee and assessee acquires a right to receive the interest. Sub-section (3) of Section 244A only affects its quantification under certain circumstances and not the right of interest. The Hon'ble Supreme Court in the case of CIT v. Shri Goverdhan Ltd. , has observed at page 681 that once a debt is created, then the liability cannot be said to be contingent merely because it is to be quantified at later date. Under Section 244A, even the interest is quantified immediately whenever a refund is issued. In our view, the right to grant interest is absolute since existence of such right is not dependent on any event. For example, assessee is granted interest of Rs. 1,000 on the date of granting refund. Subsequently, under Section 244A(3), it is reduced to Rs. 600 by virtue of assessment under Section 143(3). Can it be said that right to interest did not accrue on the date of refund? In our opinion, the right of interest came into existence on the date of refund by virtue of Section 244A(1) though its quantification may or may not vary depending upon the outcome of assessment.”

32.1 The Special Bench of the Tribunal, Bombay has considered the decision of the Hon‟ble Supreme Court in the case of Kedarnath Jute Mfg.

Co. Ltd. v. CIT, 1971 AIR 2145, 1972 SCR (1) 277 approving the judgment of the Hon'ble Madras High Court in the case of Pope the King Match Factory v. CIT [1963] 50 ITR 495 and has held as follows:

“12. The ratio of the above judgment is clearly applicable to the present case. According to the above judgment, if an enforceable debt is created under a statute then any subsequent event would not affect the existence of such right/obligation despite the fact that such debt is subject-matter of appeal. The right to interest under Section 244A is not dependent upon any assessment inasmuch as there is no compulsion or obligation upon the Assessing Officer to make an assessment under Section 143(3). The moment the return is processed under Section 143(1)(a) and refund is issued on the basis of intimation under Section 143(1)(a), an enforceable legal right is created in favour of assessee under Section 244A and simultaneously the Assessing Officer is under legal obligation to grant the interest. Merely because quantum of such interest may vary on assessment made under Section 143(3), it cannot be said that legal right was not acquired on the date of refund. The effect of assessment under Section 143(3) would be that interest on refund under Section 244A would get substituted in terms of Sub-section (3) of Section 244A without affecting right already accrued.”

Therefore, interest on refund whenever it is granted, it is assessable in that year itself and if it is adjusted with any prior tax liability of earlier years and such interest is in turn paid to the Government Account that also is payment of interest to the assessee, in such case, there is no need for any intimation separately. Hence, this ground of appeal raised by the assessee is dismissed.

33. The assessee has also raised ground with regard to initiation of penalty proceedings u/s.271(1)(c) of the Act. At this stage, challenging of initiation of penalty proceedings u/s.271(1)(c) of the Act is premature and the same is hereby rejected.

34. In the result, appeal of the assessee is partly allowed for statistical purposes.

Order pronounced on 04th day of March, 2020.