Ld. Dispute Resolution Panel (DRP). The grounds urged by the assessee give rise to the following issues:

a) Transfer Pricing adjustment made in respect of Software Development section.

b) Transfer pricing adjustment made in respect of I.T. enabled services.

c) Disallowance made u/s 14A of the Act.

d) Non set off of entire brought forward losses

e) Non grant of MAT credit.

f) Short grant of TDS credit.

g) Interest charged u/s 234B & 234D of the Act.

2. Other grounds are general in nature or premature in nature.

3. The assessee is engaged in providing software development services (SWD) and telephonic support services (ITES) to its overseas associated enterprises.

4. We shall first take up the transfer pricing adjustment made in respect of software development segment. The assessee adopted TNMM method as most appropriate method and OP/OC, as Profit level indicator (PLI). The assessee had selected 8 comparable companies with arithmetic mean of 12.42%. The PLI of the assessee was 10.03%. Accordingly, it was contended that the

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transaction with it's A.E. are at arm's length. The TPO however, rejected the transfer pricing study of the assessee and selected following 10 comparable companies.

Accordingly, the T.P. made an adjustment of Rs.10.15

crores in software segment. The DRP also confirmed the

order passed by TPO.

5. The Ld. A.R. submitted that the assessee seeks exclusion of following six companies:

Sl.No. Name of the Company

1 Genesys International Corpn. Ltd.

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2 ICRA Techno Analytics Ltd.

3 Infosys Ltd.

4 Larsen &Touibro Infotech Ltd.

5 Persistent Systems Ltd.

6 Spry Resources India Pvt. Ltd. The Ld. A.R. submitted that M/s Genesys International Corporation Ltd; M/s Infosys Ltd; M/s Larsen & Toubro Infotech Ltd and M/s Persistent Ltd were considered by the coordinate bench in the case of CGI Information Systems &Management Consultants Pvt. Ltd. (2018) 94 taxmann.com 97 by holding that they are not good comparables. He further submitted that the company M/s. ICRA Techno Analytics Ltd. was excluded in assessment year 2011-12 by the coordinate bench in the case of Applied Materials India Pvt. Ltd. Vs. ACIT (TS-815- ITAT-2016(Bang)-TP). He further submitted that the above said company was excluded on reasoning that no segmental information is available in the services segment. The Ld. A.R. submitted that the segmental details are not available during the year under consideration also. Accordingly, he prayed for exclusion of this company. With regard to the Spry Resources India Pvt. Ltd., the Ld. A.R. submitted that the said company is having inventories on its hand, which shows that the above said company is dealing with software products. Accordingly, he prayed for exclusion of this company also.

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6. We heard Ld D.R and perused the record. In the case of CGI Information systems & management Consultants P Ltd (supra), following four companies were excluded with the following observations:-

"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:

(a) Infosys Ltd., was excluded from the list of comparable companies by following the decision of the Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies (P.) Ltd. [2013] 36 taxmann.com 289/219 Taxman 26 (Delhi). The discussion is contained in paragraphs 4.5 to 4.7 of the Tribunal's order. The Tribunal accepted that Infosys Ltd. is a giant risk taking company and engaged in development and sale of software products and also owns intangible assets and therefore not comparable with a software development service provider such as the Assessee in that case.

(b) Larsen &Tourbro Infotech Ltd., was excluded from the list of comparable companies by relying on the decision of the Delhi Bench of ITAT in the case of Saxo India (P.) Ltd. v. Asstt. CIT [2016] 67 taxmann.com 155 (Delhi - Trib.). The discussion is contained in paragraphs 4.8 to 4.10 of the

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Tribunal's order. The Tribunal held that L & T Infotech Ltd., was a software product company and segmental information on SWD services was not available. The Tribunal also noticed that the appeal filed by the revenue against the tribunal's order was dismissed by the Hon'ble Delhi High Court in ITA No.682/2016.

(c) Persistent Systems Ltd., was excluded from the list of comparable companies on the ground that this company was a software product company and segmental information on SWD services was not available. The Tribunal in coming to the above conclusion referred to the decision rendered by ITAT Delhi Bench in the case of Cash Edge India (P.) Ltd. v. ITO ITA No.64/Del/2015 order dated 23.9.2015 and the decision of Hon'ble Delhi High Court in the case of Saxo India Pvt. Ltd. (supra). The findings in this regard are contained in Paragraphs 4.14 to 4.16 of its order.

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

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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

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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

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uncontrolled transaction shall be judged with reference to the following, namely:—

(a) the specific characteristics of the property transferred or services provided in either transaction;

(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;

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."

7. In respect of ICRA Techno Analytics Ltd, it is the submission of the Ld A.R that this company was excluded in AY 2011-12 in the case of Applied Materials India P Ltd (supra) by holding that it is providing various types of services and segmental information thereof is not available. He invited our attention to the annual report of this company pertaining to the year relevant to AY 2012-13 and submitted that, in the year under consideration also, the facts are identical. Accordingly, he sought exclusion of this company.

8 We heard Ld D.R and have gone through the Annual Report of this company. It is stated in page 44 of the Annual report (Running page 2364 of assessee's paper

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book) that this company is engaged in the software development & consultancy, engineering services, web development & hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing. It is further stated under the head

"Revenue recognition" (page 45 of the Annual report) that a. the revenue from services consists of revenue earned from services performed for software development & consultancy, licensing & sub- licensing fee, annual maintenance charges for software support, web development and hosting which is recognized to the extent services are performed.

b. Revenue from sales is recognized as and when the delivery of branded software is made is booked net of trade discount…..

Page no.2 of Annual Report (Running page 2379 of paper book) contains Profit and Loss account. The Revenue from sale of services is mentioned therein, but break-up details is not given. Thus, we notice that this company is engaged in various types of services and break-up details of each of the services are not available. The Ld A.R also mentioned that a company named M/s Axiom

Technologies Ltd has merged with this company during this year. However, the Director's report states that the

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Hon'ble High Court of Calcutta has passed the order confirming the merger of above said company. The effective date of merger is not given. Hence it is not clear as to whether the effective date of merger falls during the year under consideration or in any of the earlier years. If it is falling in any of the earlier years, then the merger should not have any effect, unless the assessee is able to demonstrate the impact, if any. We notice that the TPO has applied RPT filter of 25%. According to the assessee, the RPT works out to 29.36%, while the TPO has worked out the same at 23.15%. We notice that the Ld DRP has not addressed this issue. We notice that the TPO has also taken the view that the services rendered by this company are not different, while the contention of the assessee is that this company is engaged in providing different kinds of services which are not akin to that of the assessee. Hence we are of the view that this company requires examination afresh at the end of AO/TPO. Accordingly, we restore this company to the file of AO/TPO for examining it afresh.

9. The next company that was sought by the Ld A.R to be excluded is M/s Spry Resources P Ltd. It is the submission of the assessee that this company is engaged in the development of software products and outsourcing activities. The segmental details are also not available. It

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was further submitted that this company is engaged in rendering onsite activities. Accordingly he sought for exclusion of this company.

10. We have heard Ld D.R and gone through the Annual Report of this company. The Revenue recognition policy given under Significant Accounting policies (Page 2790 of paper book) states that the assessee is recognizing revenue from software consultancy and also from sale of products. This company is possessing inventories also, which is shown in Note no. 18 (page 2787 of paper book). The revenue from operations, however, consists of Income from software development. Hence it is not clear as to whether this company has sold any of its inventories or not during the year under consideration. We notice that the TPO has not examined the aspects relating to software products. We notice that in the case of CGI information systems & Management Consultants (P) Ltd (supra), M/s Spry Resources India P Ltd has been taken as a comparable company. All these aspects show that there is no clarity on the factual aspects relating to this company. Accordingly, we are of the view that this company also requires fresh examination at the end of AO/TPO. Accordingly we restore this company to the file of the AO/TPO for examining it afresh.

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11. We shall now take up the transfer pricing adjustment made in respect of I.T. enabled services. The assessee had selected 5 comparable companies. The arithmetic mean was worked out at 11.91% by the assessee. The PLI of the assessee was 10.04% and accordingly, it was submitted that the international transactions entered with the assessee with the A.E. under this segment is at arm's length. The TPO, however, rejected the TP study of the assessee and he selected 10 comparable companies with average mark up of 28.11%. Accordingly, the TPO made an adjustment of 1.04 crores under this segment. The Ld. DRP excluded two comparable companies and retained 8 comparable companies. Now before us, the assessee seeks exclusion of following 5 comparable companies and inclusion of one company named M/s Informed Technologies India Ltd.

12. We heard the parties and perused the record. M/s Universal Print Systems Ltd (seg.)(BPO) was restored back to the file of AO/TPO in the case of CGI Information

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Systems & Management Consultants P Ltd (2018)(94 taaxmann.com 97) at paragraph 47 to 52 of the order of Tribunal. The relevant paragraphs are extracted below:-

"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,

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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 to 51 ……

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

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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

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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."

Following the same, we restore this comparable to the file of AO/TPO for examining it afresh.

13. M/s Infosys BPO Ltd, TCS E-serve Ltd and M/s Excel Infoway Ltd., were excluded by the co-ordinate bench in the case of CGI Information Systems & Management Consultants P Ltd (supra) 44-46. The co- ordinate bench had followed the decision rendered by another co-ordinate bench in the caseof Baxter (I) (P) Ltd vs. A.CIT (2017)(85 taxmann.com 285 (Delhi-Trib.). The relevant observations made by the co-ordinate bench in the case of CGI Information systems & management consultants P Ltd (supra) are extracted below:-

"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.

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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:

(i) In paragraph 23 of its order the Tribunal held that Infosys BPO Ltd., is not comparable with a company providing ITES because of brand value and extraordinary events in the previous year relevant to AY 2012-13 viz., acquisition of an Australia based company which had effect on its profits.

(ii) In paragraphs 24 & 25 of its order the Tribunal held Excel Infoway Ltd., as not comparable because of consistent diminishing revenue. The figures of diminution revenue are given in paragraph 24 of its order.

(iii) In paragraphs 21 & 22 of its order the Tribunal held that Excel Infoway Ltd., was liable to be excluded because it was also engaged in the business of software testing, Verification and validation of software at the time of implementation and data centre management activities.

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."

Respectfully following the above said decision, we direct exclusion of above said three companies.

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14. M/s BNR Udyog Ltd was held to be not a good comparable in the case of M/s Zyme Solutions P Ltd (Order dated 28-06-2019 passed in IT(TP)A No.1661/Bang/2016) with the following observations:-

"8. We have heard the rival submissions on the comparability of the aforesaid company. The Delhi ITAT in the case of BT e-service (India) Ltd vs. ITO (ITA No.6690/Del/2016 for AY 2012-13 order dated 19-6-2018 considered the comparability of this company and came to the conclusion that this company was carrying out medical transcription, medical billing and coding whereas the Assessee was a captive service provider. The Tribunal followed its own ruling in the same assessee's case in AY 2011- 12 in ITA No.99/Del/2016 reported in (2017) 87 taxmann.com 251 (Del) in BT e-serve (India) P Ltd vs. ITO giving identical reasons for excluding BNR Udyog Limited from the list of comparable companies in the field of companies rendering ITES such as the Assessee. Respectfully following the aforesaid decision, we direct exclusion of the aforesaid company from the list of comparable companies chosen by the TPO."

Respectfully following the above said decision of co- ordinate bench, we direct exclusion of M/s BNR Udyog Ltd from the list of comparable companies.

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15. The assessee seeks inclusion of M/s Informed Technologies India Ltd. In the case of CGI Information systems & management consultants P Ltd (supra), the above said company was directed to be included with the following observations:-

"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,

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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."

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Respectfully following the above said decision of the co- ordinate bench, we direct inclusion of M/s Informed Technologies India Ltd as a comparable company.

16. The next issue contested by the assessee is disallowance made u/s 14A of the Act. The AO disallowed a sum Rs.8,24,996/- u/s 14A of the Act. It is the submission of the assessee that it did not earn any exempt income during the year under consideration. Accordingly, by placing reliance on the decision rendered by Hon'ble Delhi High Court in the case of Cheminvest Ltd vs. CIT (2015)(61 taxmann.com 118), the Ld A.R contended that no disallowance is called for.

17. We agree with the contentions of Ld A.R, as the claim of the assessee finds support from the decision rendered by Hon'ble Delhi High Court in the case of Cheminvest Ltd (surpa). Accordingly we direct the AO to delete this disallowance after satisfying himself that the assessee did not earn any exempt income.

18. The assessee has raised grounds on Non set-off of the entire brought forward losses, non-grantof MAT credit and short grant of TDS. All these issues require verification at the end of the AO. Accordingly we restore all these issues to the file of the assessing officer.

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19. The assessee has also raised grounds regarding charging of interest u/s 234B and 234D of the Act. These are consequential in nature and hence these grounds do not require adjudication. The grounds relating to initiation of penalty proceedings is premature and hence does not require adjudication.

20. In the result, the appeal of the assessee is treated as allowed for statistical purposes.

Order pronounced in the open court on 17.03.2020

Sd/- Sd/- (N.V. Vasudevan) (B.R. Baskaran) Vice President Accountant Member

Bangalore, Dated 17^thMarch, 2020. VG/SPS

Copy to:

1. The Applicant

2. The Respondent

3. The CIT

4. The CIT(A)

5. The DR, ITAT, Bangalore.

6. Guard file By order

Asst. Registrar, ITAT, Bangalore.

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