M/S. INTEGRAL INDIA SOFTWARE DEVELOPMENT CENTRE PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-3(1)(1), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

IT(TP)A Nos. 188 to 190/Bang/2023 Assessment years : 2006-07 to 2008-09

Integral India Software Vs. The Deputy Commissioner Development Centre Pvt. Ltd., of Income Tax, 193, Indiqube Opal, 3rd Floor, Circle 3(1)(1), Stage 2, Eshwara Layout, Bangalore. HAL II Stage H.O., Bangalore – 560 008. PAN: AABCI 0768B APPELLANT RESPONDENT

Appellant by : Shri K.P. Srinivas, CA Respondent by : Shri Sunil Kumar Singh, CIT-2 (DR)(ITAT), Bengaluru.

Date of hearing : 12.07.2023 Date of Pronouncement : 19.07.2023 O R D E R Per Bench These appeals are at the instance of assessee directed against the orders u/s. 254 of the Income-tax Act, 1961 [the Act] dated 30.12.2022, 30.12.2022 and 30.12.2022 passed by the Assessing Officer giving effect to the ITAT orders dated 14.09.2011, 07.07.2017 and 18.2.2014 for the assessment years 2006-07 to 2008-09 respectively. Certain common issues are involved in these appeals

IT(TP)A Nos. 188 to 190/Bang/2023 Page 2 of 62 and hence disposed of by this consolidated order for the sake of convenience.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 3 of 62 by the Hon’ble Supreme Court in CIT v. HCL Technologies Ltd. [2018] 93 taxmann.com 33 (SC). We accordingly direct the AO to follow the earlier direction of the Tribunal and allow deduction u/s. 10A after reducing the expenses incurred by the assessee in foreign currency for deliver of software and telecommunication charges both from the export turnover as well as the total turnover. It is ordered accordingly for both the AYs 2006-07 and 2008-09 and this ground is allowed.

ITA No.188/B/2023 AY 2006-07

Grounds No.2 to 14

IT(TP)A Nos. 188 to 190/Bang/2023 Page 4 of 62

times the assessee’s turnover and the functional profile of these companies were also different from the assessee, as given below:-

Name of the Turnover Functional profile of companies comparable entities (Rs. in selected by the TPO Crores) iGate Global It is an integrated technology & operations Solutions Ltd. (seg.) company with global Services model and offers complete range of business solutions spanning consulting, technology, operations 527.91 and process outsourcing towards customers in a wide range of industry including bank and financial services, manufacturing, retail and distribution and telecommunications. Infosys Ltd. The company provides end to end business solutions that leverage technology, thus enabling its clients to enhance business performance. The company provides solutions that span the entire software life cycle 9,028.00 encompassing technical consulting, design, development, reengineering, maintenance, systems integration and package evaluation and implementation. In addition, the company offers software products for the banking industry. Mindtree Consulting This company is an international information Ltd. technology consulting and implementation company that delivers business solutions 448.79 through global software development. It is structured into two business units that focus on software developments- R&D services and IT services. Persistent Systems The Company is primarily engaged in offering Ltd. complete product life cycle services to the 209.18 software product companies in infrastructure segment. Sasken This is a focused communication software Communications Ltd. company with presence in the broadband and (seg.) wireless software space. It develops embedded 240.03 communication software for companies across the communication value chain viz. network equipment manufacturers (NEM),

IT(TP)A Nos. 188 to 190/Bang/2023 Page 5 of 62 semiconductor vendors, terminal device vendors and operators. They focus on connecting all the dots in the telecom value chain and create competitively priced software solutions that helps its customers increase their revenue base. In the context of the Indian IT industry structure, their services fall under the R&D services category which is a part of IT services. Flextronics Software The company is an end to end provider of Systems Ltd communication products, services and solutions to network equipment providers, 595.12 handset manufacturers, service providers and business process outsourcing sectors. It has a hybrid business model of supplying both products and services to its customers.

6.1 The ld. AR submitted that the turnover of the assessee company during the year which is Rs.15.89 crores. He relied on the decision of the coordinate Bench of the Tribunal in the case of ITO v. Maxim India Integrated Security (P.) Ltd. in IT(TP) Appeal No.28 (Bang.) of 2012) where it was held that large and big companies in the area of software development cannot be bench marked or equated with small sized captive service providers like the assessee. He also relied on the decision of the Tribunal in the case of Sterling Commerce Solutions India (P.) Ltd. [2019] 109 taxmann.com 106 (Bangalore - Trib.)

6.2 He further submitted that the functional profile of the assessee is that it is only a captive service provider render software development services and is functionally different from the above companies as per the details submitted above and the above companies have to be excluded on the ground of functional dissimilarity also.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 6 of 62 7. The ld. DR relied on the orders of lower authorities and he submitted that if the comparable company is otherwise comparable, then turnover filter should not be taken for exclusion.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 7 of 62 choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co- ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is

IT(TP)A Nos. 188 to 190/Bang/2023 Page 8 of 62 favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)." 10. Respectfully following the aforesaid decisions of the Tribunal referred to above, we hold that the following companies whose turnover is above Rs.200 Crores should be excluded from the list of comparable companies:—” 8.1 Respectfully following the decision of the Tribunal in Sterling Commerce Solutions India (P.) Ltd. (supra), we direct the AO/TPO to exclude the above six companies viz., iGate Global Solutions Ltd. (seg.), Infosys Ltd., Mindtree Consulting Ltd., Persistent Systems Ltd., Sasken Communications Ltd. (seg.) and Flextronics Software Systems Ltd. whose turnover is exceeding Rs.200 crores from the comparables and also for the reason that these companies are functionally different from the assessee which is a captive service provider rendering software development services.

Ground Nos.15 to 17

IT(TP)A Nos. 188 to 190/Bang/2023 Page 9 of 62 filter. The ld. AR submitted that the DRP has wrongly considered as 5.29% by considering aggregate of operating income and operating expenses as the denominator instead of operating revenues only as considered by the TPO in the order u/s 92CA. Regarding Geometric Solutions Ltd. and Mega Soft Ltd. also, the ld. AR submitted that DRP has wrongly considered as 5.30% and 4.79% by considering aggregate of operating income and operating expenses as the denominator instead of operating revenues only. He relied on the decision of the Tribunal in the case of Sterling Commerce Solutions India (P.) Ltd. (supra) wherein it was held that RPT of companies exceeding 15% should be excluded as comparables and therefore submitted that this company has to be excluded.

Ground No.18

IT(TP)A Nos. 188 to 190/Bang/2023 Page 10 of 62 RPT filter of 15%, this alternate ground raised by the assessee is not adjudicated and left open.

“17. As far as comparable company chosen by the TPO viz., Tata Elxsi Ltd., is concerned, the comparability of the aforesaid company with that of the software service provider such as the Assessee was considered by the Mumbai Bench of this Tribunal in the case of Logica (P.).Ltd. (supra), wherein on the comparability of the aforesaid company, the Tribunal held as follows:— "14. As far as comparable at Sl.No.6 & 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:— "7.7.Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed

IT(TP)A Nos. 188 to 190/Bang/2023 Page 11 of 62 and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties." 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable." 18. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO. 13.1 Respectfully following the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 12 of 62 functional profile. The coordinate Bench of the Tribunal in Sterling Commerce Solutions India (P.) Ltd. (supra) has considered this issue and held as under:-

“19. The learned counsel submitted that Bodhtree Consulting Ltd., should be excluded from the list of comparable companies chosen by the TPO, as it is functionally different as held in the case of Support.Com India (P.) Ltd. v. Jt. CIT [2015] 63 taxmann.com 238 (Bang-Trib) (copy at page 2104 of Paper Book-III filed by Assessee) which case also relates to a SWD service provider such as the Assessee. Respectfully, following the same, we hold that Bodhtree Consulting Ltd., should be excluded from the list of comparable companies chosen by the TPO.” 15.1 In view of the above, we direct exclusion of Bodhtree Consulting Ltd. from the comparables list.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 13 of 62 he submitted that it was engaged into developing software products. It was further submitted that these company were excluded in the case of Sterling Commerce Solutions India (P.) Ltd. (supra).

“11. It was submitted by the learned counsel for the Assessee that the following 2 companies are not functionally comparable with that of the Assessee. (a) KALS Information Systems Limited (b) Accel Transmission Limited. In this regard our attention was drawn to the decision of the Hon'ble ITAT Bangalore Bench in the case of Trilogy E-Business Software India Pvt.Ltd. ITA No.1338/Bang/2010 for AY 2007-08 wherein these two companies were held to be not functionally comparable with that of a pure software developer like the Assessee. 12. The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E- Business Software India (P.) Ltd.(supra):— "(d) KALS Information Systems Ltd. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the

IT(TP)A Nos. 188 to 190/Bang/2023 Page 14 of 62 salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India (P.) Ltd. v. DCIT, ITA No. ITA No 1386/PN/10 wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We

IT(TP)A Nos. 188 to 190/Bang/2023 Page 15 of 62 therefore accept the plea of the Assessee that this company is not comparable." "(e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to

IT(TP)A Nos. 188 to 190/Bang/2023 Page 16 of 62 exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin." Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables." 13. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Triology E-Business Software India (P.) Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Trilogy E-Business Software India (P.) Ltd. (supra), we direct that KALS InfoSystems Ltd. And Accel Transmatic Ltd. be excluded from the list of 20 comparable arrived at by the TPO.” 17.1 In view of the above discussion, we direct exclusion of KALS Info Systems Ltd. and Accel Transmatic Ltd. from the list of comparables.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 17 of 62 ITA No.189/B/2023 AY 2007-08

Ground No. 01-10 excluding Ground No. 06

Avani Cimcon Technologies Ltd

20.1 During the year ended 31st March 2007, the export sales of the company had increased by 63% as compared to the previous year. (i.e., from Rs.2.18 crores to Rs.3.55 crores) However, the direct costs have increased only by 44% (i.e, from Rs.1.64 crores to Rs.2.36 crores). This has resulted in an operating margin of 50.28% to cost in FY 2006- 07 as compared to 32.55% of the previous year. It is noteworthy that

IT(TP)A Nos. 188 to 190/Bang/2023 Page 18 of 62 the growth of software industry for FY 2006-07 as per NASSCOM was only 32%. The Appellant’s own turnover had increased by only 23.77% (from Rs.15.98 crores for YE March 2006 to Rs.19.78 crores for YE March 2007. Hence adopting Avani Cimcon Technologies Ltd. as a comparable was totally erroneous and ought to have been rejected.

20.2. The ld. AR relied on the decision of this Tribunal in the case of Softbrands India (P.) Ltd. [2016] 73 taxmann.com 231 (Bangalore - Trib.) where it was held that this company is not comparable to a captive service provider like the assessee since it has operating income from IT services and sale of software products and the segmental details are not available.

“.2 We have considered the rival submissions as well as the relevant material on record. We note that the comparability of this company has been considered by the co-ordinate bench of this Tribunal in Trilogy E-Business Software India (P.) Ltd.'s case (supra) in para 39 & 41 as under : '39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's website, which reveals that this company has developed a software product by name "DXchange", it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally

IT(TP)A Nos. 188 to 190/Bang/2023 Page 19 of 62 different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT - ITA No.7821/Mum/2011 wherein the Tribunal accepted the assessee s contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only and it was held as follows:- "7.8 Avani Cincom Technologies Ltd. ('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis." It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:-

Particulars FYs 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87% 41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of

IT(TP)A Nos. 188 to 190/Bang/2023 Page 20 of 62 Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable.' Following the earlier orders of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparable for determining the ALP.” 22.1 Respectfully following the above order of the Tribunal, we direct to exclude Avani Cincom Technologies Ltd. from the list of comparables.

Celestial Biolabs Ltd.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 21 of 62 25. After considering the rival submissions, we note that this Tribunal in Softbrands India (P.) Ltd. (supra) has excluded this company from the comparables by holding as under:-

“9.2 We have considered the rival submissions as well as the relevant material on record. We note that the comparability of this company has been considered by the co-ordinate bench of this Tribunal in Trilogy E-Business Software India (P.) Ltd.'s case (supra) in paras 43 & 45 as under : "43. Further reference was also made to the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma Private Ltd. v. Addl. CIT - ITA No.6623/Mum/2011 (for AY 2007-08) in which the comparability of this company for clinical trial research segment. The relevant extract of discussion regarding this company is as follows: "The learned D.R. however drew our attention to page-389 of the paper book which is an extract from the Directors report which reads as follows: 'The Company has developed a de novo drug design tool "CELSUITE" to drug discovery in, finding the lead molecules for drug discovery and protected the IPR by filing under the copy if sic (of) right/patent act. (Apprised and funded by Department of Science and Technology New Delhi) based on our insilico expertise (applying bio-informatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would

IT(TP)A Nos. 188 to 190/Bang/2023 Page 22 of 62 also include the research laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh.' According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard.' " "45. From the material available on record, it transpires that the TPO has accepted that up to AY 06-07 this company was classified as a Research and Development company. According to the TPO in AY 07-08 this company has been classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company. The TPO has relied on the response from this company to a notice u/s.133(6) of the Act in which it has said that it is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not available and therefore this company should not be treated as comparable. Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the

IT(TP)A Nos. 188 to 190/Bang/2023 Page 23 of 62 entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06- 07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable." Following the earlier orders of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparable for determining the ALP.” 25.1 Respectfully following the above decision of this Tribunal, we direct exclusion of Celestial Labs Ltd. from the comparables.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 24 of 62 Helios & Matheson Information Technology Ltd.

“12.2 We have considered the rival submissions as well as the relevant material on record. We note that the comparability of this company has been considered by the co-ordinate bench of this Tribunal in the case of Serial Innovations India (P.) Ltd. (supra) in paras 29 & 30 as under : '29. As far as comparable chosen by the TPO at Sl.No.8 of the final list of comparable viz., M/s.Helios & Matheson Information Technology Ltd., we find that the said company has been held to be not comparable with a software service provider like the Assessee by the ITAT Pune Bench in the case of PTC Software (India)Pvt.Ltd. ITA.No.1605/PN/2011 (Asstt. Year : 2007-08) order dated 30.4.2013. The following were the relevant observations of the Tribunal: "16. The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) namely Helios & Matheson

IT(TP)A Nos. 188 to 190/Bang/2023 Page 25 of 62 Information Technology Ltd., and KALS Information Solutions Ltd. (Seg). The primary plea raised by the assessee to assail the inclusion of the aforesaid two companies from the list of comparables is to be effect that they are functionally incomparable and therefore, are liable to be excluded. In sum and substance, the plea set up by the assessee is that both the aforesaid concerns are engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its IT-services segment. 17. As per the discussion in para 6.3.2. of the order of the TPO, the reason advanced for including KALS Information Systems Ltd., is to the effect that the said concern's application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F.Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee's IT-Services Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in selling of some of the software products which are developed by it, however, the said concern was not into trading of software products as there were no cost of purchases debited in the Profit & Loss Account. Though the TPO agreed that the quantum of revenue from sale of products was not available as per the financial statements of the said concern, but as the basic function of the said concern was software development, it was includible as it was functionally comparable to the assessee's segment of IT-Services.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 26 of 62 18. Before us, apart from reiterating the points raised before the TPO and the DRP, the Ld. Counsel submitted that in the immediately preceding assessment year of 2006-07, the said concern was evaluated by the assessee and was found functionally incomparable. For the said purpose, our reference has been invited to pages 421 to 542 of the Paper book, which is the copy of the Transfer Pricing study undertaken by the assessee for the A.Y. 2006-07, and in particular, attention was invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (Seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was no justification for the TPO to consider the said concern as functionally comparable in the instant assessment year. 19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern has not been found to be functionally comparable with the assessee in the immediately preceding assessment year and in the present year also, on the basis of the Annual Report, referred to in the written submissions addressed to the lower authorities, the assessee has correctly asserted out that the said concern was inter alia engaged in sale of software products, which was quite distinct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functional profile of the said concern has undergone a change from that in the immediately preceding year. Therefore, having regard to the factual aspects brought out by the assessee, it is correctly asserted that the application software segment of the said concern is not comparable to the assessee's segment of IT services. 20. With regard to the inclusion of Helios & Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of KALS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the

IT(TP)A Nos. 188 to 190/Bang/2023 Page 27 of 62 case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position was not disturbed by the TPO. The relevant portion of the Transfer pricing study, placed at page 432 of the Paper book has been pointed out in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables." 30. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid company from the final list of comparable companies for the purpose of determining ALP.' Respectfully following the decision of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparable for determining the ALP.” 28.1 Respectfully following the above order of this Tribunal, we hold that Helios & Matheson Information Technology Ltd. is not comparable with the assessee and directed to be excluded from the comparable companies.

Ishir Infotech Pvt. Ltd.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 28 of 62 rejected on the ground that it fails the employee cost filter. The ld. AR relied on the decision of this Tribunal in the case of Softbrands India (P.) Ltd. (supra) where this company was excluded as a comparable.

“14.2 We have considered the rival submissions as well as the relevant material on record. We note that the comparability of this company has been considered by the co-ordinate bench of this Tribunal in the case of Serial Innovations India (P.) Ltd. (supra) in paras 21 & 22 as under : '21. As far as comparable companies listed at Sl.No.11 & 14 of the final list of comparable companies chosen by the TPO viz., M/s.Ishir Infotech Ltd., and Lucid Software Ltd., is concerned, this Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. v. DCIT IT (TP) No.1086/Bang/2011 for AY 07-08 held that the companies should be excluded for the reasons as held in the following paras: "22. The learned counsel for the assessee submitted that these two companies are also to be excluded from the list of comparables on the basis of the finding of this Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. dt 22.2.2013, wherein at pages 17 and 22 of its order the distinctions as to why these companies should be excluded are brought out. He submitted that the facts of the case before us are similar and, therefore, the said decision is applicable to the assessee's case also. 23. The learned DR however objected to the exclusion of these two companies from the list of comparables. On a careful perusal of the material on record, we find that the Tribunal in the case of

IT(TP)A Nos. 188 to 190/Bang/2023 Page 29 of 62 Mercedes Benz Research & Development India Pvt. Ltd. (cited supra) has taken a note of dissimilarities between the assessee therein and Lucid Software Ltd. As observed therein Lucid Software Ltd. company is also involved in the development of software as compared to the assessee, which is only into software services. Similarly, as regards Ishir Infotech Ltd., the Tribunal has considered the decision of the Tribunal in the case of 24/7 Co. Pvt. Ltd to hold that Ishir Infotech is also out-sourcing its work and, therefore, has not satisfied the 25% employee cost filter and thus has to be excluded from the list of comparables. As the facts of the case before us are similar, respectfully following the decision of the co-ordinate bench, we hold that these two companies are also to be excluded." 22. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP.' Following the earlier orders of this Tribunal, we direct the A.O./TPO to exclude this company from the list of comparable for determining the ALP.” 31.1 Respectfully following the above decision of this Tribunal, we remit this issue to the AO/TPO to re-examine the issue whether professional charges paid to outside consultants are also included in the employee compensation and decide the issue as per law if it satisfies 25% employee cost filter.

Megasoft Ltd.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 30 of 62 services and does not sell any software products. Moreover, there was also an extraordinary event of amalgamation which makes this company not fully comparable to the assessee.

32.1 Without prejudice to the above contentions, it was submitted that there is an error in the margin computation of this company by the TPO. This company has two divisions, viz., Blue Ally division, which is an offshore and online consulting division, and XIUS-BCGI division, which is a product division. Of these, Blue Ally division may be remotely comparable with that of the Appellant. The other being an entirely product division, has no comparability at all with an off-shore service company like the Appellant. The TPO has determined the PLI of this company at 60.23% by considering both these divisions which is unfair to the Appellant, which is a purely service oriented company and is not into the sale of products to its AEs. It renders only software development services to its AEs.

32.2 He further submitted that the operating margin of this comparable was arrived at 23.11% for FY 2006-07 in the case of Trilogy E-Business Software India Pvt. Ltd. Vs. DCIT (ITA No.1054/Bang/2011 AY 2007-08) [Para 16.2] which relates to the software development division alone and therefore ensures a certain degree of comparability with the assessee though not fully comparable. The same operating margin of 23.11% was also adopted by the Bangalore Bench of ITAT in several other cases. The ld. AR relied on

IT(TP)A Nos. 188 to 190/Bang/2023 Page 31 of 62 the decision of this Tribunal in the case of Softbrands India (P.) Ltd. (supra).

“16.2 The main grievance of the assessee against this company is incorrect computation of the operating margin by the TPO at 60.23%. The assessee claims that the correct margin of the company is 23.11% for this Assessment Year as considered by the Tribunal in the case of Trilogy E-Business Software India (P.)Ltd. (supra). Thus the assessee has pleaded that the operating margin of Blue Ally division of this company is to be considered as comparable as operating margin of the said division alone should be considered. Since the assessee has disputed the correctness of the operating margin and relied upon the decision of the co-ordinate bench on this point accordingly, in the facts and circumstances of the case, we set aside this issue to the record of the A.O./TPO to verify this aspect and the contention of the assessee in the light of the decision of the co-ordinate bench.” 34.1 In the present case also, the TPO has computed the PLI of this company at 60.23%, whereas the assessee’s claim is at 23.11%. Respectfully following the above decision of the Tribunal, we remit this issue to the AO/TPO to verify the aspect of correct computation of operating margin of this company in the light of the decision of the coordinate Bench in the case of Trilogy E-Business Software India (P.)Ltd.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 32 of 62 Thirdware Solutions Ltd

“10.2 We have considered the rival submissions as well as the relevant material on record. We note that the comparability of

IT(TP)A Nos. 188 to 190/Bang/2023 Page 33 of 62 these companies have been considered by the co-ordinate bench of this Tribunal in the case of Serial Innovations India (P.) Ltd (supra) in paras 27 & 28 as under : '27. As far as comparable companies at Sl.No.5, 18, 19 and 25 of the final list of comparable companies chosen by the TPO are concerned, viz., M/S. E-Zest Solutions Ltd., Persistent Systems Ltd., Quintegra Solutions Limited and Thirdware Solutions Ltd., this Tribunal in the case of 3DPLM Software Solutions Ltd. IT(TP)A No.1303/Bang/2012 (Assessment Year: 2008-09) order dated 28.11.2013 was pleased to hold that the aforesaid companies are not comparable with a company engaged in Software Development Services such as the Assessee. The following were the relevant observations of the Tribunal: ………….. 15. Thirdware Solutions Ltd. (Segment) …….. ……….. 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand."

IT(TP)A Nos. 188 to 190/Bang/2023 Page 34 of 62 37.1 We find that this company deals in both products and services and manages products and applications for other product companies, whereas the assessee is into only software development services. Also, following the decision of the Tribunal in the case of Softbrands India (P.) Ltd. (supra), we direct to exclude Thirdware Solutions Ltd. from the comparable companies.

Accel Transmatic Ltd.

KALS Info Systems Ltd.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 35 of 62 40. The ld. DR relied on the orders of lower authorities.

“We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable." 41.1 Following the above decision, we direct the AO/TPO to exclude Kals Info Systems from the comparables.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 36 of 62 Lucid Software Ltd.

“"7.2 Lucid Software Limited It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under Section 133(6), the company has described its business as software development company or pure software development service provider. This information itself is very vague as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service and development. Looking to the fact that it has developed a software product named as "Muulam" which is used for civil engineering structures and the product development expenditure itself is substantial vis-a-vis the capital employed by the said company, this criteria for being taken as comparable party, gets vitiated. For the purpose of

IT(TP)A Nos. 188 to 190/Bang/2023 Page 37 of 62 comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee.” 44.1 In the light of the decision of the coordinate Bench of the Tribunal in Cypress Semiconductor Technology India P Ltd (supra), we hold that Lucid Software Ltd. is not comparable with the assessee and excluded from the comparables list.

IT(TP)A No.190/Bang/2023 AY 2008-09

IT(TP)A Nos. 188 to 190/Bang/2023 Page 38 of 62 AY 2006-07 shall apply mutatis mutandis for the AY 2008-09, therefore this ground is allowed.

Ground Nos. 2 to 15

IT(TP)A Nos. 188 to 190/Bang/2023 Page 39 of 62 2008-09 including the four companies discussed above. We now take up for consideration the issue of comparability each company wise as follows:-

Avani Cimcon Technologies Ltd.

49.1 He further submitted that in the case of IBM India Private Limited Vs JCIT (AY 2008-09 dated 20th Dec 2013), the ITAT, Bangalore Bench had decided that Avani is functionally different from a software development company as it is engaged in software product development also and that segmental details were not available. In the case of 3DPLM Software Solutions Limited for AY 2008-09 (dated 28th Nov 2013), the Bangalore Bench of ITAT pointed out that this company is functionally dissimilar to captive software service providers like the appellant.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 40 of 62 “7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any search process carried out by the TPO but only on the basis of information collected under section 133(6) of the Act. Apart from placing reliance on the judicial decision cited above, including the assessee's own case for Assessment Year 2007-08, the assessee has brought on record evidence that this company is functionally dis-similar and different from the assessee and hence is not comparable. Therefore the finding excluding it from the list of comparables rendered in the immediately preceding year is applicable in this year also. Since the functional profile and other parameters by this company have not undergone any change during the year under consideration which fact has been demonstrated by the assessee, following the decisions of the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013, and in the case of Triology E- Business Software India (P.) Ltd. (supra), we direct the A.O./TPO to omit this company from the list of comparables.” 51.1 In view of the above decision of the Tribunal, we direct the AO/TPO to exclude Avani Cimcon Technologies Ltd. from the comparables list on functional dissimilarity.

Bodhtree Consulting Ltd

IT(TP)A Nos. 188 to 190/Bang/2023 Page 41 of 62 52.1 The ld. AR submitted that this company was rejected as a comparable by the Hon’ble Mumbai Bench, ITAT for AY 2008-09 in the case of Nethawk Networks India Private Limited Vs. ITO (Refer Pages 1192 to 1193, Para 23 of Paper book 2) as it was not engaged in software development services. He relied on the decision of the Mumbai Tribunal in the case of Nethawk Networks India Pvt. Ltd., [2014] 41 taxmann.com 250 (Mumbai) for AY 2008-09.

“C. Bodhtree Consulting Limited 21. On this comparable, case of the assessee is that the company is not a good comparable in view of the software products produced by the company. As such, no segmental data is adequately available too. 22. On the other hand, Ld DR filed a copy of the financial statement and argued vehemently stating that this company is not engaged in the software products. In this regard, Ld DR relied on the note no. 3, relating to the relating to the revenue

IT(TP)A Nos. 188 to 190/Bang/2023 Page 42 of 62 recommendation in Schedule 12, note no. 5 relating to the segmental information etc to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software based products. Further, Ld Counsel mentioned that the said company was already examined and was held as product based company by the TPO in the TP study of other case and the TPO cannot take different stand in this case. In this regard, we have perused the para 29 of the order of the Tribunal in the case of Wills Processing Services (I) P. Ltd. (supra) wherein it was mentioned that the TPO described this company is engaged in the business of software products, not the software development services. Relevant portions from the said para 29 of the order of the Tribunal is reproduced here under: "29.1 The Id Sr Counsel for the assessee has submitted that this company is engaged in the software products. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The Id AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy design and development of software, using the latest technologies. Further, the company has identified only one segment i.e. software development. Therefore, the Id AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables. 29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the IT Act and submitted that as per this information, this company has revenue from ITES activity to the extent of Rs. 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity. 29.3** ** ** 30. We have considered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the

IT(TP)A Nos. 188 to 190/Bang/2023 Page 43 of 62 TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application...." 23. Considering the above, we are of the opinion that Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysis goes against the TPO/AO. Accordingly, we dismiss the argument of the Ld DR in this regard. Ex consequenti, the AO/TPO is directed to exclude the same from the list of final comparables for working out the arithmetic mean.” 54.1 In view of the above decisions, we hold that Bodhtree Consulting Ltd. is functionally dissimilar to the assessee which is engaged in software development services and exclude this company from the comparables list.

Celestial Biolabs Ltd.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 44 of 62 2008-09 (supra), pointed out that Celestial Biolabs Ltd. is functionally dissimilar since it is engaged in the development of products in the field of bio- technology, pharmaceuticals etc.

“9.4 We have heard both the parties and perused and carefully considered the material on record. While it is true that the decisions cited and relied on by the assessee were with respect to the immediately previous assessment year, and there cannot be an assumption that it would continue to be applicable for this year as well, the same parity of reasoning is applicable to the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO's order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.5 Apart from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record substantial factual evidence to establish that this company is functionally dis- similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year

IT(TP)A Nos. 188 to 190/Bang/2023 Page 45 of 62 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co- ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology E-Business Software India (P.) Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 and Triology E-Business Software India (P.) Ltd. case (supra), we hold that this company ought to be omitted form the list of comparables. The A.O./TPO are accordingly directed.” 57.1 In view of the above decisions of the Tribunal, we note that this company’s functional profile is different from the assessee and it fails employee cost filter of 25% applied by the TPO, therefore we direct exclusion of Celestial Biolabs Ltd. from the comparables list.

E- Zest Solutions Ltd.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 46 of 62 taxmann.com 191 – Bangalore ITAT and the case of 3DPLM Software Solutions Limited for AY 2008-09 (supra).

“14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P.) Ltd. (supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O./TPO is accordingly directed.” 60.1 Following the above decision of the Tribunal, we direct exclusion of this company from the comparables.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 47 of 62 Infosys Limited

“11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India (P.) Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly.” 63.1 Respectfully following the above decision, we note this company has significant intangibles and huge revenue from software

IT(TP)A Nos. 188 to 190/Bang/2023 Page 48 of 62 products and not comparable with the assessee, therefore Infosys Ltd. is excluded from the list of comparables.

KALS Information Systems Ltd. (Seg)

“10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained

IT(TP)A Nos. 188 to 190/Bang/2023 Page 49 of 62 u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India (P.) Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted form the list of comparable companies. It is ordered accordingly.” 66.1 In view of the above decisions, we direct exclusion of KALS Information Systems Ltd. (Seg) from the comparables list.

LGS Global Ltd

IT(TP)A Nos. 188 to 190/Bang/2023 Page 50 of 62 rendering software services as this company is engaged in rendering diversified services like product evaluation design and development, BPO and other activities which are different from the appellant.

“104. So far as exclusion of LGS Global Limited ("LGS") is concerned, we are of the considered opinion that LGS is not comparable as the company is engaged in rendering diversified services like product evaluation design and development, business process outsourcing ("BPO") and other activities which are different from the appellant which is a captive services provider rendering software services. The business description of the LGS is given on internal page 26 of the Annual Report of the company.. Further, the company does not have separate segmental accounts and operates under one segment only. (page 26 of the Annual Report of the company) 105. We further find the company has intangible in the nature of goodwill amounting to INR 3.67 crores. However, the Appellant does not have any goodwill nor it has any other intangible. (page 57 of the Annual Report of the company) 106. We find the issue of comparability of LGS to captive service provider is covered in the favour of the appellant for the same AY by the co-ordinate Bench of the Tribunal in the case of Cash Edge India (P.) Ltd. (supra) wherein it has been held as follows: "18 ……similarly, Assessing Officer will only take segmental results relating to services only for comparing the companies M/s

IT(TP)A Nos. 188 to 190/Bang/2023 Page 51 of 62 Kals Information Systems, Avani Cincon, LGS Global Ltd. and Bothtree Consulting Systems as the consolidated results of these companies cannot be compared with the assessee, as assessee is admittedly into service providing activities. It is further directed that if segmental results of the above companies relating to similar services as being provided by assessee are not available, then these companies will have to be excluded as comparables as held in various judicial pronouncements relied upon by Ld. A.R.. " 107. We find the decision of the co-ordinate Bench of the Tribunal in the case of Saxo India (P.) Ltd. (supra) has been upheld by the Hon'ble Delhi High Court Saxo India (P.) Ltd. (supra). The relevant extract of the Hon'ble High Court reads as under:- "10. On a comparison with the data available and made available, undoubtedly, the object of the statute is to "pull in transactions which otherwise escaped the radar of tax assessment under one head or the other. The transfer pricing methodology - shorn of its details is an attempt by each nation to locate the incidents of income which would be subjected to levy within its jurisdiction where international transactions are involved. This exercise does not compare with other income assessments where the methodology adopted in their domestic jurisdiction will differ". The TNMM method depends on accurate data with respect to all the three elements - wherever they apply. In the Comparable Uncontrolled Price (CUP) method - which is premised upon the elements in Rule 10B(l)(a), the methodology adopted is the price charged or paid for property transfer or services provided in the Comparable Uncontrolled transaction. Therefore, the nature of the transaction and the appropriate filter determines the elements that are to be considered in TNMM. Therefore, the costs, sales and assets employed wherever relevant are to be applied. From this perspective, the revenue's contention that segmental data was available, cannot be accepted. The mere availability of proportion of the turnover allocable for software product sales per se cannot lead to an assumption that segmental data for relevant facts was available to determine the profitability of the concerned comparable."

IT(TP)A Nos. 188 to 190/Bang/2023 Page 52 of 62 108. In view of the above discussion, we direct the AO/TPO to exclude LGS Global Ltd. from the list of comparables.” 69.1 Respectfully following the decision of the Delhi ITAT, we hold that LGS Global Ltd be excluded from the comparables list.

Persistent Systems Ltd

IT(TP)A Nos. 188 to 190/Bang/2023 Page 53 of 62 “ 17.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly.” 72.1 Respectfully following the decision, on identical facts, we direct exclusion of Persistent Systems Ltd. from the list of comparables.

Quintegra Solutions Ltd

IT(TP)A Nos. 188 to 190/Bang/2023 Page 54 of 62 75. We have considered the rival submissions and perused the material on record. This issue came up for consideration before this Tribunal in 3DPLM Software Solutions P Ltd (AY 2008-09) (supra), where it was held as under:-

“18.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra SolutionsLtd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.5 ……………………………… 18.6 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra), we direct that this company i.e. Quintegra SolutionsLtd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider.” 75.1 Respectfully following the above decision of the co-ordinate bench of the Tribunal, we direct exclusion of Quintegra Solutions Ltd. from the comparables.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 55 of 62 R Systems International (Seg)

Tata Elxsi (Seg)

“3.4 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software development services performed by the assessee.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 56 of 62 13.5 The Hon'ble Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :— " …. Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly.” 79.1 Respectfully following the above decision, this company is rejected as a comparable with the assessee company which renders software development services.

Thirdware Solutions Limited

IT(TP)A Nos. 188 to 190/Bang/2023 Page 57 of 62 decided by the ITAT, Bangalore Bench in the case of 3DPLM Software Solutions Ltd Vs DCIT (AY 2008-09) (supra) that this company is to be rejected as a comparable for small software services companies. It was also observed that Thirdware is engaged in product development and earns revenue from sale of licenses and subscription, which is different from software developmental services.

“15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications (P.) Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand.”

IT(TP)A Nos. 188 to 190/Bang/2023 Page 58 of 62 82.1 Respectfully following the decision of this Tribunal in the case of in 3DPLM Software Solutions Ltd Vs DCIT for AY 2008-09 (supra), this company is rejected as a comparable with the assessee.

Wipro Ltd (Seg)

IT(TP)A Nos. 188 to 190/Bang/2023 Page 59 of 62 “12.4 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.5 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com (P.) Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration.” 85.1 Considering the submissions of the assessee and respectfully following the above decision of this Tribunal, this company is rejected as a comparable with the assessee company.

Lucid Software Ltd.

IT(TP)A Nos. 188 to 190/Bang/2023 Page 60 of 62 house and hence functionally different. It was rejected as a comparable for small software services companies in the case of 3DPLM Software Solutions P Ltd (AY 2008-09) (supra).

“16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India (P.) Ltd. (supra), CSR India (P.) Ltd. (supra); the ITAT, Mumbai Bench in the case of Telcordia Technologies India (P.) Ltd. (supra) and the Delhi ITAT in the case of Transwitch India (P.) Ltd. (supra) have held, that since this company, is engaged in the software product development and not software development services, it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this

IT(TP)A Nos. 188 to 190/Bang/2023 Page 61 of 62 company be omitted from the list of comparables for the period under consideration in the case on hand.” 88.1 Respectfully following the aforesaid decision of this Tribunal, this company which is engaged in software development products unlike the assessee which renders software development services is rejected as a comparable with the assessee company.

(i) Aarman Software Private Limited (ii) Cepha Imaging Private Limited (iii) Chakkilam Infotech Limited (iv) E2E Infotech Limited (v) Globsyn Infotech Limited (vi) I C R A Techno Analytics Limited (vii) VGL Softech Limited (viii) Birla Technologies Limited

IT(TP)A Nos. 188 to 190/Bang/2023 Page 62 of 62 detailed discussed about the same in the TP order. We therefore think it fit to remit this issue to the ld. TPO for fresh decision with elaborate reasoning, after providing opportunity of being heard to the assessee.

Pronounced in the open court on this 19th day of July, 2023.

Sd/- Sd/-

( GEORGE GEORGE K) (LAXMI PRASAD SAHU ) JUDICIAL MEMBER ACCOUNTANT MEMBER

Bangalore, Dated, the 19th July, 2023. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. DRP 5. DR, ITAT, Bangalore. By order

Assistant Registrar ITAT, Bangalore.