M/S STERLING COMMERCE PVT. LTD.,BANGALORE vs. DCIT, BANGALORE

PER SMT BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against final assessment order dated 30/09/11 passed by Ld. DCIT, Circle 12 (4), Bangalore under section 143 (3) read with 144C of the Act, for assessment year 2006-07 on following grounds of appeal: The grounds stated hereunder are independent of, and without prejudice to one another. The Appellant submits as under:

IT(TP)A No.1220(B)/2011 2 1.Assessment and reference to Transfer Pricing Officer are bad in law The final assessment order issued by the Deputy a) Commissioner of Income-tax, Circle 12(4),DCIT' or 'AO is bad on facts and in law, and is in violation of the b) principles of natural justice. Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Telelogic India Private Limited (`the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. The AO has erred in law in making a reference to the Deputy c) Commissioner of Income Tax - Transfer Pricing - V [`TP0'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in section 92CA (1) of the Act. 2.The fresh comparable search undertaken by the TPO is bad in law. a) The AO/TPO erred on facts and in law in conducting fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus the Appellant prays that the fresh benchmarking analysis conducted by the learned TPO is liable to be quashed. b) On the facts and in the circumstances of the case and in law, the learned TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which are a pre- requisite condition to make any adjustment under the provision of Chapter X of the Act.

IT(TP)A No.1220(B)/2011 3 3. Comparability analysis adopted by the TPO/AO for determination of arm's length price. a) The AO/TPO grossly erred on facts in benchmarking the transactions of the captive software services of the Appellant with companies operating as full-fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-a-vis comparable companies. b)The AO/TPO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study without considering the functional and risk analysis of the Appellant. c) The AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability. d) The AO/TPO also erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. e) The AO/TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules and arbitrarily applying a 25% related party criteria in accepting / rejecting comparables. f) The AO/TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e. other than 31 March 2007) and inconsistently applying such filter. g) The AO/TPO grossly erred on facts in arbitrarily rejecting companies having IT and ITeS revenues less than 75% of total operating revenue and inconsistently applying such filters, without considering the specific segmental results.

IT(TP)A No.1220(B)/2011 4 h) The AO/TPO erred on facts in arbitrarily rejecting companies having onsite revenues more than 75% of the export turnover, with respect to the comparability analysis for IT segment. i) The AO/ TPO erred in rejecting companies having employee cost less than 25% of total sales, with respect to the comparability analysis for IT segment. j) The AO/TPO also erred on facts in arbitrarily rejecting companies based on their financial results without considering the functional comparability. k) The AO/TPO erred on facts and in law in considering a set, of 'secret data', i.e. data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. l) The AO/TPO also erred on facts and in law in excluding the foreign exchange gain or loss while calculating the net margins of the comparable companies. 4. Erroneous data used by the AO/TPO a) The AO/TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO/TPO erred in law in not applying the multiple-year data while computing the margin of alleged comparable companies as such data had an influence in determining the pricing policy of the Appellant. 5. Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO The AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule10B to account for, inter alia, differences

IT(TP)A No.1220(B)/2011 5 in (a) accounting practices, (b) marketing expenditure, (c) research and development expenditure and (d) risk profile between the Appellant and the comparable companies. 6. Variation of 5% from the arithmetic mean The AO/TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant. 7. Deduction under section 10A of the Income-tax Act, 1961 On the facts and in the circumstances of the case, the learned AO has erred in reducing the foreign travel expenditure amounting to Rs. 3,594,864 and other foreign currency expenses of Rs 13,344 from the export turnover while computing the deduction under section 10A of the Act irrespective of the fact that the same are incurred for software development outside India and not for rendering technical services outside India. b) On the facts and in the circumstances of the case, the learned AO has erred in reducing the telecommunication expenses of Rs. 2,864,615 from the export turnover irrespective of the fact that entire expenses cannot be-attributable to the delivery of computer software outside India. c)On the facts and in the circumstances of the case, the learned AO has erred in treating the asset insurance expenses of Rs 73,800 as incurred for delivery of computer software outside India inspite of clear directions of the Hon'ble DRP In this regard. d) Without prejudice to the above, on the facts and in the circumstances of the case, the learned AO has erred in reducing the foreign travel & other expenses amounting to Rs. 3,608,208; telecommunication expenses amounting to Rs. 2,864,615; and asset insurance expenses of Rs 73,800 only from the export turnover without correspondingly reducing the said expenses from the total turnover.

IT(TP)A No.1220(B)/2011 6 8. Disallowance of amounts paid to hotels On the facts and in the circumstances of the case, the learned AO has erred in disallowing the amounts paid to hotels of Rs 215,579 towards room hire charges and food expenses, on the ground that no tax has been deducted on the same. 9.Set off of brought forward losses of earlier years On the facts and in the circumstances of the case, the learned AO is to be directed to allow set off of brought forward losses against the taxable income of the subject assessment year in case the additions/ disallowances 10 Short grant of credit for Tax Deducted at Source (`TDS') made in earlier years' assessment orders are deleted by The learned AO has erred in granting short credit of TDS the appellate authorities. amounting to Rs 43,686 inspite of clear directions of the Hon'ble DRP in this regard. 11 Non issue of refund The learned AO has erred in considering that refund of Rs 1,120,000 has been issued to t Appellant under section 143(1) of the Act when no such refund has been issued to the Appellant inspite of clear directions of the Hon'ble DRP in this regard 12 Interest under section 234B of the Act. The learned AO has erred in levying interest under section 234B of the Act amounting to Rs. 2,049,088. 13 Interest under section 234D of the Act. The learned AO has erred in levying interest under section 234D of the Act amounting to Rs 173,600 where no refund has been issued to the Appellant. 14 Penalty under section 271(1)(C) The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. 15 Directions issued by the Honorable Dispute Resolution Panel (DRP). The Honorable DRP has erred in law and on facts in not a) taking cognizance of the objections filed by the Appellant in

IT(TP)A No.1220(B)/2011 7 relation to the draft assessment order/TP Order issued by the AO/ TPO in the proceedings before them. The Honorable DRP erred in facts and in law in confirming b) the draft assessment order of the AO. 16 Relief The Appellant prays that directions be given to grant all such a) relief arising from the above grounds and also all relief consequential thereto. The Appellant craves leave to add to or alter, by deletion, b) substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. Further, the Appellant prays that the adjustment in relation c) to transfer pricing matters made by the learned AO/TPO and upheld by Honorable DRP is bad in law and liable to be deleted. 2. Brief facts of the case are as under: It has been observed that assessee is engaged in business of selling licenses for use of software applications, rendering maintenance services of the same, technical support services, consulting and training, product development and testing in international telemarketing. For year under consideration assessee filed its return of income on 25/10/07 declaring loss of Rs.32,06,615/- after claiming deduction under section 10A of the Act amounting to Rs.2,76,11,149/-. The case was selected for scrutiny, and notices under section 143 (2) was issued to assessee, in response to which representative of assessee appeared. It was observed that assessee claimed deduction under section 10A of the Act, and reduced fright, telecommunication expenses, insurance, foreign travel, other expenses amounting to Rs.65,46,623/- was disallowed.

IT(TP)A No.1220(B)/2011 8 2.1 Further, from details filed, Ld.AO that assessee had international transaction with its associated enterprises exceeding Rs.15 crores and accordingly reference under section 92CA, was made to transfer pricing officer. Ld.TPO upon receipt of reference called upon assessee to file economic details regarding international transactions entered into by it with its AE. Ld.TPO observed that assessee was incorporated in India as wholly owned subsidiary of Telelogic AB, Sweden. It has been observed that assessee is engaged in rendering software development services and global support business, telecasting and global services (primarily characterised as ITES services) to its associated enterprises. Ld.TPO observed that assessee has entered into following international transaction with its associated enterprises: S.No Particulars Amount(in Rupees) 1. Payment of royalty towards software 4,09,60,721/- product distribution 2. India global services 1,50,98,435/- 3. Global support services 5,91,07,951/- 4. International telemarketing 1,18,03,842/- 5. Rendering of software development 14,13,65,683/- services 6. Reimbursement of expenses 12,87,191/- 7. Recovery of expenses 2,00,07,085/-

Ld.AR submitted that except for software development services and ITES services rendered to AE all other transactions have been held to be at arms length price by Ld. TPO.

IT(TP)A No.1220(B)/2011 9 From TP study is observed that assessee had used TNMM as the most appropriate method by using OP/OC as PLI for computing net margin of assessee. Ld.AR submitted that in the above table, transactions at Serial No.2, 3 and 4 pertains to ITES segment and transaction at Serial No.5 pertains to software development service segment. 3. ITeS Segment: He submitted that under ITES segment, assessee has earned margin of 13.22% as against following 23 comparables selected by assessee which had an average margin of 13.08%.

Sl.No. Name of the company 1 Allsec Technologies Ltd., 2 Ask me Info Hubs Ltd., 3 B2 K Corp.Pvt.Ltd. 4 BNR Udyog Ltd 5 CMC Limited., 6 Cosmic Global Ltd. 7 Datamatics Technologies Ltd., 8 Firstsources Solutons Ltd. 9 Fortune Infotech Ltd., 10 Galaxy Commercials Ltd., 11 HCL Technologies Ltd. 12 KPIT Cummins Global Business Solutions Ltd. 13 MCS Limited., 14 Mapl E-solutions Ltd 15 Mphasis Ltd., 16 NIIT Smartserve Ltd. 17 Spanco Telesystems & Solutions Ltd., 18 Sutherland Global services Ltd., 19 T S R Darashaw Ltd 20 Transworks Information Service Ltd., 21 Tricom Corp.Ltd., 22 Triton Corp.Ltd. 23 Wipro Limited

IT(TP)A No.1220(B)/2011 10 Ld.TPO disagreed with comparables selected by assessee, applied various filters to exclude/include comparables to the final list. Ld.TPO thus shortlisted following 27 companies with an average margin of 30.21%:

Sl.No. Name of the company 1 Accentia Technologies Ltd., 30.61% 2 Aditya Birla Minacs Worldwide (Transwork Information 11.98% Services Ltd).sk me Info Hubs Ltd., 3 Accurate Data Convertors Ltd., 50.68% 4 Allsec Technologies Ltd., 27.31% 5 Apex Knowledge Solutions Ltd., 12.83% 6 Appollo Healthstreet Ltd., -13.35% 7 Asit C Mehta Financial Services Ltd., 24.21% 8 Bodhtree Consulting Ltd., 29.58% 9 Calibre Business Solutions Ltd., 21.26% 10 Cosmic Global Ltd., 12.40% 11 Datamatics Financial Servics Ltd., 5.07% 12 Eclerx Services Ltd., 89.33% 13 Flextronics Software Systems Ltd., 8.62% 14 Genesys International Corporation 13.35% 15 HCL Comnet Systems & Services Ltd., 44.99% 16 ICRA Techno Analytics Ltd., 12.24% 17 Informed Technologies Ltd., 35.56% 18 Infosys BPO Ltd., 28.78% 19 I -Service India Pvt.Ltd 49.47% 20 Maple E-Solutions Ltd., 34.05% 21 Mold Tek Technologies Ltd.(Seg.) 113.49% 22 Nittany Outsourcing Services Pv.Ltd., 11.50% 23 R Systems International Ltd.(Seg.) 20.18% 24 Spanco Ltd., 25.81% 25 Triton Corp.Ltd., 34.93% 26 Vishal Information Technologies Ltd 51.19% 27 Wipro Limited., 29.70% Arithmetic Mean 30.21% He thus proposed adjustment of Rs.1,30,25,605/- under ITES segment. 4. Software Development Service Segment: Is in respect of software development service segment, assessee had earned margin of 13.33%. It was submitted that assessee selected

IT(TP)A No.1220(B)/2011 11 following 55 comparables having an average margin of 14.64% (before working capital):

Sl.No. Name of the company 1 Akshay Software Technologies Ltd., 2 A S M Technologies Ltd., 3 Aztecsoft Ltd., 4 Blue Star Infotec Ltd, 5 Bodhtree Consulting Ltd. (SWD Seg.), 6 BT TechNet Ltd., 7 C M C Ltd., 8 Computech International Ltd., 9 Essel Software & Services Ltd., 10 Exensys Software Solutions Ltd., 11 FCS Software Solutions Ltd., 12 Geomeric Software SolutinsCo.Ltd., 13 Goldstone Technologies Ltd., 14 HCL Technologies Ltd., 15 Helios & Matheson Information Technology Ltd., 16 Hexaware Technologies Ltd., 17 ICSA (India) Ltd., 18 Infosys Technologies Ltd., 19 Infotech Enteprises Ltd 20 Intertec Communications Ltd., 21 KALS Information Systems Ltd., 22 KPIT Cummins Infosystem Ltd., 23 Lanco Global Systems Ltd., 24 Larsen & Toubro Infotech Ltd., 25 Maars Software International Ltd., 26 Mascon Global Ltd 27 Meltar Information Technologies Ltd., 28 Mphasis Ltd., 29 Nav-Parva Technologies Pvt.Ltd., 30 Orient Information Technology Ltd., 31 PSI Data Systems Ltd., 32 Patni Computer systems Ltd., 33 Powersoft Global Solutions Ltd., 34 Prithvi Information Solutions Ltd., 35 R S Software (India) Ltd., 36 R Systems International Ltd., 37 Ramco Systems Ltd., 38 Saksoft Ltd., 39 SQL Star International Ltd., 40 Sasken Communication Technologies Ltd., 41 Satyam Compute services Ltd.,

IT(TP)A No.1220(B)/2011 12 42 Shree Tulsi Online.com Ltd., 43 Sonata Software Ltd., 44 Subex Azure Ltd., 45 Synergy Log-in systems Ltd., 46 Synetairos Technologies Ltd., 47 Tata Consultancy services Ltd., 48 Tata Elxsi Ltd., 49 V & K Softech Ltd., 50 V M Soft Tech Ltd., 51 Vama Industries Ltd., 52 Visesh Infotecnics Ltd., 53 Visualsoft Technologies Ltd., 54 Wipro Ltd., 55 Zensar Technologies Ltd.,

Assessee thus held its transaction to be at arms length price. Ld.TPO however applied various filters and is finalised a new set of 26 comparables as under, with an average margin of 25.14% (before working capital):

Sl.No. Name of the company 1 Accel Transmatic Ltd.(Seg.) 21.11% 2 Avani Cimcon Technologies Ltd.(Seg.) 52.59% 3 Celestial Labs Ltd., 58.35% 4 Datamatics Ltd., 1.38 5 E-Zest Solutions Ltd., 36.12% 6 Flextronics Software Systems Ltd.(Seg.) 25.31% 7 Geometric Ltd.(Seg.) 10.71% 8 Helios and Matheson Information Technology Ltd., 36.63% 9 iGate Global Solutions 7.49% 10 Infosys Technologies 40.30% 11 Ishir Infotech Ltd., 30.12% 12 KALS Information Systems Ltd., (Seg.) 30.55% 13 LGS Global Ltd.(Lanco Global Solutions Ltd., ) 15.75% 14 Lucid Software Ltd., 19.37% 15 Mediasoft Solutions Ltd, 3.66% 16 Megasoft Ltd.(Seg.) 60.23% 17 Mindtree Ltd. 16.90% 18 Persistent Systems Ltd., 24.52% 19 Quintegra Solutions Ltd., 12.56% 20 R S Software (India) Ltd., 13.47% 21 R Systems International Ltd.(Seg.) 15.07% 22 Sasken Communication Technologies Ltd.(Seg.) 22.16%

IT(TP)A No.1220(B)/2011 13 23 SIP Technologies & Exports Ltd., 13.90% 24 Tata Elxsi Ltd.(seg.) 26.51% 25 Thirdware Solutions Ltd., 25.12% 26 Wipro Ltd. (Seg.) 33.65% Total 25.14%

It has been submitted that Ld.TPO denied working capital adjustment, as assessee did not provide segment wise breakup of creditors debtors etc., and also excluded foreign exchange gain/loss from operating revenue. He thus proposed adjustment of Rs.1,46,97,412/-. 4. Aggrieved by proposed adjustment, assessee filed objection before DRP. DRP after dealing with objection raised by assessee, upheld comparables selected by Ld.TPO, however granted working capital adjustment under both segments, if details are provided by assessee. Under ITES segment DRP did not direct for adjustment on depreciation. 4.1 Upon receipt of DRP directions, assessing officer passed final assessment order by making an addition in the hands of assessee as under: Net Profit of STP Unit 2,76,11,149 Addition under the head non-deduction of Tax at source as 2,15,579 discussed in para—9.1 to 9.5 Assessed Net Profit of 10A unit 2,78,26,728 Less:10A deduction 2,69,82,007 Taxable Income 8,44,721 Loss of Non-10A Unit (-)43,26,551 Addition under the head Transfer Pricing 2,77,23,017 Assessed Income of Non-STP 2,33,96,466

Computation of Total Income Taxable Income of STP 8,44,721

IT(TP)A No.1220(B)/2011 14 Assessed Income of Non-STP 2,33,96 Assessed Income 2,42,41,187

Computation of Tax Assessed Income 2,42,41,187 Tax thereon @30% 72,72,356 Surcharge @10% 7,27,235 Education Cess @2% 1,59,992 Net Tax 81,59,583 Less:TDS 22,80,801 Balance Payable 58,78,782 Add: Interest u/s 234B 10,00,000 Total 48,78,782 Add: Refund issued u/s 143(1) 11,20,000 Add: Interest u/s 234B 1,73,600 Total Balance Payable 82,21,470

Ld.AR further submitted that assessing officer while passing final assessment order did not granted working capital adjustment even after the directions of DRP. He submitted that all relevant details required, was furnished by assessee before Ld.AO as per directions of DRP. 5. Aggrieved by additions made by Ld.AO, assessee is in appeal before us now. 5.1 Assessee has raised following additional ground on 15/11/16. PRAYER FOR ADMISSION OF ADDITIONAL GROUNDS OF d) APPEAL The above referred appeal is in respect of the order passed 1. by the learned Deputy Commissioner of Income Tax, Circle 12(4) (`Assessing Officer' {'AO']). The Assessing Officer had passed Draft Assessment Order against which the Appellant

IT(TP)A No.1220(B)/2011 15 had filed objection before the Dispute Resolution Panel (`DRP'). The DRP dismissed the objections and confirmed the draft assessment order. Pursuant to the final assessment order issued by the learned AO under section 143(3) r.w.s. 144C, the Appellant is in appeal before the Hon'ble Bench. 2. In the final assessment order issued under section 143(3) r.w.s. 144C, transfer pricing additions were made for transactions with associated enterprises along with certain other additions to the total income of the Appellant. 3. The additional grounds of appeal (enclosed herewith) relates to rejection of Helios & Matheson Information Technology Limited, Infosys Technologies Limited, Kals Information Systems Limited, Sasken Communication Technologies Limited, Tata Elxsi Limited and Wipro Limited as comparables for the software development services rendered by the Appellant.

The additional grounds of appeal (enclosed herewith) 4. relates to rejection of Cosmic Global Limited, Maple E- solutions Limited, Spanco Limited, Triton Corporation Limited and Wipro Limited as comparables for the Information Technology enabled services (`IT Enabled services') rendered by the Appellant.

The Appellant had selected these companies as comparables in its Transfer Pricing study. The TPO has also selected these companies as comparables in the order passed u/s 92CA. The Appellant had raised objection before lower authorities against inclusion of these companies in the list of comparables. With respect to rejection of a comparable, the ground pertains to question of law and facts. The Appellant submits that it is not estopped from rejecting companies selected as

IT(TP)A No.1220(B)/2011 16 comparables in the Transfer Pricing study based on facts available in the public domain. The Appellant humbly prays that the additional ground be admitted and adjudicated along with the other grounds of appeal in the course of hearing of the appeal. It has been submitted that assessee missed to allege certain comparables under software development service segment and ITES segment for exclusion, while filing the appeal before this Tribunal. It has been submitted that these comparables were agitated before DRP however DRP failed to appreciate contentions raised by assessee. Placing reliance upon decision of Hon’ble Supreme Court in case of NTPC Ltd vs CIT reported in 229 ITR 383 and Jute Corporation of India vs CIT reported in 53 taxman 85, submitted that comparables specified in additional grounds may be admitted. Ld.CIT DR, though opposed admission of additional ground, could not controvert submissions advance by Ld.AR. 6. We have perused details relied upon by both sides In our considered opinion the comparables alleged in additional ground arises out of the records and was objected before DRP for its exclusion/inclusion. Considering inadvertent mistake on behalf of assessee in raising these grounds before this Tribunal, we allow additional ground raised now. Accordingly additional grounds raised by assessee vide application dated 5/11/2016 stands allowed. It has been submitted that all Transfer Pricing issues raised in Ground No. 1-6 are in respect of inappropriate comparables included by Ld.TPO, and rejecting certain comparables which were

IT(TP)A No.1220(B)/2011 17 functionally similar to that of assessee. Ld.AR alleged by way of chart, exclusion of certain comparables under both segments, which are as follows: 7. ITES segment: Ld.AR submitted that following comparables are either to be excluded for failing in RPT filter less than 15% or having high turnover more than 200 crores:  Apollo Healthstreet Ltd  Asit C Mehta Financial Services Ltd  Informed Technologies Ltd  HCL Comnet Systems and Services Ltd  Infosys BPO Ltd  Wipro Ltd. He submitted that other comparables alleged for exclusion, which are functionally not similar with that of assessee are as under:  Accentia Technologies Ltd.,  Accurate Data Converters Ltd  Bodhtree Consulting Ltd.,  Calibre Business Solutions Ltd  Eclerx services Ltd  I Services India Pvt. Ltd.,  Maple Evolution Ltd  Mould-Tech Technologies Ltd (segmental)  Spanco Ltd  Triton Corpn. Ltd  Vishal Information Technologies Ltd

IT(TP)A No.1220(B)/2011 18 Before we analyse these comparables it is sine qua non to understand functions performed, assets employed and risks assumed by assessee under this segment. Functions: In TP study, assessee has been set to be providing global support business/tele-calling/global, consultancy services to the group companies and also provides after sales services and training. Telelogic India performs all routine functions required to render these services to Telelogic Group of companies. Assets employed: It has been submitted that assessee does not own any intangible assets and has got routine assets as listed in the balance sheet for the year ending. Risks Assumed: Under ITES service segment, assessee is said to be risk mitigated as the group companies compensate assessee for the cost incurred in providing the services, except for foreign exchange risk as the invoice is raised by assessee in foreign currency and employee hiring and retention risk as assessee is responsible for the recruitment and retention of personal in its organisation. Based upon the above we shall now undertake compatibility of alleged comparables for exclusion by assessee. 8. Apollo Healthstreet Ltd., Asit C Mehta Financial Services Ltd., and Informed Technologies Ltd. It has been submitted by Ld.AR that, these comparables fail RPT filter, being less than 15%. In support of his contention placed reliance on following decisions of this Tribunal:

IT(TP)A No.1220(B)/2011 19  M/s Poll to Win India Pvt.Ltd. vs DCIT reported in IT(TP)A No. 1053/Bang/2011;  M/s Tesco Hindustan Services Centers Pvt.Ltd. vs DCIT in ITA No. 1285/Bang/2011;  M/s Magma Design Automation India Pvt.Ltd. vs ACIT in ITA No.1241/Bang/2011;  First Advantage Offshore Services Pvt.Ltd. vs DCIT in ITA No. 1086/Bang/2011; On the contrary, Ld.CIT DR relying upon Rule 10 B (4) of Income tax Rules, submitted that in;  Microelectronics Ltd., reported in 87 Taxmann.com 262;  Triology E-business Software, reported in 29 Taxmann.com 310  Sendute India Ltd., In ITA (TP) A 59/Bang/2016 vide order dated 07/07/17; this Tribunal held that, merely because in decisions passed by this Tribunal in various cases, excludes certain comparables alleged by assessee, does not mean that it is excludable in present case too. 9. We have perused submissions advanced by both sides in light of records placed before us. 9.1 On perusal of order passed by Ld.TPO it is observed that filter applied in respect of related party transaction was 25%. Before DRP assessee objected application of this filter. Assessee now placing reliance upon various decisions of this Tribunal contends that RPT filter must be restricted to 15% and thereby alleges exclusion of Apollo Healthstreet Ltd., Asit C Mehta Financial Services Ltd., and Informed Technologies Ltd. As per present position of law, RPT filter should be applied is at 15%. We therefore

IT(TP)A No.1220(B)/2011 20 set aside order of Ld.AO/TPO and restore back the issue to file of Ld.AO/TPO for fresh decision by applying RPT filter of 15% We accordingly set aside Apollo Healthstreet Ltd., Asit C Mehta Financial Services Ltd., and Informed Technologies Ltd.back to Ld. AO/TPO. 10. HCL Comnet Systems and Services Ltd., Infosys BPO Ltd., and Wipro Ltd. Ld.AR submitted that these comparables fails in turnover filter of 1 to 200 Crores. It has been submitted that companies having turnover of more than 200 Crores have to be eliminated from list of comparables as laid down in several decisions referred to by Ld.AR:  Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 20 taxmann.com 715(Bang-Trib)  CIT v. Pentair Water India (P.) Ltd. [2016] 69 taxmann.com 180 (Bom)  Commissioner of Income-tax v. Agnity India Technologies (P.) Ltd (2013) 36 taxmann.com 289(Delhi) It is submitted that HCL Comnet Systems and Services Ltd., Infosys BPO Ltd., and Wipro Ltd., have high turnover of more than 200 crore, and therefore, cannot be compared with assessee which is captive service provider. Ld.AR submitted that, assessee's turnover was Rs.8.6 Crore.He submitted that Ld.TPO had applied lower turnover filter and excluded companies whose turnover was less than Rs.1 Crore. Further assessee contentded, before DRP that while Ld.TPO excluded companies with low turnover, he failed to apply same yardstick to exclude companies with high turnover. He submitted that reasons given by authorities below for exclusion of companies with low turnover was that, such companies do not

IT(TP)A No.1220(B)/2011 21 reflect industry trends, as their low cost to sales ratio made their results unreliable. Contention of assessee was that there would be effect on profitability whenever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. DRP rejected assessee’s contentions without assigning any reason. Ld.AR placed reliance on decision of co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. (supra), wherein it was held that when there is a limit for the lower end for identifying the comparable companies, there is no reason why there should not be an upper turnover limit also, as size matters in business. Ld.AR submitted that co-ordinate bench of this Tribunal in the case of Dell International Services India (P.) Ltd. v. Dy. CIT reported in [2018] 89 taxmann.com 44 for Assessment Year 2005-06 considered various aspects of application of turnover filter for excluding companies and observed that first decision rendered on application of this filter was in case of Genisys Integrating Systems (India) (P.) Ltd. (supra). Further, in case of Dell International Services India Pvt. Ltd. (supra), co-ordinate bench of this Tribunal discussed apparent divergent view of two non-jurisdictional High Courts and also decision of this Tribunal in the case of Sysarris Software (P.) Ltd. v. Dy. CIT reported in [2016] 67 taxmann.com 243 (Bang. - Trib.), wherein, Tribunal, after noticing decision of Hon'ble High Delhi Court in case of Chryscapital Investment Advisors (India) (P.) Ltd. v. Dy. CIT reported in [2015] 56 taxmann.com 417 and decision to the contrary by Hon'ble Bombay High Court in case of CIT v. Pentair Water India (P.) Ltd. reported in [2016] 69 taxmann.com 180 held that, since there were contrary views on the

IT(TP)A No.1220(B)/2011 22 issue, therefore view favourable to assessee laid down in case of Pentair Water India (P) Ltd. (supra) should be adopted. The Ld.CIT DR submitted that turnover is not a relevant criteria to regard a company as not comparable, so long the two companies are functionally comparable. 11. We have perused submissions advanced by both sides in light of records placed before us. We have also referred to the decisions relied upon by both sides. It has been held in various decisions by this Tribunal that turnover filter is a relevant filter. This Tribunal in case of Genesis Integrating Systems India Pvt. Ltd., vs DCIT reported in (2012) 20 taxman.com 715. In facts of present case, assessee has been set to be providing global support business/tele-calling/global, consultancy services to group companies and also provides after sales services and training. 11.1 It is observed that comparables sought to be excluded are 100 % Software Development Companies, having high turnover, and therefore respectfully following aforestated view in case of Genesis Integrating Systems India Pvt. Ltd., vs DCIT (supra), these comparables are to be excluded because they have high turnover of more than 200 crore. It is submitted that subsequently this Tribunal in case of Yodlee Infotech Pvt. Ltd vs ITO in IT(TP)A no. 108/Bang/2014 For assessment year 2009-10, vide order dated 12/12/14, excluded these companies following Genesis Integrating systems Indi Pvt.Ltd vs.DCIT(supra).

IT(TP)A No.1220(B)/2011 23 Reliance has been placed on decision of this Tribunal in case of Autodesk India Pvt.Ltd. vs DCIT reported in (2018) 96 Taxmann.com 263 followed similar view to exclude identical comparables by applying turnover filter, wherein all the decisions relied upon by Ld. CIT DR has been considered and dealt with. Therefore, respectfully following above decisions, we direct Ld.TPO to exclude HCL Comnet Systems and Services Ltd., Infosys BPO Ltd., and Wipro Ltd., from final list as they fail turnover filter of 1- 200 crores. 12. Now coming to comparables alleged to be functionally not similar with assessee. We shall analyse each of them, having regards to annual reports of comparables placed before us. a) Accentia Technologies Ltd., This company has been selected by Ld.TPO into the list of comparables. Ld.Counsel submitted that during the year under consideration Geo-Soft Technologies (Trivandrum) Ltd. and Iridium Technologies India Pvt. Ltd amalgamated with Accentia resulting in abnormal rise in profits. It has been submitted that Delhi benches in case of Ciena India Pvt.Ltd vs. DCIT reported in (2015) 57 Taxmann.com 329 and ICC India Pvt.Ltd versus DCIT reported in (2016) 71 Taxmann.com 164 as well as Mumbai bench in Petro Araldite Pvt.Ltd vs DCIT reported in 31 Taxmann.com 281, has held that a company cannot be considered as comparable because of financial results become distorted due to mergers, demergers etc. It has been submitted that similar view has also been taken by Delhi bench in case of Toluna India Pvt.Ltd vs. ACIT reported in (2014) 50 Taxmann.com 24. Due to the amalgamation of companies into

IT(TP)A No.1220(B)/2011 24 Accentia during the year in question it may not be comparable with assessee. Ld.DR on the contrary submitted that annual report does not specify any amalgamation and therefore the financials cannot be considered to be distorted. This company is into medical transcription and is perfectly comparable with that of assessee being a BPO. We have perused the submissions advanced by both the sides in the light of the records placed before us. From the audited statements of this company placed at page 286-335 of paper book volume 2, it is clear that assessee has acquired 51% stake in Geo- Soft Technologies (Trivandrum) Ltd. and 51% stake in Iridium Technologies India Pvt. Ltd. It is observed that almost approximately 68% of operating cost is towards overseas business expenses as against ‘nil’ in case of assessee and hence there is a difference in business model. Further substantial marketing expenses to an extent of approximately 28% of sales as against ‘nil’ of assessee have been undertaken by this company. Under such circumstances, we are of the considered opinion that this company is not functionally similar as well as the risk profile is quite different from that of assessee and accordingly cannot be considered to be a fit comparable. We direct this company to be excluded from the list of comparables. b) Bodhtree Consulting Ltd., Eclerx Services Ltd., and Mold- Tek Technologies Ltd., It has been submitted by Ld.AR that, Bodhtree Consulting Ltd., Eclerx Services Ltd., and Mold-Tek Technologies Ltd., were

IT(TP)A No.1220(B)/2011 25 excluded from list of comparables by this Tribunal in case of First Advantage Offshore Services (P.) Ltd. (supra) for functional dissimilarity. This Tribunal observed that these companies are into business of Knowledge Process Outsourcing (KPO)and thus held these companies un comparable with an assessee which is engaged in IT enabled services. Relevant paragraphs of order of Tribunal in case of First Advantage Offshore Services (P.) Ltd. (supra) are extracted hereunder: "39, Having heard both the parties and having considered their rival contentions, we find that the assessee had raised elaborate objections to each of the comparables in group 3 before the TPQ, The TPO has also reproduced the said objections in his order para 6.5.1. of page 178 of his order. He has rejected the contention of the assessee by holding that every function within BPO sector can be from low end to high end and the activities of the assessee such as accounting, web management, network management are BPO services using technology but these services are not categorized as KPO. He held that a call centre may offer support services, like telemarketing to high end services like technical support services, where not only the level of knowledge, skill required would be high, but the technical knowledge as well would be high. According to him, back office transaction process services may he as remarkable and as complicated as insurance/market transaction processing services. He, therefore, rejected the contention of the assessee and treated the 131 'O as equivalent to KPO services.

IT(TP)A No.1220(B)/2011 26 40. We have to now consider whether a BPO and a KPO are functionally similar and are comparable to each, other. BPO is a subset if, outscoring arid involves the contracting of the operations and responsibilities of specific business functions or process to a third party services provider. Often business processes outsourcing are information technology based and referred to as ITES-BPO, KPO is one of the sub-segment of the BPO industry. It involves outsourcing of core information related business activities which are competitively important or form an integral part of a company's value chain. It thus requires advanced analytical and technical skills as well as a high degree of specialist expertise, The KPO services include all kinds of research and information gathering. Thus it can be seen that even though both BPO and KPO are offering information technology based services/ the skill and expertise and may be even the tools required are different which may result in different economic results of both the segments. Thus, in such circumstances, we are of the opinion that they cannot be compared with each other and have to be excluded from the list of comparables. " Hon'ble Delhi High Court in the case of Rampgreen Solutions Ltd. v. CIT [2015] 234 Taxman 573 held that KPO company cannot be compared with BPO company. Ld.CIT DR has not controverted that these companies are KPO companies and that assessee before us is a captive service provider low end BPO functions to support AE. At this juncture Ld.DR placed reliance upon decision of Microgenetic Ltd reported in 87 taxman.com 262, Triology e-

IT(TP)A No.1220(B)/2011 27 Business Software reported in 29 Taxmann.com 310, wherein it has been observed that, merely because that certain decisions of this Tribunal excluded certain comparables, does not ipso facto mean, such comparables should be excluded without analysing functional similarities/dissimilarities with that of assessee in present case. In support of his argument Ld.CIT DR referred to decision of this Tribunal in Sendute India Pvt.Ltd in IT (TP) A 59/B/2016 vide order dated 07/07/17. c) Bodhtree Consulting Ltd. This comparable has been included by ld.TPO in the list of comparables. Ld.Cunsel submitted that this company is functionally not similar, as it is into software development and data cleaning segment vis-a-vis captive service provider like assessee. It has been submitted that ld.TPO considered data cleaning segment as ITES, only on the basis of companies reply under 133 (6) of the Act. However on perusal of the reply it is very clear that company provides cleansing services only to those clients for whom it had developed software applications. Thus Ld. counsel submitted that cleansing services rendered by this company is ancillary to software development services provided to those clients to whom it had provided the software applications. On the contrary ld. DR placed reliance upon the order of ld. TPO. We have perused submissions advanced by both sides and observed that it is into software development and data cleansing segment. It has been categorised to have only one segment being software development and is engaged in providing open and end- to-end web solutions, software consultancy, design and development of solutions using the latest technologies.

IT(TP)A No.1220(B)/2011 28 We therefore do not find this company to be comparable with that of assessee and direct Ld.TPO to exclude this from list of comparables. d).Eclerx services Ltd., This comparable was included by Ld.TPO, as it is providing knowledge-based specialised services. It has been submitted by Ld.Counsel that Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd., vs. CIT reported in (2015) 377 ITR 533 has held that KPO segment cannot be compared with ITES segment. Hon’ble Court has held Eclerx to be a KPO, whereas present assessee is a captive service provider. Ld.DR submitted that functions performed by assessee is also KPO and therefore is a fit comparable. We have perused submissions advanced by both sides in light of records placed before us. It is observed this company is engaged in providing high-level services involving specialised knowledge and domain expertise and is a leading provider of KPO services, whereas assessee is a captive service provider which provides services only to its group concerns on the requirement as per the contract. It has been submitted that Delhi Bench of the ITAT in iQor India Services (P.) Ltd v. ITO [2015] 57 taxmann.com 416/69 SOT 37 (URO) held as under:— 'Eclerx Services Ltd. Eclerx is engaged in providing data analytics services with expertise in financial service and retail and manufacturing. The service provided by the company are high end in nature involving special knowledge and domain expertise and therefore, not functionally comparable with the assessee company which is engaged in providing low end ITES enabled call centre services to its AE. The fact Eclerx Services Ltd. is providing high end services

IT(TP)A No.1220(B)/2011 29 involving special knowledge and domain expertise is evident from the company's own reply to the notice u/s 133(6) which is placed at pages 976 to 979 of the paper book filed by the assessee. The Hon'ble Special Bench of the Tribunal in case of Maersk Global Centre (India) (P.) Ltd. v. Asstt. CIT [2014] 147 ITD 83/43 taxmann.com 100 (Mum.) had excluded Eclerx Services Pvt. Ltd. from the list of comparables for the reason that it is providing high end services involving specialised knowledge and domain expertise and same cannot be compared with companies which are mainly engaged in providing low end services to group companies. The relevant finding of the Hon'ble Tribunal read as follows :— "In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007- 08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx is a different company with industry specialized services for meeting complex client needs, data analytics KPO service provider specializing in two business verticals - financial services and retail and manufacturing. It is claimed to be engaged in providing solutions that do not just reduce cost, but help the clients increase sales and reduce risk by enhancing efficiencies and by providing valuable insights that empower better decisions. M/s eClerx Services Pvt. Ltd. is also claimed to have a scalable delivery model and solutions offered that include data analytics, operations management, audits and reconciliation, metrics management and reporting services. It also provides tailored process outsourcing and management services along with a multitude of data aggregation, mining and maintenance services. It is claimed that the company has a team dedicated to developing automation tools to support service delivery. These software automation tools increase productivity, allowing customers to benefit from further cost saving and output gains with better control over quality. Keeping in view the nature of

IT(TP)A No.1220(B)/2011 30 services rendered by M/s eClerx Services Pvt. Ltd. and its functional profile, we are of the view that this company is also mainly engaged in providing high-end services involving specialized knowledge and domain expertise in the field and the same cannot be compared with the assessee company which is mainly engaged in providing low-end services to the group concerns. For the reasons given above, we are of the view that if the functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Pvt. Ltd. and Mold-Tek Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparables for the purpose of determining ALP of the transactions of the assessee company with its AEs. We, therefore, direct that these two entities be excluded from the list of 10 comparables finally taken by the AO/TPO as per the direction of the DRP."' The above ruling of Special Bench is equally applicable to facts of assessee, as is evident from functional profile of assessee. For aforesaid reasons, we direct Eclerx Services Ltd. be excluded from final list of comparables. e) Mold- Tek Technologies Ltd (Seg) This company has been included by ld.TPO. However Ld.Counsel submits that it is pioneer in structural engineering services and provides highly technical and specialised engineering services by use of information technology which is incidental. Further it has been submitted that there are no segmental information regarding this comparable and has relied upon decision of Delhi Tribunal in the case of ICC India Pvt.Ltd., vs. ACIT (supra). Ld.DR placed reliance upon order of ld.TPO. We have perused submissions advanced by both the sides in the light of records placed before us. It is observed that this company is

IT(TP)A No.1220(B)/2011 31 involved in providing structural engineering services to high-rise buildings. It is observed that this company has undergone merger with Tools Pvt. Ltd., and acquisition of Crossroads IMC USA. Post amalgamation accounts of companies were revised for the financial year 2006-07 because of which this company has underwent a huge change in business module. Delhi benches of this Tribunal in Cienna India Pvt.Ltd reported in (2015) 57 taxman.com 329 as well as Mumbai bench in Petro Araldite Pvt.Ltd reported in (2013) 31 taxman.com 281, held that a company cannot be considered as comparable because of financial results becoming distorted due to mergers, demergers etc. Similar view has been taken in case of Toluna India Pvt.Ltd reported in (2014) 50 Taxmann.com 24, and ICC India Pvt.Ltd versus DCIT reported in (2016) 71 taxman.com 164. Respectfully following the same, we direct this comparable to be excluded from the list of comparables. f) Caliber Point Business Solutions Ltd., Regarding Caliber Pint Business Solutions Ltd., co-ordinate bench (Mumbai) of Tribunal in case of Stream International Services (P.) Ltd. v. Asstt. CIT reported in [2015] 53 taxmann.com 19 held: " (x) Caliber Point Business Solutions Ltd.:- At the outset, the ld. Counsel for the assessee stated that this company deserves to be rejected as the related party transaction is more than 25% which is a filter adopted by the TPO himself. We find that the DRP has not considered this objection because it was of the opinion that related party transaction is mainly for reimbursements and recoveries and therefore would not affect the company. We find

IT(TP)A No.1220(B)/2011 32 that an identical issue came up before the Tribunal in assessee's own case in A.Y. 2006-07 in ITA No. 8997/Mum/2010 wherein the Tribunal has rejected this contention of the Department. The Tribunal at para 13 of its order has observed that "A pure reimbursement of expenses by one AE to another AE is very much a 'transaction' as per section 92F(v) and consequently is equally an international transaction as per section 92B requiring consideration as per section 92 of the Act". These observations were in relation to a company namely Datamatics Financial Services Limited. We therefore do not find any force in the rejection of the objection by the DRP in line with the observations of the Tribunal in assessee's own case for A.Y. 2006-07. We direct for the exclusion of this company from the final set of comparable. Learned Standing Counsel has not brought anything controverting the findings of the Tribunal in the above case. Therefore, we have no reason to differ with the reasoning adopted by the co- ordinate bench in the case of Stream International Services (P.) Ltd. (supra). Therefore, we direct the AO/TPO to exclude this company form the list of comparables.” Even before us nothing contrary to the above findings has been brought on record by revenue. Respectfully following the same, we therefore direct Ld.TPO to exclude these comparables from final list. g) Maple Esolutions Ltd and Triton Corporation Ltd Assessee seeks exclusion of Maple Esolutions Ltd and Triton Corporation Ltd. on the ground that their financial results are not

IT(TP)A No.1220(B)/2011 33 reliable. It has been submitted that comparability of Maple E Solutions Ltd., and Triton Corporation Ltd. came up for consideration before co-ordinate bench of this Tribunal in case of e4e Business Solutions India (P.) Ltd. (supra), wherein it has been held: "14. With regard to company at SI.Nos.19 & 23 of the list of comparable companies chosen by the TPO viz., M/s. Maple E solutions Ltd., and Triton Corporation Ltd., the Mumbai Bench of the Tribunal in the case of Stream International Services (P.) Ltd., (supra) in para 13(iii) at page-14 of the order held that the promoters of these two companies were involved in fraud for earlier years and hence the financial results of these companies are distorted and cannot be relied upon and in this regard relied on several decisions rendered by the various benches of ITAT. Respectfully following the same, we direct the aforesaid two companies be excluded from the list of comparable companies chosen by the TPO." Learned Standing Counsel has not brought anything controverting the findings of the Tribunal in the above case. Therefore, we have no reason to differ with the reasoning adopted by the co-ordinate bench in the case of e4e Business Solutions India (P.) Ltd. (supra). Therefore, we direct the AO/TPO to exclude these companies form the list of comparables. Before us nothing contrary to the above findings has been brought on record by revenue. Ld. DR do not have any objection in exclusion of this comparable.

IT(TP)A No.1220(B)/2011 34 Respectfully following the same, we therefore direct Ld.TPO to exclude these comparables from final list. h) I Services India Pvt. Ltd, Assessee seeks exclusion of I Services India Pvt. Ltd, on ground that complete data is not available. Reliance was placed on decision in case of e4e Business Solutions India (P.) Ltd. (supra) wherein it has been held: "30. The assessee has not raised any specific ground on adopting this company as a comparable before the DRP. Before us, the learned counsel for the assessee has submitted that the TPO did not furnish the information obtained from this company in exercise of his powers u/s. 133(6) of the Act. It was further pointed out that even as per the TPO, the annual report of this company for F. Y. 2006-07 was not available. The TPO has gone by the data available on capita line data base. The learned counsel for the assessee therefore made a prayer that the question of considering the aforesaid company as a comparable should be remanded back to the TPO/Assessing Officer for fresh consideration and the issue decided in the light of the published annual report for F.Y. 2006-07 and also on the basis of the information furnished by this company to the Assessing Officer in response to notice u/s. 133(6) of the Act. We have considered the submissions and are of the view that the same deserves to be accepted. The TPO/Assessing Officer will obtain the annual report of the company for F.Y. 2006-07 and also furnish the assessee copies of the same together with the information obtained by the TPO pursuant to issue of notice u/s. 133(6) of the

IT(TP)A No.1220(B)/2011 35 Act. The assessee will thereafter furnish its reply as to why this company should not be considered as a comparable company. The TPO/Assessing Officer will thereafter decide the question of considering this company as a comparable company after affording opportunity of being heard to the assessee. " Learned Standing Counsel has not brought anything controverting the findings of the Tribunal in the above case. Therefore, we have no reason to differ with the reasoning adopted by the co-ordinate bench in the case of e4e Business Solutions India (P.) Ltd. (supra). Therefore, we direct the AO/TPO to exclude these companies form the list of comparables.” Even before us nothing contrary to the above findings has been brought on record by revenue. Respectfully following the same, we therefore direct Ld.TPO to exclude these comparables from final list. i) Vishal Information Technologies Ltd This comparable was selected by Ld.TPO. Ld.Counsel submitted that this company is not similar in function, assets and risk profile with that of assessee and it has a different business module. Further it has been submitted that Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt Ltd., (supra) categorised this comparable to be a KPO service provider. Further Ld.Counsel submitted that this entity outsources its ITES services to third- party vendor thereby increasing operating expenses. Ld. DR placed reliance upon the orders of authorities below. We have perused the submissions advanced by both the sides in the light of the records placed before us. It is observed that Hon’ble

IT(TP)A No.1220(B)/2011 36 Delhi High Court in the case of Rampgreen Solutions Private Limited (supra) has considered this to be a KPO service provider. In the facts of present assessee before us, services are rendered to group concerns, strictly on the basis of contract and requirement of its AE. And therefore this company cannot be comparable with the functions performed by present assessee before us. Accordingly we direct this company to be excluded from the list of comparables. j) Accurate Data Converters Ltd Assessee objected for exclusion of this comparable for the reason that it is functionally with that of assessee and financial data are not available in the database. It is also been submitted that it this company fails employee cost filter applied by Ld. TPO. It has been submitted that this comparable has reported employee cost at 1.61% which shows a different business model. Ld.ARfurther submitted that this company outsources its business and provides software development services. On the other hand Ld. DR placed reliance upon orders of authorities below. We have perused submissions advanced by both sides in the light of records placed before us. Ld.AR placed reliance upon decision of coordinate bench of this Tribunal in case of Siemens information processing services (P) Ltd vs DCIT reported in (2016) 71 Taxmann.com 281, wherein this company was considered for comparability analysis under ITES segment. It has been observed by the tribunal that employee cost is at 1.61% and this company also outsources its business to outside vendor is. It is also been observed by the tribunal therein that in

IT(TP)A No.1220(B)/2011 37 information sought by Ld. TPO under section 133 (6) it was found that this company provides software development services. However before us Ld. TPO has not verified the functions performed by this company. We are therefore inclined to set aside this comparable to Ld.TPO for verification and to decide the comparability on the basis of functional dissimilarities/similarities. Accordingly this comparable is set aside to Ld.TPO. k) Spanco Ltd., Assessee sought to exclude this comparable on the basis of failure of revenue filter earned from ITES segment. It has been submitted that this comparable earns only 8.21% from ITES segments and that the employee cost of this company is as lower 7.16%. It has also been pointed out that this comparable has underwent a demerger of the division during the year under consideration. In support of his submission he placed reliance upon the decision of coordinate bench of this Tribunal in case of Siemens information processing services (P) Ltd vs DCIT(supra) and AOL online India private limited reported in (2016) 68 Taxmann.com 235. Ld. DR on the contrary placed reliance upon orders of authorities below. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that coordinate bench of this tribunal in aforestated decisions have set aside this issue for verification as regarding be employee cost of 7.16% and revenue earned under ITES segment at 8.21% with a direction to exclude if the alleged fact is found to be correct. Respectfully following the same we direct Ld. AO to verify

IT(TP)A No.1220(B)/2011 38 the same and to consider the comparability of this company with assessee on the basis of details verified. Accordingly this comparable is set aside to Ld.TPO.

IT(TP)A No.1220(B)/2011 39 assessee is in respect of foreign exchange fluctuation risk as the invoicing is done in foreign currency and employee risk as assessee is responsible for recruitment and retention of personal in its organisation. c) Assets employed: Assessee does not own any intangibles and possesses only routine tangible assets required to perform its day- to-day affairs like computers office spaces etc. In the TP study, assessee is thus categorised as a captive service provider providing services only to Telelogic group companies. On the basis of aforestated FAR analysis, we shall now undertake comparability of comparables disputed by assessee for alleged reasons as under: A) Ld. AR submitted that following comparables are sought to be excluded on turnover filter:  Flextronics Software Systems Ltd  iGate Global Solutions Ltd  Infosys Technologies  Mindtree Ltd  Persistent Systems Ltd  Sasken Communications Technologies Ltd (seg.)  Tata Elxsi Ltd  Wipro Ltd (segmental) B) Ld.AR submitted that Geometric Ltd (seg) is to be excluded as related party transaction of this comparable is more than 15%. C) Ld.AR submitted that assessee seeks to exclude following comparables on functional dissimilarities:  Accel Transmatic Ltd.,

IT(TP)A No.1220(B)/2011 40  Avani Cimcon Technologies Ltd.,  Celestial Labs Ltd  KALS Information Systems Ltd (seg.)

A. Ld.AR submitted that these comparables fails in turnover filter of 1 to 200 crores. It has been submitted that companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by ld. AR : Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 20 taxmann.com 715(Bang-Trib) CIT v. Pentair Water India (P.) Ltd. [2016] 69 taxmann.com 180 (Bom) Commissioner of Income-tax v. Agnity India Technologies (P.) Ltd (2013) 36 taxmann.com 289(Delhi) It is submitted that Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Infosys Technologies., Mindtree Ltd.,Persistent Systems Ltd., Sasken Communications Technologies Ltd (seg.)., Tata Elxsi Ltd., Wipro Ltd (segmental) have high turnover of more than 200 crore, and therefore, cannot be compared with assessee which is captive service provider. Ld.AR submitted that, assessee's turnover under this segment is only14.13 crores. Ld.AR submitted that Ld.TPO applied lower turnover filter and excluded companies whose turnover was less than Rs.1 Crore. Further assessee's contented, before DRP that while Ld.TPO excluded companies with low turnover, he failed to apply same yardstick to exclude companies with high turnover. He submitted that reasons given by authorities below for exclusion of companies with low turnover was

IT(TP)A No.1220(B)/2011 41 that, such companies do not reflect industry trends, as their low cost to sales ratio made their results unreliable. Contention of assessee was that there would be effect on profitability whenever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. DRP rejected assessee’s contentions without assigning any reason. Ld.AR placed reliance on decision of co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. (supra), wherein it was held that when there is a limit for the lower end for identifying the comparable companies, there is no reason why there should not be an upper turnover limit also, as size matters in business. Ld.AR submitted that co-ordinate bench of this Tribunal in the case of Dell International Services India (P.) Ltd. v. Dy. CIT reported in [2018] 89 taxmann.com 44 for Assessment Year 2005-06 considered various aspects of application of turnover filter for excluding companies and observed that first decision rendered on application of this filter was in case of Genisys Integrating Systems (India) (P.) Ltd. (supra). Further, in case of Dell International Services India Pvt. Ltd. (supra), co-ordinate bench of this Tribunal discussed apparent divergent view of two non-jurisdictional High Courts and also decision of this Tribunal in the case of Sysarris Software (P.) Ltd. v. Dy. CIT reported in [2016] 67 taxmann.com 243 (Bang. - Trib.), wherein, Tribunal, after noticing decision of Hon'ble High Delhi Court in case of Chryscapital Investment Advisors (India) (P.) Ltd. v. Dy. CIT reported in [2015] 56 taxmann.com 417 and decision to the contrary by Hon'ble Bombay High Court in case of CIT v. Pentair Water India (P.) Ltd. reported in [2016] 69

IT(TP)A No.1220(B)/2011 42 taxmann.com 180 held that, since there were contrary views on the issue, therefore view favourable to assessee laid down in case of Pentair Water India (P) Ltd. (supra) should be adopted. The Ld.CIT DR submitted that turnover is not a relevant criteria to regard a company as not comparable, so long the two companies are functionally comparable. 14. We have perused submissions advanced by both sides in light of records placed before us. We have also referred to the decisions relied upon by both sides. It has been held in various decisions by this Tribunal that turnover filter is a relevant filter. This Tribunal in case of Genesis Integrating Systems India Pvt. Ltd., vs DCIT reported in (2012) 20 taxman.com 715. In facts of present case, assessee has been set to be providing global support business/tele-calling/global, consultancy services to group companies and also provides after sales services and training. It is observed that comparables sought to be excluded are 100 % Software Development Companies, having high turnover, and therefore respectfully following aforestated view in case of Genesis Integrating Systems India Pvt. Ltd., vs DCIT (supra), these comparables are to be excluded because they have high turnover of more than 200 Crore. It is submitted that subsequently this Tribunal in case of Yodlee Infotech Pvt. Ltd vs ITO in IT(TP)A no. 108/Bang/2014 For assessment year 2009-10, vide order dated 12/12/14, excluded these companies following Genesis Integrating systems Indi Pvt.Ltd vs.DCIT(supra).

IT(TP)A No.1220(B)/2011 43 Reliance has been placed on decision of this Tribunal in case of Autodesk India Pvt.Ltd. vs DCIT reported in (2018) 96 Taxmann.com 263 followed similar view to exclude identical comparables by applying turnover filter, wherein all the decisions relied upon by Ld. CIT DR has been considered and dealt with. Therefore, respectfully following above decisions, we direct Ld.TPO to exclude Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Infosys Technologies., Mindtree Ltd.,Persistent Systems Ltd., Sasken Communications Technologies Ltd (seg.)., Tata Elxsi Ltd., Wipro Ltd (seg.) from final list as they fail turnover filter of 1-200 Crores. B. Ld.AR submitted that Geometric Ltd (seg) is to be excluded as related party transaction of this comparable is more than 15%. Geometric Ltd (seg): It has been alledged by Ld.AR that this company fail in RPT filter of less that 15%, as applied by Ld.TPO. It has been submitted that the range of RPT filter generally accepted by coordinate benches of this tribunal is 5% to 25%. Ld.AR placed reliance upon decision of coordinate bench of this tribunal in case of M/s novel software development (India) private limited vs DCIT in ITA (TP) A No. 1287/Bang/2011 for assessment year 2007-08 for exclusion of this comparable. C. Ld. DR placed reliance upon orders of authorities below. 15. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that this tribunal has remitted this comparable back to Ld.TPO by observing as under:

IT(TP)A No.1220(B)/2011 44 “31. …….. Question of having a higher RPT level or lower RPT 11 would depend on the No. of comparables available after exclusions. In the case before us there are 26 comparables and even after exclusion there will definitely be at list 9 comparables. Hence we are of the opinion that RPT at 15% can rightly be applied. Since assessee had not raced this ground before any of the authorities below, we remit the question of exclusion of geometric Ltd back to the file of the AO/TPO for consideration afresh.” Even in the case before us it is observed that there are 8 comparables left after exclusion of the alleged comparables. However assessee has raised this issue before us for the 1st time and accordingly respectfully following aforestated view of coordinate bench of this tribunal, we also remit this comparable back to Ld.TPO for consideration afresh. Ld.AR submitted that assessee seeks to exclude following comparables on functional dissimilarities:  Avani Cimcon Technologies Ltd.,  Celestial Labs Ltd  KALS Information Systems Ltd (seg.) Accel Transmatic Ltd. It has been submitted by Ld.AR that activities of this company is different with assessee and that this company was functionally different from assessee, as it was engaged in services in form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore Ld.AR submitted that this company was functionally different. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and

IT(TP)A No.1220(B)/2011 45 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. Ld. DR, on the other hand, relied on the order of the TPO. 16. We have considered submissions advanced by both sides and perused records placed before us. It is observed that has accepted that this company is functionally not comparable with assesses, as it is engaged in software development services business, as compared to a captive service provider like assessee. Plea of assessee that aforesaid company should not be treated as comparables was considered by Tribunal in Maphasis Ltd. vs.ACIT reported in (2017) 83 taxmann.com 362, First Advantage Offshore Services Pvt.Ltd. Vs DCIT in IT(TP) A No. 1086/Bang/2011. It is observed that this comparable has been excluded for aforastated reasons by this Tribunal in case of Capgemini India (F) Ltd. Vs ACIT reported in 12 taxman.com 51, where assessee was captive software developer. Accepting argument of Ld.AR, we hold that aforesaid company should be excluded as comparables. Respectfully following decisions of this Tribunal in similar set of facts, these companies are directed to be excluded from list of comparables. a) Avani Cimcon Technologies Ltd. It has been submitted that this company is functionally different from the assessee. Based on the information available in company’s website, it has been submitted that this company developed a software product by name “DXchange”. It was also submitted that

IT(TP)A No.1220(B)/2011 46 this company has revenue from software product sales, apart from rendering of software services for which segmental information is not available. It has therefore been submitted that this company is functionally different from assessee. It was further submitted that Mumbai Bench of Tribunal in case of Telcordia Technologies Pvt. Ltd. v. ACIT in ITA No.7821/Mum/2011 accepted assessee’s contention that this company has revenue from software product and observed that in absence of segmental details, Avani Cincom cannot be considered as comparable to an assessee who was rendering captive software development services. Ld.DR, on the other hand, relied on order of Ld.TPO. 17. We have considered submissions advanced by both sides and perused records placed before us. It was submitted that this company has made unusually high profit during the financial year 06-07. It is observed that Operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. Even growth of software industry for previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it was argued that this company ought to have been rejected as a comparable. It was observed by this Tribunal in case of Telcordia Technologies Pvt. Ltd. v. ACIT(supra ) that margin of this company is 52.59% which represents abnormal circumstances and profits. Following figures were relied by Ld.AR, as observed by coordinate bench of

IT(TP)A No.1220(B)/2011 47 this Tribunal in case of First Advantage Offshore Services Pvt.Ltd. Vs DCIT(supra):- Particulars 2005-06 20006-07 20007-08 2008-09 Operating 21761611 35477523 29342809 28039851 Revenue Operating 16417661 23249646 23359186 31108949 Expns Operating 5343950 12227877 5983623 (3069098) Profit Operating 32.55% 52.59% 25.62% - 9.87% Margin

We, therefore, direct Ld.TPO to exclude this company from final list. b) Celestial Labs Ltd. It has been submitted that this research & development company. In this regard, the following submissions were made:- As per Notes to Accounts - Schedule 15, under “Deferred Revenue Expenditure” (page ____ of PB-II), it is mentioned that, “Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and same has been written off in 10 years equally yearly installments from the year in which it is incurred.” An amount of Rs.11,692,020/- has been debited to Profit and Loss Account as “Deferred Revenue Expenditure”. This amounts to nearly 8.28 percent of sales of this company. 17.1 Reliance was made to decision of Mumbai Bench of Tribunal in case of Teva Pharma Private Ltd. v. Addl. CIT – ITA No.6623/Mum/2011 (for AY 2007-08) in which comparability of this company for clinical trial research segment. The Company has developed a drug design tool “CELSUITE” to find lead molecules for drug discovery and has patented the same. It has observed that

IT(TP)A No.1220(B)/2011 48 this Company developed molecule to treat Leucoderma and multiple cancer which is also protected under IPR by filing patent. It is observed that this company is planning to set up biotechnology facility to manufacture industrial enzymes, which include research laboratories for carrying out further R & D activities to develop new drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. It is thus observed that this company is into diversified activities and therefore cannot be considered as functionally comparable with Assessee who is a captive service provider. It was thus submitted that, this company is not into software development activities, accordingly, this company should be rejected as comparable being functionally different. Ld.DR, on the other hand, relied on order of Ld.TPO. 18. We have considered submissions advanced by both sides and perused records placed before us. It has been 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 pointed out from annual report highlighting the fact that, this company is into developing biotechnology products and provides related software development services, without any segmental details. There is no detail regarding nature of software development services performed by this comapny. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which business of

IT(TP)A No.1220(B)/2011 49 this company was explained as to clinical research. We are of the view that in light of submissions made by Ld.AR 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 it could be held that this company is mainly in the business of providing software development services. We therefore direct Ld.TPO to exclude this company from final list. KALS Information Systems Ltd (seg.) It has been contended that this company has revenues from both software development and software products. It is also pointed out that this company is engaged in providing training and that as per the annual repot, salary cost debited under software development expenditure was Rs45,93,351/- which is less than 25% of software services revenue and therefore fails in salary cost filter testapplied by Ld.TPO. Reliance has been placed on decision of this Tribunal for assessment year 2007-08, in case of Maphasis Ltd. vs ACIT (supra) wherein KALS as comparable was rejected 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.

IT(TP)A No.1220(B)/2011 50 Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable.” Ld.DR, on the other hand, relied on order of Ld.TPO. 19. We have considered submissions advanced by both sides and perused records placed before us. We find that Ld.TPO concluded on 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 Ld.TPO, when the same is contrary to annual report of this company as highlighted by Ld.AR. We also find that in the decision referred to by Ld.AR, of this Tribunal 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. Megasoft Ltd., It has been submitted that this company is functionally similar to assessee. However Ld.TPO adopted incorrect margin. We thus set aside this comparable to Ld.AO/TPO with a direction to adopt correct margin and to consider segmental level results for comparing it with assessee. Accordingly ground No. 1-6 stands allowed as indicated hereinabove. 20. Ground No. 7 is in respect of disallowance of expenses claimed by assessee from total turnover amounting to Rs. 65, 46, 623/-. This ground has been raised by assessee, is in respect of exclusion of telecommunication expenses, asset insurance expenses foreign exchange currency expenses and foreign travel expenditure while

IT(TP)A No.1220(B)/2011 51 computing deduction under section 10A of the Act upheld by Ld. CIT (A). Ld.AR placed reliance upon the decision of Hon’ble Karnataka High Court in case of CIT vs Tata Elxsi Ltd reported in 349 ITR 98 and submitted that this issue stands covered in favour of assessee. On the contrary,Ld.CIT DR placed reliance upon the order passed by Ld.AO. 20.1 We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that, Hon’ble Karnataka High Court in case of CIT vs Tata Elxsi Ltd(supra) on identical issue held that telecommunication expenses is to be included while computing deduction under section 10 A of the act as it is directly linked with earning of income. Ld CIT DR has not brought before us any contradictory/distinguishable facts in respect of present case before us. Respectfully following Hon’ble Karnataka High Court in case of CIT Vs Tata Elxsi Ltd(supra), we direct Ld.AO to include telecommunication expenses while computing exempt income u/s10A of the Act. Accordingly this ground raised by assessee stands allowed. 21. Ground No. 8 is in respect of amounts paid to hotel amounting to Rs.2,15, 579/-towards whom hire charges and food expenses on the ground that no tax was deducted. It has been submitted by Ld.AR that therefore stated amount was not substantiated by assessee with supporting documents and evidences it has been submitted that the payments were made to Golden Palms and Taj residency for banquet and food for the

IT(TP)A No.1220(B)/2011 52 purpose of seminar conducted by assessee and companies annual Day celebration respectively. It was thus submitted that there was not liable to TDS. He placed reliance upon CBDT circular No. 5/2002 dated 08/08/95 wherein it has been very clearly mentioned that the rooms hired on regular basis are liable for TDS. Ld.AR submitted that in the present case the payments have been made for conducting seminars and companies annual Day celebrations and the hotels had not earmarked any room at a specific rate. He also submitted that the hotels were under no legal obligation to provide the rooms and the rooms were hired for a maximum period of 3 days on regular basis. On the contrary, Ld.DR, placed reliance upon orders passed by authorities below. 22. We have perused the submissions advanced by both sides in the light of the records placed before us. It is observed that the occupancy of the rooms in Golden Palm hotels was occasional and was taken on regular basis. Further the expenditure was incurred by assessee for the purposes of business on which TDS is not liable to be deducted. Accordingly we delete addition made by Ld.AO. In the result this ground raised by assessee stands allowed. 23. Ground No. 10 has been raised by assessee for shortfall in TDs credit granted. It has been submitted that assessee is eligible for credit of tax amounting to Rs.23,24,487/-whereas assessing officer has granted

IT(TP)A No.1220(B)/2011 53 TDs amounting to Rs.22,80,801/- thereby causing shortfall of Rs.43,686/-. Ld.TPO is directed to verify the details and provide credit for the tour shortfall as claimed by assessee. Accordingly this ground raised by assessee stands allowed for statistical purposes. 24.Ground No. 11 in respect of considering refund of Rs.11,20,000/-as issued to assessee. It has been submitted that no such refund has been issued to assessee. Ld. AO is directed to verify the same issue refund as per law. Accordingly this ground raised by assessee stands allowed for statistical purposes. 25. Ground No. 12-14 are in respect of interest computed under section 234B & D and penalty under section 271 (1) (c ) of the Act. As these are consequential in nature and premature at this stage, do not require any adjudication. 26. Ground No. 15-16 are general in nature and therefore do not require any adjudication. In the result appeal filed by assessee stands allowed as indicated of. Order pronounced in the open court on 30-09-2019

Sd/- Sd/- (B.R.BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 30-09-2019 *am

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Copy of the Order forwarded to: 1.Appellant; 2.Respondent; 3.CIT; 4.CIT(A); 5. DR 6. ITO (TDS) 7.Guard File

By Order Asst. Registrar

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