DIALOGIC NETWORKS (I) P.LD,PUNE vs. ASST CIT CIR 3(3), MUMBAI

The first issue in this appeal of assessee is against the order of AO/DRP/TPO is as regards to the making of upward adjustment to the total income of the assessee on account of international transactions relating to software development services entered into by assessee with its associate enterprises holding that the same was not at arm’s length price. For this assessee has raised the following grounds: -

Briefly stated facts are that the assessee company is engaged in the business of research and development of telecommunication, software and back office support services i.e. IT enable services. The AO during the assessment proceedings noticed that the assessee has undertaken international transaction within the meaning of section 92(b) of the Act with its associate enterprises and therefore a reference was made to the TPO under section 92(CA)(1) of the Act for determination of the arm’s length price. The TPO proposed an upward adjustment of ₹ 1,98,33,679/- to the international transactions relating to software development services entered in to by the assessee with its associate enterprises by holding that the transactions are not at arm’s length price as depicted by assessee in its accounts. The assessee raised the objections before DRP for the adjustments to the extent of ₹ 1,98,33,679/-.

Before us Ld Counsel for the assessee Miss Bavya Bansal argued that in the interest of paucity of time, she would restrict the submission to 15 comparables, based on functionality and initial filters applied by the TPO for Software Development and if these comparable are excluded, the operating margin based on other comparable will be within the limit subject to bench agree by her contentions, then she will not argue on other inclusions or exclusions although she disputed all the comparable taken by the assessing officer. Out of these 15 comparables, 11 are covered by a single judgement in the case of Infor (Bangalore) P. Ltd. In ITA (TP) No.1550/Bang/2012, wherein one company has an arithmetical error in the computation of its margin and further one company is covered by the ITAT decision in assessee's own case for AY 2009-10. For the same, assessee's representative filed a detailed table giving submissions for inclusion or exclusion of all of the comparables selected by the TPO, however detailed discussion was restricted to 15 out of the 23 companies identified by the TPO. The Ld Counsel for the assessee submitted the below table representing different scenarios with respect to her contentions:

The second company was Avani Cincom Technologies Ltd. which is the company into production of products such as D-Exchange, I-Trak, Law firm Solution suite, hotel and restaurant booking engines etc as per Page 56, 57 & 58 of the assessee paper book. No revenue bifurcation between Software Development Services and products is given. The assessee relied on the Tribunal decisions for rejection of this company on the basis of being functionally non comparable to a software development service provider.

The third company is Bodhtree Consulting Ltd., which is engaged in providing Data management and Data warehousing services which are classified as lTES. Hence it is functionally not comparable. Further, segmental data is not available. Thus, it is difficult to identify the software services provided by Bodhtree. The company has its head office in Santa Carla, CA and has offshore delivery centers in India and is engaged in Product Engineering, Analytics Services, Cloud Services, Enterprise Services. The company has a workforce of 850+ and a Fortune 500 Customer base. Hence renders it functionally different from the assessee. During the year the company has undergone restructuring activity by hiving off its e paper business. Reference was invited in this regard to Pg. 69 of the paper book. It was further contended that this Company has been rejected by the ITAT in the assessee's own case for AY 2009-10 as it is functionally dissimilar to the assessee (Para 8). In this regard reliance was placed on Mindteck (India) Ltd Vs DOT IT(TP) 70/Bang/2014 particularly para 16. She also relied on the Tribunal decisions for rejection of this company on the basis of being functionally not comparable to software development service provider.

The forth company is Celestial Labs Ltd., which fails the initial filter of employee cost applied by the TPO. Its employee cost is 21.56%. Reliance was made in this regard In the case of Ness Technologies Private Limited Vs ACIT, Mum-ITA No. 7016/Mum/2012 specially para 6(i) of the order. She further submitted that the company is engaged in the field of IT Bioinformatics, Biotechnology and consulting work and offers enterprise resource, planning solutions, data warehousing, business intelligence solutions and bin services like clinical data management, gene sequence analysis, molecular modeling, design and development of Drug Molecules dedicated to health sector to Govt. Institutions, pharma and Biotech companies, Hospitals and Medical centers in India and overseas. As per the annual reports of the company the company earns entire revenue from sale of products. Further there is substantial expenditure on product development of drug molecule. The company is engaged in software development services as well as ITES services, which is considered as the only segment as per AS-17. She relied on the Tribunal decisions for rejection of this company on the basis of being functionally not comparable to a software development service provider.

The Fifth company E- Infochips Ltd., is engaged in the development and maintenance of computer software and also manufacturing EVM and VDB Electronic Board (Hardware Division). As per the annual report of this company on page 86 of paper book the Company earns income from Software services and products. The representative of the assessee argued that as per page 8 of the TPO’s order, the TPO himself rejected Lucid software on the basis of it dealing in software products. Further as per annual report of this company on page 87 of the paper book the company has only one reportable segment which is into software services as well as IT enabled services. No separate segmental data is available for software development services. This Company was rejected by the TPO in its order for AY 2011-12 for being functionally not comparable to Dialogic by observing as under on page 4 point no 4:-

The eighth company is Infosys Technologies Ltd. and it stated that Infosys's turnover is approximately 1160 times more than that of Dialogic's turnover. Considering a number of economic factors and market dynamics, Dialogic having a turnover of Rs.13.5 crores as against that of Infosys having a turnover of around 15,653 Crores (1160 times), lacks comparability based on scale of operations. Infosys has 52 global development centers, of which 26 are located in India, 11 are in North America, 9 are in the Asia-Pacific region and 6 are in Europe. Infosys also has revenue of Rs. 597 crores from the sale of products as can be seen from page 117 of paper book. Infosys provides comprehensive end-to-end business solutions that leverage technology. There service offerings include custom application development, maintenance and production support, package enabled consulting and implementation, technology consulting and other solutions, including business process management and solutions, product engineering solutions, infrastructure maintenance services, operations and business process consulting, testing solutions, and systems integration services. These offerings are provided to clients across multiple industry verticals including banking and capital markets, communications, energy, manufacturing and retail. They also provide a core banking software solution, Financial, and provide customization and implementation services around this solution. The assessee further relied on the Tribunal decisions for rejection of this company on the basis of being functionally not comparable to a software development service provider.

The tenth company is Persistent Systems Ltd., and it was stated that the company's turnover is approximately 30 times that of Dialogic's turnover. Considering a number of economic factors and market dynamics, Dialogic having a turnover of Rs.13.5 crores as against that of Persistent having a turnover of around 406.98 Crores, lacks comparability based on scale of operations. It was also submitted that the company is engaged in four types of business segments, namely lSVs, Telecom, Enterprises and VLSI and others. The company is also engaged in the sale of products and as indicated in the annual report does not show sale of goods and income from services separately at Page 148 of Paper book. Further, the company has disclosed segment information only on the basis of the consolidated financial statements which shall be presented together with the unconsolidated financial information. The company is engaged in producing Laboratory information systems (LIMS), Device monitoring Systems (DMS), etc. Further submitted that this Company has been rejected by the ITAT in assessee’s own case vide order for AY 2009- 10 as it is functionally dissimilar to the assessee for which attention was drawn to para 3.4. of the order. She relied on the Tribunal decisions for rejection of this company on the basis of being functionally not comparable to a software development service provider.

The eleventh company is Quintegra Solutions Ltd., which is engaged in product engineering and extensive Research and development. Quintegra's goodwill constitutes approximately 78 percent of its total assets as per Page 154 of Paper book. Dialogic does not have any goodwill/intangible assets. Hence the assessee prayed that the company should be dropped as a comparable since this shows that it is functionally not comparable. She relied on the Tribunal decisions for rejection of this company on the basis of being functionally not comparable to a software development service provider.

The twelfth company is Tata Elxsi Ltd., which is an engineering designing company providing embedded product design services, industrial product design services, animation and visual effects, and system integration services as per page 163 of Paper book. Accordingly, the company is functionally different and hence not comparable, Further submitted that the company's turnover is approximately 25 times that of Dialogic's turnover. Considering a number of economic factors and market dynamics Dialogic having a turnover of Rs.13.5 crores as against that of having a turnover of around Rs. 342 Crores, lacks comparability based on scale of operations. Hence assessee prayed that the company be rejected as a comparable. The assessee relied on the Tribunal decisions for rejection of this company on the basis of being functionally not comparable to a software development service provider.

The thirteenth company is Thirdware Solutions Ltd., which is engaged in application implementation, application management and application development. Accordingly company is not a pure software development company. The company is also engaged in trading of software which is evident from the financials of the company. It is also engaged in the purchase and sale of license as per page 167 of Paper book. The company has not disclosed any segmental information in the annual report. Hence the assessee prayed that the company be dropped as a comparable. The assessee relied on the Tribunal decisions for rejection of this company on the basis of being functionally not comparable to a software development service provider.

The fourteenth company is Wipro Ltd., which is engaged in IT Services, acquisitions, BPO services, India & Asia Pacific IT Services and Products, Consumer Lighting, others. The segmental data for the above services is however not available. The company also possesses brand value. For a branded service, a customer is usually willing to pay a premium. Thus, rendering the company non comparable to the assessee. It was further submitted the company's turnover is approximately 835 times that of Dialogic's turnover. Considering a number of economic factors and market dynamics, Dialogic having a turnover of Rs.133 crores as against that of having a turnover of around Rs. 11,276 Crores, lacks comparability based on scale of operations. In this regard, she relied on the Tribunal decisions for rejection of this company on the basis of being functionally not comparable to a software development service provider.

The fifteenth company is Softsol India Ltd., and assessee pointed out that as per page 10 of the TP Order the TPO has made a mathematical error in computing the margins of Soitsol India Ltd. Softsol has a revenue of Rs. 18,99,40,746 and a cost of Rs. 16,51,65,066. Accordingly the net profit is Rs. 2,47,75,680 resulting into OP margin of 15%. The correct margin is therefore 15% and not 42.33% as has been incorrectly taken by the TPO. The same is also depicted on page 3 in the case of PlC Software (India) Private Limited Vs ACIT (2546/Pune/2012) (AY 2008-09) (Para 2.1 serial no 9).

On the other hand learned departmental representative relied on the order of the authorities below and vehemently argued that rejecting only 15 companies out of 23 will tantamount to cherry picking. He pointed out that one company Aricent Technologies (holdings) Limited has a high turnover but the assessee has not argued for exclusion of that company when the assessee is arguing for exclusion of similar high turnover companies. He further relied on two case laws for cherry picking:

UCIT Vs Panasonic AVC Networks India Co Ltd I

The Id counsel for the assessee in her rejoinder submitted that the companies for which she is requesting for exclusion have various reasons for exclusion such as different functional profile, product based company, restructuring of operations etc though high turnover is also one of the many reasons argued on, but not the only reason in any company. Hence, this argument of the Ld DR does not have any leg to stand. By referring to the cases relied on by Ld. DR, she submitted that In Panasonic the issue was for addition of 2 comparables which were earlier rejected by the assessee and for rejection of one comparable Videocon which was earlier accepted by the assessee. The same can be differentiated, since, in assessee’s case, the issue is on rejection of the comparables identified by the TPO and not by the assessee. Finally, she argued that the decision of Allscripts was on rejection of two comparables selected by the TPO. That case can be differentiated since in the case of Allscripts the counsel fairly accepted that the assessee has not analysed all the comparables selected by the TPO to the same test of rigorous scrutiny. However, in assessee’s case all the companies selected by the TPO to the same rigorous test of scrutiny, and for which she stated that she has filed detailed submissions for exclusion or inclusion for the comparables. However she argued for exclusion of only 15 companies. It was further submitted that in the case of Allscripts the argument of cherry picking was raised since the Ld counsel was not able to substantiate the process by which the 20 companies were finally selected by the assessee by way of the TP Study.

We have heard the rival submission and carefully considered the same along with the order of the authorities below as well as the material and the documents referred to us during the course of hearing. We have also gone through the various case laws referred to during the course of hearing from both the sides. The only issue in this ground relates to the selection of comparable by TPO while computing the operating margin in the case of the assessee. The uncontroverted facts before us are that the AO made an adjustment of Rs. 1.98 crores to the international transaction of software development services rendered by the assessee to its associated enterprises to the tune of Rs 13,53,11,573. The assessee is a 100% subsidiary of Dialogic Inc (Erstwhile Veraz Networks Ltd, USA). It set up an unit for development of telecommunication software for its group entities and which also provides marketing and customer services and back office support services (ITES) to its group companies. One of the segments is provision of software development services to its AEs based in Israel and USA. In consideration of the services provided, the assessee received compensation at cost +12% markup during the year amounting to Rs.13,53,11,573/-. For benchmarking the transaction the assessee has used Transactional Net Margin Method ('TNMM') as the most appropriate method and the profit level indicator ("PLI") was taken as Operating Profit to Total Cost (OP/TC). The TPO has accepted the method used by the assessee’s TNMM and accepted the PLI i.e. OP/TC used by the assessee. The assessee has worked out Operating Margin at 9.13%. The assessee has given 11 comparable. The TPO has rejected 10 out of 11 comparables which were selected by the assessee and undertaken a fresh search on the databases Prowess and capitaline. The TPO has shortlisted set of 23 companies as comparables out of which one company is common with the assessee's set and worked out operating margin of comparable at 24.99% and thus made an addition of Rs.1.98 Cr. While selecting such comparables, the TPO has put various filters as given on Page 4 Para 6.2 of TPO’s order such as export earnings less than 25%, employee cost less than 25%, RPT more than 25%, Onsite revenue more than 60% etc. The DRP has upheld the order of the TPO. We find that now though the assessee has disputed all the comparable taken by TPO but even if we restrict adjudication to 15 comparables, based on functionality and initial filters applied by the TPO for Software Development and if these comparable are excluded, the operating margin based on other comparable will be within the limit. The assessee filed the details of each of the comparables and made the following calculation of operating margin by showing that the operating margin if these 15 comparable are excluded comes within the range of 5% as given under section 92C(2) of the Act. Since the operating margin in the case of the assessee is 9.13%, therefore in both the situation it comes to less than 14.13%.

The first objection relates to Acropetal Technologies Ltd which is appearing at serial no.3. We noted that while selecting various comparables the TPO has put various filters such as export earnings less than 25%, employee cost less than 25%, RPT more than 25%, Onsite revenue more than 60% etc We do agree with the Id. Counsel that Acropetal fails to pass the employee cost to turnover filter and even fails the onsite development filter as Acropetal has employee cost of only 7.48% and the onsite development is 73%. As per the Annual Report of the Company for FY 2007-08, the total employee cost is Rs. 45130,804 and total operating revenue is Rs. 603.148,486 (Employee cost ratio of 7.48%). Also, the total Onsite Development Charges is Rs. 314.591.271 and total operating cost is Rs. 432,400,427 (Onsite development ratio of 73%). Acropetal has been rejected on the basis of failing the similar filter applied by TPO in the case of Ness Technologies (India) Private Limited Vs ACIT (ITA 7016/MUM/2012) (AV 2008-09) wherein under Para 6 (iv), it was held:

Not only this, we noted that as per the annual report of this company on page 35 of paper book, the Company has inventory worth Rs. 1.1 Crores as on 31 March 2008 and is into the business of sale of products. As per page 8 of the TP order, the TPO himself rejected Lucid software on the basis of its dealing in software products. The company is engaged in Education services (includes Digital Learning, Mobile Learning, education applications), Healthcare services (Patient Life cycle Management, Hospital Administration Management, Drug Discovery, Disease Life cycle Management), Manufacturing CPG and retail (R&D, New Product Development, Global Supply chain management), Enterprise development, Product development and Enterprise business services. This company thus in our view cannot be regarded to be comparable as it not only fails two of the initial filters applied by the TPO himself, but it is functionally non comparable to the assessee. We therefore exclude the said company from comparable and direct the AO accordingly.

The second comparable which has been disputed is Avani Cincom Technologies Ltd. appearing at serial no.5 of the above table. We noted that this company is into production of products such as DExchange, l- Trak, Law firm Solution suite, hotel and restaurant booking engines etc as per Page 56, 57 & 58 of the Paper book. No revenue bifurcation between Software Development Services and products is given. We find that in the case of Infor (Bangalore) P. Ltd Vs ACIT, it was held:

The third comparable which has been disputed is Bodhtree Consulting Ltd. appearing at serial no. 6 of the above table. We noted that this company has its head office in Santa Carla, CA and has offshore delivery centres in India and is engaged in Product Engineering, Analytics Services, Cloud Services, Enterprise Services. The company has a workforce of 850+ and a Fortune 500 Customer base. This company is engaged in providing Data management and Data warehousing services which are classified as ITES. Further, we noted that during the year the company has undergone restructuring activity by hiving off its e-paper business. Thus, it is functionally non comparable. We also noted that segmental data is not available in the case of this company. Thus, it is difficult to identify the software services provided by Bodhtree which is apparent from Pg 69 of the paper book. We noted that this Company has been rejected by the ITAT in the assessee's own case for AY 200910 as it is functionally dissimilar to the assessee (Para 8). In this regard, We noted that Banglore bench of this tribunal in the case of MIs Mindteck (India) Ltd Vs DCIT IT(TP) 70fBangJ2014 (Para 16) also held as under:

The fourth comparable as disputed before us is Celestial Labs Ltd. as appearing at serial no. 7 of the above table. We noted that this company fails the initial filter of employee cost applied by the TPO as its employee cost is 21.56%. This company is engaged in the field of IT Bioinformatics, Biotechnology and consulting work and offers enterprise resource planning solutions, data warehousing, business intelligence solutions and bio services like clinical data management, gene sequence analysis, molecular modeling, design and development of Drug Molecules dedicated to health sector to Govt. Institutions, pharma and Biotech companies, Hospitals and Medical centers in India and overseas. As per the annual reports of the company the company earns entire revenue from sale of products. This company has incurred substantial expenditure on product development of drug molecule. The company is engaged in software development services as well as ITES services which is considered the only segment as per AS-17. We noted that In the case of Ness Technologies Private Limited Vs ACIT, Mum lTA No. 7016/Mum/2012, this tribunal under para 6(i) observes as under:

The fifth comparable which has been disputed before us is E- Infochips Ltd. Appearing at Sr. No.8 in the above table. This is undisputed fact that this Company is engaged in the development and maintenance of computer software and also manufacturing EVM and VDB Electronic Board (Hardware Division). The company earns income from software services and products as is apparent from annual report at page 86 of paper book. Further, we noted as contended by the Id. counsel as per annual report of this company at page 87 of the paper book, the company has only one reportable segment which is into software services as well as IT enabled services. No separate segmental data is available for software development services. This is a fact that TPO himself as per page 8 of TP Order rejected Lucid software on the basis of it dealing in software products under the similar facts. This Company has been rejected by the TPO in assessee’s own case vide order for AY 2011-12 for being functionally non comparable to assessee by observing as under on page 4 point no 4:-

The sixth comparable which has been disputed before us is E- Zest Solutions Ltd. as appearing at Sr. No. of the above table. This company as contended by Id. Counsel is engaged in providing TPO services (includes Business Research, Marketing Research, Pharmacy and Healthcare Research, Financial Services Research, Legal Research and IP Research), helpdesk services, infrastructure management, Vendor Management services, IT Asset management services, Multi- channel Support Solution: Voice/Email/Chat/Web, CRM, Knowledgebase, Remote Diagnostics, Data Centre Services etc. We also noted following features from page 91 of Paper book:

The seventh comparable which has been disputed before us is Igate Global Solutions Ltd. appearing at serial No.10 in the above table. We find that the assessee earns total revenue of Rs. 13.5 crores in the relevant Assessment Year while as per the annual report of iGate, this company has earned net sales revenue of Rs. 781 crores which is roughly 58 times that of the assessee. This proves that the scale of operations in the case of the assessee and this company is totally different. IGate is engaged in application development, Application management, Business Process Management, IT Governance, Web Technology Solutions, Enterprise Integration, CIS and BPO, Infrastructure Management, Cloud Services. The company also provides Business Intelligence and Data Warehousing Solutions as is apparent from Page 102 & 103 of Paper book. We noted that this Company has been rejected by the ITAT in assessee’s own case vide order for AY 2009-10 as it is functionally dissimilar to the Dialogic by observing under:

The eight comparable, which is disputed before us is lnfosys Technologies Ltd. as Appearing at serial No. 11 of the above table. This is a fact that Infosys's turnover is approximately 1160 times more than that of assessee's turnover. The assessee is having a turnover of Rs.13.5 crores as against that of Infosys having a turnover of around 15,653 Crores - Infosys has 52 global development centers, of which 26 are located in India, 11 are in North America, 9 are in the Asia- Pacific region and 6 are in Europe. lnfosys also has a revenue of Rs. 597 crores from the sale of products as is apparent from page 117 of paper book. Inlosys provides comprehensive end-to-end business solutions that leverage technology. Its service offerings include custom application development, maintenance and production support, package enabled consulting and implementation, technology consulting and other solutions, including business process management and solutions, product engineering solutions, infrastructure maintenance services, operations and business process consulting, testing solutions, and systems integration services. These offerings are provided to clients across multiple industry verticals including banking and capital markets, communications, energy, manufacturing and retail. Infosys also provide a core banking software solution. We do agree this company lacks comparability based on scale of operations. Even functionally also it is different from assessee. Similar view has been taken in various cases relied on and referred to by the learned counsel. We, accordingly, hold that this company be excluded from comparable as selected by TPO and direct the AO accordingly.

The ninth comparable, which is in dispute before us is KALS Information Systems Ltd. as appearing at serial No. 12 of the above table. This company has reported its operations under two segments; Application software segment and Training segment. The revenue from products and services must be reported under the Application software as a single business segment while the other business segment is training services, bifurcation between products and services is not available in order to consider this company for comparison. We also noted that KALS holds inventory of 38.42% and 53.50% of the total assets as at 31 March 2008 and 31 March 2007 respectively which clearly demonstrates that Kals is a software product company as per Page 122 of Paper book. Service provider in our view usually will not hold such a big percentage of inventories. The assessee does not hold any inventory in its books of account. This company is engaged in the manufacture of Shine- ERP Software for Metal based Manufacturers, Dcuflo- Document Management Software, Dac4Cast is an Enterprise Solution for Co-operative Banks, Consultant Management Sales Systems, La Vision- Order Management Software, Virtual Insure- Integrated Software for Life & General Insurers, Aldon- Application Life Cycle Management Software while this is not the function of assessee company. Further it is duly supported by the decision of coordinate bench of this Tribunal in the case of Infor (Bangalore) P. Ltd Vs ACIT (ITA 1550/Bang/2012) (AY 2008-09). Further, no contrary decision was brought to our knowledge or referred to us. We therefore hold that this company be excluded from comparable as selected by TPO and we direct the AO accordingly.

The tenth comparable, which has been disputed before us is Persistent Systems Ltd. as appearing at serial No. 15 of the above table. We noted that this company is having a turnover of around 406.98 Crores while the assessee's turnover is only 13.5 Crores i.e. this company's turnover is approximately 30 times that of assessee’s turnover. Thus this company lacks comparability based on scale of operations. This company is engaged in four types of business segments, namely ISV5, Telecom, Enterprises and VLSI and others. The company is also engaged in the sale of products and as indicated in the annual report does not show sale of goods and income from services separately as is apparent from Page 148 of Paper book. This company has disclosed segment information only on the basis of the consolidated financial statements which shall be presented together with the unconsolidated financial information. This company is engaged in producing Laboratory information systems (LIMS), Device monitoring Systems (DM5), etc. We noted that this Company has been rejected by the ITAT in assessee’s own case videorder for AY 2009- 10 held as it is functionally dissimilar to the assessee by observing as under:-

The eleventh comparable, which is under dispute before us is Quintegra Solutions Ltd. This company is engaged in product engineering and extensive Research and development. This company's goodwill constitutes approximately 78 percent of its total assets as per Page 154 of Paper book. The assessee does not have any goodwill / intangible assets. Therefore, this company is also functionally non comparable. In this regard we noted that Banglore Bench of this Tribunal in the case of Infor (Bangalore) P. ltd Vs ACIT (ITA 15S0/Bang/2012) (AY 2008-09) has held as under:-

The twelfth comparable, which is under dispute is Tata Elxsi Ltd. This company is an engineering designing company providing embedded product design services, industrial product design services, animation and visual effects, and system integration services as is apparent from page 163 of Paper-book. Thus this company is functionally different from assessee. We also noted that this company is having a turnover of Rs.342 Crores as against assessee' turnover of Rs.13.5 Crores. Thus this company's turnover is approximately 25 times that of assessee's turnover. We do agree that this company cannot be comparable due to scale of turnover as well as functionally different from assessee. We noted that Bangalore Bench of this tribunal while dealing with similar issue under Para 30 of its order in this regard held as under:-

The thirteenth comparable under dispute is Thirdware Solutions Ltd. This company is engaged in application implementation, application management and application development. Accordingly company is not a pure software development company. This company is also engaged in trading of software which is evident from the financials of the company. It is also engaged in the purchase and sale of license as is apparent from page 167 of Paper book. We noted that this company has not disclosed any segmental information in the annual report. We therefore agree with the contention of the assessee's counsel that this company is functionally different and cannot be taken to be comparable to assessee. Our aforesaid view is duly supported by the decision of Bangalore Bench of this Tribunal in the case of Infor (Bangalore) P. Ltd Vs ACIT (ITA 1550/Rang/2012) (AY 2008-09) wherein it was held as under:-

The fourteenth comparable which has been disputed before us is Wipro Ltd. This is undisputed fact that Wipro Limited is engaged in IT Services, acquisitions, IWO services, India & Asia Pacific IT Services and Products, Consumer Lighting, others. The segmental data for the above services is however not available. The company also possesses brand value. For a branded service, a customer is usually willing to pay a premium. This company's turnover is approximately 835 times that of assessee's turnover as its turnover is Rs. 11276 crores as compared to assessee's turnover of Rs.13.5 crores. Thus this company lacks comparability based on scale of operations. Our aforesaid view is duly covered by the decision of Banglore bench of this tribunal as relied on by assessee's counsel not disputed by Id. DR in the case of Infor (Bangalore) P. Ltd Vs ACIT (ITA 1550/Bang/2012) (AY 2008-09) wherein it was held as under:-

The fifteenth comparable which has been disputed before us is Softsol India Ltd. We find that at page 10 of the TPO’s Order, the TPO has made mathematical error in computing the margin of Softsol India Ltd. Softsol has a revenue of Rs. 18,99,40,746 and a cost of Rs. 16,51,65,066. Accordingly the net profit is Rs. 2,47,75,680 resulting to a OP margin 15%. But TPO has taken 42.33% incorrectly. The DR has not disputed this fact. We therefore, direct the revenue to take 15% OP margin in the case of this company while working out the OP margin in the case of the assessee. We have gone through the case laws as relied on by the Id. DR, in our view both the case laws are not applicable to the facts available in the case of the assessee. The facts In Panasonic Networks case, were that the CIT(A) had allowed for inclusion of 2 comparables which were rejected by the assessee and further rejected one comparable which was accepted by the TPO. Hence the revenue was in appeal against inclusion and exclusion of the aforesaid 3 companies at the CIT(A) stage. With regard to the inclusion of the 2 comparables the issue was decided in favour the assessee by the ITAT by referring to a special bench decision in the case of Quark Systems Ltd (132 TTJ 1 SB) -Para 9 "in this view of the matter and having regard to the entirety of the case we approve the stand of the CIT(A) and decline to interfere in the matter." With regard to this issue of rejection of one comparable as accepted by the TPO the ITAT noted "During the course of hearing the assessee was asked to demonstrate that this kind of an analysis, as was done to argue on unsuitability of Videocon International, was also done on other comparables. Learned Cow.' admittedly his inability to do so but fairly accepted that the matter can be remitted to the file of the learned CIT(A) for fresh adjudication by applying uniform norms on the analysis of oil entities picked up as comparables."

Secondly, issue in this appeal of assessee is against the order of AO/TPO/DRP is as regards to the upward adjustment made to the international transactions entered into by the assessee with its associate enterprise as the same are not at arm’s length price and made an adjustment relation to international transactions to global call center services at ₹ 22,07,311/-. For this assessee has raised the ground No. 2 : -

Similarly, with respect to ground no 2 relating to ITES the Ld representative of the assessee submitted that the assessee had identified a set of 6 comparables by way of its TP Study. However, the TPO identified a set of 21 companies after undertaking a fresh search on the databases prowess' and capitaline as reproduced in the table below:

Infosys BPO Ltd 20.01 15. Iservices India Pvt. Ltd 9.58 16. Paple eSolutions Ltd. 20.43 17. Mold-Tek Technologies Ltd. 96.66 18. R System International Ltd. 4.3 19. Spanco Ltd. 11.04 20. Troton CorpLtd. 23.81 21. Wipro Ltd 30.5 22. Arithmetic Mean 29.25% 42. The Id representative again submitted that in the interest of time, she would restrict her arguments for exclusion of only 11 out of the 21 comparable selected by the TPO. For the same, assessee’s representative filed a detailed table giving submissions for inclusion or exclusion of all of the comparable selected by the TPO. However, detailed discussion was restricted by her to rejecting 11 out of the 21 companies identified by the TPO. The Id representative further argued that even if we exclude 9 of these companies which are covered by two judicial precedents Flextronics Technologies (India) ITA(TP) No. 1559/Bang/2012 and Symphony Marketing Solutions India Pvt Ltd. Vs the assessee will be through. The Ld representative of the assessee submitted the following table representing different scenarios with respect to the contentions of the assessee being accepted or not:

Asit C Mehta Financial 9.42 9.42 9.42 9.42 Services Ltd.

Coral Hubs Ltd. (Earlier 50.68 Flextronics known as Vishal Technologies 1559 Technologies Ltd.) 7. Cosmic Global Ltd. 23.3 23.3 23.3 8. Flextronics Crossdomain Solutions 26.96 ltd. Technologies 1559 9. Datamatics Financial 34.87 34.87 Fails initial filter applied by TPO Services 10. E4e Healthcare solutions 16.72 16.72 16.72 16.72 Ltd.

Eclerx Services Ltd. 65.88 Flextronics Technologies 1559 12. Genesys International 47.4 Flextronics Corporation Ltd. Technologies 1559 13. HCL Comnet System & 32.9 32.9 Fails initial filter Services Ltd. applied by TPO 14. Infosys BPO Ltd 20.01 Flextronics Technologies 1559 15. Iservices India Pvt. Ltd 9.58 9.58 9.58 9.58 16. 20.43 20.43 Paple eSolutions Ltd. 20.43 17. Mold-Tek Technologies 96.66 Flextronics Ltd. Technologies 1559 18. R System International 4.3 4.3 4.3 4.3 Ltd.

The first comparable taken up by Ld Counsel for assessee is Accentia Technologies Ltd. We find that assessee’s counsel statedthe facts that Accentia has undergone reconstruction in the relevant Assessment year. It acquired Oak Technologies Inc. & Trans Services which in turn has an impact on the profits of the company. Further it was highlighted that Accentia's major revenue is from Medical transcription business (64%), Medical billing & coding (17%) & software devel & implementation (19%) as per Page 208 of Paper book. It operates in a single segment (Healthcare receivable management) as per page 209 of Paper book. The company has their own line of products which they sell to the customers including iRTS, iAMS, iIMS, iPMS, iHMS. Hence, it was submitted that it is functionally not comparable. She relied on the judicial precedents for rejection of this company on the basis of being functionally non comparable to a ITES provider. We find that this company is functionally different from the assessee and cannot be compared. Further this view of ours is Supported by the decision of this Tribunal in the cases of Flextronics Technologies (India) Pvt Ltd ITA(TP) No. 1559/Bang/2012 (Para 12), Symphony Marketing Solutions India Pvt Ltd. Vs ITO PTA No. 1316/Bang/2012 (Para 10) & Capital IQ Information Systems Pvt Ltd Vs ACIT (Para 21). Respectfully, following the decision of coordinate bench of this Tribunal in the case of Flextronics Technologies (India) Pvt. Ltd (Supra), we direct the AO to exclude this company from comparables.

The second comparable which is in dispute before us is Acropetal Tecnologies Ltd., and the learned Counsel for the assessee stated the facts that the ITES segment is divided into 3 segments education, healthcare and manufacturing. In education the company provides distance/mobile learning, digital learning. Under healthcare they do patient life cycle management, physician and clinical life cycle management, hospital administration management, etc. Under manufacturing they provide R&D services, global supply chain management, standards and good manufacturing practice The services provided show that it is a high end KPO services provider. She relied on the judicial precedents for rejection of this company on the basis of being functionally non comparable to a ITES provider. We are in agreement with the argument of learned counsel of the assessee and by going through the facts of the case, we are of the view that this company is not comparable with the assessee company. Our view is supported by the decision of co-ordinate Bench of this Tribunal in the case of Flextronics Technologies (India) Pvt Ltd ITA(TP) No. 1559/Bang/2012 (Para 13) & Symphony Marketing Solutions India Pvt Ltd. Vs ITO (Para 12). We find that this issue is covered by the decision of Flextronics Technologies (India) Pvt Ltd (supra) and respectfully following the same, we hold that this company is regarded as comparable and this company is to be excluded from comparables as selected by the TPO. We direct the AO accordingly.

The third comparable which is under dispute is Coral Hubs Ltd. (Earlier known as Vishal Technologies Ltd). Before us, the learned counsel for the assessee stated the facts that the company is rejected by TPO in assessee's own case for AY 2009-10. It is engaged in data digitization, print on demand, e-Publishing as per page 215-217 of paper book. It Incurred negligible employee cost of 2.92% of operating revenue, signifying that it is engaged in trading of services instead of providing services. It has an outsourcing of services model, hence non comparable to assessee. In this regard the learned Counsel for the assessee relie don the decision of co-ordinate Bench of this Tribunal In the case of Flextronics Technologies (India) Pvt Ltd v DCIT (IT(TP)A No.1559/Bang/2012, wherein it is held as under:-

The fourth comparable which is in dispute before us is Crossdomain Solutions Ltd. Before us, the learned counsel for the assessee stated that facts that this company is engaged in building the brand EXDION to target the insurance industry in US as per page 226 of paper book. It is engaged in KPO services in insurance, Healthcare, HR & accounting as per page 228 of paper book. The company is engaged in knowledge services outsourcing in Insurance, Healthcare, HR and Accounting domains. The company also offers Business Excellence, Market Research & Data Analytics and IT Services. The HR solutions provided by the company include Recruitment & Separation, Payroll Processing, Travel and Expense reports review, Leave Management, Electronic personal Dossiers. The Healthcare solutions provided by the company are Revenue Cycle Management, Data Abstraction, Clearing House Solutions, Health Information and Data Analytics, Custom IT Solutions. The accounting solutions provided by the company are General Ledger Accounting, Accounts Receivable, Accounts Payable, Fixed Asset Accounting, Financial Reporting and Analysis, Business and Travel Expense Accounting. It was argued in light of the above that the company is functionally different hence the assessee prayed that it should be dropped as a comparable. Further it was submitted that the company has an annual turnover of Rs. 26.6 crores as compared to that of the assessee which is Its 1.43 crores. Thus a company having 19 times the turnover of the assessee lacks comparability based on scale of operations.IN THIS regard she relied on the judicial precedents for rejection of this company on the basis of being functionally non comparable to a ITES provider. We find from the above facts and the case law relied on by the learned Counsel for the assessee that this issue is covered by the decision of co- ordinate bench in the case of Flextronics Technologies (India) Pvt. Ltd ITA(TP) No. 1559/Bang/2012 (Para 15) & Symphony Marketing Solutions India Pvt. Ltd. Vs ITO (Para 18). No contrary decision is brought before us by the leaned Sr. DR, and we therefore respectfully following the decision of co-ordinate Bench of this tribunal hold that this company cannot be regarded as comparable and direct the AO to exclude the same from comparables as selected by the TPO.

The fifth comparable under dispute is Datamatics Financial Services Ltd. Before us the learned Counsel for the assessee stated the facts that Datamatics is engaged in providing registrar & transfer agency services. Further, the company also offers issue management services and IT enabled services in India. However, the company has not disclosed any segmental information for the registrar & transfer agency services and IT enabled services. Thus, Datamatics fails the initial export revenue filter of 75 % applied by the TPO, as the only export is ITES Services which are 36.23% of revenue (Page 246 of Paper book). Further, from the annual reports it is evident that no segmental data is available for the ITES segment and hence rendering it impossible to calculate margins. In view of the above, the assessee prayed to drop Datamatics as a comparable. In this, she relied on the decision of Hyderabad Bench of this tribunal in the case of HSBC Electronic Data Processing Ltd -ITA No. 1624/Hyd/2011 (Para 11) for rejection of this company on the basis of being functionally non comparable to a ITES provider. Before us, no contrary decision is brought by the leaned Sr. DR, and we therefore respectfully following the decision of co-ordinate Bench of this tribunal hold that this company cannot be regarded as comparable and direct the AO to exclude the same from comparables as selected by the TPO

The sixth comparable under dispute is Eclerx Services Ltd. Before us the learned counsel for the assessee stated that the company is a leading third party data analytics KPO as per page 270 of paper book. Hence, functionally non comparable. As per the annual report the Chairman’s message it is mentioned by the chairman that the company is not a BPO or an IT offshoring company. It is mentioned that the company is a data analytics KPO service provider specializing in two business verticals Financial Services and Retail and Manufacturing. Further the company provides pricing analytics, bundling optimization, content operations, sales and marketing support, product data management, revenue management and data analytics are to Retail and Manufacturing clients. To the Financial Services clients, they offer real-time capital markets, middle and back office support, portfolio risk management services and various critical data management services. In light of the above the representative of the assessee argued that this company should be rejected further, it was highlighted that this Company has been rejected by the TPO in AY 2011-12. Further, it was submitted that the company has a revenue of around Rs. 122.19 crores, which is around 85 times that of the assessee. Also From the annual reports of the company it is depicted that the company has related party transactions of Rs. 29.107 crores. The operating revenue of the company is Rs. 116.9 crores. Hence, related party transactions is 25% of operating revenues. The assessee relied on the judicial precedents for rejection of this company on the basis of being functionally non comparable to a ITES provider. Before us the learned counsel for the assessee relied on the case law of co- ordinate Bench of this Tribunal in the case of Flextronics Technologies (India) Pvt. Ltd ITA(TP) No. 1559/BangJ2012 (Para 16), Lionbridge Technologies Pvt. Ltd. vs ITO - 8(2)(2) - AY 2008-09 (Para 8) & Symphony Marketing Solutions India Pvt. Ltd, Vs ITO ITA No. 1316/Bang/2012 (Para 20). No contrary decision is brought before us by the leaned Sr. DR, and we therefore respectfully following the decision of co-ordinate Bench of this tribunal hold that this company cannot be regarded as comparable and direct the AO to exclude the same from comparables as selected by the TPO.

The seventh comparable under dispute is Gensys International Corporation Ltd. Before us, the learned counsel for the assessee stated the facts that Genesys is engaged in rendering geospatial services and caters to the needs of consumer mapping, navigation, internet portals etc. provides geographical information service Photogrammetry, Remote Sensing, Cartography, Data Conversion, related Computer based Services and other related services. As per page 46 & 47 it has only one reportable segment Geographical Information Service (page 287 of paper book). During the year, the business of engineering and Information technology division was transferred - and de-merged (Pg. 41 of the annual report).A review of the Annual Report of Genesys reveals the fact that intangible assets constitute 22.57 percent of the total fixed assets of the company. On the other hand, the assessee has no intangible assets. This showcases that the assets used by the assessee and that used by Genesys are different and the dissimilarity in assets showcase differences in the functional profile of Genesys vis-a-vis the Company. in view of the above the learned counsel for the assessee argued that Genesys is not functionally comparable to the assessee. In this regard, she relied on the judicial precedents for rejection of this company on the basis of being functionally non comparable to a lTES provider. We find from the case laws relied on by the learned counsel for the assessee that the issue is covered by the decision of co-ordinate bench in the case of Flextronics Technologies (India) Pvt Ltd IIA(TP) No. 1559/Bang/2012 (Para 17), Symphony Marketing Solutions India Pvt Ltd, Vs ITO (Para 22). No contrary decision is brought before us by the leaned Sr. DR, and we therefore respectfully following the decision of co-ordinate Bench of this tribunal hold that this company cannot be regarded as comparable and direct the AO to exclude the same from comparables as selected by the TPO.

The eight comparable under dispute is HCL Comnet Systems& Services Ltd. Before us, the learned Counsel for the assessee stated that the company does not meet the initial filter as given on page 16 of the TPO order applied by the learned TPO of year end March 2008. (June 2008 as is clear from Page 289 of paper book). The learned counsel for the assessee submitted that while identifying the comparables by the TPO he has applied certain initial filters one of which is yearend being March 2008. Therefore, technically it is not possible to identify and select a comparable which has a yearend different from March 2008, since it will automatically get rejected while undertaking the search on the databases. Hence, HCL Comnet having year end of June 2008 ought to be rejected ion these grounds. Further it was submitted that the scale of operation (Rs 495 cr) is very different from the assessee (1.43 cr), hence it should be rejected. After hearing both the sides and going through the facts, we are of the view that this company cannot be regarded as comparable and direct the AO to exclude the same from comparables as selected by the TPO.

The ninth comparable under dispute is Infosys BPO ltd. Before us, the learned Counsel for the assessee stated that lnfosys BPO has a turnover of Rs 825.08 Crores as against that of the assessee having a turnover of around 1.43 Crores which is around 577 times that of the assessee, lacks comparability based on scale of operations. It was also submitted that Infosys BPO s.r.o. was incorporated on February 4, 2004 in the Czech Republic as a wholly owned subsidiary to provide business process management and transitioning services. During the year the company acquired IL Financial Services Holding B.V, Netherlands. The name of the company was changed from Progeon Limted to Infosys BPO Limited with effect from August 29, 2006. The company now has 11 delivery centers across Bangalore, Pune, Chennai, Jaipur and Gurgaon in India, Brno in Czech Republic, Hangzhou in China, Manila in Philippines, Monterrey in Mexico, Lodz in Poland and Bangkok in Thailand. The company started the year with 11,226 employees and closed the year with 16,295 employees as of March 31, 2008. In view of all of the above, the learned counsel for the assessee submitted that Infosys BPO ought to be rejected as a comparable of the assessee. She, in this regard relied on the judicial precedents for rejection of this company on the basis of being functionally non comparable to ITES provider. Before us the learned counsel for the assessee relied on the case law of co-ordinate Bench of this Tribunal in the case of Flextronics Technologies (India) Pvt Ltd ITA(TP) No. 1559/BangJ2Ol2 (Para 18) & Symphony Marketing Solutions India Pvt Ltd. Vs ITO (Para 24). No contrary decision is brought before us by the leaned Sr. DR, and we therefore respectfully following the decision of co-ordinate Bench of this tribunal hold that this company cannot be regarded as comparable and direct the AO to exclude the same from comparables as selected by the TPO.

The tenth comparable under dispute is Mold-Tek Technologies Ltd. Before us, the learned Counsel for the assessee stated that Mold-tek has undergone restructuring in the AY 2008 09 details of the same are provided on Page 307 of Paper book. The scheme of arrangement involving amalgamation between Teck-men Tools private limited (TTPL), the transfer company and Mold-tek, the transferee company and the demerger between Mold-tek, the demerged company and Mold-Tek Plastics Limited (MPL), the resulting company was sanctioned by Hon'ble High Court of Andhra Pradesh vide its order dated 25 July 2008. The appointed date for amalgamation and the demerger were 1 October 2006 and 1 April 2007 respectively. The effective date of the scheme is 26 August 2008, the date on which form 21 was filed with the Registrar of companies, Andhra Pradesh. (Pg. 9 and Pg 41 of the AR for FY 2007-08). Hence, it was submitted, that a company undergone restructuring cannot be considered as a comparable. Also with regard to the functional profile it was submitted that Mold-Tek Technologies Ltd. ('Mold-tek') primarily operates under two business segments Plastic division: The plastic division is engaged in the manufacture of plastic containers, pet bottles, blow moulding, tube & oils, paints, pet products, consumer products, etc. IT (KPO) division. The IT division specializes in providing structural engineering and design services for construction of buildings. (Pg 29 of the AR for FY 2007-08). Thus it was submitted that Mold-tek performs a completely different set of functions than those performed by the Appellant. It is engaged in providing Structural Engineering and Design KPO services for construction of building by using design tools like CAD/ CAM, Stadd Pro by employing highly skilled software engineers for the purpose. Thus, the learned Counsel for the assessee requested to drop Mold-Tek as a comparable. In this regard, she relied on the judicial precedents for rejection of this company on the basis of being functionally non comparable to a ITES provider. Before us the learned counsel for the assessee relied on the case law of co-ordinate Bench of this Tribunal in the case of Flextronics Technologies (India) Pvt Ltd ITA(TP) No. 1559/Bang/2012 (Para 19) & Symphony Marketing Solutions India Pvt. Ltd. Vs ITO (Para 25). No contrary decision is brought before us by the leaned Sr. DR, and we therefore respectfully following the decision of co-ordinate Bench of this tribunal hold that this company cannot be regarded as comparable and direct the AO to exclude the same from comparables as selected by the TPO.

The eleventh comparable under dispute is Wipro Ltd. Before us the learned counsel for the assessee stated that from the annual report of the company it is evident that they have earnings from export of Rs. 1,288.5 crores, and their revenue is Rs. 1,781.9 crores, i.e, 72% of annual revenue. Hence, failing the export to revenue filter of 75% applied by the Learned TPO. The standalone (abridged) financials indicate that the Company is engaged in Personal Computer, IT Software, Vegetable fats and Oils. Wipro does not have a BPO segment on a standalone level and hence, it cannot be considered as a comparable to the IT support services rendered by the assessee The company has operations in more than 35 countries through more than 75 subsidiary companies, joint ventures and associate companies. Further it was submitted that the Scheme of Amalgamation for merger of Wipro Infrastructure Engineering Limited, Wipro Healthcare IT Limited, Quantech Global Services Limited (subsidiary companies) with Wipro limited was approved during the financial year 2007-08 by the Honorable High Court of Karnataka and the Honorable High Court of Andhra Pradesh. The merger comes into effect from the Appointed Date i.e. April 1, 2007. The Annual Report of Wipro Limited for the year 2007-08 has been prepared after giving effect to these amalgamations as per page 324 of paper book. Further submitted from annual reports it is evident that the company generates its own electricity. The company is also engaged in R&D activities and their focus has been to strengthen the portfolio Centers of Excellence (COE) and Innovation projects. Thus It was vehemently argued that considering a number of economic factors and market dynamics, your good-self would appreciate that a company like Wipro having a turnover of Rs. 1,781.9 Crores (1,246 that of the Appellant) as against that of the Appellant. i.e. 1.43 crores lacks comparability based on scale of operations. Further Wipro has been granted 40 registered patents and has 62 pending applications. Hence, the assessee submits that Wipro should not be considered as comparable. In this regard, she relied on the following judicial precedents for rejection of this company on the basis of being functionally non comparable to a ITES provider. Before us the learned counsel for the assessee relied on the case law of co-ordinate Bench of this Tribunal in the case of Flextronics Technologies (India) Pvt. Ltd ITA(TP) No. 1559/l3ang/2012 (Para 20) & Symphony Marketing Solutions India Pvt Ltd. Vs ITO (Para 26). No contrary decision is brought before us by the leaned Sr. DR, and we therefore respectfully following the decision of co-ordinate Bench of this tribunal hold that this company cannot be regarded as comparable and direct the AO to exclude the same from comparables as selected by the TPO.

The next issue in this appeal of assessee is against the order of AO/DRP/ is as regards to disallowing the claim of deduction under section 10A of the Act in respect of expenditure of ₹ 33,95,873/-. For this assessee has raised the following grounds: -

Brief facts are that the assessee has both 10A units and non 10A unit. Since the non 1OA (PSE) unit has a loss, the AO under para 7.4 of the order did not agree with the expenses incurred and noted that higher expenses have been allocated to non 10A units as compared to 10A units. Though the AO did not re allocate the expense and treated the expense enumerated under para 7.4 not wholly & exclusively for non 10A PSI unit & ultimately under para 7.6 disallowed on an ad hoc basis 1/4th of such expense Nowhere has he found out or noted that the expense was illegal or not for business purpose or in genuine or capital expense. Hence it was argued that disallowing 25% thereof on an ad hoc is not justified. U/s 37 of the Act. AO does not have the power to assume part of expense to be genuine and other part non genuine. The Id representative argued that the assessee has submitted all the details and the AO has not pointed out the specific expense for which he was of the opinion the assessee has rot submitted evidence. Hence it was argued that there is no legal basis of this disallowance. The same issue was considered by the ITAT during the proceeding AY 2009-10. We find that this issue has been restored back to the file of the AO for fresh adjudication in AY 2009-10 by observing as under:-

Respectfully, following the Tribunal order in assessee’s own case for immediate preceding year, exactly on same lines, we set aside the issue to the file of the AO for re-adjudication. This issue of assessee’s appeal is allowed for statistical purposes.

In the result, the appeal of the assessee is partly allowed for statistical purposes.