SOFTBRANDS INDIA PRIVATE LIMITED,BANGALORE vs. DCIT, BANGALORE

Per Shri Vijay Pal Rao, J.M. : This appeal by the assessee is directed against the assessment order

dt.15.09.2011 passed under Section 143(3) r.w.s. 144C(5) of the Income Tax

Act, 1961 (in short 'the Act') in pursuant to the directions of the Dispute

Resolution Panel (‘DRP’) dt.30.8.2011 for the Assessment Year 2007-08.

2 IT(TP)A No.1094/Bang/2011 1. “ The Assessing Authority has considered expenditure incurred in foreign currency aggregating to Rs.14,15,598/- towards foreign travel (Rs.14,12,493/-) and software license fees (Rs.3,105/-) which in fact is not attributable to the delivery of software outside India. These expenses were primarily incurred for the purposes of travel of the directors for obtaining orders and for sending people abroad for training etc. These are clearly not incurred for the delivery of software outside India as your appellant did not render any onsite service and hence ought not to have been deducted while computing the export turnover. 2. Even if the view of the DCIT, that these are to be reduced from export turnover, is to be accepted for the sake of argument without conceding it, then this should be deducted from the calculation of Total Turnover also. The Deputy Commissioner has wrongly disallowed the claim of the assessee for a full deduction under Section 10A for all its profits and gains from the software business of the STPI unit at Bangalore by adopting as the denominator, total turnover of the business without deducting the expenditure on delivery of software outside India although export turnover which is the nominator was computed after reducing all these expenses ignoring the parity principle which ought to have been considered based on the decision of the jurisdictional High Court in the case of CIT Vs Tata Elxsi Limited (Karnataka High Court – 2011). 3. Total turnover ought to have been determined by adding other turnover if any to the export turnover. Since your appellant has no other turnover, the export turnover should be adopted as the total turnover also.

Ground II 4. The Assessing Officer has wrongly adjusted the loss incurred by the non STPI unit of your assessee against the profits earned by the STPI unit in arriving at the amount of deduction allowed u/s 10A although the deduction U/s 10A is to be calculated on the basis of profits and

3 IT(TP)A No.1094/Bang/2011 gains derived by the respective STPI undertaking and not on the basis of profits and gains derived by the company as the benefit travels with the undertaking and is not attached to the assessee.

Ground III

i) The TPO rejected Comparable Uncontrolled Price Method adopted by the appellant and instead used Transaction Net Margin Method as the most appropriate method for determining arms length price. No adjustments were made by the TPO for the differences in the functions and risks which are not undertaken by your appellant but undertaken by the comparable companies considering the fact that your appellant does not undertake marketing activities and does not complete the entire development process.

ii) Since the information available in the external environment is not perfectly comparable due to the niche nature of the entity’s business, rates adopted by it for similar transactions with uncontrolled entities have been used to benchmark the hourly billing rates adopted by the company. The nature of services on implementation, customization and support are similar for controlled and uncontrolled entities and hence it provides the best comparable.

iii) The TPO’s order which is based on information collected by him using the powers under the provisions of Section 133(6) of the Income Tax Act, 1961 to obtain further information from the Companies ought

4 IT(TP)A No.1094/Bang/2011 not to have been acted upon as benefit of such data which is not in the public domain is not available to your appellant.

iv) Your appellant functions in a limited risk environment vis-à-vis entrepreneurial risk borne by comparable companies who are independent service providers. It is operating under economic circumstances that warrant adjustments to the margins earned by the comparable companies, so as to make the comparison between the margins earned by the comparable companies and Softbrands appropriate. This view finds support in the decision of this Hon’ble Tribunal in the case of M/s. SAP Labs India Pvt. Ltd vs. ACIT.

v) The TPO has not made any adjustments to the margins determined by him for the margins attributable to the marketing function carried on by the comparable companies as selected by him whereas your appellant do not carry out any marketing functions. Significant profits have to be attributed to this functional difference. Not making any adjustment for this is a major flaw in your analysis. The Hon ITAT has attributed 35% of the total margins as attributable to marketing function while disposing off the case of Rolls Royce PLC Vs. DDIT dated January 30th, 2009. He has also adopted a wide variety of companies enjoying margins in the range of 3.66% to 109.79%. This shows that the comparables selected by him are not comparable with each other, leave alone with us.

vi) The margins earned by our AEs are much lower than the margins earned by us. This clearly indicates that we have undertaken our transactions with our AEs at arm’s length price and have continued to bill our AEs at arm’s length price even when they are making lower margins than us even though our profits are tax free u/s.10A of the Income Tax Act, 1961. Hence you will be fully satisfied that there is no attempt to transfer profits to another tax jurisdiction. The CBDT in their Circular No.14 of 2001 (252 ITR ST.65) in Para 55.5 in Page no.104 has stated the following as the purpose behind introducing Transfer Pricing Regulations in Indian Tax Laws:

5 IT(TP)A No.1094/Bang/2011

“Para 55.5 - The new provision is intended to ensure that profits taxable in India are not understated (or losses are not overstated) by declaring lower receipts or higher outgoings than those which would have been declared by persons entering into similar transactions with unrelated parties in the same or similar circumstances. The basic intention underlying the new transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding the country’s tax base. The new section 92 is, therefore, not intended to be applied in cases where the adoption of the arm’s length price determined under the regulations would result in a decrease in the overall tax incidence in India in respect of the parties involved in the international transaction”.

vii) Applicability of +/-5% range: The Central Board of Direct Taxes (CBDT) has issued Circular No.05/2010 dated 3rd June, 2010 (published recently) as Explanatory Notes to the Provisions of the Finance (No.2) Act, 2009 (hereinafter referred to as the “Circular”). In the Circular, the CBDT has clarified that the amended provisions (i.e. on applicability of +/-5 percent range) under Section 92C of the Act have been made applicable with effect from 1st April, 2009 and will accordingly apply in respect of assessment year (“AY”) 2009-10 and subsequent years. Hence this benefit ought not to have been denied to your appellant for the AY 2007-08. 7. Accordingly it is prayed that the transfer prices actually charged by your appellant to its customer is to be held as at arm’s length and the addition proposed by the TPO and acted upon by the Assessing Officer based on approval of the DRP in the Assessment Order is to be ordered to be deleted.

6 IT(TP)A No.1094/Bang/2011 Ground III

For these and other grounds that may be adduced at the time of hearing, the order of the Deputy Commissioner of Income Tax may be modified to the extent appealed against.”

3.1 Ground Nos.1 to 3 are regarding exclusion of the expenditure incurred in

foreign currency from the export turnover for the purpose of computing the

deduction under Section 10A of the Act.

3.2 We have heard the rival submission and perused the material on

record. The Hon’ble Jurisdictional High Court in the case of CIT v M/s Tata Elxsi

Ltd. & Others 349 ITR 98 (Kar) had held that while computing the exemption

u/s 10A, if the export turnover in the numerator is to be arrived at after

excluding certain expenses, the same should also be excluded from the total

turnover in the denominator. The relevant finding of the Hon’ble High Court

reads as follows:-

“………..Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be included. However,

7 IT(TP)A No.1094/Bang/2011 the word total turnover is not defined for the purpose of this section. It is because of this omission to define ‘total turnover’, the word ‘total turnover’ falls for interpretation by this Court;

……..In section 10A, not only the word ‘total turnover’ is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the 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. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term ‘total turnover’ in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would

8 IT(TP)A No.1094/Bang/2011 nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, ‘export turnover’ is defined, and when the ‘total turnover’ includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgments rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same”.

In the light of the above binding precedent, we direct the Assessing Officer/TPO

to exclude the above mentioned expenses both from the export turnover as

well as from the total turnover while computing deduction u/s 10A of the Act.

without setting off of loss incurred by the non-STPI unit.

4.1 The learned AR of the assessee has relied upon the decision of the Hon'ble

jurisdictional High Court in the case of CIT vs. Yokogawa India Ltd. & others

(341 ITR 385) as well as the decision in the case of CIT vs. M/s.Auringene

Discovery Technologies Ltd. in ITA No.549/2013 dated 05/09/2014 and

submitted that the Hon’ble High Court has reiterated the view taken in the case

9 IT(TP)A No.1094/Bang/2011 of Yokogawa India Ltd.(supra). He has also relied upon the decision of this

Tribunal dated 30/4/2014 in the case of CIT vs. M/s.Biocon Ltd. in ITA Nos.248,

368 to 371 & 1206/2010.

4.2 On the other hand, learned Departmental Representative has relied upon

the decision of the Hon'ble jurisdictional High Court in the case of CIT vs.

Himatsinghika Seide Ltd. (156 Taxman 151) and submitted that that the

decision of the jurisdictional High Court has been confirmed by the Hon’ble

Supreme Court and the SLP filed by the assessee has been dismissed.

4.3 We have considered the rival submissions as well as the relevant

material on record. There is no dispute that the Hon'ble jurisdictional High

Court in the case of Himatsinghika Seide Ltd. (supra) had decided this issue in

favour of the revenue and against the assessee. However, it is pertinent to

note that the said decision of the Hon'ble jurisdictional High Court was

rendered in respect of the dispute for the assessment year 1994-95 and there is

an amendment in the provisions of sec.10A and 10B of the Act vide Finance Act,

2000 w.e.f. 1/4/2001. By virtue of the amendment and substitution of

provisions of sec.10A and 10B, the incentive u/s 10A and 10B was no longer in

10 IT(TP)A No.1094/Bang/2011 the nature of exemption but it is in the nature of deduction. By considering the

amendment/substitution of sec. 10A and 10B vide Finance Act, 2000 w.e.f.

1/4/2001, the Hon'ble jurisdictional High Court vide judgment in the case of

Yokogawa India Ltd.(supra) has held in paras.16 to 23 as under:

“16. The substituted s. 10A continues to remain in Chapter III. It is titled as "Incomes which do not form part of the total income". It may be noted that when s. 10A was recast by the Finance Act, 2001 (sic- 2000), the Parliament was aware of the character of relief given in Chapter III. Chapter III deals with incomes which do not form part of total income. If the Parliament intended that the relief under s. 10A should be by way of deduction in the normal course of computation of total income, it could have placed the same in Chapter VI-A which houses the sections like 80HHC, 80-IA, etc. The Parliament was aware of the various restricting and limiting provisions like s. 80A and s. 80AB which were in Chapter VI-A which do not appear in Chapter III. The fact that even after its recast, the relief has been retained in Chapter III indicates the intention of Parliament that it is to be regarded as an exemption and not a deduction. The Act of the Parliament in consciously retaining this section in Chapter III indicates its intention that the nature of relief continues to be an exemption. Chapter VII deals with the incomes forming part of the total income on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. The Parliament despite being conversant with the implications of this chapter, has consciously chosen to retain s. 10A in Chapter III. 17. If s. 10A is to be given effect to as a deduction from the total income as defined in s. 2(45), it would mean that s. 10A is to be considered after Chapter VI-A deductions have been exhausted. The deductions under Chapter VI-A are to be given from out of the gross

11 IT(TP)A No.1094/Bang/2011 total income. The term "gross total income" is defined in s. 80B(5) to mean the total income computed in accordance with the provisions of this Act, before making any deduction under this chapter. As per the definition of gross total income, the other provisions of the Act will have to be first given effect to. There is no reason why reference to the provisions of the Act should not include s. 10A. In other words, the gross total income would be arrived at after considering s. 10A deduction also. Therefore, it would be inappropriate to conclude that s. 10A deduction is to be given effect to after Chapter VI-A deductions are exhausted. 18. It is after the deduction under Chapter VI-A that the total income of an assessee is arrived at. Chapter VI-A deductions are the last stage of giving effect to all types of deductions permissible under the Act. At the end of this exercise, the total income is arrived at. Total income is thus, a figure arrived at after giving effect to all deductions under the Act. There cannot be any further deduction from the total income as the total income is itself arrived at after all deductions. 19. From the aforesaid discussion it is clear that the income of 10A unit has to be excluded before arriving at the gross total income of the assessee. The income of 10A unit has to be deducted at source itself and not after computing the gross total income. The total income used in the provisions of s. 10A in this context means the global income of the assessee and not the total income as defined in s. 2(45). Hence, the income eligible for exemption under s. 10A would not enter into computation as the same has to be deducted at source level. 2nd substantial question of law 20. Prior to the introduction of sub-s. (6) of s. 10A and s. 10B by the Finance Act, 2000, which came into effect from 1st April, 2001, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to

12 IT(TP)A No.1094/Bang/2011 any subsequent assessment year, sub-s. (2) of s. 32, cl. (ii) of sub-s. (iii), s. 32A cl. (ii) of sub-s. (3) of s. 32A, cl. (ii) of sub-s. (2) of s. 33 and sub-s. (4) of s. 35 of the Act or the second proviso to cl. (ix) of sub-s. (1) of s. 36 shall not be applicable in relation to any such allowance or deduction. Similarly no loss as referred to in sub-s. (1) or in s. 72 or sub-s. (1) or sub-s. (3) of s. 74 insofar as such loss relates to the business of the undertaking was permitted to be carried forward or set off where such loss relates to any of the relevant assessment years. 21. It is in this background the Finance Act, 2003 was introduced by inserting the words "the year ending upto the first day of April, 2001", for that in cls. (1) and (2) of sub-s. (6) restricting the disallowance only upto the first day of April, 2001 and granting the benefit, of those provisions even in respect of units to which ss. 10A and 10B are applicable. The Finance Act, 2003, amended this sub- section with retrospective effect from 1st April, 2001 by lifting the embargo in the aforesaid clauses in respect of depreciation and business loss relating to the asst. yr. 2001-02 onwards. The amendment indicates the legislative intention of providing the benefit of carry forward of depreciation and business loss relating to any year of the tax holiday period to be set off against income of any year post tax holiday. This is supported by Circular No. 7 of 2003 [(2003) 184 CTR (St) 33] wherein the board has stated that the purpose of amendment is to entitle an assessee to the benefit of carry forward of depreciation and loss suffered during the tax holiday period. The circular dt. 5th Sept., 2003 reads as under : "20. Providing for carry forward of business losses and unabsorbed depreciation to units in Special Economic Zones and 100 per cent export oriented units. 20.1 Under the existing provisions of ss. 10A and 10B, the undertakings operating in a Special Economic Zone (under s. 10A) and 100 per cent export oriented units (under s. 10B) are

13 IT(TP)A No.1094/Bang/2011 not permitted to carry forward their business losses and unabsorbed depreciation. 20.2 With a view to rationalize the existing tax incentives in respect of such units sub-s. (6) in ss. 10A and 10B has been amended to do away with the restrictions on the carry forward of business losses and unabsorbed depreciation. The amendments have been brought into effect retrospectively from 1st April, 2001 and have been made applicable to business losses or unabsorbed depreciation arising in the asst. yr. 2001-02 and subsequent years." 22. It is interesting to note that such relaxation has not been made in s. 10C which provides for exemption in respect of profits of certain undertakings in north eastern region. This makes clear the legislative intention of providing relaxation wherever it deems fit and in the present case, such relaxation has been made in s. 10A but not in s. 10C. 23. It is to be noted that the aforesaid amendment read with the Board circular does not militate against the proposition that the benefit of relief under this section is in the nature of exemption with reference to the commercial profits. However, in order to give effect to the legislative intention of allowing the carry forward of depreciation and loss suffered in respect of any year during the tax holiday for being set off against income post tax holiday, it is necessary that the notional computation of business income and the depreciation as per the provisions of the Act should be made for each year of the tax holiday period. While so computing, attention will have to be given to provisions of ss. 70, 71, 72 and s. 32(2). The amount of depreciation and business loss remaining unabsorbed at the end of the tax holiday period should be determined so that the same may be set off against the income post tax holiday period.

14 IT(TP)A No.1094/Bang/2011 4.4 We further note that this view has been reiterated by the Hon'ble jurisdictional High Court in the case of M/s.Aurigene Discovery Technologies Ltd., in ITA No.549/13. A similar issue was considered by the co-ordinate bench of this Tribunal in the case M/s.Biocon Ltd. (supra) and held in para.23 to 26 as under:

“23. We have given a very careful consideration to the rival submissions. The issue raised by the assessee in ground no.21 is identical to the ground raised by the assessee in Biocon (supra). The facts of the case before the Tribunal in the case of Biocon (supra) were that the assessee during the previous year had four units which were entitled to claim deduction u/s. 10B of the Act viz., CMZ Unit, SAP Unit, RHI Unit and IFP Unit. The assessee had claimed deduction u/s. 10B of the Act in respect of the aforesaid units totaling Rs.157,22,33,066 which is the sum total of deduction u/s. 10B for the four units as follows:- (1) CMZ Unit : 6,87,70,229 (2) SAP Unit : 76,60,29,880 (3) RHI Unit : 52,42,56,278 (4) IFP Unit : 21,31,76,679 Total 157,22,33,066 The assessee had non-10B units as well. In those non-10B units, there was a loss of Rs.105,92,19,172. In the return of income filed by the assessee, the assessee sought to carry forward the loss of non-10B units for set off against the profits of non-10B units in the subsequent assessment years. The AO firstly noticed that there was income from other sources to the extent of Rs.4,71,15,896 and such had to be set off against the loss of the non-10B units. Accordingly, the AO held that the loss of the non-10B units that had to be considered for carry forward would be Rs.101,21,03,280. Thereafter, the AO was of the view that income of the 10B units had to be set off against the loss of the non-10B units and if it is so set off, there will be no loss that

15 IT(TP)A No.1094/Bang/2011 needs to be carried forward. In coming to the aforesaid conclusion, the AO expressed the opinion that provisions of section 10B are deduction provisions and therefore effect will have to be given to the provisions of section 72 of the Act, even in respect of profits of the 10B unit. Accordingly, the claim of the assessee for carry forward of loss of non-10B unit was not allowed by the AO. On appeal by the assessee, it was contended that the provisions of section 10A and section 10B are exemption provisions and therefore the profit of 10A and 10B units will not enter the computation of total income at all and therefore the profits of these units need not be set off against the loss of non-10B unit by invoking the provisions of section 72 of the Act. The CIT(Appeals) did not agree with the contention of the assessee and in doing so, he placed reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT v. Himatsingike Seide Ltd., 286 ITR 255 (Kar). In the aforesaid decision, the Hon’ble High Court has taken the view that deduction u/s. 10B has to be allowed after set off of unabsorbed depreciation and unabsorbed investment allowance. The Hon’ble Court took the view that the aforesaid provision was only an exemption provision. The CIT(Appeals) noticed that the aforesaid decision was followed by the ITAT Bangalore Bench in the case of Intelnet Technologies India Pvt. Ltd. v. ITO, ITA No.1021/Bang/2009 dated 12.3.2010. Similar view expressed by the Delhi Bench of the Tribunal in the case of Global Vantage Pvt. Ltd. v. DCIT, 2010 TIOL 24 ITAT (DEL) was also referred to by the CIT(A). A contrary view was expressed by the Bangalore Bench of the Tribunal in the case of KPIT Cummins Info Systems (Bangalore) Pvt. Ltd. v. ACIT, 120 TTJ 956. The CIT(A) found that in the case of Global Vantage Pvt. Ltd. (supra) decided by the Delhi Tribunal this decision has been held to be not in tune with the decision of the Hon’ble High Court of Karnataka in the case of Himatsingike Seide Ltd. (supra). The CIT(A) also referred to the decision of the Chennai Bench of the Tribunal in the case of Sword Global India Pvt. Ltd. v. ITO, 306 ITR 286 (AT), wherein the provisions of section 10A and 10B have been held to be deduction provisions and not exemption provisions. For all the above reasons, the CIT(Appeals) confirmed the order of the Assessing

16 IT(TP)A No.1094/Bang/2011 Officer. Against the order of the CIT(A), the Assessee was in appeal before the Tribunal. 25. This Tribunal dealt with the issue in the following words : 63. We have given a careful consideration to the rival submissions. The issue as to whether the provisions of Sec.10B of the Act are deduction provisions or exemption provisions will assume great importance. The reason is that if the provisions are considered as exemption provisions then they will not enter the computation of total income and therefore the loss of the eligible unit cannot be set off against the profits of the non-eligible unit. This issue has already been settled by the Hon’ble Karnataka High Court in the case of Yokogawa India Ltd. (supra). The Hon’ble Karnataka High Court in the case of Yokogawa (supra) had to deal with two substantial question of law. The first substantial question of law was on the right of set off of loss of non-eligible unit against the profit of the eligible unit on which deduction u/s.10B was to be allowed. The Hon’ble Court in para 10 to 20 of its judgment dealt with the issue. The Hon’ble Court noticed that Sec.10-A(1) of the Act (which is in pari materia with Sec.10-B of the Act) read as follows:

“10B. Special provisions in respect of newly established undertaking in free trade zone etc.,-(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the Previous-year in which the under-taking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee”.

17 IT(TP)A No.1094/Bang/2011 64. The expression “Deduction” and “shall be allowed from the total income of the Assessee” used in the aforesaid provisions was considered by the Hon’ble High Court and it held in para 13 to 15 of its judgment that the expression “ shall be allowed from the total income of the Assessee” does not mean total income as defined u/s.2(45) of the Act but that expression means “profits and gains of the STP undertaking as understood in its commercial sense or the total income of the STP unit. Thus the view expressed is that income of the STP undertaking gets quarantined and will not be allowed to be set off against loss of either another STP undertaking or a non STP undertaking. The Hon’ble Court thereafter held that though the expression used in Sec.10A was “Deduction” but in effect it was only an exemption section. These conclusions clearly emanate from para 17 of the Hon’ble Court’s judgment.

18 IT(TP)A No.1094/Bang/2011 have to be set off against the profits before computing exempt profits. The assessee in that case set up a 100% EOU in AY 1988-89. For want of profits it did not claim benefits u/s 10B in AYs 1988-89 to 1990-91. From AY 1992-93 it claimed the said benefits for a connective period of 5 years. In AY 1994-95, the assessee computed the profits of the EOU without adjusting the brought forward unabsorbed depreciation of AY 1988-89. It claimed that as s. 10B conferred “exemption” for the profits of the EOU, the said brought forward depreciation could not be set-off from the profits of the EOU but was available to be set-off against income from other sources. It was also claimed that the profits had to be computed on a “commercial” basis. The AO accepted the claim though the CIT revised his order u/s 263 and directed that the exemption be computed after set-off. On appeal by the assessee, the Tribunal reversed the order of the CIT. On appeal by the department, the High Court in CIT Vs. Himatasingike Seide Ltd. 286 ITR 255 (Kar) reversed the order of the Tribunal and held that the brought forward depreciation had to be adjusted against the profits of the EOU before computing the exemption allowable u/s 10B. In Civil Appeal No.1501 of 2008 dated 19.9.2013 against the aforesaid decision of the Hon’ble Karnataka High Court, the Hon’ble Supreme Court observed as follows while dismissing the appeal:-

“Having perused the records and in view of the facts and circumstances of the case, we are of opinion that the civil appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly.” 67. Thus the ratio has to be confined to the facts and circumstances of the case. The aforesaid observations have to be confined to the facts of that case and as applicable to a case where brought forward losses and depreciation of the

19 IT(TP)A No.1094/Bang/2011 very same STP undertaking are not adjusted while arriving at the profits of the 10B unit for allowing deduction u/s.10A/10B of the Act and not in respect of brought forward losses and depreciation of other undertakings/non-10A/10B units. S. 10A/10B(6) as amended by the FA 2003 w.r.e.f. 1.4.2001 provides that depreciation and business loss of the eligible unit relating to the AY 2001-02 & onwards is eligible for set-off & carry forward for set-off against income post tax holiday which means that they need not be so set off as mandated in the decision of the Hon’ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra). As we have already seen, in Yokogawa India Ltd. 341 ITR 385 (Kar), it was held that even after s. 10A/10B were converted into a “deduction” provision w.e.f 1.4.2001, the benefit of relief u/s 10A/10B is in the nature of “exemption” with reference to “commercial profits” and that as the income of the s. 10A unit has to be excluded at source itself before arriving at the gross total income, the question of setting off the loss of the current year’s or the brought forward business loss (and unabsorbed depreciation) against the s. 10A profits does not arise. Therefore the decision of the Hon’ble Karnataka High Court in the case of Himatasingike Seide (supra) will not apply to the facts of the present case.”

20 IT(TP)A No.1094/Bang/2011 4.5 Accordingly by following the latest judgment of the Hon'ble jurisdictional

High Court based on the substituted/amended provisions of sec.10A/10B which

are applicable in the case of the assessee as well as the decision of the Tribunal

in case of Biocon (supra), we decide this issue in favour of the assessee and

direct the AO to allow deduction u/s 10A without setting off the domestic

losses.

5.1 The assessee is engaged in developing, testing and software solution for

group companies as well as for marketing services and solution in India for

manufacturing and hospitality industry. During the year under consideration

the assessee has carried on its business of off shore software development

services from two STPI units one in Bangalore and another in Noida. The

assessee has reported its financial results as well as international transactions

which are reproduced by the TPO in paras 2.2 and 2.3 are as under :

“ 2.2 Financial Results of Softbrands India for the F Y 2006-07 :

The TPO has computed the financial result of AE and non-AE transactions based on P&L account filed by the taxpayers. The cost between AE & Non-AE is allocated on the basis that the services to the AEs were rendered at Cost Plus 10% as mentioned in the last para of Annexure 4 of the study and also inpara 7 of the Agreement dt.1.10.2006.

21 IT(TP)A No.1094/Bang/2011

Total (Rs.) AE (Rs.) Non-AE (Rs.) Operating Income 13,56,88,365 12,34,86,776 1,22,01,589 Operating Cost excluding 12,66,63,783 11,22,60,705 1,44,03,078 Exchange Loss Op. Profit 1,12,26,071 (-)22,01,489 Operating Profit to Op. 10% (-)15.28% Cost %age

2.3 International transactions (as mentioned in the 92CE Report)

Particulars (name of the AE) Amount (Rs.) M/s. Softbrands Europe Ltd. (Receipts for software 1,93,19,177 development and product support services) M/s. Softbrands Singapore Pte Ltd. (Receipts for software 26,03,165 development and Product support services) M/s. Softbrands Hospitality Inc. (Receipts for software 1,04,83,909 development and Product support services) M/s. Softbrands Manufacturing Inc. (Receipts for software 9,07,02,772 development and Product support services) M/s. Softbrands Malaysia Sdn. (Receipts for software 3,77,753 development and Product support services) Total : 12,34,86,776

The assessee has selected 24 comparable companies in its TP Analysis

document with an average PLI 4.31% and accordingly claimed its international

transactions at Arm’s Length. There is no dispute regarding Transactional Net

22 IT(TP)A No.1094/Bang/2011 Margin Method (‘TNMM’) accepted as Most Appropriate Method (‘MAM’) as it

was accepted in the earlier year by this Tribunal. The TPO rejected 19 out of 24

companies selected by the assessee and added 21 more companies by carrying

out fresh search. Thus the TPO has considered total 26 comparable companies

to determine the Arm’s Length Price (‘ALP’) as under :

Sl.No. Company Name Op to Total Cost % 1 Accel Transmatic Ltd. (Seg.) 21.11 2 Avani Cimcon Technologies Ltd. 52.59 3 Celestial Labs Ltd. 58.35 4 Datamatics Ltd. 1.38 5 E-Zest Solutions Ltd. 36.12 6 Flextronics Software Systems Ltd. (Seg.) 25.31 7 Geometric Ltd. (Seg.) 10.71 8 Helios & Matheson Information Technology 36.63 Ltd. 9 I-Gate Global Solutions Ltd. 7.49 10 Infosys Technologies Ltd. 40.30 11 Ishir Infotech Ltd. 30.12 12 KALS Information Systems Ltd. (Seg.) 30.55 13 LGS Global Ltd. (Lanco Global Solutions Ltd.) 15.75 14 Lucid Software Ltd. 19.37 15 Mediasoft Solutions Ltd. 3.66 16 Megasoft Ltd. 60.23 17 Mindtree Ltd. 16.90 18 Persistent Systems Ltd. 24.52 19 Quintegra Solutions Ltd. 12.56 20 R S Software (India) Ltd. 13.47 21 R Systems International Ltd. (Seg.) 15.07 22 Sasken Communication Technologies Ltd. 22.16 (Seg.)

23 IT(TP)A No.1094/Bang/2011 23 SIP Technologies & Exports Ltd. 13.90 24 Tata Elxsi Ltd. (Seg.) 26.51 25 Thirdware Solutions Ltd. 25.12 26 Wipro Ltd. (Seg.) 33.65 25.14

The TPO has computed the average PLI of 26 comparables at 25.14% after

granting working capital adjustment of 1.19%, adjusted mean margin was

arrived at 23.95%. Accordingly, the TPO proposed an adjustment under

Section 92CA of Rs.1,56,60,368. The assessee raised the objections against the

adjustment proposed by the TPO and Assessing Officer before the DRP but

could not succeed.

companies selected by the TPO, the assessee is also seeking inclusion of 3

companies viz. Genysis International Corporation Ltd., Hypersoft Technology

Ltd. and VPL Software Limited which were rejected by the TPO. We will deal

with the issue of functional comparability and inclusion of these three

companies as under :

24 IT(TP)A No.1094/Bang/2011 (i) Genysis International Corporation Ltd.

(a) The learned Authorised Representative of the assessee has submitted that

the TPO has rejected this company on the ground of functionally different

whereas this company has been designing and developing complex location

based solution for enterprises, government and consumers. Hence this

company is functionally comparable to the assessee.

(b) On the other hand, the learned Departmental Representative has relied

upon the orders of the TPO as well as DRP and submitted that this company is

deriving income from software development services as well as ITES and no

separate segmental results are available.

(c) Having considered the rival submissions and relevant material on

record, we note that the TPO has rejected this company by citing the reason

that this company’s entire revenue is from GIS which is in the nature of ITES

and it is functionally different. This fact recorded by the TPO has not disputed

by the learned Authorised Representative of the assessee that part of the

revenue of this company is from ITES segment. Since this company is earning

revenue from Hybrid service activities which includes ITES as well as software

development services therefore, in the absence of segmental results, this

25 IT(TP)A No.1094/Bang/2011 company cannot be considered as a good comparable for software

development services providing activity of the assessee. Accordingly, we do

not find any reason to interfere with the orders of the authorities below in

rejeting this company.

(ii) Hyper Soft Technology Ltd. a) The learned Authorised Representative of the assessee has submitted

that this company provides strategic off shore development and software

services including application, development and hence is functionally

comparable with the assessee.

b) On the other hand, the learned Departmental Representative has

submitted that the TPO has rejected this company by noting the fact that it is a

software product and trading company. Thus it is functionally different and is

not comparable. c) We have considered the rival submissions as well as the relevant material

on record. The TPO asked information from the company under Section 133(6)

and in reply it was found that this company is a software product and trading

company. This fact has not been disputed by the assessee by producing any

record to contradict the findings of fact recorded by the TPO. In the absence of

26 IT(TP)A No.1094/Bang/2011 any material brought or produced before us to contradict the facts recorded by

the TPO that this company is in software product and trading activity. We do

not find any error or illegality in the orders of the authorities below in rejecting

this company as a comparable.

(iii) VGL Software Limited. a) The learned Authorised Representative of the assessee has submitted

that the TPO has rejected this company because of the information regarding

Related Party Transaction (RPT) is not available in the Annual Report of the

company. Thus he has contended that when this company is otherwise

functionally comparable then the TPO cannot assume that the RPT are more

than 25% of the sale being a filter applied by the TPO.

b) On the other hand, the learned Departmental Representative has

referred to reasons recorded by the TPO in rejecting this company and

submitted that the Annual Report is not available for the Financial Year 2006-07

relevant to the assessment year under consideration. Even the information

sought under Section 133(6) of the Act was not submitted by the company.

Thus in the absence of any relevant information including the RPT, the TPO has

rejected this company.

27 IT(TP)A No.1094/Bang/2011 c) We have considered the rival submissions as well as the relevant

material on record. The reason for rejecting this company are recorded by the

TPO at pages 41 & 42 of the impugned order as under :

“ Annual Report is not available for the FY 2006-07. RPT Information is not available. 133(6) notice was issued. The company did not submit information. Thus the company is not considered as a comparable.”

It is clear from the above reasons recorded by the TPO that the Annual Report

of this company is not available for the year under consideration and further

the notice issued under Section 133(6) of the Act was also not responded by

the company to submit the information. Therefore, there was no information

available regarding the basic facts and revenue details of this company. The

assessee has not filed any record before us even the Annual Report of this

company is not available. Accordingly, we do not find any merit or substance

in the objections raised by the assessee against the rejection of this company

by the TPO.

comparable companies selected by the TPO. We deal with these comparability

one by one as under :

28 IT(TP)A No.1094/Bang/2011 (i) Accel Transmatics Ltd. (Seg.)

7.1 The learned Authorised Representative has submitted that the company is

engaged in healthcare equipment, consumer electronics, net working, CAD,

Embedded Software Services, software testing, imaging technologies and re-

engineering software training. Therefore, this company is functionally different

from the assessee and cannot be considered as comparable. In support of his

contention he has relied upon the following decisions : i. Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. ii. Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012.

7.2 On the other hand, the learned Departmental Representative has relied

upon the orders of the TPO and DRP and submitted that the functional

comparability has been examined by the TPO and it was found that this

company is functionally comparable with the assessee and also satisfies all the

filters applied by the TPO.

7.3 We have considered the rival submissions as well as the relevant material

on record. At the outset, we note that the comparability of this company to a

software development services provider has been considered by the co-

29 IT(TP)A No.1094/Bang/2011 ordinate bench of this Tribunal in the case of Trilogy E-Business Solutions

dt.23.11.2012 for the Assessment Year 2007-08 in ITA No.1054/Bang/2011.

The Tribunal in para 48 of the said order has reproduced the finding of the

Mumbai Bench of the Tribunal in the case of Capgemini India (P) Ltd. Vs. Addl.

CIT 12 Taxman.com 51 as under :

“48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: “In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (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

30 IT(TP)A No.1094/Bang/2011 Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin.” “ By following the above decision of the Mumbai Tribunal, the co-ordinate bench

has held that this company is not comparable and should be excluded from the

list of comparable in para 50 as under :

“ 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.”

As far as the business activities of the company are concerned, the revenue has

not disputed that this company is engaged in the diversified activity as recorded

by the Tribunal in the earlier year. Accordingly, by following the earlier orders

of this Tribunal, we direct the A.O./TPO to exclude this company from the list of

comparable for determining the ALP.

(ii) Avani Cincom Ltd.

engaged in healthcare equipment, consumer electronics, net working, CAD,

Embedded Software Services, software testing, imaging technologies and re-

31 IT(TP)A No.1094/Bang/2011 engineering software training. Therefore, this company is functionally different

from the assessee and cannot be considered as comparable. In support of his

contention he has relied upon the following decisions : a. Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. b. Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012.

8.1 On the other hand, the learned Departmental Representative has relied

upon the orders of the TPO and DRP and submitted that the functional

comparability has been examined by the TPO and it was found that this

company is functionally comparable with the assessee and also satisfies all the

filters applied by the TPO.

8.2 We have considered the rival submissions as well as the relevant material

on record. We note that the comparability of this company has been

considered by the co-ordinate bench of this Tribunal in Trilogy E-Business

Software India Pvt. Ltd. (supra) in para 39 & 41 as under :

“ 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

32 IT(TP)A No.1094/Bang/2011 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%

“ 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

33 IT(TP)A No.1094/Bang/2011 Technologies 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.” Following the earlier orders of this Tribunal, we direct the A.O./TPO to exclude

this company from the list of comparable for determining the ALP.

iii) Celestial Labs Ltd.

engaged in the business of developing software tools to offer services in the

field of biotechnology, pharmaceutical and healthcare industry. This company

developed a tool which has been offered as a customized tool in the field of

software development for services in biotechnology, pharmaceuticals and

healthcare. The risks and rewards available to a R&D company engaged in

supporting drug discovery are vastly different from a company which is

developing and maintaining software for manufacturing and hospitality

industries. This also explains the huge operating margin of 58.59% to cost. This

company ought to be rejected on the ground that it is a pure R&D Company

and therefore, functionally very different from the appellant. In support of his

contention he has relied upon the decisions of - i) Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015.

34 IT(TP)A No.1094/Bang/2011 ii) Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012.

9.1 On the other hand, the learned Departmental Representative has relied

upon the orders of the TPO and DRP and submitted that the functional

comparability has been examined by the TPO and it was found that this

company is functionally comparable with the assessee and also satisfies all the

filters applied by the TPO.

9.2 We have considered the rival submissions as well as the relevant material

on record. We note that the comparability of this company has been

considered by the co-ordinate bench of this Tribunal in Trilogy E-Business

Software India Pvt. Ltd. (supra) in paras 43 & 45 as under :

“ 43. Further reference was also made to the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma Private Ltd. v. Addl. CIT – ITA No.6623/Mum/2011 (for AY 2007-08) in which the comparability of this company for clinical trial research segment. The relevant extract of discussion regarding this company is as follows:

“The learned D.R. however drew our attention to page-389 of the paper book which is an extract from the Directors report which reads as follows: ‘The Company has developed a de novo drug design tool “CELSUITE” to drug discovery in, finding the lead molecules for drug discovery and protected the IPR by filing under the copy if sic (of) right/patent act. (Apprised and funded by Department of Science and Technology New Delhi) based on our insilico expertise (applying bio-informatics tools). The Company has developed a molecule to treat Leucoderma and multiple

35 IT(TP)A No.1094/Bang/2011 cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R & D activities to develop new candidates’ drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh.’ According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard.’ ”

“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

36 IT(TP)A No.1094/Bang/2011 company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO’s order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable.”

Following the earlier orders of this Tribunal, we direct the A.O./TPO to exclude

this company from the list of comparable for determining the ALP.

iv) Persistent Systems Ltd.

v) e-Zest Solutions Ltd.

vi) Thirdware Software Solutions Ltd.

that the TPO has rejected this company for the Assessment Year 2006-07 on

the ground that it has merged with the foreign parent company Thirdware ING.

Thus it cannot be considered as a comparable in view of restructuring as well as

extraordinary event like merger in the financial year. In support of his

37 IT(TP)A No.1094/Bang/2011 contention, he has relied upon the decision of the co-ordinate bench of this

Tribunal in case of Serial Innovations India Pvt. Ltd. (supra).

10.1 On the other hand, the learned Departmental Representative has relied

upon the orders of the TPO and DRP and submitted that the functional

comparability has been examined by the TPO and it was found that these

companies are functionally comparable with the assessee and also satisfies all

the filters applied by the TPO.

10.2 We have considered the rival submissions as well as the relevant

material on record. We note that the comparability of these companies have

been considered by the co-ordinate bench of this Tribunal in the case of Serial

Innovations India Pvt. Ltd. Vs. DCIT (supra) in paras 27 & 28 as under :

“ 27. As far as comparable companies at Sl.No.5, 18, 19 and 25 of the final list of comparable companies chosen by the TPO are concerned, viz., M/S. E-Zest Solutions Ltd., Persistent Systems Ltd., Quintegra Solutions Limited and Thirdware Solutions Ltd., this Tribunal in the case of 3DPLM Software Solutions Ltd. IT(TP)A No.1303/Bang/2012 (Assessment Year: 2008-09) order dated 28.11.2013 was pleased to hold that the aforesaid companies are not comparable with a company engaged in Software Development Services such as the Assessee. The following were the relevant observations of the Tribunal: “14. 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.

38 IT(TP)A No.1094/Bang/2011 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in ‘e- Business Consulting Services’, consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing (‘KPO’) services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company’s website which should be considered while evaluating the company’s functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co- ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/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 comparables only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P) 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.

39 IT(TP)A No.1094/Bang/2011 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 aforecited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables. 15.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand.” “17. 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

40 IT(TP)A No.1094/Bang/2011 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 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

41 IT(TP)A No.1094/Bang/2011 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. 18. Quintegra Solutions Ltd……..

Following the earlier orders of this Tribunal, we direct the A.O./TPO to exclude

these companies from the list of comparable for determining the ALP.

vii) Flextronics Software Systems Ltd. (Seg.)

that this company is having a high turnover as incomparable to the assessee.

Therefore this company enjoys economy of scale on the basis of the size of the

operation. Therefore this company this company cannot be considered as a

good comparable of the assessee. In support of his contention he has relied

upon the following decisions :

i. Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. ii. Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012.

11.1 On the other hand, the learned Departmental Representative has

relied upon the orders of the TPO and DRP and submitted that the functional

42 IT(TP)A No.1094/Bang/2011 comparability has been examined by the TPO and it was found that this

company is functionally comparable with the assessee and also satisfies all the

filters applied by the TPO.

11.2 We have considered the rival submissions as well as the relevant

material on record. We find that the comparability of this company was not an

issue before this Tribunal in the cases relied upon by the assessee as above.

Accordingly, we do not find any substance or merit in the argument of the

assessee that because of the turnover filter of this company should be excluded

from the list of comparables.

viii) Helios & Matheson Information Technology Ltd.

that this company is enjoyed in the application integration, life cycle

management and enterprise system management. It also provides a

comprehensive range of support services for managing the IT Infrastructure of

client. He has relied upon the decisions of the co-ordinate bench of the

Tribunal as follows :

(i) Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015.

43 IT(TP)A No.1094/Bang/2011 (ii) PTC Software (India) Pvt. Ltd. Vs. ACIT (ITA No.1605/PN/2011). 12.1 On the other hand, the learned Departmental Representative has relied

upon the orders of the TPO and DRP and submitted that the functional

comparability has been examined by the TPO and it was found that this

company is functionally comparable with the assessee and also satisfies all the

filters applied by the TPO.

12.2 We have considered the rival submissions as well as the relevant

material on record. We note that the comparability of this company has been

considered by the co-ordinate bench of this Tribunal in the case of Serial

Innovations India Pvt. Ltd. (surpa) in paras 29 & 30 as under :

“ 29. As far as comparable chosen by the TPO at Sl.No.8 of the final list of comparable viz., M/s.Helios & Matheson Information Technology Ltd., we find that the said company has been held to be not comparable with a software service provider like the Assessee by the ITAT Pune Bench in the case of PTC Software (India)Pvt.Ltd. ITA.No.1605/PN/2011 (Asstt. Year : 2007-08) order dated 30.4.2013. The following were the relevant observations of the Tribunal: “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

44 IT(TP)A No.1094/Bang/2011 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 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 preceding 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

45 IT(TP)A No.1094/Bang/2011 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 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.”

Respectfully following the decision of this Tribunal, we direct the A.O./TPO to

exclude this company from the list of comparable for determining the ALP.

ix) i-Gate Global Solutions Ltd. (Seg.)

that this company is having a high turnover as incomparable to the assessee.

Therefore this company enjoys economy of scale on the basis of the size of the

operation. Therefore this company this company cannot be considered as a

good comparable of the assessee. He has relied upon the following decisions :

46 IT(TP)A No.1094/Bang/2011 i. Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. ii. Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012.

13.1 On the other hand, the learned Departmental Representative has

relied upon the orders of the TPO and DRP and submitted that the functional

comparability has been examined by the TPO and it was found that this

company is functionally comparable with the assessee and also satisfies all the

filters applied by the TPO.

13.2 We have considered the rival submissions as well as the relevant

material on record. We find that the comparability of this company was not an

issue before this Tribunal in the cases relied upon by the assessee as above.

Accordingly, we do not find any substance or merit in the argument of the

assessee that because of the turnover filter of this company should be excluded

from the list of comparables.

x) Ishir Infotech Ltd.

that the employees cost of this company is only 3.96% of sales. Hence this

company fails the employee cost filter fixed by the TPO at 25%. He has referred

47 IT(TP)A No.1094/Bang/2011 to the Annual Report and submitted that the annual accounts of this company

shows that employee cost shows at Rs.29.35 lakhs as per Schedule 15 and

operating revenue of this as per Schedule 12 of the Balance Sheet of

Rs.7,42,00,000. Therefore the employee cost is only 3.96% of the turnover. In

support of his contention he has relied upon the decision of Serial Innovations

India Pvt. Ltd. Vs. DCIT (supra).

14.1 On the other hand, the learned Departmental Representative has relied

upon the orders of the TPO and DRP and submitted that the functional

comparability has been examined by the TPO and it was found that this

company is functionally comparable with the assessee and also satisfies all the

filters applied by the TPO.

14.2 We have considered the rival submissions as well as the relevant

material on record. We note that the comparability of this company has been

considered by the co-ordinate bench of this Tribunal in the case of Serial

Innovations India Pvt. Ltd. (supra) in paras 21 & 22 as under :

“ 21. 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 companies should be excluded for the reasons as held in the following paras:

48 IT(TP)A No.1094/Bang/2011 “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 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.”

Following the earlier orders of this Tribunal, we direct the A.O./TPO to exclude

this company from the list of comparable for determining the ALP.

xi) KALS Information Systems Ltd. (Seg.)

that this company is engaged in the development of software and software

products. The activity of this company consists of training centre engaged in

49 IT(TP)A No.1094/Bang/2011 the training of software professional on online process. Therefore this company

cannot be considered as functionally comparable with the assessee. In support

of his contention he has relied upon the decisions of - i. Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. ii. Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012.

15.1 On the other hand, the learned Departmental Representative has relied

upon the orders of the TPO and DRP and submitted that the functional

comparability has been examined by the TPO and it was found that this

company is functionally comparable with the assessee and also satisfies all the

filters applied by the TPO.

15.2 We have considered the rival submissions as well as the relevant

material on record. We note that the comparability of this company has been

considered by the co-ordinate bench of this Tribunal in Trilogy E-Business

Software India Pvt. Ltd. (supra) in paras 46 & 47 as under :

“ 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Q 45,93,351. The same

50 IT(TP)A No.1094/Bang/2011 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 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.”

Following the earlier orders of this Tribunal, we direct the A.O./TPO to exclude

this company from the list of comparable for determining the ALP.

51 IT(TP)A No.1094/Bang/2011 xii) Megasoft Ltd.

that this company has two divisions i.e. Blue Alloy Division and which is an off-

shore and online consulting Division and XIUS BCGI Division which is a product

division. Therefore the product division of this company is completely different

from the service activity of the assessee. In any case only Blue Ally Division may

be remotely compared with that of assessee. The TPO has considered the

functional comparability of both divisions as composite data which is not

comparable with the assessee being a purely service oriented company. In

support of his contention, he has relied upon the following decisions : i. Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. ii. Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012. 16.1 On the other hand, the learned Departmental Representative has relied

upon the orders of the TPO and DRP and submitted that the functional

comparability has been examined by the TPO and it was found that this

company is functionally comparable with the assessee and also satisfies all the

filters applied by the TPO.

52 IT(TP)A No.1094/Bang/2011 16.2 The main grievance of the assessee against this company is incorrect

computation of the operating margin by the TPO at 60.23%. The assessee

claims that the correct margin of the company is 23.11% for this Assessment

Year as considered by the Tribunal in the case of Trilogy E-Business Solutions

Ltd. (supra). Thus the assessee has pleaded that the operating margin of Blue

Ally division of this company is to be considered as comparable as operating

margin of the said division alone should be considered. Since the assessee has

disputed the correctness of the operating margin and relied upon the decision

of the co-ordinate bench on this point accordingly, in the facts and

circumstances of the case, we set aside this issue to the record of the A.O./TPO

to verify this aspect and the contention of the assessee in the light of the

decision of the co-ordinate bench.

xiii) Mindtree Ltd.

that this company is having a high turnover as incomparable to the assessee.

Therefore this company enjoys economy of scale on the basis of the size of the

operation. Therefore this company this company cannot be considered as a

good comparable of the assessee. He has relied upon the following decisions :

53 IT(TP)A No.1094/Bang/2011 i. Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. ii. Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012. 17.1 On the other hand, the learned Departmental Representative has relied

upon the orders of the TPO and DRP and submitted that the functional

comparability has been examined by the TPO and it was found that this

company is functionally comparable with the assessee and also satisfies all the

filters applied by the TPO.

17.2 We have considered the rival submissions as well as the relevant

material on record. We find that the comparability of this company has been

considered by the co-ordinate bench of this Tribunal in Trilogy E-Business

Software India Pvt. Ltd. (supra) in paras 32 & 33 as under :

“32. We have considered the rival submissions. First we will consider the submission of the Assessee that companies with abnormal margins should not be regarded as comparable. In the case of Quark Systems Pvt. Ltd. (supra), the Special Bench had to deal with cases where the results were abnormal. The special Bench observed as follows:

“Even if the taxpayer or its counsel had taken Datamatics as comparable in its T.P. audit, the taxpayer is entitled to point out to the Tribunal that above

54 IT(TP)A No.1094/Bang/2011 enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the Datamatics. The case of Datamatics is like that of "Imercius Technologies" representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover, besides differences in assets and other characteristics referred to by Shri Aggarwal.” The above observations of the special Bench is a pointer to the fact that where there are extraordinary profits and those companies are considered by the TPO for comparability but loss making companies are not considered as comparable, that would improper. The Tribunal found that such contradiction in approach should not be permitted. Similarly in the case of M/S. Sap Labs India Pvt. Ltd. 2010-TII- 44-ITAT Bang-TP had observed as follows: “86. At the cost of repetition, we have to say that extreme cases should not be included in samples and extreme comparables mean not only the positive higher side but also the lower side. In the list of 22 comparables, many of them are having very low margin rate, not only less than 10 or 5, even below that. We have already considered that the agreement entered into by the assessee with its German associate concern has contemplated a compensation of cost plus 6 per cent, or 1.5 times of the total wages bill, whichever is higher. This point we have to consider in the light of the fact that the assessee is working in a risk mitigated environment. That is why we have agreed with the argument of the assessee-company that there may not be extreme profits in the case of the assessee. When extremes are excluded from the samples, all sorts of extremes should be avoided. Otherwise, samples selected for comparative study may not be representative.”

High profit margin or high turnover is not a proper criteria for inclusion or

exclusion of a particular company in the list of comparables. This issue has

been considered by the Tribunal in a series of decisions wherein it was

held that applying a fixed slab of turnover gives absurd

55 IT(TP)A No.1094/Bang/2011 results of comparability however the Tribunal has taken a view that the

turnover in any case can be considered as a parameter / criteria for deciding

the comparability but the proper yardstick would be a range of multiples of

turnover of the tested party on both sides.

xiv) R S System International Ltd. (Seg.)

following a different financial year ending on 31.12.2006. Therefore, the

financial data is not relating to the same period from 1.4.2006 to 31.3.2007.

Hence, this company cannot be compared with the assessee.

18.1 On the other hand, the learned Departmental Representative has relied

upon the orders of the TPO and DRP and submitted that the functional

comparability has been examined by the TPO and it was found that this

company is functionally comparable with the assessee and also satisfies all the

filters applied by the TPO.

18.2 We have considered the rival submissions as well as the relevant

material on record. The main objection of the assessee against this company is

that it follows a different financial year ending on 31.12.2006. Therefore, the

financial data is not relating to the same period from 1.4.2006 to 31.3.2007.

56 IT(TP)A No.1094/Bang/2011 Since the contemporaneous data are not available in respect of this company as

provided under Rule 10B(4) of the IT Rules, therefore, we are of the view that

this company cannot be considered as a good comparable for want of

contemporaneous financial data to be compared with the assessee.

Accordingly, we direct the Assessing Officer / TPO to exclude this company

from the list of comparables.

xv) Sasken Communication Technologies Ltd. (Seg.)

that this company is having a high turnover as incomparable to the assessee.

Therefore this company enjoys economy of scale on the basis of the size of the

operation. Therefore this company this company cannot be considered as a

good comparable of the assessee. He has relied upon the following cases :

(i) Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. (ii) Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012.

19.1 On the other hand, the learned Departmental Representative has relied

upon the orders of the TPO and DRP and submitted that the functional

57 IT(TP)A No.1094/Bang/2011 comparability has been examined by the TPO and it was found that this

company is functionally comparable with the assessee and also satisfies all the

filters applied by the TPO.

19.2 We have considered the rival submissions as well as the relevant

material on record. We note that the comparability of this company has been

considered by the co-ordinate bench of this Tribunal in Trilogy E-Business

Software India Pvt. Ltd. (supra) in paras 32 & 33 as under :

“ 32. We have considered the rival submissions. First we will consider the submission of the Assessee that companies with abnormal margins should not be regarded as comparable. In the case of Quark Systems Pvt. Ltd. (supra), the Special Bench had to deal with cases where the results were abnormal. The special Bench observed as follows: “Even if the taxpayer or its counsel had taken Datamatics as comparable in its T.P. audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the Datamatics. The case of Datamatics is like that of "Imercius Technologies" representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover, besides differences in assets and other characteristics referred to by Shri Aggarwal.” The above observations of the special Bench is a pointer to the fact that where there are extraordinary profits and those companies are considered by the TPO for comparability but loss making companies are not considered as comparable, that would improper. The Tribunal found that such contradiction in approach should not be permitted. Similarly in the case of M/S. Sap Labs India Pvt. Ltd. 2010-TII- 44-ITAT Bang-TP had observed as follows: “86. At the cost of repetition, we have to say that extreme cases should not be included in samples and extreme comparables mean not only the positive

58 IT(TP)A No.1094/Bang/2011 higher side but also the lower side. In the list of 22 comparables, many of them are having very low margin rate, not only less than 10 or 5, even below that. We have already considered that the agreement entered into by the assessee with its German associate concern has contemplated a compensation of cost plus 6 per cent, or 1.5 times of the total wages bill, whichever is higher. This point we have to consider in the light of the fact that the assessee is working in a risk mitigated environment. That is why we have agreed with the argument of the assessee-company that there may not be extreme profits in the case of the assessee. When extremes are excluded from the samples, all sorts of extremes should be avoided. Otherwise, samples selected for comparative study may not be representative.” 33. Even in the aforesaid decision the point that has been emphasized is that when the margins of comparable companies are either extremely low or high, the approach should be to eliminate both and not consider only the high or low margin comparables as it suits either the TPO or the Assessee.”

Following the earlier orders of this Tribunal, we direct the A.O./TPO to exclude

this company from the list of comparable for determining the ALP.

xvi) Infosys Ltd.

xvii) Wipro Ltd.

xviii) Tata Elxsi Ltd. (Seg.)

companies are not comparable to the assessee and all the three companies are

leaders in the field and enjoys the brand value as well as bargain power of their

huge size and dominance. In support of his contention he has relied upon the

following decisions :

59 IT(TP)A No.1094/Bang/2011 (i) Serial Innovations India Pvt. Ltd. Vs. DCIT in IT(TP)A No.1330/Bang/2011 Dt.30.6.2015. (ii) Triology E-Business Software India Pvt. Ltd. Vs. DCIT in ITA No.1054/Bang/2011 Dt.23.11.2012. 20.1 On the other hand, the learned Departmental Representative has relied

upon the orders of the TPO and DRP and submitted that the functional

comparability has been examined by the TPO and it was found that these

companies are functionally comparable with the assessee and also satisfies all

the filters applied by the TPO.

20.2 We have considered the rival submissions as well as the relevant

material on record. We note that the comparability of these three companies

have been considered by the co-ordinate bench of this Tribunal in Serial

Innovations India Pvt. Ltd. (supra) in paras 25 & 26 as under :

“ 25. As far as comparable companies listed at Sl.No.10, 24 & 26 of the final list of comparable companies chosen by the TPO viz., M/S.Infosys Technologies Limited, Tata Elxsi Ltd. (Seg.) & Wipro Limited are concerned, this Tribunal in the case of M/S. Curam Software International Pvt.Ltd. Vs. ITO ITA No.1280/Bang/2012 for AY 08-09 order dated 31.7.2013 has held that the aforesaid companies are not comparable companies in the case of software development services provider. The following were the relevant observations in the case of M/S.Curam Software International Pvt. Ltd.(supra): “12. (4) 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

60 IT(TP)A No.1094/Bang/2011 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 :- (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 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

61 IT(TP)A No.1094/Bang/2011 be omitted from the set of comparable companies. It is ordered accordingly.

13.0 (5) 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 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 co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a

62 IT(TP)A No.1094/Bang/2011 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.

14.0 (6) 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 ( 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

63 IT(TP)A No.1094/Bang/2011 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.”

Following the earlier orders of this Tribunal, we direct the A.O./TPO to exclude

this company from the list of comparable for determining the ALP.

Since we have excluded various companies from the list of comparables

selected by the TPO, accordingly, the A.O/TPO is directed to recompute the ALP

from the remaining set of comparables and after considering the benefit of

provision to section 92C regarding tolerance range of + or – 5%.

Sd/- Sd/- (ABRAHAM P GEORGE) (VIJAY PAL RAO) Accountant Member Judicial Member *Reddy gp