TAVANT TECHNOLOGIES INDIA PRIVATE LIMITED,BANGALORE vs. DCIT, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH “ A ”

BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER

I.T.(T.P) A. Nos.292/Bang/2014 & 1592/Bang/2012 (Assessment Years : 2007-08 & 2008-09) M/s. Tavant Technologies Vs. Dy. Commissioner of Income India Pvt. Ltd., Tax, No.12, CSRIE-II, Circle 12(4), Bangalore. Guava Garden, 5th Block, Koaramangala, Bangalore-560 095 PAN AABCT 3261E Appellant Respondent.

Appellant By : Shri Gurunathan, Advocate. Respondent By : Shri G.R. Reddy, CIT (DR) (ITAT)-1, Bengaluru.

Date of Hearing : 02.03.2017. Date of Pronouncement : 31.05.2017.

O R D E R Per Shri Vijay Pal Rao, J.M. : These two appeals by the assessee are directed against the assessment order dt.25.9.2012 and 31.1.2014 passed under Section 143(3) r.w.s. 144C in pursuant to the directions of the Dispute Resolution Panel (in short DRP) for the Assessment Years 2008-09 & 2007-08 respectively. 2. First we take up the appeal for the Assessment Year 2008-09 wherein the assessee has raised the following grounds :

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5 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012

6 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012

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Officer, fresh search conducted by the TPO and rejection of CUP as Most

Appropriate Method (MAM). At the time of hearing, the learned Authorised

Representative of the assessee has stated at Bar that the assessee does not

press Ground Nos.1 to 3 and the same may be dismissed as not pressed. The

learned Departmental Representative has raised no objection if the Ground

Nos.1 to 3 are dismissed. Accordingly, Ground Nos.1 to 3 of assessee's appeal

for the Assessment Year 2008-09 are dismissed being not pressed.

Departmental Representative and considered the relevant material on record.

The learned Authorised Representative of the assessee has submitted that the

TPO has not given the adjustment of under utilization of capacity by the

assessee due to business recession and unavoidable circumstances. He has

further submitted that the cost of employees and cost of rental due to under-

utilisation of capacity is required to be considered for adjustment.

8 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 6. On the other hand, the learned Departmental Representative has

submitted that the assessee has simply made a claim of adjustment due to

capacity under-utilisation without giving the relevant and necessary details. He

has relied upon the orders of the authorities below.

on record, we note that the assessee has claimed the adjustment on account of

under-utilisation of capacity and particularly on account of cost of employees

and cost of rental which remained unutilized. However, the assesseehas not

given the proper details as well as evidences to show the level of capacity of

utilization of the assessee as well as comparable companies. The learned

Authorised Representative of the assessee has submitted that it was not

feasible for the assessee to give all the details of the comparable companies

regarding capacity utilization. We do not find any merit in the claim of the

assessee when the assessee failed to produce the relevant details regarding the

level of capacity utilization of each and every comparable company in

comparison to the assessee's capacity utilization. Therefore in the absence of

necessary details and evidences, this ground of the assessee's appeal is

rejected.

9 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 8. Ground Nos.5 to 8 are regarding determination of Arm’s Length Price

(ALP) and TP Adjustment made by the TPO/A.O.

Associated Enterprise (AE). To determine the ALP, the TPO has selected 20

comparable companies as under :

10 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 The TPO has computed average PLI at 23.65% and after allowing the working

capital adjustment of 2.40% the adjusted mean margin of comparable was

taken at 21.25%. Accordingly, the TPO proposed an adjustment under Section

92CA of Rs.21,33,42,639. The assessee challenged the action of the TPO before

the DRP but could not succeed.

set of 20 comparables selected by the TPO which are as under :

Sl.No. Name of the Comparable 1. Accel Transmatic Ltd. (Seg.) 2. AVanicimcon Technologies Ltd. 3. Celestial Labs Ltd. 4. E-zest Solutions 5. Flextronics Software Systems Ltd. (Seg.) 6. Geometric Ltd. (Seg.) 7. Helios & Matheson IT Ltd. 8. Infosys Technologies Ltd. 9. Ishir Infotech Ltd. 10. KALS Information Systems Ltd. (Seg.) 11. Lucid Software Ltd. 12. Persistent Systems Ltd. 13. Tata Elxsi Ltd. (Seg.) 14. Thirdware Solutions Ltd. 15. Wipro Ltd. (Seg.)

that the functional comparability of all these 15 companies have been

11 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 examined by the co-ordinate bench of this Tribunal vide order dt.28.2.2013 in

the case of Logica Pvt. Ltd. Vs. ACIT in IT(TP)A No.1129/Bang/2011, in the case

of Tesco Hindustan Service Centre (P) Ltd. Vs. DCIT 77 Taxman.com 48, in

the case of Societe Generale Global Solution Centre Pvt. Ltd. Vs. DCIT

dt.22.4.2016 in IT(TP)A No.1188/Bang/2011 and the decision dt.18.3.2016 in

the case of McAfee Software (India) Pvt. Ltd. Vs. ACIT in IT(TP)A

Nos.1388/Bang/2011 & 4/Bang/2012 vide decision dt.18.03.2016. Thus the

learned Authorised Representative has submitted that these 15 companies are

required to be excluded from the set of comparables.

objected to the exclusion of these companies and submitted that without

examination of FAR Analysis of each and every comparable company with the

assessee, it cannot be excluded merely on the basis of the finding of the

Tribunal in some other case. He has relied upon the orders of the authorities

below.

on record. It is pertinent to note that turnover and size are relevant factor for

selecting the comparable companies for the purpose of determining the ALP

however a proper parameter of turnover has to be applied. This Tribunal is

12 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 taking a consistent view of applying the turnover filter of 10 times of assessee's

turnover on both sides for selecting the comparable companies. Further the

RPT is also a relevant factor for selecting comparable companies though the

comparable price should be uncontrolled and unrelated however it is not

possible to find a company without having RPT therefore, in due course of

consideration and in analyzing this issue, this Tribunal has taken a view that a

tolerance range of 5% to 25% can be considered depending upon the

availability of the comparable companies. Accordingly, in normal course 15%

of RPT can be a tolerance range for selection of comparable entity. Since the

TPO has not applied and also not given the details of turnover as well as RPT of

the comparable. Therefore we are of the considered opinion that the entire

issue of TP Adjustment requires a fresh consideration at the level of TPO.

Accordingly, we set aside the issue of determination of ALP and TP Adjustment

to the record of TPO/A.O. for fresh consideration.

consequential final order passed by the Assessing Officer.

assessee has stated at Bar that the assessee does not press Ground Nos.9, 10 &

15 and the same may be dismissed as not pressed. The learned Departmental

13 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 Representative has raised no objection if the Ground Nos.9, 10 & 15 are

dismissed. Accordingly, Ground Nos.9, 10 & 15 of assessee's appeal for the

Assessment Year 2008-09 are dismissed being not pressed.

of Rs.39,99,683 under the head Provision towards Long Term Retention

Bonus. The Assessing Officer held that this amount is a provision and

accordingly he has added back the said amount to the income of the assessee.

submitted that this is not a provision for uncertain liability but this is an actual

amount paid by the assessee therefore no addition is called for. He has relied

upon the decision of Hon'ble Supreme Court in the case of Bharat Earth

Movers Vs. CIT 245 ITR 248. He has also relied upon the decision of Hon'ble

Supreme Court in the case of Taparia Tools Ltd. Vs. JCIT 312 ITR 605.

upon the orders of the authorities below and submitted that when the

assessee has not produced the relevant evidence to show that this is a certain

liability then provision made on this account is not an allowable claim.

14 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 20. We have considered the rival submissions as well as the relevant

material on record. The Assessing Officer has disallowed this amount by

treating the same as provision and not an ascertained liability. The assessee

has claimed that this is not a provision but the amount has actually been paid

in the subsequent year in June, 2009. We find that even if provision is made

towards the accrued bonus on account of length of service of the employee

then the actual payment may be made in the subsequent year or in future but

the liability cannot be treated as uncertain. Therefore in view of the decision

of the Hon'ble Supreme Court in the case of Bharat Earth Movers Vs. CIT

(supra) the provision made towards accrued long term retained bonus is an

allowable claim. Accordingly, the Assessing Officer is directed to allow the

claim of the assessee after verification of the quantum which has accrued as a

bonus to the employees though the payment may be paid in future.

expenditure. On verification of the record, the Assessing Officer found that the

amount of Rs.11,86,981 is a provision and cannot be recognized as a certain

liability. Accordingly, the Assessing Officer has made addition of Rs.11,86,981.

15 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 23. Before us, the learned Authorised Representative of the assessee has

relied upon the decision of the co-ordinate bench of this Tribunal in the case of

Telelogic India Pvt. Ltd. Vs. DCIT 67 taxmann.com 159 and submitted that the

Tribunal has decided this issue in favour of the assessee.

submitted that the assessee has not produced any evidence to show any such

liability accrued on account of rent equilisation. He has relied upon the orders

of the authorities below.

on record. Though the assessee has debited a sum of Rs.11,86,981 as part of

rent expenditure however, no record has been furnished by the assessee to

show how this liability has arisen and what is the basis of this liability. We

further note that the assessee has even not filed the rent agreement under

which this liability is claimed to be discharged by the assessee in future.

find that the said decision is only with regard to the legal proposition that once

the assessee has brought on record, the liability to be discharged by the

assessee in future then the same cannot be disallowed merely because the

actual payment has to be made in future. In the case on hand, the assessee

16 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 has failed to produce the primary evidence on the basis of which the liability

has been recognized and provision is made. Accordingly, we do not find any

reason to interfere with the orders of the authorities below qua this issue.

The Assessing Officer made disallowance under Section 14A r.w. Rule 8D on

account of interest of Rs.35,067 as well as common administrative expenses of

Rs.9,47,932.

submitted that there is no interest expenditure and therefore the disallowance

made by the Assessing Officer is not justified. He has relied upon the decision

of Hon'ble jurisdictional High Court in the case of CIT Vs. Deepak Mittal 361 ITR

131 (P&H) and submitted that there must be certain expenditure it must have

been incurred by the assessee then only provision of Section 14A as well as

Rule 8D can be invoked. The assessee has claimed that it has not incurred any

expenditure for earning the exempt income then without verifying the claim of

the assessee the Assessing Officer cannot make a disallowance under Section

14A of the Act.

17 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 30. On the other hand, the learned Departmental Representative has relied

upon the orders of the authorities below.

material on record. As regards the disallowance made by the Assessing Officer

on account of interest expenditure computed as per Rule 8D(2)(ii), we find that

when the assessee has not shown any interest expenditure in the profit and

loss account then no disallowance is called for on account of interest

expenditure under Section 14A of the Act. As regards, the administrative

expenditure that the assessee has claimed that it has not incurred any

expenditure for earning the exempt income however, we find that in the

investment portfolio of assessee there is a significant change and movement.

The balance as on 31.3.2007 was Rs.30,85,00,000 which has been reduced to

Rs.7,06,00,000 which shows a significant change in the investment portfolio

and the assessee has taken a decision to sell the securities/shares during the

year under consideration. The decision of making fresh investment or selling

the existing investment is taken at a very high level of management therefore it

cannot be accepted that the assessee has not incurred any expenditure for

earning the dividend income. Accordingly, when there is a change and

reshuffling in the investment portfolio then the indirect expenditure is bound

18 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 to be incurred which is allocable to the tax exempt income. In view of the

above facts and circumstances of the case, we confirm the disallowance made

by the Assessing Officer on account of administrative expenses and delete the

disallowance made by the Assessing Officer on account of interest expenditure.

claimed as provision but the same has not been added back to the total

income of the assessee. The Assessing Officer made the addition of the said

amount to the total income of the assessee. The assessee challenged the

action of the Assessing Officer before the Dispute Resolution Panel (DRP). The

DRP on examination of the fact found that the disallowance made by the

Assessing Officer was on the basis that the assessee has failed to substantiate

the claim. Accordingly, the DRP directed the Assessing Officer to consider the

relevant record in support of the claim and then decide the issue after affording

a reasonable opportunity to the assessee. In the final order, the Assessing

Officer has made a disallowance of Rs.44,19,778 on the ground that this is only

19 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 a provision not allowable as expenditure. Further the Assessing Officer noted

that the assessee has not complied with the TDS provision as required under

Section 40(a)(ia) of the Act.

Departmental Representative and considered the relevant material on record.

The Assessing Officer has disallowed these expenses by giving the reasons in

para 13.5 as under :

20 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012

21 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012

that though the amount was not paid till date however if the amount was

accrued during the year then the claim of expenditure cannot be disallowed on

the ground of non-deduction of TDS as the TDS provisions are not applicable

on such expenditure. Accordingly, this amount of Rs.20,00,000 is an allowable

claim.

provisions, therefore the provisions of Section 40(a)(ia) are attracted on this

amount.

again the Assessing Officer has recorded that the assessee has not complied

with the provisions of TDS. Since the Assessing Officer has not discussed

22 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 relevant provisions under Chapter XVII of IT Act under which the TDS is required

to be deducted in respect of these amounts of expenditure therefore it is not

clear how the provisions of Section 40(a)(ia) are applicable on this amount.

Accordingly, we direct the Assessing Officer to properly examine the relevant

provisions of Chapter XVII qua these payments on account of repairs and

maintenance and then decide the issue.

this amount on the ground that it is a provision on estimate basis but no

estimation has been provided by the assessee. It is pertinent to note that if an

amount has accrued in respect of staff welfare expenses then the payment of

the same in future cannot be a ground for disallowance of expenditure.

However, since the assessee has not provided the necessary details to show

that this expenditure is already accrued on account of staff welfare, therefore

we do not find any reason to interfere with the order of the Assessing Officer

qua this issue.

Assessment 2007-08

23 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012

1 Assessment and reference to Transfer Pricing Officer are bad in law a) The final order issued by the Deputy Commissioner of Income Tax – Circle 12(4) [‘ITO’ or ‘AO’], is bad on facts and in law and is in violation of the principles of natural justice. Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Tavant Technologies India Private Limited (‘the Appellant or ‘the Company’), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 [‘the Act’]. b) The AO has erred in law in making a reference to the Transfer Pricing Officer [‘TPO’], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in section 92CA(1) of the Act. The fresh comparable search undertaken by the AO/TPO is bad in law 2 a) The AO/TPO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant’s analysis with fresh benchmarking analysis on his own conjectures and surmises. b) On the facts and in the circumstances of the case and in law, the learned AO/TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act 3 Determination of arm’s length price by the TPO in relation to the ‘Software Development Services’ segment a) The AO/TPO grossly erred on facts in benchmarking the transactions of the limited risk software services of the appellant with companies operating as full fledged entrepreneurs without considering the

24 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 differences in the functions performed, assets employed and risk undertaken by the appellant vis-à-vis comparable companies. b) The AO/TPO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study without considering the functional and risk analysis of the Appellant. c) The AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability. d) The AO/TPO also erred on facts in arbitrarily accepting companies without considering the turnover and size of the Appellant and comparables. e) The AO/TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules and arbitrarily applying a 25% related party criteria in accepting / rejecting comparables. f) The AO /TPO grossly erred on facts in arbitrarily rejecting companies having software development revenue less than 75% of total operating revenue. g) The AO/ TPO erred on facts in arbitrarily rejecting companies having export sales less than 25% of total sales. h) The AO/TPO erred on facts in arbitrarily rejecting companies having onsite revenue more than 75% of the export revenue. i) The AO/TPO erred on facts in arbitrarily rejecting companies having employee cost less than 25% of the operating revenue. j) The AO/TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e. other than 31 March 2008). k) The AO/TPO also erred on facts in arbitrarily rejecting companies based on their financial results without considering the functional comparability.

25 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 l) The TPO erred on facts and in law in considering a set of ‘secret data’, i.e. data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. 4 Erroneous data used by the AO/TPO a) The AO/ TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. b) The AO/TPO erred in law and on facts in disregarding the application of multiple-year data while computing the margins of alleged comparable companies. Non-allowance of appropriate adjustments to the comparable companies, 5 by the AO/TPO a) The TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices, (b) marketing expenditure adjustment, (c) research and development expenditure adjustment; and (d) risk profile between the Appellant and the comparable companies. 6. Variation of 5% from the arithmetic mean a) The AO/TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant.

26 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012

27 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 15.Directions issued by the Honorable Dispute Resolution Panel [‘DRP’] a) The DRP has erred in law and facts in not taking cognizance of the objections filed by the Appellant in relation to the draft assessment order issued by the AO in the proceedings before them. b) The DRP further erred on facts and in law confirming the draft order of the AO. 16. Penalty under section 271(1)(c) a) The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. 17. Without prejudice, the additions and disallowances as made by the ld. Assessing Officer are excessive, arbitrary and unreasonable and ought to be deleted in total. 18. For these and such other grounds that may be urged at the time of hearing, the appellant prays that the appeal may be allowed. 19. Relief a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. c) Further, the Appellant prays that all the above adjustments / additions / disallowances made by the learned Assessing Officer and upheld by the Hon,ble DRP are bad in law and liable to be deleted.

Authorised Representative of the assessee has stated at Bar that the assessee

does not press these grounds. Accordingly, the Ground Nos.1 & 2 are dismissed

being not pressed.

28 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 42. Ground Nos.3 to 7 are regarding determination of Arm’s Length Price

(ALP) and Transfer Pricing Adjustment.

25.14%. The TPO has allowed working capital adjustment of 2.18% and arrived

at adjusted mean margin of 22.96%. Accordingly, the TPO proposed an

adjustment under Section 92CA of Rs.11,17,08,740.

of 20 comparables selected by the TPO as under :

Sl.No. Name of the Comparable 1. Accel TRansmatic Ltd. (Seg.) 2. AVanicimcon Technologies Ltd. 3. Celestial Labs Ltd. 4. E-zest Solutions 5. Flextronics Software Systems Ltd. (Seg.) 6. Geometric Ltd. (Seg.) 7. Helios & Matheson IT Ltd. 8. Infosys Technologies Ltd. 9. Ishir Infotech Ltd. 10. KALS Information Systems Ltd. (Seg.) 11. Lucid Software Ltd. 12. Persistent Systems Ltd. 13. Tata Elxsi Ltd. (Seg.) 14. Thirdware Solutions Ltd. 15. Wipro Ltd. (Seg.)

29 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 45. The learned Authorised Representative of the assessee has submitted

that the functional comparability of all these 15 companies have been

examined by the co-ordinate bench of this Tribunal vide order dt.28.2.2013 in

the case of Logica Pvt. Ltd. Vs. ACIT in IT(TP)A No.1129/Bang/2011, in the case

of Tesco Hindustan Service Centre (P) Ltd. Vs. DCIT 77 Taxman.com 48, in

the case of Societe Generale Global Solution Centre Pvt. Ltd. Vs. DCIT

dt.22.4.2016 in IT(TP)A No.1188/Bang/2011 and the decision dt.18.3.2016 in

the case of McAfee Software (India) Pvt. Ltd. Vs. ITO in IT(TP)A

Nos.1388/Bang/2011 & 4/Bang/2012 vide decision dt.;18.03.2016. Thus the

learned Authorised Representative has submitted that these 15 companies are

required to be excluded from the set of comparables.

objected to the exclusion of these companies and submitted that without

examination of FAR Analysis of each and every comparable company with the

assessee, it cannot be excluded merely on the basis of the finding of the

Tribunal in some other case. He has relied upon the orders of the authorities

below.

on record, at the outset we note that the functional comparability of following

30 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 8 companies are examined by the co-ordinate bench of this Tribunal in the case

of Logica Pvt. Ltd. Vs. ACIT (supra) dt.21.2.2013 one by one in para Nos.12 to

15 as under :

“ 12. The next aspect which was highlighted by the ld. counsel for the assessee was that out of the 26 comparables, comparables at Sl.No.1, 2, 3 & 12 have to be rejected as they were held to be functionally not similar to a software services provider as held by this Tribunal in the case of Trilogy E-business Software India (P.) Ltd. v. Dy. CIT [2013] 140 ITD 540/29 taxmann.com 310 (Bang). The relevant paragraphs 39 to 50 of the aforesaid order of the Tribunal are as follows:— '(b) Avani Cimcon Technologies Ltd. 39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's website, which reveals that this company has developed a software product by name "DX change", it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee. It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd. v. ACIT - ITA No.7821/Mum/2011 wherein the Tribunal accepted the assessee's contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only and it was held as follows:- "7.8 Avani Cincom Technologies Ltd. ('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis." It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:-

31 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 Particulars FY 05-06 FY 06-07 FY 07-08 FY 08-09 Operating 21761611 35477523 29342809 28039851 Revenue Operating 16417661 23249646 23359186 31108949 Expenses Operating 5343950 12227877 5983623 (3069098) Profit Operating 32.55% 52.59% 25.62% - 9.87% Margin

32 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 It was therefore submitted that the acceptance of this company as a comparable for the reason that it is into pure software development activities and is not engaged in R&D activities is bad in law. 43. Further reference was also made to the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma Private Ltd. v. Addl. CIT - ITA No.6623/Mum/2011 (for AY 2007-08) in which the comparability of this company for clinical trial research segment. The relevant extract of discussion regarding this company is as follows: "The learned D.R. however drew our attention to page-389 of the paper book which is an extract from the Directors report which reads as follows: 'The Company has developed a de novo drug design tool "CELSUITE" to drug discovery in, finding the lead molecules for drug discovery and protected the IPR by filing under the copy if sic (of) right/patent act. (Apprised and funded by Department of Science and Technology New Delhi) based on our insilico expertise (applying bio-informatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh.' According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard." 44. It was submitted that the learned DR in the above case vehemently argued that this company is into research in pharmaceutical products. The ITAT concluded that this company is owner of IPR, it has software for discovery of new drugs and has developed molecule to treat cancer. In the ultimate analysis, the ITAT did not consider this company as a comparable in clinical trial segment, for the reason that this company has diverse

33 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 business. It was submitted that, however, from the above extracts it is clear that this company is not into software development activities, accordingly, this company should be rejected as a comparable being functionally different. 45. From the material available on record, it transpires that the TPO has accepted that up to AY 06-07 this company was classified as a Research and Development company. According to the TPO in AY 07-08 this company has been classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company. The TPO has relied on the response from this company to a notice u/s. 133(6) of the Act in which it has said that it is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not available and therefore this company should not be treated as comparable. Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable. (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case.

34 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited v. DCIT, ITA No. ITA No 1386/PN/10wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s. 133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. (e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v. Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system

35 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)-training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin." 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables.' 13. So also, the comparables listed at Sl.Nos. 10, 14 and 26 have to be rejected as functionally not comparable with that of the assessee in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. v. Asstt. CIT [2012] 137 ITD 1/22 taxmann.com 96 (Mum.) wherein it was held as under:— "7.2 Lucid Software Limited It has been submitted before us that this company, besides doing software development services, is also involved in development of software product. The learned AR has tried to distinguish by pointing out that product development expenditure in this case is around 39% of the capital employed by the said company, and, therefore, such a company cannot be considered as tested party. Even as per the information received in response to notice under Section 133(6), the company has described its business as software development company or pure software development service provider. This information itself is very vague as the segmental details of operating revenue has not been made available to examine how much is the ratio of sale from software product and sale of software service

36 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 and development. Looking to the fact that it has developed a software product named as "Muulam" which is used for civil engineering structures and the product development expenditure itself is substantial vis-a-vis the capital employed by the said company, this criteria for being taken as comparable party, gets vitiated. For the purpose of comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the assessee company and T.P. analysis/study can be made with fewest and most reliable adjustment. If a company has employed heavy capital in development of a product then profitability in the sale of product would be entirely different from the company, who is involved in service sector. Therefore, this company cannot be treated as having same function and profitability ratio. In our view, due to non-availability of full information about the segmental details as to how much is the sale of product and how much is from the services, therefore, this entity cannot be taken into account for comparability analysis for determining arms length price in the case of the assessee. 7.4 Infosys Technologies Ltd.: The parameter for identifying comparable entity has to be seen from the angle of functions formed by the company, size of the company in terms of the sale revenue, stage of business cycle and company's growth cycle. In the case of Infosys, there are huge intangible assets which as per the information provided by the learned AR are valued at Rs.69,522 crores, which comprises of brand value itself at Rs.22,915 crores. Based on such fund valuation, the profit of Infosys is predominantly due to its premium branding. It is India's No.2 software service exporter and Third in the World as an IT Service company. It is a giant company which is evident from its revenue fund from the sales which itself is more than Rs.13145 crores and expenditure on advertisement/sales promotion and expenditure on R&D is at Rs.69 crores and Rs.167 crores respectively, whereas in the case of the assessee the revenue is only 10.7 crores with no expenditure on advertisement, sales and promotion etc., which are borne by the associated enterprises. Even from the test of 'FAR' ie. function performed, assets employed and risk assumed, comparability analysis miserably fails in this case. The comparison of function and profile as has been reproduced in para 6(iv) above, mostly shows that the profit level indicators in relation to return of cost, return of sales and return of assets are huge between Infosys and the assessee company and therefore, the Infosys cannot be treated as comparable entity for making comparability analysis with the assessee company. The comparability of lnfosys Technology of the company as that of an assessee has been dealt with ITAT Delhi Bench in the case of 'Agnity India Technologies Private Limited' (ITA No.3856/Delhi/2010), wherein it was held that lnfosys is a giant in the area of development of software and it assumes all risks, leading to higher profit and cannot be compared with the company which is a captive unit of its parent company assuming only limited currency risk. In view of the above finding, we hold that the Infosys cannot be taken as a comparable for determining the arms length price in the case of the assessee.

37 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 7.5 Wipro Ltd.-IT Services Seqment ('Wipro'): This company is also a global IT Company having varieties of service and products and looking to the magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with the assessee company at all. There are several judgments of ITAT which have been referred in para 6.5 above, that Wipro cannot be taken as comparable case for comparable case with the company like assessee. In view of these facts and the reasoning given in the case of lnfosys, we hold that Wipro also cannot be considered as a comparability analysis, hence, would not be included in the list of the comparable entities as identified by the TPO." 14. As far as comparable at Sl.No.6 & 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- "7.6 Flextronics Software Systems Ltd.: As per the statement of the learned AR, this company is also involved in the development of the software product and is also involved in BPO services, besides joint software consultancies for the use in telecommunication industries. Thus, being product and service company, it cannot be taken as comparable. However, the learned CIT DR has amply controverted the said contention of the learned AR by submitting before us a copy of profit and loss account of the company for the relevant assessment year, obtained from the public domain. From the perusal of the profit and loss account of the said company, it is seen that the revenue sales from services constitutes almost 90% and the product sales is only 10%. Thus, in this case also not much adjustment is required to be made for taking the profit ratio for comparing it with the assessee in determining the arms length price. In view of the above, we hold that TPO has rightly included the said company as comparable case which can be taken into consideration for comparing the profit ratio. 7.7 Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties."

38 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable.” Following the earlier order of this Tribunal, we direct the TPO/A.O. to exclude

the above mentioned 8 companies from the set of comparables.

E-Zest Solutions Ltd.

that the functional comparability of this company has been examined by the

co-ordinate bench of this Tribunal in the case of Tesco Hindustan Service

Centre (P.) Ltd. Vs. DCIT (supra) and accordingly this company is required to

be excluded from the set of comparables.

objected to the exclusion of this company and submitted that without

examination of FAR Analysis, it cannot be excluded merely on the basis of the

finding of the Tribunal in some other case. He has relied upon the orders of the

authorities below.

on record, at the outset we note that the functional comparability of this

company i.e. E-Zest Solutions is examined by the co-ordinate bench of this

39 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 Tribunal in the case of Tesco Hindustan Service Centre (P.) Ltd. Vs. DCIT

(supra) one by one in para Nos.14.1 to 14.4 as under :

"E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee 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. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in 'e-Business Consulting Services', consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd) of 2011, dated 23-11-2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in

40 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 the case of Capital IQ Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O./TPO is accordingly directed." Following the earlier order of this Tribunal, we direct the TPO/A.O. to exclude

this company from the set of comparables.

Thirdware Solutions Ltd. (Seg.)

that the functional comparability of this company has been examined by the

co-ordinate bench of this Tribunal in the case of Tesco Hindustan Service

Centre (P.) Ltd. Vs. DCIT (supra). Thus the learned Authorised Representative

has submitted that this company is required to be excluded from the set of

comparables.

objected to the exclusion of this company and submitted that without

examination of FAR Analysis, it cannot be excluded merely on the basis of the

finding of the Tribunal in some other case. He has relied upon the orders of the

authorities below.

on record, at the outset we note that the functional comparability of this

41 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 company i.e. Thirdware Solutions has been examined by the co-ordinate bench

of this Tribunal in the case of Tesco Hindustan Service Centre (P.) Ltd. Vs. DCIT

(supra) in para Nos.15 to 15.3 as under :

“ (15) Thirdware Solutions Ltd. (Segment) : "15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of Rs.500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned Authorised Representative submitted that :- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII-04- ITAT-PUNE-TP), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. The learned A.R. prayed that in the light of the above facts and in view of the afore cited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 15.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal

42 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand.” Following the earlier order of this Tribunal, we direct the TPO/A.O. to exclude

this company from the set of comparables.

Flextronics Ltd.

that the functional comparability of this company has been examined by the

co-ordinate bench of this Tribunal in the case of Tesco Hindustan Service

Centre (P.) Ltd. Vs. DCIT (supra). Thus the learned Authorised Representative

has submitted that this company is required to be excluded from the set of

comparables.

objected to the exclusion of this company and submitted that without

examination of FAR Analysis, it cannot be excluded merely on the basis of the

finding of the Tribunal in some other case. He has relied upon the orders of the

authorities below.

on record, at the outset we note that the functional comparability of this

company i.e. Flextronics Ltd. is examined by the co-ordinate bench of this

43 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 Tribunal in the case of Tesco Hindustan Service Centre (P.) Ltd. Vs. DCIT

(supra) in para Nos.26 to 28 as under :

“ (10) Flextronics Software Systems Ltd (seg) : 26. Now taking up the question of exclusion of Flextronics Software Systems Ltd (seg), it is true that the decision of Motorola Solutions (India) P. Ltd (supra) also was for the very same year and also on software development services sector. This Tribunal held as under : "97.2 For a company to be included in the list of comparables, it is necessary that credible information is available about the company. Unless this basic requirement is fulfilled, the company cannot be taken as a comparable. It is true that ld. TPO is entitled to obtain information us/133(6), the object of which is primarily only to supplement the information already available on record, but not, as rightly submitted by ld. Counsel for the assessee, to replace the information. If there is a complete contradiction between the information obtained u/s 133(6) and annual report then the said information cannot be substituted for the information contained in annual report. We, therefore, are in agreement with ld. counsel for the assessee that this company cannot be included as a comparable in the set of comparables selected by ld. TPO on account of clear contradiction between contents of annual report and information obtained u/s 133(6). 27. Rule 10D(3) specifies the information and documents that are to be maintained by a person who is entering into international transactions. These are official publications, published accounts or those which are in public domain except for agreements and contracts to which assessee is privy. Once the annual report of a company is for a year different from the financial year ending 31st March, then without doubt, it will cease to be a good comparable, unless the information received in pursuance to a notice u/s.133(6) of the Act from such company, is reconciled with the figures available in such annual report. 28. In the case of Flextronics Software Systems Ltd (seg), no doubt the annual report was for the year ending 31.03.2007. However it was only for a nine months period. No reconciliation was attempted by the lower authorities between the figures given in such annual report with the figures which were made available by the said company to the TPO pursuant to notice issued to them u/s.133(6) of the Act. No doubt at page 123 of TP order, TPO has stated that the software development service revenues were more than 75% based on the following figures : [IMAGE NOT REPRODUCED] But how this segmentation was done by the TPO and the reconciliation of the said segmentation with the annual report of the assessee was never attempted or done. In such a situation we are of the opinion that Flextronics Software Solutions Ltd (seg) could not be considered as a proper comparable. We direct exclusion thereof."

44 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 Following the earlier order of this Tribunal, we direct the TPO/A.O. to exclude

this company from the set of comparables.

Geometric Software Ltd.

Issir Infotech Limited.

that the RPT of these two companies are 19.98% and 21.97% respectively -

therefore these companies cannot be considered as good comparable in view

of the decision dt.18.03.2016 in the case of McAfee Software India Pvt. Ltd.

Vs. ACIT (supra).

disputed the percentage of RPT in respect of these two companies however he

has contended that when TPO has applied 25% filter of RPT then these two

companies should not be excluded on this ground. He has relied upon the

orders of the authorities below.

material on record. At the outset, we note that the co-ordinate Bench of this

Tribunal vide order dt.18.3.2016 in the case of McAfee Software India Pvt. Ltd.

Vs. ACIT (supra) has considered this issue of RPT filter in para 7 as under :

45 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 “ 7. Both Revenue appeal and Assessee's appeal are interrelated. Revenue is mainly aggrieved on the RPT filter adopted by Ld.CIT(A) at 0% where as the Co-ordinate Benches have been accepting upto 15% and in some orders up to 25%. Depending on the facts of each case in each year, the RPT filter is being used / approved. Learned Counsel fairly admitted that Co-ordinate Bench in the case of ITO v. Sunquest Information Systems (India) (P.) Ltd. [2015] 61 taxmann.com 81 (Bang. - Trib.)a (Sunquest) has followed the other decisions on the issue and held that in various other cases companies having related party transaction upto 15% of total revenues can be considered. Considering the above, it was contended that the Revenue's Ground No. 2 may have to be allowed and the companies rejected by Ld.CIT(A) has to be reconsidered. At the same time, Learned Counsel also submitted that the companies which are functionally not similar, having RPT of more than 15% and high turnover cases require reconsideration and made various submissions on the issue. Ld. DR also made submissions on the filters of RPT, turnover etc., and comparability of each of the companies.”

Accordingly, a consistent view has been taken by the Tribunal that in normal

circumstances the tolerance range of RPT should not exceed more than 15%.

Hence, we direct the TPO/A.O. to exclude these two companies from the set of

comparables.

Helios & Matheson Information Technology Ltd.

Persistent System Ltd.

Departmental Representative and considered the relevant material on record.

The co-ordinate bench of this Tribunal in the case of Societe Generale Global

Solution Centre Pvt. Ltd. Vs. DCIT (supra) has considered the functional

comparability of these two companies in para 9 as under :

“ 9. We shall take up the appeal segment-wise. At first instance, we shall now deal with Software Development Services. Before us, learned counsel for assessee-company argued that the following companies finally chosen by the TPO should be excluded for the reason of functional dissimilarity.

46 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 i. Accel Transmatic Ltd. ii. Avani Cimcon Technologies Ltd iii. Celestial Biolabs Ltd. iv. E-Zest Solutions Ltd. v. Helios & Matheson Information Technology Ltd. vi. Infosys Technologies Ltd., vii. Ishir Infotech Ltd. viii. KALS Information Systems Ltd. ix. Lucid Software Ltd. x. Persistent Systems Ltd. xi. Quintegra Solutions Ltd. xii. Thirdware Solution Ltd., and xiii. Wipro Ltd. …………..

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(v) Helios & Matheson Information Technology Ltd. This company was excluded by the co-ordinate bench of this Tribunal in the case of this company was excluded by the co-ordinate bench of this Tribunal in the case of LSI Research (India) (P.) Ltd. (supra) on the ground that it was engaged in the business of development and sale of software products. This finding has not been rebutted by the learned DR. Further, we find that Pune bench of the Tribunal in the case of PTC Software (India) (P.) Ltd. v. Asstt. CIT [2012] 28 taxmann.com 412 (Pune - Trib.) also given similar findings in respect of this comparable. It is now trite law that a company engaged in software development cannot be compared with the company engaged in development of software products. Therefore, we direct the AO/TPO to exclude this company from the list of comparables. …………...

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(x) Persistent Systems Ltd. : This company was excluded from the list of comparable by

47 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 this Tribunal in the case of LSI Research (India) (P.) Ltd. (supra) which is engaged in software service provider on the ground of functional dissimilarities. The Hon'ble Tribunal further observed that it is engaged in the business of product development, software product document and product design services and no segmental details were available. Therefore, it was held that this company was not comparable with that of the assessee-company. Similar observations have been made in the following decisions: Bearing Point Business Consulting (P.) Ltd.'s case (supra) CSR India (P.) Ltd.'s case (supra) LG Soft India (P.) Ltd.'s case (supra) Mercedes Benz R & D India (P.) Ltd.'s case (supra); NDS Services Pay-TV Technology (P.) Ltd.'s case (supra) Following the decisions cited supra, we hold that this company cannot be considered as comparable company which is engaged in providing software development services. Therefore, we direct the TPO/AO to exclude this company from the list of comparable. ………………………….

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(xii) Thirdware Solution Ltd., This company was excluded from the list of comparables by this Tribunal in the case of LSI Research (India) (P.) Ltd. (supra) following the decision of Pune Bench of Tribunal in the case of E-Gain Communication (P.) Ltd. v. ITO [2009] 118 ITD 243 (Pune - Trib.) on the ground of functional dissimilarities. The Pune Bench of the Tribunal observed that this company had income from other sources like interest and deposits which jacked up the profit margin of the company. It was also observed that it was into the purchase & sale of software licenses. Thus, ITAT held that it cannot be a comparable to a company which is engaged in software development. This decision was in relation to assessment year 2004-05, whereas, in the present case, we are concerned with assessment year 2007-08. It is not clear from material on record whether similar circumstances were present for the assessment year 2007-08. In the circumstances, we have no option but to remit the issue to the file of the TPO/AO for fresh evaluation of this company on the above lines.”

48 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 In view of the decision of the co-ordinate bench of this Tribunal, we direct the

TPO/A.O. to exclude these two companies from the set of comparables.

comparables therefore the TPO/A.O. is directed to recomputed the ALP on the

basis of the remaining comparables. Needless to say the benefit of proviso to

Section 92CA(2) also be considered.

has stated at Bar that the assessee does not press Ground No.8 and the same

may be dismissed as not pressed. The learned Departmental Representative

has raised no objection if the Ground No.8 is dismissed. Accordingly, Ground

No.8 of assessee's appeal is dismissed being not pressed.

finding on this issue for the Assessment Year 2008-09, this issue stands partly

allowed.

finding on this issue for the Assessment Year 2008-09, this issue stands allowed

in favour of the assessee.

49 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 67. Ground No.11 is regarding rent equilisation.

finding on this issue for the Assessment Year 2008-09, this issue stands

dismissed.

the same as capital in nature.

learned Departmental Representative and considered the relevant material on

record. We find that the details and nature of the expenditure is mentioned in

the invoice / bills. However, the Assessing Officer has not conducted a proper

enquiry and verification regarding the nature of expenditure incurred by the

assessee from the invoices / bills. Accordingly in view of the facts and

circumstances of the case, we set aside this issue to the record of the Assessing

Officer for re-adjudication of this issue after verification of the invoices / bills as

well as in the light of the decision of the Special Bench of the Tribunal in the

case of Amway India Enterprises Vs. DCIT 111 ITD 112.

has stated at Bar that the assessee does not press Ground No.13 and the same

may be dismissed as not pressed. The learned Departmental Representative

50 IT(TP)A Nos.292/Bang/2014 & 1592/Bang/2012 has raised no objection if the Ground No.8 is dismissed. Accordingly, Ground

No.13 of assessee's appeal is dismissed being not pressed.

which are mandatory and consequential in nature.

ground is dismissed as not pressed.

Act which is premature.

adjudication.

Sd/- Sd/- (ARUN KUMAR GARODIA) (VIJAY PAL RAO) Accountant Member Judicial Member Bangalore, Dt.31.05.2017.

*Reddy gp