ITO vs. M/S CDC SOFTWARE INDIA PVT. LTD.,, BANGALORE

Per Inturi Rama Rao, Accountant Member

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 2 of 23 of Income Tax (Appeals)-IV, Bangalore dated 17-9-2013 for the assessment year 2005-06.

2. The revenue raised the following grounds of appeal.

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4. Being aggrieved by the order of the assessment, an appeal was preferred before CIT(A), who vide impugned order held that the companies which are functionally dissimilar to that of the assessee company and the company’s whose turnover exceeded Rs.200 crores are directed to be excluded from the list of comparables. The learned CIT(A), also held that in respect of internet bandwidth charges incurred in connection with the delivery of the computer software outside India, should be excluded from both export turnover as well as the total turnover following the law laid down by the jurisdictional High Court in the case of CIT Vs. Tata Elxsi 349 ITR 98. Being aggrieved, the revenue is an appeal before us in the present appeal.

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 4 of 23 6. Ground Nos. 2 and 3 challenges direction of the CIT(A) to exclude internet charges incurred in connection with delivery of software outside India both from total turnover as well as from the export turnover. The issue in these grounds appeal is settled in favour of the assessee by jurisdictional High Court in the case of CIT Vs. Tata Elxsi wherein it was held as follows:

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 5 of 23 The expression 'total turnover' has been the subject matter of 12. various decisions as defined under the Act under Section 80HHC. However, in the aforesaid provision, the total turnover is defined. The definitions of 'export turnover' and 'total turnover' as defined in Explanation to Section 80HHC read as under: (b) "export turnover" means the sale proceeds received in, or 13. brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this Section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962." (ba) "total turnover" shall not include freight or insurance 14. attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962." In the aforesaid definitions, what is to be excluded from both is 15. expressly mentioned. In Section 10-A, not only the word 'total turnover' is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the aforesaid provisions of Section 80HHC, the Courts have laid down various principles, which are independent of the statutory provisions. The question is, whether those independent principles can be adopted while defining 'total turnover' in the absence of a definition in Section 10-A. The Apex Court, in the case ofLakshmi Machine Works (supra) held at para. 15 as under: "15. It is important to note that tax under the Act is upon income, 16. profits and gains. It is not a tax on gross receipts. Under Section 2(24) of the Act the word "income" includes profits and gains. The charge is not on gross receipts but on profits and gains. The charge is not on gross receipts but on profits and gains properly so-called. Gross receipts or sale proceeds, however, include profits. According to "The Law and Practice of Income Tax" by Kanga and Palkhivala, the word "profits" in section 28 should be understood in normal and proper sense. However, subject to special requirements of the income-tax, profits have got to be assessed provided they are real profits. Such profits have to be got to be ascertained on ordinary principles of commercial trading and accounting. However, the income-tax has laid down certain rules to be applied in deciding how the tax should be assessed and even if the result is to tax as profits what cannot be construed as profits, still the requirements of the income-tax must be complied with. Where a deduction is necessary in order to ascertain the profits and gains, such deductions should be allowed. Profits should be computed after deducting the expenses incurred for business though such expenses may not be admissible expressly under the Act, unless such expenses are expressly disallowed by the Act [see page 455 of "The Law and Practice of Income- tax by Kanga and Palkhivalal. Therefore, schematic interpretation for making the formula in section 80HHC workable cannot be ruled out. Similarly, purposeful interpretation of section 80HHC which has undergone so many changes cannot be ruled out, particularly, when those legislative changes

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 6 of 23 indicate that the Legislature intended to exclude items like commission and interest from deduction on the ground that, then did not possess any element of "turnover" even though commission and interest emanated from exports. We have to read the words "total turnover" in section 80HHC as part of the formula which sought to segregate the "export profits" from the "business profits". Therefore, we have to read the formula in entirety. In that formula the entire business profits is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover/total turnover which constitute section 80HHC concession (deduction). Income in the nature of "business profits" was, therefore, apportioned. The above formula fixed a ratio in which "business profits" under section 28 of the Act had to be apportioned. Therefore, one has to give weightage not only to the words "total turnover" but also to the words "export turnover", "total export turnover" and "business profits". That is the reason why we have quoted hereinabove extensively the illustration from the Direct Taxes (Income tax) Ready Reckoner of the relevant word. In the circumstances, we cannot interpret the words "total turnover" in. the above formula with reference to the definition of the word "turnover" in other laws like Central Sales tax or as defined in accounting principles. Goods for export do not incur excise duty liability. As stated, above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under section 80HHC. They were not eligible even without the clarification introduced by the Legislature by various amendments because they did not involve any element of turnover. Further, in all other provisions of the income-tax, profits and gains were required to be computed with reference to the books of account of the assessee. However, as can be seen from the Income-tax Rules and from the above Form No. 10CCAC in the case of deduction under section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing section 80HHC deduction was "business profits" as computed under section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. Section 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports. In the case of combined business of an assessee having export business and domestic business the Legislature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. This method earlier existed under Excess Profits-tax Act. it existed in the Business Profits-tax Act. Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part of "turnover", excise duty and sales tax also cannot form part of the "turnover". Similarly, "interest" emanates from exports and yet "interest" does not involve an element of turnover. The object of the Legislature in enacting section 80HHC of the Act was to confer a benefit on profits accruing with reference to export turnover. Therefore, "turnover" was the requirement. Commission, rent, interest etc. did not involve any turnover.

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 7 of 23 Therefore, 90 per cent of such commission, interest etc. was excluded from the profits derived from the export. Therefore, even without the clarification such items did not form part of the formula in section 80HHC(3) for the simple reason that it did not emanate from the "export, turnover", much less any turnover. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the "turnover". Just as interest, commission etc. did not emanate from the "turnover", so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent etc. do yield profits, but they do not partake of the character of turnover and, therefore, they were not includible in the "total turnover". The above discussion shows that income from rent, commission etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. In fact, in Civil Appeal No. 4409 of 2005, the above proposition has been accepted by the Assessing Officer See: page No. 24 of the paper book, if so, then excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of "turnover" which is the position even in the case of rent, commission, interest etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government Therefore, if they are made relatable to exports, the formula under section 80HHC would become unworkable. The view which we have taken is in the light of amendments made to section 80HHC from time-to-time." The said judgment has been re-affirmed by the Apex Court, in the 17. ease of CIT v. Catapharma (India) (P.) Ltd. [2007] 292 ITR 641/ 162 Taxman 455. The Bombay High Court had an occasion to consider the meaning 18. of the word 'total turnover' in the context of Section 10-A, in the case of CIT v.Gem Plus Jewellery India Ltd. [2011] 330 ITR 175 [2010] 194 Taxman 192 (Bom.). Interpreting sub-Section (4) of Section 10-A, it is held as under: "Under sub-section (4) the proportion between the export turnover 19. in respect of the articles or things, or, as the case may be, computer software exported, to the total turnover of the business carried over by the under- taking is applied to the profits of the business of the undertaking in computing the profits of the business of the undertaking in computing the profits derived from export. In other words, the profits of the business of the undertaking are multiplied by the export turnover in respect of the articles, things or, as the case may be, computer software and divided by the total turnover of the business carried or by the undertaking. The formula which is prescribed by sub-section (4) of section 10A is as follows: Profits of the Export turnover in respect Profits derived from business of the × of the articles or things or export of articles or undertaking computer software = things or Computer Total turnover of the business carried on by the software undertaking

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 8 of 23 The total turnover of the business carried on by the undertaking 20. would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator inasmuch as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning 21. as the export turnover which is a constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Explanation 2 to section 10A by which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in, or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles things or software outside India. Therefore in computing the export turnover the Legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the Revenue is 22. that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the Revenue, however, misses the point that the expression "total turnover" has not been definded at all by Parliament for the purposes of section 10A. However the expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined be Parliament and there is a specific exclusion of freight and insurance, the expression "export turnover" cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision to the contrary. However, no such provision having been made, the principle which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. "export turnover" would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though it has been specifically excluded from "export turnover" for the purposes of the numerator would be brought in as part of the "export turnover" when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided." The special bench of the Tribunal, in the case of ITO v. Sak Soft 23. Ltd. [2009] 313 ITR (AT) 353/ 30 SOT 55 (Chennai) also had an occasion to consider the meaning of the word 'total turnover'. After referring to the various judgments of the High Court as well as the Supreme Court held as under:

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 9 of 23 "53. For the above reasons, we hold that for the purpose of applying 24. the formula under sub-section (4) of Section 10-B, the freight telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula….." The formula for computation of the deduction under Section 10-A 25. would be as under: Profits of the business × export turnover Total turnover From the aforesaid judgments, what emerges is that, there should be 26. uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10-A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the ease of Section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in Section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in Section 10-A, there is nothing in the said Section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 10 of 23 meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore, the formula for computation of the deduction under Section 10-A, would be as under: Export turn over Profits of the business of × (Export turnover + the undertaking domestic turn over) Total Turn Over In that view of the matter, we do not see any error committed by 27. the Tribunal in following the judgments rendered in the context of Section 80HHC in interpreting Section 10-A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in these appeals. The substantial question of law framed is answered in favour of the assessee and against the revenue.”

7. We find that order of CIT(A) on this issue is in consonance with law laid down by the Hon’ble jurisdictional High Court in the above case. Hence we dismiss these grounds of appeal.

8. Ground No. 4 challenge the direction of the learned CIT(A) remanding the matter AO/TPO to exclude functionally dissimilar companies following guidelines laid down in the division of ITAT, Delhi in the case of Actis Advertisers P. Ltd., Vs. Dy. Commissioner of Income-tax (20 ITR (Trib) 138). The learned DR contended that CIT(A) ought not have restored matter to the file of TPO as entire information is available on the record and should have rendered finding on merits. It was further contended that the CIT(A) has no power of remand.

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1. Bodhtree Consulting Ltd., 2. Exensys Software Solutions Ltd., 3. Sankhya Infotech Ltd., 4. Foursoft Ltd., 5. Thirdware solutions Ltd., 6. Tata Elxsi Ltd., (Seg.) 10. Thus, it was submitted that if the above companies are excluded from list of comparables, and he has no serious objections for inclusion of the companies item Nos. (1) Lanco Global Systems Ltd., (2) Sasken Network Systems Ltd., (3) R. S. Software (India) Ltd., (4) Geometric Software Solutions Co. Ltd., (5) Visuals Soft Technologies Ltd., (Seg), (6)

Sasken Communication Technologies Ltd., (Seg). Thus he submitted that there was no need of remanding the matter, these companies can be excluded on the ground of functional dissimilarity following the decision of the Coordinate Bench in the case of Symbol Technology P. Ltd.

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“We have considered his submission and find that the ITAT Hyderabad Bench on identical facts, held that the aforesaid two companies viz., Four Soft Ltd., and Thirdware Solutions Ltd., are not comparable companies in Software Development Services companies. The following were :— "15.4. FOURSOFT LIMITED : This comparable is objected on the same reason as this company is involved in product development and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and assessee have been investing continuously on product developments. Since assessee is in the product development, having I.P. rights, the same is not comparable. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : This company is objected to by the assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT, Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible owns. 15.6. These three comparable above Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited were analysed by the Coordinate Bench of the Tribunal in the case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it has been held as under : "23. The other companies which are objected to by the assessee are Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, the learned Counsel appearing on behalf of the assessee submitted that they are into both software as well as product development. He submitted that the TPO has taken note of the fact these companies are also into product development but has selected these companies as comparables by applying the filter of more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these companies from software services and software products and has adopted the figure as segmental margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable companies before adopting them as comparable companies and before taking the operating margin for arriving at the arms length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as comparables.

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 13 of 23 For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. v. DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from the list of comparables.

24. The learned D.R. however, supported the Orders of the authorities below.

25. Having heard both the parties and having gone through the material on record, we find that the TPO at page 37 of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPO's Order, the said company has derived income from software licence also and AMCs. 26. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products. 27. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable.

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 14 of 23 Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables". Respectfully, following the same, we accept the assessee's objections and direct the TPO to exclude the above three companies from the list of comparables.' 23. In view of the aforesaid decision rendered on identical facts and circumstances, we are of the view that Foursoft Ltd., and Thirdware Solutions Ltd., should be excluded from the list of comparable companies.

24. The learned counsel for the Assessee submitted before us that TATA Elxsi Ltd., a comparable company out of the 12 excluded by the CIT(A) by applying RPT filter and which gets included in the comparable companies because of 15% RPT being adopted as threshold limit for excluding companies for the purpose of comparability. It was his submission that this company will however, have to be excluded as this company was held to be not comparable with an Assessee such as the Assessee in the present case providing software development services by the ITAT Hyderabad Bench in the case of CNO IT Services (India) (P.) Ltd. (supra).”

“18. It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products & services and training. The company focuses on the development of niche products for the transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below:— SILICONTM Training Suite of Products: The products are a comprehensive (1) enterprise wide training platform that covers the entire spectrum of training in a paperless environment. It comprises of four products:— - SILICONTM LMS (Training Management Information - SILICONTM QT (Online Assessment System) - SILICONTM LCMS (Learning Content Management System) - IRMAQTM : This is an integrated resource planning, management

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 15 of 23 tracking system exclusively developed for Airline operations. It is an end-to-end solution for all Flight Operations. - Sakai CLE : This is a widely used and popular open source LMS used in many leading educational institutions and corporate. The relevant extract from the Annual report substantiating that the company also engages in different activities is reproduced below: "2. Activities The company as engaged in the business of development of Software Products & Services and training. The production of software is not capable of being expressed in any generic unit and hence 11 is riot possible to give the information as required by certain clauses of paragraphs 3.4C and 4 D of Part II of Schedule VI of the Companies Act, 1956."

20. The submissions made by the learned counsel for the Assessee are considered. The activities set out above and the decision of the Delhi ITAT rendered in the context of a software development company such as the Assessee makes it amply clear that this company Sankhya cannot be regarded as a comparable. The same is directed to be excluded from the list of comparable companies.

21. The learned counsel for the Assessee submitted before us that two of the comparable companies out of the 12 excluded by the CIT(A) by applying RPT filter and which gets included in the comparable companies because of 15% RPT being adopted as threshold limit for excluding companies for the purpose of comparability, viz., Four Soft Ltd., and Thirdware Solutions Ltd., will have to be excluded as these companies are not functionally comparable. These companies according to him, will however, have to be excluded as these two companies were held to be not comparable with an Assessee such as the Assessee in the present case providing software development services by the ITAT Hyderabad Bench in the case of CNO IT Services (India) (P.) Ltd. v. Dy. CIT [2014] 43 taxmann.com 231.

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"15.4. FOURSOFT LIMITED : This comparable is objected on the same reason as this company is involved in product development and owns products namely 4S eTrans and 4S eLog. These products are used in Sun Microsystems Inc, in an Application Verification Kit Certified for Enterprises and assessee have been investing continuously on product developments. Since assessee is in the product development, having I.P. rights, the same is not comparable. 15.5. THIRDWARE SOFTWARE SOLUTIONS LIMITED : This company is objected to by the assessee on the reason that the said Thirdware Software Solutions Ltd. is engaged in sale of software licence and related services and not a service provider. Referring to the annual report, it was submitted that this comparable was rejected by the ITAT, Pune in the case of Egain Communications Ltd. This company having revenue from product license and earning extraordinary profit due to intangible owns. 15.6. These three comparable above Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited were analysed by the Coordinate Bench of the Tribunal in the case of Intoto Software Solutions Pvt. Ltd. (supra) wherein it has been held as under :

"23. The other companies which are objected to by the assessee are Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, the learned Counsel appearing on behalf of the assessee submitted that they are into both software as well as product development. He submitted that the TPO has taken note of the fact these companies are also into product development but has selected these companies as comparables by applying the filter of more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in the proportion of the revenue of these companies from software services and software products and has adopted the figure as segmental margin of the company and has taken these companies as comparables. He submitted that by taking the proportionate expenditure, the correct financial results would not emerge. He submitted that nothing prevented the Assessing Officer/TPO from obtaining the segmental details from the respective comparable companies before adopting them IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 17 of 23 as comparable companies and before taking the operating margin for arriving at the arms length price. He submitted that wherever the segmental details are not available, then the said companies should not be taken as comparables. For this purpose, he placed reliance upon the decision of the Bangalore Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. v. DCIT in ITA.No.1252/Bang/2010 wherein these companies were directed to be excluded from the list of comparables.

25. Having heard both the parties and having gone through the material on record, we find that the TPO at page 37 of his order has brought out the differences between a product company and a software development services provider. Thus, it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions, the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO as exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced at page 7 of the TPO's Order, the said company has derived income from software licence also and AMCs.

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 18 of 23 27. As far as Flextronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R & D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever, the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee company to bring them on par with the assessee, these companies are to be excluded from the list of comparables. Therefore, we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables". Respectfully, following the same, we accept the assessee's objections and direct the TPO to exclude the above three companies from the list of comparables.' 13. Similarly in respect of Tata Elxsi Ltd., the coordinate bench vide paras 25-27 held as follows:

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 19 of 23 "22 Tata Elxsi Limited : As regards this company, the learned Counsel appearing on behalf of the assessee, filed before us the reply of Tata Elxsi Limited to the Addl. CIT (Transfer Pricing), Hyderabad, wherein the concerned Officer has been informed that Tata Elxsi Limited is specialised Embedded Software Development Service Provider and that it cannot be compared with any other software development company. It was submitted that because of the specialisation and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another assessee. In the result, the Assessing Officer/TPO is directed to reconsider the issue in accordance with law, after affording a reasonable opportunity of being heard to the assessee." Keeping the assessee's objections and the decisions of the Coordinate Bench, prima facie, we are of the view that TATA Elxsi Limited is functionally different and has incomparable size to that of the assessee. Further, we are unable to verify whether the segmental profits adopted by the TPO pertain to entire software development services or pertain to limited service akin to assessee services. Since, these aspects are not clear from the data furnished before us, we direct the TPO to examine and in case, the segmental profits of a particular service is not available, then, to exclude the TATA Elxsi Limited from the list of comparables. Accordingly, this issue is restored to the file of TPO for examination and to decide in accordance with law and facts, after affording reasonable opportunity of being heard to assessee.' 26. Though the issue has been set aside to the AO in the aforesaid decision, the ITAT Hyderabad in the case of NTT Data India Enterprise Application Services (P.) Ltd. v. Asstt. CIT [2013] 40 taxmann.com 173 and in a subsequent ruling in the case of Invensys Development Centre (India) (P.) Ltd. v. Addl CIT [2014] 151 ITD 245/43 taxmann.com 419 (Hyd. - Trib) held that TATA Elxsi is not functionally comparable with that of a software development service provider such as the Assessee.

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 20 of 23

C.O. No. 113/B/15

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b) The assessing officer erred in not providing the copy of the approval granted by the Commissioner which is in violation of the settled principles of natural justice and thus the order of assessment needs to be set aside.

3. The TPO, CIT-(A) and the AO failed to understand the spirit and intent of Rule 10B(1)(e)(ii) as per which even if one of the comparables selected by the cross objector satisfies the computation mechanism for determination of the ALP, the determination of ALP by using arithmetic mean of different comparables is not warranted.

5. The cross objector / respondent craves leave to add, alter, delete, and modify any of the grounds which are urged above.

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 22 of 23

19. On perusal of the orders of CIT (A), it is crystal clear that the issues raised vide cross-objections 1 to 3 do no form part of the order of the learned CIT(A). A cross-objection is maintainable only when the CIT(A) renders some finding on the issues raised on the cross-objection.

Therefore, the cross-objection 1 to 3 are dismissed as such. In respect of cross-objection No. 4 challenges denial of risk adjustment by learned CIT(A). The CIT(A) has denied the risk adjustment on the ground that the working capital adjustment was granted by the TPO and therefore no risk adjustment can be granted.

IT(TP)A No.1645/Bang/2013 & C.O. No.113/Bang/2015 Page 23 of 23 Pronounced in the open court on this 14th day of October, 2016.