1. This appeal at the instance of the Revenue and cross objection preferred by the assessee are directed against CIT(A)’s order dated 27.08.2019. The relevant assessment year is 2011-2012.

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

The assessee is a private limited company engaged in providing software development and support services to Sharp Group under a software development service contract. The assessee is remunerated on a cost plus mark up basis. For the assessment year 2011-2012, the return of income was filed on 29.11.2011 declaring total taxable income of Rs.3,51,11,704 under the normal provisions of the and a book profit of Rs.3,37,56,248 under the provisions of section 115JB of the I.T.Act. The assessment was selected for scrutiny and notice u/s 143(2) and 142(1) of the was issued to the assessee. During the course of assessment proceedings, the matter was referred to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) of the international transactions entered by the assessee with its Associate Enterprises (AEs). For the international transactions pertaining to software development services with AEs, the assesee in its transfer pricing study had undertaken the comparability analysis selecting Transactional Net Margin Method (TNMM) as the most appropriate method and computed the average net margin of 13.60% on operating cost. The net margin earned by the assessee for the software development services being at 15.80%, the ALP of the international transaction undertaken by the assessee was sought to be justified on TP study. During the TP proceedings, the TPO retained certain comparables chosen by the assessee, introduced few new comparables and then recomputed the average net margin of comparables at 24.82% on operating cost. The TPO after providing the working capital adjustment of 1.2%, the adjusted net margin of comparable companies was determined at 23.58% on operating cost. Accordingly, the TPO passed an order dated 28.01.2015 u/s 92CA of the determining the transfer pricing adjustment of Rs.1,69,00,721 in respect of software development transaction. The comparables selected by the TPO, the arithmetical mean, computation of ALP by the TPO and the adjustment made are as follows:-

Comparables selected by TPO and their arithmetic mean:

Computation of arm’s length price by the TPO and the adjustment made:

3. Since the assessee preferred an appeal before the CIT(A), final assessment order u/s 143(3) r.w.s. 144C(13) of the was passed vide order dated 31.03.2015. The CIT(A) granted substantial relief to the assessee. Pursuant to the order of the CIT(A), the final list of comparable companies and their margins are as follows:-

4. The revised Arm’s Length Margin (ALM) for the assessee after factoring the + / - 5 range, the entire adjustment in relation to the international transaction of provision or software development services would stand deleted.

5. Aggrieved by the order of the CIT(A), the Revenue has filed the appeal and the assessee has filed the cross objection. We shall first adjudicate the Revenue’s appeal.

IT(TP)A No.2358/Bang/2019 (Revenue’s appeal)

6. The grounds raised read as follows:-

“1 The order of the CIT(Appeals) is opposed to law and the facts and circumstances of the case.

2. On the facts and circumstances of the case, whether the ld.CIT(A) is justified in directing to exclude the company, E- Infochips Ltd. on the ground of the company failing the software Development revenue / Sales filter, without taking into consideration the TPO’s integration of the hardware maintenance revenue with the SWD revenue while applying the filter

3. On the facts and circumstances of the case, whether the ld.CIT(A) is justified in directing to exclude companies M/s.E- Zest Solutions Ltd., M/s.Infosys Technologies Ltd. and M/s.Tata Elxsi Ltd from the list of comparables on the ground of functional dissimilarity without undertaking any FAR analysis of the companies for the two different AYs to establish that the functions of the companies have remained constant over the period

4. On the facts and circumstances of the case, whether the 0ld.CIT(A) is justified in directing to exclude companies M/s.E- Zest Solutions Ltd. M/s.Infosys Technologies Ltd. and M/s.Tata Elxsi Ltd. from the list of comparables relying upon the decision of the Hon’ble Tribunal in the assessee’s own case for a different assessment year when the case has not reached its finality

5. On the facts and circumstances of the case, whether the ld.CIT(A) is justified in holding the company M/s.Akshay Technologies Ltd. as functional comparables to the assessee without giving any reason and without undertaking a FAR analysis of the company

6. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A), in so far as it relates to the above grounds may be reversed and that of the Assessing Officer be restored.

7. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.”

7. Grounds 1, 6 and 7 are general in nature and no adjudication is called for.

8. In grounds 2, 3 and 4, the Revenue is challenging the CIT(A)’s direction to exclude the following companies from the list of comparables:-

(i) E-Zest Solutions Limited

(ii) E-Infochips Limited

(iii) Infosys Limited

(iv) Tata Elxsi Limited.

9. In ground 5, the Revenue challenges the CIT(A)’s direction to include M/s.Akshay Software Technologies Limited in the list of comparables. We shall first adjudicate grounds 2, 3 and 4, namely, the CIT(A) has erred in directing to exclude the above mentioned companies from the list of comparables.

E-Zest Solutions Limited

10. The CIT(A) has excluded the above company from the list of comparables on functional dissimilarity by following the Tribunal’s order in assessee’s own case for the assessment year 2007-2008 in IT(TP)A No.1102/Bang/2011 (order dated 09.12.2016).

10.1 Aggrieved the Revenue has raised this issue before the Tribunal. The learned Departmental Representative relied on the order of the Assessing Officer.

10.2 The learned AR, apart from supporting the order of the CIT(A), submitted that the above company should be excluded from the comparable list for the following reasons:-

(a) The company offers product engineering along with software development services. Key offering includes product design and development, product feature enhancement, product platform migration, Enterprise Application Development, IT services – Onsite / offshore software development, Software testing etc. However, the revenue break-up for each of the services is not available. The company has only one segment.

(b) Engaged into outsourced product development services.

(c) Provides EPO services.

(d) The company has opening and closing stock. Hence, the company is involved in sale of products.

10.3 in support of his contentions, the learned AR relied on the following orders of the Tribunal :-

(i) Arcot R&D Software Private Limited [IT(TP)A No.397/Bang/2016, IT(TP)A No.437/Bang/2016 and CO No.14/Bang/2017 for A.Y. 2011-12.]

(ii) Sharp Software Development India Pvt. Ltd. [IT(TP)A No.1102/Bang/2011 for A.Y. 2007-08]

(iii) AMD India P Ltd. v. ACIT [IT(TPA) No.1487/Bang/2015 for A.Y. 2011-12]

(iv) Autodesk India Private Limited [IT(TPA) No.156/Bang/2016 and IT(TP)A No.220/Bang/2016 for A.Y. 2011-12]

(v) 3DPLM Software Solutions Ltd. [IT(TP)A No.1303/Bang/2012 for A.Y.2008-09]

10.4 We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of ACIT v. M/s.Arcot R&D Software Pvt. Ltd. in IT(TPA) No.397/Bang/2016 & Ors. for assessment year 2011- 2012 (order dated 15.10.2018) had excluded E-Zest Solutions Limited from the list of comparables on account of functional dissimilarity. We notice that the profile of the assessee and that of the assessee in the case of M/s.Arcot R&D Software Pvt. Ltd. are similar. Further, the assessment year in this case and M/s.Acrot R&D Software Pvt. Ltd. is 2011-2012. The Bangalore Bench of the Tribunal in the case of Arcot R&D Software Pvt. Ltd. (supra) had held that E-Zest Solutions Limited is engaged in product engineering and software development. It was further held by the Tribunal that since the company was having closing stock of Rs.1,64,69,183, it prima facie indicate that the company was engaged in product development also. Therefore, it was held that E-Zest Solutions Limited is not functionally comparable. The relevant finding of the Bangalore Bench of the Tribunal in the case of Arcot R&D Software Pvt. Ltd. (supra) reads as follows:-

“28. The ld.DRP has rejected E-zest Solutions Ltd. on the ground that the company has engaged in product engineering and software development. Further, the company is having closing stock of Rs.1,64,69,183/- which is prima facie indicates that the company is engaged in product development also. The above facts make it clear that the above company is not functionally comparable with the assessee company.

29. Having heard both sides, we find that this company is engaged in product engineering and software development which is evident from the fact that it derived revenue from product sales and also carries closing stock in its financial statements for the year end. We further observed that there is abnormal trend in profits in previous year. Further, the company has been considered by theAT in the case of M/s.Comsco Networks India Pvt. Ltd. in IT(TP)A No.166/Bang/ 2016, where under similar circumstances held that this company is not functionally comparable. Therefore, we are of the considered view that the ld.DRP was right in rejecting this company from the list of comparables and hence reject ground taken by the Revenue.”

10.5 In view of the co-ordinate Bench order of the Tribunal in the case of Arcot R&D Software Pvt. Ltd. (supra), we hold that E-Zest Solutions Limited is not functionally comparable to that of the assessee and the CIT(A) has rightly directed the A.O. to exclude the same from the list of comparables.

E-Infochips Limited

11. The CIT(A) had excluded the above company from the list of comparables since it fails the service revenue filter as revenue from software development contributes only 74% of the operating revenue.

11.1 The learned DR supported the order of the A.O.

11.2 The learned AR, apart from relying on the order of the CIT(A), submits that the above company ought to be excluded from the list of comparables for the following reasons:-

(a) This company is functionally different from the assessee-company.

(b) The company has revenue from hardware maintenance along with inventory reporting indicating that company has software products.

(c) No break up between the revenue from products and services.

(d) As per segment reporting company is into software development, ITES and products, but break up of revenue from SWD, ITES and products is not available.

(e) The company earns revenue from royalty, professional and consultancy fees also.

(f) The company has expertise in application specific integrated circuit systems area and embedded software area.

(g) The company is also into research and development activities.

(h) The company has inventories which indicates that it has software products unlike the assessee.

11.3 In support of the above submission, the learned AR relied on the following orders of the Tribunal:-

(i) Arcot R&D Software Private Limited [IT(TP)A No.397/Bang/2016, IT(TP)A No.437/Bang/2016 and CO No.14/Bang/2017 for A.Y. 2011-12.]

(ii) AMD India P Ltd. v. ACIT [IT(TPA) No.1487/Bang/2015 for A.Y. 2011-12]

(iii) Autodesk India Private Limited [IT(TPA) No.156/Bang/2016 and IT(TP)A No.220/Bang/2016 for A.Y. 2011-12]

(iv) GT Nexus Software Pvt. Ltd. v. DCIT [IT(TP)A No.409/Bang/2016 for A.Y. 2011-12]

(v) Microsoft Research Lab India Pvt. Ltd. [IT(TP)A No.115/Bang/2016 for A.Y. 2011-12]

(vi) CGI Information Systems & Management Consultation Pvt. Ld. [ITA Nos.502/Bang/2016 and CO No.01/Bang/2017 for A.Y. 2011-12]

11.4 We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of Arcot R&D Software Pvt. Ltd. (supra), had excluded the company since it fails to the filter of software development services. The relevant finding of the Bangalore Bench of the Tribunal, reads as follows:-

“26. The ld.DRP has rejected E-Infochips Ltd., on the ground that there is abnormal trend in revenue, profits and also the company fails the filter of software development services greater than 75% of total operating revenue applied by the ld.TPO. Further, the company is engaged in development and maintenance of computer software and software development segment and also manufacturing EVM and VDB electronic board. The software development and IT enabled services and products are considered as one reportable segment. Even in the profit and loss account the expenses have been debited under the head manufacturing and other operating expenses, therefore, held that this company cannot be compared with profile of the assessee company which is mainly engaged in software development service segment. The Revenue fails to counter the findings of facts recorded by the ld.DRP with any evidences. Further, theAT has considered this company as comparable in earlier assessment years therefore, we are of the considered view that there is no error in the findings given by the ld.DRP for excluding this company from the list of comparables, hence we reject ground taken by the Revenue.”

11.5 In the light of the order of the co-ordinate Bench of the Tribunal, we hold that the CIT(A) is justified in excluding the above company from the list of comparable companies.

Infosys Limited

12. The above company was excluded by the CIT(A) by stating that it is functionally different from that of the assessee by relying on the order of the Bangalore Bench of the Tribunal in assessee’s own case for assessment year 2007- 2008 (supra).

12.1 On further appeal, the learned DR relied on the grounds and supported the order of the A.O.

12.2 The learned AR submitted that the above company ought to be excluded from the list of comparables for the following reasons:-

(a) The company is a giant company and is a leading global technology service corporation, Infosys provides a gamut of services that includes business consulting, technology engineering and outsourcing services etc. and in addition, the company offers various software products for the various industries.

(b) Revenue from both products are services.

(c) Infosys provides a gamut of services that includes business consulting, technology, engineering and outsourcing services etc. and also offers various software products.

(d) The company owns significant intangibles (patents) and has incurred huge R&D expenditure. The fixed assets schedule of the company suggests that it owns intangibles in the form of intellectual property rights.

(e) The annual report indicates that Infosys brand is one of the most important intangible assets owned by the company.

(f) Infosys has incurred sales and marketing expenditure amounting to Rs.1,219 crores for the F.Y. 2010-11 and also has 64 marketing office around the globe.

(g) Infosys operates as a full-fledged risk bearing entrepreneur as compared to the assessee which is a risk mitigated captive service provider.

12.3 In support of the above submission, the learned AR relied on the following orders of the Tribunal.

(i) Arcot R&D Software Private Limited [IT(TP)A No.397/Bang/2016, IT(TP)A No.437/Bang/2016 and CO No.14/Bang/2017 for A.Y. 2011-12.]

(ii) Sharp Software Development India Pvt. Ltd. [IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 for A.Y.2005-06]

(iii) Sharp Software Development India Pvt. Ltd. [IT(TP)A No.1102/Bang/2011 for A.Y. 2007-08]

(iv) AMD India P Ltd. v. ACIT [IT(TPA) No.1487/Bang/2015 for A.Y. 2011-12]

(v) Autodesk India Private Limited [IT(TPA) No.156/Bang/2016 and IT(TP)A No.220/Bang/2016 for A.Y. 2011-12]

(vi) GT Nexus Software Pvt. Ltd. v. DCIT [IT(TP)A No.409/Bang/2016 for A.Y. 2011-12]

(vii) Delhi ITAT & Delhi High Court – Fiserv India Private Limited for A.Y. 2009-10.

(viii) Electronics for Imaging India [IT(TP)A No.212/Bang/2015 for A.Y. 2010-2011]

12.4 We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of Arcot R&D Software Pvt. Ltd. (supra), had excluded the company from the list of comparable companies. The relevant finding of the Bangalore Bench of the Tribunal, reads as follows:-

“30. The ld.DRP has rejected Infosys Ltd. and TATA Elexi Ltd. on the ground that this company has been consistently rejected by various courts and tribunals based on very large scale or functional dissimilarity. Further, we noticed that these two companies have been rejected by theAT in assessee’s own case for A.Y. 2010-11, on the ground tht this company is functionally dissimilar of its size, profits, turnover, brand value and it operates in diversified markets. Therefore, we are of the considered view that the ld.DRP was right in rejecting these two companies from the list of comparables and hence, we reject the ground taken by the Revenue.”

12.5 In the light of the order of the co-ordinate Bench of the Tribunal, we hold that the CIT(A) is justified in excluding the above company from the list of comparable companies.

Tata Elxsi Limited

13. The above company was excluded by the CIT(A) by stating that it is functionally different from that of the assessee by relying on the order of the Bangalore Bench of the Tribunal in assessee’s own case for assessment year 2007- 2008 (supra).

13.1 On further appeal, the learned DR relied on the grounds and supported the order of the A.O.

13.2 The learned AR submitted that the above company ought to be excluded from the list of comparables for the following reasons:-

(a) The company operates in 2 segments (i) systems integration and support services, and (ii) software development and services.

(b) The software development and services segment comprises of three sub-services – (i) produce design services, (ii) industrial design services, and (iii) visual computing labs.

(c) No sub-services break up under the software development and services segment.

(d) As per the annual report of Tata Elxsi for F.Y. 2010-11, the company has disclosed inventories in the balance sheet which a pure software services provider would not disclose as it would not carry any such inventory.

13.3 In support of the above submission, the learned AR relied on the following orders of the Tribunal.

(i) Arcot R&D Software Private Limited [IT(TP)A No.397/Bang/2016, IT(TP)A No.437/Bang/2016 and CO No.14/Bang/2017 for A.Y. 2011-12.]

(ii) Sharp Software Development India Pvt. Ltd. [IT(TP)A No.1109/Bang/2011 & CO 13/Bang/2012 for A.Y.2005-06]

(iii) Sharp Software Development India Pvt. Ltd. [IT(TP)A No.1102/Bang/2011 for A.Y. 2007-08]

(iv) AMD India P Ltd. v. ACIT [IT(TPA) No.1487/Bang/2015 for A.Y. 2011-12]

(v) Autodesk India Private Limited [IT(TPA) No.156/Bang/2016 and IT(TP)A No.220/Bang/2016 for A.Y. 2011-12]

(vi) GT Nexus Software Pvt. Ltd. v. DCIT [IT(TP)A No.409/Bang/2016 for A.Y. 2011-12]

(vii) Electronics for Imaging India [IT(TP)A No.212/Bang/2015 for A.Y. 2010-2011]

13.4 We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of Arcot R&D Software Pvt. Ltd. (supra), had excluded the company from the list of comparable companies. The relevant finding of the Bangalore Bench of the Tribunal, reads as follows:-

“30. The ld.DRP has rejected Infosys Ltd. and TATA Elexi Ltd. on the ground that this company has been consistently rejected by various courts and tribunals based on very large scale or functional dissimilarity. Further, we noticed that these two companies have been rejected by theAT in assessee’s own case for A.Y. 2010-11, on the ground that this company is functionally dissimilar of its size, profits, turnover, brand value and it operates in diversified markets. Therefore, we are of the considered view that the ld.DRP was right in rejecting these two companies from the list of comparables and hence, we reject the ground taken by the Revenue.”

13.5 In the light of the order of the co-ordinate Bench of the Tribunal, we hold that the CIT(A) is justified in excluding the above company from the list of comparable companies.

Inclusion of Akshay Software Technologies Limited (Ground 5)

14. The CIT(A) directed the AO / TPO to include Akshay Software Technologies Limited in the list of comparables, since it was functionally comparable to that of the assessee. The relevant directions of the CIT(A) reads as follows:-

”During the appellate proceedings it was submitted by the AR that the inclusion of comparables chosen by the appellant is not being pressed with the exception of M/s.Akshay Software Technologies Ltd. The appellant has contended that this company is functionally comparable and sale of products is less than 1% of revenue and sub-contracting charges are only 3.52% of the total expenses of the company. The contentions of the appellant are accepted. The TPO is directed to include this company as a comparable in t his year after verifying that it satisfies all the filters. With the above observations, this ground of appeal is partly allowed.”

14.1 We have heard rival submissions and perused the material on record. The Revenue has not controverted the above factual finding of the CIT(A) by placing any contra material / evidence on record. Hence, the directions of the CIT(A) to include Akshay Software Technologies Limited is confirmed.

14.2 Therefore, this ground is dismissed.

CO No.2/Bang/2020 (By Assessee)

15. The learned AR did not press the cross objection and hence, the cross objection is dismissed as not pressed.

16. In the result, the appeal filed by the Revenue and the cross objection filed by the assessee are dismissed.

17. Order pronounced on this 23rd day of February, 2022.