ACIT 2(3), MUMBAI vs. TECH MAHINDRA ( R &D SERVICES) LTD (NOW MERGED WITH TECH MAHINDRA LTD), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य सद�य, राजे�� राजे�� केकेकेके अनुसार अनुसार /PER RAJENDRA, AM - लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order dated 22.01.2013 of the CIT(A)-IV,Bengaluru the Assessing Officer (AO) and the assessee have filed cross appeals for the year under consideration.Assessee-company is engaged in telecom software development services for telecom equipment manufacturers, carriers and service providers.It filed return of income on 30.10.2007,declaring a total income of Rs.2.01 crores.Subsequently, a revised return was filed on 12.8.2008, declaring a total loss of Rs.7.23crores.The AO completed the assessment u/s.143(3)of the Act on,24.1.2011,determining the income of the assessee at Rs.16.71 crores. ITA/2392/Mum/2013: 2.First ground of appeal raised by the AO,is about adjustment made to export turnover on account of freight,telecommunication and insurance, on-site fees and marketing fees.During the 2392/Mum/2013&336/Bang./2013(2007-08) M/s. Tech Mahindra Ltd. assessment proceedings,the AO reduced the following items of expenditure from the export turnover: i) Freight, telecommunication and insurance expenditure of Bangalore Exempt Unit (Rs.58.28 lacs) ii) Bangalore Exempt Unit in Foreign exchange on providing technical services outside India (Rs.12.77 crores) iii) Chennai Exempt Unit on freight, telecommunication and insurance (Rs.29.32 lacs) iv) Chennai Exempt Unit on providing technical services outside India (Rs.5.30 crores)

2.1.Before us,the Departmental Representative (DR) stated that the matter could be decided on merits.The Authorised Representative (AR) relied upon the cases of Taxa Elxsi Ltd.(supra) and Gem Plus Jewellery India Ltd.(33 ITR 175).He also referred to the order of the Tribunal dated 24.2.2012 (ITA No. 201/Bang/2011 and ITA No.160/Bang/2011-AY.2006-07).

2.2.We have heard rival submissions.We find that the Tribunal while deciding the appeal of the AO filed for the AY.2006-07(i.e. had held as under: 3.8. We have heard the rival submission and perused the material on record. The Hon'ble Karnataka High Court in assessee's own case in ITA Nos.203 & 204/2011 dated 18th October, 2011 has decided the issue in favour of the assessee and dismissed the appeal of the revenue. The Hon'ble High Court had followed its earlier judgement in the case of CIT v M/s Tata Elxsi Ltd. & Others (2011-TIOL-684-HC-KAR-II). The Hon'ble High Court in the case of Tata Elxsi Ltd. & Others had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. The relevant finding of the Hon'ble jurisdictional High Court reads as follows:- "...........Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. 2 2392/Mum/2013&336/Bang./2013(2007-08) M/s. Tech Mahindra Ltd.

While computing the consideration received from such export turnover, the expenses incurred towards freight,telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be included. However, the word total turnover is not defined for the purpose of this section. It is because of this omission to define 'total turnover', the word 'total turnover' falls for interpretation by this Court; ........In section 10A, not only the word 'total turnover' is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assxcessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same". 3.9 The Hon'ble Mumbai High Court in the case of Gem Plus Jewellery India Ltd. (supra), in identical circumstances, held that since the export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced from the total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A of the Act. The relevant finding of the Hon'ble Mumbai High Court reads as follows:- "The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Expln.2 to 3 2392/Mum/2013&336/Bang./2013(2007-08) M/s. Tech Mahindra Ltd. s.10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression "total turnover" has not been defined at all by Parliament for the purposes of s.10A. However, the expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression "export turnover" cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. 'export turnover' would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though these have been specifically excluded from 'export turnover' for the purposes of the numerator would be brought in as part of the 'export turnover' when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary - CIT v Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596: (2000) 245 ITR 769 (Bom) applied; CIT v Lakshmi Machine Works (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) and CIT v Catapharma (India) (P) Ltd. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) relied on" 3.10 In the case of Sak Soft Ltd. (supra), the assessee was engaged in the business of exporting computer software and claimed deduction u/s 10B of the Act. In completing the assessment u/s 143(3) of the Act, the AO reduced the expenditure incurred in foreign exchange in providing the technical services outside India, from the export turnover without corresponding reduction from total turnover, thereby reducing the deduction claimed by the assessment u/s 10B of the Act. 3.11 In light of the above facts, the Special Bench held as under:- "For the above reasons, we hold that for the purpose of applying the formula under sub- section (4) of section 10B, the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula. The appeals filed by the department are thus dismissed". 3.12 In the light of the above judgements of the Hon'ble High Courts and the order of the Special Bench, we are of the view that the CIT(A) is justified in directing the Assessing Officer to exclude the above mentioned expenditure both from the export turnover as well as from the total turnover 2392/Mum/2013&336/Bang./2013(2007-08) M/s. Tech Mahindra Ltd. while calculating deduction under section 10A of the Act. Therefore, the order of the CIT(A) is correct and in accordance with law and no interference is called for. Respectfully following the judgements of the Karnataka and Bombay High Court and the orders of the Tribunal mentioned above,we dismiss the grounds 2(i) and 2(ii).

3.Next ground of appeal (GOA) is about allowing the deduction u/s. 10A.During the assessment proceedings,the AO adjusted losses of Rs.9.36 crores from the Bangalore Exim Unit and Rs.4.84 lacs from the Chennai Non Exempt Unit against the exempt profits of the Bangalore and Chennai units. 3.1.Before the FAA during the appellate proceedings,the assessee stated that there was no provision u/s.10A or u/s. 72 of the Act for adjustment of such losses.After considering the available material,the FAA referred to the case of IGate Global Solutions Ltd. (24 SOT 3)and held that the issue was fully covered by the order of Jurisdictional Bench of the Tribunal. Accordingly,he directed the AO to compute the deduction u/s. 10A of the Act in a like manner. 3.2.Before us,the DR stated that the matter could be decided on merits. AR supported the order of the ITAT. We find that in the case of IGate Global Solutions Ltd. (supra),the Tribunal has held that in a situation where a unit of the assessee company was found to be independent, its loss could not be adjusted against the profit of the other units for the purpose of computing deduction u/s. 10A of the Act.Here,we would like to refer to the case of Black and Veatch Consulting Pvt.Ltd.(348 ITR 72) and it reads as under: “Section 10A of the Income-tax Act, 1961, is a provision which is in the nature of a deduction and not an exemption. The deduction under section 10A has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of section 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in sections 80C to 80U . Section 80B(5) defines for the purposes of Chapter VI-A “gross total income” to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. Therefore, the deduction under section 10A has to be given at the stage when the profits and gains of business are computed in the first instance. The Tribunal was right in holding that the deduction under section 10A in respect of the 5 2392/Mum/2013&336/Bang./2013(2007-08) M/s. Tech Mahindra Ltd. allowable unit under section 10A has to be allowed before setting off brought forwarded losses of a non-section 10A unit.” Considering the above,we dismiss ground nos. 3(i) and 3(ii) raised by the AO.

ITA/336/Mum/2013: 4.The assessee has raised 8 grounds of appeal.Before us,the AR stated that the ground nos. 4 and 4.1 only were to be adjudicated, pertaining to the transfer pricing (TP)adjustments.During the assessment proceedings,the AO found that the assessee entered into International Taxations (IT.s)with its Associated Enterprises (AE).He made a reference to the Transfer Pricing Officer (TPO) to determine the Arms Length Price (ALP) of the IT.s.

4.1.During the TP proceedings, the TPO found that assessee had selected 50 comparables and had used TNMM as the most appropriate method. The PLI adopted was operating profit/ operating cost.The arithmetic margin of the IT.s was 9.95% as against the margin of 12.82% of the comparables.The TPO rejected 42 comparables,out of the comparables selected by the assessee.He added new 8 comparables.The arithmetic mean of the 26 comparables of the final list was 25.14%.The TPO,in his order,suggested upward adjustment of Rs.10.91 crores. Accordi -ngly,the AO passed the order adding the said amount to the total income of the assessee.

4.2.During the appellate proceedings,the assessee made elaborate submissions before the FAA. After considering the available material,he held that the TPO had rightly rejected the comparab- les selected by the assessee.The FAA retained the following comparables in the final list: SN. Comparable company OP/TC (%) 1. Accel Transmatic Ltd. 21.11 2 Computech International Ltd. 05.88 3 Datamatics Ltd. 01.38 4 E-Zest Solutions Ltd. 36.12 5 Geometric Ltd. 10.71 6 Helios & Matheson IT Ltd. 36.63 7 Ishir Infotech Ltd. 30.12 8 KALS Info Systems Ltd. (segment) 30.55 9 LGS Global Ltd. 15.75 10 Lucid Software Ltd. 19.37 11 Mediasoft Solutions Ltd. 03.66 12 Quintegra Solutions Ltd. 12.56 13 RS Software (India) Ltd. 13.47 14 R Systems International Ltd. (seg.) 15.07 6 2392/Mum/2013&336/Bang./2013(2007-08) M/s. Tech Mahindra Ltd. 15 SIP Technologies & Exports Ltd. 13.90 16 Thirdware Solutions Ltd. 25.12 17 VMF Soft Tech Ltd. 02.38 Arithmetic Mean 18.16 He further observed that the TPO had, on page 190 of his order, used the ratio of operating profit to sales (19.01%)to compute the ALP,that on page 186, he stated that the IT.s under considera - tion pertained to the operating cost of the taxpayer,that he computed the ratio of operating profit(OP)to total cost(TC)as the profit level indicator(PLI)in each of the 26 comparables, that on page 3 of his order he mentioned that appellant's margin (OP/TC) was 9.95%,that there was no basis to adopt the ratio of operating profit to sales to determine the ALP,that the same should OP/TC.The FAA computed the mean operating margin @18.16% by adopting the OP/TC ratio.He directed the AO to provide adjustment after considering above mean margin.

5.Before us,the AR objected to inclusion of following comparables in the final list stating that same were functionally different.About Quintegra Solutions Ltd.(QSL),the AR contended that the comparable in question did not appear in databases when the search process was conducted, that from the annual report of comparable it was clear that it was involved in providing full range of custom development solutions, focused software products as well as consultancy services,that QSL incurred R&D expenses which worked out to 2.18% of operating revenue for the year under appeal,that segmental break-up of RPT was not apparent from audited financials. Referring to the annual report of Thirdware Solutions Ltd.(TSL),he argued that apart from providing software development services TSL was involved in product development, trading in software and giving licenses for use of software,that it was difficult to bifurcate operating profits between product development and software development services. About Accel Transmatic Ltd.(Segmental)(ATL),he contended that it was not a pure software development services provider,that it had reported Manufacturing and Trading sales income,that it was also providing training and educational services,that it did not appear in databases when the search process was conducted,that segmental break-up of RPT was not apparent from audited financials,that the TPO had selected the comparable purely on the basis of information collected u/s 133(6); otherwise information was not available in public domain. With regard to E-Zest Solutions Ltd.(EZSL).EZSL,the AR argued that it did not appear in databases when the search process was conducted,that it was engaged in 'e-business consulting 7 2392/Mum/2013&336/Bang./2013(2007-08) M/s. Tech Mahindra Ltd. services', which includesd web strategy services, IT Design services, technology consulting services and product development consulting services,that segmental break-up of RPT was not apparent from audited financials. The AR stated that Ishir Infotech Ltd.(IIL)had displayed business promotion expenses which worked out to 7.72% of operating revenue,that it was out sourcing its work,that it had not satisfied the 25% employee cost filter,that that the profit margin of the comparable company was abnormally high. About Lucid Software Ltd.(LSL),he argued that from the website of comparable it was clear it was involved in development and sale of software products,that Segmental break-up of RPT was not apparent from audited financials. 5.1.He referred to the cases of NXP Semiconductors India Pvt. Ltd.(IT-TP-/1174/Bang/2011- AY.07-08),3DPLM Software Solutions Ltd.[IT-TP/ 1303/Bang/2012- AY.08-09),Sharp Soft - ware Development India Pvt. Ltd.(IT-TP-/1102/Bang/2011- AY 07-08),Actiance India P. Ltd (IT-TP/1056/Bang/2011- AY.07-08), Barclays Technology Centre India (P.) Ltd.(56 taxmann.com 386), Capital IQ Information Systems (India) Pvt. Ltd.(ITA 1961/Hyd/2011), John Deere India Pvt.Ltd.(ITA/2236/PN/2012),MSC Software Corporation India Pvt. Ltd.([ITA/ 46/ Pun/2013), Mercedes Benz R&D India Pvt. Ltd.(ITA/1222/Bang/2011-AY. 2007-08), Sunquest Information Systems (ITA/79/Bang/2013). He referred to the pages 167, 213,215,286-290,364, 388 and 391 of the PB.The AR further argued that if following the order of the Tribunal,delivered in the case of NXP Semiconductors India Pvt. Ltd.(supra)seven of the comparables[namely,Accel Transmatic Ltd., E-Zest Solutions Ltd.,Helios & Matheson IT Ltd., Ishir Infotech Ltd., KALS Info Systems Ltd.(segment),Lucid Software Ltd.,Thirdware Solutions Ltd. and LGS Global Ltd.]were excluded from the final list the assessee would be in the safe zone(plus/minus 5% of the margin).The DR relied upon the order of the FAA for first five comparables.About TSL,he stated that if it had to be excluded then others comparables selected by assessee should also be excluded on the same basis. 6.We have bestowed our due consideration to the respective submissions of the representatives of both the parties.We find that the assessee in engaged in the business of software development, that it had adopted TNMM for benchmarking the IT.s,that the it had selected 50 comparables,that the margin shown by it was 9.95%,that the average margin of the comparables was 12.82%,that 8 2392/Mum/2013&336/Bang./2013(2007-08) M/s. Tech Mahindra Ltd. it claimed that the IT.s entered into by it were at Arm’s Length,that the TPO rejected 42 of the comparables and added 18 new comparables while recommending TP adjustments,that the FAA excluded one comparable selected by the TPO,that he partly allowed the appeal of the assessee. The AR had stated that if seven of the comparables were taken out of the final list the assessee would be in safe zone.We would like to discuss the validity of each of the comparables that was objected to by the assessee. 6.1.We find that QSL is engaged in software services,that as per its Annual Report QSL was engaged in providing of computer hardware, software and business solutions,that the assessee had not incurred any R&D expenses,that it is not possible to deduce the break-up between hardware, software & consulting income of the comparable company(Ref.Pg. 290 of PB).We are of the opinion that services provided by EZSL were high-end ITES services or KPO, which are different from services provided by the assessee i.e.basic software development services.We have already held that the assessee was engaged in to software development services only.TSL was earning revenue from sale of licenses and subscription,that segmental break-up was not apparent from audited financials.As far as ATL is concerned it is found that it had reported Manufacturing and Trading sales income,that it was also providing training and educational services.We find that IIL had incurred business promotion expenses which worked out to 7.72% of operating revenue and that it was out sourcing its work.The remaining comparables that have been objected to by the assessee are also functionally different from the assessee.They are not in the pure software development like the appellant.Therefore,we hold that above referred seven comparables should be excluded from the final list of the valid comparables. 6.2.We find that in the case of NXP Semiconductors India Pvt. Ltd.(supra)the Tribunal has dealt with the various comparables which are subject matter of dispute before us and had dealt the issue as under: 2.1.The assessee is engaged in the business of development of software and indenting sale of application embedded business and industrial software. xxxx 2.2.In the period under consideration, the assessee had reported the following international transactions :- Provision of Software Development Services-Rs.253,89,24,193. In view of the above international transactions entered into by the assessee, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determining the Arm's Length Price ('ALP') of these international transactions, after obtaining 9 2392/Mum/2013&336/Bang./2013(2007-08) M/s. Tech Mahindra Ltd. necessary approval from the CIT-III, Bangalore. The TPO vide order under Section 92CA of the Act dt.31.10.2011 proposed a T.P. Adjustment of Rs.20,53,68,934 to the ALP of international transactions in respect of software development services rendered by the assessee. The Assessing Officer then issued a draft order of assessment under Section 143(3) r.w.s. 144C of the Act dt.30.12.2011 determining the assessable income of the assessee at Rs.54,10,24,876; which included the T.P. Adjustment of Rs.20,53,68,934 to the ALP of international transactions in respect of the software development services rendered by the assessee as proposed by the TPO in the order under Section 92CA of the Act. 3.1.Aggrieved by the order of assessment for Assessment Year 2008-09 dt.27.9.2012, the assessee has preferred this appeal raising the following grounds :- xxxx

4. The learned AO / Transfer Pricing Officer ("TPO") have erred, in law and in facts, in making an addition of Rs. 20,53,68,934 to the total income of the Appellant on account of adjustment in the arm's length price of the software development services transaction entered by the Appellant with its associated enterprise. xxxx

7. The learned AO / TPO have erred, in law and in facts, in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters: a. the learned AO / TPO erred in rejecting certain comparable companies identified by the Appellant where consolidated results had been used for analysis. b. the learned AO / TPO erred in rejecting certain comparables identified by the Appellant using 'onsite revenues greater than 75% of the export revenues' as a comparability criterion. c. the learned AO / TPO erred in rejecting certain comparables identified by the Appellant using 'employee cost greater than 25% of the total revenues' as a comparability criterion; d. the learned AO / TPO erred in rejecting certain comparable companies identified by the Appellant using turnover < Rs. 1 Crore as a comparability criterion; e. the learned AO / TPO erred in rejecting certain comparable companies identified by the Appellant as having economic performance contrary to the industry behavior (e.g. companies which showed a diminishing revenue trend); and f. the learned AO / TPO erred in rejecting certain comparable companies identified by the Appellant on the ground that the comparables were having different accounting year (other than March 31 or companies whose financial statements were for a period other than 12 months). 8.The learned TPO erred in obtaining information which was not available in public domain by exercising powers u/s 133(6) of the Act and relying on the information for comparability analysis. TRANSFER PRICING ISSUES (Ground Nos.4 to12) 6.1 In the course of proceedings before us, the learned Authorised Representative submitted a chart explaining the assessee's position regarding the acceptability or otherwise of each of the companies selected by the TPO as comparable companies to the assessee. The learned Authorised Representative also submitted that he would only press those grounds on the comparability of individual companies selected by the TPO in the final set of comparables and companies erroneously rejected by the TPO. In support of assessee's contentions, the learned Authorised Representative placed reliance on the decisions of various co-ordinate benches of the ITAT, Bangalore in the following cases :- Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011 dt.23.11.2012) Curram Software International Pvt. Ltd. (ITA No.1280/Bang/2012 dt.31.7.2013) for A.Y. 2008-09. Yodlee Infotech Pvt. Ltd. (IT(TP)A No.1538/Bang/2012 dt.30.8.2013) 3DPLM Software Solutions Ltd. (IT(TP)A No.1303/Bang/2012 dt.28.11.2013) for A.Y. 2008-09. 10 2392/Mum/2013&336/Bang./2013(2007-08) M/s. Tech Mahindra Ltd.

6.2 It was submitted, by the learned Authorised Representative, that the set of comparables chosen by the TPO in the cited cases (supra) are the same as those selected in the case on hand and therefore the assessee places reliance on the decisions in the cited cases. xxxx 7.1 As per the T.P. Study carried out by the assessee, for the software development service segment, adopting TNMM as the Most Appropriate Method ('MAM') and taking itself as the tested party, the assessee selected a set of 23 companies as comparables with an average profit margin of 14.84% on cost. The assessee's list of comparables,as per its T.P.Study, are as under :- xxxx Since the average profit margin of the assessee was 12.64% on total cost, the assessee held its international transactions in the software development services segment to be at arm's length. 7.2 The TPO, while accepting TNMM as the MAM, as adopted by the assessee, rejected the assessee's T.P. Study for various reasons and embarked on a fresh search, using the data bases, 'Prowess' and 'Capitaline.' After issuing a show cause notice to the assessee proposing to adopt a fresh set of comparable companies and considering the objections of the assessee, the TPO selected the final list of 20 comparables,which are as under :- xxxx The average mean margin of the 20 comparable companies selected by the TPO was 23.65% whereas the average mean margin of the software development services segment of the assessee was 12.64% on total cost. After granting working capital adjustment of 2.05%, the TPO computed the T.P. Adjustment of Rs.20,53,68,934 to the ALP of international transactions entered into by the assessee in the period relevant to Assessment Year 2008-09. 8.3 It was also submitted by the learned Authorised Representative that the following 7 companies are liable to be rejected as comparables as they are functionally different from the assessee, based on the decision of a co-ordinate bench of the ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra);- i) Bodhtree Consulting Ltd; ii) e-Zest Solutions Ltd. iii) Persistent Systems Ltd. iv) Quintegra Solutions Ltd. v) Thirdware Solutions Ltd. vi) Softsol India Ltd. vii) Lucid Software Ltd. We now proceed to examine and consider each of the comparable companies so highlighted by the assessee in its chart. xxxx 11. KALS Information Systems Ltd. 11.1 This is a company selected by the TPO. The assessee had objected to the inclusion of this company in the TPO's set of comparables for the reason that it is functionally different from the assessee and also because segmental details had not been provided in the Annual Report of the company with regard to software service revenue and software product revenue. The TPO, however, rejected the objections put forth by the assessee and included this company in his final set of comparables. xxxx 11.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a co- ordinate bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra), for Assessment Year 2008-09 has excluded this company as a comparable, observing that it was 2392/Mum/2013&336/Bang./2013(2007-08) M/s. Tech Mahindra Ltd. developing software products and was not purely a software service provider and at para 10.4 thereof it was held as under :- " 10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co- ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the list of comparable companies. It is ordered accordingly." 11.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider. xxxx 16. E-Zest Solutions Ltd. 16.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO rejected the assessee's objections on the ground that as per the information received in response to notice under Section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. xxxx 16.4.1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd.(supra) for Assessment Year 2008-09 had excluded this company from the list of comparables holding that this company is into rendering of product development services and high end technical services in the category of KPO Services and therefore cannot be considered as comparable to an assessee rendering purely software development services. The relevant portion of the order of the co-ordinate bench at para 14.4 thereof is as under :- " 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparables only on the basis of the statement made by the company in its reply to the notice under section 133(6)of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P) 12 2392/Mum/2013&336/Bang./2013(2007-08) M/s. Tech Mahindra Ltd.

Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand.The A.O./TPO is accordingly directed." 16.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the A.O. / TPO to exclude this company from the list of comparables as it is functionally different from the assessee in the case on hand who is rendering purely software development services. It is ordered accordingly.

development and the relevant observations of the order at para 16.3 thereof is extracted hereunder :- " 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) and the Delhi ITAT in the case of Transwitch India Pvt. Ltd. (supra) have held, that since this company, is engaged in the software product development and not software development services, it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand." 18.3.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different; (being engaged in software product development) from the assessee in the case on hand who is rendering only software development services. It is ordered accordingly. xxxx 20. Quintegra Solutions Ltd. 20.1 This case was selected as a comparable by the TPO in spite of the objections of the assessee that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections, holding that this company qualifies all the filters applied and included this company in the list of comparables. xxxx 20.4.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that a co-ordinate bench of this Tribunal in its order in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company be excluded from the list of comparables for software development service providers, holding as under at paras 18.3.1 to 18.3.3 thereof :- " 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand.

2392/Mum/2013&336/Bang./2013(2007-08) M/s. Tech Mahindra Ltd. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider." 20.4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different being engaged in product engineering services and in R&D activities which has resulted in the creation of its own IPRs, etc. whereas the assessee in the case on hand is a software development service provider. It is ordered accordingly. Considering the above,we hold that above mentioned seven comparables have to treated as invalid comparables for the year under consideration,as stated earlier.We find that if the above referred seven comparables are not included in the final list,then the average margin of the assessee is within the range of (+/-)5%.Therefore,we hold that adjustment made by the TPO and confirmed by the FAA have to be deleted.Ground no.4.and 4.1 are decided in favour of the assessee.