TESCO HINDUSTAN SERVICE CENTRE PRIVATE LIMITED,BANGALORE vs. DCIT, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE

BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER

IT(TP)A No.1285/Bang/2011 Assessment year : 2007-08

Tesco Hindustan Service Vs. The Deputy Commissioner of Centre Pvt. Ltd., Income Tax, 81 & 82, EPIP Area, Circle 12(4), Whitefield, Bangalore. Bangalore – 560 066. PAN: AABCT 8915B APPELLANT RESPONDENT

Appellant by : Shri Sampath Raghunathan, Advocate Respondent by : Shri Kamaladhar, Standing Counsel

Date of hearing : 19.10.2016 Date of Pronouncement : 09.12.2016

O R D E R Per Sunil Kumar Yadav, Judicial Member

This appeal is preferred by the assessee against the assessment order passed consequent to the order of the DRP.

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“The grounds stated hereunder are independent of, and without prejudice to one another. The Appellant submits as under: I. Transfer Pricing 1 Comparability analysis adopted by the Learned TP'O ('Ld. TPO') for determining the arm's length price for software development services segment [This refers to Ground No. 2.2,2.3 and 7 of the original Form 36B filed by the Appellant] 1.1 The learned AO ('Ld. AO') I Ld, TPO grossly erred on facts in benchmarking the transactions of the captive services of the Appellant with companies operating as full-fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-a-vis the comparable companies. i. Infosys Ltd. ii. Wipro Ltd. (Seg)

1.2 The Ld. AO/ Ld. TPO also erred on facts in accepting companies without considering the functional comparability. i. Accel Transmatic Ltd. ii. Avani Cimcon Technologies Ltd. iii. Celestial Labs Ltd. iv. E- Zest Solutions Ltd. v. Flextronics Software Systems Ltd. vi. Ishir lnfotech Ltd. vii. KALS Information Systems Ltd. viii. Lucid Software Ltd. ix. Megasoft Ltd. x. Persistent Systems Ltd. xi. Tata Elxsi Ltd. xii. Thirdware Solution Ltd. xiii. Helios & Matheson Information Technology Ltd.

1.3 The Ld. AO/ Ld. TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional analysis. i. RPT> 15% i. Ishir Infotech Ltd. ii. Megasoft Ltd. iii. Accel Transmatic Ltd. ii. Employee Cost < 25% i. Ishir Infotech Ltd.

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1.4 The Ld. AO/ Ld. TPO erred on facts in arbitrarily accepting companies without considering the differences in the turnover and size of the Appellant vis-a-vis the comparables. i. Considering the upper limit of 10 times and lower limit of 1I10th times the turnover of the Appellant i. Accel Transmatic Ltd. ii. Avani Cimcon Technologies Ltd. iii. e-Zest Solutions Ltd iv. Infosys Technologies Ltd v. Ishir Infotech Ltd. vi. KALS Information Systems Ltd. vii. Lucid Software Ltd. viii. Wipro Ltd.

1.5 The Ld. AO/ Ld. TPO erred on facts in arbitrarily accepting companies where segmental data pertaining to the provision of services is not available. i. Avani Cimcon Technologies Ltd. ii. Celestial Labs Ltd. iii. e-Zest Solutions Ltd iv. KALS Information Systems Ltd. v. Persistent Systems Ltd. vi. Thirdware Solution Ltd.

1.6 The Ld. AO/ Ld. TPO erred on facts in accepting companies with peculiar economic circumstances and extra ordinary events during the year. i. Megasoft Ltd.

1.7 The Ld, AO/ Ld. TPO erred on facts in accepting companies with highly fluctuating profits.

2 Comparability analysis adopted by the TPO for determining the arm's length price for software development services segment and business process services / ITeS services segment (This refers to Ground No. 2.2, 2.3 and 8 of the original Form 36B filed by the Appellant)

2.1 The Ld. AO/ Ld. TPO grossly erred on facts in benchmarking the transactions of the captive services of the Appellant with companies operating as full-fledged entrepreneurs without

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considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-a-vis the comparable companies. i. Infosys BPO Ltd. ii. Wipro Ltd. (Seg)

2.2 The Ld. AO/ Ld. TPO also erred on facts in accepting companies without considering the functional comparability. i. Bodhtree Consulting Ltd. ii. Eclerx Services Ltd. iii. Mold-Tek Technologies Ltd - Seg iv. Vishal Information Technologies Ltd. v. Ash C Mehta Financial Services Ltd.

2.3 The Ld. AO/ Ld. TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional analysis. i. RPT> 15% i. Apollo Healthstreet Ltd. ii. Asit C Mehta Financial Services Ltd. iii. HCL Comnet Systems & Services Ltd -Seg iv. Informed Technologies Ltd. ii. Employee Cost < 25% i. Asit C Mehta Financial Services Ltd. ii. Informed Technologies Ltd. iii. Mold-Tek Technologies Ltd - Seg iv. Spanco Ltd. - Seg v. Vishal Information Technologies Ltd. vi. Accurate Data Convertors Ltd.

2.4 The Ld. AO/Ld. TPO erred on facts in arbitrarily accepting companies without considering the differences in the turnover and size of the Appellant vis-a-vis the comparables. i. Considering the upper limit of 10 times and lower limit of 1I10th times the turnover of the Appellant i. Asit C Mehta Financial Services Ltd.

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ii. Bodhtree Consulting Ltd. iii. Informed Technologies Ltd. iv. Accurate Data Convertors Ltd.

2.5 The Ld. AO/ Ld. TPO erred on facts in arbitrarily accepting companies where segmental data pertaining to the provision of services is not available. i. Asit C Mehta Financial Services Ltd. ii. Bodhtree Consulting Ltd. iii. Wipro Limited - Seg

2.6 The Ld. AO/ Ld. TPO erred on facts in accepting companies with peculiar economic circumstances and extra ordinary events during the year. i. Accentia Technologies Limited – Seg ii. Bodhtree Consulting Ltd. iii. Maple Esolutions Ltd. iv. Triton Corp. Ltd

2.7 The Ld. AO/ Ld. TPO erred on facts in accepting companies with highly fluctuating profits and abnormal growth patterns.

3 Mark-up on expenses recovered from associated enterprises 3.1 The Ld. AO/ Ld. TPO erred on facts in including recovery of expenses in operating revenue and cost for determination of mark-up and not appreciating the fact that those are expenses incurred on behalf of the associated enterprises for administrative convenience and only represent pass through costs which were not received against any specific services rendered by the Appellant to its associated enterprises.

4 Variation of 5% from the arithmetic mean [This refers to Ground No. 6 of the original Form 36B filed by the Appellant] 4.1 The Ld. AO/ Ld. TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Income Tax Act, 1961 ('Act') available to the Appellant.

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II. Corporate Tax 5 Computation of deduction under Section 10A of the Act [This refers to Ground No. 9 of the original Form 36B filed by the Appellant] 5.1 The Ld. AO erred in re-computing the deduction under Section 10A of Act, by reducing the amount of freight, telecommunication and insurance expenses totaling to Rs. 24,745,834 from the Export Turnover alone although no part of the said expenses was attributable to the delivery of computer software outside India. 5.2 The Ld. AO erred in re-computing the deduction under Section 10A of the Act by reducing the amount of expenses incurred in foreign currency of Rs. 289,404,138 from the Export Turnover alone although no part of the expenditure incurred in foreign exchange was incurred in delivery of computer software outside India or for providing technical services outside India. 5.3 The Ld. AO has further erred in not reducing the freight, telecommunication and insurance expenses and expenses incurred in foreign exchange from both Export Turnover and Total Turnover. 5.4 The Ld. AO has erred in no relying on the decision of the jurisdictional High Court in the case of CIT vs. Dell International Services India Private Limited and Others.

6 Disallowance of expenses for non-deduction of tax at source (Rs, 945,963) [This refers to Ground No. 11 of the original Form 36B filed by the Appellant) 6.1 The Ld. AO erred in disallowing expenses of Rs. 945,963 on the grounds that taxes had not been deducted at source, while making payment, though Chapter XVII-B is not applicable to the said payment.

7.1 The Ld. AO erred in levying interest under Section 234B of the Act amounting to Rs. 37,926,765. The levy of interest under Section 234B is consequential in nature.

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8 Interest under Section 234D of the Act [This refers to Ground No. 14 of the original Form 36B filed by the Appellant) 8.1 The Ld, AO erred in levying interest under Section 234D of the Act amounting to Rs. 137,096. The levy of interest under Section 234D is consequential in nature.

9 Relief 9.1 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.”

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was passed by the AO by making TP adjustment of Rs.17,13,16,590 and was added back to the total income of the assessee.

IT SEGMENT

1) Datamatics Ltd. 2) Geometric Ltd.

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3) iGate Global Solutions Ltd. 4) L G S Global Ltd. 5) Mediasoft Solutions Pvt. Ltd. 6) Mindtree Ltd. 7) Quintegra Solutions Ltd. 8) R S Software (India) Ltd. 9) R Systems International Ltd. 10) Sasken Communication Technologies Ltd. 11) SIP Technologies & Exports Ltd. 8. With regard to remaining comparables, the ld. counsel for the assessee has raised various arguments and we deal with the arguments comparable-wise.

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was also examined by the Tribunal in the case of AOL Online India Pvt. Ltd. v. DCIT, IT(TP)A No.1036/Bang/2011 for AY 2007-08 in which it has been held that this company is not a pure software development company. Reliance was also placed on other order of Tribunal in the case of LSI Technologies India (P.) Ltd. v. ITO in IT(TP)A No.1048/Bang/2011. Copy of the orders of Tribunal are placed on record.

“(8) 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.

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(i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers) - training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee’s claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to 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.”

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order and the AO/TPO was directed to exclude this comparable.

aforesaid orders and has been directed to be excluded, we find no

justification to examine this issue afresh in this appeal. Therefore, following

the same, we direct the AO/TPO to exclude this comparable from the list of

comparables.

(3) E-Zest Solutions Ltd., (4) Flextronics Software Systems Ltd, (5) Helios

& Matheson Information Technology Ltd. (6) Infosys Technologies Ltd., (7)

Ishir Infotech Ltd., (8) KALS Information Systems Ltd., (9 Lucid Software

Ltd., (10) Megasoft Ltd., (11) Persistent Systems Ltd., (12) Tata Elxsi Ltd.

(13) Thirdware Solutions Ltd., and (14) Wipro Ltd.

These companies are functionally different from the assessee company

and some of them can also be excluded by applying the turnover filter. These companies were examined by the Tribunal in the case of Meritor

LVS India (P) Ltd. (supra) and AOL Online India Pvt. Ltd. (supra) and the

Tribunal has concluded that these companies are not good comparables

and they were directed to be excluded from the list of comparables. The relevant observations of the Tribunal in the case of Meritor LVS India (P)

Ltd. (supra) with respect to these companies are extracted hereunder:-

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“(9) Avani Cincom 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 “DXchange”, 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: Particulars FYs 05-06 06-07 07-08 08-09

Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87%

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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

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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 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

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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.” (2) “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

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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)/2011 dt.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 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.” (3) Infosys Technologies Ltd. 12.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 12.2 Before us, the assessee contended that this company is not functionally comparable to the assessee and in this context has cited various portions of the Annual Report of this company to this effect which is as under :-

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(i) The company has an Intellectual Property (IP) Cell to guide its employees to leverage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately Rs.200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions :- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. (ITA No.3856/Del/2010) and (b) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) 12.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the operating margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 12.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. The argument put forth by assessee's is that Infosys Technologies Ltd is not functionally comparable since it owns

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significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly.” (4) 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 report, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal’s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: “16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds.” Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 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

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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.” (5) & (6) M/S.Ishir Infotech Ltd. And Lucid Software Ltd : 20. As far as comparable companies listed at Sl.No.11 & 14 of the final list of comparable companies chosen by the TPO viz., M/S.Ishir Infotech Ltd. And Lucid Software Ltd., is concerned, this Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. Vs. DCIT IT (TP) No.1086/Bang/2011 for AY 07-08 held that the aforesaid companies are not comparable companies in the case of software development services provider. The nature of services rendered by the Assessee in this appeal and the Assessee in the case of First Advantage Offshore Services Pvt.Ltd.(supra) are one and the same. This fact would be clear from the fact that the very same 26 companies were chosen as comparable in the case of the Assessee as well as in the case of First Advantage Offshore Services Pvt.Ltd.(supra). The following were the relevant observations in the case of First Advantage Offshore Services Pvt.Ltd.(supra): 22. The learned counsel for the assessee submitted that these two companies are also to be excluded from the list of comparables on the basis of the finding of this Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. dt 22.2.2013, wherein at pages 17 and 22 of its order the distinctions as to why these companies should be excluded are brought out. He submitted that the facts of the case before us are similar and, therefore, the said decision is applicable to the assessee's case also. 23. The learned DR however objected to the exclusion of these two companies from the list of comparables. On a careful perusal of the material on record, we find that the Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. (cited supra) has taken a note of dissimilarities between the assessee therein and Lucid Software Ltd. As observed therein Lucid Software Ltd. company is also involved in the development of software as compared to the assessee, which is

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only into software services. Similarly, as regards Ishir Infotech Ltd., the Tribunal has considered the decision of the Tribunal in the case of 24/7 Co. Pvt. Ltd to hold that Ishir Infotech is also out-sourcing its work and, therefore, has not satisfied the 25% employee cost filter and thus has to be excluded from the list of comparables. As the facts of the case before us are similar, respectfully following the decision of the co-ordinate bench, we hold that these two companies are also to be excluded. 21. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP.” (7) Wipro Limited 13.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables or several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 13.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for several reasons, which are as under : (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles and quoted extracts from the Annual Report of this company in the submissions made. (ii) The TPO had adopted the consolidated financial statements for comparability purposes and for computing the margins, which contradicts the TPO’s own filter of rejecting companies with consolidated financial statements. 13.3. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without

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demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 13.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the coordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration.” (9) 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 “DXchange”, 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

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into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis.” It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FYs 05-06 06-07 07-08 08-09 Operating Revenue 21761611 35477523 29342809 28039851 Operating Expns. 16417661 23249646 23359186 31108949 Operating Profit 5343950 12227877 5983623 (3069098) Operating Margin 32.55% 52.59% 25.62% - 9.87% 40. It was submitted that this company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicates that it was an extraordinary year for this company. Even the growth of software industry for the previous year as per NASSCOM was 32%. The growth rate of this company was double the industry average. In view of the above, it was argued that this company ought to have been rejected as a comparable. 41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies IT(TP)A.1231/Bang/2011 Page - 22 Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable.” (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

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(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

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Flextronics Software Solutions Ltd (seg) could not be considered as a proper comparable. We direct exclusion thereof.” (11) Helios & Matheson Information Technology Ltd : 16. The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) namely Helios & Matheson Information Technology Ltd., and KALS Information Solutions Ltd. (Seg). The primary plea raised by the assessee to assail the inclusion of the aforesaid two companies from the list of comparables is to be effect that they are functionally incomparable and therefore, are liable to be excluded. In sum and substance, the plea set up by the assessee is that both the aforesaid concerns are engaged in development and sale of software products which is functionally different from the services undertaken by the assessee in its IT-services segment. 17. As per the discussion in para 6.3.2. of the order of the TPO, the reason advanced for including KALS Information Systems Ltd., is to the effect that the said concern’s application software segment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F.Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee’s IT- Services Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in selling of some of the software products which are developed by it, however, the said concern was not into trading of software products as there were no cost of purchases debited in the Profit & Loss Account. Though the TPO agreed that the quantum of revenue from sale of products was not available as per the financial statements of the said concern, but as the basic function of the said concern was software

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

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portion of the Transfer pricing study, placed at page 432 of the Paper book has been pointed out in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables. (12) Persistent Systems Ltd. “17.1.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in ‘Outsourced Software Product Development Services’ for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd.(supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental

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information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly.

14) Tata Elxsi Ltd. 14.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on several counts like, functional dis-similarity, significant R&D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 14.2 Before us, it was reiterated that this company is not functionally comparable to the assessee as it performs a variety of functions under the software development and services segment namely (a) Product design services (b) Innovation design engineering and

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(c) visual computing labs. In the submissions made the assessee had quoted relevant portions from the Annual Report of the company to this effect. In view of this, the learned Authorised Representative pleaded that this company be excluded from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the stand o the TPO in including this company in the list of comparables. 14.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment “software development services” relates to design services and are not similar to software development services performed by the assessee. 14.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- “ .... Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm’s length price for the assessee, hence, should be excluded from the list of comparable portion.” As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly.

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(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.

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In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand. 13. In so far as Megasoft Ltd, is concerned, findings of the Tribunal in the above case were as under : Megasoft Ltd.: 24. This company was chosen as a comparable by theTPO. The objection of the assessee is that there are two segments in this company viz., (i) software development segment, and (ii) software product segment. The Assessee is a pure software services provider and not a software product developer. According to the Assessee there is no break up of revenue between software products and software services business on a standalone basis of this comparable. The TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius- BCGI Division does the business of product software. This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to product software) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO’s filter of more than 75% of revenues from software development services. The basis on which the TPO

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arrived at the PLI of 60.23% is given at page-115 and 116 of the order of the TPO. It is clear from the perusal of the same that the TPO has proceeded to determine the PLI at the entity level and not on the basis of segmental data. 25. In the order of the TPO, operating margin was computed for this company at 60.23%. It is the complaint of the assessee that the operating margins have been computed at entity level combining software services and software product segments. It was submitted that the product segment of Megasoft is substantially different from its software service segment. The product segment has employee cost of 27.65% whereas the software service segment has employee cost of 50%. Similarly, the profit margin on cost in product segment is 117.95% and in case of software service segment it is 23.11%. Both the segments are substantially different and therefore comparison at entity level is without basis and would vitiate the comparability (submissions on page 381 to 383 of the PB-I). It was further submitted that Megasoft Limited has provided segmental break-up between the software services segment and software product segment (page 68 of PB-II), which was also adopted by the TPO in his show cause notice (Page 84 of PB-I). The segmental results i.e., results pertaining to software services segment of this company was: Segmental Operating Revenues Rs.63,71,32,544 Segmental Operating Expenses Rs.51,75,13,211 Operating Profit Rs.11,96,19,333 OP/TC (PLI) 23.11%

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in assessee’s own case for the AY 2006-07, the margin pertaining to

software services segment was directed to be considered by the Tribunal.

However, the ld. counsel for the assessee further contended that this comparable was examined in the case of Tribunal in the case of Meritor

LVS India (P) Ltd. (supra) and it was held that the company carried out

product development. Software development is carried out under

BLUEALLY division. The product segment has employee cost of 27.65%,

whereas software services segment has employee cost of 50%. Similarly

the profit margin on cost in product segment is 117.95% and in case of

software services segment it is 23.11%. The Tribunal accordingly held that

both segments are substantially different and only the software services

segment margin is to be considered.

of RPT filter as RPT in this case is 20.33%, whereas the Tribunal has taken

a consistent view that if the RPT is more than 15%, the comparable has to

be excluded. But this aspect was not examined by the AO/TPO.

assessee’s own case it was directed to be reconsidered by the Tribunal,

therefore in this case also, it may be restored back to the AO/TPO to be re-

examine the comparability of this company in the light of the order of the

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Tribunal in the case of Tribunal Meritor LVS India (P) Ltd. (supra) and the RPT filter.

ITES Segment

(1) Accentia Technologies Ltd. – Seg. (2) Aditya Birla Minacs Worldwide Ltd. (3) Allsec Technologies Ltd. (4) Apex Knowledge Solutions Ltd. (5) Apollo Healthstreet Ltd. (6) Asit C Mehta Financial Services Ltd. (7) Bodhtree Consulting Ltd. (8) Caliber Business Solutions Ltd. (9) Cosmic Global Ltd. (10) Datamatics Financial Services Ltd. – Seg. (11) Eclerx Services Ltd.

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(12) Flextronics Software Systems Ltd. (13) Genesys International Corporation (14) HCL Comnet Systems & Service Ltd. (15) ICRA Techno Analytics Ltd. (16) Informed Technologies Ltd. (17) Infosys BPO Ltd. (18) I-Services India Pvt. Ltd. (19) Maple Esolutions Ltd. (20) Mold-Tek Technologies Ltd. – Seg (21) R Systems International Ltd. – Seg (22) Spanco Ltd. – Seg (23) Triton Corp Ltd. (24) Vishal Information Technologies Ltd. (25) Wipro Ltd. – Seg (26) Nittany Outsourcing Services Pvt Ltd (27) Accurate Data Convertors Ltd.

(1) Aditya Birla Minacs Worldwide Ltd. (2) Allsec Technologies Ltd. (3) Apex Knowledge Solutions Ltd. (4) Caliber Business Solutions Ltd. (5) Cosmic Global Ltd. (6) Datamatics Financial Services Ltd. – Seg. (7) Flextronics Software Systems Ltd. (8) Genesys International Corporation (9) ICRA Techno Analytics Ltd.

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(10) R Systems International Ltd. – Seg (11) Nittany Outsourcing Services Pvt Ltd

and it was held that Accentia Technologies Ltd. cannot be a good comparable and accordingly directed exclusion of this company from the

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final list of comparables. The relevant observations of the Tribunal are extracted hereunder for the sake of reference:-

“(iv) Accentia Technologies Ltd.:- The OP/TC of this company is 38.26%. The ld. Counsel for the assessee stated that this company amalgamated with two of its subsidiaries pursuant to the order of the court because of which the immediate effect of the amalgamation/ merger is reflected on the operating income, expenses and PBIT. This amounts to extraordinary events and therefore the company needs to be excluded. The Co-ordinate Hyderabad Bench of the Tribunal in the case of Capital IQ Information Systems (India) Pvt. Ltd. in ITA No. 1964/Hyd/2011 and in the case of Zavata India Private Limited in ITA No. 1781/Hyd/2011 has taken a view that extraordinary events like merger and de-merger will impact profitability of companies and therefore should be excluded. We also find that the segmental data is not available and therefore where there is no segmental data, the overall result declared by a company cannot per se be applied for purposes of taking comparison. A similar view was taken by the Tribunal in the case of Roche Diagnostics India Pvt. Ltd. in ITA No. 4127/Mum/2009. We also find that this company was rejected by the DRP in assessee’s own case for A.Y. 2009-10 on account of non-availability of segment- wise results. Considering the facts in the light of the judicial decisions discussed hereinabove, we direct the exclusion of this company from the final list of comparables.”

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comparable has to be excluded as it is settled position of law that Related Party Transactions more than 15% are to be excluded. In support of his contention, he has placed reliance upon the order of Tribunal in the case of ACIT v. McAfee Software (India) Pvt. Ltd. in IT(TP)A No.04/Bang/2012 and Pole to Win India (P.) Ltd. v. DCIDT in IT(TP)A No.1053/Bang/2011 in which it has been held that comparables having RPT more than 15% of the total revenue are to be excluded.

“7.5 We have heard the ld. A.R. & ld. D.R. and considered carefully the relevant material on record. We find that in the case of Ariba Technologies India (P) Ltd. (supra), the TPO has selected the same set of 27 comparable companies as in the case of the assessee before us. We further note that in the case of the assessee, the TPO has accepted that the assessee is in the ITES segment which was also accepted in the case of Ariba Technologies India (P) Ltd. (supra). We further find that most of the comparable companies are required to be excluded by applying the filter of RPT at 15%. Therefore, to the extent of the exclusion of the companies on the ground of RPT filter. We need not go into the functional comparability of those comparables.”

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filter is more than 15%, the comparable has to be excluded from the list of

comparables and in the instant case the RPT was 22.90% which is more

than 15%, therefore it deserves to be excluded and we accordingly direct

the AO/TPO to exclude this comparable from the list of comparables.

assessee has contended that this company should be excluded by applying

the RPT filter and employee cost filter. On the other hand, the ld. DR has

contended that RPT is 15.17% of total sales and employee cost is also

24% of sales, whereas it has been repeatedly held by the Tribunal that

RPT filter should apply when it is more than 15% and employee cost filter

will apply when it is lower than 25%. In the instant case, since there is

marginal difference from the benchmark, the comparable should be

included in the list of comparables.

that undisputedly the RPT of this company is 15.17% which is marginally

higher than the benchmark of RPT filter of 15%. Similarly, employee cost

is 24% which is marginally low to the benchmark of employee cost filter i.e.,

25%. This benchmark was set by the Tribunal to scrutinise or to find out

the best comparables in order to compute the ALP. While filtering the

comparables, some benchmark is to be fixed by the AO/TPO or the

Tribunal. Undisputedly, employee cost filter was benchmarked to be 25%

IT(TP)A No.1285/Bang/2011 Page 42 of 62

of sales and RPT filter was benchmarked to be 15% of sales; but this is

not a water-tight compartment that once it crosses by 0.1%, the

comparable is to be excluded. It is only a criterion adopted for shortlisting

the comparables out of bunch of comparables. We therefore find no

justification in excluding this comparable only on the ground that the RPT

has exceeded by 0.17% and the employee cost has decreased by only 1%.

We therefore do not find force in the contention of the assessee and

accordingly we approve the inclusion of this comparable in the list of

comparables.

counsel for the assessee has contended that this company’s function is

different, therefore it should be excluded from the list of comparables. It

was further contended that this company provides open end-to-end web

solutions, software consultancy, design and development of solutions

which cannot be compared to a BPO company. It was also contended that

during the year there were peculiar circumstances where the company

hived off certain business expenses without hiving off the revenue stream.

The segmental details are not available in the annual report. The ld.

counsel for the assessee further contended that this comparable was examined by the Tribunal in the case of Stream International Services (P)

Ltd. (supra). Copy of the order is placed on record.

IT(TP)A No.1285/Bang/2011 Page 43 of 62

“(ix) Bodhtree Consulting Ltd.:- The OP/TC of this company is 29.58%. The ld. Counsel for the assessee stated that this company has extraordinary profit due to hiving off of e- paper business and web based assessment services to separate companies. The ld. Counsel for the assessee further stated that this company is finally not comparable as the company is in the software development. Further, this company has no segmental reporting. On perusal of the accounts of this company, we find that the company has earned extraordinary profit during the year due to hiving off of e-paper business and web based assessment services to separate company. It appears that the cost has been transfer red to new companies while income is retained by this company. We further find that this company is engaged in single segment hence it is functionally different. As the company has hived off its business, it is a case of de-merger. In our considered opinion, this issue needs to be considered by the A.O./TPO. We accordingly restore this company back to the file of the A.O./TPO with a direction to verify the contentions of the assessee that the company is in ITES

IT(TP)A No.1285/Bang/2011 Page 44 of 62

and whether segmental data are available or not and decide afresh whether this company needs to be considered in the final list of comparables.”

IT(TP)A No.1285/Bang/2011 Page 45 of 62

“(xi) Eclerx Services Ltd. & Mold-Tek Technologies Ltd.:- For both these companies, the ld. Counsel for the assessee stated that these companies are functionally different, therefore, cannot be considered as comparables. We find that the Mumbai Special Bench of the Tribunal in the case of Maersk Global Centres (India) Pvt. Ltd. in ITA No. 7466/Mum/2012 has rejected eClerx Services Limited because solutions offered by this company included data analytics, operations, management, audits and reconciliation, metrics management and reporting services. The Special Bench opined that if these functions actually performed by the assessee company for its AEs are compared with the functional profile of M/s eClerx Services Limited and Mold-Tek Technologies Ltd., it is difficult to find out any relatively equal degree of comparability and the said entities cannot be taken as comparable for the purpose of determining ALP of the transactions of the assessee company with its AEs. Facts being identical, respectfully following the observations of the Special Bench (supra), we direct that these two entities be excluded from the list of final comparables.”

IT(TP)A No.1285/Bang/2011 Page 46 of 62

(supra), we hold that this company is not a good comparable and direct the AO/TPO to exclude it from the list of comparables.

“8.2.1 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that HCL Comnet System & Services Ltd.(seg.) is following its accounting year from 1st July to 30th June. For the year under consideration, the financial accounts are prepared for the year ended on 30th June, 2007. Therefore, it is clear that for the financial year under consideration, only partial data are available from 1st July 2006 to 31st March 2007. At the outset, we note that an identical issue has been considered by this Tribunal in a series of decisions as relied upon by the assessee and referred (supra). In the case of Sandstone Capital Advisors Pvt. Ltd. vs. ACIT (supra),

IT(TP)A No.1285/Bang/2011 Page 47 of 62

the Tribunal vide its order dated 6/2/2013 held in para.10 to 10.3 as under: “10. We have considered the rival submissions and relevant material on record. The TPO has rejected this comparable because the financial data for the Financial Year 2007-08 were not available in the public domain and hence, if was held that this company is not a suitable comparable. There is no dispute that the data furnished by the assessee are regarding the financial results as on 30.6.2007. Therefore, as far as the financial year 2007-08 is concerned, the data available were only for 3 months. 10.1 As per Rule 10B(4), the data to be used in analysing the comparability of or uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Therefore, it is mandatory for the purpose of comparing the data of an uncontrolled transaction with an international transaction that the same should relating to the financial year in which the international transaction has been entered into. The information, data and documents should be contemporaneous. 10.2 Undisputedly, the final accounts of Arix Consultants Pvt Ltd are prepared on 30th June; therefore, the objection raised by the TRO has merits. The Rune Benches of the Tribunal in the case of Honeywell Automation India Ltd in ITA No.4/PN/08 vide order dated 10", Feb 2009 has also taken a similar view. 10.3 Apart from this, as it has been fairly conceded by the Ld Sr counsel for the assessee that there are related party transaction in the case of Arix Consultants Pvt Ltd a s i t is evident from the note on account at page 89 of the paper book. Therefore, in view of the tact that this company is having related party transactions, the same cannot be considered as a proper comparable. ” We further note that a similar view has been taken in all other decisions as relied upon by the Tribunal in the case of ACIT vs. Loyal Groth services (supra) the Tribunal vide its order dated 26/02/2013 has held in para.7.2 as under: “7.2 The learned Departmental Representative contended the financial year end of a comparable case matches with assessee, it cannot be considered as comparable because of different financial year endings are distorted. He relied passed by the Mumbai

IT(TP)A No.1285/Bang/2011 Page 48 of 62

Bench of the Tribunal in the case 01 Capital Advisors Private Limited v. AC'IT in ITA No 2012. Vide its order dated 06.02.2013, the Tribunal, after considering the prescription of Rule 10B(4) and an another case the Tribunal in Honeywell Automation India Lid, has mandatory for the purposes of comparing the data of m wpm transaction with an international transaction that the - to the financial year ending similar to that of the assessee. The ld.DR contended that since the case of CMC Limited financial year ending vis-a-vis that of the assessee, have been excluded. No contrary precedent was brought to our notice by the learned AR. In fact, the argument advanced by this regard was not seriously challenged by the id. AR. following the precedent, we hold that this case should from the list of comparables.” Accordingly, by following series of decisions of the Tribunal on the point, we hold that this company cannot be treated as a good comparable for the purpose of determining the ALP. Hence, the AO/TPO is directed to exclude this company from the list of comparable for the purpose of determination of ALP.”

IT(TP)A No.1285/Bang/2011 Page 49 of 62

employee cost was 21.77% of sales. Since it is less than 25%, the said

comparable should be excluded. Besides, it was also contended that RPT

was 15.72% of sales, therefore, it should also be excluded by applying the

RPT filter. In support of his contentions, the ld. counsel for the assessee has placed reliance upon the order of Tribunal in the case of Stream

International Services (P) Ltd. (supra) and AOL Online India Pvt. Ltd.

(supra).

transactions have just crossed the benchmark of 15%, therefore it cannot

be excluded by applying the RPT filter. So far as low employee cost is

concerned, the ld. counsel for the assessee has not stated how much is the

employee cost of the assessee. If there is substantial difference in the

employee cost, then the comparable can be ignored. He also placed reliance upon the order of Tribunal in the case of Stream International

Services (P) Ltd. (supra), in which the comparable was excluded on

account of employee cost of assessee at 49.34%. Since the complete data

of employee cost is not available with regard to assessee, the comparable

cannot be excluded.

light of rival submissions, we find that undisputedly the RPT in the case of

this company is 15.72%. Undisputedly the benchmark taken by the TPO at

15% has been approved by the Tribunal also. But it is not a water-tight

IT(TP)A No.1285/Bang/2011 Page 50 of 62

compartment that where once it is crossed by few points, the comparable

has to be ingored. Since RPT is 15.72%, it cannot be ignored only for the

reason that RPT transactions in this case has exceeded 15% of the total

sales.

in this case employee cost to sales 21.77%, but data in this regard in the

case is not available. We are therefore of the view that this matter be

examined by the AO/TPO in the light of low employee cost filter. If there is

substantial difference between employee cost to sales in the case of

Informed Technologies Ltd. and the assessee, then it can be excluded from

the list of comparables. With these directions, we restore the matter to the

file of the AO/TPO to re-examine this comparable in the terms indicated

above.

assessee has contended that this company is functionally dissimilar.

Therefore, the same may be excluded from the list of comparables. In

support of his contention, he placed reliance upon the order of Tribunal in the case of Stream International Services (P) Ltd. (supra) in which

comparability of this company was examined and it was held that this

company has brand and commands premium in the market. It also

assumes significant business risk. For these reasons, this comparable was

IT(TP)A No.1285/Bang/2011 Page 51 of 62

excluded from the list of comparables. The relevant observations of the Tribunal are extracted hereunder for the sake of reference:-

“vi) Infosys BPO Ltd.:- The ld. Counsel for the assessee stated that the turnover of this company is extremely high as compared to that of the assessee. Moreover, Infosys is a brand and commands premium in the market, therefore, this company should be excluded from the list of comparables. It is an undisputed fact that Infosys is a brand and commands premium in the market. It is also a fact that the turnover for the year of this company was Rs. 649.56 crores as against that of the assessee of Rs. 54.17 crores which is almost 12 times of the assessee. Infosys BPO Ltd. is a joint company and it assumes significant business risks unlike the assessee who does not assume significant risks therefore deserves to be excluded from the final list of comparables. We direct accordingly. A similar view was taken by the Hyderabad Bench of this Tribunal in the case of C3i Support Services Pvt. Ltd. in ITA No. 2183/Hyd/2011.”

IT(TP)A No.1285/Bang/2011 Page 52 of 62

in which the Tribunal has examined the facts and data available and has restored the matter to TPO/AO for deciding the comparability of the same.

“11.1 I-services India Pvt. Ltd. : The learned Authorised Representative of the assessee has submitted that the complete financial details are not available in the public domain in respect of this company despite the TPO has selected this company for the purpose of computing the ALP. He has pointed out that an identical issue has been considered by the co-ordinate bench of this Tribunal in the case of sister concern of the assessee i.e. e4e Business Solutions India Pvt. Ltd. Vs. DCIT in ITA No.819/Bang/2011 vide order dt.26.5.2015 wherein the Tribunal has remanded the issue to the record of the A.O./TPO. Thus the learned Authorised Representative has submitted that the assessee be given the complete financial information of this company for filing its objections and comments against the comparability of this company. 11.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that the TPO has called the relevant information under Section 133(6) of the Act. Thus the TPO has considered this company after examination of the entire relevant record. 11.3 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the TPO in para 33.18 of the impugned order has stated that the Annual Report was not

IT(TP)A No.1285/Bang/2011 Page 53 of 62

available for the year under consideration. Thus the notice under Section 133(6) was issued to the company. The company made available its Annual Report to the TPO and on the basis of the information received under Section 133(6), the TPO has concluded that this company is comparable with the assessee. The co-ordinate bench of this Tribunal in the case of e4e Business Solutions India Pvt. Ltd. (supra) has considered this issue in para 30 as under : “ 30. The assessee has not raised any specific ground on adopting this company as a comparable before the DRP. Before us, the learned counsel for the assessee has submitted that the TPO did not furnish the information obtained from this company in exercise of his powers u/s.133(6) of the Act. It was further pointed out that even as per the TPO, the annual report of this company for F. Y. 2006-07 was not available. The TPO has gone by the data available on capita line data base. The learned counsel for the assessee therefore made a prayer that the question of considering the aforesaid company as a comparable should be remanded back to the TPO / Assessing Officer for fresh consideration and the issue decided in the light of the published annual report for F. Y. 2006-07 and also on the basis of the information furnished by this company to the Assessing Officer in response to notice u/s.133(6) of the Act. We have considered the submissions and are of the view that the same deserves to be accepted. The TPO / Assessing Officer will obtain the annual report of the company for F. Y. 2006-07 and also furnish the assessee copies of the same together with the information obtained by the TPO pursuant to issue of notice u/s.133(6) of the Act. The assessee will thereafter furnish its reply as to why this company should not be considered as a comparable company. The TPO / Assessing Officer will thereafter decide the question of considering this company as a comparable company after affording opportunity of being heard to the assessee.” Thus the Tribunal has observed that the TPO/A.O has to furnish the copies of the information to the assessee and thereafter the assessee has to furnish its reply as to why this company should not be considered as a comparable company. In view of the order of the co-ordinate bench, we set aside this issue to the record of the A.O./TPO for deciding the comparability of the same after considering the reply of the assessee on furnishing of the information received under Section 133(6) of the Act.”

IT(TP)A No.1285/Bang/2011 Page 54 of 62

the AO and restore the matter to his file with a direction to readjudicate the

comparability of this company in the light of the data available in the public

domain and also after obtaining the comments of the assessee.

assessee has contended that this company has peculiar economic

circumstances and is unreliable financial results and had also merged with

Triton, therefore this company cannot be held to be a good comparable. It

was further contended that this company was examined by the Tribunal in the case of Stream International Services (P) Ltd. (supra). This company

was also rejected in assessee’s own case for the AY 2006-07 while dealing

with the IT segment. Copies of the orders of Tribunal are placed on record.

light of rival submissions, we find that for AY 2006-07 this company was

rejected by the Tribunal in the assessee’s own case while dealing with the comparables in the IT segment. In the case of Stream International

Services (P) Ltd. (supra), this company was examined by the Tribunal for

the AY 2007-08 and the Tribunal excluded the same on the ground that this

company was under serious indictment in fraud cases. The relevant

IT(TP)A No.1285/Bang/2011 Page 55 of 62

observations of the Tribunal are extracted hereunder for the sake of reference:-

“Maple Esolutions Ltd.:- The OP/TC of this company is 34.32%. It is the say of the ld. Counsel for the assessee that this company was under serious indictment in fraud cases. A perusal of the order of the Tribunal for A.Y. 2006-07 in ITA No. 8997/Mum/2010 show that this company was excluded from the list of comparables. Respectfully following the precedent, we direct the exclusion of this company from the final list of comparables.” 56. We, therefore, following the same, direct the AO/TPO to exclude this company from the list of comparables.

IT(TP)A No.1285/Bang/2011 Page 56 of 62

Eclerx Services Ltd. Therefore, we find no justification to reproduce the same again. We, therefore, following the order of the Tribunal, direct the AO/TPO to exclude this comparable from the list of final comparables.

“Spanco Ltd (Sr. No. 22): The objections of assessee is about functionality of the above comparable. It fails employee cost filter, adopted by the TPO in IT segment but not in ITeS segment. It was submitted that employee cost of 7.20% of sales which indicate outsourcing of services. Moreover, the companies involved in telecom business, BPO services. It was submitted that principle of employee cost filter was upheld in Co- ordinate Bench decision in the case of First Advantage Offshore Services P. Ltd., Vs. DCIT in ITA No. 1086/Bang/2011. Considering that assessee is also having BPO services and employee cost is very less when compared to similar businesses. We are of the opinion that this comparable can be excluded from the list of comparables.”

IT(TP)A No.1285/Bang/2011 Page 57 of 62

“(ii) Triton Corp. Ltd.:- The OP/TC of this company is 32.36%. It is the say of the ld. Counsel for the assessee that this company also deserves to be excluded as the Directors of this company were involved in fraud, therefore, financial results of the company are not reliable. In support, reliance was placed on the decision of the Tribunal in the case of Capital IQ Information Systems (India) Pvt. Ltd. in ITA No. 1961/Hyd/2011, CRM Services India (P) Ltd. in ITA No. 4068/(Del)/2009, Avincon India Pvt. Ltd. in ITA No. 1989/Mum/2011 and Market Tools Research Pvt. Ltd. on ITA No. 2066/Hyd/2011. We have perused the decisions relied upon by the ld. Counsel for the

IT(TP)A No.1285/Bang/2011 Page 58 of 62

assessee. We find that whenever a company or its directors are found to be involved in fraud, the co-ordinate Benches have taken a consistent view of excluding such company from the final list of comparables as the financial results are not reliable. Respectfully following this 7 ITA 8290/M/11 consistent view taken by the Tribunal, we direct the exclusion of this company from the final list of comparables.” 63. Following the aforesaid order of Tribunal, we hold that the directors of the company were involved in fraud and financial results of the company are not reliable, therefore we direct the AO/TPO to exclude this company from the list of comparables.

IT(TP)A No.1285/Bang/2011 Page 59 of 62

company and held it to be excluded from the list of comparables. The relevant observations of the Tribunal are extracted hereunder for the sake of reference:-

“(xiii) Vishal Information Technologies Ltd.:- We find that this company was excluded from the final list of comparables in A.Y. 2006- 07 by the Tribunal in ITA No. 8997/Mum/2010. The issue has been discussed by the Tribunal at para 19, 20 & 21 of its order. As no distinguishing fact has been brought on record before us, respectfully following the findings of the co-ordinate Bench of this Tribunal in assessee’s own case in A.Y. 2006-07, we direct for the exclusion of this company from the final list of comparables.”

IT(TP)A No.1285/Bang/2011 Page 60 of 62

light of rival submissions, we find that undisputedly this company’s function

is dissimilar with the assessee company and its profile was examined by

the Tribunal in other cases also. We are therefore of the view that this

company is not a good comparable. Therefore, we direct the AO/TPO to

exclude this company from the list of final comparables.

for the assessee has contended that employee cost filter was inconsistently

applied. The TPO has applied the filter of employee cost to operating

revenue less than 25% for the IT segment, but the same filter was not

applied for ITeS segment. This company has employee cost less than

25%, therefore, it should be excluded from the list of comparables. He placed reliance upon the order of the Tribunal in the case of AOL Online

India Pvt. Ltd. (supra), Pole to Win India (P.) Ltd. (supra) and Siemens

Information Processing Services (P) Ltd. in IT(TP)A No.1359/Bang/2011.

No doubt, we have already held that employee cost filter should be

uniformly applied to all types of segments and TPO should not pick and

choose in this regard. Therefore, employee cost filter should be applied in

ITeS segment also. But complete data with regard to employee cost is not

available with regard to the comparable and the assessee. We therefore

restore this matter to AO/TPO to re-examine the comparability of this

IT(TP)A No.1285/Bang/2011 Page 61 of 62

company in the light of employee cost filter and the data available with

regard to assessee as well as this company.

accordance with law and in the terms indicated above.

Corporate Tax Issues

deduction u/s. 10A of the Act. In this regard, the ld. counsel for the

assessee has contended that this issue is squarely covered by the order of jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd., 349 ITR 98

(Karn) in which it has been held that whatever expenses are excluded from

export turnover should also be excluded from the total turnover. We

therefore, following the same, direct the AO to compute deduction u/s. 10A in the light of judgment of jurisdictional High Court in the case of CIT v.

Tata Elxsi Ltd. (supra).

pressed by the ld. counsel for the assessee and accordingly the same is

dismissed being not pressed.

contended that this issue should be examined in the light of Circular

No.715 dated 8.8.1998 issued by the CBDT. In this regard, the ld. DR did

not oppose and we accordingly set aside the issue to the file of AO to

IT(TP)A No.1285/Bang/2011 Page 62 of 62

adjudicate the disallowance of expenses for non-deduction of tax at source in the light of the aforesaid Circular issued by the Board.

Pronounced in the open court on this 9th day of December, 2016.

Sd/- Sd/- ( S. JAYARAMAN ) (SUNIL KUMAR YADAV ) Accountant Member Judicial Member

Bangalore, Dated, the 09th December, 2016.

/D S/

Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file

By order

Assistant Registrar, ITAT, Bangalore.