ORDER

N.V Vasudevan, Judicial Member - IT(TP) A.No.586/Bang/2015 & JT (TP) A.No.l83/Bang/2017 are appeals by the assessee against the order dated 30/1/2015 & 24.11.2016 of Asst. Commissioner of Income-tax, Cire1e-2(1)(1), Bangalore in respect of an order passed u/s. 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 (Act) relating to assessment years 2010-11 & 2012-13 respectively. Both these appeals were heard together and have common issues. We deem it convenient to pass a common order.

IT(TP) A.No.586/Bang/2015 (AY 2010-11)

2. First we shall take up for consideration issues with regard to determination of Arm's Length Price in respect of international transaction of rendering of Software Development Services and Information Technology Enabled Services by the Assessee to its holding company. The Assessee is a company engaged in the business of providing contract Software Development Services (SWD Services) and providing Information Technology Enabled Services (ITES) to its holding company in Netherlands BV as a captive service provider. The transaction of rendering software development services and ITES to holding company was a transaction with an Associated Enterprise (AE) and was therefore an international transaction. As per the provisions of Sec.92 of the Act, income from international transaction has to be computed having regard to Arm's Length Price (ALP).

3. The details of the international transaction between the Assessee and its AE in AY 2010-11 were as follows:

4.SOFTWARE DEVELOPMENT SERVICES SEGMENT: It is not in dispute between the Assessee and the revenue that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee's profit with that of comparable companies was Operating Profit/Total Cost (OP/TC). The OP/TC of the Assessee was 13.87%. The Assessee in its TP study selected 16 comparable companies whose arithmetic mean of OP/TC was arrived at 13%. Since the profit margin of the Assessee was more than the arithmetic mean of OP/TC of the 16 comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in the international transaction was at Arm's Length. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the AO, accepted 4 out of the 16 comparable companies suggested in the TP study by the Assessee as comparable with the Assessee. The TPO on his own selected 6 other companies as comparable companies with the Assessee. Thus a final set of 10 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment was as follows:

Comparables selected by the TPO and their arithmetic mean:

5. Based on the above average arithmetic mean of profit margin of the comparable companies, the TPO computed the ALP of the international transaction of rendering of SWD services by the Assessee to its holding company as follows:

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

6. The difference between the price charged by the Assessee and the ALP determined by the TPO viz., Rs. 24,62,86,639/- was added to the total income by the AO in his draft assessment order dated 11.3.2014 as addition on account of shortfall being adjustment u/s.92CA of the Act.

7. The Assessee filed objections to the draft assessment order by the AO before the Disputes Resolution Panel (DRP). The DRP in its directions dated 3.12.2014 rejected the objections of the Assessee and confirmed the addition on account of shortfall being adjustment u/s.92CA of the Act. The AO passed a fair order of assessment making the addition on account of determination of ALP by the TPO. Aggrieved by the addition made in the fair order of assessment, the Assessee has raised several grounds of appeal challenging the addition on several counts. However, at the time of hearing of the appeal, the learned counsel for the Assessee submitted that if 5 out of the 10 comparables chosen by the TPO viz., (i) Infosys Ltd., (ii) Kals Informations Systems Ltd., (iii) Persistent Systems Ltd., (iv) Tata Elxsi Ltd.; and (v) Persistent System and solutions Ltd., are excluded and if the arithmetic mean of the profit margin of the remaining 6 companies when compared with the price charged by the Assessee, then the price charged by the Assessee would be at Arm's length.

8. The learned counsel for the Assessee submitted before us that the comparability of the 5 companies which the Assessee seeks exclude from the list of comparable companies chosen by the TPO were considered by the ITAT Bangalore Bench in the case of Dy. CIT v. Electronics for Imaging India (P.) Ltd. [2016] 70 taxmann.com 299 for the same AY 2010-H. In this regard it was submitted that the functional profile of the Assessee is same as that of the Assessee in the case of Electronics for Imaging India Pvt. Ltd. is identical inasmuch as the said company was also involved in providing SWD services to its AE and the TPO had chosen 11 comparable companies out of which the very same 10 companies that were chosen by the TPO in the case of the Assessee for the purpose of comparability. His submission was that the decision rendered by the Tribunal in the case of Electronics for Imaging India (P.) Ltd. (supra) would be equally applicable to the Assessee in the present case also. The learned DR. submitted that the DRP in its directions has merely accepted with the reasoning of the TPO and therefore the issue of exclusion of these companies should be directed to be examined afresh by the DRP.

9. We have considered the rival submissions. In the case of Electronics for Imaging India (P.) Ltd. (supra), this Tribunal considered the comparability of the 5 companies which the Assessee seeks to exclude from the final list of comparable companies chosen by the TPO. The functional profile of the Assessee and that of the Assessee in the case of Electronics for Imaging India (P.) Ltd. (supra) is identical inasmuch as the said company was also involved in providing SWD services to its AE and the TPO had chosen 11 comparable companies out of which the very same 10 companies that were chosen by the TPO in the case of the Assessee was also included for the purpose of comparability. In the aforesaid decision the Tribunal held on the comparability of the 5 companies which the Assessee seeks to exclude as follows:

10. Respectfully following the decision of the Tribunal we hold that the aforesaid 5 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins of the? In this regard we are also of the view that the plea of the learned DR for a remand of the issue to the DRP on the ground that the DRP has not given any reasons in its directions cannot be accepted. The DRP has endorsed the view of the TPO in its directions and therefore the reasons given by the TPO should be regarded as the conclusions of the DRP. If the above 5 comparable companies are excluded the arithmetic mean of the remaining comparables would be as follows:

The computation of ALP would be as follows:

Since the arithmetical mean- of the working capital adjusted margins of the above 5 comparables (15.36%) is within +/- 5% of the NCP margin of the Assessee (13.87%), the TP adjustment made by the TPO insofar as it relates to the SWD services provided by the Appellant to its AEs in FY 2009-10 is deleted. The other grounds raised in the Assessee's memorandum of appeal insofar as it relates to the SWD services provided to its AEs in FY 2009-10 are not pressed at this stage. However, the Assessee is at liberty to urge the said grounds in any future proceeding, appellate or otherwise, and in these proceedings at a future point in time.

11. ITeS Segment: It is not in dispute between the Assessee and the revenue that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee's profit with that of comparable companies was Operating Profit/Total Cost (OP/TC). The OP/TC of the Assessee was 14.52%. The Assessee in its TP study selected 15 comparable companies whose arithmetic mean of OP/TC was arrived at 14%. Since the profit margin of the Assessee was more than the arithmetic mean of OP/TC of the 15 comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in the international transaction was at Ann's Length. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the AO, accepted 3 out of the 15 comparable companies suggested in the TP study by the Assessee as comparable with the Assessee. The TPO on his own selected 6 other companies as comparable companies with the Assessee. Thus a final set of 9 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment was as follows:

Comparables selected by TPO and their arithmetic mean:

12. Computation of arm's length price by TPO and the adjustment made:

13. The difference between the price charged by the Assessee and the ALP determined by the TPO viz., Rs.24,62,86,639/- was added to the total income by the AO in his draft assessment order dated 11.3.2014 as addition on account of shortfall being adjustment u/s. 92CA of the Act.

14. The Assessee filed objections to the draft assessment order by the AO before the Disputes Resolution Panel (DRP). The DRP in its directions dated 3.12.2014 rejected the objections of the Assessee and confirmed the addition on account of shortfall being adjustment u/s. 92CA of the Act. The AO passed a fair order of assessment making the addition on account of determination of ALP by the TPO. Aggrieved by the addition made in the fair order of assessment, the Assessee has raised several grounds of appeal challenging the addition on several counts. However, at the time of hearing of the appeal, the learned counsel for the Assessee submitted that if 3 out of the 9 comparables chosen by the TPO viz., (i) Accentia Technologies Ltd., (ii) ICRA online Ltd., and (iii) Infosys BPO Ltd., are excluded and if the arithmetic mean of the profit margin of the remaining 6 companies when compared with the price charged by the Assessee, then the price charge by the Assessee would be at Arm's length.

15. It needs to be clarified that Infosys BPO Ltd., was a comparable chosen by the Assessee in his Transfer Pricing Study (TP Study). However before the DRP the Assessee has objected to inclusion of this company as a comparable at page-58 of its objections before the DRP to the draft assessment order incorporating the ALP suggested by the TPO. The DRP did not find any merit in the objections for exclusion of this company from the list of comparable companies. The DRP has not dealt with .the specific objections of the Assessee for exclusion of this company from the list of comparable companies. In view of the decision of the Special Bench Chandigarh in the case of Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 307 , wherein the Special Bench had laid down that there is no estoppel in the matter of selection of comparables and that objections to exclusion or inclusion of comparables can be made by the parties, the comparability of this company with the Assessee needs to be examined. The Learned counsel for the Assessee submitted before us that in the case of Goldman Sachs Services (P.) Ltd. v. Dy. CIT A.No.267/Bang/2015 for AY 2010-11, the comparability of the three companies for very same AY 2010-11, which the Assessee seeks to exclude in this appeal with a company rendering ITES was considered. The Tribunal held that the aforesaid three companies cannot be regarded as comparable with a routine ITES company. In this regard it was submitted that the functional profile of the Assessee is same as that of the Assessee in the case of Goldman Sachs Services Pvt. Ltd. (supra), inasmuch as the said company was also involved in providing ITES to its AE and the TPO had chosen same comparable companies that were chosen by the TPO in the case of the Assessee. His submission was that the decision rendered by the Tribunal in the case of Goldman Sachs Services (P.) Ltd. (supra) would be equally applicable to the Assessee in the present case also. The learned DR submitted that the DRP in its directions has merely accepted with the reasoning of the TPO and therefore the issue of exclusion of these companies should be directed to be examined afresh by the DRP.

16. We have considered the rival submissions. In the case of Goldman Sachs Services (P.) Ltd. (supra), this Tribunal considered the comparability of the 5 companies which the Assessee seeks to exclude from the final list of comparable companies chosen by the TPO. The functional profile of the Assessee and that of the Assessee in the case of Goldman Sachs Services (P.) Ltd. (supra) is identical inasmuch as the said company was also involved in providing 1TES to its AE and the TPO had chosen same comparable companies. In me aforesaid decision the Tribunal held on the comparability of the 3 companies which the Assessee seeks to exclude as follows:

17. Respectfully following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies tor the purpose of comparison with the profit margins of the. In this regard we are also of the view that the plea of the learned DR for a remand of the issue to the DRP on the ground that the DRP has not given any reasons in its directions cannot be accepted. The DRP has endorsed the view of the TPO in its directions and therefore the reasons given by the TPO should be regarded as the conclusions of the DRP. If the above 3 comparable companies are excluded the arithmetic mean of the remaining comparables would be as follows:

Computation of arithmetic mean of 6 comparables for the Appellant's IT Enabled Services segment:

+/- 5% of Appellant's Net Margin for IT enabled services:

Thus, since the arithmetical mean of the working capital adjusted margins of the above 6 comparables (18.70%) is within +/- 5% of the NCP margin of the Appellant (14.52%), the TP adjustment made by the TPO insofar as it relates to the ITE Services provided by the Assessee to its AEs in FY 2009-10 is liable to be deleted. Therefore, the other grounds raised in the Assessee's memorandum of appeal insofar as it relates to the ITE Services provided to its AEs in FY 2009-10 are not adjudicated at this stage. However, the Assessee is at liberty to urge the said grounds m any future proceeding, appellate or otherwise, and in these proceedings at a future point in time.

18. In Gr. No. 18, the Assesses has prayed for a direction that the credit for Taxes deducted at sources has not been properly allowed by the AO. In this regard it was submitted that for AY 2010-11, the Assessee was entitled to a total credit of TDS of a sum of Rs. 1,18,40,477/-, as per its Form No.26AS for the said assessment year. The AO, however, allowed TDS credit of only Rs. 92,81,177/- while computing its income chargeable to tax. The DRP, vide its rectified directions dated 25.02.2015, directed the AO to verify the Assessee's claim as regards short-grant of TDS credit and to allow the credit after verification. It was submitted that despite such directions, no such relief was granted to the Assessee on this issue despite the Assessee being entitled to the balance TDS credit. We arc of the view that it would be just and appropriate to direct the AO to grant TDS credit of the entire amount of Rs. 1,18,40,477/- after due verification.

19. The other grounds of appeal except the grounds decided above do not require any adjudication. In the result, the appeal of the Assessee is partly allowed.

20. IT(TP) A.No.183/Bang/20l7 for AY 2012-13): First we shall take up for consideration issues with regard to determination of Arm's Length Price in respect of international transaction of rendering of Software Development Services and Information Technology Enabled Services by the Assessee to its holding company. The Assessee is a company engaged in the business of providing contract Software Development Services (SWD Services) and providing Information Technology Enabled Services (ITES) to its holding company in Netherlands BV as a captive service provider. The transaction of rendering software development services and ITES to holding company was a transaction with an Associated Enterprise (AE) and was therefore an international transaction. As per the provisions of Scc.92 of the Act, income from international transaction has to be computed having regard to Arm's Length Price (ALP).

21. The details of the international transaction between the Assessee and its AE in AY 2012-13 were as follows:

22. SOFTWARE DEVELOPMENT SERVICES SEGMENT: It is not in dispute between the Assessee and the revenue that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee's profit with that of comparable companies was Operating Profit/Total Cost (OP/TC). The OP/TC of the Assessee was 12.63%. The Assessee in its TP study selected 14 comparable companies whose arithmetic mean of OP/TC was arrived at 13.08%. Since the profit margin of the Assessee was more than the arithmetic mean of OP/TC of the 14 comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in the international transaction was at Arm's Length. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the AO, accepted 1 (Mindtree Ltd.) out of the 14 comparable companies suggested in the TP study by the Assessee as comparable with the Assessee. The TPO on his own selected 9 other companies as comparable companies with the Assessee. Thus a final set of 10 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment selected by TPO was as follows:

23. Based on the above average arithmetic mean of profit margin of the comparable companies, the TPO computed the ALP of the international transaction of rendering of SWD services by the Assessee to its holding company as follows:

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

24. The difference between the price charged by the Assessee and the ALP determined by the TPO viz., Rs. 50,47,78,165/- was added to the total income by the AO in his draft assessment order dated 29.2.2016 as addition on account of shortfall being adjustment u/s. 92CA of the Act.

25. The Assessee filed objections to the draft assessment order by the AO before the Disputes Resolution Panel (DRP). The DRP in its directions dated 15.9.2016 directed the AO (i) to exclude 1CRA Techno Analytics Ltd, and Datamatics Global Services Ltd. from die list of comparable companies as they agreed with the Assessee that these two companies are not functionally comparable to the Assessee, (ii) rejected the Assessee's claim for exclusion of the following four companies viz., (a) Genesys International Corpn. Ltd., (b) Infosys Ltd., (c) Larsen and Toubro Infotech Ltd., and (d) Persistent Systems Ltd. The Assessee had contended before DRP that these 4 companies are not comparable to the Assessee. (iii) directed TPO to recompute the margins of the Assessee and the comparables after treating foreign exchange fluctuations as operating income or loss as the case may be.

26. Pursuant to the above directions issued by the DRP, the list of comparables that remained for consideration was as follows:

27. Pursuant to the directions of the DRP, the AO passed the final assessment order wherein the TP adjustment stood reworked at a lesser figure than what was originally suggested by the TPO. The AO passed a fair order of assessment making the addition on account of determination of ALP by the TPO as modified by the DRP. Aggrieved by the addition made in the fair order of assessment, the Assessee has raised several grounds of appeal challenging the addition on several counts. However at the time of hearing the learned counsel restricted his arguments to exclusion of 4 comparables out of the 8 comparable companies that remain in the final list of comparable companies after the directions of the DRP viz., (a) Genesys International Corpn. Ltd., (b) Infosys Ltd., (c) Larsen and Toubro Infotech Ltd., and (d) Persistent Systems Ltd.

28. The learned counsel for the Assessee submitted before us that the comparability of the 3 companies out of the aforesaid 4 companies which the Assessee seeks to exclude from the list of comparable companies chosen by the TPO viz., Infosys Ltd., Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd., were considered by the ITAT Delhi Bench in the case of Agilis Information Technologies India (P.) Ltd. v. Asstt. CIT [2018] 89 taxmann.com 440 (Delhi - Trib.) for the same AY 2012-13. In this regard it was submitted that the functional profile of the Assessee is same as that of the Assessee in the case of Agilis Information Technologies India (P.) Ltd. (supra), is identical inasmuch as the said company was also involved in providing SWD services to its AE and the TPO had chosen 16 comparable companies out of which 6 companies chosen by the TPO in the case of the Assessee for the purpose of comparability were the same. His submission was that .the decision rendered by the Tribunal in the case of Agilis Information Technologies India (P.) Ltd. (supra) would be equally applicable to the Assessee in the present case also. The learned DR. submitted that the DRP in its directions has merely accepted with the reasoning of the IPO and therefore the issue of exclusion of these companies should be directed to be examined afresh by the DRP.

29. We have considered the rival submissions. In the case of Agilis Information Technologies India (P.) Ltd. (supra), this Tribunal considered the comparability of the 3 companies which the Assessee seeks to exclude from the final list of comparable companies chosen by the TPO. The functional profile of me Assessee and that of the Assessee in the case of Agilis Information Technologies India (P.) Ltd. (supra), is identical inasmuch as the said company was also involved in providing SWD services to its AE and the TPO had chosen some comparable companies which were also chosen by the TPO in the case of the Assessee for the purpose of comparability. In the aforesaid decision the Tribunal held on the comparability of the 3 companies which the Assessee seeks to exclude as follows:

30. Respectfully following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins. In this regard we are also of the view that the plea of the learned DR for a remand of the issue to the DRP on the ground that the DRP has not given any reasons in its directions cannot be accepted. The DRP bas endorsed the view of the TPO in its directions and therefore the reasons given by the TPO should be regarded as the conclusions of the DRP.

31. The learned DR. next submitted that Genesys International Corporation Ltd., should be excluded from the list of comparable companies. The comparability of this company with the Assessee has been discussed by the TPO in page-11 of his order. The Assessee objected to inclusion of this company in the list of comparable companies for the reason that this company is functionally different and owns intangible assets which are peculiar only when the Assessee owns software products. The objections of the Assessee are contained in its letter dated 22.12.2015 addressed to the TPO and in annexure-B to the said letter. The relevant portion of the objection is at pages 711-713 of the Assessee's paper book. According to the Assessee this company is engaged in providing Geographical Information Services comprising of Photogrammetry, Remote Sensing, Cartography, Data Conversion, state of the art terrestrial and 3D geocontent including location based and other computer based related services. Pagc-38 of the Annual report 2012 containing the above description was brought to the notice of the TPO, Attention of the TPO was invited to the directors report to the shareholders at page ii of the annual report 2012, wherein the Directors have informed the shareholders that the company continued in its journey, to be innovators and leaders in the fields of location based services related geoplatforms and advanced survey techniques. There is no segmental reporting because it is stated in the annual report that this company is only in one segment viz., GIS based services and therefore there is no requirement of segmental reporting. It was also submitted that this company owns substantial intangibles equivalent to 10.42% of its total turnover.

32. The TPO however has regarded this company as a comparable company by observing that this company develops software for mapping and geospatial services and operates a few development centres in India. The company is predominantly into software development services. The intangibles in the possession of the company are only the GIS database which is only depreciation. It does not add significant value to the company.

33. The objections as put forth before the TPO were reiterated before the DRP. The DRP in paragraphs 6.2.2 & 6.2.3 of its directions dealt with this issue as follows:

"6.2.2 The functions of the Assessee company have been examined in detail. A financial product on which the settlement system of bank runs is a real time system. It is very complex. Any bug or problem in it can crash the entire banking system of several nations. The Assessee's claim of providing only basic software services is rejected.

6.2.3 The Panel holds that the software for financial product is much more complex than a geospatial software. Therefore, the panel holds that the Genesys is a valid comparable."

34. The learned counsel for the Assessee submitted that the DRP has completely proceeded on wrong facts which does not either emanate from the order of the TPO or the submissions of the Assessee. He reiterated submissions made before the TPO and DRP. The learned OR relied on the order of the DRP/TPO.

35. We have given a careful consideration to the rival submissions. It is clear from the material brought to the notice of the TPO by the Assessee that this: company renders mapping and geospatial services. In rendering such services it develops software. But that does not mean that this company is in the business of software development. The business profile of this company as per the annual report does not show that this company is into software development service. The only line of business that this company carries on is rendering GIS based services and this is clear from the annual report which specifies that since the company carries on only one line of business viz., GIS based services there is no need to give any segmental results. In the circumstances, we are of the view that there is no basis for the TPO to conclude that this company is predominantly into software-development services. The presence of intangible assets is indicative of the fact that this company is not in software development services business. The TPO has overlooked this aspect and proceeded on the basis that the presence of intangible assets would not be significant. Rule 10B(2) of the Income Tax Rules, 1962 (Rules) specifically provides that for the purposes of sub-rule (1) of Rule 10B, the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:—

In the given facts and circumstances, we are of the view that Genesys International Corporation Ltd., cannot be considered as a comparable company and the said company should be excluded from the final list of comparable companies. We hold accordingly.

36. If the aforesaid 4 companies are excluded from the list of comparable companies, the remaining comparable companies and the average arithmetic mean of those comparables would be as follows:

The arithmetical mean of the working capital adjusted recomputed margins of the above comparables would fall within the +/-5% range of the Appellant's NCP margin of 12.63% for provision of SWD services. Consequently, the international transaction of provision of SWD services by the Assessee to its AEs in FY 2011-12 can be concluded as being at arm's length. Therefore, the other grounds raised in the appeal in relation to its international transaction of provision, of SWD services do not require any adjudication at this stage. However, the Assessee is at liberty to urge the said grounds in any future proceeding, appellate or otherwise, and in these proceedings at a future point in time.

37. ITES Segment: It is not in dispute between the Assessee and the revenue .that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee's profit with that of comparable companies was Operating Profit/Total Cost (OP/TC). The OP/TC of the Assessee was 12.39%. The Assessee in its TP study selected 7 comparable companies whose arithmetic mean of OP/TC was arrived at 11.48%, Since the profit margin of the Assessee was more than the arithmetic mean of OP/TC of the 7 comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in the international transaction was at Arm's Length. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the AO, accepted 2 out of the 7 comparable companies suggested in the TP study by the Assessee as comparable with the Assessee. The TPO on his own selected 8 other companies as comparable companies with the Assessee. Thus a final set of 10 comparable companies was chosen by the TPO as comparable companies. The arithmetic mean of profit margin of these companies after and before adjustment towards working capital adjustment was as follows:

Comparables selected by TPO and their arithmetic mean:

38. On the basis of the comparable companies, the TPO computed arm's length price of the international transaction of rendering of ITES by the Assessee to its AE and the consequent addition to total income by way of adjustment to ALP as follows:

39. The difference between the price charged by the Assessee and the ALP determined by the TPO viz., Rs. 20,44,28,488/- was added to the total income by the AO in his drat assessment order dated 29.2.2016 as addition on account of shortfall being adjustment u/s. 92CA of the Act

40. The Assessee filed objections before the DRP against the addition made on account of adjustment to ALP. The DRP gave the following directions:

41. List of Comparables post the DRP's Directions

On giving effect to the DRP's directions, the list of comparables is as follows:

42. Pursuant to the directions of the DRP, the AO passed the final assessment order wherein the TP adjustment stood reworked at a lesser figure than what was originally suggested by the TPO. The AO passed a fair order of assessment making the addition on account of determination of ALP by the TPO as modified by the DRP. Aggrieved by the addition made in the fair order of assessment, the Assessee has raised several grounds of appeal challenging the addition on several counts.

43. The learned counsel for the Assessee submitted before us that the Assessee seeks the following relief from the Tribunal:

44. The learned counsel for the Assessee submitted before us that 3 out of the 5 companies which the Assessee seeks to exclude from the list of comparable companies viz., Infosys BPO Ltd. TCS B-service Ltd. and Excel Infoway Ltd., were considered for exclusion by the Tribunal in the case of a similar Assessee such as the Assessee engaged in providing ITES in the case of Baxter (I) (P.) Ltd. v. A.CIT [2017] 85 taxmann.com 285 (Delhi - Trib.) . The learned DR relied on the order of the DRP/TPO.

45. We have considered the rival submissions. In the case of Baxter (I) (P.) Ltd., (supra) the Delhi ITAT Bench considered comparability of the aforesaid three companies with a company engaged in providing ITBS such as the Assessee. The functional profile of the Assessee and the Assessee in the case of Baxter (I) (P.) Ltd. (supra) are identical inasmuch as 7 out of the 10 companies chosen by the TPO in the case of the Assessee were chosen as comparable in the case of Baxter (I) (P.) Ltd. (supra). The Tribunal held on the comparability of the three companies Infosys BPO Ltd., TCS E-service Ltd. and Excel Infoway Ltd., as follows:

46. Respectfully, following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins.

47. The next submission of the learned counsel for the Assessee was with regard to exclusion of 2 comparable companies from the list of 7 comparable companies that remain after the order of the DRP. The first comparable company sought to be excluded is Universal Print Systems Ltd. This company was chosen as a comparable company by the TPO. In reply to the proposal of the TPO to include this company as a comparable company, the Assessee vide its letter dated 22.12.2015 had pointed out its objections to including this company as a comparable company. A copy of the said objection is at page-785 of the Assessee's paper book. The Assessee pointed out that the OP/TC of this company as worked out by the TPO at 59.40% was wrong and unallocated costs as per the annual report should be allocated to BPO segment and if that is done then the OP/TC of this company will be only 51.80%. The Assessee further pointed out (Page764 of paper book) that the TPO had applied revenue filter of more than 75% being from non-financial service income. The Assessee pointed out that the percentage of income from ITES was only 21.63% of the total revenue from operations of this company as per its annual report. The Assessee also pointed out that in the Pre-press BPO segment this company was providing integrated print solutions to its customers, which includes scanning, design/layout, trapping, hand-outlined clipping path and image masking and magazine and catalogue publishing. The Assessee submitted that the aforesaid services are not in the nature of ITES. The Assessee pointed out that as per the safe harbour rules introduced by the CBDT ITES has been defined as business process outsourcing services provided mainly with the assistance or use of information technology. It was also submitted that this company does not satisfy the definition of ITES as contained in Rule IOTA(e) of the Rules. Since use of information technology is absent .in the various services provided by this company, it cannot be regarded as ITES company. The Assessee also submitted that this company fails the employee cost filter. The employee cost filter requires that the employees cost incurred by the company must be more than 25% of its revenue.

48. The TPO at page-20 of his order has dealt with the above objections by observing as follows:

49. On objections by the Assessee before the DRP, the DRP confirmed the action of the TPO. One of the objection before the DRP was that this company did not figure in the list of companies engaged in ITES. On this objection the DRP held that though this company did not figure in the list of companies in ITES in the main search of capital line and prowess database but on a segmental search these two companies satisfied the requirement of being considered as companies engaged in providing ITES.

50. Aggrieved by the directions of the DRP, the Assessee is in appeal before the Tribunal. The learned counsel for the Assessee reiterated submissions that were made before the TPO/DRP. In particular it was submitted that the service revenue filter was applied by the TPO himself at the entity level and on such search this company was not regarded as engaged in providing ITES. At this stage the TPO ought to have dropped this company as a comparable company because this filter has to be applied at the entity level and not at the segmental level. The learned DR submitted that if the service revenue filter is applied at the segmental level there can be no objection by the Assessee. She relied on the order of the DRP/TPQ.

51. The requirements of Rule 10B(1)(2) & (3) of the Rules in the matter of comparability of companies under TNMM needs to be seen. The same reads as follows:

"10B. (1) For the purposes, of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:—

(e) transactional-margin method, by which,

(2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:-

(3) An uncontrolled transaction shall be comparable to an international transaction if-

52. There appears to be no bar in the Rules referred to above to considering segmental data under TNMM because the comparison is of "net profit margin realized by the enterprise from an international transaction" with the "net profit realized from a comparable uncontrolled transaction". Therefore comparison is of similar transaction. When segmental information is available and is not disputed, it cannot be argued that filters have to be applied at entity level. It cannot be argued that when the TPO himself applied the filters at the entity level he was not entitled to apply the filters at segmental level. As we have already stated if clear segmental information is available the filters can be applied at the segmental level in TNMM. Therefore the objection with regard to this company failing the employee cost filter and service revenue filter in our view was rightly rejected by the TPO and DRP. It is however seen that this company has four segments viz., Repro. Label Printing, Offset Printing and Pre-press BPO. Whether the label printing and offset printing segments supplement the functions performed in the Pre-press BPO segment has to be seen. We therefore set aside the order of the DRP in this regard and remand for fresh consideration by the TPO the comparability of this company. In terms of Rule 10B(3) of the rules the profit margins of Pre-Press BPO have to be adjusted taking into account the fact that two other segments supplement the pre-press BPO segment. If such adjustment cannot be reasonably or accurately made then this company has to be excluded from the list of comparable companies. The TPO for this purpose can use his powers u/s. 133(6) of the Act to get required details from this company. As far as the argument that this company fails functional comparability, we find that none of the objections raised by the Assessee in this regard about lack of information about allied services performed by die pre-press BPO segment of this company and the break-up of the revenue from such allied services have been dealt with specifically by the TPO or DRP. Since the comparability of this company is being remanded to be TPO for consideration of adjustments as mentioned above, the objection with regard to functional comparability should also be looked into by the TPO in the remand proceedings on the basis of materials which he may gather u/s. 133(6) of the Act, The Assessee should be given opportunity of being heard by the TPO before the issue is decided by the TPO.

53. The next comparable company retained after the order of the DRP which the Assessee seeks to exclude is BNR Udyog Ltd. As far as this company is concerned, it was the objection of the Assessee before the TPO that the TPO ought not to have selected this company as comparable company for the reason that the related party transaction of this company at the entity level was 49.60% of the total revenue and that this company has less than-75%-of its revenue from providing TTES. The TPO rejected The above contention by holding that this company has 3 major business segments and the segmental results of medical transcription business which is providing 1TES alone was considered for die purpose of comparison. When the segmental results are considered the related party transaction is nil. 100% of the segmental income was from providing 1TES, i.e., emedical transcription and therefore 75% revenue is from providing ITES and therefore the company passes the test of income from providing ITES being more than 75% of the total income. The DRP accepted the view of the TPO.

54. The submission of the learned counsel for me Assessee was identical as were made before the TPO and DRP. We have while deciding the objection with regard to excluding Universal Print Systems Ltd., already held that when clear segmental information is available then there is no bar in applying filters at the segmental level. The reasons given while coming to the above conclusion will equally apply to including BNR Udyog Ltd., as a comparable. Since this company passes RPT filter as well as income from providing ITES being more than 75% of its revenue, this company has to be regarded as comparable company. No other arguments were advanced for exclusion of this company. Hence this company is held to be comparable with that of the Assessee.

55. The next submission of the learned counsel for the Assessee was for inclusion of two companies viz., (i) Informed Technologies India Ltd., and (ii) Jindal Intellicom Ltd., in the final list of comparable companies. In this regard it was argued that both these companies were held to be comparable companies by the TPO and the Assessee did not object before the DRP to inclusion of these two companies as comparable companies. The DRP suo motu excluded these two companies from the list of comparable companies vide paragraphs 6.18 & 6.19 of its directions. On a perusal of the Order of the DRP it is clear that the DRP did not put the Assessee on notice as to its proposed action of excluding these two companies from the list of comparable companies. As far as the company Informed Technologies India Ltd., is concerned, it was excluded by the DRP for the reason that this company had advanced certain interest-free sums in prior financial years, which came to be written off by the company in FY 2011-12. According to the DRP the action on the part of the management of this company was prejudicial to die company and therefore this company would fail the comparability criteria considering the Functions, Asset and Risk, FAR analysis. It was contended by the learned counsel for the Assessee that when functionally this company was found to be comparable with the Assessee, the DRP ought not to have excluded this company on a ground which is not relevant while performing FAR analysis. It was also submitted that this company has been selected by the TPO as a comparable to the Assessee for the assessment years 2009-10 and 2010-11 and its inclusion for those assessment years has not been objected to by the Assessee in those years. The learned DR submitted that the proper course would remand the issue for fresh consideration by the DRP as the Assessee was not put on notice before exclusion of this company. We have considered the submissions and are of the view that when this company is consistently figuring in the list of comparables to assessees similarly placed to the Assessee the DRP has proceeded on irrelevant grounds to exclude this company. At best the DRP ought to have directed the TPO to give proper adjustment in terms of Rule 10B (3) of the rules for impact, if any, to this company's policy. No purpose would be served by remanding the issue to the DRP. In the given facts and circumstances, we are of the view that this company should be included in the list of comparable companies because it is not disputed by the DRP that this company is functionally comparable and that in the past AYs this company was regarded as a comparable company and generally regarded as comparable company providing ITES.

56. The same reasoning given for including Informed Technologies India Ltd., would apply for including Jindal Intellicom Ltd., also. This company was selected by the Assessee in its TP study and accepted by the TPO as being comparable to it (pages 16-17 of the TP order). Since it passed all the filters applied by the TPO, as subsequently upheld by the DRP, it was rightly included in the list of comparables. In the proceedings before the DRP, the Assessee did not object to its inclusion in the list of comparables. However, despite the above, the DRP on its own directed its exclusion on the premise that since it catered only to customers in USA, where there was allegedly an adverse business climate for outsourcing work, its profitability was impacted. According to the DRP the Assessee's AE was in Netherlands where there was no adverse market conditions and therefore Jindal Intellicom Ltd., was liable to be excluded from the list of comparable companies. The DRP did not put the Assessee on notice as to its proposed action of excluding this company. We find that the Assessee does not merely provide services to its AE in Netherlands. It also provides ITE services to its AE's in UK, Finland, Germany, Sweden, Belgium, Denmark, Norway and USA. A perusal of its Form 3CEB for the instant assessment year which is produced at pages 1035-1046 of the paper book, shows that it provided services to AE's at USA also. Therefore, the entire basis for its exclusion is wholly misconceived and erroneous and, accordingly, its suo motu exclusion by the DRP is not proper. The functions performed by this company are comparable to the services provided by the Assessee and have not been disputed whatsoever by the DRP. That apart, Jindal has been selected by the TPO as a comparable to the Assessee for the assessment years 2008-09, 2011-12 and 2013-14 and its inclusion for those assessment years has not been objected to by the Assessee either. Moreover, it is consistently figuring in the list of comparables in companies providing ITES. We therefore direct inclusion of this company in the list of comparable companies.

57. The TPO is directed to consider the revised profit margins after considering the directions in this order and recomputed the ALP in the ITES segment No submissions were made on the other grounds raised in the appeal in relation to its transaction of provision of ITE services. The learned counsel for the Assessee however sought liberty to urge other grounds in any future proceeding, appellate or otherwise, and in these proceedings at a future point in time. We allow liberty to the Assessee as prayed for by the learned counsel for the Assessee.

58. In Ground No. 13, the Assessee has sought direction from this Hon'ble Tribunal to the AO to grant the entire FTC (Foreign Tax Credit) (i.e., credit for tax paid outside India on income which is also included in die total income in me return of income filed in India). According to the Assessee it was entitled to such credit and its tax liability has to be recomputed for the present assessment year after giving such credit. The facts in this regard are that in its return of income filed under the Act for the AY 2012-13, the Assessee for the instant assessment year, Assessee has claimed FTC of Rs. 13,94,950/- (relevant details at pages 867 and 894 of the paperbook). However, in the draft assessment order passed by the AO, he allowed FTC only to the extent of Rs. 9,83,255/- without giving any explanation for the short-grant of FTC. Although the Assessee objected to the same before the DRP, it refused to interfere with this issue on the premise that doing so would be beyond the scope of its powers. Consequently, in the impugned final assessment order, FTC was only allowed to the extent of Rs. 9,83,255/- as against the sum of Rs. 13,94,950/- that was claimed by the. Assessee in its return of income. We are of the view that it would meet the ends of justice if a direction is given to the AO to verify the claim of the Assessee and allow tax credit in accordance with law.

59. In the result, IT (TP) A. No. 183/Bang/20I7 is partly allowed.

60. In the result, both the appeals are partly allowed.

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